UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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TOLL BROTHERS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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TOLL BROTHERS, INC.

250 Gibraltar Road

Horsham, Pennsylvania 19044

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

to be held on Wednesday, March 17, 2010

 

The 2010 Annual Meeting of Stockholders (the “Meeting”) of Toll Brothers, Inc. (the “Company”) will be held on Wednesday, March 17, 2010 at 12:00 noon EDT, at the offices of the Company, 250 Gibraltar Road, Horsham, Pennsylvania 19044, for the following purposes:

 

1. To elect the four directors nominated by the Board of Directors and named in the proxy statement to hold office until the 2013 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified. (The terms of office of the other directors do not expire until 2011 or 2012.)

 

2. To ratify the re-appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the 2010 fiscal year.

 

3. To approve a protective amendment to the Company’s Second Restated Certificate of Incorporation to restrict certain transfers of common stock in order to preserve the tax treatment of the Company’s net operating losses and unrealized tax losses.

 

4. To approve the Toll Brothers, Inc. Section 382 Rights Agreement.

 

5. To approve the Toll Brothers, Inc. Senior Officer Bonus Plan.

 

6. To consider two stockholder proposals if properly presented at the Meeting.

 

7. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof.

 

The Board of Directors has fixed the close of business on January 19, 2010, as the record date for the Meeting. Only stockholders of record at that time are entitled to notice of and to vote at the Meeting and any adjournment or postponement thereof.

 

The enclosed proxy card is solicited by the Board of Directors of the Company. Reference is made to the attached proxy statement for further information with respect to the business to be transacted at the Meeting. The Board of Directors urges you to sign, date and return the enclosed proxy card promptly, although you are cordially invited to attend the Meeting in person. The return of the enclosed proxy card will not affect your right to vote in person if you do attend the Meeting.

 

Please note the admission policy and procedures regarding attendance at the Meeting, which are set forth on the next page.

 

MICHAEL I. SNYDER

Secretary

 

February 1, 2010

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MARCH 17, 2010

 

The proxy statement and 2009 Annual Report of Toll Brothers, Inc. are available at:
https://materials.proxyvote.com/889478

 

ATTENDANCE AT ANNUAL MEETING — ADMISSION POLICY AND PROCEDURES

 

The Meeting will begin promptly at 12:00 noon EDT. All attendees must present a valid photo identification to be admitted to the Meeting. Cameras (including cellular phones or PDAs with photographic capabilities), recording devices and other electronic devices, and the use of cellular phones or PDAs, will not be permitted at the Meeting. Representatives will be at the entrance to the Meeting and these representatives will have the authority, on the Company’s behalf, to determine whether the admission policy and procedures have been followed and whether you will be granted admission to the Meeting.

 

Admission Policy

 

Attendance at the Meeting is limited to:

 

 

Admission Procedures

 

 

 

TABLE OF CONTENTS

 

TOLL BROTHERS, INC.

250 Gibraltar Road

Horsham, Pennsylvania 19044

 

PROXY STATEMENT
For
Annual Meeting of Stockholders
Wednesday, March 17, 2010

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Toll Brothers, Inc., a Delaware corporation, for use at the Toll Brothers, Inc. 2010 Annual Meeting of Stockholders (the “Meeting”), which will be held on the date, at the time and place, and for the purposes set forth in the foregoing notice, and any adjournment or postponement thereof. Any reference to “Toll Brothers” or any use of the terms “Company,” “we,” “us” or “our” in this proxy statement refers to Toll Brothers, Inc. This proxy statement, the foregoing notice and the enclosed proxy card are first being sent to our stockholders on or about February 1, 2010.

 

The Board of Directors does not intend to bring any matter before the Meeting except as specifically indicated in the notice and does not know of anyone else who intends to do so; however, if any other matters properly come before the Meeting, Robert I. Toll and Zvi Barzilay, acting as your designated proxies, will vote or otherwise act thereon in accordance with their judgment on such matters.

 

If the enclosed proxy card is properly executed and returned to and received by us prior to voting at the Meeting, the shares represented thereby will be voted in accordance with the instructions marked thereon. If the enclosed proxy card is properly executed, returned and received by us prior to voting at the Meeting without specific instructions, Messrs. Robert I. Toll and Zvi Barzilay, acting as your proxies, will vote your shares “FOR” all nominees under Proposal One, “FOR” Proposals Two, Three, Four and Five, and “AGAINST” Proposals Six and Seven.

 

Any proxy card may be revoked at any time before its exercise by notifying the Secretary in writing, by delivering a duly executed proxy card bearing a later date, or by attending the Meeting and voting in person.

 

Shares Entitled To Vote, Quorum and Required Vote

 

The record date fixed by our Board of Directors for the determination of stockholders entitled to notice of and to vote at the Meeting is January 19, 2010 (the “Record Date”). At the close of business on the Record Date, there were 165,293,308 shares of our common stock outstanding and eligible to vote at the Meeting. We have no other class of voting securities outstanding. At the Meeting, stockholders will be entitled to one vote for each share of common stock owned at the close of business on the Record Date. The presence at the Meeting, in person or by proxy, of persons entitled to cast the votes of a majority of such outstanding shares of common stock will constitute a quorum for consideration of the matters expected to be voted on at the Meeting. Abstentions and broker non-votes represented by submitted proxies will be included in the calculation of the number of the shares present at the Meeting for the purposes of determining a quorum. “Broker non-votes” means shares held of record by a broker that are not voted on a matter because the broker has not received voting instructions from the beneficial owner of the shares and either lacks or declines to exercise the authority to vote the shares in its discretion.

 

Proposal One:  Directors are elected by a plurality of the votes cast at the Meeting on this proposal and the four nominees who receive the most votes will be elected. Please note that the New York Stock Exchange (“NYSE”) rules that guide how brokers vote your stock have changed. Your brokerage firm or other nominee may no longer vote your shares with respect to Proposal One without specific instructions from you as to how to vote with respect to the election of each of the four nominees for director, because the election of directors is no longer considered a “routine” matter under the NYSE rules. Abstentions and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of the election of directors.

Proposal Two:  To be approved, this proposal must receive an affirmative majority of the total votes cast “FOR” and “AGAINST” this proposal at the Meeting. Proposal Two is considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE have the authority under those rules to vote their customers’ unvoted shares on Proposal Two if the customers have not furnished voting instructions within a specified period of time prior to the Meeting. Abstentions and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of this proposal.

 

Proposal Three:  To be approved, this proposal must receive an affirmative majority of our outstanding shares of common stock. Proposal Three is not considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE will not be able to vote the shares of customers from whom they have not received voting instructions with regard to this proposal. Abstentions and broker non-votes represented by submitted proxies will have the effect of a negative vote on this proposal.

 

Proposal Four:  To be approved, this proposal must receive an affirmative majority of the total votes cast “FOR” and “AGAINST” this proposal at the Meeting. This proposal is not considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE will not be able to vote the shares of customers from whom they have not received voting instructions with regard to this proposal. Abstentions and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of this proposal.

 

Proposals Five, Six and Seven:  To be approved, each of these proposals must receive an affirmative majority of the total votes cast “FOR” and “AGAINST” each of these proposals at the Meeting. These proposals are not considered “routine” matters under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE will not be able to vote the shares of customers from whom they have not received voting instructions with regard to any of these proposals. Abstentions and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of these proposals.

 

Security Ownership of Principal Stockholders and Management

 

The following table sets forth certain information with respect to the holdings of: (1) each person known to us to be the beneficial owner of more than 5% of our common stock; (2) each of our directors, nominees for director and executive officers; and (3) all directors and executive officers as a group. This information is as of the Record Date, except as otherwise indicated. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

At the Meeting, our stockholders will elect four directors to hold office until the 2013 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. The directors whose terms of office expire at the Meeting are Messrs. Zvi Barzilay, Edward G. Boehne, Richard J. Braemer and Carl B. Marbach.

 

Our Board of Directors is currently divided into three classes serving staggered three-year terms, with the term of one class of directors expiring each year. The Board of Directors has determined that, at the 2011 Annual Meeting of Stockholders, it will recommend that stockholders approve measures that would permit us to take the necessary steps to declassify the Board so that all directors are thereafter elected annually, with such declassification to be carried out in such a manner that does not affect the unexpired terms of any previously elected directors then in office.

 

The Board of Directors, upon the recommendation of the Nominating and Corporate Governance Committee, has nominated Messrs. Zvi Barzilay, Edward G. Boehne, Richard J. Braemer and Carl B. Marbach to serve again as directors until the 2013 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. Each nominee has indicated a willingness to continue to serve as a director. Should a nominee become unavailable to accept election as a director, the persons named in the enclosed proxy will vote the shares that such proxy represents for the election of such other person as the Board of Directors may nominate on the recommendation of the Nominating and Corporate Governance Committee.

 

Set forth below is certain information concerning each current director, each nominee for election as a director at the Meeting and each director whose current term of office will continue after the Meeting.

 

 

Robert I. Toll co-founded our predecessor’s operations with his brother, Bruce E. Toll, in 1967. He has been a member of our Board of Directors since our inception in May 1986. His principal occupation since our inception has been to serve as our Chief Executive Officer and Chairman of the Board.

 

Bruce E. Toll, the brother of Robert I. Toll, has been a member of our Board of Directors since our inception in May 1986 and served as our Chief Operating Officer until May 1998 and our President until November 1998. He is a member of the Public Debt and Equity Securities Committee. Mr. Toll is the founder and president of BET Investments, a commercial real estate company, and the owner of several car dealerships. From June 2006 through August 2009, Mr. Toll was the Chairman of Philadelphia Media Holdings, L.L.C., the parent company of the Philadelphia Inquirer and the Philadelphia Daily News, and from December 2007 through February 2009, he served on the board of directors of Fifth Street Finance Corp., a NYSE-listed company that lends to and invests in small and mid-sized companies. From 2000 until July 2006, Mr. Toll was a member of the board of directors of UbiquiTel, Inc.

Zvi Barzilay has been a member of our Board of Directors since June 1994. He joined our predecessor in 1980 as a Project Manager and was appointed a Vice President in 1983. He held the position of Executive Vice President from January 1992 until May 1998, when he was appointed to the additional position of Chief Operating Officer. Since November 1998, he has been our President and Chief Operating Officer.

 

Robert S. Blank has been a member of our Board of Directors since September 1986. He is a member of the Nominating and Corporate Governance Committee and the Public Debt and Equity Securities Committee. For more than the past five years, Mr. Blank has been Co-Chairman and Co-Chief Executive Officer of Whitney Communication Company and Senior Partner of Whitcom Partners. Whitney Communications Company and Whitcom Partners make investments in public and non-public companies. From August 2001 until June 2007, Mr. Blank was a member of the board of directors of Advanta Corp.

 

Edward G. Boehne has been a member of our Board of Directors since July 2000. He is the Chair of the Nominating and Corporate Governance Committee and a member of the Audit Committee. From 1981 until his retirement in May 2000, Mr. Boehne was the President of the Federal Reserve Bank of Philadelphia. Mr. Boehne is a member of the board of directors of Beneficial Mutual Bancorp, Inc., Penn Mutual Life Insurance Co. and AAA Mid-Atlantic, Inc. Mr. Boehne is also a member of the board of directors of, and a Senior Economic Advisor to, the Haverford Trust Company.

 

Richard J. Braemer has been a member of our Board of Directors since September 1986. He is the Chair of the Public Debt and Equity Securities Committee. Mr. Braemer is senior counsel at the law firm of Ballard, Spahr, Andrews & Ingersoll, LLP, where he was a partner from 1994 through 2008.

 

Christine N. Garvey has been a member of our Board of Directors since September 2009. She is a member of the Audit Committee. Ms. Garvey was the Global Head of Corporate Real Estate Services at Deutsche Bank AG from 2001 to 2004. Prior to that, she served as Vice President of Worldwide Real Estate and Workplace Resources at Cisco Systems, Inc. and as Group Executive Vice President at Bank of America. Ms. Garvey has served as a member of the board of trustees of ProLogis since September 2005, when Catellus Development Corporation, where she had been a member of the board since 1995, merged into a subsidiary of ProLogis. She is also a member of the board of directors of HCP, Inc. and Maguire Properties, Inc., and she served on the board of directors of Hilton Hotels Corporation through October 2007.

 

Roger S. Hillas has been a member of our Board of Directors since April 1988. He is a member of the Audit Committee. From July 1988 until his retirement in December 1992, Mr. Hillas was Chairman and Chief Executive Officer of Meritor Savings Bank. Prior to July 1988, Mr. Hillas was Chairman of PNC Financial Corp. and, before that, Chairman of Provident National Bank. On August 11, 2009, Mr. Hillas advised the Chairman of the Board that he will be resigning as a member of our Board of Directors, effective at the Board of Directors meeting currently scheduled for March 17, 2010, immediately following the Annual Meeting of Stockholders, and he stated that his resignation was not the result of a disagreement with us on any matter relating to our operations, policies or practices.

 

Carl B. Marbach has been a member of our Board of Directors since December 1991. He is the Chair of the Executive Compensation Committee and a member of the Audit Committee and the Public Debt and Equity Securities Committee. Since January 2004, Mr. Marbach has been President of Greater Marbach Airlines, Inc. and Florida Professional Aviation, Inc., companies that provide aviation and consulting services. From January 1995 to January 2004, Mr. Marbach was President of Internetwork Publishing Corp., an electronic publisher, which he founded.

 

Stephen A. Novick has been a member of our Board of Directors since January 2003. He is a member of the Executive Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Novick serves as Senior Advisor for The Andrea and Charles Bronfman Philanthropies, a private family foundation. Until December 2006, Mr. Novick was a consultant to Grey Global Group, a marketing communications company. From 1990 until his retirement in December 2004, Mr. Novick was Chief Creative Officer-Worldwide, and from April 2000 to December 2004 was Vice Chairman, of Grey Global Group. Mr. Novick is also a member of the board of directors of Ark Restaurant Corp.

Joel H. Rassman has been a member of our Board of Directors since September 1996. He joined our predecessor in 1984 as Senior Vice President, Treasurer and Chief Financial Officer. Mr. Rassman was appointed Executive Vice President in June 2002. Mr. Rassman continues to serve as our Executive Vice President, Treasurer and Chief Financial Officer.

 

Paul E. Shapiro has been a member of our Board of Directors since December 1993. He is the Chair of the Audit Committee. Since June 30, 2004, Mr. Shapiro has been Chairman of the Board of Q Capital Strategies, LLC, a life settlement company. From January 1, 2004 to June 30, 2004, Mr. Shapiro was Senior Vice President of MacAndrews & Forbes Holdings, Inc., a private holding company of operating businesses. From June 2001 to December 2003, Mr. Shapiro was Executive Vice President and Chief Administrative Officer of Revlon Inc.

 

Meetings and Committees of the Board of Directors

 

The Board of Directors held four meetings during our 2009 fiscal year.

 

The Board of Directors currently has an Audit Committee, an Executive Compensation Committee, a Nominating and Corporate Governance Committee and a Public Debt and Equity Securities Committee.

 

The Audit Committee is currently comprised of Paul E. Shapiro (Chair), Edward G. Boehne, Christine N. Garvey, Roger S. Hillas and Carl B. Marbach. Each of Messrs. Shapiro, Boehne, Hillas and Marbach was a member of the Audit Committee for the entire 2009 fiscal year; Ms. Garvey joined the Audit Committee upon her election to the Board of Directors in September 2009. Each member of the Audit Committee has been determined by the Board of Directors to meet the standards of independence required of audit committee members by the NYSE and applicable SEC rules. For more information on the NYSE standards for independence, see “Corporate Governance-Director Independence” in this proxy statement. The Board of Directors has also determined that all members of the Audit Committee are financially literate, and that Edward G. Boehne possesses accounting and related financial management expertise within the meaning of the listing standards of the NYSE and is an “audit committee financial expert” within the meaning of the applicable SEC rules. The Board of Directors has further determined that Ms. Garvey’s simultaneous service on the audit committees of more than three public companies will not impair her ability to effectively serve on our Audit Committee.

 

The Audit Committee, among other things, acts on behalf of our Board of Directors to discharge the Board’s responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements, risk oversight and assessment, the qualifications and independence of the independent registered public accounting firm, and the performance of our internal audit function and independent audits. The Audit Committee also has the responsibility and authority for the appointment, compensation, retention, evaluation, termination and oversight of the independent registered public accounting firm, and pre-approval of audit and permissible non-audit services provided by the independent registered public accounting firm. The Audit Committee held seven meetings during the last fiscal year. Four of its meetings were attended by representatives from Ernst & Young LLP, our independent registered public accounting firm, to consider, among other things, the scope of the annual audit and issues of accounting policy and internal control. The Chair of the Audit Committee (or, on one occasion, another Audit Committee member as his designee) also met telephonically with our management and representatives from Ernst & Young LLP eight times during the 2009 fiscal year, prior to each public release of our quarterly and annual financial information.

 

The Executive Compensation Committee is, and for the entire 2009 fiscal year was, comprised of Carl B. Marbach (Chair) and Stephen A. Novick, each of whom has been determined by the Board of Directors to meet the NYSE’s standards for independence. In addition, each committee member is a “Non-Employee Director” as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and an “outside director” as defined for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Executive Compensation Committee, among other things, sets compensation for our executive officers and our named executive officers (“NEOs”) and administers (in some cases along with the Board of Directors) the Toll Brothers, Inc. Cash Bonus Plan (the “Cash Bonus Plan”), the Toll Brothers, Inc. Executive Officer Cash Bonus Plan (the “Executive Officer Bonus Plan”), the Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007) (the “Employee Plan”), and the Toll Brothers, Inc. Supplemental Executive Retirement Plan (the “SERP”). It also administers the Toll Brothers, Inc. Stock Option and Incentive Plan (1995)

(the “1995 Plan”) and the Toll Brothers, Inc. Stock Incentive Plan (1998) (the “1998 Plan”), which plans are inactive except for exercises of existing stock option grants. The Executive Compensation Committee held five meetings during the 2009 fiscal year, some of which took place over multiple days.

 

The Nominating and Corporate Governance Committee is, and for the entire 2009 fiscal year was, comprised of Edward G. Boehne (Chair), Robert S. Blank and Stephen A. Novick, each of whom has been determined by the Board of Directors to meet the NYSE’s standards for independence. The Nominating and Corporate Governance Committee is responsible for, among other things, the recommendation to the Board of Directors of nominees for election to the Board of Directors, the evaluation of the size of the Board of Directors, the evaluation and recommendation to the Board of Directors of the compensation of the non-employee directors, the establishment and updating of corporate governance guidelines, the review and approval of related party transactions and the acting on behalf of the Board of Directors with respect to certain administrative matters. The Nominating and Corporate Governance Committee, along with the Board of Directors, administers the Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Non-Employee Directors (2007) (the “Director Plan”). The Nominating and Corporate Governance Committee held five meetings during the 2009 fiscal year.

 

The Public Debt and Equity Securities Committee is, and for the entire 2009 fiscal year was, comprised of Richard J. Braemer (Chair), Robert S. Blank, Carl B. Marbach and Bruce E. Toll. The Public Debt and Equity Securities Committee’s primary responsibility, as set forth in its charter, is to review and approve, pursuant to authority granted by the Board of Directors, certain transactions relating to the public debt and equity securities of the Company and its affiliates. The Public Debt and Equity Securities Committee did not hold a formal meeting during the 2009 fiscal year.

 

Each director attended at least 75% of the meetings of the Board of Directors and of the committees of which he or she was a member during the 2009 fiscal year.

 

Director Compensation

 

The Nominating and Corporate Governance Committee is responsible for evaluating and recommending compensation for non-management directors to the Board of Directors.

 

Elements of Director Compensation

 

Non-management directors are compensated in cash, stock options and restricted stock for their services as directors.

 

 

 

 

Equity compensation grants to non-management directors during fiscal 2009 for services rendered during fiscal 2008 were made on December 19, 2008 (in the case of restricted stock) and on December 20, 2008 (in the case of stock options) and were granted under the Director Plan as follows:

 

 

Ms. Garvey was granted an option under the Director Plan to acquire 10,000 shares of common stock upon her election to the Board of Directors on September 24, 2009. The option vests equally over a two-year period, with the potential for automatic vesting upon a change of control of the Company.

 

 

Other Director Compensation Arrangements

 

An Advisory and Non-Competition Agreement (the “Advisory Agreement”), dated as of November 1, 2004, and amended as of June 13, 2007, and November 24, 2008, is in place between the Company and Mr. Bruce E. Toll. The Advisory Agreement currently expires on October 31, 2010. The purpose of the Advisory Agreement is to provide us with the valuable and special knowledge, expertise and services of Mr. Toll, one of our co-founders and a director of the Company since our inception, on a continuing basis, as well as to ensure that Mr. Toll does not engage in activities or business ventures that compete with us. The Advisory Agreement provides, among other things, that (a) we will retain Mr. Toll as Special Advisor to the Chairman until October 31, 2010, at an annual compensation rate of $675,000, (b) he will be paid such amount for each of the three years following the term (or termination) of the Advisory Agreement so long as he does not violate certain non-competition and other provisions, and (c) during the term of the Advisory Agreement, he will be entitled to receive the health and 401(k) retirement plan benefits provided to our NEOs. In January 2009, we suspended matching 401(k) contributions for all employees, which included our NEOs and Mr. Toll. During fiscal 2009, prior to the January 2009 suspension of this benefit, we made $1,038 in matching contributions to Mr. Toll. We also made an annual discretionary contribution to Mr. Toll’s 401(k) account in March 2009 for service rendered during fiscal 2008, in the amount of $7,160. We do not currently expect to make any matching or discretionary contributions to Mr. Toll’s 401(k) account during fiscal 2010. Pursuant to the terms of the Advisory Agreement, Mr. Toll was designated a participant in the SERP, which provides an annual benefit of $230,000 for 20 years, provided that no payments will be made to Mr. Toll under the SERP until

the expiration of the three-year non-competition period following the term (or termination) of the Advisory Agreement. During fiscal 2009, we provided Mr. Toll with certain benefits having an estimated value of $23,870, which are described in greater detail under “Director Compensation Table” below. These benefits were reviewed by the Executive Compensation Committee as part of its review of benefits and perquisites paid to our NEOs and were found to be reasonable and consistent with past practices.

 

Director Compensation Table

 

The following table sets forth information concerning the fiscal 2009 compensation awarded to or earned by our non-management directors. Management directors are not compensated for their service as directors. The compensation received by our management directors for their services as employees is shown in the Summary Compensation Table on page 48 of this proxy statement.

 

Non-Management Director Compensation during Fiscal Year 2009

 

 

 

 

 

 

 

 

 

Required Vote

 

To be elected, each director nominee must receive a plurality of the votes cast at the Meeting. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own “FOR” the election of each of the nominees named above. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.”

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” THE ELECTION OF

ZVI BARZILAY, EDWARD G. BOEHNE, RICHARD J. BRAEMER

AND CARL B. MARBACH.

 

The Audit Committee recommends ratification of its re-appointment of Ernst & Young LLP, independent registered public accounting firm, to audit our consolidated financial statements for the fiscal year ending October 31, 2010. Ernst & Young LLP has audited our consolidated financial statements since 1984.

 

Representatives of Ernst & Young LLP are expected to be present at the Meeting, will be afforded the opportunity to make a statement if they desire, and are expected to be available to respond to appropriate questions.

 

We have been advised by Ernst & Young LLP that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in us or our subsidiaries.

The following table sets forth the fees paid to Ernst & Young LLP for professional services for the fiscal years ended October 31, 2009 and 2008:

 

 

 

 

 

 

The Audit Committee meets and agrees upon the annual audit fee directly with our independent auditors. The Audit Committee also establishes pre-approved limits for which our management may engage our independent auditors for specific services. Any work that exceeds these pre-approved limits in a quarter requires the advance approval of the Audit Committee. Each quarter the Audit Committee reviews the matters worked on by the independent auditors during the previous quarter and establishes any pre-approved limits for the current quarter. All fees and services for fiscal 2009 were approved by the Audit Committee.

 

Required Vote

 

To be approved, this proposal must receive an affirmative majority of the total votes cast at the Meeting “FOR” and “AGAINST” this proposal. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own in favor of approval of the ratification of the re-appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal 2010 year. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.”

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” PROPOSAL TWO

 

We have generated significant net operating losses and unrealized tax losses (collectively, “NOLs”) and may generate additional NOLs in future years. Under federal tax laws, we generally can use NOLs and certain related tax credits to offset ordinary income tax paid in our prior two tax years or on our future taxable income for up to 20 years when they “expire” for such purposes. Until they expire, we can “carry forward” NOLs and certain related tax credits that we do not use in any particular year to offset income tax in future years. We have, or expect to use, certain NOLs that we had generated up to October 31, 2009 to offset some income taxes we paid with regard to our fiscal 2006 and fiscal 2007 tax years. The Worker, Homeownership and Business Assistance Act of 2009, enacted on November 6, 2009, will permit us, on a one-time basis, to carry tax losses incurred in one tax year back for up to five years. We expect to use this one-time carry back for our fiscal 2010 tax year. After giving effect to the carry back and use of certain NOLs, we estimate, as of the date of this proxy statement, that we still have approximately $400 million of net deferred tax asset related to our NOLs that we have generated but not yet realized for tax purposes. We believe that these NOLs could be used to potentially offset up to $1.2 billion of future taxable income. While we cannot estimate the exact amount of NOLs that we can use to reduce future income tax liability because we cannot predict the amount and timing of our future taxable income, our NOLs are a very valuable asset.

 

The benefits of our NOLs would be reduced, and our use of the NOLs would be substantially delayed, if we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as

amended (the “Code”). Under Section 382, an “ownership change” occurs if a stockholder or a group of stockholders who is deemed to own at least 5% of our common stock increases its ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 would impose an annual limit on the amount of our NOLs that we can use to offset income taxes equal to the product of the total value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the ownership change. A number of complex rules apply to calculating this annual limit.

 

If an ownership change were to occur, the limitations imposed by Section 382 could result in a material amount of our NOLs expiring unused and, therefore, significantly impair the value of our NOLs. While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred, we currently believe that an ownership change has not occurred. However, if no action is taken, we believe it is possible that we could experience an ownership change.

 

After careful consideration, the Board of Directors believes the most effective way to preserve the benefits of our NOLs for long-term stockholder value is to adopt both the Protective Amendment to the Toll Brothers, Inc. Second Restated Certificate of Incorporation (the “Protective Amendment”) and the Toll Brothers, Inc. Section 382 Rights Agreement (the “Section 382 Rights Agreement”). The Protective Amendment, which is designed to block transfers of our common stock that could result in an ownership change, is described below under Proposal Three, and its full terms can be found in the accompanying Addendum A. The Section 382 Rights Agreement, pursuant to which we have issued certain stock purchase rights with terms designed to deter transfers of our common stock that could result in an ownership change, is described below under Proposal Four, and its full terms can be found in the accompanying Addendum B.

 

The Board of Directors urges stockholders to carefully read each proposal, the items discussed below under the heading “Certain Considerations Related to the Protective Amendment and the Section 382 Rights Agreement” and the full terms of the Protective Amendment and the Section 382 Rights Agreement. The Board of Directors unanimously adopted both measures, but the Protective Amendment requires stockholder adoption to be put into effect, and the Section 382 Rights Agreement requires stockholder approval to remain effective after June 17, 2010.

 

It is important to note that neither measure offers a complete solution and an ownership change may occur even if the Protective Amendment is adopted and the Section 382 Rights Agreement is approved. There are limitations on the enforceability of the Protective Amendment against stockholders who do not vote to adopt it that may allow an ownership change to occur, and the Section 382 Rights Agreement may deter, but ultimately cannot block, transfers of our common stock that might result in an ownership change. The limitations of these measures are described in more detail below. Because of their individual limitations, the Board of Directors believes that both measures are needed and that they will serve as important tools to help prevent an ownership change that could substantially reduce or eliminate the significant long-term potential benefits of our NOLs. Accordingly, the Board of Directors strongly recommends that stockholders adopt the Protective Amendment and approve the Section 382 Rights Agreement.

 

For the reasons discussed above under “Background to Proposals Three and Four,” the Board of Directors recommends that stockholders adopt the Protective Amendment to the Toll Brothers, Inc. Second Restated Certificate of Incorporation. The Protective Amendment is designed to prevent certain transfers of our common stock that could result in an ownership change under Section 382 and, therefore, materially inhibit our ability to use our NOLs to reduce our future income tax liability. The Board believes it is in our and our stockholders’ best interests to adopt the Protective Amendment to help avoid this result.

 

The purpose of the Protective Amendment is to assist us in protecting long-term value to the Company of its accumulated NOLs by limiting direct or indirect transfers of our common stock that could affect the percentage of

stock that is treated as being owned by a holder of 4.95% of our stock. In addition, the Protective Amendment includes a mechanism to block the impact of such transfers while allowing purchasers to receive their money back from prohibited purchases. In order to implement these transfer restrictions, the Protective Amendment must be adopted. The Board of Directors has adopted resolutions approving and declaring the advisability of amending the Second Restated Certificate of Incorporation as described below and as provided in the accompanying Addendum A, subject to stockholder adoption.

 

Description of Protective Amendment

 

The following description of the Protective Amendment is qualified in its entirety by reference to the full text of the Protective Amendment, which is contained in a proposed new Article Nine of our Second Restated Certificate of Incorporation and can be found in the accompanying Addendum A. Please read the Protective Amendment in its entirety as the discussion below is only a summary.

 

Prohibited Transfers.  The Protective Amendment generally will restrict any direct or indirect transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be to:

 

 

“Person” means any individual, firm, corporation or other legal entity, including persons treated as an entity pursuant to Treasury Regulation § 1.382-3(a)(1)(i), and includes any successor (by merger or otherwise) of such entity.

 

Restricted transfers include sales to Persons whose resulting percentage ownership (direct or indirect) of our common stock would exceed the 4.95% thresholds discussed above, or to Persons whose direct or indirect ownership of our common stock would by attribution cause another Person to exceed such threshold. Complicated common stock ownership rules prescribed by the Code (and regulations promulgated thereunder) will apply in determining whether a Person is a 4.95% stockholder under the Protective Amendment. A transfer from one member of a “public group” (as that term is defined under Section 382) to another member of the same public group does not increase the percentage of our common stock owned directly or indirectly by the public group and, therefore, such transfers are not restricted. For purposes of determining the existence and identity of, and the amount of our common stock owned by, any stockholder, we will be entitled to rely on the existence or absence of certain public securities filings as of any date, subject to our actual knowledge of the ownership of our common stock. The Protective Amendment includes the right to require a proposed transferee, as a condition to registration of a transfer of our common stock, to provide all information reasonably requested regarding such person’s direct and indirect ownership of our common stock.

 

These transfer restrictions may result in the delay or refusal of certain requested transfers of our common stock, or prohibit ownership (thus requiring dispositions) of our common stock due to a change in the relationship between two or more persons or entities or to a transfer of an interest in an entity other than us that, directly or indirectly, owns our common stock. The transfer restrictions will also apply to proscribe the creation or transfer of certain “options” (which are broadly defined by Section 382) with respect to our common stock to the extent that, in certain circumstances, the creation, transfer or exercise of the option would result in a proscribed level of ownership.

 

Consequences of Prohibited Transfers.  Upon adoption of the Protective Amendment, any direct or indirect transfer attempted in violation of the Protective Amendment would be void as of the date of the prohibited transfer as to the purported transferee (or, in the case of an indirect transfer, the ownership of the direct owner of our common stock would terminate simultaneously with the transfer), and the purported transferee (or in the case of any indirect transfer, the direct owner) would not be recognized as the owner of the shares owned in violation of the Protective Amendment for any purpose, including for purposes of voting and receiving dividends or other distributions in respect of such common stock, or in the case of options, receiving our common stock in respect

of their exercise. In this proxy statement, our common stock purportedly acquired in violation of the Protective Amendment is referred to as “excess stock.”

 

In addition to a prohibited transfer being void as of the date it is attempted, upon demand, the purported transferee must transfer the excess stock to our agent along with any dividends or other distributions paid with respect to such excess stock. Our agent is required to sell such excess stock in an arm’s-length transaction (or series of transactions) that would not constitute a violation under the Protective Amendment. The net proceeds of the sale, together with any other distributions with respect to such excess stock received by our agent, after deduction of all costs incurred by the agent, will be distributed first to the purported transferee in an amount, if any, up to the cost (or in the case of gift, inheritance or similar transfer, the fair market value of the excess stock on the date of the prohibited transfer) incurred by the purported transferee to acquire such excess stock, and the balance of the proceeds, if any, will be distributed to a charitable beneficiary. If the excess stock is sold by the purported transferee, such person will be treated as having sold the excess stock on behalf of the agent, and will be required to remit all proceeds to our agent (except to the extent we grant written permission to the purported transferee to retain an amount not to exceed the amount such person otherwise would have been entitled to retain had our agent sold such shares).

 

To the extent permitted by law, any stockholder who knowingly violates the Protective Amendment will be liable for any and all damages we suffer as a result of such violation, including damages resulting from any limitation in our ability to use our NOLs and any professional fees incurred in connection with addressing such violation.

 

With respect to any transfer of common stock that does not involve a transfer of our “securities” within the meaning of the Delaware General Corporation Law but that would cause any stockholder of 4.95% or more of our stock to violate the Protective Amendment, the following procedure will apply in lieu of those described above: In such case, such stockholder and/or any person whose ownership of our securities is attributed to such stockholder will be deemed to have disposed of (and will be required to dispose of) sufficient securities, simultaneously with the transfer, to cause such holder not to be in violation of the Protective Amendment, and such securities will be treated as excess stock to be disposed of through the agent under the provisions summarized above, with the maximum amount payable to such stockholder or such other person that was the direct holder of such excess stock from the proceeds of sale by the agent being the fair market value of such excess stock at the time of the prohibited transfer.

 

Public Groups; Modification and Waiver of Transfer Restrictions.  In order to facilitate sales by stockholders into the market, the Protective Amendment permits otherwise prohibited transfers of our common stock where the transferee is a public group. These permitted transfers include transfers to new public groups that would be created by the transfer and would be treated as a 4.95% stockholder.

 

In addition, the Board of Directors will have the discretion to approve a transfer of our common stock that would otherwise violate the transfer restrictions if it determines that the transfer is in our and our stockholders’ best interests. If the Board of Directors decides to permit such a transfer, that transfer or later transfers may result in an ownership change that could limit our use of our NOLs. In deciding whether to grant a waiver, the Board of Directors may seek the advice of counsel and tax experts with respect to the preservation of our federal tax attributes pursuant to Section 382. In addition, the Board of Directors may request relevant information from the acquirer and/or selling party in order to determine compliance with the Protective Amendment or the status of our federal income tax benefits, including an opinion of counsel selected by the Board of Directors (the cost of which will be borne by the transferor and/or the transferee) that the transfer will not result in a limitation on the use of the NOLs under Section 382. If the Board of Directors decides to grant a waiver, it may impose conditions on the acquirer or selling party.

 

In the event of a change in law, the Board of Directors will be authorized to modify the applicable allowable percentage ownership interest (currently 4.95%) or modify any of the definitions, terms and conditions of the transfer restrictions or to eliminate the transfer restrictions, provided that the Board of Directors determines, by adopting a written resolution, that such action is reasonably necessary or advisable to preserve the NOLs or that the continuation of these restrictions is no longer reasonably necessary for such purpose, as applicable. Our stockholders will be notified of any such determination through a filing with the SEC or such other method of notice as the Secretary of the Company shall deem appropriate.

The Board of Directors may establish, modify, amend or rescind bylaws, regulations and procedures for purposes of determining whether any transfer of common stock would jeopardize our ability to use our NOLs.

 

Implementation and Expiration of the Protective Amendment

 

If our stockholders adopt the Protective Amendment, we intend to promptly file the Protective Amendment or file a Third Restated Certificate of Incorporation incorporating the Protective Amendment with the Secretary of State of the State of Delaware, whereupon the Protective Amendment will become effective. We intend to immediately thereafter enforce the restrictions in the Protective Amendment to preserve the future use of our NOLs. We also intend to include a legend reflecting the transfer restrictions included in the Protective Amendment on certificates representing newly issued or transferred shares, to disclose such restrictions to persons holding our common stock in uncertificated form and to disclose such restrictions to the public generally.

 

The Protective Amendment would expire on the earliest of (i) the Board of Directors’ determination that the Protective Amendment is no longer necessary for the preservation of our NOLs because of the amendment or repeal of Section 382 or any successor statute, (ii) the beginning of a taxable year to which the Board of Directors determines that none of our NOLs may be carried forward, and (iii) such date as the Board of Directors otherwise determines that the Protective Amendment is no longer necessary for the preservation of our NOLs. The Board of Directors may also accelerate or extend the expiration date of the Protective Amendment in the event of a change in the law.

 

Effectiveness and Enforceability

 

Although the Protective Amendment is intended to reduce the likelihood of an ownership change, we cannot eliminate the possibility that an ownership change will occur even if the Protective Amendment is adopted given that:

 

 

As a result of these and other factors, the Protective Amendment serves to reduce, but does not eliminate, the risk that we will undergo an ownership change.

 

Section 382 Ownership Change Determinations

 

The rules of Section 382 are very complex and are beyond the scope of this summary discussion. Some of the factors that must be considered in determining whether a Section 382 ownership change has occurred include the following:

 

 

 

Required Vote

 

To be approved, this proposal must receive an affirmative majority of our outstanding common stock. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own in favor of approval of this proposal. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.” The Protective Amendment, if adopted, would become effective upon the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware or the filing of a Third Restated Certificate of Incorporation incorporating the Protective Amendment, which we would expect to do as soon as practicable after the Protective Amendment is adopted.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” PROPOSAL THREE

 

Background on Our Existing Rights Agreement

 

We have an existing stockholder rights agreement that was adopted in June 2007 (the “Existing Rights Agreement”). At the time of its adoption, the Existing Rights Agreement was intended to reduce our vulnerability to certain potentially coercive takeover practices and takeover bids that are inadequate or otherwise inconsistent with our interests and our stockholders’ interests and to encourage potential acquirors to negotiate with our Board of Directors. The rights issued under the Existing Rights Agreement, as originally adopted, would generally be triggered if a person or group acquired a number of shares of our common stock that were entitled to 15% or more of our outstanding voting power. The rights issued pursuant to the Existing Rights Agreement will expire on July 11, 2017, unless earlier exchanged or redeemed. The Board of Directors intends to terminate the Existing Rights Agreement and redeem the rights issued thereunder upon approval of the Section 382 Rights Agreement by our stockholders.

 

The Section 382 Rights Agreement

 

On June 17, 2009, our Board of Directors adopted the Section 382 Rights Agreement. The rights issued under the Section 382 Rights Agreement will expire on June 17, 2010 if our stockholders have not approved the Section 382 Rights Agreement by that date. Subject to certain limited exceptions, the Section 382 Rights Agreement is designed to deter any person from buying our common stock (or any interest in our common stock) if the acquisition would result in a stockholder (or several stockholders, in the aggregate, who hold their stock as a “group” under the federal securities laws) owning 4.95% or more of our then-outstanding common stock.

 

The Section 382 Rights Agreement is intended to protect stockholder value by attempting to preserve our ability to use our NOLs to reduce our future income tax liability. Because of the limitations of the Protective Amendment in preventing transfers of our common stock that may result in an ownership change, as further described above under Proposal Three, the Board of Directors believes it is in our and our stockholders’ best interests to approve the Section 382 Rights Agreement.

 

The following description of the Section 382 Rights Agreement is qualified in its entirety by reference to the text of the Section 382 Rights Agreement, which can be found in the accompanying Addendum B. Please read the Section 382 Rights Agreement in its entirety, as the discussion below is only a summary.

 

Description of Section 382 Rights Agreement

 

The Section 382 Rights Agreement is intended to act as a deterrent to any person or group acquiring 4.95% or more of our outstanding common stock (an “Acquiring Person”) without the approval of the Board of Directors. Stockholders who owned 4.95% or more of our common stock as of the close of business on June 17, 2009, which includes Robert I. Toll and his affiliates, generally will not trigger the Section 382 Rights Agreement so long as they do not acquire 1,000 or more shares of our common stock. Any rights held by an Acquiring Person are void and may not be exercised. The Board of Directors may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Section 382 Rights Agreement that it determines would not jeopardize or endanger the availability to the Company of its NOLs.

 

The Rights.  The Board of Directors authorized the issuance of one right per each outstanding share of our common stock payable to our stockholders of record as of the close of business on July 17, 2009. Subject to the terms, provisions and conditions of the Section 382 Rights Agreement, if these rights become exercisable, each right would initially represent the right to purchase from us a unit (“Unit”) consisting of one ten-thousandth of a share of our Series B Junior Participating Preferred Stock for a purchase price of $100 per Unit (the “Purchase Price”). If issued, each fractional share of preferred stock would generally give a stockholder approximately the same dividend, voting and liquidation rights as does one share of our common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder, including without limitation any dividend, voting or liquidation rights.

Exercisability.  The rights will not be exercisable until the earlier of (i) 10 calendar days after a public announcement that a person or group has become an Acquiring Person (the date of such public announcement is referred to herein as the “Stock Acquisition Date”) and (ii) 10 business days after the commencement of a tender or exchange offer by a person or group if upon consummation of the offer the person or group would beneficially own 4.95% or more of our outstanding common stock. In this proxy statement, we refer to the date on which the rights become exercisable as the “Distribution Date.”

 

Until the Distribution Date, common stock certificates will evidence the rights and may contain a notation to that effect. Any transfer of shares of our common stock prior to the Distribution Date will constitute a transfer of the associated rights. After the Distribution Date, the rights may be transferred other than in connection with the transfer of the underlying shares of our common stock.

 

If there is an Acquiring Person on the Distribution Date or a person or group becomes an Acquiring Person after the Distribution Date, each holder of a right, other than rights that are or were beneficially owned by an Acquiring Person (which will be void), will thereafter have the right to receive upon exercise of a right and payment of the Purchase Price that number of shares of our common stock having a market value of two times the exercise price of the right. The exercise price is the Purchase Price times the number of Units associated with each right (initially, one).

 

Exchange.  At any time after the Stock Acquisition Date, the Board of Directors may exchange the rights, other than rights that are or were beneficially owned by an Acquiring Person, which will be void, in whole or in part, at an exchange ratio equal to (i) a number of shares of common stock per right with a value equal to the spread between the value of the number of shares of common stock for which the rights may then be exercised and the Purchase Price, or (ii) if prior to the acquisition by the Acquiring Person of 50% or more of the then-outstanding shares of common stock, one share of common stock per right.

 

Redemption.  At any time until 10 days after the Stock Acquisition Date, the Board of Directors may redeem all of the then-outstanding rights in whole, but not in part, at a price of $0.001 per right, subject to adjustment (the “Redemption Price”). Immediately upon action of the Board of Directors ordering redemption of the rights, the right to exercise the rights will terminate, and the only right of the holders of rights will be to receive the Redemption Price, with interest thereon.

 

Anti-Dilution Provisions.  The Purchase Price of the preferred shares, the number of preferred shares issuable and the number of outstanding rights are subject to adjustment to prevent dilution that may occur as a result of certain events, including, among others, a stock dividend, a stock split or a reclassification of the preferred shares or common stock. No adjustments to the Purchase Price of less than 1% will be made.

 

Amendments.  Other than certain provisions relating to the principal economic terms of the rights, any of the provisions of the Section 382 Rights Agreement may be amended by the Board of Directors prior to the Distribution Date. After the Distribution Date, the provisions of the Section 382 Rights Agreement may be amended by the Board of Directors in order to cure any ambiguity, to correct or supplement inconsistent provisions, to make changes which do not adversely affect the interests of holders of Rights (other than an Acquiring Person or an affiliate or associate thereof), or to shorten or lengthen any time period under the Section 382 Rights Agreement (provided that no amendment to lengthen the time period governing redemption may be made at such time as the rights are not redeemable, and no amendment to lengthen any other time period may be made unless for the purpose of protecting, enhancing or clarifying the rights of, or benefits to, the rights holders).

 

Expiration.  The rights issued pursuant to the Section 382 Rights Agreement will expire on the earliest of (i) the close of business on July 16, 2019, (ii) the time at which the rights are redeemed, (iii) the time at which the rights are exchanged, (iv) the time at which the Board of Directors determines that the Section 382 Rights Agreement is no longer necessary or desirable for the preservation of our NOLs because of the repeal of Section 382 or any successor statute, (v) the beginning of the taxable year of the Company to which the Board of Directors determines that no tax benefits may be carried forward, and (vi) June 17, 2010, if prior to such time the Section 382 Rights Agreement has not been approved by our stockholders.

Required Vote

 

To be approved, this proposal must receive an affirmative majority of the total votes cast at the Meeting “FOR” and “AGAINST” this proposal. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own in favor of approval of the Section 382 Rights Agreement. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.” Upon approval by our stockholders of the Section 382 Rights Agreement, the Existing Rights Agreement shall be terminated by the Board and all rights under that plan shall be redeemed. If the Section 382 Rights Agreement is not approved by our stockholders, the Existing Rights Agreement will continue in full force and effect in accordance with its terms.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” PROPOSAL FOUR

 

The Board of Directors believes that attempting to protect the tax benefits of our NOLs as described above under “Background to Proposals Three and Four” is in our and our stockholders’ best interests; however, we cannot eliminate the possibility that an ownership change will occur even if the Protective Amendment is adopted and the Section 382 Rights Agreement is approved. Please consider the items discussed below in voting on Proposals Three and Four.

 

The Internal Revenue Service (“IRS”) could challenge the amount of our NOLs or claim we experienced an ownership change, which could reduce the amount of our NOLs that we can use or eliminate our ability to use them altogether.

 

The IRS has not audited or otherwise validated the amount of our NOLs. The IRS could challenge the amount of our NOLs, which could limit our ability to use our NOLs to reduce our future income tax liability. In addition, the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred. Therefore, we cannot assure you that the IRS will not claim that we experienced an ownership change and attempt to reduce or eliminate the benefit of our NOLs even if the Protective Amendment and the Section 382 Rights Agreement are in place.

 

Continued Risk of Ownership Change

 

Although the Protective Amendment and the Section 382 Rights Agreement are intended to reduce the likelihood of an ownership change, we cannot assure you that they would prevent all transfers of our common stock that could result in such an ownership change. In particular, absent a court determination, we cannot assure you that the Protective Amendment’s restrictions on acquisition of our common stock will be enforceable against all our stockholders, and they may be subject to challenge on equitable grounds, as discussed above under Proposal Three.

 

Potential Effects on Liquidity

 

The Protective Amendment will restrict a stockholder’s ability to acquire, directly or indirectly, additional shares of our common stock in excess of the specified limitations. Furthermore, a stockholder’s ability to dispose of our common stock may be limited by reducing the class of potential acquirers for such common stock. In addition, a stockholder’s ownership of our common stock may become subject to the restrictions of the Protective Amendment upon actions taken by persons related to, or affiliated with, them. Stockholders are advised to carefully monitor their ownership of our stock and consult their own legal advisors and/or us to determine whether their ownership of our stock approaches the restricted levels.

Potential Impact on Value

 

If the Protective Amendment is adopted, the Board of Directors intends to include a legend reflecting the transfer restrictions included in the Protective Amendment on certificates representing newly issued or transferred shares, to disclose such restrictions to persons holding our common stock in uncertificated form, and to disclose such restrictions to the public generally. Because certain buyers, including persons who wish to acquire more than 5% of our common stock and certain institutional holders who may not be comfortable holding our common stock with restrictive legends, may not be able to purchase our common stock, the Protective Amendment could depress the value of our common stock in an amount that could more than offset any value preserved from protecting our NOLs. The Section 382 Rights Agreement could have a similar effect if investors object to holding our common stock subject to the terms of the Section 382 Rights Agreement.

 

Anti-Takeover Impact

 

The reason the Board of Directors adopted the Protective Amendment and the Section 382 Rights Agreement is to preserve the long-term value of our NOLs. The Protective Amendment, if adopted by our stockholders, could be deemed to have an anti-takeover effect because, among other things, it will restrict the ability of a person, entity or group to accumulate more than 4.95% of our common stock and the ability of persons, entities or groups now owning more than 4.95% of our common stock from acquiring additional shares of our common stock without the approval of the Board of Directors. Similarly, while the Section 382 Rights Agreement is not intended to prevent a takeover, it does have a potential anti-takeover effect because an Acquiring Person may be diluted upon the occurrence of a triggering event. Accordingly, the overall effects of the Protective Amendment, if adopted by our stockholders, and the Section 382 Rights Agreement may be to render more difficult, or discourage, a merger, tender offer, proxy contest or assumption of control by a substantial holder of our securities. The Protective Amendment and the Section 382 Rights Agreement proposals are not part of a plan by us to adopt a series of anti-takeover measures, and we are not presently aware of any potential takeover transaction.

 

Stockholders should be aware that we are subject to Section 203 of the Delaware General Corporation Law, which provides, in general, that a transaction constituting a “business combination” within the meaning of Section 203 involving a person owning 15% or more of our outstanding voting stock (referred to as an “interested stockholder”) cannot be completed for a period of three years after the date on which the person became an interested stockholder unless (i) our Board of Directors approved either the business combination or the transaction that resulted in the person becoming an interested stockholder prior to such business combination or transaction, (ii) upon consummation of the transaction that resulted in the person becoming an interested stockholder, that person owned at least 85% of our outstanding voting stock (excluding shares owned by persons who are both directors and officers of the Company and shares owned by certain of our employee benefit plans), or (iii) the business combination was approved by our Board of Directors and by the affirmative vote of the holders of at least 662/3% of our outstanding voting stock not owned by the interested stockholder.

 

Our Second Restated Certificate of Incorporation and our bylaws contain the following provisions that may also be deemed to have a potential anti-takeover effect:

 

 

 

In addition, our Existing Rights Agreement is intended to reduce our vulnerability to certain potentially coercive takeover practices and takeover bids that are inadequate or otherwise inconsistent with our interests and our stockholders’ interests, and to encourage potential acquirors to negotiate with our Board of Directors. However, upon approval of the Section 382 Rights Agreement by our stockholders, the Board of Directors will take action to terminate the Existing Rights Agreement.

 

Effect of the Protective Amendment if you vote for it and already own more than 4.95% of our common stock

 

If you already own more than 4.95% of our common stock, you would be able to transfer shares of our common stock only if the transfer does not increase the percentage of stock ownership of another holder of 4.95% or more of our common stock or create a new holder of 4.95% or more of our common stock. You will also be able to transfer your shares of our common stock through open-market sales to a public group, including a new public group. Shares acquired in any such transaction will be subject to the Protective Amendment’s transfer restrictions.

 

Effect of the Protective Amendment if you vote for it and own less than 4.95% of our common stock

 

The Protective Amendment will apply to you, but, so long as you own less than 4.95% of our common stock you can transfer your shares to a purchaser who, after the sale, also would own less than 4.95% of our common stock.

 

Effect of the Protective Amendment if you vote against it

 

Delaware law provides that transfer restrictions of the Protective Amendment with respect to shares of our common stock issued prior to its effectiveness will be effective as to (i) stockholders with respect to shares that were voted in favor of adopting the Protective Amendment and (ii) purported transferees of such shares if (A) the transfer restriction is conspicuously noted on the certificate(s) representing such shares or (B) the transferee had actual knowledge of the transfer restrictions (even absent such conspicuous notation). We intend to cause shares of our common stock issued after the effectiveness of the Protective Amendment to be issued with the relevant transfer restriction conspicuously noted on the certificate(s) representing such shares, and therefore under Delaware law such newly issued shares will be subject to the transfer restriction. We also intend to disclose such restrictions to persons holding our common stock in uncertificated form. For the purpose of determining whether a stockholder is subject to the Protective Amendment, we intend to take the position that all shares issued prior to the effectiveness of the Protective Amendment that are proposed to be transferred were voted in favor of the Protective Amendment, unless the contrary is established. We may also assert that stockholders have waived the right to challenge or otherwise cannot challenge the enforceability of the Protective Amendment, unless a stockholder establishes that it did not vote in favor of the Protective Amendment. Nonetheless, a court could find that the Protective Amendment is unenforceable, either in general or as applied to a particular stockholder or fact situation.

 

The Board of Directors has adopted, upon the recommendation of the Executive Compensation Committee (the “Compensation Committee”) and subject to stockholder approval, the Toll Brothers, Inc. Senior Officer Bonus Plan (“Senior Officer Plan”), to provide a tax-deductible bonus program for those officers designated as participants in the Senior Officer Plan by the Compensation Committee. If approved by stockholders, the Senior Officer Plan will replace the existing Toll Brothers, Inc. Executive Officer Cash Bonus Plan (the “Executive Officer Bonus Plan”) as the method of awarding tax-deductible bonus compensation to our executive officers (excluding Robert I. Toll). If the Senior Officer Plan is not approved by stockholders, we would not be able to deduct any cash compensation over $1 million that is awarded to any such officer after fiscal 2009.

Background

 

The Board of Directors believes that our executive officers should be compensated through a mix of salary, bonus awards and long-term incentive compensation, and that this compensation should be tax-deductible by us to the largest extent possible. The Board of Directors and the Compensation Committee developed the Senior Officer Plan as a replacement for the Executive Officer Bonus Plan. In doing so, they determined that the Senior Officer Plan should be sufficiently flexible to allow the Compensation Committee to make awards in appropriate amounts and with appropriate performance periods and performance goals to whichever existing, new or recently promoted executive or other officers the Compensation Committee designates as plan participants. The Compensation Committee will not designate Robert I. Toll as a participant in the Senior Officer Plan as long as he is the participant in the Toll Brothers, Inc. Cash Bonus Plan. The Board of Directors and the Compensation Committee believe the Senior Officer Plan will enable us to attract, retain, motivate and reward the exceptional level of leadership to which we and our stockholders have become accustomed.

 

Since 2005, cash bonus awards to executive officers, other than Robert I. Toll, have been determined pursuant to the Executive Officer Bonus Plan, which permits the Compensation Committee to award up to $3.5 million per year to each participant. The Compensation Committee has never awarded this maximum amount, but has used its discretion to award amounts that are significantly less than this maximum. Since the adoption of the Executive Officer Bonus Plan in fiscal 2005, the Committee has consistently granted bonus awards that were less than 50% of the maximum allowable, and has never awarded an annual bonus of more than $1.52 million to any individual participant under the Executive Officer Bonus Plan.

 

Tax Deductibility

 

The Senior Officer Plan is being presented to stockholders for approval in order to preserve the tax deductibility of cash incentive awards to executive officers under Section 162(m) (“Section 162(m)”) of the Code. Section 162(m) generally limits to $1 million per year the deductibility, for Federal income tax purposes, of cash compensation to any individual who, as of the end of the year, is the chief executive officer of a public company or one of the other three most highly compensated executive officers. This limitation does not apply to compensation that is deemed to be “qualified performance-based” within the meaning of Section 162(m). Therefore, if compensation qualifies as “qualified performance-based” for purposes of Section 162(m), we will be permitted to deduct it for federal income tax purposes.

 

The provisions of Section 162(m) require, among other things, that the material terms of compensation plans such as our bonus award plans must be approved by a company’s stockholders every five years in order for compensation awarded under such plan to qualify as “qualified performance-based.” The material terms of the Executive Officer Bonus Plan were last approved by stockholders in 2005, and, accordingly, its replacement, the Senior Officer Plan, will need to be approved by stockholders in 2010 in order for bonuses to qualify as “qualified performance-based compensation” under Section 162(m).

 

Material Provisions of Senior Officer Plan

 

The material provisions of the Senior Officer Plan are as follows:

 

1. Participants.  The participants in the Senior Officer Plan are those officers designated as participants by the Compensation Committee for a given Performance Period (as defined in the Senior Officer Plan and described below). As long as Robert I. Toll is a participant in the Toll Brothers, Inc. Cash Bonus Plan, he will not be eligible to be named as a participant in the Senior Officer Plan. If the Senior Officer Plan is approved by stockholders, the Compensation Committee has designated that the participants for fiscal 2010 will be our current executive officers (other than Robert I. Toll): Zvi Barzilay, Joel H. Rassman and Douglas C. Yearley, Jr.

 

2. Effective Date; Term.  Subject to the approval of our stockholders, the Senior Officer Plan will be effective for our fiscal year ending October 31, 2010, and subsequent years unless and until terminated by the Board of Directors.

 

3. Performance Periods.  The Compensation Committee has the discretion to establish Performance Periods for Awards (as defined in the Senior Officer Plan and described below) under the Senior Officer Plan.

Performance Periods may be equal to one of our full fiscal years, or may be longer or shorter than a full fiscal year. Multiple Awards may be granted to any participant.

 

4. Awards.  Awards are payable to participants in the Senior Officer Plan based on the achievement of one or more pre-established performance goals. For each Award established under the Senior Officer Plan, prior to or within the first 90 days of the relevant Performance Period (or, if the Performance Period is shorter than a full year, within the first 25% of the Performance Period), in accordance with the requirements of Section 162(m), the Compensation Committee will establish one or more performance goals with respect to such Performance Period and an objective formula or method for computing the amount of the Award payable to each participant if the specified performance goals are achieved. The performance goals established by the Compensation Committee will be based on one or more of the business criteria set forth in the Senior Officer Plan. At or after the end of each Performance Period, the Compensation Committee will determine whether and to what extent the performance goals have been achieved and will calculate the amount of the Award to be paid to each participant, if any, based upon the levels of achievement of the relevant performance goals and the objective formula or method established with respect to such Performance Period. The establishment of performance goals and the granting of Awards under the Senior Officer Plan will, in all cases, be implemented in a manner that is consistent with the requirements of Section 162(m) and the Treasury Regulations promulgated thereunder.

 

5. Cap on Awards.  Section 162(m) requires that the maximum potential Award amount payable under the Senior Officer Plan be disclosed to, and approved by, our stockholders, in order for any Award, regardless of its amount, to be tax-deductible by us. In order to ensure tax deductibility of all Awards under the Senior Officer Plan, the Compensation Committee has established that no Award payable under the Senior Officer Plan can exceed $8.5 million (the “Award Cap”), and in no event will the maximum aggregate amount payable to any participant with respect to Awards that have Performance Periods that end in the same fiscal year exceed two times the Award Cap, regardless of the number of Awards that would otherwise be payable in that fiscal year (the “Annual Payment Cap”). Awards that are limited pursuant to the Annual Payment Cap may not be carried over and paid during a subsequent fiscal year. The Compensation Committee will have no discretion to increase the amount of any Awards beyond the Award Cap or the Annual Payment Cap, as applicable, but may, in its sole discretion, reduce the amount of an Award to any lesser amount, or set the Awards at any lesser amount, including as low as $0, based on such facts and circumstances as it deems relevant.

 

6. Payment of Awards.  Awards under the Senior Officer Plan may be paid in cash, equity or a combination of the two. The equity portion of any Award under the Senior Officer Plan may be paid in shares of restricted stock, shares of unrestricted stock or restricted or unrestricted stock units, all of which will be issued from the Employee Plan or a successor plan. To the extent an Award is settled with equity, such equity shall be valued as of the end of the Performance Period for the Award.

 

7. Amendment and Termination of the Senior Officer Plan.  The Senior Officer Plan may be terminated or revoked by action of the Compensation Committee or the Board of Directors at any time. The Senior Officer Plan may be amended from time to time by the Compensation Committee, provided that no amendment may be made to the class of individuals who are eligible to participate in the Senior Officer Plan, the business criteria specified in the Senior Officer Plan or the maximum amount payable under the Senior Officer Plan without disclosure to and approval by our stockholders, unless stockholder approval is not required in order for the Award paid under the Senior Officer Plan to a covered employee (as defined in Section 162(m)) to constitute qualified performance-based compensation under Section 162(m). The Senior Officer Plan may be amended by the Compensation Committee as it deems appropriate in order to comply with the provisions of Section 162(m).

 

The foregoing description of the Senior Officer Plan is qualified in its entirety by reference to the full text of the Senior Officer Plan, which can be found in the accompanying Addendum C.

 

New Plan Benefits

 

The amount of any Award to a participant in the Senior Officer Plan depends on the performance goals established for an Award for such participant by the Compensation Committee, the determination as to whether

such performance goals were met, our overall performance as a company, the participant’s individual performance and the discretion of the Compensation Committee. The actual amount that will be received under the Senior Officer Plan (assuming stockholder approval of the Senior Officer Plan) for Awards that have already been established by the Compensation Committee is not currently determinable. The table below discloses, based on the assumptions contained in footnotes 2 and 3 thereto: (a) what each individual who was a named executive officer for fiscal 2009 could potentially have received if the Senior Officer Plan, and the Awards made thereunder, had been in effect for fiscal 2009, and (b) what all of our current executive officers as a group could potentially have received if the Senior Officer Plan, and the Awards made thereunder, had been in effect for fiscal 2009, in each case assuming that the Senior Officer Plan is approved by stockholders.

 

New Plan Benefits
Toll Brothers, Inc. Senior Officer Bonus Plan

 

 

 

 

 

 

Required Vote

 

To be approved, this proposal must receive an affirmative majority of the total votes cast at the Meeting “FOR” and “AGAINST” this proposal. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own in favor of approval of the Senior Officer Plan. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.” If the Senior Officer Plan is not approved by stockholders, we would not be able to deduct any fiscal 2010 cash compensation over $1 million that is awarded to any executive officer, other than Robert I. Toll.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” PROPOSAL FIVE

 

The Central Laborers’ Pension Fund, located at P.O. Box 1267, Jacksonville, IL 62651, the beneficial owner of approximately 1,600 shares, or approximately 0.001%, of our outstanding common stock, has submitted a stockholder proposal, which is quoted verbatim in italics below:

 

Stockholder Proposal

 

RESOLVED:  That the stockholders of Toll Brothers, Inc. (“Toll Brothers” or “the Company”) request that the Board of Directors adopt a policy that the Board’s Chairman be an independent director who has not previously served as an executive officer of the Company. The policy should be implemented so as not to violate contractual obligation. The policy should also specify (a) how to select a new independent chairman if a current chairman ceases to be independent during the time between annual meetings of shareholders; and, (b) that compliance with the policy is excused if no independent director is available and willing to serve as chairman.

 

SUPPORTING STATEMENT

 

It is the responsibility of the Board of Directors to protect shareholders’ long-term interests by providing independent oversight of management, including the Chief Executive Officer (CEO), in directing the corporation’s business and affairs. Currently at our Company, Robert Toll holds both the position of Chairman of the Board and CEO. We believe that this current scheme may not adequately protect shareholders.

 

Shareholders of Toll Brothers require an independent leader to ensure that management acts strictly in the best interest of the Company. By setting agendas, priorities and procedures, the position of Chairman is critical in shaping the work of the Board of Directors. Accordingly, we believe that having an independent director serve as chairman can help ensure the objective functioning of an effective Board.

 

We believe that ensuring that the Chairman of the Board of our Company is independent will enhance Board leadership at Toll Brothers, and protect shareholders from future management actions that can harm shareholders. Other corporate governance experts agree. As a commission of The Conference Board stated in a 2003 report, “The ultimate responsibility for good corporate governance rests with the Board of Directors. Only a strong, diligent and independent board of directors that understands the key issues provides wise counsel and asks management the tough questions is capable of ensuring that the interests of shareowners as well as other constituencies are being properly served.”

 

We believe that the current arrangement at Toll Brothers is of particular concern to shareholders since the Board of eleven directors includes three members identified as “inside” by the Corporate Library, a leading corporate governance research organization, and one identified as “outside related.” Further, the average tenure of those directors is over 14 years. In addition, we find the Board’s classified structure for director elections and the lack of a majority vote standard to elect new members to the Board problematic. These factors increase the need for true Independent leadership from its Chairman. We therefore urge shareholders to vote FOR this important corporate governance reform.

 

The Company’s Response

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE AGAINST THIS PROPOSAL FOR THE FOLLOWING REASONS:

 

The Board of Directors has carefully considered the proposal submitted by the Central Laborers’ Pension Fund and recommends that stockholders vote against this proposal. The Board believes it is not in our stockholders’ best interests to adopt a policy that the Chairman of the Board may not have served as one of our executive officers. The Chairman of the Board position demands an individual with strong leadership skills and a comprehensive knowledge of our Company. The Board believes it is important to have the flexibility to select a Chairman of the Board who is the best person for the job, regardless of whether that person is someone who is currently serving, or has previously served, as one of our executive officers.

The Board elects the Chairman of the Board on an annual basis. Each year the Board has an opportunity to review the leadership provided by Robert I. Toll in this capacity and determine whether it believes we would be better served by appointing a different person to serve as Chairman of the Board. In March 2009, following the 2009 Annual Meeting of Stockholders, the Board again gave careful consideration to separating the roles of Chairman of the Board and Chief Executive Officer and determined that our stockholders would be best served by having Mr. Toll continue to serve in both capacities. When making this determination in March 2009, the Board gave special consideration to the results from our 2009 Annual Meeting of Stockholders, where our stockholders had the opportunity to consider an identical proposal calling for the adoption of a policy that the Chairman of the Board be an independent director who has not previously served as an executive officer of the Company. Our stockholders resoundingly defeated this proposal, with approximately 74% of the votes cast against this proposal. This represented not only a majority of the votes cast, but also a majority of the voting power of our outstanding stock.

 

Mr. Toll, our co-founder, has served as Chairman of the Board since 1986. He is a prominent leader in the nation’s home building industry. Under Mr. Toll’s leadership, we have become one of the most trusted and respected home builders in the country and have received numerous awards from national, state and local home builder publications and associations. We are honored to have won all three of the industry’s highest honors: America’s Best Builder (1996), the National Housing Quality Award (1995), and Builder of the Year (1988). In addition, in 2009, Institutional Investor magazine named Mr. Toll the top CEO in our industry for the second year in a row and named us the most shareholder-friendly company in our industry.

 

The Board continues to believe that our current leadership structure and Board composition protect stockholder interests and provide sufficient independent oversight, while also providing exceptional leadership and direction for the Board and executive management. More than a majority of our current directors are “independent” under NYSE standards, as more fully described elsewhere in this proxy statement under “Corporate Governance.” The independent directors meet separately from our management on at least a quarterly basis and are very active in the oversight of our Company. The independent directors oversee such critical matters as the integrity of our financial statements, the evaluation and compensation of executive management, the selection and evaluation of directors, and the development and implementation of corporate governance programs.

 

Each independent director has the ability to add items to the agenda for Board meetings or raise subjects for discussion that are not on the agenda for that meeting. In addition, the Board and each Board committee has complete and open access to any member of management and the authority to retain independent legal, financial and other advisors as they deem appropriate. The Chair of our Nominating and Corporate Governance Committee, Edward G. Boehne, served as chair at meetings of the independent directors for several years. The Board believes that its majority-independent composition and the roles that our independent directors perform provide effective corporate governance at the Board level and independent oversight of both the Board and our management.

 

The Board believes that our stockholders have been and continue to be well served by having Mr. Toll serve as our Chairman of the Board. The current leadership model, when combined with the functioning of the independent director component of the Board and our overall corporate governance structure, strikes an appropriate balance between strong and consistent leadership and independent oversight of our business and affairs.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “AGAINST” PROPOSAL SIX

 

The Office of the Comptroller of New York City, located at 1 Centre Street, New York, NY 10007-2341, is the custodian and trustee of the New York City Employees’ Retirement System, the New York City Teachers’ Retirement System, the New York City Police Pension Fund and the New York City Fire Department Pension Fund, and the custodian of the New York City Board of Education Retirement System (collectively, the “funds”). The funds, which are the beneficial owners of approximately 318,131 shares, or approximately 0.2%, of our outstanding common stock, in the aggregate, have submitted the stockholder proposal quoted verbatim in italics below:

 

Stockholder Proposal

 

The Intergovernmental Panel on Climate Change (IPCC) recently concluded that warming of the climate system is unequivocal and that human activity is the main cause. Debate surrounding climate change now focuses not on whether a problem exists but rather on the best means for abatement and adaptation.

 

The rise in average global temperatures resulting from climate change is expected to have significant adverse impacts. According to Business Week, many scientists agree that the warmer temperatures resulting from climate change and causing more powerful storms and perhaps intensifying extreme weather events including droughts and wild fires. Thermal expansion and melting ice sheets are expected to lead to rising sea levels, with significant implications for coastal communities. Rising temperatures will also impact fresh water supplies. California’s Department of Water Resources, for instance, has stated that, “Adapting California’s water management systems to climate change presents one of the most significant challenges for the 21st century.”

 

Climate change also has important economic implications. The Stern Review, often cited as the most comprehensive overview of the economics of climate change, estimated that the cumulative economic impacts of climate change could be equivalent to a loss of up to 20% of average world-wide consumption if action is not taken quickly. A more general pronouncement in the IPCC’s report, Climate Change 2007: Impacts, Adaptation and Vulnerability, observed that “Taken as a whole, the range of published evidence indicates that the net damage costs of climate change are likely to be significant and to increase over time.”

 

According to the Washington Post, “Buildings are the largest source of the greenhouse-gas emissions that are causing global warming, and in the United States, half of building-related emissions are from houses.” In the latest The EPA estimates that the residential end-use sector accounted for 21% of CO₂ emissions from fossil fuel combustion in 2007.

 

With residential end-use accounting for such a high production of GHG emissions stemming from fossil fuel combustion, a number of recent studies have focused on energy efficiency improvements in residential dwellings as a potential source of emission reductions. One study in The McKinsey Quarterly found that nearly a quarter of cost-effective GHG abatement potential involves efficiency-enhancing measures geared at reducing demand in the buildings and transportation sectors. A second McKinsey study concluded that the residential sector represents the single-largest opportunity to raise energy productivity, noting that, “The adoption of available technologies (including high-efficiency building shells, compact fluorescent lighting, and high-efficiency water heating) would cut ... end-use demand for energy by 32 QBTUs in 2020, equivalent to 5 percent of global end-user demand in that year.”

 

RESOLVED:

 

Shareholders request that the Board of Directors adopt quantitative goals, based on available technologies, for reducing total greenhouse gas emissions from the Company’s products and operations and report to shareholders by December 31, 2010, on its plans to achieve these goals. Such a report will omit proprietary information and be prepared at reasonable cost.

The Company’s Response

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE AGAINST THIS PROPOSAL FOR THE FOLLOWING REASONS:

 

The Board of Directors has carefully considered the proposal submitted by the Office of the Comptroller of New York City and recommends that stockholders vote against this proposal. The Board of Directors believes that, because reduction of total greenhouse gas emissions from our products largely rests with the preferences of our home buyers, it is not appropriate for the Company to adopt quantitative goals for something over which we do not have full control. In addition, the adoption of quantitative goals to reduce total greenhouse gas emissions will require an expensive and complex technical analysis that will ultimately place us at a severe competitive disadvantage when competing to sell homes against other homebuilders who have not adopted such goals, as well as with the resale home market.

 

Commitment to Environmental Responsibility

 

We are committed to being an environmentally responsible builder. We recognize the importance of minimizing our impact on climate change to purchasers of our homes, our stockholders and other constituencies. In our business practices, we place a priority on the evaluation of our designs and building methods to better conserve resources, improve energy efficiency and reduce greenhouse gas emissions.

 

We have long recognized the benefits of improving the efficiency of our homes and have implemented various energy efficiency initiatives. On a community-by community basis, our homebuilding operations executives continually strive to improve the efficiency of our designs and periodically evaluate the relative costs and benefits of incorporating various energy efficient technologies into our communities. To that end, many of our communities offer:

 

 

We also designate some homes as Energy Star^® qualified homes, which means they meet guidelines for energy efficiency set by the U.S. Environmental Protection Agency. Energy Star^® qualified homes are at least 15% more energy efficient than homes built to the 2004 International Residential Code, and include additional energy-saving features that typically make them 20% to 30% more efficient than standard homes. Also, in New York City, our 303 East 33^rd project is the first LEED-registered building and energy-efficient condominium in its neighborhood. At 303 East 33^rd, the condominium layouts, materials and mechanical systems were designed to maximize efficiency and ensure sustainability. In keeping with our commitment to leadership in energy efficiency and environmental design, 303 East 33^rd was conceived using modern green technology, which includes covering approximately 75% of the roof with plants and heat- and light-reflecting materials in an effort to help prevent global warming and utilizing heating and cooling systems that use 15% less energy, as compared to other residential buildings its size, and which incorporates the highest level of efficiency for air filtration.

Our Home Buyers’ Role in Reduction of Greenhouse Gas Emissions

 

The stockholder proposal requests that the Board adopt goals for reducing greenhouse gas emissions from our products and cites a Washington Post article that claims that half of all building-related emissions are from houses. The reduction of greenhouse gas emissions from houses largely depends on consumer choices and individual efforts on the part of each household to conserve energy. The level of greenhouse gas emissions from our houses depends upon home design and option choices made by the home buyers prior to construction and their energy conservation efforts as they live in their Toll Brothers homes. As noted above, we strive to offer and promote various options to our home buyers that will increase energy efficiency and reduce greenhouse gas emissions related to our homes; however, the decision as to whether to include these energy efficient options in one of our homes or to take actions to conserve energy once living in the home rests squarely with our home buyers. Most of our homes are customized, with each buyer selecting specific options for his or her home. As the final decision-maker regarding energy-efficient options and the ultimate end users of our product, our home buyers are largely responsible for how, and to what extent, greenhouse gas emissions related to our products may be reduced. Based on our home buyers’ purchases and option selections to date, we have not seen meaningful market demand for many of the energy-efficient options we offer. While we are committed to continuing to offer and promote these options to our home buyers, we cannot force a home buyer to include an energy-efficient option in his or her home. For us to adopt quantitative goals to reduce something that we do not and cannot fully control is inappropriate and unreasonable.

 

Inappropriate Use of Resources and Competitive Disadvantage

 

The stockholder proposal requests that the Board adopt quantitative goals for reducing total greenhouse gas emissions, and report to stockholders on its plans to achieve these goals. Adoption of this proposal would require us to hire outside experts to conduct numerous expensive and complex analyses of each of our product types at each of our communities, and of each proposed community and new product type. These analyses would likely include:

 

 

While the analyses themselves would be both expensive and complex, the adoption of quantitative goals to reduce greenhouse gas emissions would place us at a competitive disadvantage. During the current market downturn, we have increasingly been forced to refrain from sales price increases and to increase incentives to compete with the growing supply of homes offered for sale by other home builders and on the resale market. Adoption of the technologies necessary to achieve quantitative goals to reduce greenhouse gas emissions would result in increases to our costs to build homes. If we were forced to increase our home prices, we would be placed at a competitive disadvantage to other home builders that have not adopted such goals, as well as with homes for sale on the resale market.

 

The Board has carefully considered this proposal and believes that we have proven our commitment to energy efficiency and that our stockholders are best served by allowing management to continue to direct us in this regard without being tied to a quantitative standard that is not common in our industry and would prove to be competitively harmful to us. Moreover, since predominant control over greenhouse gas emissions from our products lies with our home buyers, the Board does not believe it is in our best interests to spend valuable resources on adopting the measures set forth in this proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “AGAINST” PROPOSAL SEVEN

 

We operate within a comprehensive plan of corporate governance for the purpose of defining independence, assigning Board committee responsibilities, setting high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. We regularly monitor developments in the area of corporate governance.

 

Director Independence

 

The standards applied by the Board of Directors in affirmatively determining whether a director is “independent,” in compliance with the rules of the NYSE, generally provide that a director is not independent if:

 

(1) the director is, or has been within the last three years, our employee or an immediate family member (defined as including a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone, other than domestic employees, who shares such person’s home), or is, or has been within the last three years, one of our executive officers;

 

(2) the director has received, or has an immediate family member who has received, during any 12-month period within the last three years, more than $120,000 per year in direct compensation from us, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);

 

(3) (a) the director is a current partner or employee of a firm that is our internal or external auditor; (b) the director has an immediate family member who is a current partner of such a firm; (c) the director has an immediate family member who is a current employee of such a firm and who works on our audit; or (d) the director or an immediate family member was, within the last three years, a partner or employee of such a firm and personally worked on our audit within that time;

 

(4) the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of our present executive officers at the same time serves or served on that company’s compensation committee;

 

(5) the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to or received payments from us for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or two percent of such other company’s consolidated gross revenues; and

 

(6) the director or an immediate family member is, or within the past three years has been, an affiliate of another company in which, in any of the last three years, any of our present executive officers directly or indirectly either:

 

(a) owned more than five percent of the total equity interests of such other company, or

 

(b) invested or committed to invest more than $900,000 in such other company.

 

In addition to these objective standards, the Board of Directors has adopted a general standard, also in compliance with the NYSE rules, to the effect that no director qualifies as “independent” unless the Board of Directors affirmatively determines that the director has no material relationship with us.

The Board of Directors, in applying the above-referenced standards, has affirmatively determined that our current “independent” directors are Robert S. Blank, Edward G. Boehne, Richard J. Braemer, Christine N. Garvey, Roger S. Hillas, Carl B. Marbach, Stephen A. Novick and Paul E. Shapiro. As part of the Board’s process in making such determination, each such director provided written assurances that (a) all of the above-cited objective criteria for independence are satisfied, and (b) he or she has no other “material relationship” with us that could interfere with his or her ability to exercise independent judgment.

 

Independent and Non-Management Directors

 

 

Audit Committee

 

 

 

 

Executive Compensation Committee

 

 

Nominating and Corporate Governance Committee

 

 

 

 

Corporate Governance Guidelines

 

 

Codes of Business Conduct and Ethics

 

 

Compensation Committee Interlocks and Insider Participation

 

The only individuals who served as members of the Executive Compensation Committee during the fiscal year ended October 31, 2009, were Messrs. Carl B. Marbach and Stephen A. Novick, the current members of that committee. Both Mr. Marbach and Mr. Novick are independent directors, neither has had any relationship requiring disclosure by us under Item 404 of the SEC’s Regulation S-K and neither has ever served as an officer of the Company or any of our subsidiaries.

 

Personal Loans to Executive Officers and Directors

 

We comply with, and operate in a manner consistent with, applicable law prohibiting extensions of credit in the form of personal loans to or for the benefit of our directors and executive officers.

 

Director Attendance at Annual Meetings of Stockholders

 

It is the policy of our Board of Directors that all directors attend annual meetings of stockholders except where the failure to attend is due to unavoidable circumstances or conflicts discussed in advance by the director with the Chairman of the Board. All members of the Board of Directors attended our 2009 Annual Meeting of Stockholders.

 

Communication with the Board of Directors

 

Any person who wishes to communicate with the Board of Directors, or specific individual directors, including the chair of the non-management directors meetings or the non-management directors as a group, may do so by directing a written request addressed to such directors or director in care of the Office of the General Counsel, Toll Brothers, Inc., at the address appearing on the first page of this proxy statement. Communications directed to members of the Board who are management directors will be relayed to the intended Board member(s) except to the extent that it is deemed unnecessary or inappropriate to do so pursuant to the procedures established by a majority of the independent directors. Communications directed to non-management directors will be relayed to the intended Board member(s) except to the extent that doing so would be contrary to the instructions of such non-management directors. Any communication so withheld will nevertheless be made available to any non-management director who wishes to review it.

 

This compensation discussion and analysis (“CD&A”) describes each element of compensation that we pay or award to, or that is earned by, our named executive officers (“NEOs”). For our 2009 fiscal year, our NEOs were Robert I. Toll, Chairman and Chief Executive Officer (“CEO”); Zvi Barzilay, President and Chief Operating Officer (“COO”); and Joel H. Rassman, Executive Vice President, Chief Financial Officer and Treasurer (“CFO”).

 

Executive Summary

 

As we entered fiscal 2009, the Executive Compensation Committee of the Board of Directors (“Compensation Committee”) took note of the continued difficult conditions facing the home building industry. As a result, the Compensation Committee sought to compensate our NEOs in a way that would enable us to retain them as our senior management team through the current downturn, appropriately recognize their unique experience and skill sets and their efforts on behalf of the Company during fiscal 2009 and be consistent with our overall business objectives and our stockholders’ best interests. The Compensation Committee paid particular attention to our achievements in fiscal 2009 in light of the current recession in our industry and the economy as a whole, noting:

 

 

 

Some highlights of our fiscal 2009 compensation program, all of which are discussed in detail in this CD&A are:

 

 

In addition, consistent with our historical compensation practices, we maintained,

 

 

 

Total cash compensation (base salary and annual incentive bonus) to each of our NEOs for fiscal 2009 is set forth below. Details on total compensation, presented in the format required by the SEC, can be found in the Summary Compensation Table on page 48 of this proxy statement.

 

Overview of Contents

 

In this CD&A, you will find details on, and discussion of, the following topics:

 

 

Compensation Governance — Role of Executive Compensation Committee

 

The compensation program for our NEOs is administered by the Compensation Committee, which is, and for all of fiscal 2009 was, comprised of Messrs. Carl B. Marbach (Chair) and Stephen A. Novick. More information on the Compensation Committee’s experience, independence, duties and meetings held during fiscal 2009 can be found under “Proposal One — Election of Directors” and “Corporate Governance” in this proxy statement.

 

The Compensation Committee is responsible for all aspects of executive compensation, including, among other things:

 

 

Role of Executive Officers

 

The Compensation Committee works with management to establish meeting agendas and determine who should be invited to attend meetings. Throughout the year, the Compensation Committee requests various types of information from management, including information about other companies, including home building companies and the home building industry in general. At various times during fiscal 2009, our CFO was invited by the Compensation Committee to attend relevant portions of the Compensation Committee meetings in order to provide information and answer questions regarding the Company’s strategic objectives and financial performance that impact the Compensation Committee’s functions. Our CEO and COO have both been available to members and meetings of the Compensation Committee, but did not attend any Compensation Committee meetings during fiscal 2009. Our CEO annually submits recommendations to the Compensation Committee regarding equity compensation, performance goals and overall compensation levels for the COO and CFO. The Compensation Committee then exercises its discretion in determining actual awards to the COO and CFO. The Compensation Committee acts alone in evaluating the CEO’s performance and setting CEO compensation.

 

Use of Compensation Consultants

 

During fiscal 2009, the Compensation Committee engaged the executive compensation advisory firm, Mercer (US) Inc. (“Mercer”), which receives instructions from, and reports to, the Compensation Committee. Mercer is

also authorized by the Compensation Committee to share with and request and receive from management certain information in order to prepare for meetings. The Compensation Committee requested Mercer’s advice on a variety of issues, including compensation strategy, market comparisons, pay and performance alignment versus industry peers, executive pay trends, compensation best practices and potential compensation plan designs and modifications. The Compensation Committee met with Mercer, both with and without one or more members of our management, on several occasions during fiscal 2009 and thereafter.

 

Compensation Philosophy and Objectives

 

The Board of Directors and the Compensation Committee believe that our ability to retain and motivate NEOs who possess the skills, experience and capacity to succeed in our competitive industry has been essential to the long-term success of our Company and a significant factor in creating long-term value for our stockholders. Base salaries, annual incentive bonuses, long-term equity compensation and competitive benefits are the primary tools used to retain and motivate our NEOs to deliver superior performance and to enhance value to our stockholders. Our compensation philosophy recognizes the value of rewarding our NEOs for their past performance and motivating them to continue to excel in the future. The Compensation Committee has developed and maintains a compensation program that is intended to reward superior performance and encourage actions that drive our business strategy.

 

The compensation policies for our NEOs are based on the philosophy that compensation should reflect both our Company’s financial and operational performance and the individual performance of the executive. The Compensation Committee also believes that long-term incentives should be a significant factor in the determination of compensation, particularly because the business of home building, including evaluating and purchasing land, planning the use of that land, obtaining approvals and completing development, and many of the other actions and decisions of our NEOs, require a long time horizon before we realize a tangible financial benefit.

 

The Compensation Committee’s primary objectives when setting compensation for our NEOs are:

 

 

 

 

 

Elements of Compensation

 

The Compensation Committee seeks to be creative, as well as cognizant of changing economic and industry conditions, in its choice of methods to achieve these objectives, using a variety of compensation elements described below.

 

 

Compensation Decision Making Process

 

The Compensation Committee reviews and determines base salary, annual incentive bonuses and long-term incentive compensation, as well as benefits and perquisites, on an annual basis. For fiscal 2009, the steps taken by the Compensation Committee to establish and award compensation to our NEOs were as follows:

 

 

Certain elements of the compensation decision-making process are more fully described below.

 

Establish Performance Goals

 

The Compensation Committee, when setting performance goals, reviews the Company’s financial condition, current industry and national economic factors and compensation practices and trends at other companies within our industry and our market capitalization, and attempts to set goals that will effectively motivate the NEOs to achieve the Company’s most important business objectives, while limiting risk. The establishment of performance goals does not automatically entitle any NEO to a bonus or require that the Compensation Committee award a bonus if the relevant performance goals are met. Rather, the establishment of performance goals permits the Compensation Committee, in its discretion, to determine to award bonuses to our NEOs that will be tax-deductible by us, if the performance goals are met.

 

At the beginning of fiscal 2009, the Compensation Committee, mindful of the severe downturn the housing industry was continuing to experience, believed that the achievement of revenues was once again an important goal that each of our NEOs should focus on during fiscal 2009. It established that eligibility for the full bonus available under the Executive Officer Bonus Plan and under the Plan Year Performance Bonus component of the Cash Bonus Plan would be conditioned upon our achievement of at least $1.2 billion in consolidated revenues in fiscal 2009, and eligibility for 80% of the full bonus available under the Executive Officer Bonus Plan and under the Plan Year Performance Bonus component of the Cash Bonus Plan would be conditioned upon our achievement of at least $960 million in consolidated revenues in fiscal 2009. The Compensation Committee established $1.2 billion in

revenues as the goal after reviewing, among other things, market conditions, our backlog (homes under contract but not yet delivered) at the end of fiscal 2008, the average sales price of those homes, the number of homes in backlog which were projected to be delivered during fiscal 2009, and trends in cancellation rates and delivery delays which we were experiencing at the time.

 

Review Market Comparisons

 

Although the Compensation Committee does not believe that it is appropriate to establish compensation levels based solely on market comparisons or industry practices, it believes that information regarding pay practices at other companies is useful in two respects. First, marketplace information is one of the many factors that the Compensation Committee considers in assessing the reasonableness of compensation. Second, it recognizes that our compensation practices must be generally competitive for executive talent in the home building industry and the market overall. Finally, the Compensation Committee recognizes that our NEOs have more tenure with our Company and more combined years of experience than any other executive team in our industry. While the Compensation Committee factors peer compensation levels and practices into its compensation decisions, it does not target compensation at any particular point within a range established by a comparison of the financial performance or compensation levels of our peer companies.

 

When setting fiscal 2009 salaries, performance goals and ultimate bonus amounts, and equity compensation awards, the Compensation Committee, with assistance from Mercer, compared our NEOs’ compensation against a peer group of publicly-traded home building companies. The homebuilding peer group for fiscal 2009 consisted of the following companies with whom the Compensation Committee believes we primarily compete for talent and market share.

 

 

Mercer also provided compensation data for companies outside of the home building sector for the Compensation Committee’s consideration.

 

Review Company Performance

 

Throughout the fiscal year, the full Board of Directors monitors our financial performance in relation to our historical performance and, to the extent reliable data is available, in relation to our peers. Following the conclusion of fiscal 2009, the Compensation Committee reviewed data on our performance during the fiscal year, which it considered when making final fiscal 2009 compensation decisions.

 

Fiscal 2009 Compensation Elements

 

Base Salary

 

Base salaries for the NEOs are established by the Compensation Committee on an annual basis. For fiscal 2009, the Compensation Committee established a base salary for the CEO of $1,170,000, which was 10% lower than his fiscal 2008 base salary. The Compensation Committee reduced Mr. Toll’s fiscal 2009 salary by 10% below its fiscal 2008 level in the interest of conserving our cash resources; similar actions were taken with respect to the fiscal 2008 bonuses for the other NEOs. Fiscal 2009 base salaries for the COO and the CFO were set at $1,000,000. When establishing annual base salaries, the Compensation Committee takes into account each NEO’s performance of his role and responsibilities and the compensation of comparable executives at other public home building companies in our peer group. The Compensation Committee believes that its compensation objectives are more effectively met when the majority of an executive’s compensation package is comprised of performance-based bonuses and long-term incentive compensation. Through fiscal 2009, the Compensation Committee had not raised the CEO’s base salary since fiscal 2004, the COO’s since fiscal 2003 and the CFO’s since fiscal 2005.

Annual Incentive Bonus — Robert I. Toll

 

An annual incentive bonus is payable to Mr. Toll if and when earned under the terms of the stockholder-approved Cash Bonus Plan. Amounts payable under the Cash Bonus Plan are designed to be “performance-based” compensation and, therefore, exempt from the limitations on tax deductibility under Section 162(m).

 

Description of the Cash Bonus Plan.  The Cash Bonus Plan was approved by our stockholders at the 2008 Annual Meeting of Stockholders and subsequently amended and restated by the Compensation Committee to clarify certain terms not material in nature. The purpose of the Cash Bonus Plan is to provide a tax-deductible, performance-based bonus for Mr. Toll, paid partly in accordance with a formula that is based on our financial success and partly on the basis of one or more performance goals, all as part of an integrated compensation program which is intended to assist us in motivating and retaining the leadership of our co-founder, Robert I. Toll.

 

The Cash Bonus Plan has two components — a Company performance component (“Company Performance Bonus”) and an individual performance component (referred to in the Cash Bonus Plan and herein as the “Plan Year Performance Bonus”). The formula for determining the Company Performance Bonus is set forth in the Cash Bonus Plan and is equal to 2.0% of our pre-tax income before CEO bonus for the applicable fiscal year.

 

The Plan Year Performance Bonus under the Cash Bonus Plan is determined on an annual basis by the Compensation Committee, based on the achievement of one or more performance goals established by the Compensation Committee at the beginning of each fiscal year based upon various business criteria as set forth in the Cash Bonus Plan. In no event can the total amount of the Plan Year Performance Bonus exceed the greater of $5.2 million or 1/10 of 1% of our gross revenues for the applicable fiscal year. The Compensation Committee, in its sole discretion, has the power to reduce or completely eliminate, but not increase, the Plan Year Performance Bonus.

 

Bonuses under the Cash Bonus Plan may be paid in cash, in shares of our common stock or both; the method of payment is determined by the Compensation Committee. In addition, in no event shall the sum of the Company performance component and the Plan Year Performance Bonus (cash and fair market value of stock) exceed $25 million.

 

Fiscal 2009 Company Performance Bonus Determination.  In fiscal 2009, we did not have pre-tax income; therefore Mr. Toll was not entitled to a Company Performance Bonus under the terms of the Cash Bonus Plan.

 

Fiscal 2009 Plan Year Performance Bonus Determination.  At the beginning of fiscal 2009, the Compensation Committee established that eligibility for the full amount available to Mr. Toll under the Plan Year Performance Bonus was conditioned upon our achievement of at least $1.2 billion in consolidated revenues in fiscal 2009, and eligibility for 80% of the amount available to Mr. Toll under the Plan Year Performance Bonus was conditioned upon our achievement of at least $960 million in consolidated revenues in fiscal 2009.

 

The Compensation Committee met in December 2009 and certified that we had achieved at least $1.2 billion in consolidated revenues (our actual fiscal 2009 consolidated revenues were $1.76 billion) during fiscal 2009 and, therefore, the maximum amount ($5.2 million) was available for the Plan Year Performance Bonus. The Compensation Committee then evaluated Mr. Toll’s overall performance during fiscal 2009, in light of the difficult industry conditions during this period, and noted that he had done an excellent job of steering the Company through the worst downturn our industry has ever experienced. Specific factors noted by the Compensation Committee were: the increase in our net contracts during the second half of fiscal 2009, as compared to fiscal 2008, the maintenance of our strong balance sheet and significant liquidity, the selection of Mr. Toll as top CEO in the homebuilding industry by Institutional Investor magazine and the selection of Toll Brothers as the most admired homebuilding company by Fortune magazine. Although the Compensation Committee determined that the performance goal had been met and exceeded and that Mr. Toll had performed exceedingly well during fiscal 2009, it decided that no Plan Year Performance Bonus would be paid for fiscal 2009 due to overall economic conditions, both in our industry and the country as a whole. The Compensation Committee believed surpassing the performance goal and the outstanding individual accomplishments of the CEO in fiscal 2009 merited a long-term incentive compensation award, which was granted in December 2009 and is further described below under “Elements of NEO Compensation for Fiscal Year 2010.”

Annual Incentive Bonus — COO and CFO

 

Description of Executive Officer Bonus Plan.  The Executive Officer Bonus Plan was last approved by our stockholders in 2005. The awards paid under the Executive Officer Bonus Plan are designed to be “performance-based compensation” under Section 162(m) for participants. In order for compensation awarded under the Executive Officer Bonus Plan to continue to qualify as “performance-based,” the Executive Officer Bonus Plan would need to be approved by stockholders at the 2010 Annual Meeting. The Compensation Committee has proposed that the Executive Officer Bonus Plan be replaced with the Senior Officer Plan, which is further described elsewhere in this CD&A and in Proposal Five contained in this proxy statement.

 

The Executive Officer Bonus Plan is designed to permit us to pay participants incentive compensation based upon the achievement of one or more pre-established performance goals. It is administered by the Compensation Committee, which, at the beginning of each performance period in accordance with the requirements of Section 162(m), designates the specific executives who will participate in the Executive Officer Bonus Plan for that performance period and establishes one or more performance goals that it will use for determining each participant’s bonus for such performance period. The only participants in the Executive Officer Bonus Plan since its adoption have been the COO and the CFO, although the Compensation Committee has the discretion to add other participants. At or after the end of each performance period, the Compensation Committee determines whether the pre-established performance goal or goals were satisfied during the performance period. The actual bonus award to any participant for a performance period is then determined by the Compensation Committee. The Executive Officer Bonus Plan limits the maximum amount of any participant’s bonus for any fiscal year to the lesser of (a) 350% of the participant’s annual base salary as in effect at the beginning of that fiscal year or (b) $3.5 million. It also limits the aggregate amount of all bonuses payable in any plan year under the Executive Officer Bonus Plan to 10% of our average annual income before taxes for the preceding five fiscal years. The Compensation Committee has no discretion to increase the amount of any participant’s bonus under the Executive Officer Bonus Plan, but may reduce (as it has done every year to date) the amount of, or totally eliminate, the bonus if it determines, in its absolute and sole discretion, that such a reduction or elimination is appropriate.

 

Fiscal 2009 Performance Goal.  For fiscal 2009, the Compensation Committee established that eligibility for the full $3.5 million available to each of the COO and CFO under the Executive Officer Bonus Plan was conditioned upon our achievement of at least $1.2 billion in consolidated revenues in fiscal 2009 and eligibility for 80% of the amount available to each of the COO and CFO under the Executive Officer Bonus Plan was conditioned upon our achievement of at least $960 million in consolidated revenues in fiscal 2009.

 

The Compensation Committee met in December 2009 and certified that we had achieved at least $1.2 billion in consolidated revenues (our actual fiscal 2009 consolidated revenues were $1.76 billion) during fiscal 2009 and, therefore, the maximum amount ($3.5 million) was available to each of the COO and CFO. The Compensation Committee then evaluated each of the COO’s and CFO’s overall individual performance during fiscal 2009, in light of the current difficult industry conditions, and noted each executive had performed exceptionally well in fiscal 2009.

 

With respect to the COO, the Compensation Committee particularly noted the following: he was instrumental in leading us to an increase in net contracts in the second half of fiscal 2009, as compared to fiscal 2008, and to a $73 million reduction in our general and administrative costs during fiscal 2009, as compared to fiscal 2008, and he continued to oversee the strategic expansion of the Company, with our entry into the Houston, TX market in fiscal 2009.

 

With respect to the CFO, the Compensation Committee cited his leadership role in: the two public debt offerings we completed in fiscal 2009, particularly noting our status as the first public home builder to raise capital following 2008’s financial market meltdown; the redemption, repurchase and tender for various series of our public debt, which led to the extension of the average maturity of our outstanding public debt from 3.5 years to 6.1 years; the maintenance of our investment grade rating at two of the three major rating agencies; the increased balance of cash and marketable securities at October 31, 2009, as compared to October 31, 2008; our continued compliance with our debt covenants; and his recognition by Institutional Investor magazine as top CFO in the homebuilding industry.

The Compensation Committee believed that, by surpassing the performance goal and by performing in an outstanding manner in fiscal 2009, the COO and CFO merited bonuses for fiscal 2009 performance of $1,520,000 and $1,220,000, respectively. The Committee believed these amounts were appropriate given the performance by each of the COO and CFO during fiscal 2009, and were reasonable in light of current economic conditions and comparisons within our industry. In addition, the Compensation Committee believed the individual performance of the COO and CFO in fiscal 2009 merited long-term incentive compensation awards, which were granted in December 2009 and are further described below under “Elements of NEO Compensation for Fiscal Year 2010.”

 

Long-Term Incentive Compensation

 

Long-term incentive compensation is designed to provide NEOs with incentives to enhance stockholder value through their efforts. No constant criteria are used by the Compensation Committee from year to year in the granting of equity compensation. The Compensation Committee makes a subjective determination of the effectiveness of each NEO and the extent of his contributions to our success and, based on that determination, awards equity compensation.

 

Equity compensation to any of our employees, including our NEOs, may be either in the form of stock options, stock appreciation rights, stock awards or stock units (which may be restricted, unrestricted or performance-based), in accordance with the terms of our stockholder-approved Employee Plan.

 

Our traditional grant date for all equity compensation is December 20 of each year (or the immediately preceding or succeeding business day if December 20 falls on a weekend) for all employees, including NEOs; all determinations with regard to such grants have been made in advance of that date. We grant equity compensation on a set date each year, and we do not time or plan the release of material, non-public information for the purpose of affecting the value of executive compensation.

 

The Compensation Committee’s primary purposes and objectives when granting equity compensation to our NEOs under the Employee Plan are to:

 

 

Stock Options.  During fiscal 2009, the Compensation Committee granted stock options to certain NEOs, as set forth in the table below. These grants were awarded at the beginning of fiscal 2009 in recognition of the respective NEO’s service during fiscal 2008.

 

 

The Compensation Committee chose to grant stock options to the COO and CFO in order to further the Compensation Committee’s objectives of motivating these NEOs to achieve long-term financial results — such as improved financial or other performance that may ultimately cause an increase in the market price of our stock. Because the options were granted with exercise prices equal to the fair market value of the underlying common stock on the date of the grant, any value that ultimately accrues to the grantee is based entirely upon our performance, as perceived by investors who establish the market price of our common stock. In determining the number of shares able to be acquired by the COO and CFO upon exercise of the option, the Compensation Committee reviewed its fiscal 2008 stock option grants and believed similar grants were appropriate. The

Compensation Committee chose not to grant stock options to the CEO in fiscal 2009; rather, it chose to award performance-based equity compensation to the CEO, as further described below.

 

The term of these options is 10 years from the date of the grant and the options vest equally over a four year period, beginning on the first anniversary of the date of the grant. These options will continue to vest and be exercisable upon death, disability or retirement of the NEO and will fully vest upon a change of control of the Company. In addition, all stock options, vested and unvested, granted to NEOs are subject to forfeiture in the event that, after the NEO retires or otherwise leaves our employ, the NEO competes with us.

 

Restricted Stock Units.  During fiscal 2009, the Compensation Committee granted restricted stock units (“RSUs”) to the NEOs, as set forth in the table below:

 

 

The Compensation Committee granted RSUs worth $130,000 to the CEO, $152,000 to the COO and $122,000 to the CFO, which corresponded to the 10% reduction in the CEO’s fiscal 2009 base salary and the 10% reduction in the COO’s and CFO’s fiscal 2008 bonuses. The exact number of shares underlying each RSU was determined by dividing the dollar value set forth above by the closing price of our common stock on the NYSE on December 19, 2008. Each RSU vests over a four-year period and is subject to automatic vesting upon the NEO’s death, disability or retirement or upon a change of control of the Company. The Compensation Committee chose to award these RSUs in lieu of cash compensation in order to conserve our cash resources.

 

Performance-Based Restricted Stock Unit.  During fiscal 2009, the Compensation Committee, in lieu of granting stock options to the CEO, awarded him a performance-based RSU relating to 200,000 shares of our common stock. The underlying shares were valued based on the closing price of our common stock on the NYSE on December 19, 2008. The RSU is performance-based and will only vest if (i) the average closing price of our common stock on the NYSE, measured over any 20 consecutive trading days ending on or prior to December 19, 2013, increases 30% or more over the closing price of our common stock on the NYSE on December 19, 2008, and (ii) provided Mr. Toll continues to be employed by us or serve as a member of our Board of Directors until December 19, 2011. The performance-based RSU will also vest if Mr. Toll dies or becomes disabled, or we experience a change of control prior to satisfaction of the aforementioned performance criteria. The Compensation Committee chose to award this performance-based RSU and selected the increase in stock price and continued service as its vesting criteria in an effort to retain Mr. Toll, to motivate him to continue to lead us in such a manner that will cause a sustained increase in our stock price and to further align his financial interests with those of our stockholders. As of the date of this proxy statement, none of the vesting criteria have been satisfied.

 

Benefits and Perquisites

 

We provide all of our employees (after 60 days of service with us), including our NEOs, with certain employee benefits. These include the opportunity to save for retirement through the Toll Brothers 401(k) Savings Plan (the “401(k) Plan”), which is more fully described below, and various health and welfare benefit programs, including medical, dental, life and short-term disability insurance. We share the cost of these benefit programs with our employees. Our NEOs participate in these programs on the same terms as our other employees. These programs are intended to promote the health and financial security of our employees and are provided at competitive market levels to attract, retain and reward employees.

 

Retirement Benefits.  We provide various plans to meet the retirement needs of our NEOs. Retirement plans are an important part of the overall compensation scheme because we seek to provide our NEOs with the ability to plan for their future while keeping them focused on our present success.

 

401(k) Savings Plan.  All employees, including our NEOs, after 60 days of service with us, are eligible to participate in the 401(k) Plan. The 401(k) Plan is a qualified retirement savings plan under Section 401(k) of the Code. Participants in the 401(k) Plan may contribute a portion of their compensation, subject to IRS regulations and

certain limitations applicable to “highly compensated employees,” as such term is defined in the Code. After a year of service, we may match a portion of each participant’s contribution and also may make an annual discretionary contribution to each active participant’s account. All of the NEOs are participants in the 401(k) Plan.

 

In January 2009, as an additional cash-conservation measure, we suspended the matching 401(k) contribution for all employees, including the NEOs and Mr. Bruce E. Toll, who had not reached the maximum matching contribution at the time of the suspension. Prior to suspension of this benefit, we made $4,600 in matching contributions to each of Mr. Barzilay and Mr. Rassman; Mr. Robert I. Toll did not receive a matching contribution because he did not receive any compensation from us in 2009 prior to suspension of this benefit. The annual discretionary contribution made in March 2009 was for service rendered during fiscal 2008, and was $7,160 for each NEO. We do not currently expect to make any matching or discretionary contributions during fiscal 2010.

 

Supplemental Executive Retirement Plan (“SERP”).  We also maintain our SERP, which provides retirement benefits to our NEOs. The Board’s intention when adopting the SERP was to provide competitive retirement benefits, to protect against reductions in retirement benefits due to tax law limitations on qualified plans and to encourage continued employment or service with us.

 

The SERP, which is currently an unfunded plan, generally provides for an annual benefit, payable for 20 years following retirement, once a participant has completed 20 years of service with us and has reached “normal retirement age,” which is age 62 under the SERP. The SERP also provides for increases in annual retirement benefits to the NEOs for each year of service to the Company after age 62. For each NEO on his birthday during fiscal 2009, annual retirement benefits under the SERP increased by 10% of the applicable original annual benefit amount (set forth below), and the annual retirement benefit to each NEO shall continue to increase each year by 10% of the applicable original annual benefit amount (set forth below), effective on each NEO’s birthday each year through fiscal 2018 or earlier if the NEO retires or his service with us ends due to death or disability. In order to be eligible for the annual increase in any given year, the NEO must be employed by us on his birthday during such year, have completed 20 years of service with us on or prior to his birthday during such year, and have reached normal retirement age on or prior to his birthday during such year. The original annual benefit amounts, the fiscal 2009 increase and the annual benefits to our NEOs under the SERP as of the end of fiscal 2009 are set forth in the table below.

 

 

All of the NEOs have completed the requisite 20 years of service with us and have reached normal retirement age and are, therefore, fully vested in their SERP benefits. Benefits under the SERP will cease if any participant competes with us following retirement.

 

Perquisites.  Perquisites did not constitute a material portion of the compensation paid to the NEOs for fiscal 2009. We provide our NEOs with limited perquisites and personal benefits that the Company and the Compensation Committee believe are consistent with our executive compensation philosophy and objectives. Each fiscal year, the Compensation Committee reviews and approves those perquisites which are to be provided to our NEOs. The Compensation Committee believes the perquisites for fiscal 2009 — which included auto and gas allowances, insurance, telephone and internet services and tax and financial statement preparation as more fully described in the Summary Compensation Table in this proxy statement — are reasonable, consistent with past practices and consistent with general practices in our industry.

 

Deferred Compensation Plan.  Our NEOs may elect to defer receipt of all or part of their cash compensation pursuant to the Toll Bros., Inc. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”). The purpose of the Deferred Compensation Plan is to offer eligible employees an opportunity to elect to defer the receipt of compensation in order to provide deferred compensation, post-employment, supplemental retirement and related benefits. The Deferred Compensation Plan is open to certain management and highly compensated employees; all of the NEOs are eligible to participate in the Deferred Compensation Plan. Under the Deferred

Compensation Plan, NEOs may elect, prior to the beginning of the year, to defer a portion of their cash compensation during any calendar year. They may select a fixed payment date or dates for payment of the deferred amounts, or elect to have such amounts paid upon termination of employment. We have the right under the Deferred Compensation Plan to make discretionary contributions for the benefit of any participant in the plan. We did not make any discretionary contributions under the Deferred Compensation Plan for any NEO in fiscal 2009.

 

During fiscal 2009, Mr. Zvi Barzilay elected to defer compensation under the Deferred Compensation Plan; Messrs. Robert I. Toll and Joel H. Rassman did not elect to defer any compensation during fiscal 2009. Compensation that is deferred under the Deferred Compensation Plan earns various rates of return, depending upon when the compensation was deferred and the length of time it has been deferred. Interest earned during fiscal 2009 on any NEO deferred compensation is included under “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the Summary Compensation Table in this proxy statement, and further information about NEO deferred compensation is contained in the Nonqualified Deferred Compensation at October 31, 2009 table in this proxy statement.

 

Employment Agreements, Change of Control Provisions and Severance Payments

 

Other than a 1988 agreement with our CFO (described below), none of our NEOs have an employment agreement with us. We do not have a severance plan for our NEOs. Our equity compensation plans and our SERP provide for the acceleration of certain benefits in the event we experience a change of control.

 

CFO Agreement

 

We are a party to an agreement, dated June 30, 1988, with our CFO, Mr. Joel H. Rassman (the “CFO Agreement”). The CFO Agreement is an amended and restated version of an agreement that was a condition to Mr. Rassman’s employment with us in 1984. The CFO Agreement provides, among other things, Mr. Rassman with certain protections in the event his employment with us terminates. The CFO Agreement provides for a one-time payment of at least $250,000, with the potential for an additional one-time payment to Mr. Rassman in the event he (a) is terminated by us without cause, (b) leaves our employ after a material reduction in duties or benefits or (c) leaves our employ due to his compensation being less than $350,000. The CFO Agreement also provides for payment of three months’ base salary in the event Mr. Rassman is terminated for cause. In addition, the CFO Agreement provides that in the event of Mr. Rassman’s death, his widow will be entitled to receive two months’ base salary and, in certain circumstances, his legal representatives may be entitled to an additional amount which shall not exceed $350,000.

 

Change of Control Provisions

 

We have no change of control agreements relating to employment benefits; however, under our equity compensation plans and our SERP, awards and benefits are generally subject to special provisions upon a defined “change of control” transaction. Upon a change of control, any outstanding options, restricted stock, deferred cash or other plan awards will generally immediately vest and any restrictions will immediately lapse. Under the SERP, if there is a change of control of the Company, all participants in the SERP shall be fully vested in their SERP benefits and potentially eligible for a lump sum payout.

 

Tax and Accounting Implications

 

Tax Regulations.  Section 162(m) generally disallows a tax deduction to a public company for compensation over $1 million paid to certain “covered employees” (its chief executive officer and to any of its three other most highly-compensated executive officers). Performance-based compensation will not be subject to the deduction limitation if certain requirements set forth in the Code and applicable Treasury Regulations are met. We generally structure our compensation plans for our NEOs to comply with the performance-based compensation exemption requirements of Section 162(m); however, since corporate objectives may not always be consistent with the requirements for full deductibility, the Board of Directors and the Compensation Committee may award non-deductible compensation to our NEOs as they deem appropriate.

Accounting Considerations.  When making decisions about executive compensation, the Compensation Committee also considers how elements of compensation will impact our financial results. We accrue our NEOs’ salaries and cash bonus awards as an expense when earned by the NEO. For equity compensation grants, SFAS 123R requires us to recognize compensation expense for all share-based payment arrangements, based upon the grant date fair value of those awards. In the Summary Compensation Table contained in this proxy statement, we are required to the show compensation expense for equity awards made to our NEOs and to include this expense as part of the NEOs’ total compensation. This number, while required by the SEC rules and important for understanding the impact of granting equity on our financial statements, may not accurately represent the value received by the NEO. For example, stock options have a compensation expense for accounting purposes, but do not have any value to an NEO unless the market value of our stock increases above the exercise price of the stock option. In fact, options granted over the past five years to our NEOs were “underwater” as of October 31, 2009 (i.e., the exercise price of these options is higher than the closing price of our common stock on the NYSE on October 31, 2009). Similarly, stock awards and stock units fluctuate in value based on the market price of our stock, and may be worth more or less than the associated compensation expense. Finally, performance-based stock awards and stock units, which do have a compensation expense to us, may never have any value to the recipient because the performance criteria may never be met.

 

Looking Ahead — Fiscal 2010

 

Named Executive Officers for Fiscal 2010

 

The Compensation Committee anticipates that we will have four named executive officers for fiscal 2010: Robert I. Toll, Chairman and Chief Executive Officer; Zvi Barzilay, President and Chief Operating Officer; Joel H. Rassman, Executive Vice President, Chief Financial Officer and Treasurer; and Douglas C. Yearley, Jr., Executive Vice President.

 

Adoption of Toll Brothers, Inc. Senior Officer Bonus Plan

 

At the beginning of our 2010 fiscal year, the Compensation Committee developed, and our Board of Directors adopted, the Senior Officer Plan. If approved by our stockholders, the Senior Officer Plan will be effective for fiscal 2010. For additional information about the Senior Officer Plan, please see Proposal Five in this proxy statement.

 

Elements of NEO Compensation for Fiscal Year 2010

 

Base Salary.  In December 2009, the Compensation Committee established the following fiscal 2010 base salaries for our executive officers:

 

 

Annual Incentive Bonus — Mr. Toll.  Mr. Toll will be entitled to a Company Performance Bonus under the Cash Bonus Plan for fiscal 2010 equal to 2.0% of our fiscal 2010 income before taxes and CEO bonus. As noted above, the Cash Bonus Plan also contains a Plan Year Performance Bonus. The amount of the Plan Year Performance Bonus is determined by evaluating Mr. Toll’s performance in light of one or more performance goals established by the Compensation Committee. In December 2009, the Compensation Committee determined that, for the fiscal year ending October 31, 2010, the Plan Year Performance Bonus will be conditioned upon our achievement of a specified level of net revenues in fiscal 2010. If this goal is achieved, Mr. Toll will be eligible for a Plan Year Performance Bonus, which may not exceed the greater of $5.2 million or 1/10 of 1% of fiscal 2010 gross revenues, as set forth in the Cash Bonus Plan. The establishment of this performance goal does not automatically entitle Mr. Toll to a fiscal 2010 Plan Year Performance Bonus or require that the Compensation Committee award a fiscal 2010 Plan Year Performance Bonus if the performance goal is met. Rather, the establishment of this performance goal permits the Compensation Committee, in its discretion, to determine to award a Plan Year

Performance Bonus to Mr. Toll for fiscal 2010 performance that will be tax-deductible by us, if the performance goal is met. The Compensation Committee may reduce the maximum amount otherwise payable under the Plan Year Performance Bonus based upon such facts and circumstances that the Compensation Committee deems relevant. All bonuses under the Cash Bonus Plan are subject to a $25 million cap.

 

Annual Incentive Bonus — Messrs. Barzilay, Rassman and Yearley.  In December 2009, the Compensation Committee determined that Messrs. Barzilay, Rassman and Yearley would be participants in the Senior Officer Plan for fiscal 2010 and determined that potential bonuses for fiscal 2010 under the new Senior Officer Plan, if adopted by stockholders, will be conditioned upon our achievement of a specified level of net revenues in fiscal 2010. If this goal is achieved, each participant will be eligible for a bonus, which may not exceed the maximum amount permitted under the Senior Officer Plan. The establishment of this performance goal does not automatically entitle any participant to a fiscal 2010 bonus or require that the Compensation Committee award a fiscal 2010 bonus if the performance goal is met. Rather, the establishment of this performance goal permits the Compensation Committee, in its discretion, to determine to award a bonus to a participant for fiscal 2010 performance that will be tax-deductible by us, if the performance goal is met. The Compensation Committee may reduce the amount otherwise payable based upon such facts and circumstances that the Compensation Committee deems relevant. The Compensation Committee has determined that the total bonus payable to each participant for fiscal 2010 under the Senior Officer Plan is subject to an $8.5 million cap.

 

Long-Term Incentive Compensation.  The Compensation Committee met in December 2009 and decided to grant options to acquire 124,000 shares of common stock to Mr. Barzilay, options to acquire 70,000 shares of common stock to Mr. Rassman, and options to acquire 50,000 shares of common stock to Mr. Yearley. Such grants were made as of December 20, 2009, have an exercise price equal to the closing price of our common stock on the NYSE on December 21, 2009 and will vest equally over four years. The Compensation Committee, also determined, in lieu of granting stock options, to award a performance-based RSU relating to 200,000 shares of our common stock to Mr. Toll. The underlying shares were valued based on the closing price of our common stock on the NYSE on December 21, 2009. The RSU is performance-based in that it will only vest if the average closing price of our common stock on the NYSE, measured over any 20 consecutive trading days ending on or prior to December 21, 2014, increases 30% or more over the closing price of our common stock on the NYSE on December 21, 2009, and provided Mr. Toll continues to be employed by us or serve as a member of our Board of Directors until December 21, 2012. The performance-based RSU will also vest if Mr. Toll dies or becomes disabled, or if we experience a change of control prior to satisfaction of the aforementioned performance criteria.

 

The following Executive Compensation Committee Report shall not be deemed to be “soliciting material” or to be “filed” with the Securities Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934 or incorporated by reference in any document so filed.

 

The Executive Compensation Committee of our Board of Directors has reviewed and discussed with our management the Compensation Discussion and Analysis section of this proxy statement, as required by Item 402(b) of the SEC’s Regulation S-K. Based on such review and discussion, the Executive Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

Respectfully submitted by the members of the Executive Compensation Committee of the Board of Directors.

 

Carl B. Marbach (Chair)
Stephen A. Novick

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards during Fiscal 2009

 

 

 

 

 

 

 

Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

 

Please see the “Compensation Discussion and Analysis” section of this proxy statement for a detailed description of the fiscal 2009 equity and bonus awards and the amounts of salary and bonus in proportion to total compensation with respect to each named executive officer.

Outstanding Equity Awards at October 31, 2009