<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1999.
REGISTRATION NO. 333-82997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------
HOMESERVICES.COM INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 6531 41-1945806
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
HOMESERVICES.COM INC.
6800 FRANCE AVENUE SOUTH, SUITE 600
EDINA, MINNESOTA 55435
(612) 928-5900
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
STEVEN A. MCARTHUR, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
HOMESERVICES.COM INC.
6800 FRANCE AVENUE SOUTH, SUITE 600
EDINA, MINNESOTA 55435
(612) 928-5900
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
<TABLE>
<S> <C>
STACY J. KANTER, ESQ. CLAUDE S. SERFILIPPI, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP CHADBOURNE & PARKE LLP
919 THIRD AVENUE 30 ROCKEFELLER CENTER
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10112
(212) 735-3000 (212) 408-5100
(212) 735-2000 (FAX) (212) 541-5369 (FAX)
</TABLE>
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Approximate date of commencement of proposed sale to the public: as soon
as practicable after the effective date of this Registration Statement.
--------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to 462(b) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES
OUR REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 1999
3,750,000 SHARES
HOMESERVICES.COM INC.
[Graphics of HomeServices.Com omitted:
o Brand logos for operating subsidiaries
o Map depicting office locations and major markets
o 7 year home ownership cycle including services and referrals provided by
HomeServices
o Computer icon]
COMMON STOCK
$ PER SHARE
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o HomeServices.Com Inc. is offering 2,187,500 shares and MidAmerican Energy
Holdings Company, the selling stockholder, is offering 1,562,500 shares.
o We anticipate that the initial public offering price will be between $15
and $17 per share.
o This is our initial public offering.
o Proposed trading symbol: Nasdaq Stock National Market-HMSV
-------------------------------
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 11.
================================================================================
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price .................... $ $
Underwriting discount .................... $ $
Proceeds to HomeServices ................. $ $
Proceeds to selling stockholder .......... $ $
</TABLE>
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The underwriters have a 30-day option to purchase up to 562,500 additional
shares of common stock to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
U.S. Bancorp Piper Jaffray Credit Suisse First Boston
THE DATE OF THIS PROSPECTUS IS , 1999.
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[GRAPHICS FOR INSIDE FRONT COVER]
<PAGE>
TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary .................................................... 1
Risk Factors ............................................... 8
Special Note Regarding Forward-looking Statements .......... 17
Use of Proceeds ............................................ 17
Dividend Policy ............................................ 17
Dilution ................................................... 18
Capitalization ............................................. 19
Unaudited Pro Forma Condensed Consolidated Financial
Information ................................................ 20
Selected Consolidated Financial Data ....................... 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 32
Business ................................................... 46
Management ................................................. 61
Principal and Selling Stockholders ......................... 71
Certain Relationships and Related Transactions ............. 72
Description of Capital Stock ............................... 76
Description of Indebtedness ................................ 81
Shares Eligible for Future Sale ............................ 83
United States Federal Tax Considerations Relating to
Non-United States Holders .................................. 84
Underwriting ............................................... 87
Legal Matters .............................................. 90
Experts .................................................... 90
Where You Can Find More Information ........................ 91
Index to Financial Statements .............................. F-1
</TABLE>
-------------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. This prospectus is not an offer to sell, nor is
it seeking an offer to buy, these securities in any state where the offer or
sale is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have
changed since that date. Information contained on HomeServices' and its real
estate brokerage subsidiaries' websites is not part of this prospectus.
<PAGE>
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SUMMARY
The items in the following summary are described in more detail later in this
prospectus. This summary provides an overview of selected information and does
not contain all the information you should consider. Therefore, you should also
read the more detailed information set out in this prospectus, the financial
statements and the other information in this prospectus. Unless otherwise
indicated, the information contained in this prospectus:
o gives effect to a merger of MidAmerican Realty Services Company, an Iowa
corporation, with and into HomeServices and the issuance of 677.87 shares
of HomeServices' common stock in exchange for each share of common stock
of MidAmerican Realty Services Company, which merger will occur
immediately before the closing of the offering;
o assumes that the underwriters' over-allotment option is not exercised;
and
o assumes that all pro forma information is unaudited and gives effect to
historical acquisitions completed in the third and fourth quarters of
1998 and the third quarter of 1999 and the offering as if they were
consummated at the beginning of the earliest period presented.
As used in this prospectus, unless the context otherwise requires, references
to "HomeServices" mean HomeServices.Com Inc., and its subsidiaries and
predecessor.
Statistical information on the residential real estate brokerage industry has
been derived from publicly available sources, which HomeServices has not
independently verified but believes to be reliable.
HOMESERVICES
HomeServices is the second largest residential real estate brokerage firm in the
United States based on aggregate closed transaction sides in 1998 for its
various brokerage firm operating subsidiaries. HomeServices' operations are
largely concentrated in the Midwest. HomeServices also offers integrated real
estate services, including mortgage and title insurance services, and is
developing various related E-commerce services. HomeServices currently operates
primarily under the Edina Realty, Iowa Realty, J.C. Nichols, CBS HOME, Paul
Semonin Realtors and Long Realty brand names in eleven states primarily in the
Midwest. HomeServices occupies the number one or number two market share
position in each of its major markets based on aggregate closed transaction
sides for the year ended December 31, 1998. Closed transaction sides mean either
the buy side or sell side of any closed home purchase and is the standard used
by industry participants and publications to rank real estate brokerage firms.
The real estate brokerage firms that comprise HomeServices collectively manage
146 branch offices, have more than 5,800 sales associates and have operated for
between 12 and 84 years, with an average operating history of approximately 54
years. Sales associates are not employees of HomeServices, but operate under
independent contractor agreements. HomeServices is a newly formed holding
company that was incorporated in Delaware in July 1999.
Immediately prior to the offering, HomeServices will be 95.2% owned by
MidAmerican Energy Holdings Company, a large Midwestern utility holding company
(MEC:NYSE). After giving effect to the offering, HomeServices will continue to
be a subsidiary of MidAmerican Holdings, which will then own 60.2% of
HomeServices' common stock, or 56.2% if the underwriters' over-allotment option
is exercised in full. As a result, MidAmerican Holdings will continue to have
the power to elect the entire board of directors and approve matters submitted
to a vote of stockholders. MidAmerican Holdings provides services to
HomeServices, including management, advisory, financial, accounting, legal,
employee benefit plan and insurance administration and other services, and will
continue to do so following the offering on terms HomeServices believes to be as
favorable as it could obtain from an unrelated third party. It is required to
pay MidAmerican Holdings a monthly fee in an amount equal to $50,000 plus
reimbursement for all reasonable employee and out-of-pocket costs and expenses
incurred by MidAmerican Holdings in connection with providing these services to
HomeServices. In connection with the offering, HomeServices and MidAmerican
Holdings will enter into various intercompany agreements that are described
under "Certain Relationships and Related Transactions--Relationship with
MidAmerican Holdings."
1
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In addition to providing traditional residential real estate brokerage
services, HomeServices also cross sells to its existing real estate customers
preclosing services, such as mortgage origination, closing administrative
services and title abstracting, and provides referrals for other preclosing and
postclosing services provided by third parties, such as home warranty, home
inspection, home security, property and casualty insurance, home maintenance
and home repair. HomeServices intends to significantly expand these services in
the future, particularly through E-commerce. In August 1999, HomeServices
launched preliminary activities under its E-commerce platform with the
commencement of its on-line mortgage origination business and on-line referral
services for home warranty, home security, home inspection and property and
casualty insurance. While this on-line business has just commenced and has only
produced $30,000 of revenues to date, HomeServices believes that its E-commerce
business will allow it to significantly increase sales of existing products and
services and to offer new products and services, such as E-loans and on-line
referrals for preclosing and postclosing services.
GROWTH STRATEGY. HomeServices' business objective is to become a seamless
one-source provider of a comprehensive menu of products and services for the
total home ownership experience, particularly by means of E-commerce.
HomeServices' growth strategy comprises the following elements:
o Selective acquisitions and consolidations.
o Expanding its presence in its existing markets.
o Cross selling real estate related products and services.
o Offering referrals for various home care and other products and services,
particularly by means of E-commerce.
You should read pages 48-50 for an expanded discussion of the elements of
HomeServices' growth strategy.
COMPETITIVE STRENGTHS. HomeServices believes that the following competitive
strengths differentiate it from its residential real estate brokerage
competitors:
o Long-established presence in its markets with well-recognized brand names
and leading market shares.
o Comprehensive range of services.
o Larger scale of operation than the competition.
o Experienced management.
o Efficient sales associates.
You should read pages 50-51 for an expanded discussion of HomeServices'
competitive strengths.
HOMESERVICES STRUCTURE AND RECENT ACQUISITIONS
In May 1998, HomeServices acquired Iowa Realty Co. Inc. and Edina Realty Home
Services of Minnesota, both formerly part of AmerUs Home Services Inc.
HomeServices expanded its real estate brokerage business with the purchases in
August 1998 of two real estate brokerage firms in Omaha, Nebraska, HOME Real
Estate Holdings Inc. and CBS Real Estate Company, which were merged to form CBS
HOME. In September 1998, HomeServices acquired J.C. Nichols Residential, Inc.
in Kansas City, Missouri. In July 1999, HomeServices acquired Paul Semonin
Realtors, a Louisville, Kentucky real estate brokerage firm with 11 offices and
a leading market share in Louisville in terms of closed transaction sides, and
operations in Lexington, Kentucky and southern Indiana. In August 1999,
HomeServices acquired Long Realty, a Tucson, Arizona real estate brokerage firm
with 12 offices and a leading market share in Tucson in terms of closed
transaction sides.
Immediately prior to the offering, MidAmerican Realty Services Company, which
is currently 95.2% owned by MidAmerican Holdings, will be merged with and into
HomeServices, a then wholly owned
2
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subsidiary of MidAmerican Holdings, with HomeServices being the surviving
entity. Accordingly, MidAmerican Realty Services Company, which began
operations in May 1998 and currently owns the HomeServices operating
subsidiaries, will be the predecessor entity to HomeServices. Following
consummation of the merger and before the offering, HomeServices will own the
HomeServices brokerage firm operating subsidiaries and be 95.2% owned by
MidAmerican Holdings.
As a holding company, HomeServices conducts all of its operations through its
real estate brokerage subsidiaries. The following chart is a summary of
HomeServices' organizational structure, including its principal real estate
brokerage subsidiaries, after giving effect to the offering. The chart also
includes the states in which each real estate brokerage subsidiary operates and
the year each real estate brokerage subsidiary began operations.
MidAmerican Energy HomeServices' Public
Holdings Company management Stockholders
and directors
60.2% 3.8% 36.0%
HomeServices.Com Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Edina Realty J.C. Nichols Residential Iowa Realty CBS HOME Real Paul Semonin Long Realty
(Minnesota, Wisconsin, (Kansas, Missouri) (Iowa) Estate* Realtors (Arizona)
North Dakota, (1915) (1952) (Nebraska, Iowa) (Kentucky, Indiana) (1926)
South Dakota) (1964) (1915)
(1955)
</TABLE>
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* CBS HOME Real Estate was formed in 1998 as a result of a merger between
HOME Real Estate Holdings Inc., which began operations in 1987, and CBS
Real Estate Company, which began operations in 1964.
* * * * *
HomeServices' principal executive offices are located at 6800 France Avenue
South, Suite 600, Edina, Minnesota 55435 and its telephone number is (612)
928-5900. HomeServices maintains a website that is hyperlinked to the separate
websites maintained by its real estate brokerage subsidiaries. The information
contained in these websites is not part of this prospectus.
3
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THE OFFERING
Common stock offered:
By HomeServices.......... 2,187,500 shares
By MidAmerican Holdings... 1,562,500 shares
Total................ 3,750,000 shares
Common stock outstanding
after the offering.......... 10,422,943 shares
Offering price.............. $ per share
Use of proceeds............. HomeServices intends to use the net proceeds of
the offering for (1) the continued development of
its E-commerce operations, (2) working capital
and (3) general corporate purposes, which include
acquisitions of real estate brokerage firms and
their related service businesses. The Company has
no pending acquisitions and therefore is unable
to specify any amount earmarked to future
acquisitions. HomeServices will not receive any
of the proceeds from the sale of shares by
MidAmerican Holdings. You should read "Use of
Proceeds" on page 17 for an expanded discussion.
Proposed Nasdaq National Market
symbol...................... HMSV
4
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SUMMARY FINANCIAL AND OTHER DATA
The following tables present summary historical and pro forma financial and
other data for HomeServices. The pro forma financial and other data gives
effect to (1) the merger of MidAmerican Realty Services Company into
HomeServices, (2) the offering and the application of the estimated net proceeds
to HomeServices and (3) the acquisitions described under "Unaudited Pro Forma
Condensed Consolidated Financial Information." For additional information, you
should refer to "Selected Consolidated Financial Data," "Unaudited Pro Forma
Condensed Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included elsewhere in this prospectus.
The pro forma data is provided for informational purposes only and is not
necessarily indicative of the financial position or the results of operations
of HomeServices had the events described below occurred on the dates specified.
In addition, the pro forma data is not indicative of HomeServices' future
financial condition or results of operations.
Historical data for 1996 reflects the results of Iowa Realty and its
consolidated subsidiaries and Edina Realty, which became a subsidiary of Iowa
Realty through a reorganization effected by their parent company. In July 1997,
Iowa Realty acquired HOME Real Estate Holdings, Inc. Accordingly, the
predecessor historical data for 1997 includes the results of Iowa Realty and
Edina Realty and their consolidated subsidiaries, which from July 1, 1997 to
December 31, 1997 also includes the results of HOME Real Estate.
<TABLE>
<CAPTION>
PREDECESSOR
HISTORICAL DATA HOMESERVICES PRO FORMA DATA
--------------------------- ------------------------------------
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, YEAR ENDED 30,
--------------------------- DECEMBER 31, -----------------------
1996 1997 1998 1998 1999
------------ ------------ ------------- ----------- -----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Commission revenue .......................................... $ 179,378 $ 191,083 $ 356,433 $ 162,432 $188,952
Title fees .................................................. 14,821 16,203 22,965 10,344 10,644
Other (a) ................................................... 22,092 7,410 15,032 7,844 8,759
Total revenues ............................................. 216,291 214,696 394,430 180,620 208,355
Commission expense .......................................... 115,331 125,148 243,036 110,024 130,879
Amortization of pending real estate sales contracts ......... -- -- 21,026 21,026 --
Depreciation and amortization ............................... 5,103 5,619 9,410 4,215 4,609
All other operating expenses (a) ............................ 85,162 72,808 119,714 54,516 61,123
Total operating expenses ................................. 205,596 203,575 393,186 189,781 196,611
Operating income (loss) ..................................... 10,695 11,121 1,244 (9,161) 11,744
Interest and other income (expense), net .................... (2,582) (903) (3,118) (1,612) (2,012)
Income (loss) before income taxes ........................... 8,113 10,218 (1,874) (10,773) 9,732
Income taxes (benefit) ...................................... 3,263 4,725 (654) (4,307) 4,019
Minority interest ........................................... 1,276 633 -- -- --
Net income (loss) ........................................... $ 3,574 $ 4,860 $ (1,220) $ (6,466) $ 5,713
Pro forma earnings (loss) per share:(b)
Basic .................................................... $ 0.53 $ 0.72 $ (0.12) $ (0.62) $ 0.55
Diluted .................................................. $ 0.53 $ 0.72 $ (0.12) $ (0.62) $ 0.54
Pro forma weighted average shares outstanding:(b)
Basic .................................................... 6,779 6,779 10,423 10,423 10,423
Diluted .................................................. 6,779 6,779 10,423 10,423 10,676
OTHER DATA:
EBITDA (c) .................................................. $ 15,798 $ 16,740 $ 31,680 $ 16,080 $ 16,353
Net cash provided by (used in) operating activities ......... 2,134 5,297 25,998 18,058 19,376
Net cash used in investing activities ....................... (8,874) (6,759) (128,377) (126,099) (6,011)
Net cash provided by (used in) financing activities ......... 10,664 (1,575) 116,308 108,041 (3,898)
</TABLE>
5
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<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------------------------- -----------
PREDECESSOR HOMESERVICES
----------------------- -----------------------------------------
AS OF AS OF AS OF
AS OF DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
----------------------- -------------- ---------- -----------
1996 1997 1998 1999 1999
---------- ---------- -------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 5,627 $ 2,590 $ 3,114 $ 11,544 $ 29,877
Total assets (a) .................................. 95,504 62,346 128,520 132,001 183,052
Long-term debt, including current portion ......... 16,397 7,651 61,445 59,567 60,578
Stockholders' equity .............................. 33,699 36,791 35,194 39,938 78,688
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, HOMESERVICES PRO FORMA DATA
------------------------- -------------------------------------
SIX MONTHS ENDED JUNE
PREDECESSOR YEAR ENDED 30,
------------------------- DECEMBER 31, -----------------------
1996 1997 1998 1998 1999
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Closed transaction sides ........................... 47,836 48,631 87,974 39,282 42,482
Average home sales price ........................... $ 120.9 $ 127.1 $ 138.0 $ 136.7 $ 146.1
Closed transaction volume (in millions) ............ $ 5,783 $ 6,183 $12,137 $ 5,368 $ 6,208
(Closed transaction sides multiplied by average
home sales price)..................................
Average sales commission (%)
(Commission revenues divided by home sales
volume) ........................................... 3.1% 3.1% 2.9% 3.0% 3.0%
Number of branch offices (at period end) ........... 103 103 148 148 146
Number of sales associates (at period end) ......... 3,063 3,298 5,769 5,608 5,822
</TABLE>
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(a) Prior to 1997, the predecessor was also engaged in real estate
development operations in addition to real estate brokerage
operations. All real estate brokerage and development activities
were operated by the same corporate entity using shared management,
office space and other related services. At the beginning of 1997,
the majority of the assets associated with the development
operations was transferred to the parent company. These development
operations contributed only $0.4 million to the line item "Other"
revenues in 1997. Based on the way the brokerage and development
operations were managed, only certain revenues, expenses, assets and
liabilities can be specifically identified in the predecessor's
statements of income and balance sheets. Revenues from the sale of
real estate development projects of $14.0 million are included in
the line item "Other" revenues for the year ended December 31, 1996.
Cost of real estate sales totaling $11.3 million are included in the
line item "All other operating expenses" for the year ended December
31, 1996. Real estate contracts and real estate inventory of $23.2
million are included in the line item "Total assets" as of December
31, 1996. Since 1997, HomeServices has not been engaged in real
estate development operations to any significant degree.
(b) Pro forma earnings (loss) per share for the predecessor is computed
using the historical weighted average shares of MidAmerican Realty
Services Company as of June 30, 1999 of 10,000 shares, after giving
effect to the exchange of 677.87 shares of HomeServices common stock
for each share of MidAmerican Realty Services Company common stock in
a merger of the two expected to be consummated immediately prior to
the offering. Pro forma earnings per share for the HomeServices pro
forma data is computed using the historical weighted average shares
of MidAmerican Realty Services Company as of June 30, 1999 of 10,000,
after giving effect to the following events as if they had occurred
at the beginning of the period: (a) the issuance of 2,149 shares
issued in August 1999 in connection with the acquisition of Paul
Semonin Realtors, (b) the exchange of 677.87 shares of HomeServices
common stock for each share of MidAmerican Realty Services Company
common stock in a merger of the two
6
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(FOOTNOTE--CONTINUED)
expected to be consummated immediately prior to the offering and (c) the
issuance of the 2,187,500 shares to be sold by HomeServices in the offering
after the merger.
(c) EBITDA is defined as net income (loss) before minority interest, income
taxes (benefit) and interest and other income (expense), net, plus
depreciation and amortization and amortization of pending real estate sales
contracts. HomeServices has included information concerning EBITDA because
it believes that it is useful to an investor in evaluating the operating
performance of HomeServices as it compares to other companies and because
this measure is a widely accepted financial indicator used by investors and
analysts to compare the operating performance of companies. While EBITDA is
routinely used by investors and analysts, it may not necessarily be
comparable to other similarly titled measures of other companies due to
potential differences in the methods of calculation. EBITDA is not intended
to represent cash flows for the periods presented or results of operations
in accordance with generally accepted accounting principles. EBITDA should
not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
The following table presents the calculation of EBITDA for each of the
periods shown:
<TABLE>
<CAPTION>
PREDECESSOR
HISTORICAL DATA HOMESERVICES PRO FORMA DATA
------------------- ------------------------------
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, YEAR ENDED JUNE 30,
------------------- DECEMBER 31, ----------------
1996 1997 1998 1998 1999
--------- --------- ------------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss) ....................................... $ 3,574 $ 4,860 $ (1,220) $ (6,466) $ 5,713
Minority interest ....................................... 1,276 633 -- -- --
Income taxes (benefit) .................................. 3,263 4,725 (654) (4,307) 4,019
Interest and other (income) expense ..................... 2,582 903 3,118 1,612 2,012
------- ------- -------- -------- -------
Operating income (loss) ................................. 10,695 11,121 1,244 (9,161) 11,744
Depreciation and amortization ........................... 5,103 5,619 9,410 4,215 4,609
Amortization of pending real estate sales contracts ..... -- -- 21,026 21,026 --
------- ------- -------- -------- -------
EBITDA .................................................. $15,798 $16,740 $ 31,680 $ 16,080 $16,353
</TABLE>
7
<PAGE>
RISK FACTORS
Set forth below is a description of material risks to investors considering an
investment in the common stock. You should consider carefully the following
risks and other information in this prospectus before deciding to invest in
shares of common stock. HomeServices may also face some nonmaterial risks which
are not discussed below. HomeServices' business, results of operations or
financial condition could be materially adversely affected if any of the
following risks do occur. If HomeServices' business, results of operations or
financial condition were materially adversely affected, the trading price of
its common stock could decline, and you could lose all or part of your
investment.
HOMESERVICES CANNOT ASSURE YOU OF ITS ABILITY TO SUCCESSFULLY COMPLETE AND
INTEGRATE FUTURE ACQUISITIONS
HomeServices has pursued an active acquisition strategy to strengthen its
position within the Midwestern residential real estate markets by integrating
acquisitions into its operations to achieve economies of scale, and it intends
to continue to do so as part of its growth strategy. As a result, HomeServices
has derived a substantial portion of its revenues and profits from acquired
real estate brokerage firms. The success of HomeServices' future acquisition
strategy will continue to depend upon its ability to find suitable acquisition
candidates on favorable terms and to finance and complete these transactions
despite increasing competition for acquisition candidates. After completing an
acquisition, HomeServices may encounter difficulties in:
o the assimilation of the operations, technologies, products and personnel
of the acquired company;
o retaining key employees and sales associates of the acquired company;
o cross selling services to customers of the acquired company; and
o maintaining effective and consistently applied standards, controls,
procedures and policies.
If HomeServices is unable to successfully integrate an acquired company,
HomeServices may not realize anticipated benefits of the acquisition.
In addition, HomeServices' growth strategy could be materially adversely
affected if it is unable to complete realty company acquisitions in general. By
pursuing an active acquisition strategy, HomeServices could also divert
management's attention away from focusing on its core business operations.
Because HomeServices expects that its future acquisitions will continue to be
accounted for under the purchase method, its goodwill amortization could
increase significantly and have a material adverse effect on its results of
operations. In addition, depending on a number of factors, including the then
current market price of HomeServices' common stock, HomeServices may decide to
pay for these acquisitions in whole or in part by issuing additional shares of
common stock. The issuance of such shares in an acquisition may result in
dilution if the agreed upon per share valuation for purposes of the acquisition
is less than the fair market value of the issued common stock.
HOMESERVICES' PROPOSED REFERRAL STRATEGY DEPENDS ON ACCEPTANCE BY HOMEOWNERS OF
A NEW MEANS OF OFFERING TRADITIONAL HOME SERVICES
HomeServices plans to offer referral services for various services,
particularly by means of E-commerce, including Concierge Services and Home
Dividends. This is a relatively new business for HomeServices and represents a
new means of offering traditional home services to homeowners. HomeServices
began offering and generating revenues from certain referral services, such as
home warranty, home security, home inspection and property and casualty
insurance, in 1998, and launched preliminary activities under its E-commerce
platform, with the commencement of its on-line mortgage origination business
and on-line referral services for home warranty, home security, home inspection
and property and casualty insurance in August 1999. HomeServices cannot assure
you that this new way of offering traditional home services will gain
sufficient market acceptance. Furthermore, because many elements of this
business will be new to it, HomeServices' management may not have the
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experience necessary to successfully introduce and operate this new business.
The lack of market acceptance of, or HomeServices' inability to generate
satisfactory revenues from, this new business could have a material adverse
effect on its business and results of operations.
HOMESERVICES' LIMITED OPERATING HISTORY MAKES EVALUATING ITS BUSINESS AND ITS
PROSPECTS DIFFICULT
While HomeServices' predecessors have operated real estate brokerage firms for
a significant period, as a combined organization, HomeServices has operated
only since May 1998, when HomeServices acquired the assets of Iowa Realty Co.
Inc. and Edina Realty Home Services. Including Iowa Realty and Edina Realty,
HomeServices has acquired seven major residential real estate businesses since
May 1998. As a result, HomeServices and its acquired operations have a limited
combined operating history upon which you can evaluate HomeServices and its
prospects.
HOMESERVICES MAY NOT BE ABLE TO SUSTAIN OR SUCCESSFULLY MANAGE ITS RAPID GROWTH
HomeServices intends to pursue an aggressive growth strategy by:
o completing selected acquisitions and consolidations;
o expanding its market presence in its existing markets;
o cross selling real estate related products and services; and
o offering referrals for various home care and other products and services,
particularly by means of E-commerce.
Any significant future growth will place demands on HomeServices' resources.
HomeServices' future success and profitability will depend, in part, on its
ability to enhance its operating, accounting and management information systems
and obtain financing for capital expenditures and strategic acquisitions.
HomeServices may not be able to sustain or successfully manage any significant
expansion or obtain adequate financing on favorable terms.
SEASONAL FLUCTUATIONS IN THE RESIDENTIAL REAL ESTATE BROKERAGE BUSINESS COULD
ADVERSELY AFFECT HOMESERVICES
The residential real estate brokerage business is subject to seasonal
fluctuations. Historically, HomeServices' revenues have been strongest in the
second and third quarters of the calendar year. While HomeServices pays
commissions to its sales associates only upon the sale of a home, some of its
other expenses, such as rent, personnel and expenses incidental to being a
public company, are or will be fixed and cannot be reduced during a seasonal
slowdown. As a result, HomeServices may be required to borrow cash in order to
fund its operations during seasonal slowdowns or at other times. HomeServices'
inability to finance its funding needs during a seasonal slowdown or at other
times could have a material adverse effect on its results of operations and
financial condition. HomeServices believes its charges for occupancy,
telecommunications, professional fees, data processing, equipment leasing,
office expense, corporate charges and depreciation, which approximated 11% of
total 1998 operating expenses on a historical basis, are costs that cannot be
significantly reduced in the short-term during a seasonal slow down.
CYCLICAL FLUCTUATIONS IN THE RESIDENTIAL REAL ESTATE BROKERAGE BUSINESS COULD
ADVERSELY AFFECT HOMESERVICES
The residential real estate brokerage industry tends to experience cycles of
greater and lesser activity and profitability and is typically affected by
changes in economic conditions which are beyond HomeServices' control. Any of
the following could have a material adverse effect on HomeServices' business by
causing a general decline in the number of home sales or sale prices and the
demand for Concierge Services or Home Dividends services which, in turn, would
adversely affect revenues and profitability:
o periods of economic slowdown or recession;
o natural disasters such as floods, hurricanes or tornadoes;
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o rising interest or unemployment rates;
o decreasing home ownership rates; and
o declining demand for real estate.
NEGATIVE ECONOMIC CONDITIONS OR A DOWNTURN IN THE RESIDENTIAL REAL ESTATE
MARKET IN HOMESERVICES' PRIMARY SERVICE AREAS COULD HAVE AN ADVERSE EFFECT ON
ITS BUSINESS
HomeServices' current primary service area is Minnesota, Iowa, Arizona, Kansas,
Missouri, Kentucky, Nebraska, Wisconsin, Indiana, North Dakota and South
Dakota. HomeServices intends to expand its operations beyond its existing
service area as part of its acquisition strategy and its future results of
operations may be affected to a larger extent than its past results of
operations by changes in economic conditions in its expansion markets. A
downturn in residential real estate markets or economic conditions in
HomeServices' current markets or in HomeServices' future markets could have a
material adverse effect on it.
HOMESERVICES' SUCCESS DEPENDS IN PART ON THE CONTINUED GROWTH OF INTERNET
COMMERCE AND ITS ABILITY TO SUCCESSFULLY IMPLEMENT CHANGING TECHNOLOGIES
HomeServices believes that expansion through E-commerce will enable it to more
readily achieve its business objective of becoming a one-source provider of
products and services relating to the home ownership experience. HomeServices'
ability to meet these expansion goals through E-commerce depends substantially
upon the widespread acceptance and use of the Internet as an effective medium
of commerce by consumers. Rapid growth in commercial on-line businesses is a
recent phenomenon and demand for recently introduced services and products over
the Internet is, accordingly, subject to a high level of uncertainty. The
development of the Internet as a viable means of marketing products directly to
consumers is subject to a number of factors, including:
o continued growth in the number of users who purchase services over the
Internet;
o concerns about transaction security;
o continued development of the necessary technological infrastructure; and
o the development of complementary services and products.
Failure of the Internet and on-line businesses to become a viable means of
marketing products directly to consumers would adversely affect HomeServices'
business and financial condition.
The development of on-line commerce using the Internet is characterized by
rapidly changing technologies, evolving industry standards, frequent new
product or service introductions and changing consumer preferences.
HomeServices' growth strategy to expand its product offerings by means of
E-commerce and its future success will depend, in part, on its ability to
successfully adapt to these rapidly changing technologies and industry
standards and to meet the changing demands of its customers. HomeServices
cannot assure you that it will be able to implement its strategy in a
successful and timely manner.
BREACHES OF ON-LINE SECURITY COULD HARM HOMESERVICES' E-COMMERCE OPERATIONS
A significant barrier to on-line commerce is the secure transmission of
confidential information over public networks. As HomeServices expands its
developing E-commerce operations, it will rely on technology from third parties
to effectively secure transmission of confidential information, such as that
required on a mortgage loan application. A compromise of HomeServices' on-line
security could injure its reputation and impact the success of its developing
E-commerce operations.
LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO E-COMMERCE AND MAY DECREASE
USE OF THE INTERNET
HomeServices' developing E-commerce operations are not currently subject to
direct regulation by any governmental agency in the United States beyond
mortgage-related regulations and regulations applicable to businesses
generally.
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A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including:
o on-line content;
o user privacy;
o taxation;
o access charges; and
o jurisdiction.
The adoption of new laws or the unfavorable application of existing laws may
decrease the use of the Internet, which would decrease the demand for
HomeServices' developing E-commerce services, increase its cost of doing
business or otherwise have an adverse effect on its business and growth
strategy. In addition, the applicability to the Internet of existing laws is
uncertain, including the following:
ON-LINE CONTENT AND USER PRIVACY. Although there are very few laws and
regulations directly applicable to the protection of consumers in an on-line
environment, it is possible that legislation will be enacted in this area and
could cover such topics as permissible on-line content and user privacy,
including the collection, use, retention and transmission of personal
information provided by an on-line user. Furthermore, the growth and demand for
on-line commerce could result in more stringent consumer protection laws that
impose additional compliance burdens on on-line companies. Such consumer
protection laws could result in substantial compliance costs and interfere with
the conduct and growth of HomeServices' business.
TAXATION. The tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made that could impose
taxes on the sale of goods and services and certain other Internet activities.
Recently, the Internet Tax Information Act was signed into law placing a
three-year moratorium on new state and local taxes on Internet commerce. This
moratorium is expected to end on October 21, 2001. Nonetheless, HomeServices
cannot assure you that future laws imposing taxes or other regulations would
not substantially impair the growth of its business and its financial
condition.
ACCESS CHARGES. The Federal Communications Commission recently characterized
dial-up Internet traffic bound for Internet service providers as
jurisdictionally mixed but largely interstate in nature. However, the Federal
Communications Commission has made it clear that its position does not affect
its long-standing rule that Internet and other information services are exempt
from interstate access charges, that it does not change the manner in which
consumers obtain and pay for access to the Internet nor does it transform the
nature of traffic routed through Internet service providers. Certain local
telephone carriers claim that the increasing popularity of the Internet has
burdened the existing telecommunications infrastructure and that many areas
with high Internet use are experiencing interruptions in telephone service.
These carriers have petitioned the Federal Communications Commission to impose
access fees on Internet service providers, but not consumers. If these access
fees are imposed on the Internet service providers, the cost of communicating
on the Internet could increase, which would decrease demand for HomeServices'
developing E-commerce services and increase its cost of doing business.
JURISDICTION. Because HomeServices' on-line services will be available over the
Internet in multiple states, and as a result, HomeServices expects to sell to
numerous consumers resident in such states, such jurisdictions may claim in the
future that HomeServices is required to qualify to do business as a foreign
corporation or obtain other qualifications in each such state. HomeServices is
qualified to do business in those ten states in which it currently operates,
and its failure in the future to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject it to taxes and
penalties for the failure to so qualify and limit its ability to conduct
litigation in such states.
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CHANGES IN MORTGAGE RESALE MARKETS COULD HAVE AN ADVERSE EFFECT ON
HOMESERVICES' MORTGAGE ORIGINATION BUSINESS
HomeServices' business depends in part on selling to investors the mortgage
loans that it originates as a broker. Less than 1% of HomeServices' pro forma
1998 revenues was derived from its mortgage operations. As part of
HomeServices' growth strategy, it intends to increase its mortgage origination
business, particularly through its on-line mortgage origination services which
HomeServices launched in August 1999. Accordingly, any significant change in
the secondary mortgage market, including the operations, level of activity or
underwriting criteria of Fannie Mae or the Federal Home Loan Mortgage
Corporation, could have an adverse effect on HomeServices' business and results
of operations.
HOMESERVICES MAY BE REQUIRED TO REPURCHASE MORTGAGES IT HAS ORIGINATED IF THE
REPRESENTATIONS AND WARRANTIES MADE BY HOMESERVICES ARE INACCURATE
In the ordinary course of business, HomeServices makes representations and
warranties to the purchasers and insurers of mortgage loans that it originates,
including representations and warranties as to compliance with the investor's
applicable underwriting guidelines. Any loss resulting from a material
inaccuracy in these representations and warranties could have an adverse effect
on HomeServices. From time to time, HomeServices may be obligated to repurchase
loans as a result of such representations and warranties and such repurchases
could adversely affect its results of operations or financial condition.
HomeServices cannot assure you that it will not be required to repurchase any
mortgage loan that it originates in the future.
HOMESERVICES MAY BE UNABLE TO RESELL MORTGAGES IT HAS UNDERWRITTEN
Plaza Mortgage, a wholly owned subsidiary of J.C. Nichols, also underwrites
mortgage loans originated by it. In 1998, mortgages originated and underwritten
by Plaza Mortgage accounted for approximately 15% of HomeServices' total
mortgage operations. Plaza Mortgage's underwriting loan commitments are
contractual obligations in its own name to mortgage loan applicants. Before
underwriting the loan commitment, Plaza Mortgage performs a credit analysis to
confirm that the loan would meet the particular guidelines established by
several investors with whom Plaza Mortgage has established relationships. Prior
to closing with the mortgage applicant, Plaza Mortgage obtains a commitment
that an investor will purchase the loan after the closing at an agreed upon
price on the condition that the loan meets the investor's particular investment
guidelines. The investor's final review is then typically conducted after the
closing of the loan with the mortgage loan applicant. As a result, if
HomeServices subsequently fails to satisfy the terms of the commitment made
with such investor to purchase the loan, then HomeServices would have to find
another purchaser for the loan. HomeServices may incur losses on the resale of
such loan, particularly in cases where mortgage interest rates for the kind of
loan made to the mortgage loan applicant rise after the commitment to the
applicant is made.
THE LOSS OF ITS SENIOR MANAGEMENT TEAM OR A SIGNIFICANT NUMBER OF KEY SALES
ASSOCIATES COULD ADVERSELY AFFECT HOMESERVICES' BUSINESS
HomeServices' ability to continue to expand its business depends to a
significant extent on the experience and service of its senior management team
and the services of its key sales associates. HomeServices' management team is
led by Ronald J. Peltier, its President and Chief Executive Officer, and also
consists of Dwayne J. Coben, Senior Vice President and Chief Financial Officer;
Jack W. Frost, President and Chief Executive Officer of J.C. Nichols; R.
Michael Knapp, President and Chief Executive Officer of Iowa Realty; Arne M.
Rovick, Vice Chairman and General Counsel of Edina Realty; Joseph J. Valenti,
President and Chief Executive Officer of CBS HOME; George E. Gans, President
and Chief Executive Officer of Paul Semonin Realtors; and Stephen E. Quinlan,
President and Chief Executive Officer of Long Realty. HomeServices does not
carry any key man life insurance. The loss of the services of Messrs. Peltier,
Coben, Frost, Knapp, Rovick, Valenti, Gans or Quinlan or a significant number
of key sales associates could adversely affect its business and growth
prospects.
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HOMESERVICES MAY NOT BE ABLE TO ATTRACT AND RETAIN EMPLOYEES WITH INFORMATION
TECHNOLOGY SKILLS THAT HOMESERVICES NEEDS TO GROW
In addition, HomeServices' business strategy to grow through E-commerce
offerings depends highly on its ability to attract and retain employees with
highly developed information technology skills. Individuals with information
technology skills are in short supply and competition for qualified information
technology personnel is intense. The failure to attract new information
technology personnel could adversely affect its business and growth prospects.
CHANGES IN GOVERNMENT REGULATION COULD ADVERSELY AFFECT HOMESERVICES
HomeServices' business activities are subject to substantial regulation by
governmental authorities. The jurisdictions in which HomeServices does business
have established requirements governing the licensing and conduct of real
estate brokerage, mortgage and brokerage-related businesses. In addition, the
federal Real Estate Settlement Procedures Act and comparable state statutes
impose restrictions on how HomeServices may conduct its business. More
restrictive laws, regulations or interpretations could be adopted in the future
that could make HomeServices' ability to comply with such regulations more
difficult or expensive. Furthermore, regulatory authorities have broad
discretion to grant, renew and revoke licenses and approvals and to implement
regulations. Accordingly, these regulatory authorities could prevent or
temporarily suspend HomeServices from carrying on some or all of its activities
or otherwise penalize it if its practices were found not to comply with the
then current regulatory or licensing requirements or any interpretation of
these requirements by the regulatory authority. HomeServices' failure to comply
with any of these requirements or interpretations could have a material adverse
effect on its operations and financial performance.
THE TERMS OF CERTAIN INDEBTEDNESS RESTRICT HOMESERVICES' BUSINESS ACTIVITIES
The terms and conditions of HomeServices' new amended and restated senior
secured revolving credit facility and 7.12% senior notes will restrict the
ability of HomeServices and its subsidiaries to incur debt, pay dividends and
other distributions, create liens, sell assets and make investments. The terms
of the new amended and restated revolving credit facility will also require
HomeServices to maintain specified financial ratios, including an interest
coverage ratio at quarter end of not more than 2.50 to 1, a fixed charge
coverage ratio at quarter end of not less than 1.25 to 1, a total debt to
EBITDA ratio at quarter end of not more than 3.25 to 1 and a consolidated debt
to consolidated total capitalization ratio at quarter end of not more than 0.65
to 1. Similar provisions are also contained in debt agreements of MidAmerican
Holdings, HomeServices' parent. Although HomeServices and its subsidiaries are
not a party to such debt agreements, the restrictions contained in them apply
to HomeServices and its subsidiaries. These restrictive and financial
maintenance provisions could limit HomeServices' ability to obtain additional
funds for its operations or future acquisitions, which could have a material
adverse effect on its operations and acquisition strategy.
HOMESERVICES IS A HOLDING COMPANY AND DEPENDS ON DIVIDENDS AND DISTRIBUTIONS
FROM ITS OPERATING SUBSIDIARIES TO FUND ITS OPERATIONS
HomeServices is a holding company and its only assets are the capital stock of
its subsidiaries, which stock will be pledged to secure borrowings under the
amended and restated revolving credit facility. As a holding company with no
operating assets or independent means of generating operating revenue,
HomeServices will depend on dividends and other payments from its subsidiaries
to pay its obligations. HomeServices' obligations may include salaries of its
executive officers, insurance, professional fees, expenses incidental to being
a public company and any debt and associated interest charges that it may incur
from time to time. Financial covenants under future debt agreements entered
into by HomeServices' subsidiaries or the laws of the states of incorporation
of those subsidiaries may limit the ability of its subsidiaries to make
sufficient dividend or other payments to permit it to fund its obligations.
Creditors of HomeServices' subsidiaries and the lenders under HomeServices'
amended and restated senior secured revolving credit facility will have a prior
claim to the assets of its subsidiaries prior to the holders of HomeServices'
common stock.
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HOMESERVICES RECORDS A SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS ON ITS BALANCE
SHEET AND CANNOT ASSURE YOU AS TO THE RECOVERABILITY OF THIS AMOUNT
As of June 30, 1999, approximately 55.3% of total assets on HomeServices'
balance sheet consisted of goodwill, net of accumulated amortization.
HomeServices, in accordance with generally accepted accounting principles,
analyzes the recoverability of goodwill at each balance sheet date and
determines at that time the recoverability of any intangible assets. Although
HomeServices' accounting for goodwill fully complies with current generally
accepted accounting principles and HomeServices does not believe that there
exists any uncertainty with respect to the recoverability of the amount of
intangible assets recorded on its balance sheet, it cannot assure you that
recoverability will continue to be the case.
YEAR 2000 PROBLEMS COULD DISRUPT HOMESERVICES' BUSINESS
Many existing computer systems and software products are coded to accept only
two-digit entries in the date code field and cannot properly recognize dates in
the year 2000 and beyond. Consequently, these systems and software products
need to be either upgraded or replaced to function properly on and after
January 1, 2000.
If, due to hardware or software problems, HomeServices' systems were unable to
operate due to year 2000 problems, it would face the risks of incurring
additional costs to correct its year 2000 problems or losing revenue due to its
inability to deliver services to its customers. These costs or losses, if
incurred, could have a material adverse effect on HomeServices. For a
description of HomeServices' year 2000 readiness efforts, you should refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
HomeServices cannot assure you, however, that the systems of those companies
will be converted in a timely manner or that the third parties will mitigate
the effects of non-readiness. Any failure by HomeServices' third-party vendors
and service providers to comply in a timely manner could have a material
adverse effect on its operations.
HOMESERVICES WILL CONTINUE TO BE CONTROLLED BY MIDAMERICAN HOLDINGS AFTER THE
OFFERING
Before the offering, HomeServices was a 95.2%-owned subsidiary of MidAmerican
Holdings. Immediately following the offering, MidAmerican Holdings will
continue to own 60.2% of its common stock or 56.2% if the underwriters'
over-allotment option is exercised in full.
As a result of its common stock ownership, MidAmerican Holdings will continue
to have the power to elect HomeServices' entire board of directors and approve
other matters submitted to a vote of HomeServices' stockholders. HomeServices
may not engage in any consolidation, merger or other significant corporate
transaction, even if beneficial to the interests of its other stockholders,
without the approval of MidAmerican Holdings. This concentration of ownership
could also delay or impede a change of control, even if a change of control
would be beneficial to HomeServices' other stockholders. In addition to a
change of control, there may be other instances in which the interests of
HomeServices' public stockholders differ from the interests of MidAmerican
Holdings, which will have the ability to control corporate policies by electing
its directors and officers to serve as directors and officers of HomeServices.
MidAmerican Holdings could decide to sell a substantial portion of its
remaining equity interest in HomeServices to a third-party. A sale involving a
change of control of HomeServices may adversely affect the market price of the
common stock and could affect HomeServices' business.
PROVISIONS OF HOMESERVICES' RESTATED CERTIFICATE OF INCORPORATION, AMENDED AND
RESTATED BYLAWS AND RIGHTS AGREEMENT COULD DETER TAKEOVER ATTEMPTS
HomeServices' restated certificate of incorporation and amended and restated
bylaws include provisions that:
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o divide the board of directors into three classes of directors serving
staggered three-year terms;
o authorize the board of directors to fill vacant directorships or increase
the size of the board of directors;
o deny the stockholders the right to cumulate votes in the election of
directors;
o eliminate the ability of stockholders to act by written consent;
o provide that special meetings of HomeServices' stockholders may be called
only by the chairman of the board of directors or a majority of the board
of directors; and
o require stockholders seeking to bring business before an annual meeting
of stockholders, or to nominate candidates for election as directors at
an annual meeting of the stockholders to provide timely notice in
writing.
Following the offering, these provisions could delay or impede the removal of
incumbent directors or discourage a third-party from attempting to acquire
control of it, even if doing so would be beneficial to you as a common
stockholder.
In addition, HomeServices' rights agreement contains rights that have potential
antitakeover effects. The rights under the rights agreement may cause
substantial dilution to an acquirer who attempts to acquire HomeServices
without obtaining consent from HomeServices' board of directors or conditioning
the offer on a substantial number of rights being acquired or redeemed.
Accordingly, these rights have the potential to deter a potential acquirer from
making takeover proposals or tender offers that are not negotiated with
HomeServices' board of directors.
THE CREDIT AGREEMENT WITH MIDAMERICAN HOLDINGS MAY NOT BE THE RESULT OF
ARM'S-LENGTH NEGOTIATIONS
Currently, HomeServices has an existing revolving credit agreement with
MidAmerican Holdings pursuant to which HomeServices may borrow up to $10.0
million. This agreement was amended on June 24, 1999 to reduce MidAmerican
Holdings' total commitment from $100.0 million to $10.0 million. The maximum
amount that HomeServices had borrowed during the life of the agreement to date
is $54.2 million. Although the credit agreement primarily requires HomeServices
to pay MidAmerican Holdings its cost of funds, the credit agreement may not be
the result of arm's-length negotiations because before the offering HomeServices
was a 95.2%-owned subsidiary of MidAmerican Holdings. If HomeServices did not
have the existing credit agreement and had to obtain a loan from an unaffiliated
third party, it could have difficulty obtaining the loan or only be able to
obtain the loan on less favorable terms than under its existing credit
agreement. HomeServices believes that the terms of its credit agreement are no
less favorable to it than one that could be negotiated with unaffiliated third
parties. However, HomeServices cannot assure you that this is the case. For a
description of the credit agreement, see "Description of Indebtedness--Revolving
Credit Facility."
THE SERVICES AGREEMENT AND REGISTRATION RIGHTS AGREEMENT WITH MIDAMERICAN
HOLDINGS MAY NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS
Before the closing of the offering, HomeServices will enter into a services
agreement and a registration rights agreement with MidAmerican Holdings.
Although the services agreement will require HomeServices to reimburse
MidAmerican Holdings its reasonable employee and out-of-pocket costs and
expenses in addition to a monthly fee of $50,000, it may not be the result of
arm's length negotiations because before the offering HomeServices was a
95.2%-owned subsidiary of MidAmerican Holdings. HomeServices believes that the
terms of its services agreement and registration rights agreement will be no
less favorable to it than agreements that could be negotiated with unaffiliated
third parties. However, HomeServices cannot assure you that this will be the
case. Furthermore, if HomeServices were required to obtain the services
provided under the services
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agreement from an unaffiliated third party, the terms on which such services
were provided may be less favorable to HomeServices than the terms of the
services agreement. For a description of these agreements, see "Certain
Relationships and Related Transactions--Registration Rights Agreement" and
"--Services Agreement."
THE ABSENCE OF A TRADING MARKET FOR THE COMMON STOCK COULD MAKE IT DIFFICULT
FOR INVESTORS TO RESELL THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING
PRICE
Before the offering, there was no trading market for the common stock. Although
HomeServices will apply to have the common stock approved for quotation on the
Nasdaq National Market, HomeServices does not know whether its application for
quotation will be approved or, if it is approved, whether a liquid trading
market for the common stock will develop. Investors may not be able to resell
their shares at or above the initial public offering price. The initial public
offering price for the shares of common stock will be determined through
negotiations among HomeServices, MidAmerican Holdings and representatives of
the underwriters. The initial public offering price may be higher than the
market price of the common stock after the offering.
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE VALUE
OF THEIR INVESTMENT
The initial public offering price of the common stock will be substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock. As a result, HomeServices currently expects that new investors
will experience immediate dilution of $17.96 per share in the net tangible book
value per share of the common stock from the initial public offering price,
assuming an initial public offering price of $16.00 per share, the midpoint of
the estimated range of the initial public offering price per share. If
HomeServices issues additional shares of common stock in the future, investors
may experience further dilution. Any further dilution could adversely affect
the price of its common stock.
HOMESERVICES DOES NOT EXPECT TO PAY DIVIDENDS ON ITS COMMON STOCK
HomeServices does not anticipate paying any cash dividends on its common stock
in the foreseeable future. Any payment of future dividends and the amounts
thereof will depend upon HomeServices' earnings, financial requirements and
other factors deemed relevant by its board of directors. In addition, covenants
contained in the revolving credit facility and the 7.12% senior notes limit the
ability of HomeServices and its subsidiaries to pay dividends unless, after
payment of such dividends, the aggregate amount of such payments and certain
investments does not exceed a specified basket equal to $5 million plus 75% of
cumulative consolidated net income since June 30, 1998 plus cash proceeds of
certain equity offerings. See "Description of Indebtedness."
THE AVAILABILITY OF A SIGNIFICANT NUMBER OF SHARES FOR FUTURE SALE BY
MIDAMERICAN HOLDINGS AND OTHER SHARES ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY
AFFECT THE MARKET PRICE OF HOMESERVICES' COMMON STOCK
Immediately after the closing of the offering, HomeServices will have
10,422,943 shares of common stock issued and outstanding or 10,751,068 shares
if the underwriters' over-allotment option is exercised in full. Of these
shares, all of the shares sold in the offering will be freely tradeable without
restrictions or further registration under the Securities Act, except for any
shares purchased by HomeServices' affiliates, which are persons that directly
or indirectly control, are controlled by, or are under common control with,
HomeServices. Any shares held by affiliates, whether purchased in the offering
or otherwise, will be eligible for sale subject to meeting the volume and
manner of sale limitations and other conditions contained in Rule 144 and the
expiration of any lock-up agreements entered into with the underwriters.
In addition, after completing the offering, HomeServices intends to file a
registration statement on Form S-8 under the Securities Act covering the
shares of common stock reserved for issuance under HomeServices' employee stock
option plan. The registration statement on Form S-8 will automatically become
effective upon filing. Subject to vesting and the exercise of the issued and
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outstanding options, shares registered under the registration statement on Form
S-8 will be freely tradeable and available for sale in the open market.
Subject to applicable federal securities laws and restrictions contained in the
underwriting agreement with the underwriters, MidAmerican Holdings can sell any
or all of its shares of common stock. In addition, under the registration
rights agreement, MidAmerican Holdings has registration rights with respect to
the shares of its common stock, which would facilitate any future disposition.
Sales in the public market of substantial amounts of common stock, or the
perception that such sales could occur, could cause the prevailing market price
for HomeServices' common stock to decrease. HomeServices cannot predict how
long MidAmerican Holdings will maintain its current majority ownership of
common stock after the offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. These statements may be found under "Prospectus
Summary," "Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Forward-looking statements contain the
words "believes," "anticipates," "expects" and words of similar import. Because
these statements involve risks and uncertainties, actual results could differ
materially from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Factors
that could cause these differences include those discussed under "Risk Factors"
in this prospectus. The forward-looking statements are made as of the date of
this prospectus.
USE OF PROCEEDS
HomeServices estimates that the net proceeds to it from the offering, after
deducting applicable underwriting discounts and commissions and estimated
offering expenses payable by it, will be approximately $30.2 million.
HomeServices has not yet decided how it will use the proceeds of this offering.
However, HomeServices currently has tentative plans to use the balance of the
proceeds of this offering in the manner outlined below:
o approximately $7 million towards the continued development of
HomeServices' E-commerce operations;
o approximately $5 million for working capital; and
o the balance to general corporate purposes, including acquisitions of real
estate brokerage firms and their related service businesses.
You should note that these plans may change and HomeServices may decide not to
allocate proceeds or to allocate more or less proceeds to a specified use.
The Company has no pending acquisitions and therefore is unable to specify any
amount earmarked to future acquisitions. Pending such use, HomeServices will
invest the net proceeds from the offering in short-term treasury, municipal or
investment grade securities.
HomeServices will not receive any proceeds from the sale of shares by
MidAmerican Holdings.
DIVIDEND POLICY
HomeServices does not anticipate paying cash dividends to its common
stockholders in the foreseeable future after the offering. The timing, amount
and form of future dividends, if any, will be at the discretion of
HomeServices' board of directors and will depend on HomeServices' results of
operations, financial condition, cash requirements and other factors considered
relevant by the board of directors.
Before the offering, HomeServices paid cash dividends on the common stock of
$0.39 per share in 1997. HomeServices did not pay any cash dividends on the
common stock during 1998 or 1999.
17
<PAGE>
DILUTION
At June 30, 1999, the adjusted net tangible book value of HomeServices, after
giving effect to the intended 677.87-for-1 share exchange to be effected as part
of the merger with MidAmerican Realty Services Company and the acquisitions of
Paul Semonin Realtors and Long Realty, was approximately $(50.7) million, or
$(6.16) per share. Net tangible book value is defined as the book value of all
assets of HomeServices, less all liabilities and intangible assets.
HomeServices' intangible assets consist primarily of goodwill. Without taking
into account any changes in adjusted net tangible book value after June 30,
1999, other than to give effect to the offering and the application of the
estimated net proceeds, the pro forma adjusted net tangible book value of
HomeServices' common stock as of June 30, 1999 would have been approximately
$(20.5) million, or $(1.96) per share. The following table gives effect to the
offering as if it had occurred on June 30, 1999 at an assumed initial public
offering price of $16.00 per share, which is the midpoint of the estimated range
of the initial public offering price per share, before deduction of the
underwriting discount and commission and other expenses payable by HomeServices.
The table illustrates the immediate increase in net tangible book value of $4.20
per share to HomeServices' existing stockholders and an immediate dilution of
$17.96 per share to new investors:
<TABLE>
<S> <C> <C>
Public offering price per share ....................................... $ 16.00
Adjusted net tangible book value per share as of June 30, 1999 ........ $ (6.16)
Increase in adjusted net tangible book value per share attributable
to the offering ..................................................... $ 4.20
Pro forma adjusted net tangible book value per share as of June
30, 1999, after giving effect to the offering ....................... $ (1.96)
--------
Immediate dilution per share to new investors ......................... $ 17.96
========
</TABLE>
The following table presents as of June 30, 1999, on a pro forma basis after
giving effect to the offering, the positions of existing common stockholders
and new investors with respect to the number of shares of common stock
purchased from HomeServices, the total consideration paid and the average price
paid per share, at an assumed initial public offering price of $16.00 per
share, which is the midpoint of the estimated range of the initial public
offering price per share, before deduction of the underwriting discount and
commission and other expenses payable by HomeServices.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- ------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------------ ------------ ---------- ------------ ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
New investors ........................ 3,750,000 36.0% $60,000 60.7% $ 16.00
Existing common stockholders ......... 6,672,943 64.0 38,903 39.3 5.83
--------- ----- ------- -----
Total ................................ 10,422,943 100.0% $98,903 100.0%
</TABLE>
18
<PAGE>
CAPITALIZATION
The following table sets forth HomeServices' cash and cash equivalents and
capitalization as of June 30, 1999 on an actual basis and on a pro forma basis
after giving effect to:
o the offering and the application of the estimated net proceeds to
HomeServices;
o the merger of MidAmerican Realty Services Company with and into
HomeServices and the issuance of 677.87 shares of HomeServices'
common stock for each share of common stock of MidAmerican Realty
Services Company, which merger will occur immediately before the
closing of the offering;
o the amendment and restatement of HomeServices' certificate of
incorporation to increase the authorized shares of capital stock and
adopt a rights plan before the closing of the offering; and
o the acquisitions of Paul Semonin Realtors and Long Realty.
You should read this table together with the consolidated financial statements
and the related notes, "Unaudited Pro Forma Condensed Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------
ACTUAL(A) PRO FORMA
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents ................................................... $11,544 $ 29,877
======= ========
Long-term debt (including current portion):
Revolving credit facility (b) .............................................. $23,500 $ 23,500
7.12% senior notes ......................................................... 35,000 35,000
Other ...................................................................... 1,067 2,078
------- --------
Total long-term debt ..................................................... 59,567 60,578
------- --------
Stockholders' equity:
Preferred stock, $0.01 par value, no shares authorized, no shares issued
and outstanding (actual); $0.01 par value, shares authorized,
no shares issued and outstanding (pro forma) ............................. -- --
Common stock, no par value, 1,000,000 shares authorized, 10,000 shares
issued and outstanding (actual); $0.01 par value, shares
authorized, 10,422,943 shares issued and outstanding (pro forma) ......... 10 104
Additional paid-in capital ................................................. 39,505 78,161
Notes receivable (c) ....................................................... (753) (753)
Accumulated other comprehensive loss ....................................... (16) (16)
Retained earnings .......................................................... 1,192 1,192
------- ----------
Total stockholders' equity ............................................... 39,938 78,688
------- ----------
Total capitalization ..................................................... $99,505 $139,266
======= ==========
</TABLE>
- ----------
(a) Represents capitalization of MidAmerican Realty Services Company.
(b) At August 16, 1999, an aggregate of $23.5 million in borrowings were
outstanding under the revolving credit facility.
(c) Represents promissory notes issued by certain members of
HomeServices' management as consideration for their aggregate 4.8%
ownership (3.8% ownership on a pro forma basis) of the common stock
of HomeServices. See "Certain Relationships and Related
Transactions--Management Indebtedness."
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial information
of HomeServices presents the unaudited pro forma condensed consolidated
statements of income for the year ended December 31, 1998, and the six months
ended June 30, 1999, and June 30, 1998, and the pro forma condensed
consolidated balance sheet as of June 30, 1999 after giving effect to the
merger of MidAmerican Realty Services Company into HomeServices.
The unaudited pro forma condensed consolidated statements of income for the
year ended December 31, 1998, and the six months ended June 30, 1998, give
effect to the following acquisitions completed during 1998 and 1999 as if they
occurred on January 1, 1998:
o Predecessor which consists of Iowa Realty Co., Inc. and its consolidated
subsidiaries, which at the time of acquisition by HomeServices included
Edina Realty Home Services of Minnesota;
o J.C. Nichols Residential, Inc.;
o Other acquisitions which consist of CBS Real Estate Company, HOME Real
Estate Holdings Inc. and Nebraska Land Title & Abstract;
o Paul Semonin Realtors; and
o Long Realty.
The unaudited pro forma condensed consolidated statement of income for the six
months ended June 30, 1999 gives effect to the acquisition of Paul Semonin
Realtors and Long Realty as if they occurred on January 1, 1998.
The pro forma statements of income do not give effect to the interest income
that would have been earned on proceeds of the offering that are not used by
HomeServices had such transaction occurred on January 1, 1998.
The unaudited pro forma condensed consolidated balance sheet as of June 30,
1999 gives effect to the following transactions as if they occurred on June 30,
1999: (1) the offering, (2) the application of the estimated net proceeds to
HomeServices from the offering and (3) the acquisitions of Paul Semonin
Realtors and Long Realty.
HomeServices' acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values. Management does not expect that the
final allocations of the purchase prices for the acquisitions will differ
materially from the preliminary allocations.
The pro forma adjustments reflect HomeServices' determination of all
adjustments necessary to present fairly HomeServices' pro forma financial
position and results of operations. These adjustments are based on available
information and assumptions HomeServices considers reasonable under the
circumstances. All material intercompany eliminations have been made.
Prior to the offering, HomeServices will enter into a service agreement with
MidAmerican Holdings. In consideration for services provided, HomeServices will
pay a monthly fee of $50,000, plus an amount for the reimbursement of all
reasonable employee and out-of-pocket costs incurred by MidAmerican Holdings in
connection with providing these services. No adjustment has been made in the
pro forma statements of income as charges are already reflected in the
historical amounts for costs of similar services provided to MidAmerican Realty
Services Company and the predecessor by their respective parent companies.
The unaudited pro forma condensed consolidated financial information is
provided for informational purposes only. This information is not necessarily
indicative of the financial position or the results of operations of
HomeServices had the transactions referred to above occurred on the dates
specified. In addition, this information is not necessarily indicative of the
financial condition or results of operations which may exist in the future. You
should read the unaudited pro forma condensed consolidated financial
information together with the historical consolidated financial statements of
HomeServices, its predecessor and acquired companies and the related notes
included elsewhere in this prospectus.
20
<PAGE>
HOMESERVICES.COM INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MIDAMERICAN J.C. PAUL
PREDECESSOR (1)(2) REALTY (2)(3) NICHOLS (4) SEMONIN (5)
-------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commission revenue .......... $74,893 $169,647 $25,715 $30,663
Title fees .................. 7,575 14,154 -- --
Other ....................... 3,769 6,790 2,163 1,180
------- -------- ------- -------
Total revenues ............. 86,237 190,591 27,878 31,843
------- -------- ------- -------
Operating expenses:
Commission expense .......... 49,107 113,225 18,173 21,408
Amortization of pending
real estate sales
contracts .................. -- 18,271 -- --
Depreciation and
amortization ............... 2,293 4,177 292 501
All other operating
expenses ................... 31,126 59,265 7,266 8,126
------- -------- ------- -------
Total operating
expenses .................. 82,526 194,938 25,731 30,035
------- -------- ------- -------
Operating income (loss) ...... 3,711 (4,347) 2,147 1,808
Interest and other income
(expense), net .............. (94) (1,334) (69) 440
------- -------- ------- -------
Income (loss) before
income taxes ................ 3,617 (5,681) 2,078 2,248
Income taxes (benefit) ....... 1,664 (2,247) 792 913
------- -------- ------- -------
Net income (loss) ............ $ 1,953 $ (3,434) $ 1,286 $ 1,335
======= ======== ======= =======
Per share information(12):
Earnings per share -
Basic and diluted ..........
Weighted average shares
Outstanding -
Basic and diluted ..........
<PAGE>
<CAPTION>
OTHER HOMESERVICES
LONG (6) ACQUISITIONS (2)(7) ADJUSTMENTS PRO FORMA
---------- --------------------- ------------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commission revenue .......... $36,217 $19,298 $ -- $356,433
Title fees .................. -- 1,236 22,965
Other ....................... 376 754 15,032
------- ------- --------
Total revenues ............. 36,593 21,288 -- 394,430
------- ------- ----------- --------
Operating expenses:
Commission expense .......... 26,701 14,422 243,036
Amortization of pending
real estate sales
contracts .................. -- -- 2,755 (8) 21,026
Depreciation and
amortization ............... 422 228 1,497 (9) 9,410
All other operating
expenses ................... 7,565 6,366 119,714
------- ------- --------
Total operating
expenses .................. 34,688 21,016 4,252 393,186
------- ------- ----------- --------
Operating income (loss) ...... 1,905 272 (4,252) 1,244
Interest and other income
(expense), net .............. (27) 78 (2,112)(10) (3,118)
------- ------- ----------- --------
Income (loss) before
income taxes ................ 1,878 350 (6,364) (1,874)
Income taxes (benefit) ....... 763 296 (2,835)(11) (654)
------- ------- ----------- --------
Net income (loss) ............ $ 1,115 $ 54 $ (3,529) $ (1,220)
======= ======= =========== ========
Per share information(12):
Earnings per share -
Basic and diluted .......... $ (0.12)
Weighted average shares
Outstanding -
Basic and diluted .......... 10,423
</TABLE>
- ----------
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income for
the Year Ended December 31, 1998.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998
(1) Reflects the historical results of the predecessor for the period from
January 1, 1998 through May 27, 1998, the day prior to the predecessor's
acquisition by HomeServices. Predecessor refers to Iowa Realty and its
consolidated subsidiaries which, at the time Iowa Realty and Edina Realty
were acquired in May 1998, included Edina Realty.
(2) Prior to HomeServices' acquisition of Iowa Realty, Iowa Realty sold its
subsidiary, HOME Real Estate Holdings Inc., to a third party. On August
18, 1998, HomeServices acquired HOME Real Estate from the third party in
an unrelated transaction. Accordingly, the historical results of HOME Real
Estate are reflected as follows: (a) in HomeServices' results for the
period from August 19, 1998, the date following acquisition by
HomeServices, to December 31, 1998, (b) in the predecessor's results for
the period from January 1, 1998 to May 7, 1998, the day prior to the
predecessor's sale of HOME Real Estate to a third party, and (c) in the
Other Acquisitions column for the period from May 8, 1998 to August 18,
1998, which represents the period during which HOME Real Estate was not
owned by either HomeServices or the predecessor.
(3) Reflects historical results of HomeServices for the period from May 28,
1998, its inception date, to December 31, 1998 and includes the historical
results for the acquisitions completed in 1998 from their respective dates
of acquisition.
(4) Reflects the historical results of J.C. Nichols for the period from
January 1, 1998 through August 31, 1998, the date of acquisition by
HomeServices.
(5) Reflects the historical results of Paul Semonin Realtors for the year
ended December 31, 1998.
(6) Reflects the historical results of Long Realty for the year ended December
31, 1998.
(7) Reflects the historical results of the following companies acquired by
HomeServices: (a) CBS Real Estate Company for the period from January 1,
1998 through August 17, 1998, the date of acquisition by HomeServices, (b)
HOME Real Estate for the period from May 8, 1998 to August 18, 1998 (see
note (2) above) and (c) Nebraska Land Title & Abstract for the period from
January 1, 1998 through December 16, 1998, the date of acquisition by
HomeServices.
(8) Reflects the value of real estate sales contracts that were pending at the
date of acquisition. The established asset was amortized over three
months, based on HomeServices' estimate of when contracts typically result
in closed transactions.
(9) Reflects amortization of goodwill over a 30-year life specifically related
to the purchase of the acquired businesses along with the amortization of
non-compete agreements over the life of the respective agreements.
(10) Reflects interest expense on the $25.0 million revolving credit facility
at the blended interest rate of 6.51%, annual interest expense on $35.0
million of private placement notes at the stated rate of 7.12% and
interest expense on the $8.0 million loan from parent at 5.94%. The
average interest rate on the revolver was calculated based on the
weighted average outstanding balance of the revolving credit agreement
including the swap agreement. If interest rates were to fluctuate by 1/8%
on the portion of the revolver not covered by the swap agreement, income
from operations would be affected $16,000 annually.
(11) Reflects the income tax benefit that would have been realized if the
acquired businesses had been combined at the beginning of the period.
Calculated as income before taxes adjusted for permanent book/tax
differences of approximately $260,000 at December 31, 1998. A combined
federal and state statutory tax rate of 40.59% was applied in the
calculation.
(12) Earnings per share on a pro forma basis is computed using the historical
weighted average shares of MidAmerican Realty Services Company as of
December 31, 1998 of 10,000, after giving effect to the following events
as if they had occurred at the beginning of the period: (a) the issuance
of 2,149 shares issued in August 1999 in connection with the acquisition
of Paul Semonin Realtors, (b) the exchange of 677.87 shares of
HomeServices common stock for each share of MidAmerican Realty Services
Company common stock in a merger of the two expected to be consummated
immediately prior to the offering and (c) the issuance of the 2,187,500
shares to be sold by HomeServices in the offering after the merger.
22
<PAGE>
HOMESERVICES.COM INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MIDAMERICAN J.C. PAUL
PREDECESSOR (1) REALTY NICHOLS (2) SEMONIN (3)
----------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commission revenue........ $74,893 $26,244 $16,604 $14,692
Title fees ............... 7,575 2,455 -- --
Other .................... 3,769 1,019 1,510 525
------- ------- ------- -------
Total revenues .......... 86,237 29,718 18,114 15,217
------- ------- ------- -------
Operating expenses:
Commission expense........ 49,107 16,687 11,858 10,153
Amortization of
pending real estate
sales contracts ......... -- 4,744 -- --
Depreciation and
amortization ............ 2,293 600 201 227
All other operating
expenses ................ 31,126 7,878 5,071 3,748
------- ------- ------- -------
Total operating
expenses ............... 82,526 29,909 17,130 14,128
------- ------- ------- -------
Operating income
(loss) ................... 3,711 (191) 984 1,089
Interest and other
income (expense),
net ...................... (94) (228) (18) 114
------- ------- ------- -------
Income (loss) before
income taxes ............. 3,617 (419) 966 1,203
Income taxes (benefit)..... 1,664 (166) 394 491
------- ------- ------- -------
Net income (loss) ......... $ 1,953 $ (253) $ 572 $ 712
======= ======= ======= =======
Per share information(10):
Earnings per share -
Basic and diluted .......
Weighted average shares
Outstanding -
Basic and diluted .......
<PAGE>
<CAPTION>
OTHER HOMESERVICES
LONG (4) ACQUISITIONS (5) ADJUSTMENTS PRO FORMA
---------- ------------------ ----------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commission revenue........ $16,687 $13,312 $ -- $ 162,432
Title fees ............... -- 314 10,344
Other .................... 139 882 7,844
------- ------- ---------
Total revenues .......... 16,826 14,508 180,620
------- ------- ---------
Operating expenses:
Commission expense........ 12,199 10,020 110,024
Amortization of
pending real estate
sales contracts ......... -- -- 16,282 (6) 21,026
Depreciation and
amortization ............ 256 135 503 (7) 4,215
All other operating
expenses ................ 3,620 3,073 54,516
------- ------- ---------
Total operating
expenses ............... 16,075 13,228 16,785 189,781
------- ------- ------------- ---------
Operating income
(loss) ................... 751 1,280 (16,785) (9,161)
Interest and other
income (expense),
net ...................... 25 37 (1,448)(8) (1,612)
------- ------- ------------- ---------
Income (loss) before
income taxes ............. 776 1,317 (18,233) (10,773)
Income taxes (benefit)..... 315 571 (7,576)(9) (4,307)
------- ------- ------------- ---------
Net income (loss) ......... $ 461 $ 746 $ (10,657) $ (6,466)
======= ======= ============= =========
Per share information(10):
Earnings per share -
Basic and diluted ....... $ (0.62)
Weighted average shares
Outstanding -
Basic and diluted ....... 10,423
</TABLE>
- ----------
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income for
the Six Months Ended June 30, 1998.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED
JUNE 30, 1998
(1) Reflects the historical results of the predecessor for January 1, 1998 to
May 27, 1998, including HOME Real Estate for the period January 1, 1998,
through May 7, 1998. Predecessor refers to Iowa Realty and its
consolidated subsidiaries which, at the time Iowa Realty and Edina Realty
were acquired in May 1998, included Edina Realty.
(2) Reflects the historical results of J.C. Nichols for the period presented.
(3) Reflects the historical results of Paul Semonin Realtors for the period
presented.
(4) Reflects the historical results of Long Realty for the period presented.
(5) Reflects the historical results of CBS Real Estate Company and Nebraska
Land Title & Abstract for the period presented and the results of HOME
Real Estate for May 8, 1998, through June 30, 1998.
(6) Reflects the value of real estate sales contracts that were pending at the
date of acquisition. The established asset was amortized over three
months, based on HomeServices' estimate of when contracts typically result
in closed transactions.
(7) Reflects amortization of goodwill over a 30-year life specifically related
to the purchase of the acquired businesses along with the amortization of
non-compete agreements over the life of the respective agreements.
(8) Reflects interest expense on the $25.0 million revolving credit facility
at the blended interest rate of 6.51%, annual interest expense on $35.0
million of private placement notes at the stated rate of 7.12% and
interest expense on the $8.0 million loan from parent at 5.94%. The
average interest rate on the revolver was calculated based on the weighted
average outstanding balance of the revolving credit agreement including
the swap agreement. If interest rates were to fluctuate by 1/8% on the
portion of the revolver not covered by the swap agreement, income from
operations would be affected $16,000 annually.
(9) Reflects the income tax benefit that would have been realized if the
acquired businesses had been combined at the beginning of the period.
Calculated as income before taxes adjusted for permanent book/tax
differences of approximately $162,000 at June 30, 1998. A combined federal
and state statutory tax rate of 40.59% was applied in the calculation.
(10) Earnings per share on a pro forma basis is computed using the historical
weighted average shares of MidAmerican Realty Services Company as of June
30, 1999 of 10,000, after giving effect to the following events as if they
had occurred at the beginning of the period: (a) the issuance of 2,149
shares issued in August 1999 in connection with the acquisition of Paul
Semonin Realtors, (b) the exchange of 677.87 shares of HomeServices common
stock for each share of MidAmerican Realty Services Company common stock in
a merger of the two expected to be consummated immediately prior to the
offering and (c) the issuance of the 2,187,500 shares to be sold by
HomeServices in the offering after the merger.
24
<PAGE>
HOMESERVICES.COM INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN PAUL HOMESERVICES
REALTY SEMONIN (1) LONG (2) ADJUSTMENTS PRO FORMA
------------- ------------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commission revenue .............................. $148,979 $15,993 $23,980 $ $188,952
Title fees ...................................... 10,644 -- -- 10,644
Other ........................................... 8,101 409 249 8,759
-------- ------- ------- --------
Total revenues ................................ 167,724 16,402 24,229 208,355
-------- ------- ------- --------
Operating expenses:
Commission expense .............................. 102,085 11,098 17,696 130,879
Depreciation and amortization ................... 3,718 274 214 403 (3) 4,609
All other operating expenses .................... 52,242 4,169 4,712 61,123
-------- ------- ------- --------
Total operating expenses ...................... 158,045 15,541 22,622 403 196,611
-------- ------- ------- ------- --------
Operating income (loss) .......................... 9,679 861 1,607 (403) 11,744
Interest and other income (expense), net ......... (1,775) (37) 38 (238)(4) (2,012)
-------- ------- ------- ------- --------
Income (loss) before income taxes ................ 7,904 824 1,645 (641) 9,732
Income taxes (benefit) ........................... 3,278 339 669 (267)(5) 4,019
-------- ------- ------- ------- --------
Net income (loss) ................................ $ 4,626 $ 485 $ 976 $ (374) $ 5,713
======== ======= ======= ======= ========
Per share information(6):
Earnings per share -
Basic .......................................... $ 0.68 $ 0.55
Diluted ........................................ $ 0.68 $ 0.54
Weighted average shares
Outstanding -
Basic .......................................... 6,779 10,423
Diluted ........................................ 6,779 10,676
</TABLE>
- ----------
(1) Reflects the historical results of Paul Semonin Realtors for the period
presented.
(2) Reflects the historical results of Long Realty for the period presented.
(3) Reflects amortization of goodwill over a 30-year life specifically
related to the purchase of the acquired businesses along with the
amortization of non-compete agreements over the life of the respective
agreements.
(4) Reflects interest expense on the $8.0 million loan from parent at 5.94%.
(5) Reflects the income tax benefit that would have been realized if the
acquired business had been combined at the beginning of the period.
Calculated as income before taxes adjusted for permanent book/tax
differences of approximately $170,000 at June 30, 1999. A combined
federal and state statutory tax rate of 40.59% was applied in the
calculation.
(6) Historical earnings per share for MidAmerican Realty as computed using its
historical weighted average shares of 10,000 as of June 30, 1999, times
the exchange rate of 677.87 shares of HomeServices common stock for each
share of MidAmerican Realty Services Company common stock in a merger of
the two expected to be consummated immediately prior to the offering.
Earnings per share on a pro forma basis is computed using the historical
weighted average shares of MidAmerican Realty Services Company as of June
30, 1999 of 10,000, after giving effect to the following events as if
they had occurred at the beginning of the period: (a) the issuance of
2,149 shares issued in August 1999 in connection with the acquisition of
Paul Semonin Realtors, (b) the exchange of 677.87 shares of HomeServices
common stock for each share of MidAmerican Realty Services Company common
stock in a merger of the two expected to be consummated immediately prior
to the offering and (c) the issuance of the 2,187,500 shares to be sold
by HomeServices in the offering after the merger. A
25
<PAGE>
(footnote -- continued)
reconciliation of Net Income (Loss) and Shares for the Basic and Diluted
per share computations for income from continuing operations for the six
months ended June 30, 1999, is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
NET
INCOME PER SHARE
(LOSS) SHARES AMOUNT
-------- -------- ----------
<S> <C> <C> <C>
Income (loss) from Continuing Operations $5,713
------
Basic EPS
Income Available to Common Shareholders.. 5,713 10,423 $ 0.55
Effect of Dilutive Securities
Stock Options ........................... -- 253
------ ------
Diluted EPS
Income Available to Common Shareholders.. $5,713 10,676 $ 0.54
====== ====== ======
</TABLE>
26
<PAGE>
HOMESERVICES.COM INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PAUL
MIDAMERICAN SEMONIN
REALTY ACQUISITION(1)
ASSETS ------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 11,544 $ (4,802)
Mortgage loans held for sale and other
receivables ................................... 12,477 1,700
Cash held in trust .............................. 9,489
Income taxes receivable ......................... 1,645
Other current assets ............................ 1,789 820
-------- --------
36,944 (2,282)
-------- --------
Other assets:
Office property and equipment, net .............. 18,147 1,198
Intangible assets, net of accumulated
amortization of $2,327......................... 74,266 10,177
Investment in 50% or less owned
entities ...................................... 841 830
Held-to-maturity securities ..................... 858
Available-for-sale securities ................... 355
Other assets .................................... 590 360
-------- --------
95,057 12,565
-------- --------
Total assets ................................. $132,001 $ 10,283
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 3,876 $ --
Accrued expenses ................................ 10,915
Payable to affiliates ........................... 635
Cash held in trust .............................. 9,489
Current portion of agent profit sharing ......... 433
Current portion of long-term debt ............... 3,162 40
Other current liabilities ....................... 1,896 1,010
-------- --------
30,406 1,050
-------- --------
Other liabilities:
Deferred taxes .................................. 93
Long-term debt .................................. 56,405 395
Agent profit sharing ............................ 5,069
Other noncurrent liabilities .................... 90 338
-------- --------
61,657 733
-------- --------
Total liabilities ............................ 92,063 1,783
-------- --------
Stockholders' equity:
Common stock, no par value, 10,000
shares issued and outstanding (actual);
$0.01 par value, 10,422,943 shares
issued and outstanding (pro forma) ............ 10
Additional paid-in capital ...................... 39,505 8,500
Notes receivable ................................ (753)
Accumulated other comprehensive loss ............ (16)
Accumulated earnings ............................ 1,192
--------
Total stockholders' equity ................... 39,938 8,500
-------- --------
Total liabilities and stockholders'
equity ...................................... $132,001 $ 10,283
======== ========
<PAGE>
<CAPTION>
PRO FORMA
LONG BEFORE OFFERING HOMESERVICES
ACQUISITION (2) OFFERING ADJUSTMENTS(3) PRO FORMA
ASSETS ----------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ (7,115) $ (373) $30,250 $ 29,877
Mortgage loans held for sale and other
receivables ................................... 1,355 15,532 15,532
Cash held in trust .............................. 245 9,734 9,734
Income taxes receivable ......................... 1,645 1,645
Other current assets ............................ 2,609 2,609
-------- --------
(5,515) 29,147 30,250 59,397
-------- -------- ------- --------
Other assets:
Office property and equipment, net .............. 1,296 20,641 20,641
Intangible assets, net of accumulated
amortization of $2,327......................... 14,700 99,143 99,143
Investment in 50% or less owned
entities ...................................... 1,671 1,671
Held-to-maturity securities ..................... 858 858
Available-for-sale securities ................... 355 355
Other assets .................................... 37 987 987
-------- -------- --------
16,033 123,655 -- 123,655
-------- -------- ------- --------
Total assets ................................. $ 10,518 $152,802 $30,250 $183,052
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 123 $ 3,999 $ -- $ 3,999
Accrued expenses ................................ 1,574 12,489 12,489
Payable to affiliates ........................... 8,000 8,635 8,635
Cash held in trust .............................. 245 9,734 9,734
Current portion of agent profit sharing ......... 433 433
Current portion of long-term debt ............... 169 3,371 3,371
Other current liabilities ....................... 2,906 2,906
-------- --------
10,111 41,567 -- 41,567
-------- -------- ------- --------
Other liabilities:
Deferred taxes .................................. 93 93
Long-term debt .................................. 407 57,207 57,207
Agent profit sharing ............................ 5,069 5,069
Other noncurrent liabilities .................... 428 428
-------- --------
407 62,971 -- 62,797
-------- -------- ------- --------
Total liabilities ............................ 10,518 104,151 -- 104,364
-------- -------- ------- --------
Stockholders' equity:
Common stock, no par value, 10,000
shares issued and outstanding (actual);
$0.01 par value, 10,422,943 shares
issued and outstanding (pro forma) ............ 10 94 104
Additional paid-in capital ...................... 48,005 30,156 78,161
Notes receivable ................................ (753) (753)
Accumulated other comprehensive loss ............ (16) (16)
Accumulated earnings ............................ 1,192 1,192
-------- --------
Total stockholders' equity ................... 48,438 30,250 78,688
-------- ------- --------
Total liabilities and stockholders'
equity ...................................... $ 10,518 $152,802 $30,250 $183,052
======== ======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(1) The amounts shown in this column represent the fair value of assets and
liabilities received/assumed in the acquisition of Paul Semonin Realtors,
as well as the following adjustments to effect the acquisition (dollars
in thousands).
<TABLE>
<CAPTION>
LINE ITEM DESCRIPTION AMOUNT
- ------------------------------------------ ---------------------------------------- ------------
<S> <C> <C>
Cash Cash on hand used $ (4,802)
Mortgage loans held for sale and other
receivables Value of pending real estate contracts 1,700
Intangible assets, net Goodwill 10,177
Additional paid-in capital Contribution from parent 8,500
</TABLE>
(2) The amounts shown in this column represent the fair value of assets and
liabilities received/assumed in the acquisition of Long Realty, as well
as the following adjustments to effect the acquisition (dollars in
thousands).
<TABLE>
<CAPTION>
LINE ITEM DESCRIPTION AMOUNT
- ------------------------------------------ ------------------------------------------------- ------------
<S> <C> <C>
Cash Cash on hand used, net of cash acquired of $885 $ (7,115)
Mortgage loans held for sale and other
receivables Value of pending real estate contracts 1,055
Intangible assets, net Goodwill 14,700
Payable to affiliates Loan from parent 8,000
</TABLE>
(3) The amounts shown in this column reflect the estimated effect of
HomeServices issuance of 2,187,500 shares of its common stock at an
assumed initial public offering price of $16 per share, the midpoint of
the estimated range of the initial public offering price per share, less
estimated fees and expenses of $4.8 million to be paid by HomeServices.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1996, 1997 and 1998 and for the years ended December 31, 1996, 1997 and for the
periods ended May 28, 1998 and December 31, 1998 are derived from the audited
consolidated financial statements of MidAmerican Realty Services Company and
its predecessor, which will be merged with and into HomeServices. The selected
consolidated financial data presented below as of December 31, 1994 and 1995
and for the years ended December 31, 1994 and 1995 are derived from the
unaudited consolidated financial statements of the predecessor. The selected
consolidated financial data as of and for the six months ended June 30, 1999,
are derived from the unaudited consolidated financial statements of MidAmerican
Realty Services Company, and the selected consolidated financial data as of and
for the periods ended May 28, 1998 and June 30, 1998 are derived from the
unaudited consolidated financial statements of MidAmerican Realty Services
Company and its predecessor. Results for the six months ended June 30, 1999 are
not necessarily indicative of HomeServices' results to be expected for the full
year.
Results of operations for 1994 and 1995 reflect only the results of Iowa Realty
and its consolidated subsidiaries. In 1996, Edina Realty became a subsidiary of
Iowa Realty through a reorganization effected by their parent company.
HomeServices and its predecessor acquired companies in 1997 and 1998 and
accounted for the acquisitions by the purchase method of accounting.
Accordingly, the results of operations of the acquired companies have been
included in the consolidated operating results of HomeServices and its
predecessor only from their dates of acquisition.
In July 1997, Iowa Realty acquired HOME Real Estate Holdings, Inc. On May 8,
1998, which was before HomeServices acquired Iowa Realty, Iowa Realty sold HOME
Real Estate to a third party. Accordingly, the results of operations of the
predecessor for 1996, 1997 and 1998 include the results of Iowa Realty and
Edina Realty and their consolidated subsidiaries, which, from July 1, 1997 to
May 7, 1998, also include the results of HOME Real Estate. HomeServices
purchased its predecessor in May 1998 and acquired various other companies
thereafter.
You should read the financial data presented below together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of MidAmerican Realty Services Company,
which will be merged with and into HomeServices, and its predecessor and the
related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------- JAN 1 -
MAY 27,
1994 1995 1996 1997 1998
---------- ---------- ----------- ----------- -----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT AMOUNTS PER
SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Commission revenue ................... $50,967 $58,409 $179,378 $191,083 $74,893
Title fees ........................... -- -- 14,821 16,203 7,575
Other (a) ............................ 15,050 12,672 22,092 7,410 3,769
Total revenues ...................... 66,017 71,081 216,291 214,696 86,237
Commission expense ................... 30,792 35,433 115,331 125,148 49,107
Amortization of pending real
estate sales contracts .............. -- -- -- -- --
Depreciation and amortization ........ 1,762 2,123 5,103 5,619 2,293
All other operating expenses (a) ..... 28,769 29,767 85,162 72,808 31,126
Total operating expenses ............ 61,323 67,323 205,596 203,575 82,526
Operating income (loss) .............. 4,694 3,758 10,695 11,121 3,711
Interest and other income
(expense), net ...................... (324) (942) (2,582) (903) (94)
Income (loss) before income taxes 4,370 2,816 8,113 10,218 3,617
Income taxes (benefit) ............... 1,853 1,471 3,263 4,725 1,664
Minority interest .................... -- -- 1,276 633 --
Net income (loss) .................... $ 2,517 $ 1,345 $ 3,574 $ 4,860 $ 1,953
Earnings (loss) per share:
Basic and diluted ................... $ 3.94 $ 2.10 $ 5.59 $ 2.19 $ 0.41
Weighted average shares
outstanding:
Basic and diluted ................... 639 639 639 2,224 4,748
<PAGE>
<CAPTION>
HOMESERVICES
-----------------------------------
SIX MONTHS
MAY 28 - MAY 28 - ENDED
DEC. 31, JUNE 30, JUNE 30,
1998 1998 1999
------------ ---------- -----------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT
AMOUNTS PER SHARE)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Commission revenue ................... $169,647 $26,244 $148,979
Title fees ........................... 14,154 2,455 10,644
Other (a) ............................ 6,790 1,019 8,101
Total revenues ...................... 190,591 29,718 167,724
Commission expense ................... 113,225 16,687 102,085
Amortization of pending real
estate sales contracts .............. 18,271 4,744 --
Depreciation and amortization ........ 4,177 600 3,718
All other operating expenses (a) ..... 59,265 7,878 52,242
Total operating expenses ............ 194,938 29,909 158,045
Operating income (loss) .............. (4,347) (191) 9,679
Interest and other income
(expense), net ...................... (1,334) (228) (1,775)
Income (loss) before income taxes (5,681) (419) 7,904
Income taxes (benefit) ............... (2,247) (166) 3,278
Minority interest .................... -- -- --
Net income (loss) .................... $ (3,434) $ (253) $ 4,626
Earnings (loss) per share:
Basic and diluted ................... $ (0.51) $ (0.04) $ 0.68
Weighted average shares
outstanding:
Basic and diluted ................... 6,779 6,779 6,779
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
JAN 1 -
MAY 27,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (b) .................................... $ 6,456 $ 5,881 $ 15,798 $ 16,740 $ 6,004
Net cash provided by (used in)
operating activities ......................... 68 (2,503) 2,134 5,297 4,991
Net cash used in investing activities ......... (4,004) (6,502) (8,874) (6,759) (891)
Net cash provided by (used in)
financing activities ......................... 3,820 9,571 10,664 (1,575) (1,940)
<CAPTION>
HOMESERVICES
--------------------------------------
SIX MONTHS
MAY 28 - MAY 28 - ENDED
DEC. 31, JUNE 30, JUNE 30,
1998 1998 1999
------------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS
PER SHARE)
<S> <C> <C> <C>
OTHER DATA:
EBITDA (b) .................................... $ 18,101 $ 5,153 $ 13,397
Net cash provided by (used in)
operating activities ......................... 12,428 5,014 16,198
Net cash used in investing activities ......... (99,126) (70,342) (5,890)
Net cash provided by (used in)
financing activities ......................... 89,812 72,133 (1,898)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR HOMESERVICES
------------------------------------------ --------------------------
AS OF AS OF
AS OF DECEMBER 31, DECEMBER 31, JUNE 30,
------------------------------------------ -------------- ----------
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 871 $ 1,437 $ 5,627 $ 2,590 $ 3,114 $ 11,544
Total assets (a) .................. 52,782 68,341 95,504 62,346 128,520 132,001
Long-term debt, including current
portion .......................... 5,651 6,090 16,397 7,651 61,445 59,567
Stockholders' equity .............. 18,396 19,741 33,699 36,791 35,194 39,938
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996 1997
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C>
OPERATING DATA:
Closed transaction sides ................ 15,726 16,233 47,836 48,631
Average home sales price ................ $ 106.3 $ 118.8 $ 120.9 $ 127.1
Closed transaction volume (in millions)..
(Closed transaction sides multiplied by
average home sales price) .............. $ 1,671 $ 1,928 $ 5,783 $ 6,183
Average sales commission (%)
(Commission revenue divided by
home sales volume) ..................... 3.1% 3.0% 3.1% 3.1%
Number of branch offices (at
period end) ............................ 31 32 103 103
Number of sales associates (at
period end) ............................ 944 911 3,063 3,298
<PAGE>
<CAPTION>
PREDECESSOR HOMESERVICES
----------- ---------------------------------
SIX MONTHS
JAN 1 - MAY 28 - MAY 28 - ENDED
MAY 27, DEC. 31, JUNE 30, JUNE 30,
1998 1998 1998 1999
----------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER
SHARE)
<S> <C> <C> <C> <C>
OPERATING DATA:
Closed transaction sides ................ 18,578 41,580 6,530 33,393
Average home sales price ................ $ 132.3 $ 138.1 $ 130.8 $ 146.0
Closed transaction volume (in millions).. $ 2,458 $ 5,741 $ 854 $ 4,877
(Closed transaction sides multiplied
by average home sales price)
Average sales commission (%)
(Commission revenue divided by
home sales volume) ..................... 3.0% 3.0% 3.1% 3.1%
Number of branch offices (at
period end) ............................ 98 124 97 123
Number of sales associates (at
period end) ............................ 3,056 4,282 3,032 4,303
</TABLE>
- ----------
(a) Prior to 1997, the predecessor was also engaged in real estate
development operations in addition to real estate brokerage
operations in some of the periods presented. All real estate
brokerage and development activities were operated by the same
corporate entity using shared management, office space and other
related services. At the beginning of 1997, the majority of the
assets associated with the development operations was transferred to
the parent company. These development operations contributed only
$0.4 million to "Other" revenues in 1997. Based on the way the
brokerage and development operations were managed, only certain
revenues, expenses, assets, and liabilities can be specifically
identified in the predecessor's statements of income and balance
sheets. Revenues from the sale of real estate development projects of
$13.9 million, $10.6 million and $14.0 million are included in the
line item "Other" revenues for the years ended
30
<PAGE>
(footnote -- continued)
December 31, 1994, 1995 and 1996, respectively. Cost of real estate sales
totaling $11.0 million, $7.4 million and $11.3 million are included in the
line item "All other operating expenses" for the years ended December 31,
1994, 1995 and 1996, respectively. Real estate contracts and real estate
inventory of $22.5 million, $29.4 million and $23.2 million are included in
the line item "Total assets" as of December 31, 1994, 1995 and 1996,
respectively. Since 1997, HomeServices has not been engaged in real estate
development operations to any significant degree.
(b) EBITDA is defined as net income (loss) before minority interest, income
taxes (benefit) and interest and other income (expense), net, plus
depreciation and amortization and amortization of pending real estate sales
contracts. HomeServices has included information concerning EBITDA because
it believes that it is useful to an investor in evaluating the operating
performance of HomeServices as it compares to other companies because this
measure is a widely accepted financial indicator used by investors and
analysts to compare the operating performance of companies. While EBITDA is
routinely used by investors and analysts, it may not necessarily be
comparable to other similarly titled measures of other companies due to
potential differences in the methods of calculation. EBITDA is not intended
to represent cash flows for the periods presented, or results of operations
in accordance with generally accepted accounting principles. EBITDA should
not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
The following table presents the calculation of EBITDA for each of the
periods shown:
<TABLE>
<CAPTION>
PREDECESSOR HOMESERVICES
------------------------------------------------- -----------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, JAN 1 - MAY 28 - MAY 28 - ENDED
-------------------------------------- MAY 27, DEC. 31, JUNE 30, JUNE 30,
1994 1995 1996 1997 1998 1998 1998 1999
--------- --------- --------- --------- --------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) .............. $2,517 $1,345 $ 3,574 $ 4,860 $1,953 $ (3,434) $ (253) $ 4,626
Minority interest .............. -- -- 1,276 633 -- -- -- --
Income taxes (benefit) ......... 1,853 1,471 3,263 4,725 1,664 (2,247) (166) 3,278
Interest and other (Income)
expense, net .................. 324 942 2,582 903 94 1,334 228 1,775
Operating income (loss) ........ 4,694 3,758 10,695 11,121 3,711 (4,347) (191) 9,679
Depreciation and
amortization .................. 1,762 2,123 5,103 5,619 2,293 4,177 600 3,718
Amortization of pending real
estate sales contracts ........ -- -- -- -- -- 18,271 4,744 --
EBITDA ......................... $6,456 $5,881 $15,798 $16,740 $6,004 $ 18,101 $5,153 $13,397
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
ACQUISITION HISTORY
HomeServices, as successor by merger to MidAmerican Realty Services Company,
entered the real estate brokerage business in May 1998 by acquiring Iowa Realty
Co. Inc. and Edina Realty Home Services of Minnesota, both formerly part of
AmerUs Home Services Inc. HomeServices expanded its business with the purchases
in August 1998 of two additional established real estate brokerage firms in
Omaha, Nebraska, HOME Real Estate Holdings Inc. and CBS Real Estate Company,
which were merged to form CBS HOME Real Estate Company. In September 1998,
HomeServices acquired J.C. Nichols Residential, Inc., a brokerage firm
operating in the greater Kansas City area. In December 1998, HomeServices
acquired Nebraska Land Title & Abstract. In July 1999, HomeServices acquired
Paul Semonin Realtors, a Louisville, Kentucky real estate brokerage firm
operating in Kentucky and southern Indiana. In August 1999, HomeServices
acquired Long Realty, a Tucson, Arizona real estate brokerage firm operating in
Tucson and southern Arizona.
Each acquisition was accounted for as a purchase business combination. All
identifiable assets acquired and liabilities assumed were assigned a portion of
the acquisition price equal to their fair value at the date of acquisition.
Acquired identifiable assets consisted primarily of receivables and property
and equipment. The following table displays the purchase price, goodwill
recorded and liabilities assumed for the above acquisitions, in thousands of
dollars.
<TABLE>
<CAPTION>
PURCHASE GOODWILL LIABILITIES
PRICE RECORDED ASSUMED
---------- ---------- ------------
<S> <C> <C> <C>
Iowa Realty and Edina .................. $78,300 $54,607 $31,641
Home Real Estate ....................... 5,200 3,145 301
CBS Real Estate ........................ 5,300 3,512 637
J.C. Nichols ........................... 16,800 13,128 7,708
Nebraska Land Title & Abstract ......... 800 346 273
Paul Semonin ........................... 13,300 10,177 1,783
Long Realty ............................ 16,000 14,700 2,518
</TABLE>
OVERVIEW
REVENUES. HomeServices' commission revenue consists of sales commissions earned
by providing real estate brokerage services to customers in the purchase and
sale of new and existing homes. Sales commissions typically range from
approximately 5% to 7% of the sales price and may be shared between the
seller's broker and the buyer's broker. In transactions in which HomeServices
is acting as a broker on either the buy side or the sell side of a transaction
and a third-party broker is acting as a broker on the other side of the
transaction, HomeServices will typically share approximately 50% of the sales
commission with the other broker. In transactions in which HomeServices is
acting as the sole broker, HomeServices receives 100% of the sales commission.
Commission revenue from sales commissions is recorded as revenue upon the
closing of the home sale transaction. For the six months ended June 30, 1999,
on a pro forma basis, commission revenues represented approximately 91% of
total revenues.
In addition, to a lesser extent, HomeServices earns fee revenue by providing
the following services:
o mortgage origination services for which HomeServices receives
various fees--approximately 1% of revenues on a pro forma
basis for the six months ended June 30, 1999;
32
<PAGE>
o title services for which HomeServices receives a fee from the title
insurance underwriters or from the home buyer--approximately 5% of
revenues on a pro forma basis for the six months ended June 30, 1999;
o escrow and other closing administrative services for which
HomeServices typically receives a fee from home buyers--approximately
1% of revenues on a pro forma basis for the six months ended June 30,
1999; and
o relocation services for corporate customers; franchise services in
which HomeServices provides third parties with the right to use any
one of its brand names in connection with the residential activities
conducted by such third parties, and for which HomeServices receives a
fee from such third parties; and preclosing and home care services for
which HomeServices generally receives referral fees from third-party
providers--less than 1% of HomeServices' overall revenues on a pro
forma basis for the six months ended June 30, 1999.
Revenue derived from title and other services is recorded as revenue at the
time that the services are performed.
To date a substantial portion of HomeServices' revenues have been derived from
traditional real estate brokerage services. While to date HomeServices has not
derived any significant revenues from its E-commerce operations, as
HomeServices develops its E-commerce platform, it expects a larger percentage
of its revenues will be derived from services other than traditional real
estate brokerage services.
EXPENSES. Commission expense represents commissions paid to HomeServices' sales
associates and is based on a percentage of the sales commission earned by
HomeServices. Typically, the percentage of the sales commissions that is paid
to HomeServices' sales associates will vary based on such factors as sales
associate productivity and rates that are paid to competing associates in the
same local or regional market. The percentage of total commissions which
HomeServices or its predecessor has paid to sales associates averaged
approximately 65% over the past three years. Similar to commission revenue,
commission expense is recorded as an expense upon the closing of the home sale
transaction.
Amortization of pending real estate sales contracts is the expensing of the
value of real estate sales contracts that are pending when real estate
brokerage firms are acquired. Upon the acquisition of real estate brokerage
firms, HomeServices establishes an asset for the value of pending real estate
sales contracts. HomeServices amortized pending real estate sales contracts for
its 1998 acquisitions over three months, reflecting the period over which
HomeServices estimated that such contracts resulted in closed real estate
transactions.
Each director of HomeServices has received, as compensation for agreeing to
serve as a director, fully vested options to purchase 50,000 shares of common
stock at an exercise price equal to $5.89, which was the book value of the
common stock on June 30, 1999, after giving effect to the issuance of
approximately 677.87 shares of HomeServices' common stock in exchange for each
share of common stock of MidAmerican Realty Services Company, which merger will
occur immediately before closing of the offering. Based on an assumed initial
public offering price of $16.00 per share, which is the midpoint of the
estimated range of the initial public offering price per share, HomeServices
expects to take a one-time charge against net income of $2.4 million in the
fourth quarter of 1999.
HomeServices' office property and equipment are depreciated over their
estimated useful lives, which range from three to 33 years using straight-line
and accelerated methods. As of June 30, 1999, approximately 55.3% of total
assets on HomeServices' balance sheet consisted of goodwill, net of accumulated
amortization. Goodwill represents the excess of the purchase price that
HomeServices paid for each business acquired over the fair value of the net
identifiable assets acquired. Goodwill is an accumulation of various factors
that HomeServices believes will lead to profits above those that might normally
be expected from just acquiring the tangible assets of a business. It can
reflect different things for each business acquisition, including factors such
as market share, name recognition, competitive position and management.
HomeServices amortizes goodwill over its projected life of 30 years on a
straight-line basis.
All other operating expenses consist primarily of the following: (1) salaries
and employee benefits paid to employees, which excludes sales associates; (2)
occupancy costs, such as rent and utilities; (3) business promotion and
advertising costs; and (4) other general and administrative expenses, including
telecommunications, office supplies, professional and management fees, and
corporate charges for services provided by MidAmerican Holdings.
33
<PAGE>
Income tax expense reflects the tax effect of book income and expense for each
period presented. Although HomeServices and its predecessor were owned by
different parents in each period presented, the amounts were calculated for
HomeServices as if it filed a separate return.
RESULTS OF OPERATIONS
The following discussions of the historical results of operations of
HomeServices and its predecessor describe the results of operations of each
entity for its respective periods. Additionally, a discussion of pro forma
results for the six months ended June 30, 1999 compared to pro forma results
for the six months ended June 30, 1998 is included. Although the pro forma
results of operations are not necessarily indicative of the future results of
operations of HomeServices, management believes the discussion provides
meaningful insight into the operations of the entities which now comprise
HomeServices.
Iowa Realty and its consolidated subsidiaries, including Edina Realty, are
referred to below as the "predecessor" of HomeServices for periods prior to
their acquisition by HomeServices on May 28, 1998. Results of operations of the
entities acquired by HomeServices after May 28, 1998, namely, CBS Real Estate
Company, HOME Real Estate Holdings Inc. and J.C. Nichols are included from
their respective acquisition dates in the third quarter of 1998 and for
Nebraska Land Title & Abstract in the fourth quarter of 1998. CBS Real Estate
Company, HOME Real Estate Holdings Inc., J.C. Nichols and Nebraska Land Title &
Abstract are referred to below as the "nonpredecessor" acquired entities.
HISTORICAL RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999,
AND PERIODS IN 1998
The following table reflects selected information for the periods indicated in
dollars and as a percentage of total revenues. Dollars are in thousands unless
otherwise noted.
<TABLE>
<CAPTION>
HOMESERVICES PREDECESSOR
------------------------------------------------------------------------- -----------------------
SIX MONTHS MAY 28, 1998 MAY 28, 1998 JANUARY 1, 1998
ENDED THROUGH THROUGH THROUGH
JUNE 30, 1999 DECEMBER 31, 1998 JUNE 30, 1998 MAY 27, 1998
------------------------ ------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commission revenue ......... $148,979 88.8 % $169,647 89.0 % $26,244 88.3% $74,893 86.8 %
Title fees ................. 10,644 6.4 % 14,154 7.4 % 2,455 8.3% 7,575 8.8 %
Other ...................... 8,101 4.8 % 6,790 3.6 % 1,019 3.4% 3,769 4.4 %
-------- --------- -------- --------- ------- ----- ------- ---------
Gross revenues ........... 167,724 100.0 % 190,591 100.0 % 29,718 100.0% 86,237 100.0 %
-------- --------- -------- --------- ------- ----- ------- ---------
Commission expense ......... 102,085 60.9 % 113,225 59.4 % 16,687 56.2% 49,107 56.9 %
Amortization of pending
real estate sales
contracts ................. -- -- 18,271 9.6 % 4,744 15.9% -- --
Depreciation and
amortization .............. 3,718 2.2 % 4,177 2.2 % 600 2.0% 2,293 2.7 %
All other operating
expenses .................. 52,242 31.1 % 59,265 31.1 % 7,878 26.5% 31,126 36.1 %
-------- --------- -------- --------- ------- ----- ------- ---------
Total operating
expenses ................ 158,045 94.2 % 194,938 102.3 % 29,909 100.6% 82,526 95.7 %
-------- --------- -------- --------- ------- ----- ------- ---------
Operating income (loss) .... 9,679 5.8 % (4,347) (2.3)% (191) ( 0.6)% 3,711 4.3 %
Other income (expense),
net ....................... (1,775) (1.1)% (1,334) (0.7)% (228) ( 0.8)% (94) (0.1)%
-------- ----- -------- ----- ------- ----- ------- -----
Income (loss) before
income taxes .............. 7,904 4.7 % (5,681) (3.0)% (419) ( 1.4)% 3,617 4.2 %
Income taxes (benefit) ..... 3,278 2.0 % (2,247) (1.2)% (166) ( 0.6)% 1,664 1.9 %
-------- --------- -------- ----- ------- ----- ------- ---------
Net income (loss) .......... $ 4,626 2.7 % $ (3,434) (1.8)% $ (253) ( 0.8)% $ 1,953 2.3 %
======== ========= ======== ===== ======= ===== ======= =========
Selected Statistics:
Closed transaction sides ... 33,393 41,580 6,530 18,578
Closed transaction volume (in
millions) ................. $ 4,877 $ 5,741 $ 854 $ 2,458
Average home sales price.... $ 146.0 $ 138.1 $ 130.8 $ 132.3
</TABLE>
SEASONALITY. Some of HomeServices' real estate brokerage business is subject to
seasonal fluctuations because fewer home sale transactions tend to close during
the first and fourth quarters of the year.
34
<PAGE>
Accordingly, revenues of some of the brokerage firms have historically been
weakest in the first and fourth quarters. Although commission expense is
variable with closed transactions, many other expenses, such as rent, are fixed.
On a consolidated basis, the relationship between HomeServices'expenses and
revenues may be subject to significant fluctuation on a quarter-to-quarter
basis. As a result, on a consolidated basis, HomeServices' operating results and
profitability are lower in the first and fourth quarters relative to the
remainder of the year. Accordingly, HomeServices does not believe that its
results of operations for the six months ended June 30, 1999 will be indicative
of its results of operations for the year ending December 31, 1999.
RESULTS OF OPERATIONS OF HOMESERVICES FOR THE SIX MONTHS ENDED JUNE 30,
1999
REVENUES. Total revenues for the first six months of 1999 were $167.7 million.
Commission revenue accounted for 88.8% of total revenues and was generated by
the companies acquired by HomeServices in 1998. Compared to the last six months
of 1998, the first six months of 1999 reflected a 4.7% increase in the average
price of homes. Title fees totaling $10.6 million accounted for 6.4% of total
revenues and included title revenues of the brokerage firms and a title
services company acquired in December 1998. Other revenues include escrow and
closing revenue, mortgage service fee income, franchise fees, relocation and
referral revenue and various other revenues.
COMMISSION EXPENSE. Commission expense totaled $102.1 million, or 68.5% of
commission revenue, for the six months ended June 30, 1999. Commission expense
as a percentage of commission revenue will vary due to sales associate
productivity, seasonality and pay scales of the various subsidiaries.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the first six
months of 1999 totaled $3.7 million which included $1.2 million of amortization
of goodwill related to the 1998 acquisitions.
ALL OTHER OPERATING EXPENSES. All other operating expenses for the first six
months of 1999 totaled $52.2 million. Salaries and employee benefits accounted
for $24.3 million of the total. Included in salaries and employee benefits for
the 1999 six-month period was a higher than usual amount of medical claims and
the initiation of the sales agent stock purchase plan. Also included in other
operating expenses were additional occupancy and start-up costs due to
expansion of the title business in Omaha.
OTHER INCOME (EXPENSE), NET. Other income (expense) for the first six months of
1999 consisted primarily of interest expense. Interest expense for the first
six months of 1999 was $2.1 million. Interest expense in 1999 reflected a full
six-month amount of interest related to debt used to finance the acquisitions
of the nonpredecessor acquired entities in 1998. Initial financing was obtained
through borrowings from MidAmerican Holdings. In the fourth quarter of 1998,
most of those borrowings were refinanced with the proceeds of a $35.0 million
private placement of 7.12% senior notes and borrowings of $25.0 million under a
revolving credit facility. Other income was primarily interest income.
INCOME TAXES (BENEFIT). The effective tax rate for the six months ended June
30, 1999, was 41.5% which is higher than HomeServices statutory rate of
approximately 40.6% due to permanent tax differences for certain goodwill
amortization and other non-deductible expenses.
NET INCOME (LOSS). Net income for the first six months of 1999 was $4.6
million, reflecting operations of the entities acquired in 1998 for the full
period.
RESULTS OF OPERATIONS OF HOMESERVICES FOR THE PERIOD FROM MAY 28, 1998
THROUGH DECEMBER 31, 1998
The results of operations for this period reflect the operations of Iowa Realty
and Edina Realty and their subsidiaries for the entire period. They also include
the results of operations for the nonpredecessor acquired entities from their
date of acquisition through December 31, 1998, which acquisition dates are
disclosed above under "--Acquisition History."
REVENUES. Total revenues for the period were $190.6 million. Commission revenue
from the real estate brokerage operations was $169.6 million, or 89.0% of total
revenues. Title fees for the period
35
<PAGE>
were $14.2 million, or 7.4%of total revenues. The amount of title fees is
affected by the number of brokerage and refinancing transactions. The number of
refinancing transactions during the period was favorably affected by interest
rates which were lower than in 1997. Other revenues were $6.8 million, or 3.6%
of total revenues. Other revenues include escrow and closing revenue, mortgage
service fee income, franchise fees, relocation and referral revenue and various
other revenues.
COMMISSION EXPENSE. Commission expense from the real estate brokerage
operations was $113.2 million, or 66.7% of commission revenue.
AMORTIZATION OF PENDING REAL ESTATE SALES CONTRACTS. Upon acquiring the real
estate brokerage companies, HomeServices established an asset for the value of
pending real estate sales contracts. The value of these acquired contracts for
the 1998 acquisitions was $18.3 million, which was fully amortized to expense
in the period ended December 31, 1998. This was a noncash expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the period was
$4.2 million, of which $1.3 million was the amortization of goodwill related to
the 1998 business acquisitions.
ALL OTHER OPERATING EXPENSES. All other operating expenses for the period
totaled $59.3 million, or 31.1% of total revenues. All other operating expenses
included salaries and employee benefits of $27.6 million, occupancy costs of
$9.1 million, business promotion and advertising expenses of $8.6 million and
other operating costs. Although the overall operation of the entities acquired
by HomeServices continued basically the same as prior to their acquisition, the
period reflects costs related to the acquisitions, such as changing signage and
other transition costs.
OTHER INCOME (EXPENSE), NET. Other income (expense) consisted primarily of
interest expense, totaling $1.9 million. Initial financing for the acquisitions
was obtained through borrowings from MidAmerican Holdings. In the fourth
quarter of 1998, most of those borrowings were refinanced with the proceeds of
a $35.0 million private placement of 7.12% senior notes and borrowings of $25.0
million under a revolving credit facility. The other income was primarily
interest income.
INCOME TAXES (BENEFIT). The effective tax rate for the period was 39.6% which
is lower than HomeServices statutory rate of approximately 40.6% due to
permanent tax differences for certain goodwill amortization and other
non-deductible expenses.
NET INCOME (LOSS). HomeServices net loss for the period from May 28, 1998,
through December 31, 1998, was $3.4 million. The net loss included the
amortization of the value of real estate sales contracts that were pending at
the date of acquisition of the entities acquired by HomeServices in 1998.
Amortization of these sales contracts resulted in an $18.3 million noncash
charge that reduced net income by $10.9 million. The entire balance of such
contracts was expensed as of December 31, 1998.
RESULTS OF OPERATIONS OF HOMESERVICES FOR THE PERIOD FROM MAY 28, 1998
THROUGH JUNE 30, 1998
The results of operations for this period reflect the operations of Iowa Realty
and Edina Realty and their subsidiaries.
REVENUES. Total revenues for the period were $29.7 million. Commission revenue
from the real estate brokerage operations was $26.2 million, or 88.3% of total
revenues. Title fees were $2.5 million, or 8.3% of total revenues. Other
revenues were $1.0 million, or 3.4% of total revenues.
COMMISSION EXPENSE. Commission expense from the real estate brokerage
operations was $16.7 million, or 63.6% of commission revenue.
AMORTIZATION OF PENDING REAL ESTATE SALES CONTRACTS. Upon acquiring the real
estate brokerage companies, HomeServices established an asset for the value of
pending real estate sales contracts. The value of these acquired contracts for
the acquisition of the predecessor was $14.2 million, one-third of which was
amortized to expense in the period.
ALL OTHER OPERATING EXPENSES. All other operating expenses for the period
totaled $7.9 million, or 26.5% of total revenues. All other operating expenses
included salaries and employee benefits of
36
<PAGE>
$3.5 million, occupancy costs of $1.2 million, business promotion and
advertising expenses of $1.4 million and other operating costs. Although the
overall operation of the entities acquired by HomeServices continued basically
the same as prior to their acquisition, the period reflects costs related to the
acquisitions, such as changing signage and other transition costs.
OTHER INCOME (EXPENSE), NET. Other income (expense) consisted primarily of
interest expense of $0.3 million related to borrowings from MidAmerican
Holdings to finance the acquisition.
INCOME TAXES (BENEFIT). The effective tax rate for the period was 39.6% which
is lower than HomeServices statutory rate of approximately 40.6% due to
permanent tax differences for certain goodwill amortization and other
non-deductible expenses.
NET INCOME (LOSS). HomeServices net loss for the period from May 28, 1998,
through June 30, 1998, was $0.3 million. The net loss included the amortization
of the value of real estate sales contracts that were pending at the date of
acquisition of the entities acquired by HomeServices in May 1998. Amortization
of one-third of these sales contracts resulted in a $4.7 million noncash charge
that reduced net income by $2.8 million.
RESULTS OF OPERATIONS OF PREDECESSOR FOR THE PERIOD FROM JANUARY 1, 1998
THROUGH MAY 27, 1998
The results of operations for this period reflect the operations of Iowa Realty
and Edina Realty and their subsidiaries for the entire period. Iowa Realty sold
Home Realty on May 7, 1998. Accordingly, Home Realty's results of operations
are not included for the period following the sale.
REVENUES. Total revenues for the period were $86.2 million. Commission revenue
from the real estate brokerage operations was $74.9 million, or 86.8% of total
revenues. Title fees for the period were $7.6 million, or 8.8% of total
revenues. Other revenues were $3.8 million, or 4.4% of total revenues. Other
revenues include escrow and closing revenue, mortgage service fee income,
franchise fees, relocation and referral revenue and various other revenues.
COMMISSION EXPENSE. Commission expense from the real estate brokerage
operations was $49.1 million, or 65.6% of commission revenue.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the period was
$2.3 million, of which $0.8 million was the amortization of intangibles,
including goodwill related to acquisitions.
ALL OTHER OPERATING EXPENSES. All other operating expenses for the period
totaled $31.1 million, or 36.1% of total revenues. All other operating expenses
included salaries and employee benefits of $14.6 million, occupancy costs of
$5.6 million, business promotion and advertising expenses of $5.2 million and
other operating costs.
INCOME TAXES (BENEFIT). The effective tax rate for the period was 46.0% which
is higher than the predecessor's statutory rate due to permanent tax
differences for certain goodwill amortization and other non-deductible
expenses.
NET INCOME (LOSS). The predecessors net income for the period from January 1,
1998, through May 28, 1998, was $2.0 million.
37
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following table reflects selected information of the predecessor for the
periods indicated in dollars and as a percentage of total revenues. Dollars are
in thousands unless otherwise noted.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------
1997 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Commission revenue ...................... $191,083 89.0% $179,378 82.9%
Title fees .............................. 16,203 7.5 14,821 6.9
Other ................................... 7,410 3.5 22,092 10.2
-------- ------ -------- ------
Total revenues ......................... 214,696 100.0 216,291 100.0
-------- ------ -------- ------
Commission expense ...................... 125,148 58.3 115,331 53.3
Depreciation and amortization ........... 5,619 2.6 5,103 2.4
All other operating expenses ............ 72,808 33.9 85,162 39.4
-------- ------ -------- ------
Total operating expenses ............... 203,575 94.8 205,596 95.1
-------- ------ -------- ------
Operating income (loss) ................. 11,121 5.2 10,695 4.9
Other income (expense), net ............. (903) ( 0.4) (2,582) ( 1.2)
-------- ------ -------- ------
Income before income taxes .............. 10,218 4.8 8,113 3.7
Income taxes ............................ 4,725 2.2 3,263 1.5
Minority interest ....................... 633 0.3 1,276 0.6
-------- ------ -------- ------
Net income .............................. $ 4,860 2.3 $ 3,574 1.6
======== ====== ======== ======
Selected Statistics:
Closed transaction sides ................ 48,631 47,836
Closed transaction volume (in millions).. $ 6,183 $ 5,783
Average home sales price ................ $ 127.1 $ 120.9
</TABLE>
REVENUES. Total revenues for 1997 were $214.7 million, a decrease of $1.6
million, or 0.7%, compared to 1996. Commission revenue for 1997 was $191.1
million, an increase of $11.7 million, or 6.5%, compared to 1996. The
acquisition by the predecessor in July 1997 of HOME Real Estate accounted for
approximately $10.0 million of the increase. The number of brokerage
transactions involving the predecessor, excluding the July acquisition of HOME
Real Estate, was 46,225 in 1997, a decrease of 1,611, or 3.4%, compared to
1996, primarily as a result of a change in market conditions. The decrease in
the predecessor's transactions was more than offset by a 4.8% increase in the
average home sales price resulting in an overall increase of 1.3% in the total
dollar value of homes sold.
Title fees for 1997 were $16.2 million, an increase of $1.4 million, or 9.3%,
compared to 1996. The increase in title fees in 1997 was due to an overall
increase in the number of brokerage transactions compared to 1996.
Other revenues for 1997 were $7.4 million in 1997, a decrease of $14.7 million,
or 66.5%, compared to 1996. In 1996, the predecessor had real estate
development operations that contributed $14.0 million to other revenues. As
part of its strategy, the predecessor reduced the significance of this line of
business, which contributed only $0.4 million of other revenues in 1997.
COMMISSION EXPENSE. Commission expense from the real estate brokerage
operations for 1997 was $125.1 million, an increase of $9.8 million, or 8.5%,
compared to 1996. Of the total increase in commission expense, $7.7 million was
attributable to the acquisition of HOME Real Estate by the predecessor.
Commission expense as a percentage of commission revenue increased from 64.3%
in 1996 to 64.9% in 1997.
Net commission revenue from the real estate brokerage operations for 1997 was
$65.9 million, an increase of $1.9 million, or 2.9%, compared to 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 1997 was $5.6
million, an increase of $0.5 million, or 10.1%, compared to 1996, primarily as
a result of a $2.2 million increase in office property and equipment.
38
<PAGE>
ALL OTHER OPERATING EXPENSES. All other operating expenses for 1997 were $72.8
million, a decrease of $12.4 million, or 14.5%, compared to 1996. Although
other operating expenses increased in 1997 by $2.1 million due to the
acquisition of HOME Real Estate by the predecessor, these increases were more
than offset by decreases resulting from a decrease in real estate development
related costs. Cost of sales for the real estate development operations
discussed under "Other" revenues above totaled $11.3 million in 1996.
Additionally, the decrease resulted from the closure of seven offices in the
Iowa area and the decrease in related costs, and reduced activity levels for
1997 as compared to 1996. As a percentage of total revenue, all other operating
expenses decreased to 33.9% from 39.4%.
OTHER INCOME (EXPENSE). Other income (expense) for 1997 and 1996 consisted
primarily of interest expense. Interest expense for 1997 was $1.5 million, a
decrease of $2.1 million, or 57.7%, compared to 1996. The decrease in interest
expense is attributable to a $20.8 million reduction in borrowings under the
predecessor's line of credit and the retirement of $4.0 million of subsidiary
subordinated notes.
INCOME TAXES. The higher amount of income tax expense for the year ended
December 31, 1997 as compared to the same period in 1996 is primarily the
result of the difference in income before income taxes between the periods.
NET INCOME. The predecessor's net income for 1997 was $4.9 million, an increase
of $1.3 million compared to 1996. The major reasons for the increase included
the acquisition of HOME Real Estate in July of 1997, decreased operating
expense, decreased interest expense and a reduction in the minority owners'
interest in its Edina Realty subsidiary.
PRO FORMA RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO PRO FORMA RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1998
The following table reflects selected information of HomeServices on a pro
forma basis for the six month periods ended June 30, 1999 and 1998. The
information is shown in dollars and as a percentage of total revenues. For each
period, the pro forma amounts reflect the results of operations of all entities
acquired by HomeServices as discussed above under "--Acquisition History."
Although the amounts shown in the following table are not necessarily
indicative of those that HomeServices would have had if the acquisitions had
actually taken place on January 1, 1998, management believes they provide
useful insight into the operations of what is now HomeServices. Such belief is
based in part on the fact that the operations of the individual entities remain
basically intact as they were prior to the respective acquisitions. Dollars are
in thousands unless otherwise indicated.
39
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Commission revenue ...................................... $188,952 90.7 % $ 162,432 89.9 %
Title fees .............................................. 10,644 5.1 % 10,344 5.7 %
Other ................................................... 8,759 4.2 % 7,844 4.4 %
-------- --------- --------- ---------
Gross revenue .......................................... 208,355 100.0 % 180,620 100.0 %
-------- --------- --------- ---------
Commission expense ...................................... 130,879 62.8 % 110,024 60.9 %
Amortization of pending real estate sales contracts ..... -- -- % 21,026 11.7 %
Depreciation and amortization ........................... 4,609 2.2 % 4,215 2.3 %
All other operating expenses ............................ 61,123 29.4 % 54,516 30.2 %
-------- --------- --------- ---------
Total operating expenses ............................... 196,611 94.4 % 189,781 105.1 %
-------- --------- --------- ---------
Operating income (loss) ................................. 11,744 5.6 % (9,161) (5.1)%
Other income (expense), net ............................. (2,012) (0.9)% (1,612) (0.9)%
-------- ----- --------- -----
Income (loss) before income taxes ....................... 9,732 4.7 % (10,773) (6.0)%
Income taxes (benefit) .................................. 4,019 2.0 % (4,307) (2.4)%
-------- --------- --------- -----
Net income (loss) ....................................... $ 5,713 2.7 % $ (6,466) (3.6)%
======== ========= ========= =====
Selected Statistics:
Closed transaction sides ................................ 42,482 39,282
Closed transaction volume (in millions) ................. $ 6,208 $ 5,368
Average home sales price ................................ $ 146.1 $ 136.7
</TABLE>
REVENUES. Total revenues for the first six months of 1999 were $208.4 million,
an increase of $27.7 million, or 15.4%, compared to the same period in 1998.
Commission revenue from the brokerage operations increased $26.5 million, or
16.3%, compared to the same period in 1998. The increase in commission revenue
was due to an 8.1% increase in closed transaction sides and a 6.9% increase in
the average home sales price. Closed transaction sides increased in part due to
acquisitions in May 1998 of residential real estate brokerage firms by two of
the HomeServices companies prior to their being acquired by HomeServices.
Title fees for the first six months of 1999 were $10.6 million, an increase of
$0.3 million, or 2.9%, compared to same period in 1998. The increase in title
fees in the first six months of 1999 compared to the same period in 1998 was
due to an increase in title services provided as a result of an increase in the
number of brokerage transactions.
Other revenues for the first six months of 1999 were $8.8 million, an increase
of $0.9 million compared to the same period in 1998.
COMMISSION EXPENSE. Commission expense from the real estate brokerage operations
for the first six months of 1999 was $130.9 million, an increase of $20.9
million, or 19.0%, compared to the same period in 1998. The increase is due
primarily to the increase in commission revenue. Additionally, commission
expense as a percentage of commission revenue increased from 67.7% in the first
six months of 1998 to 69.3% in the first six months of 1999. Commission pay
rates are affected by factors such as the number of transaction sides, sales
associate productivity, sales associate recruitment programs and the mix of
where the transaction sides are produced. Some areas have higher pay schedules
and will cause HomeServices overall commission expense percentage of commission
revenues to increase if a greater portion of the transaction sides are from that
market. The three subsidiaries of HomeServices with the highest payout
percentages accounted for 33.4% of HomeServices closed transaction sides for the
six months ended June 30, 1999, compared to 30.1% for the same period in 1998.
Another factor contributing to the increase in commission expense was that the
combined commission expense as a percentage of commission revenue increased by
1.0% for these subsidiaries.
40
<PAGE>
AMORTIZATION OF PENDING REAL ESTATE SALES CONTRACTS. Upon acquiring the real
estate brokerage companies, HomeServices established an asset for the value of
pending real estate sales contracts. The value of these acquired contracts was
$21.0 million, which was fully amortized to expense in the 1998 six-month
period. This was a noncash expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the first six
months of 1999 increased $0.4 million to $4.6 million for the six month ended
June 30, 1999. Amortization of goodwill related to the acquisition of the
HomeServices companies totaled $1.7 million in each of the periods.
ALL OTHER OPERATING EXPENSES. All other operating expenses for the first six
months of 1999 were $61.1 million, an increase of $6.6 million, or 12.1%,
compared to the same period in 1998. Approximately $4.0 million of the increase
relates to salaries and employee benefits as a result of higher bonuses due to
increased sales, improved benefits for some of the acquired entities, the
impact of the companies acquired by two of HomeServices subsidiaries in May
1998, and general increases due to inflation. Increased occupancy and business
promotion and advertising also contributed to the increase. As a percentage of
total revenues, all other operating expenses decreased to 29.4% from 30.2%.
OTHER INCOME (EXPENSE), NET. Other income (expense) for the first six months of
1999 and 1998 consisted primarily of interest expense. Interest expense for the
first six months 1999 was $2.4 million, an increase of $0.2 million compared to
the same period in 1998. Other income was primarily interest income, which
decreased in the 1999 period compared to the 1998 period.
INCOME TAXES (BENEFIT). The increase in the income tax expense reflected in the
six months ended June 30, 1999 as compared to the six months ended June 30,
1998 is due to the increase in income before income taxes between the same
periods.
NET INCOME (LOSS). Net income for the first six months of 1999 was $5.7 million
compared to a net loss of $6.5 million for the same period in 1998. The net
loss for the 1998 period included the amortization of the value of real estate
sales contracts that were pending at the dates of acquisition of entities
acquired by HomeServices. The amortization resulted in a $21.0 million noncash
charge which reduced net income for the six months ended June 30, 1998, by
$12.5 million. Excluding the impact of the noncash charge, net income decreased
slightly, due primarily to the affect of the increase in commission expense as
a percentage of commission revenues.
LIQUIDITY AND CAPITAL RESOURCES
HomeServices' capital requirements consist primarily of working capital,
capital expenditures and acquisitions. Historically, HomeServices has funded
its working capital and capital expenditures using cash and cash equivalents on
hand. Acquisitions have been financed through borrowings under its revolving
credit facility, the private placement of the 7.12% senior notes, loans from
MidAmerican Holdings and capital contributions. HomeServices' cash and cash
equivalents totaled $11.5 million at June 30, 1999, compared to $3.1 million
and $6.8 million at December 31, 1998, and June 30, 1998, respectively.
HomeServices' cash provided by operating activities was $16.2 million for the
six months ended June 30, 1999, $12.4 million for the period May 28, 1998,
through December 31, 1998, and $5.0 million for the period May 28, 1998,
through June 30, 1998. The predecessor's cash provided by operating activities
was $5.0 million for the period January 1, 1998, through May 27, 1998, $5.3
million for 1997 and $2.1 million for 1996. The most significant adjustment to
net income (loss) for HomeServices' 1998 periods was the amortization of
pending real estate sales contracts. For the six months ended June 30, 1999,
and at least in the near future, depreciation and amortization, including
goodwill amortization, will be a material adjustment to reconcile net income to
cash flow from operating activities.
HomeServices' cash used in investing activities was $5.9 million for the six
months ended June 30, 1999, $99.1 million for the period May 28, 1998, through
December 31, 1998, and $70.3 million for the period May 28, 1998, through June
30, 1998. The predecessor's cash used in investing activities was
41
<PAGE>
$0.9 million for January 1, 1998, through May 27, 1998, $6.8 million for 1997
and $8.9 million for 1996. HomeServices' cash used in investing activities for
its 1998 periods was primarily a result of $70.1 million for the acquisition of
the predecessor and $26.4 million for the acquisitions of the nonpredecessor
acquired entities, net of cash received. HomeServices' cash used by financing
activities was $1.9 million for the six months ended June 30, 1999, and cash
provided by financing activities of $89.8 million for the period May 28, 1998,
through December 31, 1998, and $72.1 million for the period May 28, 1998,
through June 30, 1998. The predecessor's cash provided by financing activities
was $10.7 million for 1996, while cash used by financing activities was $1.9
million for January 1, 1998, through May 27, 1998, and $1.6 million in 1997.
HomeServices' cash provided by financing activities in 1998 was the result of
capital contributions, borrowings under HomeServices' revolving credit facility,
the issuance of its 7.12% senior notes and a loan from MidAmerican Holdings.
Cash used by financing activities in 1997 was primarily a result of the
repayment of certain indebtedness of the predecessor. In 1996, cash provided by
financing activities was primarily a result of an increase in notes and
contracts payable.
In May 1998, HomeServices entered into a revolving credit agreement with
MidAmerican Holdings to borrow funds from time to time, primarily to support
the acquisition of the predecessor and the nonpredecessor acquired companies.
The maximum indebtedness during the life of the agreement through June 30,
1999, was $54.2 million. At June 30, 1999, no amounts were outstanding under
this agreement. The interest rate on borrowings is equal to the 30-day LIBOR
rate plus 1%, which was 5.94% at June 30, 1999. Interest expense recorded on
this agreement totaled $1.3 million through June 30, 1999. As of December 31,
1998 and June 30, 1999, there were no borrowings under this agreement. On June
24, 1999, the revolving credit agreement with MidAmerican Holdings was amended
to reduce MidAmerican Holdings' total commitment and HomeServices' borrowing
capacity thereunder from $100.0 million to $10.0 million. Amounts borrowed are
payable upon demand from MidAmerican Holdings.
In November 1998, HomeServices obtained a $25.0 million, five-year revolving
credit facility with $23.5 million utilized as of June 30, 1999. The credit
availability under the revolving credit facility declines by $1.5 million every
six months beginning in May 1999 through November 2003 with an $11.5 million
balloon payment due in November 2003. Amounts outstanding under this revolving
credit facility bear interest at either the prime lending rate or LIBOR plus a
fixed spread of 1.00% to 2.00% which varies based on HomeServices' cashflow
leverage ratio. As of June 30, 1999, the blended average interest rate on the
revolving credit facility borrowings was 6.25%. Also, in November 1998,
HomeServices issued $35.0 million of 7.12% senior notes due in annual
increments of $5.0 million starting in 2004, with the final payment due in
2010. Under the terms of the 7.12% senior notes and the revolving credit
facility, HomeServices may not issue, assume or guarantee debt that would cause
its total debt to exceed 65% of total capitalization and must maintain equity
capitalization of at least $25.5 million. In addition, HomeServices is required
to comply with certain other covenants that are listed under "Description of
Indebtedness."
HomeServices is currently negotiating final documentation for an amended and
restated $75 million senior secured revolving credit agreement with its
existing commercial bank and other banks. The amended and restated revolving
credit agreement is expected to have a term of three years and to be secured by
a pledge of the capital stock of all of the existing and future subsidiaries of
HomeServices. The terms of the amended and restated revolving credit agreement
are described in more detail under the caption "Description of Indebtedness."
HomeServices believes that the net proceeds that it receives from the offering,
together with its cash flow from operations and borrowings under its amended and
restated $75 million revolving credit facility, will be adequate to meet its
needs for working capital, capital expenditures, debt service, planned
acquisitions and the continued development of its E-commerce platform for at
least the next year. If, however, net proceeds from the offering and cash flow
from operations and borrowings under HomeServices' revolving credit facilities
are insufficient to satisfy HomeServices' liquidity requirements, it may need to
raise additional funds through public or private financings or the
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formation of strategic joint ventures. HomeServices cannot assure you that such
additional funding, if needed, will be available on favorable terms, or at all.
If HomeServices raises additional funds in the future by issuing equity
securities, the percentage ownership of its then current stockholders would be
reduced, and those equity securities could be preferred securities having rights
senior to the common stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
HomeServices is subject to changes in interest rates which could negatively
impact its business. HomeServices' fixed rate long-term debt does not expose
HomeServices to the risk of earnings loss from increased interest expense as a
result of changes in the market interest rate, because the rate is fixed.
HomeServices has managed its interest rate risk for its variable rate debt,
which is based on LIBOR rates, by entering into interest rate swap agreements.
The swap arrangements effectively fix the interest rate for that portion of the
variable rate debt. In the future, HomeServices may continue using interest
rate swaps to reduce risk on the variable debt or, when appropriate, may
replace the variable rate debt with fixed rate debt. The table below shows data
for HomeServices' interest rate sensitive financial instruments as of December
31, 1998. Amounts are in thousands of dollars and represent principal unless
indicated otherwise. The weighted average interest rate for variable rate debt
and the receive rate for the swap are based on the implied forward rates in the
six-month LIBOR yield curve at December 31, 1998. The following table reflects
the scheduled maturities of each respective instrument and does not assume any
prepayment. There have been no material changes in the following information
between December 31, 1998, and June 30, 1999.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Long-term Debt:
Fixed rate debt (principal) .............. 436 243 261 281 224 35,000 36,445 37,389
Weighted average interest rate ......... 6.02% 7.56% 7.56% 7.57% 7.25% 7.12%
Variable rate debt (principal) ........... 3,000 3,000 3,000 3,000 13,000 -- 25,000 25,000
Weighted average interest rate ......... 6.28% 6.28% 6.52% 6.59% 6.68% --
Interest Rate Swap:
Variable to fixed (notional amount) ...... -- -- 12,500 -- -- -- 12,500 10
Weighted average pay rate .............. -- -- 5.05% -- -- --
Weighted average receive rate .......... -- -- 5.27% -- -- --
</TABLE>
YEAR 2000 COMPLIANCE
What is generally known as the year 2000 computer issue arose because many
existing computer programs and embedded systems use only the last two digits to
refer to a year. Therefore, those computer programs do not properly distinguish
between a year that begins with "20" instead of "19". If not corrected, many
computer applications could fail or create erroneous results. The failure to
correct a material year 2000 item could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect HomeServices' results of operations,
liquidity and financial condition.
The year 2000 issue could potentially impact systems critical to HomeServices
including real estate listing, agent support, accounting, vendor and agent
payment processing, payroll, and loan origination systems. HomeServices has
performed an inventory of its potential year 2000 issues and has verified the
readiness of approximately 90-95% of its systems through a systematic process
of assessment, remediation and testing. Under the current plan, HomeServices
expects that all of its material systems will be upgraded by September 30,
1999. To date, HomeServices has incurred $1.5 million in costs related to
addressing the year 2000 issue. HomeServices does not expect the total
remaining cost of readiness to exceed $800,000.
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Additionally, HomeServices' business operations are heavily dependent upon
service providers, most significantly communication providers. HomeServices is
inquiring of its material third-party vendors and service providers, including
multiple listing service providers, regarding the status of their year 2000
readiness preparations. HomeServices expects to have this assessment complete
by the end of September 1999. To date, HomeServices has contacted over 50% of
its material third party vendors and service providers to determine that they
have taken actions to minimize the risk of year 2000 problems that would impede
their ability to maintain a business relationship with HomeServices.
Approximately 67% of HomeServices material third parties have responded
affirmatively. HomeServices is continuing to follow up with its material third
parties which did not respond or whose response was not adequate enough to be
considered by HomeServices as affirmative at this time. The process used to
solicit information from material third parties entails administering orally
(in person or via telephone) a series of questions designed to enable an
overall evaluation of their Year 2000 preparations. Specific questions are
posed regarding the status of the third party's readiness, supply chain
assessment and contingency planning activities. The results of each interview
are documented and returned to the material third party for verification,
clarification or correction. It is important to note that the purpose of
HomeServices' supply chain/business partner assessment initiative is not to
obtain specific assurances that its material third parties are Year 2000
compliant (which is an attribute of hardware and software, not of
organizations), but rather to determine they have taken appropriate actions to
minimize the risk of problems stemming from Year 2000 problems that would
impede their ability to maintain a business relationship with HomeServices. Due
to inescapable uncertainties about the Year 2000 issue, HomeServices cannot
assure you that material third party vendors and service providers will be
unaffected by Year 2000-related problems. Any failure by HomeServices' material
third-party vendors and service providers to comply in a timely manner could
have a material adverse effect on its operations.
Year 2000 risk scenarios that are applicable to HomeServices have been
identified and written contingency plans have been developed. The objective of
HomeServices' contingency planning effort is to determine the potential causes,
symptoms, triggers and effects of specific risks and to develop individual
plans in response to each of these risks. Each plan consists of mitigation and
recovery tasks to minimize impact in the event of occurrence of a specific risk
scenario. Scenarios that have been identified as applicable to HomeServices
include, but are not limited to, loss of internal and external voice and data
communications, inability to occupy facilities, loss of business applications,
and miscellaneous business interruptions. HomeServices' contingency plans under
development by HomeServices specify staffing requirements, preventive actions
to be taken, and transition and validation activities, as well as recovery
tasks to be exercised in the event that Year 2000 problems are encountered
during the transition to 2000. The contingency plans will be subjected to
ongoing review and refinement through the remainder of the year.
In each of HomeServices' future acquisitions, HomeServices intends to evaluate
the systems of the acquired companies to determine whether their systems are
year 2000 ready. If an acquired company's systems are not year 2000 ready,
HomeServices intends to prepare a plan to bring the systems into a state of
readiness. While HomeServices cannot guarantee you that all future acquired
companies will be year 2000 ready on a timely basis, the cost of bringing such
companies into a state of readiness is not expected to have a material adverse
effect on HomeServices' financial condition or results of operations.
Nonetheless, HomeServices may experience material unexpected costs associated
with bringing such companies into a state of readiness.
SEASONALITY
HomeServices' real estate brokerage business is subject to seasonal fluctuations
because fewer home sale transactions tend to close during the first and fourth
quarters of the year. Accordingly, revenues of some of HomeServices' operating
subsidiaries historically have been strongest in the second and third quarters
of the calendar year. While commissions are paid to sales associates only upon
the sale of a home, many of HomeServices' other expenses, such as rent, are
fixed. As a result, on a consolidated basis, the relationship between
HomeServices' expenses and revenues may be subject to significant fluctuation on
a quarter-to-quarter basis. HomeServices believes its charges for occupancy,
<PAGE>
telecommunications, professional fees, data processing, equipment leasing,
office expense, corporate charges, and depreciation, which approximated 11% of
total 1998 operating expenses on a historical basis, are costs that can not be
significantly reduced in the short-term during a seasonal slow down.
IMPACT OF INFLATION AND INTEREST RATE CHANGES
HomeServices' results of operations are sensitive to changes in the U.S.
economy and the economies of the markets in which it operates and, to a lesser
extent, interest rates, particularly home mortgage rates. During periods of
inflation, the value of residential real estate increases. While increases in
the value of residential real estate typically lead to corresponding increases
in HomeServices' commissions per transaction side, inflation typically also
causes mortgage interest rates to increase. As mortgage interest rates
increase, the level of residential transaction volume declines, leading to
decreased commission revenue and decreased revenue from the related ancillary
services. Additionally, HomeServices' title businesses receive revenues from
refinancing transactions that also decline during periods of high interest
rates.
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BUSINESS
OVERVIEW
HomeServices.Com Inc. is the second largest residential real estate brokerage
firm in the United States based on aggregate closed transaction sides in 1998
for its various brokerage firm operating subsidiaries. HomeServices' operations
are largely concentrated in the Midwest. HomeServices also offers integrated
real estate services, including mortgage and title insurance services, and is
developing various related E-commerce services. HomeServices currently operates
primarily under the Edina Realty, Iowa Realty, J.C. Nichols, CBS HOME, Paul
Semonin Realtors and Long Realty brand names in the following eleven states:
Minnesota, Iowa, Arizona, Kansas, Missouri, Kentucky, Nebraska, Wisconsin,
Indiana, North Dakota and South Dakota. HomeServices occupies the number one or
number two market share position in each of its major markets based on
aggregate closed transaction sides for the year ended December 31, 1998.
HomeServices' major markets consist of the following metropolitan areas:
Minneapolis and St. Paul, Minnesota; Des Moines, Iowa; Omaha, Nebraska; Kansas
City, Kansas; Louisville, Kentucky; Springfield, Missouri; and Tucson, Arizona.
The real estate brokerage firms that comprise HomeServices collectively manage
146 branch offices, have more than 5,800 sales associates and have operated for
between 12 and 84 years, with an average of approximately 54 years.
In addition to providing traditional residential real estate brokerage services,
HomeServices also cross sells to its existing real estate customers preclosing
services, such as mortgage origination, closing administrative services and
title abstracting, and provides referrals for other preclosing and postclosing
services provided by third parties, such as home warranty, home inspection, home
security, property and casualty insurance, home maintenance and home repair.
HomeServices intends to significantly expand these services in the future,
particularly through E-commerce. In August 1999, HomeServices launched
preliminary activities under its E-commerce platform with the commencement of
its on-line mortgage origination business and on-line referral services for home
warranty, home security, home inspection and property and casualty insurance.
While this on-line business has just commenced and has only produced $30,000
revenues to date, HomeServices believes that its E-commerce business will allow
it to significantly increase sales of existing products and services and to
offer new products and services, such as E-loans and on-line referrals for
preclosing and postclosing services.
According to National Association of Realtors, the median length of the home
ownership life cycle is seven years, which means that half of all homes are
owned by the same person for seven years or more and half of all homes are
owned by the same person for less than seven years. This home ownership life
cycle includes the process of buying a home, maintaining and repairing the home
over the years, and eventually reselling and purchasing a new home. Of this
home ownership life cycle, the real estate broker's relationship with its
customer during the listing process and sale and purchase transaction has
typically lasted for 90-120 days. According to a 1997 survey conducted for the
National Association of Realtors, 78% of the recent home buyers who responded
to the survey stated that the opportunity to handle some or all of their home
buying services through their real estate company would be appealing to them,
while 66% stated that if they had the opportunity to redo their own home buying
experience, they would choose a real estate company that offers "one-stop
shopping." Based on management's extensive knowledge of the industry and
customer feedback provided directly or indirectly through HomeServices' sales
associates, HomeServices believes that being a one-source provider of products
and services and referral services to its customers means that it can offer to
its customers what they would consider to be a "one-stop shopping" experience.
HomeServices believes that the strong relationships it develops with its
customers afford it a unique opportunity to expand its business by maintaining
and strengthening its customer relationships by offering, at no cost to its
customers, referrals for additional basic home services initiated at closing
and a variety of other products and services used after the closing of a home
purchase. HomeServices receives referral fees from the service providers under
contracts entered into with the service providers. HomeServices believes that
by offering these additional services to its customers, particularly by means
of E-commerce, it can assist its customers through each stage of the average
seven-year home ownership life cycle and maintain its customers throughout the
home ownership experience. HomeServices
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believes that the customer knowledge that it gains during the sale and/or
purchase process allows it to target its particular services to the home
buyer's specific needs. In addition, as HomeServices further develops its
E-commerce operations launched in August 1999, it will seek to generate banner
advertising and sponsorship revenues from its E-commerce operations.
HomeServices' consumer-centric business model of the typical home ownership
experience is illustrated by the diagram below which depicts the stages of the
home ownership life cycle and the business opportunities for HomeServices
throughout the cycle:
CONSUMER-CENTRIC BUSINESS MODEL OF THE TYPICAL HOME OWNERSHIP EXPERIENCE
[GRAPHIC OMITTED]
- ----------
* HomeServices plans to make these referral services available to Internet
customers generally by means of E-commerce at no cost to the customer.
HomeServices currently provides referrals for a variety of Concierge
Services and Home Dividends services to its existing customers for no
charge. HomeServices generates referral fees from service providers
pursuant to agreements with the service providers. In addition, as
HomeServices further develops its E-commerce operations, it will seek to
generate banner advertising and sponsorship revenues in the future as a
result of its E-commerce operations.
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The following chart lists the preclosing services and Concierge Services
currently being offered or referred by each of HomeServices' real estate
brokerage subsidiaries.
<TABLE>
<CAPTION>
EDINA REALTY IOWA REALTY J.C. NICHOLS CBS HOME PAUL SEMONIN LONG
-------------- ------------- -------------- ---------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Services offered:
Title ......................... - - - -
Escrow ........................ - - - -
Mortgage ...................... - - - - - -
Services referred:
Property and casualty insurance - - -
Home warranty ................. - - - - - -
Home inspection ............... - - -
Home security ................. - - - -
</TABLE>
GROWTH STRATEGY
HomeServices' business objective is to become a seamless one-source provider of
a comprehensive menu of products and services for the total home ownership
experience, particularly by means of E-commerce. HomeServices' growth strategy
comprises the following elements:
o Selective acquisitions and consolidations. HomeServices intends to
continue to expand into new geographic markets within the highly
fragmented United States residential real estate brokerage industry by
generally targeting the acquisition of real estate brokerage firms
with the following primary attributes: local brand name recognition,
significant market share in their existing markets, which may be city,
state or regional markets, strong sales associate relationships,
successful operators and operations, fee income upside and significant
closed transaction sides volume. HomeServices will also continue to
pursue opportunities to consolidate two or more acquired companies
where such consolidation would create a real estate brokerage firm
with significant closed transaction volume within its existing market
while providing it with opportunities to increase revenues through
cross selling its products and services. HomeServices is demonstrating
its ability to successfully close and integrate real estate brokerage
acquisitions. Since May 1998, HomeServices has acquired and integrated
into its operations seven major residential real estate brokerage
firms.
o Expanding its presence in its existing markets. Based on aggregate
closed transaction sides, the brokerage firms that comprise
HomeServices occupy the number one or number two market share position
in each of HomeServices' major markets. Based on management's
extensive knowledge of the industry and customer feedback provided
directly or indirectly through HomeServices' sales associates,
HomeServices believes that each of its real estate brokerage firms has
achieved brand recognition and a reputation among consumers for
quality and consistency. HomeServices also believes that it is well
positioned to expand the coverage of its existing markets under the
same brand names primarily through opening additional offices, hiring
additional sales associates and the incremental acquisitions in
HomeServices' existing service areas.
o Cross selling real estate related products and services. HomeServices
intends to use the information it learns about consumers through home
purchasing transactions, such as the characteristics of their
properties, length of ownership, their age and financial
circumstances, to cross sell its existing products and services and to
generate referrals for new products and services provided by third
parties, including home maintenance and repair, to its existing realty
customer base. These existing products and services include, most
significantly, mortgage origination, title insurance and escrow
services, as well as referrals for services such as property and
casualty insurance, home warranty, home inspection and home security.
HomeServices earns fees from the providers of
48
<PAGE>
these services for loans or sales originated by it at no cost to
the customer. As HomeServices acquires additional real estate
brokerage firms, it will expand the cross selling of such products
to the customers of the newly acquired companies, thereby further
maximizing revenue opportunities from its real estate buyers.
o Offering referrals for various home care and other products and
services, particularly by means of E-commerce. While HomeServices
derived less than 1% of its revenues from referral and related
products and services in 1998, HomeServices plans to significantly
expand its referral services to include various additional home care
products and services, including Concierge Services, Home Dividends
services, E-commerce related services and nonrealty related services.
HomeServices believes that by offering these additional products and
services, it will be able to serve the needs of homeowners throughout
the complete home ownership cycle. HomeServices expects these
referrals to be accessible by telephone as well as the Internet.
HomeServices will provide these services to its customers at no cost
while generating referral fees from third-party service providers of
such products and services. In addition, as HomeServices continues to
develop its E-commerce operations which were launched in August 1999,
HomeServices is seeking to generate banner advertising and sponsorship
revenues from its E-commerce operations. HomeServices expects to offer
the following types of services to new and existing customers,
particularly through HomeServices' developing E-commerce platform:
-- Concierge Services to assist home purchasers at and after closing.
Through its Concierge Services, HomeServices intends to offer its
home buyers the opportunity to obtain in a timely and efficient
manner the basic home services that are initiated at closing and
are necessary to operate a new home. These offerings generally
include the following services, some of which HomeServices
currently provides referrals for: local and long distance telephone
service, Internet service, cable television, newspaper delivery,
home security, home warranty, property and casualty insurance,
electricity and natural gas, waste disposal and moving. Since these
services are necessary to the home buyer and a consumer decision
usually must be made by closing, HomeServices believes that, given
its strong relationship with and access to its customers, there are
significant opportunities to earn revenues by offering referrals
for such services to its customers.
-- Home Dividends services to assist home purchasers with home
maintenance and repair. Through its Home Dividends services,
HomeServices plans to offer referrals for home maintenance and
repair products and services that home owners generally need
shortly following a home purchase and throughout the typical cycle
of home ownership. HomeServices intends to offer customers
referrals for quality products and services such as roofing,
siding, decking, remodeling, windows, landscaping, plumbing,
electrical, heating, ventilation and air conditioning and
appliances.
-- Broad-based E-commerce services. Through its developing E-commerce
operations, HomeServices intends to offer E-loans to its existing
real estate customers and other Internet users, as well as provide
referrals for other products and services offered as part of
HomeServices' Concierge Services and Home Dividends operations.
HomeServices believes that it will have the capability to offer
E-loan services by the end of the third quarter of 1999.
-- Nonrealty related referrals. HomeServices believes that as an
extension of its Concierge Services and Home Dividends programs, it
will have the opportunity to offer referrals to vendors of products
and services that are not directly related
49
<PAGE>
to home ownership. HomeServices believes that these referrals
may include entertainment, leisure and recreational activities
and consumer products and services of a more general nature for
its existing realty customer base and for Internet customers
generally.
While HomeServices currently provides some of these products and services
through traditional means, such as referrals for certain Concierge
Services including home warranty, home inspection and home security, it
believes that as it continues to develop its E-commerce platform, which
was launched in August 1999, this aspect of its business will grow
proportionately.
COMPETITIVE STRENGTHS
HomeServices believes that the following competitive strengths differentiate it
from its real estate brokerage competitors:
o Long-established presence in its markets with well-recognized brand
names and leading market shares. While HomeServices' predecessor was
formed in May 1998, the real estate brokerage firms that comprise
HomeServices have operated for between 12 and 84 years, with an
average operating history in excess of approximately 54 years. These
companies occupy the number one or number two position in each of
HomeServices' major markets and enjoy strong brand-name recognition,
attributes from which HomeServices expects to benefit as it expands
its service offerings.
o Comprehensive range of services. HomeServices believes that its
current product offerings position it as one of the few full-service
providers in the residential real estate industry. HomeServices
believes its ability to offer brokerage, preclosing and postclosing
products and services in what it would consider to be a "one-stop
shopping" experience preferred by customers differentiates it from
most of its competitors and enables it to generate incremental
revenues by cross selling services to its existing realty customer
base.
o Larger scale of operation than the competition. As one of the leading
companies in the industry, HomeServices enjoys certain economies of
scale and is able to spread costs and investments, such as marketing
and technology, over a larger revenue base. In addition, HomeServices'
size permits it to offer and cross sell efficiently a broader array of
services than smaller firms and enables it to take advantage of
acquisition and consolidation opportunities.
o Experienced management. The five chief executive officers of
HomeServices and its real estate brokerage subsidiaries have between
22 and 39 years experience in the real estate industry, with an
average of 27 years, including leadership positions in national realty
organizations. This senior management team combines a deep knowledge
of HomeServices' local markets with an understanding of industry
trends and a proven ability to identify, effect and integrate
acquisitions. They have served as agents and brokers as well as
managers of their respective firms.
o Efficient sales associates. HomeServices is dedicated to the
recruitment, training and retention of both new and experienced sales
associates and provides extensive programs aimed at improving sales
associates' marketing skills and increasing their knowledge and
awareness of the issues and laws affecting the real estate industry.
Based on information provided by Real Trends, an industry publication,
the productivity of the sales associates at the various brokerage firm
operating subsidiaries that comprise HomeServices of 15.8 aggregate
closed transaction sides per sales associate in 1998 compares
favorably to an industry average of 13.2 for the top 500 residential
real estate brokerage firms, excluding Home Services. HomeServices
believes the productivity level of its sales associates is among the
highest in the industry based on aggregate closed transaction sides.
HomeServices intends to
50
<PAGE>
continue to recruit additional highly qualified sales associates,
targeting, in particular, sales associates with experience in the
real estate industry and longstanding referral relationships within
the community. Since January 1, 1998, the brokerage firm operating
subsidiaries that comprise HomeServices have added approximately 435
sales associates to the HomeServices branch network.
INDUSTRY
HomeServices believes that the residential real estate industry has undergone a
period of continued growth which, combined with certain characteristics and
trends creates an opportunity for HomeServices to leverage its strengths to its
competitive advantage. HomeServices believes most important of these industry
characteristics and trends are:
o Fragmentation. The residential real estate brokerage industry remains
primarily a local and highly fragmented industry. According to Real
Trends, in 1998, the companies comprising HomeServices and the other
top four residential brokers accounted for only 5.2% of the total
national market based on closed transaction sides, while the top 500
firms accounted for less than 20.0%. HomeServices believes this
fragmentation presents it with numerous acquisition opportunities.
o Emergence of the Internet. In the real estate and mortgage business,
the Internet is fast becoming a major marketing tool. According to a
report issued by Strategic Planning Services, mortgage originations
over the Internet are expected to grow from $4.1 billion in 1998 to
nearly $100.8 billion by 2003 as customers recognize the convenience
and benefits of shopping for and refinancing their mortgages and home
equity loans on-line. HomeServices believes that in addition to
marketing its traditional residential brokerage, mortgage and title
services on-line, the Internet provides it with significant
opportunities to offer its Concierge Services and Home Dividends
services. As part of its strategy, HomeServices will seek to attract
Internet customers outside of its existing realty customer base by
providing a broad array of E-commerce offerings, which may be tailored
to the local or regional markets in which it operates or provided on a
more expansive basis.
o Size and Recent Growth of Market. Based on information reported by the
National Association of Realtors and the United States Census Bureau,
the 1998 domestic residential real estate market for existing and new
home sales consisted of more than 11.7 million transaction sides,
representing more than $950.0 billion in aggregate closed transaction
value. Closed transaction value represents the gross sales price for a
closed home purchase and is a standard measure of market size. In
recent years, the overall domestic residential real estate market has
demonstrated continued growth in home sales and rising home prices.
According to the National Association of Realtors, sales of existing
single-family homes in the Midwest reached 1.2 million in 1998, which
represents an average annual growth rate of 5.6% since 1990. In
addition, the sales growth has accelerated in recent years, as
evidenced by average annual growth of 7.0% since 1995. In 1998, the
Midwest regional median price for existing single-family homes was
$114,300, which represents an average annual increase of 6.8% from
1990.
REAL ESTATE BROKERAGE OPERATIONS
The following chart depicts the number of branch offices, sales associates and
employees as of June 30, 1999 and the number and volume of transactions for
1998 for HomeServices. All figures are presented on a pro forma basis.
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<TABLE>
<CAPTION>
PAUL HOMESERVICES
EDINA REALTY IOWA REALTY J.C. NICHOLS CBS HOME SEMONIN LONG (TOTAL)
-------------- ------------- -------------- ------------ --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Branch Offices ............... 69 29 16 9 11 12 146
Sales Associates ............. 2,151 958 700 494 666 853 5,822
Employees .................... 668 299 166 125 114 120 1,492
Number of Transactions(1)
for 1998 .................... 31,300 20,300 9,900 10,300 7,800 8,400 88,000
Volume of Transactions
for 1998 (in billions) ...... $ 4.6 $ 2.4 $ 1.5 $ 1.4 $ 1.1 $ 1.1 $ 12.1
</TABLE>
- ----------
(1) This figure includes the buying and selling sides of a home purchase
transaction. 88,000 represents the total number of closed transaction
sides, of which approximately 45,000 were buy side transactions.
HomeServices acts as a broker or agent in residential real estate transactions.
In performing these residential real estate services, HomeServices represents
either the seller, as the listing broker, or the buyer, as the buyer's agent,
in the sale. When acting as a broker for the seller, HomeServices provides its
customers with the following services:
o assisting the seller in pricing the property and preparing it for
sale;
o advertising the property and showing it to the buyer;
o assisting the seller in negotiating the terms of the sale;
o ensuring that the transaction is in compliance with any applicable
federal, state and local regulations; and
o closing the transaction.
In exchange for providing these services as the seller's broker, the seller
pays HomeServices a commission upon the closing of the real estate transaction,
which is generally a fixed percentage of the sales price. Gross listing
commissions typically range from 5% to 7% of the sales price and may be shared
between the seller's broker and the buyer's broker. When acting as the seller's
broker, HomeServices enters into an exclusive agency relationship with the
seller, which means that HomeServices is entitled to receive a sales commission
upon the closing of the sale transaction regardless of whether HomeServices,
the seller or any other person locates the buyer.
When acting as a broker for the buyer, HomeServices provides its customers with
the following services:
o assisting the buyer in locating properties that come within the
buyer's personal and financial specifications;
o showing properties to the buyer;
o assisting the buyer in negotiating the terms of the sale;
o monitoring compliance of the transaction and the property with any
applicable federal, state and local regulations; and
o closing the transaction.
In exchange for providing these services as the buyer's broker, HomeServices
receives a commission upon the closing of the real estate transaction that is
generally a fixed percentage of the purchase price. With the consent of the
seller's broker, this commission is usually payable from the sales commission
paid by the seller to the seller's broker.
In transactions in which HomeServices is acting as a broker on either the buy
side or sell side of a transaction and a third-party broker is acting as broker
on the other side of the transaction, HomeServices will typically share
approximately 50% of the sales commission with the other broker. In certain
circumstances, and only with the consent of both the buyer and seller,
HomeServices may act as the buyer's broker and the seller's broker in the same
transaction. HomeServices receives 100% of the sales commission in transactions
in which it acts as the sole broker.
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Typically, the percentage of the real estate commissions received by
HomeServices that is then paid to HomeServices' sales associates will vary
based on factors determined by HomeServices, such as sales associate
productivity and rates that are paid to competing associates in the same local
or regional market. The percentage of total commissions which HomeServices has
paid to sales associates has averaged approximately 65% over the past three
years.
The following table sets forth the real estate sales commissions and related
data of HomeServices during the periods indicated below. These results are
shown on a pro forma basis, including all entities shown in the June 30, 1999
unaudited pro forma financial statements.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sides .............................. 76,021 75,761 87,974 39,282 42,482
Average sales price per home ....... $ 121.8 $ 129.8 $ 138.0 $ 136.7 $ 146.1
Average sales commission (%)
(Gross commission revenues
divided by home sales volume) ..... 3.1% 3.1% 2.9% 3.0% 3.0%
Real estate sales commissions ...... $288,138 $309,326 $356,433 $162,432 $188,952
</TABLE>
SALES ASSOCIATES
HomeServices had more than 5,800 sales associates as of June 30, 1999 after
giving effect to the Paul Semonin Realtors and Long Realty acquisitions. Sales
associates are not employees of HomeServices, but operate under independent
contractor agreements. Each sales associate signs an independent contractor
agreement with HomeServices that establishes the relationship between the sales
associate and HomeServices as that of an independent contractor rather than
employee and employer. Under this agreement, HomeServices agrees that the sales
associate may share with other sales associates and sales assistants the use of
HomeServices' offices and facilities for the purposes of engaging in the real
estate brokerage business. The sales associate agrees to be responsible for his
or her personal business expenses and payment of all state and federal income
taxes and self-employment taxes. The sales associate further agrees that all
listings will remain the separate and exclusive property of HomeServices.
Either HomeServices or the sales associate can terminate the independent
contractor relationship at any time upon written notice given to the other.
As independent contractors, sales associates are paid solely by commission on
the basis of closed sales transactions and do not receive a salary or benefits
from HomeServices, although they may have access to certain benefits through
HomeServices' plans. Upon the consummation of the offering, sales associates
will be eligible to participate in HomeServices' non-employee stock purchase
plan. Sales associates have participated in prior stock purchase plans
maintained on their behalf. HomeServices maintains errors and omissions
insurance coverage, referred to herein as E&O insurance, for each of its sales
associates. Some of HomeServices' real estate brokerage subsidiaries require
their sales associates to contribute towards the maintenance of such E&O
insurance.
HomeServices is dedicated to the recruitment, training and retention of its
sales associates. HomeServices provides extensive training programs for its new
and experienced sales associates aimed at improving their marketing skills and
increasing their knowledge and awareness of the issues and laws affecting the
real estate industry and their productivity. New sales associates attend a
four-week training program which prepares them for entry into the real estate
brokerage industry. Additional training is provided after sales associates have
worked in the field. Finally, more seasoned sales associates have access to an
eight-week program which is structured to improve their business and
professional skills. While industry results vary widely, from 1996 to 1998, the
annual productivity of the sales associates employed by the individual
companies that comprise HomeServices increased by 9.7% from 14.4 to 15.8
transaction sides per sales associates. Based on closed transaction sides for
sales associates, which HomeServices believes is the optimal indicator of sales
associate productivity, HomeServices believes the productivity level of its
sales associates is among the highest in the industry.
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<PAGE>
MORTGAGE OPERATIONS
HomeServices offers mortgage origination services, primarily for loans in which
it acted as the broker in the home purchase transaction. Originations refer to
the general process of arranging mortgage financing on behalf of the customer
for the purchase of property or for the refinancing of an existing mortgage.
HomeServices currently provides a substantial portion of these mortgage
origination services through a residential joint venture with Norwest Mortgage
Inc., a subsidiary of Norwest Bank and one of the largest mortgage originators
in the United States. Pursuant to the joint venture, HomeServices evaluates the
mortgage loans it originates against underwriting standards of Norwest
Mortgage. The joint venture employs loan originators and supervisory staff and
purchases processing, underwriting and closing services from Norwest Mortgage.
Under a services agreement between Norwest Mortgage and the joint venture,
Norwest Mortgage provides these services and is reimbursed by the joint venture
for the costs incurred on comparable terms to those Norwest Mortgage is
reimbursed by its own loan production offices. Profits earned by the joint
venture after payment of the amounts owed to Norwest Mortgage which amount
varies, and all other expenses are then divided equally between HomeServices
and Norwest Mortgage. Since Norwest Mortgage underwrites and services the
mortgages, HomeServices retains none of the servicing responsibilities or
liabilities for the mortgages it originates and Norwest Mortgage bears the
losses from any failure by a mortgagor to pay principal, interest or other
amounts under a mortgage.
Plaza Mortgage, a wholly owned subsidiary of J.C. Nichols, also originates,
processes, underwrites and closes mortgages. Plaza Mortgage's underwriting loan
commitments are contractual obligations in its own name to mortgage loan
applicants. Before underwriting the loan commitment, Plaza Mortgage performs a
credit analysis to confirm that the loan would meet the particular guidelines
established by several investors with whom Plaza Mortgage has established
relationships. Prior to closing with the mortgage applicant, Plaza Mortgage
obtains a commitment that an investor will purchase the loan after the closing
at an agreed upon price on the condition that the loan meets the investor's
particular investment guidelines. Plaza Mortgage then sells the mortgage,
typically within two weeks, to the investor and, after it is sold, retains no
service rights or interest carrying costs. During the period after Plaza
Mortgage closes the loan and before it sells the mortgage to the investor,
Plaza Mortgage would incur the cost if the interest rate paid by HomeServices
on borrowings made by it to fund the loan at closing is higher than the
interest rate paid on the mortgage by the mortgagee.
On a pro forma basis for the year ended December 31, 1998, HomeServices
originated approximately $590.4 million in mortgages, of which approximately
45% represented mortgages originated by HomeServices through its joint venture
with Norwest Mortgage Inc., 23% represented mortgages originated and
underwritten by Plaza Mortgage and approximately 32% represented mortgages
originated and underwritten by loan providers whose arrangements are no longer
in place. On a pro forma basis for the year ended December 31, 1998 and the six
months ended June 30, 1999, approximately $2.2 million and $1.2 million,
respectively, of HomeServices' revenues were generated by its mortgage
operations.
TITLE, ESCROW AND CLOSING SERVICES
In all markets in which it operates other than Iowa and Kansas, HomeServices
performs abstracting, examination, search, endorsements, recordation,
preparation of title policy documents when acting as agent for Chicago Title
and other title insurance companies and closing services as part of its title
insurance services. HomeServices acts as a title agent in such transactions and
does not underwrite the insurance. Iowa is the only state that does not
authorize residential title insurance. Instead, Iowa uses abstract companies to
provide the history (abstract) to lawyers for their review and warranty. In
Iowa, HomeServices prepares property abstracts for titles for real estate
agencies, attorneys, financial institutions and other parties involved in the
selling or financing of real estate. Kansas significantly restricts residential
real estate brokers from also performing title operations. HomeServices
receives fees for all of the above services in addition to retaining a
substantial portion of title insurance premiums in states other than Iowa and
Kansas.
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<PAGE>
In addition, HomeServices owns an escrow services company which provides a
range of real estate closing services to home buyers and sellers, including
third-party closings in which HomeServices is not otherwise involved. These
services include escrowing funds and processing closing documents. Revenues
from title, escrow and closing services are generated by transaction fees,
which tend to fluctuate with HomeServices' brokerage revenues. A total of 32%
of title, escrow and closing revenues have come from transactions in which
HomeServices is not the real estate broker. On a pro forma basis for the year
ended December 31, 1998 and the six months ended June 30, 1999, approximately
$24.5 million and $11.9 million of HomeServices' revenues were generated by its
title, escrow and closing services.
RELOCATION SERVICES
HomeServices offers corporations a variety of specialized services primarily
concerned with facilitating the resettlement of transferred employees.
HomeServices believes that these relocation services minimize the stress and
inconvenience for the transferees and their families while maximizing
cost-effectiveness to the corporations. These relocation services generally
include:
o home-finding assistance;
o home-selling assistance;
o group-move coordination;
o inspection services;
o international relocation assistance;
o cost-of-living comparisons;
o school and neighborhood comparisons;
o moving services;
o mortgage services; and
o expense management.
HomeServices believes that the relocation services it provides to corporate
clients, directly or indirectly through major third-party relocation companies,
enable it to develop longstanding relationships with the transferred employees
themselves. HomeServices believes that these transferred employees are
particularly in need of Concierge Services and Home Dividends services because
they most likely would be relocating to areas unfamiliar to them. On a pro
forma basis for the year ended December 31, 1998, HomeServices generated
approximately $258,000 in fees for relocation services.
CONCIERGE SERVICES
HomeServices believes that it will be able to effectively provide its
customers, and particularly its buy-side customers, a broader and more
comprehensive range of services than its competitors by offering Concierge
Services, at no cost. Concierge Services arrange for the initiation at closing
of basic home services necessary to the home buyer, such as local and
long-distance telephone service, Internet service, cable television, newspaper
delivery, home security, home warranty, property and casualty insurance,
electricity, natural gas, waste disposal and moving. HomeServices believes it
is especially well-positioned to offer Concierge Services, on a targeted basis,
to its captive buy-side customers with whom it has developed relationships
during the home purchasing experience.
HomeServices has begun to offer referrals for a variety of these Concierge
Services through Edina Realty and certain other subsidiaries and intends to
commence offering these services on a company-wide basis in the fourth quarter
of 1999. HomeServices is currently offering referrals for the following
Concierge Services:
o local and long distance telephone service;
o Internet service account establishment;
55
<PAGE>
o newspaper delivery;
o home security, including monthly monitoring;
o home warranty, which is provided by the seller to the buyer as to the
nonstructural condition of the home, such as the condition of the
heating and air conditioning units;
o home inspection;
o property and casualty insurance;
o waste disposal;
o lawn service;
o moving; and
o locksmith.
HomeServices currently provides referrals to its existing real estate customers
through traditional means. HomeServices intends to make these Concierge
Services available to its existing realty customer base and Internet customers
generally by means of E-commerce.
HomeServices continues to evaluate the types of Concierge Services that it
provides and opportunities for expansion. HomeServices receives third-party
referral fees for the services listed above from the service providers pursuant
to contracts that it has already entered into with the service providers. On a
pro forma basis for the year ended December 31, 1998 and the six months ended
June 30, 1999, approximately $791,000 and $751,000 of HomeServices' revenues
were generated by these Concierge Services. HomeServices plans to significantly
expand the types of Concierge Services that it provides and expects to derive a
greater percentage of its revenues in the future from Concierge Services.
HOME DIVIDENDS SERVICES
As part of promoting a "one-stop shopping" experience for its customers at
closing and throughout the seven-year home ownership cycle, HomeServices plans
to provide to its existing customers and to Internet customers generally,
through E-commerce, at no cost, referrals for house maintenance and repair
related products and services. These products and services will be provided by
third-party providers. HomeServices believes that these Home Dividends services
will assist a new homeowner through each stage of the home ownership cycle by
simplifying their search process for third-party service providers.
HomeServices intends to screen and monitor these third-party service providers
to ensure that they meet pre-established quality performance standards,
although HomeServices does not intend to make any contractual representations
to customers as to the quality performance of these providers or to guarantee
their performance. The third-party providers are expected to offer services
such as:
o roofing;
o siding;
o decking;
o remodeling;
o windows;
o landscaping;
o plumbing;
o electrical;
o heating, ventilation and air conditioning; and
o appliances.
In exchange for referring its existing customers to these third-party
providers, HomeServices will receive referral fees from the actual third-party
providers. HomeServices plans to make these Home
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<PAGE>
Dividends services accessible through the Internet as part of its E-commerce
operations. HomeServices believes it will generate revenues from banner
advertising on its websites in addition to the referral fees it receives.
E-LOANS
As a part of its E-commerce operations, HomeServices intends to offer to its
existing real estate customers and other Internet customers generally the
opportunity to originate and refinance mortgages and home equity loans on-line.
HomeServices currently provides mortgage origination services but intends to
transition these services on-line through E-loans. HomeServices believes its
E-commerce operations will position it to earn banner advertising revenues from
its websites in addition to the fee-based origination and referral fees.
MARKETING
REAL ESTATE. HomeServices markets its real estate brokerage, mortgage
origination, insurance and other ancillary services through a multimedia
program. This program includes advertising through major area and local
newspapers, the Internet, real estate publications, radio, television, catalogs
and direct mail. HomeServices also promotes its websites and E-commerce
offerings through these media outlets. HomeServices' advertising and marketing
expenses vary based on closed transaction volume and are funded both through
commission revenue earned by HomeServices and a marketing fee paid by sales
associates to HomeServices. In 1998, on a pro forma basis, HomeServices
incurred $18.4 million in business promotion and advertising expense.
HomeServices' individual sales associates also often market HomeServices'
business through similar marketing tools as HomeServices. Sales associates are
responsible for purchasing the marketing tools they use in their business.
E-COMMERCE OFFERINGS TO AN EXPANDED CUSTOMER BASE. HomeServices believes that
it can attract Internet customers outside of its existing realty customer base
by providing a broad array of E-commerce services. These E-commerce services,
which currently include E-loans and referrals for home warranty, home security,
home inspection and property and casualty insurance and, in the future, will
include additional referrals for products and services offered as a part of
HomeServices' Concierge Services and Home Dividends, may be tailored to the
local or regional market in which HomeServices operates or provided on a more
expansive basis. HomeServices intends to market its E-commerce service and
product offerings, particularly through on-line advertising and reciprocal
hyperlinks to other websites that are likely to attract potential home buyers.
HomeServices believes that it has already established an on-line presence
through its own website and the websites of its brokerage subsidiaries. Certain
of HomeServices' brokerage firm operating subsidiaries have already established
hyperlinks with leading Internet real estate websites, such as Realtor.com and
HomeAdvisor.com, and with websites of local newspapers in HomeServices'
existing markets. These hyperlinks enable HomeServices' brokerage firm
operating subsidiaries to access both their existing customers and Internet
customers generally without having to incur significant advertising expense.
COMPETITION
The residential real estate brokerage business throughout the United States is
highly competitive and is characterized by many small independent real estate
brokerage firms, a few major regional players, including Weichert Realtors,
Long & Foster and GMAC, and a multiregional player, NRT Incorporated. The
largest residential real estate brokerage firm in the United States, including
all of its company owned franchise offices, had 348,134 aggregate closed
transaction sides in 1998 compared to 88,000 aggregate closed transaction sides
in 1998 for the various brokerage firm operating subsidiaries that comprise
HomeServices. Despite the fragmented nature of the real estate brokerage
business, each of HomeServices' residential real estate brokerage firms
commands the number one or number two position in each of its respective major
markets. The different types of real estate operations include independent
brokers, franchises and co-owned stores.
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In the residential real estate brokerage business, HomeServices' real estate
brokerage firms compete in their existing markets with regional multioffice
independent and franchise real estate organizations, such as Coldwell Banker
Burnet and J. D. Reece Realtors, as well as local single office independent
real estate organizations. HomeServices also competes nationally with franchise
real estate organizations, such as RE/MAX franchises, GMAC, The Prudential and
NRT Incorporated, which operates a number of offices under the franchised
Century-21, ERA and Coldwell Banker brand names. Companies compete for real
estate brokerage business primarily on the basis of services offered,
reputation, personal contacts, and, to some degree, price. HomeServices
believes that its major competitors in 1999 in the acquisition of other real
estate brokerage businesses will be franchise organizations, such as NRT
Incorporated and GMAC.
In the real estate brokerage business, companies also compete to obtain the
most qualified and experienced sales associates. Competition for these sales
associates is based on commission fee rates, services the company offers, its
reputation and personal contacts.
In its mortgage loan origination business, HomeServices competes with other
mortgage originators, such as mortgage bankers, state and national banks, and
thrift institutions, some of which have substantially greater resources than
HomeServices. HomeServices competes for loan origination business based on
services offered, price and available terms and its ability to obtain referrals
through its sales and marketing services. HomeServices employs full-time
mortgage consultants who are assigned to various real estate brokerage offices
and title offices. The mortgage consultants currently originate mortgage loans
primarily from HomeServices' real estate customers. In the E-loans business,
which is fragmented with no single dominant player, HomeServices will compete
generally with other mortgage originators providing services over the Internet.
HomeServices believes it will have a competitive advantage over these rivals
because they typically do not have a direct relationship with the customer.
In the Concierge Services and Home Dividends business, HomeServices will
continue to compete with other referral services, such as other referral
companies or the yellow pages. However, these competitors, unlike HomeServices,
typically do not have a direct relationship with the customer.
In the E-commerce business, HomeServices will compete with Internet websites
such as Realtor.com and Homestore.com that provide access to similar products
or services. HomeServices believes it will have a competitive advantage over
these competitors because, unlike HomeServices, these others are not licensed
real estate brokers and therefore, typically do not have a direct relationship
with the customer.
EMPLOYEES AND SALES ASSOCIATES
As of June 30, 1999, HomeServices employed approximately 1,260 individuals,
including 360 part-time employees, and had more than 4,500 sales associates who
are independent contractors, not employees. On a pro forma basis, HomeServices
employed approximately 1,490 individuals, including approximately 420 part-time
employees, and had more than 5,800 sales associates. None of HomeServices'
employees or sales associates is covered by a collective bargaining agreement.
Management believes that HomeServices' relations with its employees and sales
associates are good.
SERVICES AGREEMENT
Prior to the consummation of this offering, HomeServices and MidAmerican
Holdings will enter into a services agreement under which MidAmerican Holdings
will provide management, advisory, financial, accounting, legal, employee
benefit plan and insurance administration and other services to HomeServices.
HomeServices is required to pay a monthly fee in an amount equal to $50,000
plus reimbursement for all reasonable employee and out-of-pocket costs and
expenses incurred by MidAmerican Holdings in connection with providing these
services. See "Certain Relationships and Related Transactions--Services
Agreement."
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REGULATION
Real estate brokerage is regulated at both the state and federal levels in the
United States. HomeServices' real estate brokerage firms and all sales
associates are licensed by their respective state regulatory agencies. State
statutes contain general standards for and prohibitions on the conduct of real
estate brokers and sales associates and set standards in:
o disclosure when acting in an agency and dual agency capacity (i.e.,
representing a seller and a buyer in a transaction);
o collecting commissions;
o continuing broker and sales associate education;
o administering trust funds;
o advertising; and
o disclosing information in real estate forms.
Under state law, each of HomeServices' realty companies has a duty to supervise
and is responsible for the conduct of its sales associates. The states enforce
their regulatory authority by responding to consumer complaints and, if
appropriate, by taking action against the licensee. The action may include a
warning letter or reprimand, a temporary suspension of license or a revocation
of license with fines imposed. Each of HomeServices' licensed realty companies
strives to avert regulatory complaints by educating its sales associates about
state regulations with established training programs. HomeServices' in-house
legal department takes primary responsibility for handling any regulatory
complaints received by the realty companies concerning their operations and
sales associates. HomeServices believes that to date none of the regulatory
complaints received by the realty companies have been material. Further, the
majority of those complaints have not resulted in any action being taken by the
regulatory authority. There are currently no regulatory investigations that, if
found to merit regulatory action, would adversely affect HomeServices' ability
to conduct business.
On the federal level, HomeServices' real estate brokerage activities are
subject to the Real Estate Settlement Procedures Act and the regulations
promulgated thereunder which prohibit discrimination and require the disclosure
of certain information to borrowers concerning settlement costs.
HomeServices mortgage loan organization activities are subject on the federal
level to the Real Estate Settlement Procedures Act, the Equal Credit
Opportunity Act, the Federal Truth-in-Lending Act and the regulations
promulgated thereunder which prohibit discrimination and require the disclosure
of certain information to borrowers concerning credit and settlement costs. As
an approved Fannie Mae and Federal Home Loan Mortgage Corporation mortgage
seller, HomeServices is required to comply with Fannie Mae and Federal Home
Loan Mortgage Corporation seller guidelines for secondary sale of mortgages.
Additionally, there are various state laws affecting HomeServices' mortgage
operations, including licensing requirements and substantive limitations on the
interest and fees that may be charged. States also have the right to conduct
financial and regulatory audits of the loans under their jurisdiction.
HomeServices, through its subsidiaries, is licensed to provide mortgage
origination services in the jurisdictions in which it operates.
HomeServices' title and escrow services are regulated by state regulatory
authorities that possess broad powers relating to the granting and revocation
of licenses. These state authorities also regulate insurance rates and the form
of policies.
HomeServices' business depends on the validity of, and HomeServices' continued
good standing under, the licenses and approvals under which it operates and
HomeServices' continued compliance with pertinent regulations. HomeServices
therefore devotes a significant amount of effort toward maintaining its
licenses and ensuring compliance with applicable regulations, which efforts
include maintaining a staff of in-house compliance officers.
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LEGAL PROCEEDINGS
In the ordinary course of business, HomeServices and its subsidiaries are
involved in legal proceedings incidental to their operations. HomeServices and
its subsidiaries are not currently involved in any legal proceedings that
management believes would have a material adverse effect on the operations or
financial condition of HomeServices and its subsidiaries taken as a whole.
PROPERTIES
HomeServices' principal offices are located in Edina, Minnesota, where
HomeServices leases approximately 46,000 square feet of office space. This
lease expires in 2003. The rent under this lease is approximately $600,000 per
year. In addition, HomeServices has a total of 146 branch offices,
substantially all of which are leased. HomeServices' office leases generally
have initial terms ranging from three to ten years, with an option to extend
the lease for additional periods. The leases are typically net leases, which
means that HomeServices is required to pay property taxes, utilities and
maintenance. HomeServices believes that its present facilities are adequate for
its current level of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information concerning the executive officers,
directors and key employees of HomeServices. Ages are as of June 30, 1999.
There are no family relationships among any of HomeServices' executive
officers, directors and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- ----- ----------------------------------------------------------------
<S> <C> <C>
David L. Sokol(1)(2) ................. 42 Chairman; Director
Ronald J. Peltier(1) ................. 49 President and Chief Executive Officer; Director
Steven A. McArthur(1)(2)(3) .......... 41 Senior Vice President, General Counsel and Secretary; Director
Dwayne J. Coben ...................... 40 Senior Vice President and Chief Financial Officer
James L. Anderson .................... 39 Director of Information Technology
Jack W. Frost ........................ 66 President and Chief Executive Officer of J.C. Nichols; Director
R. Michael Knapp ..................... 48 President and Chief Executive Officer of Iowa Realty; Director
Arne M. Rovick ....................... 55 Vice Chairman and General Counsel of Edina Realty
Joseph J. Valenti .................... 51 President and Chief Executive Officer of CBS HOME
George E. Gans III ................... 60 President and Chief Executive Officer of Paul Semonin Realtors
Stephen E. Quinlan ................... 46 President and Chief Executive Officer of Long Realty
Gregory E. Abel ...................... 37 Director
Richard R. Jaros(1)(2)(3) ............ 47 Director
W. David Scott(2)(3) ................. 37 Director
</TABLE>
- ----------
(1) Member of the executive committee.
(2) Member of the compensation committee.
(3) Member of the audit committee.
The following sets forth biographical information of HomeServices' executive
officers, directors and key employees:
DAVID L. SOKOL has been Chairman of HomeServices since its inception in July
1999. He has also been the Chairman of MidAmerican Energy Company since March
1999. Mr. Sokol has been Chairman of MidAmerican Holdings since May 1994 and
Chief Executive Officer of MidAmerican Holdings since April 1993. He has been a
director of MidAmerican Holdings since 1991 and served as President of
MidAmerican Holdings from April 1993 to January 1995. Before his service with
MidAmerican Holdings, Mr. Sokol held a variety of senior executive positions in
the independent power industry.
RONALD J. PELTIER has been President and Chief Executive Officer of
HomeServices since its inception in July 1999. He was Chairman, President and
Chief Executive Officer of Edina Realty from 1992 to May 1999. Mr. Peltier also
serves as a director for the National Association of Realtors, a director for
the RELO Network and is a founder and director for the Realty Alliance, a trade
group consisting of the nation's leading brokers. Mr. Peltier joined Edina
Realty in 1977, became General Sales Manager in 1983, and became Senior Vice
President and General Manager in 1991, where he was responsible for all sales
operations and long-range planning for Edina Realty.
STEVEN A. MCARTHUR has been Senior Vice President, General Counsel, Secretary
and a director of HomeServices since its inception in July 1999. He has been
Senior Vice President, Mergers and Acquisitions of MidAmerican Holdings since
March 1999 and had previously served as Executive Vice President and General
Counsel of MidAmerican Holdings from February 1991 to March 1999. Mr. McArthur
joined MidAmerican Holdings in 1991. From 1988 to 1991, he was an attorney in
the Corporate Finance Group at Shearman & Sterling in San Francisco. From 1984
to 1988, Mr. McArthur was an attorney in the Corporate Finance Group at
Winthrop, Stimson, Putnam & Roberts in New York.
DWAYNE J. COBEN has been Senior Vice President and Chief Financial Officer of
HomeServices since its inception in July 1999. He has also been the Vice
President, Utility Development of MidAmerican
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Energy Company since April 1999. He was a Director, Corporate Development from
August 1997 to March 1998 and Corporate Development Vice President from April
1998 to March 1999. Before joining MidAmerican Energy Company, Mr. Coben was
Controller, Marketing and Customer Services for BC Hydro from December 1994 to
August 1997, and held various business development management positions with BC
Hydro from 1990 to 1994.
JAMES L. ANDERSON has been the Director of Information Technology of
HomeServices since its inception in July 1999. He has been the Vice President
of Business Development for Northern Aurora since April 1998. From 1988 to
April 1998, Mr. Anderson held a variety of technology-related positions at
Sierra Pacific Power Company, a west coast investor-owned public utility
company, including project manager for commercial and industrial billing from
1996 to 1998 and senior systems analyst from 1991 to 1996.
JACK W. FROST has been a director of HomeServices since its inception in July
1999 and President and Chief Executive Officer of J.C. Nichols since February
1, 1990. In 1978, he sold Hardin Stockton, a residential real estate brokerage
firm, to Coldwell Banker and, five years later, became the Executive Vice
President and National General Manager for Coldwell Banker Residential Group
serving in that capacity until 1988. In 1990, Mr. Frost purchased the
75-year-old residential brokerage operation of the J.C. Nichols Company. Mr.
Frost is a former Commissioner and Chairman of the Kansas Real Estate
Commission.
R. MICHAEL KNAPP has been a director of HomeServices since its inception in
July 1999 and President and Chief Executive Officer of Iowa Realty since 1991.
Prior to 1991, Mr. Knapp held numerous positions at Iowa Realty including
General Sales Manager of the residential division and Senior Vice President.
Mr. Knapp is an active member of Pacesetters and the Vision Group, two
organizations comprised of the top real estate brokers and owners from across
the nation.
ARNE M. ROVICK has been Vice Chairman and General Counsel of Edina Realty since
1986. His other positions at Edina Realty include Chief Administrative Officer,
Senior Vice President and Secretary. Prior to such time, Mr. Rovick practiced
law in Phoenix, Arizona with the firm of Evans, Kitchel and Jenckes, P.C. In
1986, Mr. Rovick returned to Minnesota as Vice President, General Counsel for
Edina Realty.
JOSEPH J. VALENTI has been President and Chief Executive Officer of CBS HOME
since its formation in August 1998. He was licensed in the real estate business
and worked as a sales associate and office manager from 1976 through 1985. In
1985, Mr. Valenti and two other individuals purchased Wurdeman of Omaha and he
became President of the company. In 1987, Wurdeman of Omaha was merged with two
other Omaha residential companies to form HOME Realty and he became President
of that entity. Upon the acquisition of HOME Realty and CBS Realty by
HomeServices, Mr. Valenti became the president of CBS HOME, the merged entity.
Mr. Valenti is a past President of the Omaha Area Board of Realtors. He has
also been a member and chairperson of multiple local and state realtor
committees from 1979 to the present. Mr. Valenti is active in the Omaha Chamber
of Commerce and several charities in the Omaha area.
GEORGE E. GANS III has been President and Chief Executive Officer of Paul
Semonin Realtors since 1985. Mr. Gans also serves as a director for Realty
Alliance and the National Association of Realtors, serves as a member of the
Board of Governors for Norton Health Care and for the Norton Hospital Advisory
Board and serves on the Advisory Board and Executive Committee for Bank One,
Kentucky, NA. Mr. Gans joined Paul Semonin Realtors in 1973 as a sales
associate, became an office manager in 1979 and Executive Vice President in
1984.
STEPHEN E. QUINLAN has been President and Chief Executive Officer of Long
Realty since August of 1994. From 1976 through 1994, Mr. Quinlan has held a
variety of positions at Long Realty including Sales Associate in residential
and commercial areas, Branch Manager, General Manager, and Designated Broker.
Mr. Quinlan serves as a member of the Boards of Directors and/or Advisory
Boards for Sotheby's International Realty, Cendant Mobility Services, Arizona
Compass Bank and Southern Arizona Leadership Council. Mr. Quinlan is also Vice
President of a local Realtor Association and a member of the Vision Group.
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GREGORY E. ABEL has been a director of HomeServices since its inception in July
1999. He has been Chief Executive Officer of MidAmerican Energy Company since
March 1999. Mr. Abel held various executive positions at MidAmerican Holdings
from 1992 to March 1999, including responsibility for engineering,
construction, accounting and various administrative functions. He has been
President and Chief Operating Officer of MidAmerican Holdings since March 1998.
Mr. Abel is a Chartered Accountant and from 1984 to 1992 was employed by Price
Waterhouse in San Francisco, where he was responsible for clients in the energy
industry.
RICHARD R. JAROS has been a director of HomeServices since its inception in
July 1999. Mr. Jaros has also been a director of MidAmerican Holdings since
March 1991. Mr. Jaros served as President and Chief Operating Officer of
MidAmerican Holdings from January 8, 1992 to April 19, 1993 and as Chairman of
the Board from April 19, 1993 to May 1994. Until July 1997, Mr. Jaros was
Executive Vice President and Chief Financial Officer of Peter Kiewit Sons' Inc.
and President of Kiewit Diversified Group, Inc., which is now Level 3
Communications. From 1990 until January 8, 1992, Mr. Jaros served as a Vice
President of Peter Kiewit Sons' Inc. Mr. Jaros serves as a director of
Commonwealth Telephone, RCN Corporation and Level 3.
W. DAVID SCOTT has been a director of HomeServices since its inception in July
1999. Mr. Scott formed Magnum Resources, Inc., a commercial real estate holding
company, in October 1994 and has served as its President and Chief Executive
Officer since its inception. Mr. Scott has directed the development and
expansion of Magnum Resources and its primary commercial real estate
subsidiary, the Mega Corporation, through a series of acquisitions as well as a
merger of Magnum Resources and the Mega Corporation. Before forming Magnum
Resources, Mr. Scott worked for America First Companies, Cornerstone Banking
Group and the Kiewit Companies. Mr. Scott has been a director of America First
Mortgage Investments, Inc., a mortgage REIT, since 1998.
CLASSIFIED BOARD OF DIRECTORS
HomeServices' board of directors is divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
board of directors will be elected each year. These provisions, together with
the provisions of the restated certificate of incorporation that allow the
board of directors to fill vacancies in or increase the size of the board of
directors, would prevent a stockholder from removing incumbent directors and
filling such vacancies with its nominees in order to gain control of the board.
HomeServices' board has resolved that Messrs. Abel and Frost will serve as
Class I Directors whose terms expire at the 2000 annual meeting of
stockholders. Messrs. Knapp, Scott and Peltier will serve as Class II Directors
whose terms expire at the 2001 annual meeting of stockholders. Messrs. Sokol,
McArthur and Jaros will serve as Class III Directors whose terms expire at the
2002 annual meeting of stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
HomeServices' board of directors currently has three standing committees: an
executive committee, a compensation committee and an audit committee.
HomeServices' executive committee has certain selected powers and rights to
exercise the authority of the board of directors between meetings of the board
of directors. The current members of the executive committee are Messrs. Sokol,
Peltier, McArthur and Jaros.
HomeServices' compensation committee reviews and approves or recommends to the
board of directors for approval salaries, benefits and stock option grants for
all employees, consultants, directors and other individuals, such as sales
associates. The compensation committee also oversees the administration of
HomeServices' stock option, stock purchase and other employee benefits plans.
The compensation committee currently consists of Messrs. Sokol, McArthur, Jaros
and Scott.
HomeServices' audit committee reviews HomeServices' internal accounting
procedures and considers and reports to the board of directors of HomeServices
on other auditing and accounting matters,
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including the selection of HomeServices' independent accountants, the scope of
annual audits, fees to be paid to HomeServices' independent accountants and the
performance of HomeServices' independent accountants. The audit committee
currently consists of Messrs. McArthur, Jaros and Scott.
COMPENSATION OF DIRECTORS
Nonemployee directors of HomeServices or directors of HomeServices who are
full-time employees of MidAmerican Holdings receive, as compensation for their
service as directors:
o an annual retainer of $10,000;
o $500 of committee fees for each committee meeting; and
o reimbursement for reasonable expenses incurred in connection with
attendance at board and committee meetings.
Each director of HomeServices has received, as compensation for agreeing to
serve as a director, fully vested options to purchase 50,000 shares of common
stock at an exercise price equal to $5.89, which was the book value of the
common stock on June 30, 1999, after giving effect to the issuance of
approximately 677.87 shares of HomeServices' common stock in exchange for each
share of common stock of MidAmerican Realty Services Company, which merger will
occur immediately before closing of the offering.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for all services
rendered to the predecessor to HomeServices.Com Inc. and its subsidiaries in
all capacities during 1998 by the Chief Executive Officer of HomeServices and
the four other most highly compensated executive officers of HomeServices and
its subsidiaries, who earned more than $100,000 in 1998 and who were serving as
executive officers of HomeServices and its subsidiaries as of December 31,
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------- ALL OTHER
NAME AND POSITION(1) YEAR SALARY BONUS COMPENSATION(2)
- ------------------------------------------------- ------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Ronald J. Peltier, President and
Chief Executive Officer of
HomeServices(3) ................................ 1998 $325,000 $123,500 $132,037
Jack W. Frost, President and Chief
Executive Officer of J.C. Nichols .............. 1998 250,000 100,000 2,457
R. Michael Knapp, President and
Chief Executive Officer of Iowa Realty ......... 1998 225,000 200,250 162,588
Arne M. Rovick, Vice Chairman and
General Counsel of Edina Realty ................ 1998 250,000 95,000 132,849
Joseph J. Valenti, President and Chief
Executive Officer of CBS HOME .................. 1998 250,000 28,583 5,000
</TABLE>
- ----------
(1) Each of the executive officers listed earned their 1998 compensation in
their capacities as executive officers of subsidiaries of MidAmerican
Realty Services, the predecessor to HomeServices.
(2) Amounts for 1998 consist of (a) HomeServices' matching contributions to a
defined contribution plan of $4,188, $2,457 and $7,344 for Messrs.
Peltier, Frost and Knapp, respectively, and $5,000 for each of Messrs.
Rovick and Valenti; and (b) long-term compensation earned in the form of
a $127,849 credit towards payment of a promissory note for each of
Messrs. Peltier, Knapp and Rovick. In addition, the amount for Mr. Knapp
includes HomeServices' contributions totaling $18,886 to a supplemental
executive retirement plan, a $6,400 contribution to a defined
contribution plan and premiums on his behalf totaling $2,109 for
long-term disability insurance.
(3) Mr. Peltier received compensation in his capacity as Chairman, President
and Chief Executive Officer of Edina Realty, the position he held from
1992 to May 1999.
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EMPLOYMENT AGREEMENTS
In May 1998, HomeServices entered into employment agreements with each of
Messrs. Peltier, Knapp and Rovick. In August 1998, HomeServices entered into an
employment agreement with Mr. Valenti and in September 1998 it entered into an
employment agreement with Mr. Frost.
MR. PELTIER. Mr. Peltier's employment agreement provides for an annual base
salary of $325,000. Mr. Peltier is also eligible to receive a target award of
30% of base salary, with a maximum award equal to 45% of base salary for each
of the fiscal years during which he is employed. Mr. Peltier will receive this
award upon the achievement of certain performance criteria and after the
compensation committee of the board of directors approves the incentive award
computations, based upon the recommendation of the Chief Executive Officer of
MidAmerican Holdings.
Mr. Peltier has also entered into a long term incentive compensation plan with
HomeServices. Under this plan, Mr. Peltier purchased from HomeServices a total
of 84,734 shares of HomeServices' common stock for a purchase price of
$381,376. The purchase price was payable to HomeServices contemporaneously with
the execution of the employment agreement by delivery of a promissory note in
such amount. Mr. Peltier acquired his shares at a purchase price of $4.50 per
share, a 71.9% discount to the assumed initial public offering price of $16.00
per share, which is the midpoint of the estimated range of the initial public
offering price per share. Each promissory note will mature in May 2003. Mr.
Peltier is eligible to have a portion of principal and interest owing under his
promissory note forgiven for each of the fiscal years during which he is
employed. The credit will be given to Mr. Peltier upon the achievement of
certain financial performance goals, each as approved annually by the
compensation committee of the board of directors, and upon the recommendation
of the Chief Executive Officer of MidAmerican Holdings. The target amount to be
forgiven for each fiscal year is 20% of the amount due on the promissory note.
The maximum amount to be forgiven for each fiscal year is 40%. If Mr. Peltier
does not attain his performance goals and so no amount is to be forgiven,
principal and interest on the promissory note are payable by Mr. Peltier when
due.
Mr. Peltier is also eligible to participate in the tax-qualified retirement
plan and welfare benefit plans of HomeServices in accordance with the terms and
conditions of the plans.
If the employment of Mr. Peltier is terminated by HomeServices for reasons
other than good cause or if Mr. Peltier should resign for good reason, he will
be entitled to receive until the third anniversary of the termination date (1)
his base salary as in effect as of his termination date at HomeServices' normal
payroll intervals and (2) target awards equal to the average annual target
awards made to him under the agreement prior to his termination. Mr. Peltier's
employment agreement terminates in May 2003.
Prior to the closing of the offering, HomeServices intends to amend the
financial performance goals contained in the existing employment agreement with
Mr. Peltier so that the goals are related to the achievement of certain
performance criteria for HomeServices on a consolidated basis rather than
solely for Edina Realty.
MR. FROST. Mr. Frost's employment agreement provides for an annual base salary
of $250,000. Mr. Frost is also eligible to receive a target award of 40% of
base salary, with a maximum award equal to 60% of base salary for each of the
fiscal years during which he is employed. Mr. Frost will receive this award
upon the achievement of certain performance criteria and after the compensation
committee of the board of directors approves the incentive award computations,
based upon the recommendation of the Chief Executive Officer of MidAmerican
Holdings.
Mr. Frost is also eligible to participate in the tax-qualified retirement plan
and welfare benefit plans of HomeServices in accordance with the terms and
conditions of the plans.
If the employment of Mr. Frost is terminated by HomeServices for reasons other
than good cause or if Mr. Frost should resign for good reason, he will be
entitled to receive until the third anniversary of the termination date (1) his
base salary as in effect as of his termination date at HomeServices' normal
payroll intervals and (2) target awards equal to the average annual target
awards made to him under the agreement prior to his termination. Mr. Frost's
employment agreement terminates in September 2003.
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MR. KNAPP. Mr. Knapp's employment agreement provides for an annual base salary
of $225,000. Mr. Knapp is also eligible to receive a target award of 70% of
base salary, with a maximum award equal to 100% of base salary for each of the
fiscal years during which he is employed. Mr. Knapp will receive this award
upon the achievement of certain performance criteria and after the compensation
committee of the board of directors approves the incentive award computations,
based upon the recommendation of the Chief Executive Officer of MidAmerican
Holdings.
Mr. Knapp has also entered into a long term incentive compensation plan with
HomeServices. Under this plan, Mr. Knapp purchased from HomeServices a total of
84,734 shares of HomeServices' common stock for a purchase price of $381,376.
The purchase price was payable to HomeServices contemporaneously with the
execution of the employment agreement by delivery of a promissory note in such
amount. Mr. Knapp acquired his shares at a purchase price of $4.50 per share, a
71.9% discount to the assumed initial offering price of $16.00 per share, which
is the midpoint of the estimated range of the initial public offering price per
share. Each promissory note will mature in May 2003. Mr. Knapp is eligible to
have a portion of principal and interest owing under his promissory note
forgiven for each of the fiscal years during which he is employed. The credit
will be given to Mr. Knapp upon the achievement of certain financial
performance goals, each as approved annually by the compensation committee of
the board of directors, and upon the recommendation of the Chief Executive
Officer of MidAmerican Holdings. The target amount to be forgiven for each
fiscal year is 20% of the amount due on the promissory note. The maximum amount
to be forgiven for each fiscal year is 40%. If Mr. Knapp does not attain his
performance goals and so no amount is to be forgiven, principal and interest on
the promissory note are payable by Mr. Knapp.
If the employment of Mr. Knapp is terminated by HomeServices for reasons other
than good cause or if Mr. Knapp should resign for good reason, he will be
entitled to receive until the third anniversary of the termination date (1) his
base salary as in effect as of his termination date at HomeServices' normal
payroll intervals and (2) target awards equal to the average annual target
awards made to him under the agreement prior to his termination. Mr. Knapp's
employment agreement terminates in May 2003.
MR. ROVICK. Mr. Rovick's employment agreement provides for an annual base
salary of $250,000. Mr. Rovick is also eligible to receive a target award of
30% of base salary, with a maximum award equal to 100% of base salary for each
of the fiscal years during which he is employed. Mr. Rovick will receive this
award upon the achievement of certain performance criteria and after the
compensation committee of the board of directors approves the incentive award
computations, based upon the recommendation of the Chief Executive Officer of
MidAmerican Holdings.
Mr. Rovick has also entered into a long term incentive compensation plan with
HomeServices. Under this plan, Mr. Rovick purchased from HomeServices a total
of 84,734 shares of HomeServices' common stock for a purchase price of
$381,376. The purchase price was payable to HomeServices contemporaneously with
the execution of the employment agreement by delivery of a promissory note in
such amount. Mr. Rovick acquired his shares at a purchase price of $4.50 per
share, a 71.9% discount to the assumed initial public offering price of $16.00
per share, which is the midpoint of the estimated range of the initial public
offering price per share. Each promissory note will mature in May 2003. Mr.
Rovick is eligible to have a portion of principal and interest owing under his
promissory note forgiven for each of the fiscal years during which he is
employed. The credit will be given to Mr. Rovick upon the achievement of
certain financial performance goals, each as approved annually by the
compensation committee of the board of directors, and upon the recommendation
of the Chief Executive Officer of MidAmerican Holdings. The target amount to be
forgiven for each fiscal year is 20% of the amount due on the promissory note.
The maximum amount to be forgiven for each fiscal year is 40%. If Mr. Rovick
does not attain his performance goals and so no amount is to be forgiven,
principal and interest on the promissory note are payable by Mr. Rovick when
due.
Mr. Rovick is also eligible to participate in the tax-qualified retirement plan
and welfare benefit plans of HomeServices in accordance with the terms and
conditions of the plans.
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If the employment of Mr. Rovick is terminated by HomeServices for reasons other
than good cause or if Mr. Rovick should resign for good reason, he will be
entitled to receive until the third anniversary of the termination date (1) his
base salary as in effect as of his termination date at HomeServices' normal
payroll intervals and (2) target awards equal to the average annual target
awards made to him under the agreement prior to his termination. Mr. Rovick's
employment agreement terminates in May 2003.
MR. VALENTI. Mr. Valenti's employment agreement provides for an annual base
salary of $175,000. Mr. Valenti is also eligible to receive a target award of
70% of base salary, with a maximum award equal to 100% of base salary for each
of the fiscal years during which he is employed. Mr. Valenti will receive this
award upon the achievement of certain performance criteria and after the
compensation committee of the board of directors approves the incentive award
computations, based upon the recommendation of the Chief Executive Officer of
MidAmerican Holdings.
In addition, Mr. Valenti receives an annual supplement of $75,000 and is
entitled under his employment agreement to receive minimum gross compensation
of $250,000 per year. Therefore, if the total of Mr. Valenti's annual base
salary of $175,000 and annual target awards does not exceed $250,000 for any
year, HomeServices will not pay to Mr. Valenti any incentive compensation for
that year. If the total of Mr. Valenti's annual base salary and target award
for any year exceeds $250,000, then HomeServices will pay Mr. Valenti the
excess as incentive compensation.
Mr. Valenti is also eligible to participate in the tax-qualified retirement
plan and welfare benefit plans of HomeServices in accordance with the terms and
conditions of the plans.
If the employment of Mr. Valenti is terminated by HomeServices for reasons
other than good cause or if Mr. Valenti should resign for good reason, he will
be entitled to receive until the third anniversary of the termination date (1)
his base salary as in effect as of his termination date at HomeServices' normal
payroll intervals and (2) target awards equal to the average annual target
awards made to him under the agreement prior to his termination. Mr. Valenti's
employment agreements terminates in August 2002.
In connection with the acquisitions of Paul Semonin Realtors and Long Realty in
1999, HomeServices entered into employment agreements with Messrs. Gans and
Quinlan.
MR. GANS. Mr. Gans' employment agreement provides for an annual base salary of
$175,000. The term of Mr. Gans' employment agreement is for 18 months, at which
time HomeServices and Mr. Gans may mutually agree to continue the agreement or
negotiate mutually acceptable terms and conditions for a term of an additional
18 months.
MR. QUINLAN. Mr. Quinlan's employment agreement provides for an annual base
salary of $225,000. Mr. Quinlan is also eligible to receive an award of up to a
maximum of 45% of base salary for each of the fiscal years during which he is
employed. Mr. Quinlan will receive this award upon the achievement of certain
performance criteria and after the compensation committee of the board of
directors of HomeServices approves the incentive award computations, based upon
the recommendation of the President of HomeServices. The term of Mr. Quinlan's
employment agreement is for five years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors of HomeServices consists
of Messrs. Sokol, McArthur, Jaros and Scott. Mr. Sokol is Chairman of the board
of directors of HomeServices. Mr. McArthur is Senior Vice President, General
Counsel and Secretary of HomeServices.
EMPLOYEE STOCK PURCHASE PLAN
HomeServices has adopted, and MidAmerican Holdings, as the majority shareholder
of HomeServices, has approved, an employee stock purchase plan, effective as of
the consummation of the offering. The purpose of the employee stock purchase
plan is to align the interests of employees
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and stockholders by encouraging participants to purchase shares of common
stock. The employee stock purchase plan is intended to comply with the
requirements of Section 423 of the Internal Revenue Code of 1986, as amended,
and to provide participants with the tax advantages provided by Section 423. A
total of 35,000 shares of common stock has been authorized for issuance under
the employee stock purchase plan, subject to adjustment in the event of a
recapitalization, stock split, stock dividend or other similar transaction. The
description of the employee stock purchase plan set forth herein is qualified
by reference to the form of employee stock purchase plan filed as an exhibit to
the registration statement that includes this prospectus.
The employee stock purchase plan will be administered by the compensation
committee. The compensation committee may make rules and regulations and
establish procedures for the administration of the employee stock purchase plan
as it deems appropriate.
Subject to certain procedural requirements, all employees of HomeServices who
have at least one year of service and work more than twenty hours per week will
be eligible to participate in the employee stock purchase plan, except that
employees who are "highly compensated" within the meaning of Section 414(q) of
the Code and employees who are five percent or more stockholders of
HomeServices or a subsidiary of HomeServices will not be eligible to
participate. Designations of corporations participating in the employee stock
purchase plan may be made from time to time by the compensation committee from
among the subsidiaries of HomeServices, including corporations which become
subsidiaries after approval and adoption of the employee stock purchase plan.
Pursuant to the employee stock purchase plan, each eligible employee will be
permitted to purchase shares of common stock through regular payroll deductions
in an aggregate amount equal to % to % of the employee's base pay. Under the
employee stock purchase plan, a participant's right to purchase shares of
common stock cannot accrue at a rate which exceeds $25,000 of fair market value
of common stock in any calendar year.
Participating employees will be able to purchase shares of common stock with
payroll deductions on the last day of each purchase period within each cycle,
at a purchase price equal to the lesser of:
o 85% of the fair market value of common stock on the date the cycle
begins; and
o 85% of the fair market value of common stock on the last day of the
purchase period.
A right to purchase shares of common stock which is granted to a participant
under the employee stock purchase plan is transferable only by will or the laws
of descent and distribution, and is exercisable, during the participant's
lifetime, only by the participant.
The compensation committee may from time to time amend or terminate the
employee stock purchase plan. No such amendment or termination may adversely
affect the rights of any participant without the consent of such participant
and, to the extent required by Section 423 of the Code or any other law,
regulation or stock exchange rule, no amendment will be effective without the
approval of stockholders entitled to vote on the amendment. Additionally, the
compensation committee may make such amendments as it deems necessary to comply
with applicable laws, rules and regulations.
Since the amount of benefits to be received by each participant is determined
by his or her elections, the amount of future benefits to be allocated to any
individual or group of individuals under the employee stock purchase plan is
not determinable.
NON-EMPLOYEE STOCK PURCHASE PLAN
HomeServices has adopted, and MidAmerican Holdings, as the majority shareholder
of HomeServices, has approved, a non-employee stock purchase plan, effective as
of the consummation of the offering. The non-employee stock purchase plan will
be made available to HomeServices' sales associates. The purpose of the
non-employee stock purchase plan is to align the interests of sales associates
with the interests of HomeServices' stockholders by encouraging participants to
purchase shares of common stock. The non-employee stock purchase plan will
operate substantially the same as the employee stock purchase plan described
above, except that non-employees will not be entitled to any of the tax
benefits afforded to employees. A total of 35,000 shares of common stock has
been
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authorized for issuance under the non-employee stock purchase plan, subject to
adjustment in the event of a recapitalization, stock split, stock dividend or
other similar transaction. The description of the non-employee stock purchase
plan is qualified by reference to the form of non-employee stock purchase plan
filed as an exhibit to the registration statement that includes this
prospectus.
1999 EQUITY INCENTIVE PLAN
On , 1999, HomeServices adopted, and on , 1999, MidAmerican
Holdings, as its majority stockholder, approved, HomeServices' 1999 equity
incentive plan. A maximum of shares of common stock has been reserved for
issuance under the equity plan. The number of shares authorized is generally
subject to equitable adjustment upon the occurrence of any stock dividend or
other distribution, recapitalization, stock split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase or
share exchange, or other similar corporate transaction or event.
Pursuant to the equity plan, HomeServices may grant awards which may consist
of:
o stock options, including incentive stock options and nonqualified
stock options;
o restricted stock; and/or
o other stock-based awards.
From and after the consummation of the offering, the equity plan is intended to
satisfy any applicable requirements of Rule 16b-3 promulgated under Section 16
of the Securities Exchange Act of 1934 and Section 162(m) of the Code, and will
be interpreted in a manner consistent with the requirements of those rules and
regulations.
The equity plan will be administered by the compensation committee established
by the board of directors, which has been organized so as to satisfy the
provisions of Rule 16b-3 and Section 162(m). The compensation committee has
full authority, subject to the provisions of the equity plan, to, among other
things, determine the persons to whom awards will be granted, determine the
terms and conditions, including any applicable performance criteria, of the
awards, and prescribe, amend and rescind rules and regulations relating to the
equity plan.
Grants of awards may be made under the equity plan to selected employees,
independent contractors and directors of HomeServices.
STOCK OPTIONS. Stock options may be either "incentive stock options," as such
term is defined in Section 422 of the Code, or nonqualified stock options.
Pre-offering option awards will be made at "book value" and post-offering
grants will be based upon the average of the high and low sales price of
HomeServices' stock at the date of grant. Options granted pursuant to the
equity plan will become exercisable at such times and under such conditions as
the compensation committee may prescribe. The option exercise price is payable
by any one of the following methods or a combination thereof: (1) in cash or by
personal check, certified check, bank cashier's check or wire transfer; (2) in
stock owned by the participant for at least six months prior to the date of
exercise and valued at its fair market value on the effective date of such
exercise; or (3) in such other manner as the compensation committee may
authorize. The compensation committee may also authorize "reload options" which
is an option for the number of shares surrendered in exercising a previously
granted option. Generally, unless the optionee voluntarily resigns or is
terminated for cause, previously vested options will remain outstanding for the
remainder of the option term.
No person may be granted stock options under the equity plan in any calendar
year representing an aggregate of more than shares of common stock, which
number shall be subject to equitable adjustment as described above.
RESTRICTED STOCK. A restricted stock award is an award of common stock which is
subject to restrictions on transferability and other restrictions, if any, as
the compensation committee may impose at the date of grant. The restrictions
may lapse separately or in combination at such times, under such circumstances,
including, without limitation, a specified period of employment, or upon the
satisfaction of pre-established performance goals, as the compensation
committee may determine.
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These goals may be based upon one or more of the following criteria: pretax or
after-tax income; operating profit; return on equity, assets, capital or
investment; earnings or book value per share; sales or revenues; operating
expenses; stock price appreciation; and the implementation or completion of
critical projects or processes. Except to the extent restricted under the award
agreement relating to the restricted stock, a participant granted restricted
stock will have all of the rights of a stockholder, including, without
limitation, the right to vote and the right to receive dividends on the
restricted stock.
Upon termination of employment or termination of the independent contractor
relationship or termination of service as a director during the applicable
restriction period, restricted stock and any accrued but unpaid dividends that
are at that time subject to restrictions will be forfeited unless the
compensation committee provides otherwise. The compensation committee can
determine, by rule or regulation or in any award agreement, or in any
individual case, that restrictions or forfeiture conditions relating to
restricted stock will be waived in whole or in part in the event of
terminations resulting from specified causes. The compensation committee can
accelerate the lapsing of all or any portion of any outstanding restrictions on
the restricted stock.
No person may be granted restricted stock under the equity plan in any calendar
year representing an aggregate of more than shares of common stock, subject
to equitable adjustment as described above.
OTHER AWARDS; CHANGE IN CONTROL. Other awards valued in whole or in part by
reference to, or otherwise based on, common stock may be granted either alone
or in addition to other awards under the equity plan. The compensation
committee has the sole and complete authority to determine the terms and
conditions of these awards.
Upon the occurrence of a "change in control" following the offering, all then
outstanding options will become fully exercisable and any restrictions or other
conditions to the vesting of restricted shares or other equity awards will be
removed. "Change in control" is as defined in the equity plan, which excludes a
variety of transactions involving MidAmerican Holdings' ownership.
TRANSFERABILITY. Except as otherwise determined by the compensation committee,
awards granted under the equity plan may be transferred only by will or by the
laws of descent and distribution.
AMENDMENT AND TERMINATION. The equity plan may, at any time and from time to
time, be altered, amended, suspended, or terminated by the board of directors
or the compensation committee, in whole or in part, except that no amendment
that requires stockholder approval in order for the equity plan to continue to
comply with Section 162(m), state law, stock exchange requirements or other
applicable law will be effective unless the amendment has received the required
stockholder approval. In addition, no amendment may be made which adversely
affects any of the rights of any award holder previously granted an award,
without the holder's consent.
OUTSTANDING AWARDS. On , 1999, HomeServices granted to stock options
to acquire shares of common stock at an exercise price of $ . These stock
options vest .
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PRINCIPAL AND SELLING STOCKHOLDERS
The table below presents information regarding the beneficial ownership of the
common stock as of September 1, 1999 and as adjusted to reflect the sale of the
shares of common stock offered hereby by:
o each person known by HomeServices to be the beneficial owner of five
percent or more of its outstanding common stock;
o each of the executive officers of HomeServices listed in the Summary
Compensation Table above;
o each of the directors of HomeServices; and
o all directors and executive officers of HomeServices as a group.
Unless otherwise indicated, HomeServices believes that each beneficial owner
below has sole voting and investment power over such shares.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY SHARES SHARES OF COMMON STOCK
OWNED BEFORE THE BEING BENEFICIALLY OWNED
OFFERING SOLD(1) AFTER THE OFFERING
------------------------ ----------- -----------------------
NAME OF BENEFICIAL OWNER NUMBER(2) PERCENTAGE NUMBER NUMBER PERCENTAGE
- ----------------------------------------------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
MidAmerican Energy Holdings Company(3)......... 7,841,600 95.22% 1,562,500 6,279,100 60.24%
Ronald J. Peltier ............................. 153,036 1.85 -- 153,036 1.46
Jack W. Frost ................................. 50,000 * -- 50,000 *
R. Michael Knapp .............................. 153,036 1.85 -- 153,036 1.46
Arne M. Rovick ................................ 103,036 1.25 -- 103,036 *
Joseph J. Valenti ............................. -- -- -- -- --
David L. Sokol ................................ 50,000 * -- 50,000 *
Steven A. McArthur ............................ 50,000 * -- 50,000 *
Gregory E. Abel ............................... 50,000 * -- 50,000 *
Richard R. Jaros .............................. 50,000 * -- 50,000 *
W. David Scott ................................ 50,000 * -- 50,000 *
All executive officers and directors as a group
(15 persons) ................................. 709,108 8.21 -- 709,108 6.55
</TABLE>
- ----------
* Less than one percent.
(1) Represents shares of common stock to be sold by MidAmerican Holdings.
(2) Beneficial ownership of common stock owned before the offering includes
the fully vested options to purchase 50,000 shares of common stock
granted to each director of HomeServices.
(3) MidAmerican Holdings' address is 666 Grand Avenue, Des Moines, Iowa
50303.
(4) Messrs. Sokol, McArthur and Abel are officers of MidAmerican Holdings and
expressly disclaim beneficial ownership of any shares of HomeServices'
common stock owned by MidAmerican Holdings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MIDAMERICAN HOLDINGS
MidAmerican Holdings, headquartered in Des Moines, Iowa, has approximately
9,700 employees, and through its retail utility subsidiaries, MidAmerican
Energy Company in the United States and Northern Electric in the United
Kingdom, MidAmerican Holdings provides electric service to 2.2 million
customers and natural gas service to 1.2 million customers worldwide.
After giving effect to the merger and before the offering, MidAmerican Holdings
will own 95.2% of the common stock of HomeServices. After giving effect to the
offering, MidAmerican Holdings will own 60.2% of HomeServices' common stock, or
56.2% if the underwriters' over-allotment option is exercised in full. As a
result, MidAmerican Holdings will continue to have the power to elect the
entire board of directors of HomeServices and approve matters submitted to a
vote of stockholders.
Before the offering, MidAmerican Holdings provided limited management
assistance to HomeServices including some financial, accounting, legal and
human resources services. MidAmerican Holdings provided these services
intermittently and at arm's length. HomeServices paid MidAmerican Holdings a
total of $1,552,000 during 1998 and $1,105,000 for the six months ended June
30, 1999 pursuant to this arrangement. The costs for these services are charged
directly to HomeServices.
In connection with the offering, HomeServices and MidAmerican Holdings will
enter into the registration rights and service agreements summarized below.
While HomeServices believes that these agreements will have terms no less
favorable to HomeServices than could be obtained from unaffiliated third
parties, there can be no assurance that this will be the case.
The agreements summarized below are included as exhibits to the registration
statement of which this prospectus forms a part. The following summaries do not
contain all of the information contained in the exhibits.
REGISTRATION RIGHTS AGREEMENT
Pursuant to a registration rights agreement, HomeServices will grant to
MidAmerican Holdings certain "demand" and "piggyback" registration rights for
the registration under the Securities Act of 1933 of the shares of common stock
MidAmerican Holdings owns as described below. Under the registration rights
agreement, upon MidAmerican Holdings' request, HomeServices is required to use
its best efforts to register the shares.
MidAmerican Holdings will be entitled to request two demand registrations per
year of all or any portion of its common stock for so long as it owns at least
5.0% of the common stock of HomeServices. In addition, for so long as
MidAmerican Holdings owns at least 5.0% of the common stock of HomeServices,
MidAmerican Holdings may request HomeServices to use its reasonable efforts to
register shares of common stock held by it in other registrations initiated by
HomeServices on its own behalf or on behalf of any other stockholder of
HomeServices. All reasonable out-of-pocket costs and expenses, other than
underwriting discounts and commissions, of any registration under the
registration rights agreement will be paid by HomeServices. The registration
rights agreement will also contain customary provisions with respect to
registration procedures, underwritten offerings and indemnification and
contribution rights in connection with the registration of common stock on
behalf of MidAmerican Holdings.
SERVICES AGREEMENT
HomeServices and MidAmerican Holdings will enter into a services agreement
under which MidAmerican Holdings will provide management, advisory, financial,
accounting, legal, employee benefit plan and insurance administration and other
services to HomeServices. In consideration for these services, HomeServices is
required to pay MidAmerican Holdings a monthly fee in an amount equal to
$50,000, plus an amount for the reimbursement for all reasonable employee and
out-of-pocket costs and expenses incurred by MidAmerican Holdings in connection
with providing
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these services. Out-of-pocket costs and expenses reimbursable to MidAmerican
Holdings will not include any mark-up or profit factor for MidAmerican Holdings
but will include all indirect costs and an appropriate allocation for overhead
costs associated with performing these services.
MANAGEMENT INDEBTEDNESS
Messrs. Peltier, Knapp and Rovick, who are executive officers and employees of
HomeServices, were issued shares of common stock in HomeServices upon its
formation, with a corresponding note receivable recorded for the fair value of
the stock. The value of the issued shares and corresponding note receivable was
$381,000 each. The shares carry the same dividend and voting rights as the
shares held by MidAmerican Holdings. The officers and employees held a 5.0%
ownership interest as of June 30, 1999. See "Management--Employment
Agreements."
As certain performance levels are achieved over a five-year period, a portion
of the applicable note receivable balance, which consists of principal and
accrued interest, is forgiven and considered compensation to the officers and
employees. The amount accrued to the allowance for estimated forgiveness and
expensed, as compensation, in 1998 was $520,000 or $173,000 each. The balance
of the notes receivable, net of the allowance, at June 30, 1999 was $188,000
each. HomeServices charges interest on the outstanding note receivable balance
at a rate equal to its average annual borrowing rate, which was 6.87% for 1998.
Interest income recorded on this note was approximately $116,000 as of June 30,
1999.
INDEBTEDNESS WITH MIDAMERICAN HOLDINGS AND AFFILIATES
In May 1998, HomeServices entered into a revolving credit agreement with
MidAmerican Holdings to borrow funds from time to time, primarily to support
the acquisition of the predecessor and the nonpredecessor acquired companies.
The maximum indebtedness during the life of the agreement through June 30, 1999
was $54.2 million. The interest rate on borrowings is equal to the 30-day LIBOR
rate plus 1.0%, which was 5.94% at June 30, 1999. Interest expense recorded on
this agreement totaled $1.3 million through June 30, 1999. As of December 31,
1998 and June 30, 1999, there were no borrowings under this agreement. On June
24, 1999, the revolving credit agreement with MidAmerican Holdings was amended
to reduce MidAmerican Holdings' total commitment and HomeServices' borrowing
capacity thereunder from $100.0 million to $10.0 million. Amounts borrowed are
payable upon demand from MidAmerican Holdings. On August 16, 1999, HomeServices
borrowed $8.0 million from MidAmerican Holdings under the revolving credit
agreement to fund a portion of the acquisition of Long Realty.
In May 1998, HomeServices also entered into a revolving credit agreement with
MidAmerican Holdings to advance HomeServices' excess funds to MidAmerican
Holdings. The maximum amount advanced during the life of the agreement through
June 26, 1999 was $3.3 million. Interest accrued daily at 30 day LIBOR rate
plus 0.25%, which was 5.20% at June 30, 1999. Interest income recorded for
advances under this agreement totaled approximately $15,000 through June 30,
1999. The agreement was terminated effective June 26, 1999.
UNREGISTERED ISSUANCES OF STOCK
On July 13, 1999, HomeServices issued 1,000 shares of common stock to
MidAmerican Energy Holdings Company for consideration of $10.
On August 8, 1999, an aggregate of 2,149 shares of common stock of
HomeServices' predecessor were issued in connection with the acquisition of
Paul Semonin Realtors at a purchase price of $3,955.90 per share based on
MidAmerican Realty Service Company's estimated June 30, 1999 book value based
on preliminary financial results (which is equivalent to a purchase price of
$5.84 per share of HomeServices after giving effect to the exchange of 677.87
shares of HomeServices common stock for each share of MidAmerican Realty
Services Company common stock in the merger). Pursuant to a pre-existing
agreement among HomeServices' predecessors and its stockholders, all of the
stockholders were offered the opportunity to make a capital contribution in a
percentage equal to the
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percentage ownership held by each of the shareholders immediately prior to the
capital contribution to fund such acquisition. One of HomeServices' predecessor
stockholders, James Koolhof, declined to participate in the capital
contribution. Because Mr. Koolhof declined to make his pro rata share of such
capital contribution, the shares that were offered to Mr. Koolhof were
purchased by MidAmerican Holdings. The shares were issued to reflect the
capital contributions of the other stockholders and to dilute Mr. Koolhof's
interest as a result of his not making the contribution.
In May 1998, HomeServices' predecessor issued an aggregate of 338,936 shares of
common stock
at a purchase price of $4.50 per share to Ronald J. Peltier, R. Michael Knapp,
James Koolhof and Arne M. Rovick, who are all executive officers of
HomeServices or one of its subsidiaries, for an aggregate purchase price of
$1,525,657.
Prior to the offering, HomeServices intends to merge with MidAmerican Realty
Services Company, which is a 95.2% owned subsidiary of MidAmerican Energy
Holdings Company. HomeServices will be the surviving corporation in the merger.
In the merger, HomeServices intends to issue 677.87 shares of its common stock
for each share of common stock of MidAmerican Realty Services Company.
Accordingly, HomeServices will issue in the merger 7,841,600 shares to
MidAmerican Energy Holdings Company, 103,036 shares to R. Michael Knapp, 84,734
shares to James Koolhof, 103,036 shares to Ronald J. Peltier and 103,036 shares
to Arne M. Rovick.
LEASES WITH RELATED PARTIES
HomeServices has the following leases with its directors or executive officers,
or their affiliated entities. HomeServices believes that the terms of such
leases are no less favorable than the terms that could be obtained from
non-affiliated parties, though there can be no assurance that this in fact is
the case.
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<TABLE>
<CAPTION>
RELATIONSHIP TO HOMESERVICES'
LEASE INTERESTED PARTY HOMESERVICES 1998 RENT
- ----------------- -------------------- --------------------- ---------------
<S> <C> <C> <C>
Office lease Ronald J. Peltier, President and Chief $277,560
expiring partner in lessor Executive Officer;
March 31, 2001 entity Director
Office lease Ronald J. Peltier, President and Chief $165,520
expiring partner in lessor Executive Officer;
April 30, 2001 entity Director
Office lease Ronald J. Peltier, President and Chief $ 74,277
expiring lessor Executive Officer;
Jan. 31, 2005 Director
Office lease Ronald J. Peltier, President and Chief $179,446
expiring partner in lessor Executive Officer;
June 30, 2006 entity Director
Office lease Jack W. Frost, President and Chief $143,813
expiring trustee of lessor Executive Officer of
March 31, 2003 trust J.C. Nichols;
Director
Office lease Joseph J. Valenti, President and Chief $ 87,763
expiring partner in lessor Executive Officer of
Sept. 30, 2004 entity CBS HOME
Office lease Joseph J. Valenti, President and Chief $ 20,706
expiring partner in lessor Executive Officer of
Nov. 30, 2003 entity CBS HOME
Office lease Joseph J. Valenti, President and Chief $ 16,346
expiring partner in lessor Executive Officer of
Aug. 31, 2002 entity CBS HOME
</TABLE>
Additionally, HomeServices has entered into a ten-year office lease agreement to
commence on or before March 31, 2000, with an annual rent of $192,173.
Stephen E. Quinlan, President and Chief Executive Officer of Long Realty, is a
partner in the lessor entity.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, HomeServices will have:
o shares of common stock authorized, of which 10,422,943 shares of
common stock will be issued and outstanding or 10,751,068 shares if
the underwriters' over-allotment option is exercised in full; and
o shares of preferred stock authorized, of which none will be
issued and outstanding.
The following summary of the capital stock of HomeServices is qualified by
reference to HomeServices' restated certificate of incorporation and its
amended and restated bylaws, which will become effective before the closing of
the offering. Forms of HomeServices' restated certificate of incorporation and
amended and restated bylaws are filed as exhibits to the registration statement
that includes this prospectus.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock outstanding
at the time, the holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available for this purpose at the times
and in the amounts as the board of directors may from time to time determine.
Each stockholder is entitled to one vote for each share of common stock held on
all matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not provided for in HomeServices' restated certificate
of incorporation, which means that the holders of a majority of the shares
voted can elect all of the directors then standing for election. The common
stock is not entitled to preemptive rights and is not subject to conversion or
redemption. Upon the occurrence of a liquidation, dissolution or winding-up of
HomeServices, the holders of shares of common stock would be entitled to share
ratably in the distribution of all of HomeServices' assets remaining available
for distribution after satisfaction of all its liabilities and the payment of
the liquidation preference of any outstanding preferred stock. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, within the limitations and
restrictions stated in HomeServices' restated certificate of incorporation, to
provide for the issuance of shares of preferred stock, in one or more classes
or series, and to fix the rights, preferences, privileges and restrictions of
this preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series. The issuance of
preferred stock could have the effect of decreasing the market price of the
common stock and could adversely affect the voting and other rights of the
holders of common stock.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND HOMESERVICES'
RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BYLAWS
Some provisions of HomeServices' restated certificate of incorporation and
amended and restated bylaws, which provisions are summarized in the following
paragraphs, may be deemed to have an antitakeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS. HomeServices' board of directors is divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
These provisions, when coupled with the provision of HomeServices' restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may deter a
stockholder from removing
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<PAGE>
incumbent directors and simultaneously gaining control of the board of directors
by filling the vacancies created by such removal with its own nominees.
CUMULATIVE VOTING. HomeServices' restated certificate of incorporation
expressly denies stockholders the right to cumulate votes in the election of
directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. HomeServices' restated
certificate of incorporation eliminates the ability of stockholders to act by
written consent. HomeServices' amended and restated bylaws provide that special
meetings of HomeServices' stockholders may be called only by the chairman of
the board of directors or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. HomeServices' amended and restated bylaws provide that
stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at an annual
meeting of stockholders, must provide timely notice in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at
HomeServices' principal executive offices not less than 90 days nor more than
120 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; provided, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder in order to be timely must be received not
later than the close of business on the tenth day following the date on which
notice of the date of the annual meeting was mailed to stockholders or made
public, whichever first occurs. In the case of a special meeting of
stockholders called for the purpose of electing directors, timely notice by the
stockholder must be received not later than the close of business of the tenth
day following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. HomeServices' amended and restated bylaws also specify
certain requirements as to the form and content of a stockholder's notice.
These provisions may preclude stockholders from bringing matters before an
annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of HomeServices by means of a proxy contest, tender
offer, merger or otherwise.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. HomeServices' restated certificate of
incorporation imposes supermajority vote requirements in connection with
business combination transactions and the amendment provisions of HomeServices'
restated certificate of incorporation and amended and restated bylaws,
including those provisions relating to the classified board of directors,
action by written consent and the ability of stockholders to call special
meetings.
RIGHTS AGREEMENT
Under Delaware law, every corporation may create and issue rights entitling the
holders of such rights to purchase from the corporation shares of its capital
stock of any class or classes, subject to any provisions in its certificate of
incorporation. The price and terms of such shares must be stated in the
certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
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HomeServices has entered into a stockholder rights agreement. As with most
stockholder rights agreements, the terms of HomeServices' rights agreement are
complex and not easily summarized, particularly as they relate to the
acquisition of HomeServices' common stock and to exercisability.
This summary may not contain all of the information that is important to you.
Accordingly, you should carefully read HomeServices' rights agreement, which
has been filed as an exhibit to the registration statement of which this
prospectus forms a part.
HomeServices' rights agreement provides that each share of its prospective
common stock outstanding will have one right to purchase one one-hundredth of a
preferred share attached to it. The purchase price per one one-hundredth of a
preferred share under the stockholder rights agreement is four times the
average closing price of HomeServices' common stock for the first five days of
trading after the consummation of this offering.
Initially, the rights under HomeServices' rights agreement are attached to
outstanding certificates representing HomeServices' common stock and no
separate certificates representing the rights will be distributed. The rights
will separate from HomeServices' common stock and be represented by separate
certificates approximately 10 days after someone acquires or commences a tender
offer for 15% of HomeServices' outstanding common stock.
After the rights separate from HomeServices' common stock, certificates
representing the rights will be mailed to record holders of the common stock.
Once distributed, the rights certificates alone will represent rights.
All shares of HomeServices' common stock issued before the date the rights
separate from the common stock will be issued with the rights attached. The
rights are not exercisable until the date the rights separate from the common
stock. The rights will expire on the tenth anniversary of the date of the
completion of this offering unless earlier redeemed or exchanged by
HomeServices.
If an acquiror obtains or has the rights to obtain 15% or more of HomeServices'
common stock, then each right will entitle the holder to purchase a number of
shares of HomeServices' common stock equal to twice the purchase price of each
right.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value of twice the purchase
price if an acquiror obtains 15% or more of HomeServices' common stock and any
of the following occurs:
o HomeServices merges into another entity;
o an acquiring entity merges into HomeServices; or
o HomeServices sells more than 50% of its assets or earning power;
provided, however, that the foregoing will not include any transaction or
series of transactions pursuant to which MidAmerican Holdings sells, exchanges
or otherwise disposes of all or any portion of its common stock of
HomeServices, including, but not limited to, any public offering of
HomeServices' common stock by MidAmerican Holdings or a disposition of
HomeServices' common stock by means of a spin-off or other distribution to
MidAmerican Holdings' stockholders.
Under HomeServices' rights agreement, any rights that are or were owned by an
acquiror of more than 15% of HomeServices' outstanding common stock will be
null and void.
HomeServices' rights agreement contains exchange provisions which provide that
after an acquiror obtains 15% or more, but less than 50%, of HomeServices'
respective outstanding common stock, HomeServices' board of directors may, at
its option, exchange all or part of the then outstanding and exercisable rights
for common shares. In such an event, the exchange ratio is one common share per
right, adjusted to reflect any stock split, stock dividend or similar
transaction.
HomeServices' board of directors may, at its option, redeem all of the
outstanding rights under its rights agreement before the earlier of (1) the
time that an acquiror obtains 15% or more of HomeServices' outstanding common
stock or (2) the final expiration date of the rights agreement. The
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<PAGE>
redemption price under HomeServices' rights agreement is $0.01 per right,
subject to adjustment. The right to exercise the rights will terminate upon the
action of HomeServices' board ordering the redemption of the rights and the only
right of the holders of the rights will be to receive the redemption price.
Holders of rights will have no rights as HomeServices' stockholders, including
the right to vote or receive dividends, simply by virtue of holding the rights.
HomeServices' rights agreement provides that the provisions of the rights
agreement may be amended by the board of directors, without the approval of the
holders of the rights within the ten-day period after someone acquires or
commences a tender offer for 15% of HomeServices' outstanding common stock.
After this ten-day period, however, the rights agreement may not be amended in
any manner which would adversely affect the interests of the holders of the
rights, excluding the interests of an acquiror. In addition, HomeServices'
rights agreement provides that no amendment may be made to adjust the time
period governing redemption at a time when the rights are not redeemable.
HomeServices' rights agreement contains rights that have potential antitakeover
effects. The rights may cause substantial dilution to a person or group that
attempts to acquire HomeServices without obtaining consent of HomeServices'
board of directors or conditioning the offer on a substantial number of rights
being acquired or redeemed. Accordingly, the existence of the rights have the
potential to deter potential acquirors from making takeover proposals or tender
offers that are not negotiated with the board of directors. Nevertheless, the
rights are not intended to prevent a takeover, but rather are designed to
enhance the ability of HomeServices' board to negotiate with an acquiror on
behalf of all its stockholders. In addition, the rights should not interfere
with a proxy contest.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law imposes a three-year
moratorium on business combinations between a Delaware corporation and an
"interested stockholder" which is in general, a stockholder owning 15% or more
of a corporation's outstanding voting stock, or an affiliate or associate
thereof unless:
o prior to an interested stockholder becoming an interested stockholder,
the board of directors of the corporation approved either the business
combination or the transaction resulting in the interested stockholder
becoming an interested stockholder;
o upon consummation of the transaction resulting in an interested
stockholder becoming an interested stockholder, the interested
stockholder owns 85% of the voting stock outstanding at the time the
transaction commenced, excluding, from the calculation of outstanding
shares, shares beneficially owned by directors who are also officers
and certain employee stock plans; or
o on or after an interested stockholder becomes an interested
stockholder, the business combination is approved by the board of
directors and holders of at least 662/3% of the outstanding shares,
other than those shares beneficially owned by the interested
stockholder, at a meeting of stockholders.
Section 203 of the Delaware General Corporation Law applies to any corporation
incorporated in the State of Delaware unless the corporation expressly elects
not to be governed by such legislation.
LIMITATIONS ON DIRECTORS' LIABILITY
HomeServices' restated certificate of incorporation provides that no director
of HomeServices shall be liable to HomeServices or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
o for any breach of the director's duty of loyalty to HomeServices or
its stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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o in respect of certain unlawful dividend payments or stock redemptions
or repurchases; or
o for any transaction from which the director derived an improper
personal benefit.
The effect of these provisions is to eliminate the rights of HomeServices and
its stockholders, through stockholders' derivative suits on behalf of
HomeServices, to recover monetary damages against a director for breach of
fiduciary duty as a director, including breaches resulting from grossly
negligent behavior, except in the situations described above. These provisions
do not limit the liability of directors under federal securities laws.
LISTING
HomeServices has applied to have the common stock approved for quotation on The
Nasdaq Stock Market's National Market under the symbol "HMSV."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, L.L.C. Its address is 2323 Bryan Street, Suite 2300,
Dallas, Texas 75201-2656 and its telephone number is 1-800-635-9270.
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DESCRIPTION OF INDEBTEDNESS
The following is a summary of all material debt instruments of HomeServices.
The agreements summarized below are included as exhibits to the registration
statement of which this prospectus forms a part. The following summaries do not
contain all of the information contained in the exhibits.
REVOLVING CREDIT FACILITY
Prior to the offering, HomeServices was a party to a $25.0 million unsecured
revolving credit facility with a commercial bank. Before the completion of the
offering, HomeServices will enter into an amended and restated $75.0 million
revolving credit facility for which it has received commitments from its
existing commercial bank and other banks. The following is a summary of the
material terms and conditions of HomeServices' new revolving credit facility.
The new revolving credit agreement will have a term of three years and be
secured by a pledge of the capital stock of all of the existing and future
subsidiaries of HomeServices.
Under the amended and restated revolving credit facility, HomeServices may
borrow up to the maximum commitment of $75.0 million. However, the maximum
commitment will get reduced if HomeServices purchases any of the 7.12% senior
notes by the same percentage as any decrease in the amount of 7.12% senior
notes then outstanding. HomeServices may use borrowings under the amended and
restated revolving credit facility for general corporate purposes, including,
but not limited to, working capital, financings of up to $25.0 million in any
one year for non-hostile acquisitions of entities in a similar line of
business, capital expenditures and letters of credit. In addition, the amended
and restated credit facility will require the consent of the lenders for any
individual acquisition in excess of $18 million or to finance more than 55% of
any acquisition from the proceeds of bank debt.
At the option of HomeServices, each individual borrowing under the amended and
restated revolving credit facility may be designated and maintained as either a
prime rate loan or a LIBOR loan. Interest accrues on prime rate loans at the
prime lending rate of the agent bank. Interest accrues on LIBOR loans at a rate
equal to the British Bankers' Association interest settlement rate or, if not
available, by reference to the London interbank market rate, for United States
dollars plus a fixed spread of 1.25% to 2.50%, that varies based on
HomeServices' cash flow leverage ratio, which is the ratio of total debt then
outstanding to EBITDA for the preceding four fiscal quarters then ended.
Interest is payable at the earlier of the last day of each LIBOR interest
period or every 90 days.
The amended and restated credit facility will contain a number of covenants,
including limitations on (1) restricted payments and investments in excess of a
specified basket equal to $5 million plus 75% of cumulative consolidated net
income since June 30, 1998 plus proceeds of certain equity offerings; and (2)
incurrence of indebtedness unless consolidated debt does not exceed 65% of
consolidated capitalization following such incurrence. Other covenants will
include limitations on changes in lines of business, consolidations, mergers,
asset dispositions, liens, loans and advances, payment of dividends,
transactions with affiliates and modifications of HomeServices' certificate of
incorporation. HomeServices will also be required to maintain compliance with
financial performance covenants, including covenants containing a minimum
interest coverage ratio of 2.5 to 1, a minimum fixed charge coverage ratio of
1.25 to 1, a maximum total debt to EBITDA ratio of 3.25 to 1 and a minimum
consolidated net worth amount of $25.5 million plus 50% of cumulative
consolidated net income plus 50% of the net proceeds received from sales of
HomeServices' stock since January 1, 1998. In addition, the amended and
restated revolving credit facility requires HomeServices to offer to prepay all
borrowings outstanding thereunder, plus accrued interest, if MidAmerican
Holdings ceases to own at least 51% of the common stock of HomeServices.
Events of default under the credit facility include nonpayment of principal
when due, nonpayment of interest or fees following a five business day grace
period, material inaccuracy of representations and warranties, failure to
comply with covenants following a 30-day grace period, default under other
agreements, bankruptcy events, ERISA events and judgments against HomeServices
or its subsidiaries.
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7.12% SENIOR NOTES
In November 1998, HomeServices issued $35.0 million of 7.12% senior notes due
November 1, 2010 in a private placement. Interest is payable under the 7.12%
senior notes semiannually on May 1 and November 1. HomeServices is required to
prepay principal in the amount of $5.0 million per year commencing on November
1, 2004. At HomeServices' option, the 7.12% senior notes may be redeemed at any
time, in whole or in part so long as the amount being redeemed is at least
10.0% of the then outstanding aggregate amount, at a redemption price equal to
100.0% of the principal amount plus a make whole premium. To date, no senior
notes have been redeemed.
Upon execution of the amended and restated revolving credit facility, the 7.12%
senior notes will be senior indebtedness of HomeServices and secured by a
pledge of the capital stock of all of the subsidiaries of HomeServices and will
rank on an equal basis with borrowings outstanding under the amended and
restated revolving credit facility.
The notes purchase agreement governing the terms of the 7.12% senior notes
contains substantially the same restrictive covenants and events of default as
those that will be contained in the amended and restated revolving credit
facility that are discussed above.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the closing of the offering, HomeServices will have
10,422,943 shares of common stock issued and outstanding or 10,751,068 shares
if the underwriters' over-allotment option is exercised in full. All of the
shares of common stock to be sold in the offering will be freely tradeable
without restrictions or further registration under the Securities Act, except
that shares purchased by an affiliate of HomeServices will be subject to the
resale limitations of Rule 144. An affiliate of HomeServices is any person that
directly or indirectly controls, is controlled by, or is under common control
with, HomeServices.
In general, under Rule 144, within any three-month period, no more than 1% of
HomeServices' common stock then outstanding or the average weekly trading
volume in the common stock during the four calendar weeks preceding the date on
which the required notice of such sale was filed, whichever is greater, may be
sold by the following classes of person:
o any person, or persons whose shares are required to be aggregated, who
owns shares of common stock which have been held for at least one year
since such shares were sold by HomeServices or by one of its
affiliates in a transaction or chain of transactions not involving a
public offering; or
o any of HomeServices' affiliates who holds shares of common stock that
are not restricted securities.
Sales under Rule 144 are also subject to provisions concerning the manner and
notice of sale and availability of current public information about
HomeServices. HomeServices' affiliates must comply with the requirements of
Rule 144, including the one-year holding period requirement, to sell shares of
common stock that are restricted securities. If at least two years have elapsed
from the date restricted securities were acquired from HomeServices or one of
its affiliates, a holder of such restricted securities who is not its affiliate
at the time of the sale and has not been an affiliate of HomeServices at any
time during the three months before such sale would be entitled to sell such
shares without regard to the volume limitation and other conditions described
above.
In addition, after completing the offering, HomeServices intends to file a
registration statement on Form S-8 under the Securities Act covering the
shares of common stock reserved for issuance under its employee and
non-employee benefit plans. The registration statement on Form S-8 will
automatically become effective upon filing. Subject to vesting and the exercise
of the issued and outstanding options, shares registered under the registration
statement on Form S-8 will be freely tradeable and available for sale in the
open market.
Each of HomeServices, its executive officers and directors, and MidAmerican
Holdings has agreed not to offer, sell or otherwise dispose of any shares of
common stock, other than in the offering, or any security convertible into or
exchangeable or exercisable for shares of common stock, without the prior
written consent of U.S. Bancorp Piper Jaffray on behalf of the underwriters for
a period of 180 days after the date of this prospectus, unless such offer, sale
or disposition is expressly permitted by the underwriting agreement.
Before the offering, there was no public market for common stock. Although
HomeServices can make no prediction as to the effect, if any, that sales of
shares of common stock by MidAmerican Holdings would have on the market price
prevailing from time to time, sales of substantial amounts of common stock or
the availability of such shares for sale could adversely affect prevailing
market prices.
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UNITED STATES FEDERAL TAX
CONSIDERATIONS RELATING TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
common stock applicable to Non-United States Holders of such common stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder who
for United States federal income tax purposes is not a "United States person,"
as defined below. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant in light of such
Non-United States Holder's particular facts and circumstances, such as being a
U.S. expatriate, and does not address any tax consequences arising under the
laws of any state, local or non-United States taxing jurisdiction. Furthermore,
the following discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended, and administrative and judicial interpretations
thereof, all as in effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect. HomeServices has not and will not
seek a ruling from the Internal Revenue Service with respect to the United
States Federal income and estate tax consequences described below, and as a
result, there can be no assurance that the IRS will not disagree with or
challenge any of the conclusions set forth in this discussion. For purposes of
this discussion, the term "United States person" means:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof;
o an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
o a trust whose administration is subject to the primary supervision of
a United States court and which has one or more United States persons
who have the authority to control all substantial decisions of the
trust.
DIVIDENDS
If HomeServices pays a dividend, any dividend paid to a Non-United States
Holder of common stock generally will be subject to United States withholding
tax either at a rate of 30% of the gross amount of the dividend or such lower
rate as may be specified by an applicable tax treaty. Dividends received by a
Non-United States Holder that are effectively connected with a United States
trade or business conducted by such Non-United States Holder are exempt from
such withholding tax. However, such effectively connected dividends, net of
certain deductions and credits, are taxed at the same graduated rates
applicable to United States persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of common stock that is eligible for a reduced rate
of withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his common stock unless:
o such gain is effectively connected with a United States trade or
business of the Non-United States Holder which, in the case of a
corporate Non-United States Holder, must also be taken into account
for branch profits tax purposes;
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o the Non-United States Holder is an individual who holds such common
stock as a capital asset within the meaning of Section 1221 of the
Code, and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which such
sale or disposition occurs and certain other conditions are met; or
o HomeServices is or has been a "United States real property holding
corporation" for federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such
holder's holding period. HomeServices has determined that it was not,
is not and does not believe that it will become a "United States real
property holding corporation" for United States federal income tax
purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, HomeServices must report annually to the IRS the amount of dividends
paid, the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.
Dividends paid to a Non-United Sates Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or fails
to provide a correct taxpayer identification number and certain other
information to the payer. Backup withholding will generally not apply to
dividends paid to Non-United States Holders at an address outside the United
States on or prior to December 31, 1999, unless the payer has knowledge that
the payee is a United States person. Under recently finalized Treasury
Regulations regarding withholding and information reporting (the "Final
Regulations"), payment of dividends to Non-United States Holders at an address
outside the United States after December 31, 1999 may be subject to backup
withholding at a rate of 31% unless such Non-United States Holder satisfies
certain certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a Non-United States Holder of common stock
outside the United States to or through a foreign office of a broker will not
be subject to backup withholding but will be subject to information reporting
requirements if the broker is:
o a United States person;
o a "controlled foreign corporation" for United States tax purposes; or
o a foreign person, 50% or more of whose gross income for certain
periods is from the conduct of a United States trade or business,
unless such broker has documentary evidence in its files of the
holder's non-United States status and certain conditions are met or
the holder otherwise establishes an exemption.
In general, the recently promulgated Final Regulations, described above, do not
significantly alter the substantive withholding and information reporting
requirements but would alter the procedures for claiming the benefits of an
income tax treaty and change the certification procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders are urged to consult their
tax advisors regarding the effect, if any, of the Final Regulations on an
investment in the common stock. The Final Regulations are generally effective
for payments made after December 31, 1999.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
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ESTATE TAX
An individual Non-United States Holder who owned common stock at the time of
his death or had made certain lifetime transfers of an interest in common stock
will be required to include the value of such common stock in such holder's
gross estate for United States federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
The foregoing discussion is a summary of the principal federal income and
estate tax consequences of the ownership, sale or other disposition of common
stock by Non-United States Holders. Accordingly, investors are urged to consult
their own tax advisors with respect to the income tax consequences of the
ownership and disposition of common stock, including the application and effect
of the laws of any state, local, foreign or other taxing jurisdiction.
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UNDERWRITING
The underwriters named below have agreed to buy, subject to the terms of the
purchase agreement, the number of shares listed opposite their names below. The
underwriters are committed to purchase and pay for all the shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ---------------------------------------------------------- ------------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ................
Credit Suisse First Boston Corporation .........
---------
Total .................................................. 3,750,000
=========
</TABLE>
The underwriters have advised HomeServices and MidAmerican Holdings that they
propose to offer the shares to the public at $ per share. The underwriters
propose to offer the shares to certain dealers at the same price less a
concession of not more that $ per share. The underwriters may allow and the
dealers may reallow a concession of not more than $ per share on sales to
certain other brokers and dealers. After the offering, these figures may be
changed by the underwriters.
A prospectus in electronic format will be available on an Internet web site.
Other than the prospectus in electronic format, the information on that web
site is not part of this prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by HomeServices
or any underwriter and should not be relied on by prospective investors.
HomeServices has granted to the underwriters an option to purchase up to an
additional 328,125 shares of common stock and MidAmerican Holdings has granted
to the underwriters an option to purchase up to an additional 234,375 shares of
common stock, on a pro rata basis, at the same price to the public, and with
the same underwriting discount, as set forth in the table above. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus, but only to cover over-allotments, if any. To the
extent the underwriters exercise the option, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to purchase under the
purchase agreement.
The following table summarizes the underwriting fees and estimated expenses
HomeServices and MidAmerican Holdings will pay, assuming (1) the underwriters
do not exercise their overallotment option; and (2) the underwriters exercise
their overallotment option in full:
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by HomeServices ....................
Expenses payable by HomeServices
(including registration fees and fees of
financial printers, counsel and
accountants) ............................
Underwriting discounts and commissions
paid by MidAmerican Holdings ............
Expenses payable by MidAmerican
Holdings (including registration fees and
fees of financial printers, counsel and
accountants) ............................
</TABLE>
The underwriting fees were negotiated among HomeServices, MidAmerican Holdings
and the underwriters. It is currently anticipated that the underwriting fees
will equal between 6% and 7% of the aggregate initial public offering price.
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HomeServices and MidAmerican Holdings have agreed to indemnify the underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect of those liabilities. Such indemnification and contribution by
MidAmerican Holdings relates only to information in this prospectus provided by
MidAmerican Holdings.
The underwriters have informed HomeServices and MidAmerican Holdings that they
do not expect discretionary sales to exceed 5.0% of the shares of common stock
being offered.
HomeServices and each of its directors and executive officers and MidAmerican
Holdings have agreed to certain restrictions on their ability to sell
additional shares of our common stock for a period of 180 days after the date
of this prospectus. HomeServices has agreed not to directly or indirectly offer
for sale, sell, contract to sell, grant any option for the sale of, or
otherwise issue or dispose of, any shares of common stock, options or warrants
to acquire shares of common stock, or any related security or instrument,
without the prior written consent of U.S. Bancorp Piper Jaffray on behalf of
the underwriters. The agreements provide exceptions for:
o sales to underwriters pursuant to the purchase agreement;
o sales in connection with the exercise of options granted and the
granting of options under HomeServices' stock option plan and sales of
common stock under HomeServices' stock purchase plans;
o issuances of shares of common stock on conversion or exchange of
convertible or exchangeable securities or on exercise of warrants or
options outstanding on the date of the underwriting agreement;
o filing with the Commission a registration statement relating to shares
of common stock described in the preceding two clauses;
o pledges of shares of common stock by MidAmerican Holdings made to
secure debt issued by MidAmerican Holdings, if the pledgee agrees in
writing to be bound by the foregoing transfer limitations; and
o transfers of shares of common stock by a director or officer of
HomeServices to an immediate family member, a trust of which they are
a beneficiary, their estate or to any other person as a bona fide
gift, if the transferee agrees in writing to be bound by the foregoing
transfer limitations.
At the request of HomeServices, the underwriters have reserved for sale, at the
initial public offering price, up to approximately 10% of the shares of common
stock being sold in the offering for HomeServices' employees, directors,
officers and sales associates who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares. The reserved shares sold to directors and officers will be
subject to the sale restrictions described in the preceding paragraph.
HomeServices has applied to list its shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "HMSV."
Each of U.S. Bancorp Piper Jaffray and Credit Suisse First Boston Corporation
and their affiliates has provided customary financial advisory services to
MidAmerican Holdings and certain of their affiliates other than HomeServices,
for which they have received customary compensation and indemnification, and in
the future may provide such services. It is currently anticipated that an
affiliate of U.S. Bancorp Piper Jaffray will be a lender under HomeServices'
amended and restated $75 million dollar revolving credit facility.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price for the shares of common stock offered by
this prospectus was negotiated among HomeServices, MidAmerican Holdings and the
underwriters. The factors considered in determining the initial public offering
price include:
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o the information set forth in this prospectus and otherwise available
to the underwriters,
o the history of and the prospects for the industry in which
HomeServices competes,
o the ability of HomeServices' management,
o HomeServices' past and present operations,
o HomeServices' present state of development and its present financial
condition,
o HomeServices' historical results of operations,
o HomeServices' prospects for, and timing of, future earnings, the
recent market prices of, and recent demand for, securities of
generally comparable companies and
o the general condition of the securities markets at the time of the
offering.
There can be no assurance that the initial public offering price of the common
stock will correspond to the price at which the common stock will trade in the
public market subsequent to this offering or that an active public market for
the common stock will develop and continue after this offering.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their own account by
selling more shares of common stock than have been sold to them by HomeServices
and MidAmerican Holdings. The underwriters may elect to cover any such short
position by purchasing shares of common stock in the open market or by
exercising the over-allotment option granted to the underwriters. In addition,
the underwriters may stabilize or maintain the price of the common stock by
bidding for or purchasing shares of common stock in the open market and may
impose penalty bids. If penalty bids are imposed, selling concessions allowed
to syndicate members or other broker-dealers participating in the offering are
reclaimed if shares of common stock previously distributed in the offering are
repurchased, whether in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales of the
common stock. The magnitude or effect of any stabilization or other
transactions is uncertain. These transactions may be effected on The Nasdaq
Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for HomeServices by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Legal matters in connection with the sale of shares of common stock in
the offering will be passed upon for the underwriters by Chadbourne & Parke
LLP. Certain legal matters in connection with the sale of shares by MidAmerican
Holdings in the offering will be passed upon by Skadden, Arps, Slate, Meagher &
Flom LLP. Skadden, Arps, Slate, Meagher & Flom LLP has from time to time
represented, currently represents and may continue to represent MidAmerican
Holdings, the underwriters and their respective affiliates in connection with
legal matters. Chadbourne & Parke LLP has from time to time represented and may
continue to represent MidAmerican Holdings and its affiliates in connection
with legal matters.
EXPERTS
The financial statement of HomeServices.Com Inc. as of July 13, 1999 included
in this prospectus has been audited by PricewaterhouseCoopers LLP, independent
accountants, as stated in their report appearing in this prospectus and has
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of MidAmerican Realty Services Company
and subsidiaries, including the predecessor, as of December 31, 1998 and for
the periods ended May 27, 1998 and December 31, 1998 included in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants, as stated in their report appearing in this prospectus and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of J.C. Nichols Real Estate, now known as
J.C. Nichols Residential Inc., and subsidiaries as of December 31, 1997 and for
the years ended December 31, 1997 and 1996, and the eight months ended August
31, 1998, included in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing in this prospectus and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Iowa Realty Co., Inc. and subsidiaries
as of December 31, 1997 and for the years ended December 31, 1997 and 1996,
have been included in this prospectus and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Paul Semonin Company, now known as Paul Semonin
Realtors, as of December 31, 1998 and 1997, and for the years ended December
31, 1998 and 1997, included in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing in this prospectus and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of HOME Real Estate Company of Omaha for the period
May 8, 1998 through August 18, 1998, included in this prospectus have been
audited by PricewaterhouseCoopers LLP, independent accountants, as stated in
their report appearing in this prospectus and have been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Roy H. Long Realty Co., Inc., now
known as Long Realty, as of December 31, 1998 and for the year ended December
31, 1998, included in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing in this prospectus and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in the offering.
This prospectus is a part of the registration statement and does not contain
all the information in the registration statement, as permitted by the rules
and regulations of the SEC. Statements contained in this prospectus as to the
content of any contract, agreement or other document are not necessarily
complete. You should note that any statements in this prospectus as to the
content of any contract, agreement or other document filed as an exhibit to the
registration statement is not necessarily complete, and you should refer to the
copy of such contract, agreement or other document filed as an exhibit to the
registration statement for a complete statement of its terms. The registration
statement, and the reports and other information to be filed by HomeServices
with the SEC following the offering in accordance with the Securities Exchange
Act of 1934, can be inspected and copied at the principal office of the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and
at the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials
may be obtained from the SEC's website, http://www.sec.gov, and from the Public
Reference Room of the SEC at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees required by the SEC. Investors
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.
After the closing of the offering, HomeServices will be subject to the
informational requirements of the Securities Exchange Act of 1934 and will file
reports, proxy and information statements and other information with the SEC.
These reports, proxy and information statements and other information can be
inspected and copied at the addresses described above. HomeServices intends to
furnish to its stockholders annual reports containing audited consolidated
financial statements, including an opinion on the audited financial statements
expressed by HomeServices' independent auditors.
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENT OF HOMESERVICES.COM INC.
Report of Independent Accountants ..................................................... F-3
Balance Sheet as of July 13, 1999 ..................................................... F-4
Notes to Financial Statement .......................................................... F-5
CONSOLIDATED FINANCIAL STATEMENTS OF MIDAMERICAN REALTY SERVICES COMPANY
AND SUBSIDIARIES (INCLUDING PREDECESSOR)
Report of Independent Accountants ..................................................... F-6
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999 (unaudited) ..... F-7
Consolidated Statements of Income for the periods ended December 31, 1998 and May
27, 1998, the six months ended June 30, 1999 (unaudited) and May 28, 1998 through
June 30, 1998 (unaudited) ............................................................ F-8
Consolidated Statements of Changes in Stockholders' Equity for the periods ended
May 27, 1998 and December 31, 1998 and the six months ended June 30, 1999
(unaudited) .......................................................................... F-9
Consolidated Statements of Cash Flows for the periods ended December 31, 1998 and
May 27, 1998, the six months ended June 30, 1999 (unaudited) and May 28, 1998
through June 30, 1998 (unaudited) .................................................... F-10
Notes to Consolidated Financial Statements ............................................ F-11
CONSOLIDATED FINANCIAL STATEMENTS OF J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
Report of Independent Accountants ..................................................... F-26
Consolidated Balance Sheet as of December 31, 1997 .................................... F-27
Consolidated Statements of Income for the eight months ended August 31, 1998 and the
years ended December 31, 1997 and 1996 ............................................... F-29
Consolidated Statements of Changes in Partners' Capital for the years ended December
31, 1996 and 1997 and the eight months ended August 31, 1998 ......................... F-30
Consolidated Statements of Cash Flows for the eight months ended August 31, 1998 and
the years ended December 31, 1997 and 1996 ........................................... F-31
Notes to Consolidated Financial Statements ............................................ F-32
CONSOLIDATED FINANCIAL STATEMENTS OF IOWA REALTY CO., INC. AND SUBSIDIARIES
(INCLUDING EDINA REALTY HOME SERVICES)
Independent Auditors' Report .......................................................... F-38
Consolidated Balance Sheet as of December 31, 1997 .................................... F-39
Consolidated Statements of Income for the years ended December 31, 1997 and 1996 ...... F-40
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996 ........................................................... F-41
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996. F-42
Notes to Consolidated Financial Statements ............................................ F-43
FINANCIAL STATEMENTS OF PAUL SEMONIN COMPANY
Report of Independent Accountants ..................................................... F-53
Balance Sheets as of December 31, 1998 and 1997 ....................................... F-54
Statements of Income for the years ended December 31, 1998 and 1997 ................... F-55
Statements of Changes in Stockholders' Equity for the years ended December 31, 1998
and 1997 ............................................................................. F-56
Statements of Cash Flows for the years ended December 31, 1998 and 1997 ............... F-57
Notes to Financial Statements ......................................................... F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS OF HOME REAL ESTATE COMPANY OF OMAHA
Report of Independent Accountants .................................................. F-65
Statement of Income for the period from May 8, 1998 through August 18, 1998 ........ F-66
Statement of Changes in Stockholders' Equity for the period from May 8, 1998 through
August 18, 1998 ................................................................... F-67
Statement of Cash Flows for the period from May 8, 1998 through August 18, 1998 .... F-68
Notes to Financial Statements ...................................................... F-69
CONSOLIDATED FINANCIAL STATEMENTS OF ROY H. LONG REALTY CO., INC.
Report of Independent Accountants .................................................. F-71
Consolidated Balance Sheet as of December 31, 1998 ................................. F-72
Consolidated Statement of Income for the year ended December 31, 1998 .............. F-73
Consolidated Statement of Changes in Stockholders' Equity for the year ended
December 31, 1998 ................................................................. F-74
Consolidated Statement of Cash Flows for the year ended December 31, 1998 .......... F-75
Notes to Consolidated Financial Statements ......................................... F-76
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
HomeServices.Com Inc.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of HomeServices.Com Inc. at July 13,
1999, in conformity with generally accepted accounting principles. This
financial statement is the responsibility of the Company's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this statement in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall balance sheet presentation. We believe that our
audit of the balance sheet provides a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
July 13, 1999
F-3
<PAGE>
HOMESERVICES.COM INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JULY 13, 1999
ASSETS --------------
<S> <C>
Current Assets:
Cash ................................................................... $10
---
Total Assets ........................................................... $10
===
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity:
Common Stock, $.01 par, 1,000 shares authorized, 1,000 shares issued and
outstanding .......................................................... $10
---
Total Liabilities and Stockholder's Equity ............................. $10
===
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE>
HOMESERVICES.COM INC.
NOTES TO FINANCIAL STATEMENT
(1) NATURE OF OPERATIONS
HomeServices.Com Inc., (the Company), a Delaware corporation is a wholly
owned subsidiary of MidAmerican Energy Holdings Company (Parent). Currently,
the Company's only asset is the $10 cash received from Parent as consideration
for the issuance of 1,000 shares of the Company's common stock.
The Company was formed on July 13, 1999 for the purpose of merging with
MidAmerican Realty Services Company (Realty). Realty, formed in May 1998, is
currently 95.2% owned by Parent. Realty currently owns 100% of the capital
stock of Edina Realty Home Services of Minnesota, J.C. Nichols Real Estate,
Iowa Realty Co., Inc., CBS HOME Realty Co., Inc. and Paul Semonin Company.
Immediately prior to the consummation of the initial public offering of
the Company, Realty will merge with and into the Company, with the Company
being the surviving corporation. At the time of the merger each holder of
Realty common stock will receive a percentage of the Company's common stock
equal to the percentage of Realty common stock owned by such holder immediately
prior to the merger.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
MidAmerican Realty Services Company
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in stockholders' equity,
and of cash flows present fairly, in all material respects, the financial
position of MidAmerican Realty Services Company and its subsidiaries (the
"Company") at December 31, 1998 and the results of its operations and its cash
flows for the periods ended May 27, 1998 (Predecessor) and December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the
Company was formed on April 6, 1998. The Company had no substantive operations
prior to the acquisition of Iowa Realty Co., Inc. ("Iowa Realty") on May 27,
1998 and commenced operations on May 28, 1998. The results of operations,
changes in stockholders' equity and cash flows of Iowa Realty from January 1,
1998 through its acquisition by the Company are presented in the consolidated
financial statements and are designated as "Predecessor".
Kansas City, Missouri /s/ PricewaterhouseCoopers LLP
May 28, 1999
F-6
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1999
1998 (UNAUDITED)
ASSETS -------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 3,114 $ 11,544
Mortgage loans held for sale and other receivables, net of allowance of
$1,346 and $1,555...................................................... 17,320 12,477
Receivable from affiliates .............................................. 69 --
Cash held in trust ...................................................... 7,932 9,489
Income taxes receivable ................................................. 3,902 1,645
Other current assets .................................................... 2,074 1,789
-------- --------
34,411 36,944
-------- --------
Other assets:
Office property and equipment, net ...................................... 15,453 18,147
Intangible assets, net of accumulated amortization of $1,568 and $3,020.. 75,122 74,266
Investment in 50% or less owned entities ................................ 269 841
Held-to-maturity securities ............................................. 651 858
Available-for-sale security ............................................. 297 355
Deferred taxes .......................................................... 2,148 --
Other assets ............................................................ 169 590
-------- --------
94,109 95,057
-------- --------
Total assets ......................................................... $128,520 $132,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 5,448 $ 3,876
Accrued expenses ........................................................ 11,345 10,915
Payable to affiliates ................................................... 367 635
Cash held in trust ...................................................... 7,932 9,489
Current portion of agent profit sharing ................................. 433 433
Current portion of long-term debt ....................................... 3,436 3,162
Other current liabilities ............................................... 1,191 1,896
-------- --------
30,152 30,406
-------- --------
Other liabilities:
Deferred taxes .......................................................... -- 93
Long-term debt .......................................................... 58,009 56,405
Agent profit sharing .................................................... 5,074 5,069
Other noncurrent liabilities ............................................ 91 90
-------- --------
63,174 61,657
-------- --------
Total liabilities .................................................... 93,326 92,063
-------- --------
Commitments and contingencies (note 13) .................................. -- --
Stockholders' equity:
Common stock, no par; 1,000,000 shares authorized, 10,000 shares issued
and outstanding ....................................................... 10 10
Additional paid-in capital .............................................. 39,505 39,505
Notes receivable ........................................................ (896) (753)
Accumulated other comprehensive income (loss) ........................... 9 (16)
Retained earnings (accumulated deficit) ................................. (3,434) 1,192
-------- --------
Total stockholders' equity .............................................. 35,194 39,938
-------- --------
Total liabilities and stockholders' equity .............................. $128,520 $132,001
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY COMPANY
-------------- ----------------- --------------- --------------
MAY 28, 1998 SIX MONTHS MAY 28, 1998
THROUGH JANUARY 1, 1998 ENDED THROUGH
DECEMBER 31, THROUGH JUNE 30, 1999 JUNE 30, 1998
1998 MAY 27, 1998 (UNAUDITED) (UNAUDITED)
-------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Commission revenue ........................... $ 169,647 $74,893 $148,979 $26,244
Title fees ................................... 14,154 7,575 10,644 2,455
Other ........................................ 6,790 3,769 8,101 1,019
--------- ------- -------- -------
Total revenues .............................. 190,591 86,237 167,724 29,718
--------- ------- -------- -------
Operating expenses:
Commission expense ........................... 113,225 49,107 102,085 16,687
Amortization of pending real estate
sales contracts (note 2) .................... 18,271 -- -- 4,744
Salaries and employee benefits ............... 27,603 14,620 24,272 3,521
Occupancy .................................... 9,081 5,564 9,026 1,218
Business promotion and advertising ........... 8,632 5,184 7,218 1,419
Depreciation and amortization ................ 4,177 2,293 3,718 600
Operating, administrative and other .......... 13,949 5,758 11,726 1,720
--------- ------- -------- -------
Total operating expenses .................... 194,938 82,526 158,045 29,909
--------- ------- -------- -------
Other income (expense):
Interest income ............................... 595 169 308 82
Interest expense .............................. (1,929) (263) (2,083) (310)
--------- ------- -------- -------
Other income (expense), net ................. (1,334) (94) (1,775) (228)
--------- ------- -------- -------
Income (loss) before income taxes ........... (5,681) 3,617 7,904 (419)
Income taxes (benefit) ........................ (2,247) 1,664 3,278 (166)
--------- ------- -------- -------
Net income (loss) ........................... $ (3,434) $ 1,953 $ 4,626 $ (253)
========= ======= ======== =======
Net income (loss) per share:
Basic and Diluted ........................... $ (343.40) $ 0.41 $ 462.60 $ 25.30
========= ======= ======== =======
Weighted average shares outstanding ......... 10 4,748 10 10
========= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER EARNINGS
---------------------- PAID-IN NOTES COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE INCOME (LOSS) DEFICIT) TOTAL
------------- -------- ------------ ------------ --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor:
Balance, January 1, 1998 .............. 4,758,850 $47 $31,665 $ -- $ -- $ 5,079 36,791
Net income ............................ -- -- -- -- -- 1,953 1,953
Distribution to parent ................ -- -- -- -- -- (1,961) (1,961)
Share acquisition ..................... (64,692) (1) (699) -- -- -- (700)
Dividends ............................. -- -- -- -- -- (3,699) (3,699)
Capital contribution .................. -- -- 9,150 -- -- -- 9,150
--------- ----- ------- --------- ----- --------- ------
Balance, May 27, 1998 ................. 4,694,158 $46 $40,116 $ -- $ -- $ 1,372 $ 41,534
========= ===== ======= ========= ===== ========= ========
========================================
Company:
Balance, May 28, 1998 ................. -- $-- $ -- $ -- $ -- $ -- $ --
Comprehensive income (loss):
Net loss ............................. -- -- -- -- -- (3,434) (3,434)
Unrealized gain on
investments (gross $15, net
of $6 taxes)......................... -- -- -- -- 9 -- 9
--------- ----- ------- --------- ----- --------- --------
Total comprehensive income
(loss) ............................... -- -- -- -- -- -- (3,425)
Initial capitalization ................ 10,000 10 30,505 (1,525) -- -- 28,990
Capital contribution .................. -- -- 9,000 -- -- -- 9,000
Allowance for forgiveness of
notes receivable, net of
accrued interest ..................... -- -- -- 629 -- -- 629
--------- ----- ------- --------- ----- --------- --------
Balance, December 31, 1998 ............ 10,000 10 39,505 (896) 9 (3,434) 35,194
--------- ----- ------- --------- ----- --------- --------
Comprehensive income (loss):
Net income (unaudited) ............... -- -- -- -- -- 4,626 4,626
Unrealized loss on
investments (unaudited)
(gross $42, net of
$17 taxes)................. ......... -- -- -- -- (25) -- (25)
--------- ----- ------- --------- ----- --------- --------
Total comprehensive income
(unaudited) .......................... -- -- -- -- -- -- 4,601
Allowance for forgiveness of
notes receivable, net of
accrued interest (unaudited) ......... -- -- -- 143 -- -- 143
--------- ----- ------- --------- ----- --------- --------
Balance, June 30, 1999
(unaudited) .......................... 10,000 $10 $39,505 $ (753) $ (16) $ 1,192 $ 39,938
========= ===== ======= ========= ===== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY COMPANY
-------------- ----------------- --------------- --------------
MAY 28, 1998 SIX MONTHS MAY 28, 1998
THROUGH JANUARY 1, 1998 ENDED THROUGH
DECEMBER 31, THROUGH JUNE 30, 1999 JUNE 30, 1998
1998 MAY 27, 1998 (UNAUDITED) (UNAUDITED)
-------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ (3,434) $ 1,953 $ 4,626 $ (253)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 4,177 2,293 3,718 600
Amortization of pending real estate sales
contracts ......................................... 18,271 -- -- 4,744
Loss (gain) on sale of office property &
equipment ......................................... 197 (6) (2) --
Decrease in notes receivable ....................... 630 -- 143 --
Deferred income taxes .............................. (336) 79 2,415 92
Change in assets and liabilities net of effects
from purchase of subsidiaries:
Decrease (increase) in income taxes receivable..... (1,893) -- 2,470 (359)
Decrease (increase) in mortgage loans held for
sale and other receivables ...................... (7,287) (281) 4,912 910
Decrease (increase) in other assets ............... 728 1,252 (662) (1,565)
Increase (decrease) in accounts payable ........... (929) (315) (1,304) 668
Increase (decrease) in accrued expenses ........... 922 (261) (817) 3
Increase (decrease) in agent profit sharing ....... 1,169 (164) (5) --
Increase (decrease) in other liabilities .......... 213 441 704 174
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities ..................................... 12,428 4,991 16,198 5,014
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of subsidiaries, net of cash acquired ....... (96,478) -- (800) (70,139)
Proceeds from sale of subsidiary ..................... -- -- 70 --
Proceeds from sale of property and equipment ......... 2 9 68 --
Purchase of property and equipment ................... (2,650) (900) (4,938) (203)
Purchase of investments .............................. -- -- (290) --
--------- --------- --------- ---------
Net cash used in investing activities ........... (99,126) (891) (5,890) (70,342)
--------- --------- --------- ---------
Cash flows from financing activities:
Payment on long-term debt ............................ (7,753) (872) (378)
Proceeds from issuance of private placement notes..... 35,000 -- -- --
Net change in revolving credit facility .............. 25,000 -- (1,500) --
Proceeds from capital transactions ................... 37,990 -- -- 28,990
Distributions and dividends to parent ................ -- (1,068) -- --
Net change in note payable to parent ................. -- -- -- 43,143
Loan costs ........................................... (425) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities ..................................... 89,812 (1,940) (1,878) 72,133
--------- --------- --------- ---------
Net increase in cash and cash equivalents ............. 3,114 2,160 8,430 6,805
Cash and cash equivalents at beginning of period ...... -- 2,590 3,114 --
--------- --------- --------- ---------
Cash and cash equivalents at end of period ............ $ 3,114 $ 4,750 $11,544 $ 6,805
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
CORPORATE OVERVIEW
MidAmerican Realty Services Company (the Company), is a majority owned
subsidiary of MidAmerican Energy Holdings Company (Parent) that will be merged
into HomeServices.Com Inc. The Company was formed on April 6, 1998, to operate
primarily as a home services company specializing in real estate brokerage and
complimentary products. These complimentary products and services include
mortgage origination, title insurance, abstracting services, escrow services,
home warranty coverage, as well as property and casualty insurance products.
The Company operates in the eight contiguous midwest states of Minnesota, Iowa,
Kansas, Missouri, Nebraska, Wisconsin, North Dakota and South Dakota. The
Company entered into the real estate brokerage business in May 1998, with the
acquisition of Iowa Realty Co., Inc. The Company has approximately 4,300 agents
under contract across the eight contiguous states. See note 2 on acquisitions.
The accompanying financial statements include the operations of Iowa
Realty Co., Inc., including Edina Realty Home Service, prior to being acquired
by MidAmerican on May 27, 1998 and are referred to as the Predecessor. The
Company had no substantive operations prior to the acquisition of Iowa Realty
Co., Inc. and the financial statements of MidAmerican reflect its operations
from May 28, 1998, the date it commenced operations.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include MidAmerican Realty Services
Company and its active, wholly or majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL DATA
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows for the interim periods.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest-bearing deposits in depository institutions purchased with
maturity of three months or less, excluding cash held in trust.
Supplemental disclosure of cash flow information (in thousands) --
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------- --------
<S> <C> <C>
Cash paid for interest .......... $ 695 $1,292
Cash paid for taxes ............. $1,648 $4,258
</TABLE>
F-11
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental schedule of noncash investing and financing activities (in
thousands) --
<TABLE>
<CAPTION>
COMPANY
--------
<S> <C>
Acquisition payment in accounts payable ............... $ 919
Common stock issued to minority shareholders .......... $1,525
</TABLE>
INVESTMENTS
50 Percent or less owned entities
The Company accounts for its investment in 50 percent or less owned
entities using the equity method unless the Company does not have the ability
to exercise significant influence over the invested operating and financial
policies, in which case the investment is accounted for using the cost method.
Investment securities
Marketable debt securities are classified as available-for-sale or
held-to-maturity. Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities classified as
available-for-sale are stated at fair value, with unrealized gains and losses
reported in a separate component of stockholders' equity. Realized gains and
losses on sales of investments are included in other revenues. Debt securities
are classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Interest on debt securities is included in interest
income.
Certain investments in equity securities are accounted for as
available-for-sale securities and adjusted to market value with unrealized
gains or (losses) reported as a separate component of stockholders' equity.
OFFICE PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Major renewals and betterments are capitalized, while maintenance and repairs
that do not improve or extend the life of the respective assets are charged
against earnings in the current period.
Depreciation and amortization are provided on straight-line and
accelerated methods over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings ...................... 18-31 years
Furniture and fixtures ......... 3-10 years
Leasehold improvements ......... Shorter of the life of the underlying
lease or the estimated useful life of the
improvement.
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist of the excess cost over acquired net assets
(goodwill) which has been capitalized and is being amortized on a straight line
basis over 30 years. Whenever events or changes in circumstances indicate that
the carrying amount of goodwill may not be recoverable, the Company reviews the
carrying value of goodwill for impairment based on the operating cash flows
(undiscounted and without interest) of the related business unit. If the
projection of operating cash flows over the remaining life of the goodwill
proves to be less than the carrying value of goodwill, an impairment is
recognized. The amount of the impairment is calculated by taking the excess of
the goodwill over the present value of estimated expected future cash flows
over the remaining life of the goodwill using an appropriate discount rate.
Non-compete agreements are stated at cost and amortized over the lives of the
agreements.
F-12
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH HELD IN TRUST
The Company maintains separately designated trust accounts for home
buyers' earnest money and other deposits. The Company holds such funds until
sold properties are closed and subsequently disburses amounts in accordance
with the settlement instructions. At December 31, 1998, the Company held
approximately $7.9 million of funds in trust.
INCOME TAXES
Income taxes are accounted for using the asset and liability method, which
requires deferred taxes to be recognized by applying enacted statutory rates
applicable to future years to the differences between the carrying amounts and
the tax basis of existing assets and liabilities.
The Company files a consolidated income tax return with its Parent and
calculates its income tax provision as if it filed a separate return. The
Company remits to its Parent all current tax expense and receives from its
Parent the benefit of current income deductions and credits utilized.
REVENUE RECOGNITION
Commission income from real estate brokerage transactions and related
amounts due to agents are recognized when title has transferred from seller to
buyer.
Fees related to loan originations are recognized when the related loan is
delivered to the third party purchasers. At December 31, 1998, the Company had
$13.4 million in mortgage loans held for sale and other receivables related to
undelivered loans for which purchase commitments had been received.
BUSINESS PROMOTION AND ADVERTISING
Advertising and promotion costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgements regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgement and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The Company discloses the estimated fair value for its financial
instruments using the methods and assumptions set forth below:
Cash and cash equivalents
The carrying amount approximates the estimated fair value due to the
short-term nature of the investments.
Securities
Fair values of securities available for sale are based on quoted market
prices where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
F-13
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans held for sale and other receivables
Mortgage loans held for sale are carried at the lower of cost or market,
computed on the aggregate basis. Market value is computed using the outstanding
commitment price from the investors. The carrying amount approximates the
estimated fair value.
The carrying amount of other receivables approximates the estimated fair
value due to the short-term nature of the investments.
Long-term debt
Rates currently available to the Company for such borrowings with similar
terms and remaining maturities are used to discount the future cash flows to
estimate fair value for notes payable. The fair value of the private placement
notes was approximately $36 million at December 31, 1998. The carrying value of
the revolving credit facility at December 31, 1998 approximated fair value as
the facility has a floating rate based upon the current interest rate. The fair
value of the interest rate swap at December 31, 1998 was $10,000.
Derivative Financial Instruments
The Company uses interest rate swaps to reduce the impact of changes in
interest rates on variable-rate debt. The net effect of these agreements is
recorded as interest expense. Interest rate swap agreements effectively fix the
interest rates on a portion of the Company's variable-rate debt. These
agreements are not adjusted to market value as they are used only to manage
interest expense and the intent is to hold them until their termination date.
BRANDING AGREEMENTS
The Company recognizes branding revenue as cash is received under the
terms of the agreement and the earnings process is complete. Occasionally, the
Company may enter into branding agreements with third parties allowing a
subsidiary's tradename and logo to be associated with the activities conducted
by the third party. Revenue is recognized on these agreements when payment is
received and the earnings process is complete. Payments are received either
ratably over the term of the agreement or as a one time initial payment.
The Company entered into an agreement with a third party providing for
such party to use the Company's name in conjunction with the residential and
commercial activities conducted by the third party. The agreement also provides
the Company with a 60-day right of first refusal to purchase a controlling
interest in the third party's operation should a sale be initiated. The Company
has agreed to pay $10,000 monthly for these rights. The agreement was dated
October 13, 1998, and has a term of five years with an additional five-year
renewal option by the third party.
FRANCHISE SALES
The Company sells real estate brokerage franchises. In exchange for
certain fees, the Company provides the right to use certain names and related
trademarks. In addition, the Company provides brand marketing, operational
guidelines, sales and promotion materials and training. In 1998, the Company
recognized net revenue of $602,000 related to the franchise operation. Through
May 28, 1998, the Predecessor had recognized net revenues of $282,000 related
to the franchise operation.
Revenue from franchising activities includes an initial franchise fee as
well as continuing franchise fee revenue based on the gross commission income
realized by the franchisee. The initial franchise fee is recognized as revenue
when the franchise agreement is signed, at which time the Company has no
remaining financial obligation. Revenue related to ongoing fees is recognized
upon the sale of real estate. The Company provides brand marketing, operational
guidelines, sales promotion materials and training in support of its ongoing
franchise fees.
F-14
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 98-5, Reporting on the Costs of Start-Up
Activities. SOP No. 98-5 requires that the cost of start-up activities
previously capitalized be charged against income and reported as a cumulative
effect of a change in accounting principle, and further requires that such
costs subsequent to adoption be expensed as incurred. The Company adopted this
standard in 1999 and expensed applicable unamortized costs of $145,000
previously capitalized in connection with the start-up of all acquired
companies in the first quarter of 1999. As this amount is immaterial, the
cumulative effect of the change is included in depreciation and amortization
expense on the statement of income.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The statement will become effective for the Company in fiscal
2001. Adoption of this statement is not expected to have a material impact on
the Company's financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures About Segments
of an Enterprise and Related Information, which establishes standards for the
way companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosure about products
and services, geographic areas and major customers. The Company conducts its
business activity in a single operating segment. Commission revenue from real
estate brokerage services comprised approximately 87% and 89% of total revenue
for the predecessor and the Company, respectively. The Company has no other
single source of revenue greater than 7%.
(2) ACQUISITIONS
In 1998, the Company purchased the following companies from third parties:
<TABLE>
<CAPTION>
PURCHASE PRICE
ACQUISITION DATE COMPANY LOCATION (IN THOUSANDS)
- ------------------- -------------------------- ----------------- ---------------
<S> <C> <C> <C>
May 27, 1998 Iowa Realty Co., Inc., Des Moines, IA $78,300
including Edina Realty Minneapolis, MN
Home Services of Springfield, MO
Minnesota
(Predecessor)
August 18, 1998 HOME Real Estate Omaha, NE $ 5,200
Company of Omaha
August 18, 1998 CBS Real Estate Omaha, NE $ 5,300
Company
September 1, 1998 J.C. Nichols Real Estate Kansas City, MO $16,800
December 18, 1998 Nebraska Land Title & Omaha, NE $ 800
Abstract
</TABLE>
F-15
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each acquisition was accounted for as a purchase business combination. All
identifiable assets acquired and liabilities assumed were assigned a portion of
the acquisition price equal to their fair value at the date of acquisition. The
following table reconciles the fair value of assets acquired and the
liabilities assumed to the purchase price:
<TABLE>
<CAPTION>
HOME CBS NEBRASKA
IOWA REALTY REAL ESTATE J.C. NICHOLS REAL ESTATE LAND TITLE &
CO., INC. COMPANY REAL ESTATE COMPANY ABSTRACT TOTAL
------------- ------------- -------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets recorded
Pending real estate contracts .......... $ 14,231 $1,157 $ 1,831 $1,052 $ - - $ 18,271
Other receivables ...................... 12,281 225 4,799 52 13 17,370
Fixed assets ........................... 12,706 502 1,734 618 62 15,622
Cash, cash held in trust &
investments ........................... 12,701 452 2,106 504 357 16,120
Other intangibles and prepaids ......... 3,415 20 910 199 295 4,839
Goodwill ............................... 54,607 3,145 13,128 3,512 346 74,738
-------- ------ ------- ------ --------- --------
Fair value of assets acquired ......... 109,941 5,501 24,508 5,937 1,073 146,960
Liabilities assumed ..................... 31,641 301 7,708 637 273 40,560
-------- ------ ------- ------ --------- --------
Purchase price ........................ $ 78,300 $5,200 $16,800 $5,300 $ 800 $106,400
======== ====== ======= ====== ========= ========
</TABLE>
Upon acquisition of the real estate brokerage companies, the Company
established an asset for the value of pending real estate sales contracts. In
the accompanying statements of income, the asset was amortized over three
months, the period in which the related revenues are reflected. The value of
these contracts for 1998 business acquisitions was $18.3 million. As of
December 31, 1998, the entire value of the pending real estate sales contracts
has been amortized.
On May 8, 1998, the predecessor sold 80% of its 100% interest in HOME Real
Estate Holdings, Inc. (formerly Home Real Estate Company), valued at $3
million, to its minority shareholders. In addition, 64,692 shares of common
stock of the predecessor, held by the minority shareholders and valued at
$700,000, were exchanged for the remaining 20% of HOME Real Estate Holdings,
Inc. The proceeds from the sale of the 80% interest were received by the
predecessor's parent company and are reflected as a dividend in the statement
of changes in shareholders' equity. The sale of HOME Real Estate Holdings, Inc.
by the predecessor was at book value and therefore no gain or loss on the sale
was recorded.
Immediately prior to the acquisition of the predecessor by the Company,
the predecessor liquidated a joint venture with an investment balance of
approximately $3.1 million (the investment balance at December 31, 1997 was
$2.6 million). In connection with the liquidation, $1,168,000 was included in
assets purchased by the Company and $1,961,000 was transferred to the
predecessor's parent (AmerUs Group, Inc., an unrelated third party) as
reflected on the statement of changes in stockholder's equity. Income of
$477,000 was recorded for this investment in 1998 by the predecessor and is
included in other revenue on the statement of income.
Additionally, immediately prior to the acquisition of the predecessor by
the Company, the predecessor's parent acquired the $2,815,000 minority interest
in Edina Financial Services (a subsidiary of Edina Realty Home Services) for
cash of $9,150,000 which was recorded as a capital contribution and additional
goodwill of $6,335,000.
The acquisitions were partially funded through the issuance of 10,000
shares of common stock to its parent, valued at approximately $29 million.
Additional financing was provided through a $9 million capital contribution
from our parent, MidAmerican Energy Holdings Company, the issuance of private
placement notes and a revolving credit facility provided by third party
lenders.
The following pro forma financial information represents the unaudited pro
forma results of operations as if the aforementioned acquisitions had been
completed on January 1, 1998, after giving
F-16
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect to certain adjustments including increased amortization of goodwill
generated from the acquisitions. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which would have been achieved had these acquisitions been completed
as of January 1, 1998, nor are the results indicative of the Company's future
results of operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
(IN THOUSANDS)
-------------------
<S> <C>
Revenues ................... $325,994
Operating expenses ......... 324,902
Net (loss) ................. (1,602)
</TABLE>
(3) SALE-LEASEBACK TRANSACTIONS
The Company is party to sale-leaseback transactions for certain brokerage
offices. The leases are classified as operating leases, and gains realized on
the sales transactions were deferred and are being credited to income as
occupancy expense adjustments over the lease terms. At December 31, 1998,
deferred income related to these transactions was $14,000.
(4) LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
7.12% Private placement notes ......... $35,000
Revolving credit facility ............. 25,000
Other ................................. 1,445
-------
61,445
Less current portion .................. 3,436
-------
$58,009
=======
</TABLE>
PRIVATE PLACEMENT NOTES
In November 1998, the Company issued $35 million of 7.12% fixed rate
private placement senior notes due in annual increments of $5 million beginning
in 2004. Cash interest is due semi-annually on May 1 and November 1 of each
year.
REVOLVING CREDIT FACILITY
In November 1998, the Company obtained a $25 million, 5-year credit
facility of which the Company had drawn down the entire amount as of December
31, 1998. The credit availability declines $1.5 million every six months for
five years, and a commitment fee of 0.3% is charged on any unused portion of the
facility. The credit agreement has a variable interest rate (LIBOR) plus a
credit spread based on certain financial ratios. During 1998, the Company
entered into an interest rate swap agreement to reduce the impact of changes in
interest rates on a portion of its 5 year credit facility. At December 31, 1998,
the Company had outstanding one interest rate swap agreement with a financial
institution having a total notional principal amount of $12,500,000. This
agreement effectively changes the Company's interest rate exposure on
$12,500,000 of its floating credit facility to a fixed 6.3%. Interest rate swaps
are subject to market risk as interest rates fluctuate. In the event that
interest rates would rise above the fixed rate, the Company is exposed to credit
loss in the event of nonperformance by the other party to the interest rate swap
agreement. However, the Company does not anticipate nonperformance by the
counterparty.
F-17
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998 and June 30, 1999, respectively, the fair value of
this swap agreement was $9,721 and $236,884 using cash termination value.
Assuming a 1% increase in interest rates, the fair value of the swap agreement
would have been $293,454 and $458,864 at December 31, 1998 and June 30, 1999,
respectively.
The private placement notes and credit facility agreement contain various
financial covenants, including among other things, a minimum net worth of $25
million plus 25% of consolidated net earnings, maintenance of certain operating
ratios, 75% dividend payment restriction, and maximum allowable indebtedness to
net worth of 65% to 35%.
Aggregate maturities of notes payable for the next five years and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1999 .................... $ 3,436
2000 .................... 3,242
2001 .................... 3,261
2002 .................... 3,281
2003 .................... 13,225
Thereafter .............. 35,000
-------
$61,445
=======
</TABLE>
(5) MORTGAGE LOANS HELD FOR SALE AND OTHER RECEIVABLES
Mortgage loans held for sale and other receivables consisted of the
following at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Mortgage loans held for sale ......... $13,384
Other ................................ 5,282
-------
18,666
Less allowance ....................... 1,346
-------
$17,320
=======
</TABLE>
(6) OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consisted of the following at December 31,
1998 (in thousands):
<TABLE>
<S> <C>
Land .................................. $ 219
Buildings ............................. 3,929
Furniture and equipment ............... 13,914
-------
18,062
Less accumulated depreciation ......... 2,609
-------
$15,453
=======
</TABLE>
Depreciation expense for the Company in 1998 totaled $2,609,000 while the
predecessor charged $1,488,000 against income for depreciation through May 27,
1998.
F-18
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company rents office space for its various brokerage offices. Future
minimum rental payments under noncancelable operating leases at December 31,
1998, were as follows (in thousands):
<TABLE>
<CAPTION>
TO RELATED TO THIRD
PARTIES PARTIES TOTAL
------------ --------- ----------
<S> <C> <C> <C>
Year ending December 31:
1999 ........................ $ 3,181 $ 8,443 $11,624
2000 ........................ 2,809 7,034 9,843
2001 ........................ 1,579 5,429 7,008
2002 ........................ 1,269 4,519 5,788
2003 ........................ 980 3,082 4,062
Thereafter .................. 1,301 4,486 5,787
------- ------- -------
$11,119 $32,993 $44,112
======= ======= =======
</TABLE>
Total occupancy expense under noncancelable operating leases during 1998
was $4.9 million for the predecessor and $8.9 million for the Company.
(7) INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
Goodwill .............................. $74,738
Non-compete agreements ................ 1,350
Other intangibles ..................... 602
-------
76,690
Less accumulated amortization ......... 1,568
-------
$75,122
=======
</TABLE>
The Company amortized $1,568,000 in 1998 while the predecessor recorded
amortization of $805,000 for intangible assets through May 27, 1998.
(8) INVESTMENTS IN 50 PERCENT OR LESS OWNED ENTITIES
Condensed unaudited financial information for entities accounted for under
the equity method is as follows at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Total assets .............. $1,633
======
Total liabilities ......... $ 364
======
Net income ................ $ 521
======
</TABLE>
Net earnings in entities accounted for under the equity method were $-0-
and $260,000 for the predecessor and the Company, respectively.
(9) EMPLOYEE BENEFIT PLANS
CONTRIBUTION PLAN
The Company maintains various defined contribution salary deferral plans
covering substantially all employees under section 401(k) of the Internal
Revenue Code. The plans allow for matching and employer contributions not to
exceed the maximum allowable for tax purposes. The Company match
F-19
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ranges from 50 to 125 percent of the employee contribution for the first 4 to 6
percent of the employee's annual compensation depending upon the specific plan.
Additionally, one plan provides for a Company contribution equal to a percent
of annual compensation for each active, eligible employee on December 31 of
each year. Two other plans provide for additional Company contributions at the
discretion of the Company. For the period ended December 31, 1998, the Company
recognized expense of $1.2 million for the plans, while the predecessor
recognized expense of $100,000 through May 27, 1998.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company offered a post-retirement benefit plan, which provided certain
eligible participants with medical, dental and life insurance benefits. The
plan was terminated effective January 1, 1999. The plan was unfunded, and the
benefits were generally based on a combination of age and years of service at
retirement. The plan provided no vesting rights for participants. Upon
termination of the plan, there was one retiree collecting benefits. The medical
and dental insurance plan was contributory, with retirees' contributions
adjusted annually, and contained other cost sharing features such as a
deductible limit and coinsurance. The life insurance plan was reduced by 4
percent each month on a straight-line basis, upon retirement of the
participant, to a $10,000 minimum level. At December 31, 1998, the Company has
accrued $467,000 related to this plan. The Company had net post-retirement
benefit plan expense of $59,000 for the period from May 28, 1998 to December
31, 1998, while the predecessor recognized an expense of $55,000 through May
27, 1998.
DEFERRED COMPENSATION PLAN
Two subsidiaries of the Company provide a nonqualified deferred
compensation plan for certain sales agents. Under one plan, adopted in 1985 by
a prior owner, the board of directors of the subsidiary determines annually
which agents shall be entitled to participate, the benefit amount (based upon a
percentage of annual commissions paid to the participants) and the benefit
payment date. The plan is not funded. At December 31, 1998, the Company has
accrued approximately $4.7 million for estimated future payments to qualifying
sales agents. For 1998, the Company incurred expenses of $969,000 for the sales
agents' deferred compensation plan, while the predecessor recognized expenses
of $136,000 for this plan.
The second plan, adopted in 1994 by a prior owner, provides for a benefit
based on profits generated by participating agents. Benefits are payable after
ten years of continuous licensed contract with the subsidiary. At December 31,
1998, the Company has accrued $851,000 for estimated future payments to
qualifying sales agents. The Company holds U.S. Treasury Strips (principal
only) to fund this obligation. For 1998, the Company incurred expenses of
$200,000 for the sales agents' deferred compensation plan.
(10) INCOME TAXES
Income taxes for the year ended December 31, 1998, were as follows (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------- -----------
<S> <C> <C>
Current .......................... $1,585 $ (23)
Deferred ......................... 79 (2,224)
------ --------
Total expense (benefit) .......... $1,664 $ (2,247)
====== ========
</TABLE>
F-20
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liabilities as of December
31, 1998 were as follows (in thousands):
Deferred tax assets related to:
<TABLE>
<S> <C>
NOL carryforward ........................... $1,888
Bad debt reserves .......................... 334
Employee benefits .......................... 2,275
Self-insurance reserves .................... 377
Deferred gain on real estate sales ......... 87
Other ...................................... 83
------
Total deferred tax asset .................. 5,044
------
</TABLE>
Deferred tax liabilities related to:
<TABLE>
<S> <C>
Intangibles ............................. 2,824
Depreciable property .................... 72
-----
Total deferred tax liabilities ......... 2,896
-----
Net deferred tax asset ................. $2,148
======
</TABLE>
The Company has a net operating loss carryforward at December 31, 1998 of
$4,651,000 which will expire commencing in 2019 and is available to offset
future taxable income.
The following table is a reconciliation between the effective income tax
rate indicated by the Consolidated Statement of Income and the statutory
federal income tax rate for the year ended December 31, 1998:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------- ----------
<S> <C> <C>
Statutory federal income tax rate ....................... 35.0% 35.0%
State income tax, net of federal income tax benefit ..... 7.0 5.4
Amortization of acquisition costs ....................... -- 0.3
Other ................................................... 4.0 (1.1)
---- ----
Effective federal and state income tax rate ............. 46.0% 39.6%
==== ====
</TABLE>
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax assets that management believes will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. In order to fully realize the deferred tax assets, the
Company will need to generate future taxable income. Based upon the levels of
historical taxable income and projections for future taxable income, management
believes it is more likely than not the Company will realize the benefits of
the deferred tax assets and, therefore, no such valuation allowance has been
established.
F-21
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RELATED-PARTY TRANSACTIONS
Related parties consist of entities associated by common ownership or
controlled by officers or directors of the Company. The Company had the
following balances and transactions with related parties during the year ended
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------- -----------
<S> <C> <C>
Assets:
Advances receivable ...................... $69
====
Liabilities:
Accounts payable ......................... $354
Accrued expenses ......................... 13
-----
$367
=====
Stockholders' equity:
Notes receivable for shares sold ......... $896
=====
Revenues:
Title fees ............................... $ 387 $ - -
Other .................................... 11 --
------ -------
$ 398 $ - -
====== =======
Expenses:
Occupancy ................................ $ 292 $913
Corporate allocations .................... 359 1,552
------ --------
$ 651 $2,465
====== =========
Other income (expense):
Interest income .......................... $ 25 $ 64
Interest expense ......................... (485) (1,246)
------ ---------
$ (460) $(1,182)
====== =========
</TABLE>
Certain officers and employees of the Company were issued shares of common
stock in the Company upon its formation, with a corresponding receivable
recorded for the fair value of the stock. The value of the 500 issued shares
and corresponding receivables was $1.5 million. The shares carry the same
dividend and voting rights as the shares held by the Parent. The officers and
employees held a 5% ownership interest as of December 31, 1998.
As certain performance levels are achieved over a five-year period, a
portion of the receivable balance is forgiven and considered compensation to
the officers and employees. In 1998, the amount accrued to the allowance for
estimated forgiveness and expensed as compensation was $629,000. The balance of
the notes receivable at December 31, 1998 was $896,000. The Company charges
interest on the outstanding receivable balance at a rate equal to its average
annual borrowing rate (6.87% at December 31, 1998). Interest income recorded on
the notes was $64,000 in 1998.
As of December 31, 1998, the Company had advanced its excess funds to
affiliated companies. Interest accrues daily at LIBOR plus 25 basis points
(6.62% at December 31, 1998) and is receivable upon demand.
In May 1998, the Company entered into a $100 million revolving credit
agreement with its parent to borrow funds from time to time. The interest rate
on borrowings is equal to the 30-day LIBOR rate plus 1%. Interest expense
recorded on this agreement totaled $1.2 million through December 31, 1998. No
outstanding debt remained at December 31, 1998.
F-22
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is charged for direct costs incurred by the parent on its
behalf. In 1998 these costs were comprised of direct labor costs for legal,
accounting and human resource services of $394,000, professional fees of
$293,000, airplane usage of $25,000, as well as advertising fees and other of
$169,000. The Company has also allocated indirect costs from its parent for
corporate overhead such as executive costs, directors fees, and parent
interest. The Parent allocates indirect costs to its subsidiaries based on
their individual total assets and payroll. In 1998 the Company recorded
indirect costs of $671,000. Management believes this method for allocating
indirect cost is reasonable, and the costs reasonably approximate those costs
that would have been incurred on a stand-alone basis. The Parent has not
incurred or recorded any debt that is directly attributed to the Company or any
of its subsidiaries.
(12) INVESTMENT SECURITIES
The investment securities held at December 31, 1998 were (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ------------ ------------ ------
<S> <C> <C> <C> <C>
Available-for-sale:
Highwoods Properties Inc. ......... $288 $ 9 $ -- $297
==== ==== ====== ====
Held-to-maturity:
U.S. Treasury Strips (principal
only) ................................... $364 $ 90 $ -- $454
Agency obligation .................. 287 10 -- 297
---- ---- ------ ----
$651 $100 $ -- $751
==== ==== ====== ====
</TABLE>
The maturities of held-to-maturity investment securities and their
approximate fair value at December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
FAIR
COST VALUE
------ ------
<S> <C> <C>
Due in one year or less ........................ $ -- $ --
Due after one through five years ............... 287 297
Due after five years through ten years ......... 364 454
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of lawsuits, claims and assessments
arising from the operation of its business. While the results of lawsuits or
other matters against the Company cannot be predicted with certainty,
management, in consultation with legal counsel, does not expect these matters
to have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The agreements generally continue
for a period of one month to four years, and provide for severance payments
under certain circumstances. The agreements include a covenant against
competition with the Company, which extends for a period of time after
termination for any reason. As of December 31, 1998, if all employees under
contract were to be terminated by the Company without good cause, the Company's
liability would be approximately $9.6 million.
The Company assumed an outstanding contingent obligation as part of the
J.C. Nichols Real Estate asset purchase. The obligation related to an
acquisition of a residential real estate brokerage
F-23
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operating by J.C. Nichols Real Estate Co. on May 14, 1998. J.C. Nichols paid
$463,000 cash at closing and is to pay $20,000 per month for a period of twelve
months beginning July 1, 1998, for the balance of the purchase price of
$240,000. In addition, J.C. Nichols is to pay, as a monthly referral fee, a
percentage of gross profit generated by sales agents of the Seller who join
J.C. Nichols. Sales generated by these agents during the thirty-nine months
after the date of the purchase are subject to the following referral fee on
gross profit:
15% of the closed transactions within the first 12 months
10% of the closed transactions within the next 12 months
5% of the closed transactions within the last 15 months
J.C. Nichols has guaranteed that the referral fees will be no less than
$204,000. The monthly referral fees are reduced to the extent of the $20,000
monthly payments for the acquisition. Any balance due shall be paid to the
Seller at the end of the first year. If note payments exceed the amount of the
referral fees during the first twelve months, the excess will be carried
forward to apply to referral fees during subsequent months. The referral fees
are expensed as the related revenue is recognized.
The J.C. Nichols Real Estate asset purchase agreement also requires
certain installment payments be made, after the closing date, based on certain
profitability levels achieved. The payments are required 60 days after the
close of calendar year 1998, 1999 and 2000. The maximum amount payable under
the agreement is $500,000 per year. These payments will be recorded as
additional costs of acquisition.
The CBS Real Estate Company stock purchase agreement requires certain
installment and retention payments after the closing date based on agent
retention and profitability levels. These payments are required 60 days, 120
days and 17 months after the close date. A $250,000 installment payment was
made in late 1998, with subsequent net installment payments of $200,000 made in
early 1999. A final retention payment not to exceed $100,000 is due 17 months
from the closing date based on certain levels of retained agent profitability.
These payments have been and will be recorded as additional costs of
acquisition.
Through its mortgage subsidiary, the Company had commitments to sell
mortgage loans to investors of $13.4 million at December 31, 1998 and
$6.8 million at June 30, 1999.
Commitments to sell mortgage loans to investors are contracts in which the
Company agrees to deliver mortgage loans at specific future dates at specified
prices or yields. Risks may arise from the possible inability of counterparties
to meet the terms of their contracts.
(14) SUBSEQUENT EVENTS (UNAUDITED)
On June 15, 1999, management at CBS HOME negotiated a reduction in the
annual salary paid to two non-executive employees under four year employment
agreements. As a result, the annual salary for the employees will be reduced to
$50,000 from $175,000 over the remaining term (39 months) of the employment
agreements. These agreements were entered into at the time of the acquisition
by the Company. These individuals are required to pay back a portion of the
lump sum amount if they leave the Company prior to the end of the employment
agreements. This lump sum payment was recorded as a prepaid expense included
within other assets and will be amortized straight line over the remaining term
of the employment agreements.
In June 1999, the revolving credit agreement with the Company's parent (see
note 11) was amended to reduce the amount available under the agreement from
$100 million to $10 million.
In June 1999, the Company signed a purchase agreement to acquire Paul
Semonin Company, a Louisville, Kentucky real estate brokerage firm with 11
offices and a leading market share in Louisville, and also operates in
Lexington, Kentucky and southern Indiana. This transaction closed on July 8,
1999.
F-24
<PAGE>
MIDAMERICAN REALTY SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 23, 1999, the Company closed the purchase of Roy H. Long Realty
Co., Inc. (Long Realty), a Tucson, Arizona based real estate agency and
brokerage business. Long Realty has approximately 853 sales associates working
from 12 branch offices in Arizona.
The following pro forma financial information represents the unaudited pro
forma results of operations as if the aforementioned acquisitions, and the
acquisitions described in note 2, had been completed on January 1, 1998, after
giving effect to certain adjustments including increased amortization of
goodwill generated from the acquisitions. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
the results of operations which would have been achieved had these acquisitions
been completed as of January 1, 1998, nor are the results indicative of the
Company's future results of operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
(IN THOUSANDS)
-------------------
<S> <C>
Revenues .......................... $394,430
Operating expenses ................ 393,186
Net (loss) ........................ (1,220)
</TABLE>
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
J.C. Nichols Real Estate
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in partners' capital, and
of cash flows present fairly, in all material respects, the financial position
of J.C. Nichols Real Estate and its subsidiaries (the "Company") at December
31, 1997 and the results of its operations and its cash flows for the eight
months ended August 31, 1998 and the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Kansas City, Missouri /s/ PricewaterhouseCoopers LLP
June 30, 1999
F-26
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
ASSETS -------------
<S> <C>
Current assets:
Cash and cash equivalents ....................................................... $ 542
Cash held in trust .............................................................. 781
Commission revenue receivable ................................................... 197
Mortgage loans held for sale .................................................... 4,952
Other accounts receivable, net of allowance for uncollectible accounts of $3..... 95
Notes receivable, net of allowance for uncollectible notes of $4................. 109
Current portion of held-to-maturity securities .................................. 147
Prepaid expenses ................................................................ 147
------
Total current assets ......................................................... 6,970
------
Property and equipment:
Furniture and fixtures .......................................................... 1,740
Computers and electronic equipment .............................................. 851
Leasehold improvements .......................................................... 127
------
2,718
Less accumulated depreciation ................................................... 1,493
------
Net property and equipment ................................................... 1,225
------
Other assets:
Held-to-maturity securities ..................................................... 364
Available-for-sale security ..................................................... 369
Investment in less than 50% owned entity ........................................ 30
Other noncurrent assets ......................................................... 18
------
Total other assets ........................................................... 781
------
Total assets ................................................................. $8,976
======
</TABLE>
F-27
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
LIABILITIES AND PARTNERS' CAPITAL -------------
<S> <C>
Current liabilities:
Short-term bank borrowings ........................ $4,409
Cash overdraft .................................... 132
Accounts payable .................................. 227
Accrued commissions ............................... 135
Accrued expenses .................................. 501
Deposits on loans in process ...................... 97
Cash held in trust ................................ 781
Current portion of long-term debt ................. 88
Other current liabilities ......................... 7
------
Total current liabilities ...................... 6,377
------
Long-term liabilities:
Long-term debt .................................... 421
Deferred compensation ............................. 651
------
Total long-term liabilities .................... 1,072
------
Commitments and contingencies (note 10) ............ --
Minority interest in subsidiaries .................. 55
------
Partners' capital:
Partners' capital ................................. 1,211
Accumulated other comprehensive income ............ 261
------
Total partners' capital ........................ 1,472
------
Total liabilites and partners' capital ......... $8,976
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Commission revenue ....................................... $25,715 $27,860 $25,538
Other .................................................... 2,163 2,314 1,655
------- ------- -------
Total revenues ......................................... 27,878 30,174 27,193
------- ------- -------
Operating expenses:
Commission expense ....................................... 18,173 19,738 17,805
Salaries and employee benefits ........................... 3,227 3,982 3,378
Occupancy ................................................ 962 1,117 1,331
Business promotion and advertising ....................... 1,291 1,409 1,268
Depreciation and amortization ............................ 292 344 227
Operating, administrative and other ...................... 1,786 1,967 1,353
------- ------- -------
Total operating expenses .............................. 25,731 28,557 25,362
------- ------- -------
Other income (expense):
Interest income .......................................... 40 91 72
Other income ............................................. 32 7 --
Interest expense ......................................... (44) (103) (63)
Other expense ............................................ -- (4) --
Minority interest ........................................ (97) (60) (15)
------- -------- -------
Net other expense ..................................... (69) (69) (6)
------- -------- ---------
Net income ............................................ $ 2,078 $1,548 $1,825
======= ======== ========
Income before income taxes ............................... $ 2,078 $1,548 $1,825
Pro forma provision for income taxes (unaudited) ......... 792 598 704
------- -------- --------
Pro forma net income (unaudited) ...................... $ 1,286 $ 950 $1,121
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PARTNER'S PARTNER'S COMPREHENSIVE
CAPITAL-JCN CAPITAL-NM INCOME TOTAL
------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 ............... $ 221 $ 330 $ 14 $ 565
--------
Comprehensive income:
Net income ............................ 730 1,095 1,825
Unrealized gain on investment ......... 48 48
--------
Total comprehensive income ............ 1,873
Capital distributions .................. (400) (600) (1,000)
------ -------- --------
Balance, December 31, 1996 ............. 551 825 62 1,438
--------
Comprensive income:
Net income ............................ 619 929 1,548
Unrealized gain on investment ......... 199 199
--------
Total comprehensive income ............ 1,747
Capital contributions .................. 187 187
Capital distributions .................. (760) (1,140) (1,900)
------ -------- --------
Balance, December 31, 1997 ............. 410 801 261 1,472
--------
Comprehensive income:
Net income ............................ 831 1,247 2,078
Unrealized loss on investment ......... (81) (81)
--------
Total comprehensive income ............ 1,997
Capital distributions .................. (837) (1,255) (2,092)
------ -------- --------
Balance, August 31, 1998 ............... $ 404 $ 793 $ 180 $ 1,377
====== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS YEAR ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
AUGUST 31, 1998 1997 1996
----------------- -------------- -------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 2,078 $ 1,548 $ 1,825
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 292 344 227
Minority interest in subsidiaries ..................... 97 60 15
Noncash compensation expense .......................... -- 187 --
Deferred compensation expense ......................... -- 171 185
Change in current assets and liabilities (net of
acquisition):
(Increase) decrease in:
Commission revenue receivable ...................... (453) (197) 107
Mortgage loans receivable .......................... 927 (855) (1,722)
Other accounts receivable .......................... 24 22 (8)
Prepaid expenses ................................... (38) -- (15)
Other assets ....................................... 7 (14) --
Increase (decrease) in:
Accounts payable ................................... 2,398 (35) 105
Accrued commissions ................................ 354 104 14
Accrued expenses ................................... (416) (25) 228
Deposits on loans in process ....................... (49) (85) (40)
Other current liabilities .......................... (7) 5 (4)
---------- -------- ------------
Net cash provided by (used in) operating
activities ...................................... 5,214 1,230 917
--------- -------- ------------
Cash flows from investing activities:
Purchases of property and equipment ..................... (337) (564) (471)
Proceeds from sale of property and equipment ............ 4 -- 52
Acquisition of business ................................. (463) -- --
Proceeds from notes receivable .......................... 58 52 (102)
Purchase of investments ................................. (140) (61) (319)
--------- -------- ------------
Net cash used in investing activities ................. (878) (573) (840)
--------- -------- ------------
Cash flows from financing activities:
Payments on long-term debt .............................. (95) (51) (62)
Net increase in short-term bank borrowings .............. (3,201) 2,075 766
Change in cash overdraft ................................ (132) (1,344) 1,167
Distributions to partners ............................... (1,213) (1,900) (1,000)
Distributions to minority interest shareholders ......... (9) (27) (56)
---------- -------- ------------
Net cash provided by (used in) financing
activities ........................................... (4,650) (1,247) 815
--------- -------- ------------
Net increase (decrease) in cash .................... (314) (590) 892
Cash and cash equivalents at beginning of period ......... 542 1,132 240
--------- -------- ------------
Cash and cash equivalents at end of period ............... $ 228 $ 542 $ 1,132
========= ======== ============
Supplemental cash flow information:
Interest paid ............................................ $ 44 $ 103 $ 60
========= ======== ============
Noncash investing activity:
Capital lease obligations ............................... $ -- $ -- $ 23
========= ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND BASIS OF PRESENTATION
J.C. Nichols Real Estate (the Company) operates primarily as a home
services company specializing in residential real estate brokerage, specialized
services for building new homes, and complimentary products, which include
mortgage origination, home inspection/warranty assistance and relocation
assistance. The Company has over 650 sales associates working from 16 branch
offices located in Kansas and Missouri.
The consolidated financial statements include the accounts, after
inter-company eliminations, of J.C. Nichols Real Estate, its majority owned
subsidiary, Plaza Financial Services (which owns 90% of Plaza Mortgage
Services), and its majority owned subsidiary, J.C. Nichols Alliance. J.C.
Nichols Alliance markets J.C. Nichols Real Estate franchises to cities in
Missouri and Kansas.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
On August 31, 1998, the Company sold all of its assets to MidAmerican
Realty Services for $16,500,000. The asset purchase agreement also requires
certain installment payments be made after the closing date based on certain
profitability levels achieved. The payments are required 60 days after the
close of calendar years 1998, 1999 and 2000. The maximum amount payable under
the agreement is $500,000 per year. In February 1999, a $500,000 installment
was made to J.C. Nichols in accordance with the purchase agreement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest-bearing deposits in depository institutions purchased with a
maturity of three months or less, excluding cash held in trust.
CASH HELD IN TRUST
Balances of $781,000 at December 31, 1997 are restricted from use for
general operations and are held in a trust as escrow funds from real estate
transactions.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Major renewals and betterments are capitalized, and maintenance and repairs
which do not improve or extend the life of the respective assets are charged
against earnings in the current period.
Depreciation and amortization are provided on straight-line and
accelerated methods over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures ..................... 5-10 years
Computers and electronic equipment ......... 3-5 years
Leasehold improvements ..................... 5-10 years
</TABLE>
F-32
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENTS
Less Than 50 Percent Owned Entity
The investment in Reliance Relocation Services consists of a small common
stock interest in a broker-to-broker real estate referral network specializing
in relocation services. The investment is carried at cost, which approximates
market value.
Investment Securities
Marketable debt securities are classified as available-for-sale or
held-to-maturity. Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities classified as
available-for-sale are stated at fair value, with unrealized gains and losses
reported in a separate component of partners' capital. Realized gains and
losses on sales of investments are included in other revenues. Debt securities
are classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Interest on debt securities is included in interest
income.
Certain investments in equity securities are accounted for as
available-for-sale securities and adjusted to market value with unrealized
gains or (losses) reported as a separate component of partners' capital.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Where no market exists for financial instruments, fair value estimates are
based on judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgement and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The Company discloses the estimated fair value for its financial
instruments using the methods and assumptions set forth below:
Cash and cash equivalents
The carrying amount approximates the estimated fair value due to the
short-term nature of the investments.
Securities
Fair values of securities available for sale are based on quoted market
prices where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Mortgage loans held for sale
Mortgage loans held for sale are carried at the lower of cost or market,
computed on the aggregate basis. Market value is computed using the outstanding
commitment price from the investors. The carrying amount approximates the
estimated fair value.
Short-term borrowings
The carrying amount of short-term bank borrowings approximates the
estimated fair value.
Long-term debt
Rates currently available to the Company for such borrowings with similar
terms and remaining maturities are used to discount the future cash flows to
estimate fair value for debt.
F-33
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLES
Costs associated with the organization of the Company are being amortized
over 5 years, and are included in other assets. At December 31, 1997, the book
value was $4,000, net of accumulated amortization of $20,000.
Goodwill of $240,000 resulting from a business acquisition in May 1998 is
being amortized over 15 years (see note 9).
DEPOSITS ON LOANS IN PROGRESS
Deposits on loans in progress consist of funds to be paid for loan
origination fees, appraisal fees, title fees and processing fees on behalf of
the buyer. These funds are disbursed at closing or at the time of funding.
REVENUE RECOGNITION
Commission income from real estate brokerage transactions and related
amounts due to agents are recognized when title has transferred from seller to
buyer.
Income from underwriting and sales of residential mortgages is recognized
when such mortgages are sold to designated investors and funds have been
received from the respective investors.
In exchange for fees, the Company provides the right to use certain names
and related trademarks. This franchise revenue is recognized upon receipt.
BUSINESS PROMOTION AND ADVERTISING
Advertising and promotion costs are expensed as incurred.
INCOME TAXES
The Company has elected under the Internal Revenue Code to be taxed as a
partnership. The Company's subsidiary, Plaza Financial Services, is a limited
liability company and is taxed as a partnership. The partners/members are taxed
on their proportionate share of the Company's taxable income, and accordingly,
no provision for federal or state income taxes has been made. Pro forma income
taxes are calculated at a combined federal and state statutory rate of 38%. The
income tax provision for J.C. Nichols Alliance, a corporation, is included in
other expenses on the statement of income.
(3) INVESTMENT SECURITIES
The investment securities held at December 31, 1997 were (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ------------ ------------ ------
<S> <C> <C> <C> <C>
Available-for-sale:
J.C. Nichols Co. common stock ................. $108 $261 $ -- $369
Held-to-maturity:
U.S. Treasury Strips (principal only) ......... $511 $ 36 $ -- $547
</TABLE>
F-34
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The maturities of marketable debt securities and their approximate market
value at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
----------- -------
<S> <C> <C>
Due in one year or less ........................ $147 $147
Due after one year through five years .......... -- --
Due after five years through ten years ......... $364 $400
</TABLE>
(4) SHORT-TERM BORROWINGS
Short-term borrowings consist of two line of credit agreements. The first
agreement is a $2,000,000 line of credit due June 30, 1999, collateralized by
the Company's portion of commissions on pending transactions. The borrowings
are payable at a fixed rate of 8.0%. There were no amounts outstanding on the
line of credit at December 31, 1997.
The second agreement is a $7,000,000 line of credit due April 30, 1999,
collateralized by the underlying mortgages. The borrowings are payable at a
fixed rate of 8.5%. The line of credit balance at December 31, 1997 was
$4,409,000. The loan is subject to a financial covenant requiring tangible net
worth of at least $150,000 in Plaza Mortgage Services.
(5) LONG-TERM DEBT
Long-term debt at December 31, 1997 consists of the following (in
thousands):
<TABLE>
<S> <C>
Note payable to J.C. Nichols Company, interest at 8.5%, payable
in monthly installments of $10 including interest, until
maturity in April 2003 .......................................... $490
Capital lease obligations, collateralized by equipment, payable in
monthly installments of $1 including interest, through January
2000 ............................................................ 19
----
509
Less current maturities .......................................... 88
----
Total long-term debt .......................................... $421
====
</TABLE>
As of December 31, 1997, scheduled maturities of long-term debt during the
next five years ending December 31, are as follows (in thousands):
<TABLE>
<S> <C>
1998 ....................... $ 88
1999 ....................... 89
2000 ....................... 90
2001 ....................... 98
2002 ....................... 106
Thereafter ................. 38
----
$509
====
</TABLE>
(6) RELATED PARTY TRANSACTIONS
As discussed in note 5, the Company has a note payable to one of its
partners, J.C. Nichols Company, in the amount of $490,000 at December 31, 1997.
In addition, as discussed in note 3, the Company had an investment in the
common stock of J.C. Nichols Company.
F-35
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has a license agreement with J.C. Nichols Company to use the
"J.C. Nichols" tradename and servicemark for a royalty equal to $120,000 of net
income per year. Royalty expense for the year ended December 31, 1996, 1997,
and the eight months ended August 31, 1998, totaled $120,000, $120,000 and
$80,000, respectively.
The Company recognized expense in the amount of $18,000 and $12,000 for
the year ended December 31, 1997 and the eight months ended August 31, 1998,
respectively, to reimburse J.C. Nichols Company for the services of one of its
employees.
The Company leases office space from J.C. Nichols Company. Total rent
expense for the years ended December 31, 1996, 1997 and the eight months ended
August 31, 1998 was $374,000, $407,000 and $330,000, respectively.
The Company leases office space from an officer and owner of the Company.
Total rent expense for 1996, 1997 and the first eight months of 1998 was
$87,000, $98,000 and $94,000, respectively.
(7) RETIREMENT AND PROFIT SHARING PLANS
The Company maintains a 401(k) plan for the benefit of its employees. The
plan allows for matching and discretionary employer contributions not to exceed
the maximum allowable for tax purposes. Contributions are determined annually
by the Company. The consolidated statements of income for 1996, 1997 and for
the first eight months of 1998 reflect an expense of $46,000, $70,000 and
$41,000, respectively, for the employer match for the periods, based on
budgeted profits and contribution levels for the current plan years.
The Company has a nonqualified deferred compensation plan which covers
real estate agents licensed with the Company. The plan, adopted in 1994,
provides for a benefit based on profits generated by participating agents.
Benefits are payable after ten years of continuous licensed association with
the Company. The Company holds U.S. Treasury Strips (principal only) to fund
this obligation. Contributions to the plan are discretionary and are determined
annually by the Company. The Company expensed $167,000 and $140,000 in 1996 and
1997, respectively.
(8) LEASES
OPERATING
The Company leases certain equipment and office space under noncancelable
operating leases. The following is a schedule of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
RELATED
PARTY OTHER TOTAL
-------- --------- ---------
<S> <C> <C> <C>
Year ending December 31:
1998 ........................ $144 $1,389 $1,533
1999 ........................ 154 1,522 1,676
2000 ........................ 160 1,367 1,527
2001 ........................ 165 1,186 1,351
2002 ........................ 171 1,104 1,275
---- ------ ------
$794 $6,568 $7,362
==== ====== ======
</TABLE>
Total rent expense under operating leases for 1996, 1997 and the first
eight months of 1998 was $906,000, $1,116,000 and $962,000, respectively.
F-36
<PAGE>
J.C. NICHOLS REAL ESTATE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITAL
Cost of leased property under capital leases at December 31, 1997 includes
(in thousands):
<TABLE>
<S> <C>
Equipment ............................. $39
Less accumulated amortization ......... 11
---
$28
===
</TABLE>
Minimum future obligations on capital leases at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1998 ....................................... $14
1999 ....................................... 7
2000 ....................................... --
---
21
Less amount representing interest ........... (2)
---
Present value of minimum obligation ......... $19
===
</TABLE>
Total payments under capital leases for 1996, 1997 and the first eight
months of 1998 were $51,000, $24,000 and $11,000, respectively.
(9) BUSINESS ACQUISITION
In May 1998, the Company acquired certain assets of Eugene D. Brown
Company (the Seller). The acquisition was accounted for using the purchase
method. The purchase price was $703,000. The Company paid $463,000 cash at
closing and is to pay $20,000 per month for a period of twelve months beginning
July 1, 1998 (in the form of a note payable), for the balance of the purchase
price. Assets acquired included furniture, office equipment and leasehold
improvements with a fair value of $463,000, with the balance ($240,000)
allocated to goodwill. Under the terms of the agreement, the Company is to pay,
as a monthly referral fee, a percentage of gross profit generated by sales
agents of the Seller who join the Company. Sales generated by these agents
during the thirty-nine months after the date of the purchase are subject to the
following referral fee on gross profit:
15% of the closed transactions within the first 12 months
10% of the closed transactions within the next 12 months
5% of the closed transactions within the last 15 months
The Company has guaranteed that the referral fees will be no less than
$204,000.
The monthly referral fees are reduced to the extent of the $20,000 monthly
note payments for the acquisition. Any balance due shall be paid to the Seller
at the end of the first year. If note payments exceed the amount of the
referral fees during the first twelve months, the excess will be carried
forward to apply to referral fees due in subsequent months.
In connection with the acquisition, the Company entered into a five year
non-compete agreement with the Seller valued at $300,000.
(10) COMMITMENTS AND CONTINGENCIES
The Company is a party to lawsuits, claims and assessments arising during
the normal course of business. While the results of lawsuits or other matters
against the Company cannot be predicted with certainty, management, in
consultation with legal counsel, does not expect these matters to have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
At August 31, 1998, the Company had capital distributions payable of
$878,000.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Iowa Realty Co., Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Iowa Realty Co.,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of income, changes in stockholder's equity and cash flows for the
years ended December 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Iowa Realty Co., Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
KPMG, LLP
Des Moines, Iowa
February 3, 1998, except for note 15
which is as of April 3, 1998
F-38
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997
ASSETS ---------
<S> <C>
Cash and cash equivalents .............................................................. $ 2,590
Real estate contracts, net (note 2) .................................................... 361
Real estate ............................................................................ 964
Office property and equipment, net (note 3) ............................................ 14,061
Investments in 50% or less owned entities (note 4) ..................................... 2,651
Other assets (note 6) .................................................................. 41,719
-------
$62,346
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable (note 7) .................................................. $ 7,651
Accrued expenses and other liabilities ................................................ 13,717
Income taxes payable primarily to parent company ...................................... 1,307
-------
Total liabilities ................................................................... 22,675
-------
Minority interest ...................................................................... 2,880
-------
Stockholders' equity:
Serial preferred stock, $.01 par value;
2,000,000 shares authorized; no shares issued and outstanding ....................... --
Common stock, $.01 par value; 23,000,000 shares authorized; 4,758,850 shares issued
and outstanding at December 31, 1997 ................................................ 47
Additional paid-in capital ............................................................ 31,665
Retained earnings ..................................................................... 5,079
-------
Total stockholders' equity .......................................................... 36,791
-------
Commitment and contingencies (notes 3, 6, 7, 8, and 14) ................................
$62,346
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions revenue ....................... $191,083 179,378
Title fees ................................ 16,203 14,821
Real estate sales ......................... 449 14,022
Other ..................................... 6,961 8,070
-------- -------
Total revenues .......................... 214,696 216,291
Operating expenses:
Commission expense ........................ $125,148 115,331
Salaries and employee benefits ............ 33,688 35,296
Occupancy ................................. 13,091 12,377
Advertising ............................... 10,565 10,192
Depreciation and amortization ............. 5,619 5,103
Cost of real estate sales ................. 191 11,281
Other ..................................... 15,273 16,016
======== =======
Total operating expenses ................ 203,575 205,596
Other income (expense):
Interest income ........................... 633 1,050
Interest expense .......................... (1,536) (3,632)
======== =======
Net other income (expense) .............. (903) (2,582)
-------- -------
Income before income taxes and
minority interest ...................... 10,218 8,113
Income taxes (note 9) ...................... 4,725 3,263
-------- -------
Income before minority interest ......... 5,493 4,850
Minority interest .......................... 633 1,276
-------- -------
Net income .............................. $ 4,860 3,574
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ............................. $ 6 12,862 10,874 23,742
Capital contributions, net ............................... -- 7,028 -- 7,028
Net income ............................................... -- -- 3,574 3,574
Dividends ................................................ -- -- (645) (645)
--- ------ ------ ------
Balance at December 31, 1996 ............................. 6 19,890 13,803 33,699
Capital contributions, net ............................... -- 11,116 -- 11,116
Net income ............................................... -- -- 4,860 4,860
Dividends ................................................ -- -- (13,584) (13,584)
Common stock issued in acquisition of subsidiary ......... 1 699 -- 700
Restructure of authorized classes of stock ............... 40 (40) -- --
--- ------ ------- -------
Balance at December 31, 1997 ............................. $47 31,665 5,079 36,791
=== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 4,860 3,574
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ......................................................... 3,737 3,450
Amortization ......................................................... 2,009 1,653
Deferred income taxes ................................................ 706 386
Loss in undistributed earning of 50% or less owned entities .......... 240 179
Loss on sale of office property and equipment ........................ 260 413
Deferred gains on real estate sales .................................. (130) (203)
Increase in other assets ............................................. (1,672) (13,208)
Increase (decrease) in accrued expense and other liabilities ......... (6,441) 7,950
Increase (decrease) in income taxes payable .......................... 1,095 (3,336)
Minority interest earnings ........................................... 633 1,276
--------- -------
Net cash provided by operating activities .......................... 5,297 2,134
--------- -------
Cash flows from investing activities:
Cash used in acquisition ................................................ (2,800) --
Cash received from acquisition .......................................... 502 --
Proceeds from sale of office property and equipment ..................... 222 599
Purchases of office property and equipment .............................. (3,669) (9,102)
Net decrease (increase) in real estate contracts receivable ............. 1,842 (1,589)
Proceeds from sale of real estate ....................................... 1,035 1,218
Advances to affiliates (net) ............................................ (3,891) --
--------- -------
Net cash used in investing activities .............................. (6,759) (8,874)
--------- -------
Cash flows from financing activities:
Proceeds from notes and contracts payable ............................... 62,964 42,459
Repayments on notes and contracts payable ............................... (66,461) (31,907)
Subsidiaries' dividends to parent ....................................... (878) (645)
Capital contribution .................................................... 2,800 757
--------- -------
Net cash provided by (used in) financing activities ................ (1,575) 10,664
--------- -------
Net increase (decrease) in cash and cash equivalents ............... (3,037) 3,924
Cash and cash equivalents at beginning of year ........................... 5,627 1,703
--------- -------
Cash and cash equivalents at end of year ................................. $ 2,590 5,627
========= =======
Supplemental disclosure of cash flow information --
Cash paid for:
Interest .............................................................. $ 408 4,022
Income taxes .......................................................... 3,282 5,289
========= =======
Supplemental schedule of noncash investing and financing activities:
Noncash asset dividends ............................................... $ 12,706 --
Stock issued in acquisition ........................................... 700 --
Noncash assets contributed by parent .................................. 8,316 6,271
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
DESCRIPTION OF THE BUSINESS
Iowa Realty Co., Inc., headquartered in Des Moines, Iowa, is a wholly
owned subsidiary of AmerUs Group Co. AmerUs Group Co. is a wholly owned
subsidiary of American Mutual Holding Company (AMHC), headquartered in Des
Moines, Iowa. Iowa Realty Co., Inc. is primarily engaged in real estate
brokerage.
As part of a corporate reorganization during 1997, Iowa Realty Co., Inc.
contributed its investments in the following companies to AmerUs Group Co.;
AmerUs Mortgage, Inc.; Sunset Homes, Inc. (f/k/a Midland Homes Inc.); Iowa
Realty Development Co.; and Central Realty Advisors, Inc. Due to the common
ownership and control of the contributed companies, prior periods have been
restated except as follows:
The predecessor company was active in both real estate development
operations and real estate brokerage operations in 1996. The development and
brokerage activities were conducted by the company using shared management,
office space and related services. Effective January 1, 1997, the assets and
liabilities associated with the development operations were transferred to the
parent company.
Development assets and liabilities transferred effective January 1, 1997
included (in thousands):
<TABLE>
<S> <C>
Real estate ....................................... $16,416
Real estate contracts receivable .................. 6,808
Investments in 50% or less owned entities ......... 5,810
Other assets ...................................... 1,300
Notes and contracts payable ....................... 18,355
</TABLE>
Development operations for 1996 included the following direct revenue and
expense (in thousands):
<TABLE>
<S> <C>
Real estate sales ......... $14,022
Costs of sales ............ 11,281
Interest income ........... 498
Interest expense .......... 1,036
</TABLE>
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include Iowa Realty, Co., and its
wholly or majority owned subsidiaries (collectively the Company):
<TABLE>
<S> <C>
Iowa Realty Co. Edina Realty, Inc.
IMO Co., Inc. HOME Real Estate Company (note 12)
Midland Inspection Services, Inc. First Realty, Ltd.
AmerUs Insurance, Inc. Midland Escrow Services, Inc.
Edina Financial Services, Inc. (74.5% owned) Iowa Title Company
Edina Realty Title Services, Inc. Referral Company
</TABLE>
F-43
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest-bearing deposits in depository institutions with maturity of
three months or less, excluding cash held in trust.
INVESTMENT IN 50 PERCENT OR LESS OWNED ENTITIES
The Company accounts for its investment in 50 percent or less owned
entities using the equity method, unless the Company does not have the ability
to exercise significant influence over the investee's operating and financial
policies, in which case the investment is accounted for using the cost method.
OFFICE PROPERTY AND EQUIPMENT
Office property and equipment are stated at cost less depreciation.
Depreciation is calculated over the estimated useful lives of the assets, which
range from 18-31 years for buildings and from 3-7 years for furniture,
fixtures, and equipment, primarily using accelerated depreciation methods.
INTANGIBLE ASSETS
Intangible assets primarily consist of the purchase price in excess of the
fair market value of net assets acquired, organizational costs, and noncompete
agreements and are being amortized on a straight-line basis over 5-25 years.
INCOME TAXES
Income taxes are accounted for using the asset and liability method, which
requires deferred taxes to be recognized by applying enacted statutory rates
applicable to future years to the differences between the carrying amounts and
the tax basis of existing assets and liabilities.
The Company files a consolidated income tax return with its ultimate
parent company, AMHC, and calculates its income tax provision as if it filed a
separate return. The Company's share of the consolidated tax liability is
payable to AMHC upon demand.
REVENUE RECOGNITION
Commission income from real estate brokerage transactions and related
amounts paid to agents are recognized when title has transferred from buyer to
seller.
Revenue resulting from the sale of real estate inventory is recognized
when the Company receives a sufficient down payment, and the buyer is required
to maintain a continuing investment in the property. When these conditions are
not satisfied, the gain (or a portion thereof) on the sale of real estate
inventory is deferred.
F-44
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the estimated fair value for its financial
instruments using the methods and assumptions set forth below:
CASH AND CASH EQUIVALENTS
The carrying amount approximates the estimated fair value due to the
short-term nature of the investments.
REAL ESTATE CONTRACTS RECEIVABLE
The fair value of real estate contracts receivable is calculated by
discounting cash flows through the estimated maturity using estimated market
discount rates that reflect the credit risk inherent in the real estate
contract.
NOTES AND CONTRACTS PAYABLE
Rates currently available to the Company for such borrowings with similar
terms and remaining maturities are used to discount the future cash flows to
estimate fair value for notes and contracts payable.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(2) REAL ESTATE CONTRACTS
Real estate contracts receivable are secured by developed land and bear
interest at rates ranging from 8 percent to 12 percent, with maturities
extending to August 2008. The land which secures the contracts is primarily
concentrated in central Iowa. At December 31, 1997, the allowance for doubtful
accounts was approximately $12,000.
(3) OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consisted of the following at December 31,
1997 (in thousands):
<TABLE>
<S> <C>
Land .................................. $ 233
Buildings ............................. 6,387
Furniture and equipment ............... 21,229
-------
27,849
Less accumulated depreciation ......... 13,788
-------
$14,061
=======
</TABLE>
F-45
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
The Company rents office space for its various brokerage offices. Future
minimum rental payments under noncancelable operating leases at December 31,
1997, were as follows (in thousands):
<TABLE>
<CAPTION>
TO RELATED TO THIRD
PARTIES PARTIES TOTAL
------------ --------- --------
<S> <C> <C> <C>
Year ending December 31:
1998 ........................ $1,353 6,747 8,100
1999 ........................ 1,337 5,849 7,186
2000 ........................ 1,337 4,544 5,881
2001 ........................ 394 3,002 3,396
2002 ........................ 241 2,350 2,591
Thereafter .................. 885 4,867 5,752
------ ----- -----
Total ..................... $5,547 27,359 32,906
====== ====== ======
</TABLE>
Total rent expense under noncancelable operating leases during 1997 and
1996 was approximately $8,543,000 and $7,940,000, respectively.
(4) INVESTMENTS IN 50% OR LESS OWNED ENTITIES
The investment in unconsolidated entities are accounted for using the
equity method. Condensed unaudited financial information for such entities
follows (in thousands):
<TABLE>
<S> <C>
Total assets .............. $6,776
======
Total liabilities ......... $1,473
======
Net income (loss) ......... $ (148)
======
</TABLE>
(5) SALE-LEASEBACK TRANSACTIONS
The Company is party to sale-leaseback transactions for certain brokerage
offices. The leases are classified as operating leases, and gains realized on
the sales transactions were deferred and are being credited to income as rent
expense adjustments over the lease terms. At December 31, 1997 and 1996,
deferred income related to these transactions was $228,000 and $403,000,
respectively.
(6) OTHER ASSETS
Other assets at December 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
Intangible assets, net of accumulated amortization of
approximately $7,671 and $3,362 in 1997 and 1996, respectively $27,938
Cash held in trust ............................................. 1,782
Fees and other receivables ..................................... 3,566
Net deferred income tax asset (note 9) ......................... 2,068
Advances to affiliates ......................................... 3,891
Other .......................................................... 2,474
-------
$41,719
=======
</TABLE>
F-46
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
As described in note 7 (A), the Company participates in a line of credit
with affiliates. As of December 31, 1997, the Company has advanced their excess
funds to affiliated companies through the line of credit agreement. Interest
accrues daily at 6.90 percent and is receivable upon demand.
(7) NOTES AND CONTRACTS PAYABLE
Notes and contracts payable, net of original discount of $740,000 at
December 31, 1997 consisted of the following (in thousands):
<TABLE>
<S> <C> <C>
Borrowings on line of credit ................. (A) $ --
Subsidiary senior term note .................. (B) 5,643
Subsidiary junior subordinated notes ......... (C) --
Various notes and contracts payable .......... (D) 2,008
------
$7,651
======
</TABLE>
(A) The Company and its subsidiaries participate in a $30 million line of
credit agreement with other affiliated companies. Interest rate was 7.56
percent at December 31, 1997. The line of credit is due in 1998.
(B) The Company issued a senior term note in the amount of $7,978,000 in
connection with the acquisition of two subsidiaries. The note has an interest
rate of 1.25 percent over prime and is payable in quarterly installments from
September 30, 1996 to December 31, 2003. The balance is net of original issue
discount of $740,000 remaining at December 31, 1997.
(C) The Company issued a junior subordinated note in the amount of
$4,000,000 in connection with the acquisition of two subsidiaries. The note had
an interest rate of 12 percent, with principal and interest payable in
quarterly installments. During 1997, the note was extinguished prior to
maturity and without penalty.
(D) The Company has issued various notes and contracts payable primarily
for the purchase of real estate brokerage operations. Interest rates range from
7 percent to 9 percent; due annually through 2003.
In addition, a subsidiary of the Company has a $3.5 million secured line
of credit for operating purposes that is unused as of December 31, 1997. The
line of credit expires December 31, 1999; its interest rate is the prime rate;
and it is secured by assets of the subsidiary.
Aggregate maturities of notes and contracts payable, including aggregate
original issue discount of $740,000 at December 31, 1997, for the next five
years and thereafter are as follows:
<TABLE>
<S> <C>
1998 .................... $2,058
1999 .................... 1,353
2000 .................... 1,227
2001 .................... 1,238
2002 .................... 1,251
Thereafter .............. 1,264
------
Total ................... $8,391
======
</TABLE>
F-47
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS
CONTRIBUTION PLANS
The Company has a defined contribution salary deferral plan covering
substantially all employees under section 401(k) of the Internal Revenue Code.
The Plan allows eligible employees to contribute up to 15 percent of their
annual compensation. The Company matches 125 percent of employee contributions
up to 4 percent of their annual compensation. Additionally, the Company
contributes 4 percent of annual compensation for each active employee on
December 31 of each year. For the years ended December 31, 1997 and 1996, the
Company incurred expenses of $693,000 and $670,000, respectively, for the Plan.
A subsidiary of the Company has a defined contribution salary deferral
plan covering substantially all employees under Section 401(k) of the Internal
Revenue Code. The plan allows eligible employees to contribute up to 15 percent
of their annual compensation. The Company matches 50 percent of employee
contributions up to 6 percent of their annual compensation. The Company
recognized expense for contributions to the plan of $299,000 and $279,000
during 1997 and 1996, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participated in an affiliated company's post-retirement
benefit plan, which provides certain eligible participants with medical,
dental, and life insurance benefits. The plan is unfunded, and the benefits are
generally based on a combination of age and years of service at retirement. The
medical and dental insurance plan is contributory, with retiree contributions
adjusted annually, and contains other cost sharing features such as deductibles
and coinsurance. The accounting for the medical and dental insurance plan
anticipates future cost sharing changes to the written plan that are consistent
with the Company's expressed intent to increase the retiree contribution rate
annually for the expected inflation rate for that year. The life insurance plan
is reduced by 4 percent each month on a straight-line basis, upon retirement of
the participant. The actuarial present values of the accumulated plan benefits
and net assets available for benefits relating to the participants are
accounted for on a group basis and are not available at the Company level. The
Company had net post-retirement benefit plan expense of $279,574 and $-0- for
the years ended December 31, 1997 and 1996, respectively.
DEFERRED COMPENSATION PLAN
A nonqualified deferred compensation plan is provided for sales agents.
The board of directors annually determines which agents shall be entitled to
participate, the benefit amount (based upon a percentage of annual commissions
paid to the participants), and the benefit payment date. The plan is not
funded. At December 31, 1997 and 1996, the Company has accrued approximately
$3,854,000 and $3,569,000, respectively, for estimated future payments to
qualifying sales agents. For 1997 and 1996, the Company has incurred expenses
of $658,000 and $358,000, respectively, for the sales agents' deferred
compensation under the plan.
(9) INCOME TAXES
Income taxes for the years ended December 31, 1997 and 1996, were as
follows (in thousands):
F-48
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current ................ $4,019 2,877
Deferred ............... 706 386
------ -----
Total .................. $4,725 3,263
====== =====
</TABLE>
F-49
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
The following is a reconciliation of the effective income tax rate
indicated by the Consolidated Statements of Income for the years ended December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Statutory federal income tax rate .......... 35.0 % 35.0 %
Amortization of Goodwill ................... 7.2 % 6.8 %
Other ...................................... 4.0 % (1.6)%
-------- --------
46.2 % 40.2 %
======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred income tax assets:
Employee benefits ............................... $2,293
Deferred gains on real estate sales ............. 144
Valuation reserves .............................. 195
Self-insurance reserves ......................... 103
Other ........................................... 145
------
Total deferred income tax asset ............... 2,880
Deferred income tax liabilities:
Office property and equipment ................... 791
Other ........................................... 21
------
Total deferred income tax liabilities ......... 812
------
Net deferred income tax asset ................. $2,068
======
</TABLE>
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income. Based upon the levels of
historical taxable income and projections for future taxable income, management
believes it is more likely than not the Company will realize the benefits of
the deferred tax assets and, therefore, no such valuation allowance has been
established.
(10) FUNDS HELD IN TRUST AND REFUNDABLE DEPOSITS
The Company maintains a separately designated trust account for home
buyers' earnest money and other deposits. The Company holds such funds until
sold properties are closed and then disburses amounts in accordance with the
settlement instructions. At December 31, 1997, the Company held approximately
$1.8 million of funds in trust and deposits, which are included in accrued
expenses and other liabilities.
(11) RELATED-PARTY TRANSACTIONS
Related parties consist of entities associated by common ownership or
controlled by officers or directors of the Company. The Company had the
following balances and transactions with related parties during the years ended
December 31, 1997 and 1996 (in thousands):
F-50
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Assets
Accounts and other receivables ........... $ 94 172
Advances to affiliates ................... 3,891 --
------ ---
$3,985 172
====== ===
Liabilities -- accounts payable and accrued
expenses ................................. $ 192 115
====== ===
Revenues:
Interest ................................. $ 998 138
Brokerage commissions .................... 113 39
Other .................................... 1,262 407
------ ---
$2,373 584
====== ===
Expenses:
Occupancy ................................ $1,384 1,280
Interest ................................. 228 1,210
Data processing .......................... 11 14
Other expenses ........................... 659 644
------ -----
$2,282 3,148
====== =====
</TABLE>
(12) BUSINESS COMBINATIONS
In July 1997, the Company acquired all of the common stock of a real
estate brokerage operation located in Omaha, Nebraska for approximately
$2,800,000 cash, stock of $700,000, and liabilities assumed of $533,000. The
acquisition was accounted for using the purchase method, with results of
operations included in the financial statements from the acquisition date. The
fair value of the assets acquired, excluding goodwill, was approximately
$983,000.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments (as
described in note 1) at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
RECORDED FAIR
AMOUNT VALUE
---------- --------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ........... $2,590 2,540
Real estate contracts ............... 361 361
Financial liabilities --
Notes and contracts payable ......... 7,651 7,651
====== =====
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
A subsidiary of the Company has guaranteed repayment of borrowings of a
general partnership, solely owned by the subsidiary's former shareholders, in
the amount of approximately $3.7 million at December 31, 1997.
F-51
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
The Company acts as escrow agent in connection with the performance of its
real estate services. Accordingly, the Company held escrow funds totaling
approximately $1.1 million at December 31, 1997. These funds are not recorded
in the Company's consolidated financial statements.
The Company has guaranteed the repayment of approximately $1.7 million in
construction loans for various builders at December 31, 1997. The guarantees
are secured by the land and improvements made under the construction loan.
The Company is a party to a number of lawsuits, claims, and assessments
arising from the operation of its business. While the results of lawsuits or
other matters against the Company cannot be predicted with certainty,
management, in consultation with legal counsel, does not expect these matters
to have a material adverse effect on the consolidated financial position or
results of operations of the Company.
One of the Company's subsidiaries has employment and severance agreements
with key management members which expire on January 1, 1999.
(15) PROPOSED ACQUISITION OF THE COMPANY
On April 3, 1998, the Company's parent company, AmerUs Group Co., executed
a letter of intent where MidAmerican Energy Holdings Company will acquire all
of the shares of the Company's common stock. The proposed acquisition is
subject to regulatory and certain other conditions.
F-52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Paul Semonin Company
In our opinion, the accompanying balance sheets and the related statements
of income, of changes in stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of Paul Semonin
Company (the Company) at December 31, 1998 and 1997 and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
July 14, 1999
F-53
<PAGE>
PAUL SEMONIN COMPANY
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $1,116 $1,179
Cash held in trust ...................................................... 722 452
Receivables, net of allowance for doubtful accounts of $15 and $28....... 192 210
Receivable from affiliate ............................................... 28 200
Other current assets .................................................... 18 11
------ ------
Total current assets .................................................. 2,076 2,052
------ ------
Property and equipment:
Furniture and equipment ................................................. 2,788 2,472
Leasehold improvements .................................................. 954 762
------ ------
3,742 3,234
Less accumulated depreciation ........................................... 2,255 1,866
------ ------
Net property and equipment ............................................ 1,487 1,368
------ ------
Other assets:
Available-for-sale securities ........................................... -- 1,227
Investments in less than 50% owned entities ............................. 30 41
Restricted investments .................................................. 125 103
Other noncurrent assets ................................................. 35 58
------ ------
Total other assets .................................................... 190 1,429
------ ------
Total assets ............................................................. $3,753 $4,849
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 225 $ 326
Accrued expenses ........................................................ 518 370
Cash held in trust ...................................................... 722 452
Commissions payable ..................................................... 802 688
Dividends payable ....................................................... -- 885
Current maturities of long-term debt .................................... 455 390
------ ------
Total current liabilities ............................................. 2,722 3,111
------ ------
Long-term liabilities:
Long-term debt .......................................................... 825 800
Deferred compensation ................................................... 188 122
------ ------
Total long-term liabilities ........................................... 1,013 922
------ ------
Commitments and contingencies (note 11) .................................. -- --
Stockholders' equity:
Common stock, stated value $.0273 per share; 1,000,000 shares
authorized; 301,459 shares issued and outstanding ..................... 8 8
Accumulated other comprehensive income .................................. -- 196
Retained earnings ....................................................... 10 612
------ ------
Total stockholders' equity ............................................ 18 816
------ ------
Total liabilities and stockholders' equity ............................... $3,753 $4,849
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
PAUL SEMONIN COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Commission revenue ...................................... $30,663 $25,707
Other ................................................... 1,180 975
------- -------
Total revenues ........................................ 31,843 26,682
------- -------
Operating expenses:
Commission expense ...................................... 21,408 17,885
Salaries and employee benefits .......................... 3,626 3,182
Occupancy ............................................... 1,620 1,549
Business promotion and advertising ...................... 1,441 1,177
Depreciation and amortization ........................... 501 527
Operating, administrative and other ..................... 1,439 1,271
------- -------
Total operating expenses .............................. 30,035 25,591
------- -------
Other income (expense):
Interest and dividend income ............................ 46 145
Other income, net ....................................... 499 174
Interest expense ........................................ (105) (140)
------- -------
440 179
------- -------
Net income ............................................... $ 2,248 $ 1,270
======= =======
Income before income taxes ............................... $ 2,248 $ 1,270
Pro forma provision for income taxes (unaudited) ......... 913 514
------- -------
Pro forma net income (unaudited) ........................ $ 1,335 $ 756
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
PAUL SEMONIN COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------------- COMPREHENSIVE RETAINED
SHARES AMOUNT INCOME EARNINGS TOTAL
--------- -------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ......... 301,459 $ 8 $ 49 $ 449 $ 506
--------
Comprehensive income:
Net income ........................ -- -- -- 1,270 1,270
Unrealized gain on
investments ..................... -- -- 147 -- 147
--------
Total comprehensive income ......... -- -- -- -- 1,417
Dividends .......................... -- -- -- (1,107) (1,107)
------- --- ------ -------- --------
Balance, December 31, 1997 ......... 301,459 8 196 612 816
--------
Comprehensive income:
Net income ........................ -- -- -- 2,248 2,248
Unrealized gain on
investments ..................... -- -- (196) -- (196)
--------
Total comprehensive income ......... -- -- -- -- 2,052
Dividends .......................... -- -- -- (2,850) (2,850)
------- --- ------ -------- --------
Balance, December 31, 1998 ......... 301,459 $ 8 $ -- $ 10 $ 18
======= === ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
PAUL SEMONIN COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income ............................................................. $ 2,248 $ 1,270
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 501 527
Gain on sale of land ................................................. (18) --
Loss on investments .................................................. 11 --
Realized gain on available-for-sale securities ....................... (269) (1)
Change in assets and liabilities:
(Increase) decrease in:
Receivables ....................................................... 18 (40)
Receivable from affiliate ......................................... 172 (63)
Other assets ...................................................... (6) 111
Increase (decrease) in:
Accounts payable .................................................. (101) 65
Accrued expenses .................................................. 148 (81)
Commissions payable ............................................... 114 261
Dividends payable ................................................. (885) 727
Deferred compensation ............................................. 66 1
--------- ---------
Net cash provided by operating activities ............................ 1,999 2,777
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment .................................... (528) (645)
Proceeds from sale of property and equipment ........................... -- 1
Proceeds from sale of land ............................................. 20 --
Proceeds from sale of available-for-sale securities .................... 1,516 403
Purchase of available-for-sale securities .............................. (216) (726)
--------- ---------
Net cash provided by (used in) investing activities .................. 792 (967)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ............................... 1,210 1,813
Payments on long-term debt ............................................. (1,214) (1,543)
Dividends declared ..................................................... (2,850) (1,107)
--------- ---------
Net cash used in financing activities ................................ (2,854) (837)
--------- ---------
Net (decrease) increase in cash and cash equivalents .................... (63) 973
Cash and cash equivalents at beginning of year .......................... 1,179 206
--------- ---------
Cash and cash equivalents at end of year ................................ $ 1,116 $ 1,179
========= =========
Cash paid during the year for interest .................................. $ 110 $ 141
========= =========
Non-cash additions to property and equipment for capital leases ......... $ 94 $ 173
========= =========
Non-cash additions to long term debt for capital leases ................. $ 94 $ 173
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND BASIS OF PRESENTATION
Paul Semonin Company (the Company) operates as a residential real estate
broker with operations in central Kentucky and southern Indiana. The Company
has approximately 658 sales associates working from eleven branch offices.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In July 1999, the Company was purchased by MidAmerican Realty Services
Company, the second largest residential real estate brokerage firm in the
United States, and is based out of Edina, Minnesota.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest-bearing deposits in depository institutions purchased with a
maturity of three months or less, excluding cash held in trust.
RESTRICTED INVESTMENTS
Restricted investments is an investment account funded by the Company for
a deferred compensation agreement with an independent contractor. The
investment is stated at market value with the unrealized gain or loss included
in the deferred compensation liability.
CASH HELD IN TRUST
Balances of $570,000 and $367,000 at December 31, 1998 and 1997,
respectively, represent cash maintained in a separately designated trust
account for home buyers' ernest money. The Company holds such funds until
properties are closed and subsequently disburses amounts in accordance with
settlement instructions.
In 1997, the Company created a legal defense fund whereby agents make
nonrefundable payments to an escrow trust fund on deposit in a special bank
account. The fund will be used to settle potential lawsuits. The deposit and
related liability as of December 31, 1998 and 1997 totaled $152,000 and
$85,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Major renewals and betterments are capitalized, and maintenance and repairs
which do not improve or extend the life of the respective assets are charged
against earnings in the current period.
Depreciation and amortization are provided on straight-line and
accelerated methods over the following estimated useful lives:
Furniture and equipment 5-10 years
Leasehold improvements Shorter of the life of the underlying lease or
the estimated useful life of the improvement.
F-58
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Impairment losses on long lived assets are recognized when expected future
cash flows are less than the asset carrying value. When indicators of
impairment are present, the Company evaluates the carrying value of the long
lived assets in relation to the operating performance and expected future
undiscounted cash flows and adjusts net book value if appropriate. There was no
impairment for the years ended December 31, 1998 and 1997.
INVESTMENTS
Securities
Marketable securities are classified as available-for-sale. Management
determines the appropriate classification of investments in debt and equity
securities at the time of purchase. Securities classified as available-for-sale
are stated at fair value, with unrealized holding gains and losses reported in
a separate component of stockholders' equity. Mutual fund investments expose
the Company to market risk in the form of equity price risk; that is, the
potential future loss of value that would result from a decline in the fair
values of the mutual funds. Each fund and its underlying net assets are also
subject to market risk which may arise from changes in equity prices, credit
ratings, and interest rates.
Less Than 50 Percent Owned Entities
The Company has a 2% common stock interest in a broker-to-broker real
estate referral network specializing in relocation services. The investment is
carried at cost, which approximates market value.
At December 31, 1997, the Company held an investment in a broker-to-broker
real estate referral network. The investment was carried at cost and was
written off at December 31, 1998. An $11,000 loss was recorded in other income,
net on the statement of income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Where no market exists for financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The Company discloses the estimated fair value for its financial
instruments using the methods and assumptions set forth below:
Cash and cash equivalents
The carrying amount approximates the estimated fair value due to the
short-term nature of the investments.
Securities
Fair values of securities available for sale are based on quoted market
prices where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Receivables
The carrying amount of other receivables approximates the estimated fair
value due to the short-term nature of the receivables.
Long-term debt
Rates currently available to the Company for such borrowings with similar
terms and remaining maturities are used to discount the future cash flows to
estimate fair value for debt. The notes payable balances reported at December
31, 1998 and 1997 approximate fair value.
F-59
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS
Non-compete agreements are amortized over the life of the related
agreements using the straight-line method. At December 31, 1998 the non-compete
agreements were fully amortized. At December 31, 1997, the book value of the
non-compete agreement included in noncurrent other assets was $33,000, net of
accumulated amortization of $342,000.
REVENUE RECOGNITION
Commission revenue from real estate brokerage transactions and related
amounts due to agents are recognized when title has transferred from seller to
buyer.
BUSINESS PROMOTION AND ADVERTISING
Advertising and promotion costs are expensed as incurred.
INCOME TAXES
The Company has elected to be taxed as an S Corporation under the Internal
Revenue Code. The stockholders are taxed on their proportionate share of the
Company's taxable income, and accordingly, no provision for federal or state
income taxes has been made. Pro forma income taxes are calculated at a combined
federal and state statutory rate of 40.4% and are reported on the statements of
income.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for change in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The statement will become effective for the Company in fiscal
2001; however, adoption of this statement is not expected to have a material
impact on the Company's financial position, results of operations or cash
flows.
(3) INVESTMENT SECURITIES
The investment securities classified as available-for-sale at December 31,
1997 were sold and paid out as a dividend in 1998. The securities were as
follows at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
The One Group Large Company Growth Fund ..... $ 345 $ 84 $-- $ 429
The One Group Growth Opportunities Fund ..... 136 -- (1) 135
The One Group Growth Equity Index Fund ...... 184 52 -- 236
The One Group Large Company Value Fund ...... 251 43 -- 294
The One Group Small Capitalization Fund ..... 115 18 -- 133
------ ---- ----- ------
Total available-for-sale securities ....... $1,031 $197 $(1) $1,227
====== ==== ===== ======
</TABLE>
Unrealized holding gains and losses on available-for-sale securities are
reported on the balance sheet in a separate component of stockholders' equity.
F-60
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Notes Payable
Tom Helm, Inc. (a related party) -- monthly payments of $1,997
including interest at a rate of 10.5%; due March 31, 1999; unsecured. ... $ 6 $ 28
Bank One -- monthly payments of $6,944 plus interest at the bank's
index rate*; due December 30, 2000; collateralized by various fixed
assets. ................................................................. 167 250
Bank One -- monthly payments of $3,525 including interest at a rate of
7.772%; due November 1, 2003; collateralized by various fixed assets. ... 172 --
Fenley Office, LLC -- monthly payments of $4,821 including interest at
rates ranging from 8.85% to 9.50%; due August 6, 2003; unsecured. ....... 219 255
Bank One -- monthly payments of $5,512 including interest at the bank's
index rate*; due September 30, 1999; collateralized by various fixed
assets .................................................................. 76 133
Robert Jones -- monthly payments of $1,353 including interest at a rate
of 8.5%; due December 1, 1999, unsecured. ............................... 15 30
Bank One -- monthly payments of $6,759 including interest at a rate of
8.06%; due December 21, 2001 ............................................ 215 --
---- ----
870 696
Less current portion ..................................................... 315 214
---- ----
Total long-term notes payable ............................................ 555 482
---- ----
*The index rate at Bank One at December 31, 1998 and 1997 was 8.25%.
Capital Lease Obligations
Various capital lease obligations with imputed interest rates ranging from
3.86% to 11.42% and maturities extending through October 31, 2003. ...... 410 494
Less current portion ..................................................... 140 176
---- ----
Total long-term capital lease obligations ................................ 270 318
---- ----
Total long-term debt ..................................................... $825 $800
---- ----
</TABLE>
Maturities on notes payable for each of the five years succeeding December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31:
- ----------------------
<S> <C>
1999 ............... $315
2000 ............... 232
2001 ............... 161
2002 ............... 90
2003 ............... 72
----
$870
====
</TABLE>
F-61
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CURRENT NOTES PAYABLE
The Company has a $1,500,000 line of credit with Bank One which matures
August 31, 1999. Interest is incurred at the bank's index rate. The line of
credit is cosigned by the Company's president. There was no outstanding balance
on this line of credit at December 31, 1998 or 1997.
(6) RELATED PARTY TRANSACTIONS
Since 1994, the Company has provided bookkeeping services to Semonin
Mortgage Services, Inc., a related party. Income under this arrangement
included in the 1997 statement of income is $18,000. There was no income from
this arrangement in 1998.
The Company pays certain expenses on behalf of Semonin Mortgage Services,
Inc. At December 31, 1998 and 1997, the Company had a receivable of $28,000 and
$200,000, respectively, related to these expenses.
The Company's president is a member of Bank One's Advisory Board and
Executive Committee. The Company has investments held at Bank One as well as
debt outstanding with the bank.
The Company has a note payable to a former employee in the amount of
$6,000 and $28,000 at December 31, 1998 and 1997, respectively.
(7) RETIREMENT PLAN
The Company has a defined contribution retirement plan under section
401(k) of the Internal Revenue Code which covers substantially all employees.
In 1998 and 1997, the Company matched 25% of employees'contributions. The
matching applies only to the first 4% of compensation for non-highly
compensated employees. Employer contributions for the years ended December 31,
1998 and 1997 totaled $14,000 and $8,000, respectively.
(8) LEASES
OPERATING
The Company leases office space and equipment at various locations under
non-cancelable operating lease agreements which expire at various dates through
2005. Future minimum lease payments for these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31:
- ---------------------------
<S> <C>
1999 .................... $ 814
2000 .................... 708
2001 .................... 687
2002 .................... 590
2003 .................... 569
Thereafter .............. 1,084
------
Total ................... $4,452
======
</TABLE>
Total rent expense under operating leases was $927,000 and $827,000 for
the years ended December 31, 1998 and 1997, respectively.
F-62
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CAPITAL
Cost of leased property under capital leases includes:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Equipment .............................. $909 $854
Less accumulated depreciation .......... 302 222
---- ----
$607 $632
==== ====
</TABLE>
Payments on capital leases for the next five years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -------------------------------------------------
<S> <C>
1999 .................................... $159
2000 .................................... 106
2001 .................................... 94
2002 .................................... 76
2003 .................................... 17
----
Total .................................... 452
Less interest ............................ 42
----
Present value of future payments ......... 410
Less current portion ..................... 140
----
Long-term portion ........................ $270
====
</TABLE>
(9) INTANGIBLE ASSETS
In 1992, the Company was a party in an asset purchase agreement which
resulted in a five-year non-compete agreement. The Company paid $250,000 for
this asset, which was fully amortized in 1997.
In 1996, the Company entered into a non-compete agreement with a former
employee whereby he agreed not to compete with the Company for a period of two
years. The Company agreed to pay the employee the sum of $125,000, as follows:
$40,000 paid in 1996
$25,000 paid on July 15,1998; and
$60,000 paid in 24 monthly installments of $2,500 each, commencing on
August 15, 1998
The amount charged to expense for amortization of intangible assets in
1998 and 1997 was $33,000 and $81,000, respectively.
(10) OFF-BALANCE SHEET RISK
The Company's primary business is the brokerage of residential real estate
within the states of Kentucky and Indiana and thus its business is dependent on
the real estate market and general economics of those states.
Financial instruments which potentially subject the Company to credit risk
include cash on deposit with one financial institution amounting to $1,224,000
and $627,000 at December 31, 1998 and 1997, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company has an arrangement with the stockholders of record to pay
minimum dividends amounting to the federal taxable income multiplied by the
highest individual federal income tax rate including surtax. This arrangement
will continue as long as the Company remains an Internal Revenue Code
sub-chapter S Corporation.
F-63
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In 1994, the Company entered into a deferred compensation agreement with
an independent contractor associated with the Company. The agreement requires
the Company to credit 5% of commissions paid to the Company on sales activities
generated by the contractor on behalf of the Company. The Company currently
makes quarterly payments of the estimate due to the contractor, to a separately
maintained investment account. Quarterly payments will be made to the
contractor from this account for five years, beginning 90 days after the
contractor's association with the Company terminates. Expense under this
agreement was $29,000 and $24,000 in 1998 and 1997, respectively. The total
amount funded as of December 31, 1998 and 1997 was $125,000 and $103,000,
respectively, held as restricted investments.
Effective July 12, 1996, an employee terminated his employment with the
Company and exercised his rights under a Phantom Stock Agreement dated January
1, 1994. The amount due to the employee under this agreement was $13,000 as of
December 31, 1997. This liability is recorded in accrued expenses at December
31, 1997.
In April 1996, the Company purchased certain assets of Steve Hall &
Associates, Inc. No money exchanged hands at the time of purchase, however, the
Company agreed to pay Steve Hall 10% of profits earned by Hall associates on a
quarterly basis up to a maximum of $100,000 as long as Steve Hall is employed
by the Company. In exchange, Steve Hall has agreed not to compete with the
Company for five years after the date of his termination. The Company
recognized expenses of $8,000 and $11,000 in 1998 and 1997, respectively, for
this agreement.
On June 1, 1998, the Company entered into a phantom stock agreement with
an employee of the Company, as a deferred compensation arrangement. Effective
June 1, 1998, the Company granted the employee 6,030 shares of phantom stock
and agreed to grant the employee additional shares of phantom stock on July 1
of each of the years 1998 through 2000 at 1% of the issued and outstanding
common stock as of such date. Each share of phantom stock shall have a value as
agreed upon in the phantom stock agreement. Deferred compensation under this
agreement of $50,000 was charged to expense in 1998.
F-64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
HOME Real Estate Company of Omaha
In our opinion, the accompanying statements of income, changes in
stockholders' equity, and cash flows present fairly, in all material respects,
the results of operations and cash flows of HOME Real Estate Company of Omaha
for the period from May 8, 1998 through August 18, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards, which require that we perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Kansas City, Missouri /s/ PricewaterhouseCoopers LLP
July 2, 1999
F-65
<PAGE>
HOME REAL ESTATE COMPANY OF OMAHA
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 8, 1998
THROUGH
AUGUST 18,
1998
------------
<S> <C>
Revenues:
Commission revenues ......................... $8,751
Other ....................................... 37
------
Total revenues .............................. 8,788
------
Operating expenses:
Commission expense .......................... 6,470
Salaries and employee benefits .............. 1,211
Occupancy ................................... 240
Business promotion and advertising .......... 242
Depreciation and amortization ............... 63
Operating, administrative and other ......... 247
------
Total operating expenses .................... 8,473
------
Other income:
Interest income ............................. 16
------
Other income ................................ 16
------
Income before income taxes ................ 331
Income taxes ................................. 132
------
Net income .................................. $ 199
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
HOME REAL ESTATE COMPANY OF OMAHA
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
-------- -------- ----------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 8, 1998 ............. -- $-- $ -- $ -- $-- $ --
Initial capitalization ........... 85 85 3,515 -- -- 3,600
Comprehensive income:
Net income ...................... -- -- -- 199 -- 199
-- --- ------ ---- --- ------
Balance, August 18, 1998 ......... 85 $85 $3,515 $199 $-- $3,799
== === ====== ==== === ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
HOME REAL ESTATE COMPANY OF OMAHA
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 8, 1998
THROUGH
AUGUST 18,
1998
------------
<S> <C>
Cash flows from operating activities:
Net income .................................................................... $ 199
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation ................................................................ 30
Amortization ................................................................ 33
Change in current assets and liabilities:
(Increase) decrease in:
Receivables ................................................................ (20)
Prepaid expenses ........................................................... 40
Increase (decrease) in:
Accounts payable ........................................................... (11)
Accrued commissions ........................................................ (74)
Accrued expenses ........................................................... (39)
Income taxes payable ....................................................... 132
------
Net cash provided by operating activities ................................ 290
Net cash provided by (used in) investing activities ...................... --
Net cash provided by (used in) financing activities ...................... --
Net increase in cash ..................................................... 290
Cash and cash equivalents at beginning of period ............................... 144
------
Cash and cash equivalents at end of period ..................................... $ 434
======
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................ $ --
Cash paid for taxes ........................................................... --
Supplemental schedule of noncash investing activities:
Contribution of assets to HOME Real Estate Company of Omaha by parent ......... $3,600
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
HOME REAL ESTATE COMPANY OF OMAHA
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS)
(1) THE COMPANY AND BASIS OF PRESENTATION
HOME Real Estate Company of Omaha (the Company), a subsidiary of Home Real
Estate Holdings, Inc., operates primarily as a home services company
specializing in residential real estate brokerage, specialized services for
building new homes, and complimentary products, which include mortgage
origination, home inspection/warranty assistance and relocation assistance. The
Company has over 260 sales associates working from 5 branch offices in Omaha,
Nebraska.
The Company was formed on September 14, 1987. Effective July 31, 1997, the
Company was sold to AmerUs Home Services, Inc. On May 8, 1998, the original
owners repurchased the Company from AmerUs Home Services, Inc. for total
consideration of $3,600 and contributed the assets purchased to the Company. On
August 18, 1998, the Company sold all of its assets to MidAmerican Realty
Services Company, a wholly owned subsidiary of MidAmerican Energy Holdings
Company, for $5,217. These financial statements for the Company are presented
for the period May 8, 1998 through August 18, 1998 at which time the Company
was independent. The Company's fiscal year end is December 31.
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest-bearing deposits in depository institutions purchased with a
maturity of three months or less, excluding cash held in trust.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Major renewals and betterments are capitalized, while maintenance and repairs
that do not improve or extend the life of the respective assets are charged
against earnings in the current period.
Depreciation and amortization are provided on the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures ......... 5-10 years
Leasehold improvements ......... Term of lease
</TABLE>
INTANGIBLES
Goodwill of $3,088 resulting from the acquisition is being amortized over
25 years.
REVENUE RECOGNITION
Commission income from real estate brokerage transactions and related
amounts due to agents are recognized when title has transferred from seller to
buyer.
BUSINESS PROMOTION AND ADVERTISING
Advertising and promotion costs are expensed as incurred.
INCOME TAXES
The Company files a consolidated income tax return with its Parent and
calculates its income tax provision as if it filed a separate return. The
Company remits to its Parent all current tax expense and receives from its
Parent the benefit of current income deductions and credits utilized.
F-69
<PAGE>
HOME REAL ESTATE COMPANY OF OMAHA
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED)
(3) LEASES
The Company leases certain equipment and office space under noncancelable
operating leases. The following is a schedule of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms as of August 18, 1998:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER TOTAL
-------- --------- ---------
<S> <C> <C> <C>
Period from August 19, 1998 to December 31, 1998 ......... $ 74 $ 225 $ 299
Year ended December 31:
1999 .................................................... 253 479 732
2000 .................................................... 170 408 578
2001 .................................................... 170 295 465
2002 .................................................... 164 156 320
Thereafter .............................................. 125 -- 125
---- ------ ------
$956 $1,563 $2,519
==== ====== ======
</TABLE>
Total rent expense under operating leases for the period was $240,
including $38 to related parties.
(4) RETIREMENT AND PROFIT SHARING PLANS
The Company maintains a 401(k) plan for the benefit of its employees.
Under the plan, the Company matches up to 50% of the first 6% of an employee's
salary. The statement of income reflects an expense of $26 for the employer
match for the period.
(5) INCOME TAXES
Income taxes for the period ended August 18, 1998 were as follows:
<TABLE>
<S> <C>
Current ......... $132
----
</TABLE>
For the period ended August 18, 1998, deferred taxes were not significant.
Therefore, the Company did not record a deferred tax expense or a deferred tax
benefit.
The following table is a reconciliation between the effective income tax
rate indicated by the statement of income and the statutory federal income tax
rate for the period ended August 18, 1998:
<TABLE>
<S> <C>
Statutory federal income tax rate ................................ 35.0%
State income tax rate, net of federal income tax benefit ......... 4.9
----
Effective federal and state income tax rate ...................... 39.9%
====
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
The Company is a party to lawsuits, claims and assessments arising during
the normal course of business. While the results of lawsuits or other matters
against the Company cannot be predicted with certainty, management, in
consultation with legal counsel, does not expect these matters to have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
F-70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Roy H. Long Realty Co., Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statement of income, of changes in stockholders' equity,
and of cash flows present fairly, in all material respects, the financial
position of Roy H. Long Realty Co., Inc. and its subsidiary (the "Company") at
December 31, 1998 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Kansas City, Missouri /s/ PricewaterhouseCoopers LLP
-------------------------
August 27, 1999 PricewaterhouseCoopers LLP
F-71
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 1,064
Cash held in trust ............................................... 257
Commission revenue receivable .................................... 171
Other accounts receivable, net of allowance of $5................. 164
Receivable from affiliate ........................................ 39
Prepaid expenses ................................................. 7
-------
Total current assets .......................................... 1,702
-------
Property and equipment:
Furniture and fixtures ........................................... 287
Computers and electronic equipment ............................... 665
Leasehold improvements ........................................... 984
Automobiles ...................................................... 23
-------
1,959
Less accumulated depreciation .................................... 923
-------
Net property and equipment .................................... 1,036
-------
Other noncurrent assets:
Intangible assets, net of accumulated amortization of $24......... 219
Other noncurrent assets .......................................... 14
-------
Total other noncurrent assets ................................. 233
-------
Total assets .................................................. $ 2,971
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings ....................................... $ 200
Accounts payable ................................................. 110
Accrued commissions .............................................. 467
Accrued expenses ................................................. 226
Cash held in trust ............................................... 257
Current portion of long-term debt ................................ 274
-------
Total current liabilities ..................................... 1,534
-------
Long-term liabilities:
Long-term debt ................................................... 327
-------
Commitments and contingencies (note 8) ............................ --
Stockholders' equity:
Common stock, $1 par value, 1,000,000 shares authorized,
10,000 shares issued and outstanding ........................... 10
Additional paid-in capital ....................................... 388
Retained earnings ................................................ 712
-------
Total stockholders' equity .................................... 1,110
-------
Total liabilities and stockholders' equity .................... $ 2,971
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Commission revenue ....................................... $ 36,217
Other .................................................... 376
--------
Total revenues ........................................ 36,593
--------
Operating expenses:
Commission expense ....................................... 26,701
Salaries and employee benefits ........................... 3,946
Occupancy ................................................ 1,610
Business promotion and advertising ....................... 1,221
Depreciation and amortization ............................ 422
Operating, administrative and other ...................... 788
--------
Total operating expenses .............................. 34,688
--------
Other income (expense):
Interest income .......................................... 90
Other income ............................................. 45
Interest expense ......................................... (70)
Other expense ............................................ (92)
--------
Net other expense ..................................... (27)
--------
Net income ............................................ $ 1,878
========
Income before income taxes ............................... $ 1,878
Pro forma provision for income taxes (unaudited) ......... 763
--------
Pro forma net income (unaudited) ...................... $ 1,115
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
SHARES COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS TOTAL
------------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ............ 10,000 $ 10 $ 383 $ 888 $ 1,281
--------
Comprehensive income:
Net income ......................... 1,878 1,878
--------
Total comprehensive income ......... 1,878
--------
Capital distributions ............... (2,054) (2,054)
Capital contribution ................ 5 5
Shares issued ....................... --
--------
Balance, December 31, 1998 .......... 10,000 $ 10 $ 388 $ 712 $ 1,110
====== ==== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income ........................................................................ $ 1,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 422
Loss on disposal of fixed assets ................................................ 92
Change in current assets and liabilities (net of acquisitions):
(Increase) decrease in:
Commission revenue receivable .................................................. 19
Affiliate and other accounts receivable ........................................ (111)
Prepaid expenses ............................................................... 5
Other assets ................................................................... (4)
Increase (decrease) in:
Accounts payable ............................................................... (70)
Accrued commissions ............................................................ 102
Accrued expenses ............................................................... (197)
Other liabilities .............................................................. --
---------
Net cash provided by operating activities .................................... 2,136
---------
Cash flows from investing activities:
Purchases of property and equipment ............................................... (209)
Proceeds from notes receivable .................................................... 99
Acquisition of businesses ......................................................... (265)
---------
Net cash used in investing activities .......................................... (375)
---------
Cash flows from financing activities:
Payments on long-term debt ........................................................ (302)
Net increase in short-term bank borrowings ........................................ 200
Distributions to stockholders ..................................................... (2,054)
Contribution from stockholders .................................................... 5
---------
Net cash used in financing activities .......................................... (2,151)
---------
Net decrease in cash ........................................................... (390)
Cash and cash equivalents at beginning of period ................................... 1,454
---------
Cash and cash equivalents at end of period ......................................... $ 1,064
=========
Supplemental cash flow information:
Interest paid ..................................................................... $ 48
=========
Non-cash addition to property and equipment for capital leases ..................... $ 107
=========
Non-cash additions to long-term debt for capital leases ............................ $ 107
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND BASIS OF PRESENTATION
Roy H. Long Realty Co., Inc. (the Company) operates as a general real
estate agency and brokerage business engaged to act as agent, broker or
attorney in fact for any person or corporation in buying, selling or dealing in
real estate and real property specializing in residential real estate
brokerage, specialized services for building new homes, and complimentary
products, which include mortgage origination, home inspection/warranty
assistance and relocation assistance. The Company has approximately 853 sales
associates working from 12 branch offices in Arizona.
The consolidated financial statements include the accounts of Roy H. Long
Realty Co., Inc. and its 100% owned subsidiary, RHL Referral Company, L.L.C.
The majority shareholder contributed the interest in the limited liability
company as additional paid-in capital in 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
On August 23, 1999, the Company sold all of its assets to MidAmerican
Realty Services Company, a residential real estate brokerage firm based in
Edina, Minnesota.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest-bearing deposits in depository institutions purchased with a
maturity of three months or less, excluding cash held in trust.
CASH HELD IN TRUST
A balance of $257,000, at December 31, 1998 is restricted from use for
general operations and is held in a trust. Included in this amount is $236,000
in rent deposits from subleases and $21,000 in marketing advances collected
from sellers to be forwarded to an international real estate marketing company.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Major renewals and betterments are capitalized, and maintenance and repairs
which do not improve or extend the life of the respective assets are charged
against earnings in the current period.
Depreciation and amortization are provided on straight-line and
accelerated methods over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures ..................... 5-7 years
Computers and electronic equipment ......... 3-7 years
Leasehold improvements ..................... Shorter of life of improvement
or remaining life of lease
Automobiles ................................ 5 years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Where no market exists for financial instruments, fair
F-76
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value estimates are based on judgements regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgement and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The Company discloses the estimated fair value for its financial
instruments using the methods and assumptions set forth below:
Cash and cash equivalents
The carrying amount approximates the estimated fair value due to the
short-term nature of the investments.
Receivables
The carrying amount of receivables approximates the estimated fair value
due to the short-term nature of the receivables.
Short-term bank borrowings
The carrying amount of short-term bank borrowings approximates the
estimated fair value.
Long-term debt
Rates currently available to the Company for such borrowings with similar
terms and remaining maturities are used to discount the future cash flows to
estimate fair value for debt.
INTANGIBLES
Intangible assets include goodwill and a non-compete agreement amortized
on a straight-line basis as follows:
<TABLE>
<S> <C>
Goodwill ...................... 30 years
Non-compete agreement ......... Life of agreement (5 years)
</TABLE>
REVENUE RECOGNITION
Commission income from real estate brokerage transactions and related
amounts due to agents are recognized when title has transferred from seller to
buyer.
In exchange for fees, the Company provides the right to use certain names
and related trademarks. This revenue is recognized upon receipt and included in
other revenue.
The Company subleases various properties and recognizes rental income in
the period in which it is earned. In 1998, the Company recognized $184,000 in
rental income which is included in other revenue on the statement of income.
BUSINESS PROMOTION AND ADVERTISING
Advertising and promotion costs are expensed as incurred.
INCOME TAXES
The Company has elected to be taxed as an S Corporation under the Internal
Revenue Code. The stockholders are taxed on their proportionate share of the
Company's taxable income, and accordingly, no provision for federal or state
income taxes has been made. Pro forma income taxes are calculated at a combined
federal and state statutory rate of 40.59% and are reported on the statement of
income.
F-77
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for change in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The statement will become effective for the Company in fiscal
2001; however, adoption of this statement is not expected to have a material
impact on the Company's financial position, results of operations or cash
flows.
(3) SHORT-TERM BANK BORROWINGS
The Company has a $200,000 revolving line of credit agreement with Bank
One, Arizona, N.A. which matured in May 1999. The line of credit is not
collateralized and bears interest at the rate of 1% above the bank's prime rate
of interest. The Company had drawn down the entire amount as of December 31,
1998, at which time the bank's prime rate of interest was 8.25%.
(4) LONG-TERM DEBT
At December 31, 1998, long-term debt consisted of the following (in
thousands):
NOTES PAYABLE
<TABLE>
<S> <C>
Note payable to Arizona Bank, due in monthly installments of
$3 plus interest at the bank's prime rate (8.25% at December
31, 1998), but not less than 9.25%, through December 1, 2000,
at which time the entire principal balance is due and payable........ $ 58
Note payable to Arizona Bank, due in monthly installments of
$10 plus interest at the bank's prime rate maturing at various
dates through April 2002, with floors ranging from 7.25% to
9.00% ............................................................... 177
Note payable assumed upon purchase of Green Valley Realty,
payable in minimum quarterly installments of $10 (including
interest) up to 8% of net company dollar. Interest imputed on
this note is 17.29% ................................................. 28
Note payable to Bank One, due in monthly installments of $1
plus interest at the bank's prime rate through May 2001,
collateralized by a building. At December 31, 1998, this note
has been unofficially assigned to an L.L.C., however, it is still
in the Company's name ............................................... 37
Note payable to Vistoso Properties, due in 24 monthly
installments of $1 including interest at 10%, through March
1999 ................................................................ 2
Note payable to Bank One, due in monthly installments
including interest at 8.25% through July 2001, collateralized by
vehicle ............................................................. 11
----
313
Less current portion ................................................. 166
----
Total long-term notes payable ........................................ $147
====
</TABLE>
F-78
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITAL LEASE OBLIGATIONS
<TABLE>
<S> <C>
Various capital lease obligations with inputted interest rates ranging
from 8.25% to 11.95% and maturities extending through November
2003 ................................................................ $288
Less current portion ................................................. 108
----
Total capital lease obligations ...................................... 180
----
Total long-term debt ................................................. $327
====
</TABLE>
As of December 31, 1998, scheduled maturities of notes payable during the
next four years ending December 31 are as follows (in thousands):
<TABLE>
<S> <C>
1999 .............. $166
2000 .............. 88
2001 .............. 49
2002 .............. 10
----
$313
====
</TABLE>
At December 31, 1998, the Company is in compliance with all debt covenants
or has obtained waivers from the respective banks.
(5) RELATED PARTY TRANSACTIONS
The Company leases one of its office facilities from a limited liability
company that was owned during the first month of 1998 proportionately by all
shareholders of the Company. From February through December 1998, the Company's
majority shareholder held a minority interest in the limited liability company.
Rent paid to the limited liability company during 1998 was $18,000. In
addition, at December 31, 1997, the Company assigned a note payable to the
limited liability company; however, the Company is still considered the
official holder of the note. A receivable from affiliate has been recorded for
the corresponding note payable balance on the Company's books.
In January 1998, the Company paid off notes to two prior shareholders
totaling $88,000.
During 1998, two shareholders paid off notes receivable held by the
Company through non-cash distributions totaling $99,000 plus accrued interest.
The Company's majority shareholder is a member of Arizona Bank's Board of
Directors. The Company has investments held at Arizona Bank as well as debt
outstanding with the bank.
(6) LEASES
OPERATING
The Company leases certain equipment and office space under non-cancelable
operating lease agreements which expire at various dates through August 2004.
The following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1998 (in thousands):
F-79
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31:
- ---------------------------
<S> <C>
1999 .................... $ 828
2000 .................... 721
2001 .................... 616
2002 .................... 538
2003 .................... 388
Thereafter .............. 151
------
$3,242
======
</TABLE>
Total rent expense under operating leases for 1998 was $845,000.
CAPITAL
Cost of leased property under capital leases at December 31, 1998 includes
(in thousands):
<TABLE>
<S> <C>
Computers and electronic equipment ......... $ 458
Less accumulated amortization .............. (186)
------
$ 272
======
</TABLE>
Minimum future obligations on capital leases at December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31:
- -------------------------------------------------
<S> <C>
1999 .................................... $132
2000 .................................... 111
2001 .................................... 64
2002 .................................... 17
2003 .................................... 9
----
Total .................................... 333
Less interest ............................ 45
----
Present value of future payments ......... 288
Less current portion ..................... 108
----
Long-term portion ........................ $180
====
</TABLE>
Total payments under capital leases for 1998 was $88,000.
(7) BUSINESS ACQUISITIONS
In 1998, the Company purchased three real estate companies, accounting for
each as a purchase business combination. All identifiable assets acquired were
assigned a portion of the acquisition price equal to their fair value at the
date of acquisition. The goodwill associated with the acquisitions in 1998
totaled $202,000, and is being amortized over 30 years using the straight-line
method. The following companies were purchased for cash consideration during
the year:
F-80
<PAGE>
ROY H. LONG REALTY CO., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION DATE COMPANY PRICE
- ------------------ ----------------------------------- -----------
<S> <C> <C>
April 30, 1998 Mountain Vista Realty Inc. $ 60,000
May 1, 1998 Axiom Realty Group L.L.C. $175,000
July 11, 1998 Property Management portion
of Century 21 Gateway West Realty $ 30,000
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
The Company is a party to lawsuits, claims and assessments arising during
the normal course of business. While the results of lawsuits or other matters
against the Company cannot be predicted with certainty, management, in
consultation with legal counsel, does not expect these matters to have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
F-81
<PAGE>
3,750,000 SHARES
HOMESERVICES.COM INC.
COMMON STOCK
[GRAPHIC OF HOMESERVICES.COM]
-----------------------------
P R O S P E C T U S
-----------------------------
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
Credit Suisse First Boston
, 1999
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table indicates the estimated expenses to be incurred in
connection with the offering, all of which will be paid by HomeServices.
<TABLE>
<S> <C>
SEC registration fee ........................................ $ 19,182
--------
NASD fee .................................................... 7,400
--------
Nasdaq National Market listing fee .......................... *
Accounting fees and expenses ................................ *
Legal fees and expenses ..................................... *
Printing and engraving ...................................... *
Transfer agent's fees ....................................... *
Blue sky fees and expenses (including counsel fees) ......... *
Miscellaneous expenses ...................................... *
--------
Total ..................................................... *
</TABLE>
- ----------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware, the restated certificate of incorporation of HomeServices
(filed herewith as Exhibit 3.3) provides that no director shall be liable to
HomeServices or its stockholders for monetary damages for breach of fiduciary
duty as a director other than for (i) breaches of the directors' duty of
loyalty to HomeServices and its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) the unlawful payment of dividends or unlawful stock purchases or
redemptions under Section 174 of the Delaware General Corporation Law and (iv)
any transaction from which the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines or amounts paid in settlement actually and reasonably
incurred by them in connection with the defense of any action by reason of
being or having been directors or officers, if such person shall have acted in
good faith in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful, except that if such action shall be in the right of the corporation,
no such indemnification shall be provided as to any claim, issue or matter as
to which such person shall have been adjudged to have been liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which the action was brought shall determine upon application
that, in view of all of the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the Court of
Chancery or other court shall deem proper.
The restated certificate of incorporation and the amended and restated
bylaws of HomeServices (filed herewith as Exhibit 3.4) provide for
indemnification of officers and directors of HomeServices, both past and
present, to the fullest extent permitted by the Delaware General Corporation
law, and allow HomeServices to advance or reimburse litigation expenses upon
submission by the director or officer of an undertaking to repay such advances
or reimbursements if it is ultimately determined that indemnification is not
available to such director or officer pursuant to the amended and restated
II-1
<PAGE>
bylaws. The amended and restated bylaws also authorize HomeServices to purchase
and maintain insurance on behalf of an officer or director, past or present,
against any liability asserted against him in any such capacity whether or not
HomeServices would have the power to indemnify him against such liability under
the provisions of its certificate of incorporation or Section 145 of the
Delaware General Corporation Law.
HomeServices intends to provide liability insurance for each of its
directors and officers against certain losses arising from claims made against
them while acting in their capacities as directors or officers of HomeServices,
whether or not HomeServices would have the power to indemnify such person
against such losses, as permitted by law.
The form of Underwriting Agreement filed herewith as Exhibit 1.1 provides,
among other things, for the indemnification by the underwriters of directors
and certain officers of HomeServices against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 13, 1999, HomeServices issued 1,000 shares of common stock to
MidAmerican Energy Holdings Company for consideration of $10.
On August 8, 1999, an aggregate of 2,149 shares of common stock of
HomeServices' predecessor were issued in connection with the acquisition of
Paul Semonin Realtors at a purchase price of $3,955.90 per share based on
MidAmerican Realty Service Company's estimated June 30, 1999 book value based
on preliminary financial results (which is equivalent to a purchase price of
$5.84 per share of HomeServices after giving effect to the exchange of 677.87
shares of HomeServices common stock for each share of MidAmerican Realty
Services Company common stock in the merger). Pursuant to a pre-existing
agreement among HomeServices' predecessors and its stockholders, all of the
stockholders were offered the opportunity to make a capital contribution in a
percentage equal to the percentage ownership held by each of the shareholders
immediately prior to the capital contribution to fund such acquisition. One of
HomeServices' predecessor stockholders, James Koolhof, declined to participate
in the capital contribution. Because Mr. Koolhof declined to make his pro rata
share of such capital contribution, the shares that were offered to Mr. Koolhof
were purchased by MidAmerican Holdings. The shares were issued to reflect the
capital contributions of the other stockholders and to dilute Mr. Koolhof's
interest as a result of his not making the contribution.
On November 1, 1998, HomeServices' predecessor issued $35 million
aggregate principal amount of 7.12% Senior Notes to Massachusetts Mutual Life
Insurance Company and various of its related entities, at a purchase price
equal to 100% of their aggregate principal amount.
In May 1998, HomeServices' predecessor issued an aggregate of 325,300
shares of common stock
at a purchase price of $4.69 per share, on a post-split basis, to Ronald J.
Peltier, R. Michael Knapp, James Koolhof and Arne M. Rovick, who are all
executive officers of HomeServices, for an aggregate purchase price of
$1,525,504.
The foregoing transactions were exempt from the registration requirements
of the Securities Act of 1933, as amended, in reliance on Section 4(2) of the
Securities Act on the basis that such transactions did not involve a public
offering.
Prior to the offering, HomeServices intends to merge with MidAmerican
Realty Services Company, which is a 95.2% owned subsidiary of MidAmerican
Energy Holdings Company, with HomeServices being the surviving corporation in
the merger. In connection with such merger, HomeServices intends to issue
approximately 650.6 shares of its common stock for each share of common stock
of MidAmerican Realty Services Company. Accordingly, HomeServices will issue in
the merger 7,525,964 shares to MidAmerican Energy Holdings Company, 98,889
shares to R. Michael Knapp, 81,323 shares to James Koolhof, 98,889 shares to
Ronald J. Peltier and 98,889 shares to Arne M. Rovick.
The foregoing transaction will be exempt from the registration
requirements of the Securities Act of 1933, as amended, in reliance on Section
4(2) of the Securities Act on the basis that such transaction will not involve
a public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- --------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between MidAmerican Realty Services
Company and HomeServices.Com Inc.
3.1 + Certificate of Incorporation.
3.2 + Bylaws.
3.3 Form of Amended and Restated Certificate of Incorporation of HomeServices.Com Inc.
3.4 Form of Amended and Restated Bylaws of HomeServices.Com Inc.
4.1 Specimen of Common Stock Certificate.
4.2 Form of Rights Agreement.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, regarding legality of securities
being registered.
10.1 + Credit Agreement, dated as of November 12, 1998, between MidAmerican Realty
Services Company and LaSalle National Bank.
10.2 + Note Purchase Agreement dated as of November 1, 1998 between MidAmerican Realty
Services Company and the purchasers listed in Schedule A thereto.
10.3 Form of Registration Rights Agreement.
10.4 Form of Services Agreement.
10.5* Form of Stock Option Plan.
10.6* Form of Amended and Restated Revolving Credit Facility.
10.7 Employment Agreement dated as of May 27, 1998 between MidAmerican Realty
Services Company and Ronald J. Peltier.
10.8* Form of Amendment to the Employment Agreement dated as of September , 1999
between HomeServices and Ronald J. Peltier.
10.9 Employment Agreement, dated as of September 1, 1998, between J.C. Nichols
Residential, Inc. and Jack W. Frost.
10.10 Employment Agreement, dated as of May 27, 1998, between MidAmerican Realty
Services Company and Arne Rovick.
10.11 Employment Agreement, dated as of August 18, 1998, between Home Real Estate
Company of Omaha and Joseph J. Valenti.
10.12 Employment Agreement, dated as of May 27, 1998, between MidAmerican Realty
Services Company and R. Michael Knapp.
21.1 + Subsidiaries of HomeServices.Com Inc.
23.1* Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of KPMG LLP.
24.1 + Power of Attorney (included on page II-4).
27.1 + Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES:
None.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(a) HomeServices hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of HomeServices by HomeServices pursuant to the Underwriting Agreement,
the restated certificate of incorporation, the amended and restated bylaws, the
Delaware General Corporation Law or otherwise, HomeServices has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by HomeServices of expenses
incurred or paid by a director, officer or controlling person of HomeServices
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, HomeServices will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the adjudication of such issue.
(c) HomeServices hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by HomeServices pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed tobe the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS
DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN EDINA, MINNESOTA,
ON SEPTEMBER 13, 1999.
HomeServices.Com Inc.
By: /s/ Ronald J. Peltier
------------------------------------
Name: Ronald J. Peltier
Title: President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- ------------------------------------ -------------------
<S> <C> <C>
* Chairman and Director September 13, 1999
- -----------------------------
David L. Sokol
/s/ Ronald J. Peltier President, Chief Executive Officer September 13, 1999
- ----------------------------- and Director
Ronald J. Peltier
/s/ Dwayne J. Coben Senior Vice President and Chief September 13, 1999
- ----------------------------- Financial Officer
Dwayne J. Coben (principal financial and
accounting officer)
* Director September 13, 1999
- -----------------------------
Jack W. Frost
* Director September 13, 1999
- -----------------------------
R. Michael Knapp
* Director September 13, 1999
- -----------------------------
Steven A. McArthur
* Director September 13, 1999
- -----------------------------
Gregory E. Abel
* Director September 13, 1999
- -----------------------------
Richard R. Jaros
* Director September 13, 1999
- -----------------------------
W. David Scott
* By: /s/ Dwayne J. Coben
------------------------
Dwayne J. Coben
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
[DRAFT OF SEPTEMBER 3, 1999]
[INSERT NUMBER OF SHARES]
HOMESERVICES.COM INC.
COMMON STOCK
UNDERWRITING AGREEMENT
[ ] , 1999
U.S. Bancorp Piper Jaffray Inc.
Credit Suisse First Boston Corporation
As Representatives of the Several Underwriters,
c/o U.S. Bancorp Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, MN 55402
Dear Sirs:
1. Introductory. HomeServices.Com Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell to the Underwriters named in Schedule A
hereto ("UNDERWRITERS") ________ shares of its Common Stock, par value $0.01 per
share ("SECURITIES"), and MidAmerican Energy Holdings Company ("SELLING
STOCKHOLDER") proposes to sell to the Underwriters ________ outstanding shares
of the Securities (such shares of Securities being hereinafter referred to as
the "FIRM SECURITIES"). The Company also proposes to sell to the Underwriters,
at the option of the Underwriters, an aggregate of not more than ________
additional shares of its Securities and the Selling Stockholder also proposes to
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than ________ additional outstanding shares of the Company's Securities, as
set forth below (such ________ additional shares being hereinafter referred to
as the "OPTIONAL SECURITIES"). The Firm Securities and the Optional Securities
are herein collectively called the "OFFERED SECURITIES". As part of the offering
contemplated by this Agreement, U.S. Bancorp Piper Jaffray (the "Designated
Underwriter") has agreed to reserve out of the Firm Securities purchased by it
under this Agreement, up to ________ shares, for sale to the Company's
directors, officers, employees and sales associates (collectively,
"Participants"), as set forth in the Prospectus (as defined herein) under the
heading "Underwriters" (the "Directed Share Program"). The Firm Securities to be
sold by the Designated Underwriter pursuant to the Directed Share Program (the
"Directed Shares") will be sold by the Designated Underwriter pursuant to this
Agreement at the public offering price. Any Directed Shares not orally confirmed
for purchase by a Participant by the end of the business day on which this
Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus. The Company and the Selling Stockholder hereby agree
with the several Underwriters as follows:
2. Representations and Warranties of the Company and the Selling
Stockholder. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
<PAGE>
(i) A registration statement on Form S-1 (No. 333-82997)
relating to the Offered Securities, including a form of prospectus,
has been filed with the Securities and Exchange Commission
("COMMISSION") and either (A) has been declared effective under the
Securities Act of 1933 ("ACT") and is not proposed to be amended or
(B) is proposed to be amended by amendment or post-effective
amendment. If such registration statement (the "INITIAL REGISTRATION
STATEMENT") has been declared effective, either (A) an additional
registration statement (the "ADDITIONAL REGISTRATION STATEMENT")
relating to the Offered Securities may have been filed with the
Commission pursuant to Rule 462(b) ("RULE 462(b)") under the Act and,
if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement, or (B) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial
registration statement and such additional registration statement. If
the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed
and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has
been filed with the Commission prior to the execution and delivery of
this Agreement, the most recent amendment (if any) to each such
registration statement has been declared effective by the Commission
or has become effective upon filing pursuant to Rule 462(c) ("RULE
462(c)") under the Act or, in the case of the additional registration
statement, Rule 462(b). For purposes of this Agreement, "EFFECTIVE
TIME" with respect to the initial registration statement or, if filed
prior to the execution and delivery of this Agreement, the additional
registration statement, means (A) if the Company has advised the
Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement,
or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and
time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "EFFECTIVE TIME" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "EFFECTIVE DATE" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all information
contained in the additional registration statement (if any) and deemed
to be a part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION
STATEMENT". The Initial Registration Statement and the Additional
Registration are hereinafter referred to collectively as the
"REGISTRATION STATEMENTS" and individually as a "REGISTRATION
STATEMENT". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("RULE 424(b)") under the
2
<PAGE>
Act or (if no such filing is required) as included in a Registration
Statement, is hereinafter referred to as the "PROSPECTUS". No document
has been or will be prepared or distributed in reliance on Rule 434
under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement:
(A) on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all material respects to
the requirements of the Act and the rules and regulations of the
Commission ("RULES AND REGULATIONS") and did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement conformed
or will conform, in all material respects to the requirements of the
Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading,
and (C) on the date of this Agreement, the Initial Registration
Statement and, if the Effective Time of the Additional Registration
Statement is prior to the execution and delivery of this Agreement,
the Additional Registration Statement each conforms, and at the time
of filing of the Prospectus pursuant to Rule 424(b) or (if no such
filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to
make the statements therein (with respect to the Prospectus, in the
light of the circumstances under which they were made) not misleading.
If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a
material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein (with
respect to the Prospectus, in the light of the circumstances under
which they were made) not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do
not apply to statements in or omissions from a Registration Statement
or the Prospectus based upon written information furnished to the
Company by or on behalf of any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(c)
hereof.
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
and the Company is duly registered or qualified to do business as a
foreign corporation in good standing in each jurisdiction in which
such registration or qualification or good standing is required
(whether by reason of the ownership or leasing of property or the
conduct of business), except where the failure to so register or
qualify or be in good standing is not reasonably likely to have a
material adverse effect on the financial condition, business or
results of operation of the Company and the Subsidiaries (as defined
below) taken as a whole (a "MATERIAL ADVERSE EFFECT").
(iv) Each Subsidiary has been duly incorporated and is an
existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus;
3
<PAGE>
and each Subsidiary is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which such
registration or qualification or good standing is required (whether by
reason of the ownership or leasing of property or the conduct of
business), except where the failure to so register or qualify or be in
good standing is not reasonably likely to have a Material Adverse
Effect; all of the issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued and is fully
paid and nonassessable; and the capital stock of each Subsidiary owned
by the Company, directly or through Subsidiaries, is owned free from
any material liens, encumbrances and security interests. For purposes
of this Agreement, the term "SUBSIDIARY" shall mean the entities
listed in Schedule B hereto ("SCHEDULE B"), which are all of the
material direct or indirect "SUBSIDIARIES" of the Company, as such
term is defined in Rule 405 of the Rules and Regulations, and are all
of the "SIGNIFICANT SUBSIDIARIES" of the Company, as such term is
defined in Rule 1-02 of Regulation S-X.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all
outstanding shares of capital stock of the Company are, and, when the
Offered Securities have been delivered and paid for in accordance with
this Agreement on each Closing Date (as defined below) such Offered
Securities will have been, validly issued, fully paid and
nonassessable and will conform to the description thereof contained in
the Prospectus; and the stockholders of the Company have no preemptive
rights with respect to the Offered Securities which have not been
waived.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or
any Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering of the Offered Securities.
(vii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings which have not been satisfied
or waived between the Company and any person granting such person the
right to require the Company to file a registration statement under
the Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(viii) The Securities have been approved for listing subject
to notice of issuance on The Nasdaq Stock Market's National Market.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the
sale of the Offered Securities, except such as have been obtained and
made under the Act and such as may be required by the National
Association of Securities Dealers, Inc. or under state securities or
Blue Sky laws in connection with the purchase and distribution of the
Offered Securities by the Underwriters.
(x) The execution, delivery and performance of this Agreement,
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under (A) any statute, rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any Subsidiary or any
of their properties, (B) any agreement or instrument to which
4
<PAGE>
the Company or any such Subsidiary is a party or by which the Company
or any such Subsidiary is bound or to which any of the properties of
the Company or any such Subsidiary is subject, or (C) the charter or
by-laws of the Company or any such Subsidiary where, in the case of
the foregoing clauses (A) and (B) only, any such breaches, defaults or
violations, individually or in the aggregate, is reasonably likely to
(i) have a Material Adverse Effect or (ii) impair the validity or
enforceability of the Offered Securities under the Act.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and
its Subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them that are material to
the business of the Company and Subsidiaries taken as a whole, in each
case free from liens, encumbrances and defects that would materially
interfere with the use made or to be made thereof by them; and except
as disclosed in the Prospectus, the Company and its Subsidiaries hold
any leased real or personal property that is material to the business
of the Company and Subsidiaries taken as a whole, under valid and
enforceable leases , in each case free from liens, encumbrances and
defects that would materially interfere with the use made or to be
made thereof by them.
(xiii) The Company and its Subsidiaries possess all material
certificates, authorities or permits issued by appropriate
governmental agencies or bodies necessary to conduct the business now
operated by them and have not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authority or permit that, if determined adversely to the Company or
any of its Subsidiaries, would individually or in the aggregate be
reasonably likely to have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or
any Subsidiary exists or, to the knowledge of the Company, is
threatened that is reasonably likely to have a Material Adverse
Effect.
(xv) The Company and its Subsidiaries own, possess or can
acquire on reasonable terms, adequate, or have the right to use, all
trademarks, trade names and other rights to inventions, know-how,
patents, copyrights, confidential information and other intellectual
property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary to
conduct the business now operated by them, or presently employed by
them except where the failure to own, possess, use or otherwise be
able to acquire such intellectual property would not, singly or in the
aggregate, have a Material Adverse Effect; and neither the Company nor
its Subsidiaries have received any notice of infringement of or
conflict with asserted rights of others with respect to any
intellectual property rights that, if determined adversely to the
Company or any of its Subsidiaries, would individually or in the
aggregate be reasonably likely to have a Material Adverse Effect.
(xvi) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of
toxic wastes, hazardous wastes or hazardous substances, pollutants or
contaminates by the Company or any Subsidiary (or, to the knowledge of
the Company, any of their predecessors in interest) at, upon or from
any of the property now or previously owned or leased by the Company
or any Subsidiary in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or
remedial action which does not have, or would not be reasonably likely
to have, individually or in the aggregate with all such violations and
remedial actions, a Material
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Adverse Effect; there has been no off-site disposal or migration of
toxic waste, hazardous waste or hazardous substances, pollutants or
contaminants for which the Company or any Subsidiary is liable nor is
the Company or any Subsidiary subject to any claim relating to any
environmental laws which violation, liability or claim would
individually or in the aggregate be reasonably likely to have a
Material Adverse Effect; there has been no material spill, discharge,
leak, emission, injection, escape, dumping or release of any kind onto
the property now or previously owned or leased by the Company or any
Subsidiary or into the environment surrounding such property of any
toxic wastes, solid wastes, hazardous wastes or hazardous substances,
pollutants or contaminants due to or caused by the Company or any
Subsidiary or with respect to which the Company or any Subsidiary has
knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping, or release which does not have, or would
not be reasonably likely to have, individually or in the aggregate
with all such spills, discharges, leaks, emissions, injections,
escapes, dumpings and releases, a Material Adverse Effect; neither the
Company nor any Subsidiary has knowledge of any pending or threatened
investigation which might lead to a violation, liability or claim
which would individually or in the aggregate be reasonably likely to
have a Material Adverse Effect; and the terms "HAZARDOUS WASTES",
"TOXIC WASTES" and "HAZARDOUS SUBSTANCES" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(xvii) Except as disclosed in the Prospectus, there are no
actions, suits or proceedings against or affecting the Company or any
Subsidiary or any of their respective properties or assets now pending
or, to the knowledge of the Company, threatened or contemplated (i) of
a character required to be disclosed in the Registration Statement
which are not adequately disclosed in the Registration Statement or
(ii) that, if determined adversely to the Company or any of its
Subsidiaries, would individually or in the aggregate be reasonably
likely to have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context
of the sale of the Offered Securities.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated Subsidiaries as of the dates shown
and their results of operations and cash flows for the periods shown,
and such financial statements have been prepared in conformity with
the generally accepted accounting principles in the United States
applied on a consistent basis throughout the periods therein
specified; the schedules included in each Registration Statement
present fairly the information required to be stated therein; and the
assumptions used in preparing the pro forma financial statements
included in each Registration Statement and the Prospectus are
reasonable and the related pro forma adjustments give appropriate
effect to those assumptions.
(xix) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus
there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the
financial condition, business, properties or results of operations of
the Company and its Subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof by the Company as described in the Prospectus, will
not be an "investment company" as defined in the Investment Company
Act of 1940.
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(xxi) The use of the proceeds of the offering of the Offered
Securities as described in the Prospectus has been duly authorized by
all necessary action on the part of the Company.
(xxii) The Company has full power and authority to authorize,
issue and sell the Offered Securities as contemplated by this
Agreement.
(xxiii) Except as disclosed in or contemplated by the
Prospectus, the Company and its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is customary for
similarly situated companies in the Company's and such Subsidiaries'
industries respectively. Each of the foregoing insurance policies is
valid and in full force and effect, and no event has occurred and is
continuing that permits, or after notice or lapse of time or both
would permit, modifications or terminations of the foregoing that,
individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect.
(xxiv) The Company and its Subsidiaries are currently
conducting their respective businesses as described in the Prospectus.
(xxv) There is no relationship, direct or indirect, that
exists between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of the
Company on the other hand, of a character required to be described in
the Registration Statement or Prospectus which is not described as
required under the Act.
(xxvi) The Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or
supplements thereto will comply, with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or any
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program. No
authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality
or court, other than such as have been obtained, is necessary under
the securities law and regulations of foreign jurisdictions in which
the Directed Shares are offered outside the United States. The Company
has not offered, or caused the Underwriters to offer, any Offered
Securities to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its
products.
(b) The Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters that:
(i) The Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the
Offered Securities to be delivered by the Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by the Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities on each Closing Date hereunder, the several Underwriters
will acquire valid and unencumbered title to the Offered Securities to
be delivered by the Selling Stockholder on such Closing Date.
(ii) The information in the Prospectus under the headings
"Summary" and "Principal and Selling Stockholder" which specifically
relates to the Selling Stockholder (the "Selling
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Stockholder Information") does not, and will not on each Closing Date,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Selling
Stockholder and any person that would give rise to a valid claim
against the Selling Stockholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with this
offering of the Offered Securities.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and the Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and the Selling Stockholder, at a purchase price of $_____ per share, the number
of Firm Securities set forth below the caption "Company" or "Selling
Stockholder", as the case may be, and opposite the name of such Underwriter in
Schedule A hereto.
The Company and the Selling Stockholder will deliver the Firm
Securities to the Representatives for the accounts of the Underwriters, against
payment of the purchase price in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to U.S. Bancorp
Piper Jaffray Inc. drawn to the order of HomeServices.Com Inc. in the case of
__________________________ Firm Securities and MidAmerican Energy Holdings
Company in the case of _____________________ Firm Securities, at the office of
Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York, 10112, at
10:00 A.M., New York time, on [__________], 1999, or at such other time not
later than seven full business days thereafter as U.S. Bancorp Piper Jaffray
Inc. and the Company determine, such time being herein referred to as the "FIRST
CLOSING DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of
1934, the First Closing Date (if later than the otherwise applicable settlement
date) shall be the settlement date for payment of funds and delivery of
securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as U.S. Bancorp Piper
Jaffray Inc. requests and will be made available for checking and packaging at
the above office of Chadbourne & Parke LLP at least 24 hours prior to the First
Closing Date.
In addition, upon written notice from U.S. Bancorp Piper Jaffray Inc.
given to the Company and the Selling Stockholder from time to time not more than
30 days subsequent to the date of the Prospectus, the Underwriters may purchase
all or less than all of the Optional Securities at the purchase price per
Security to be paid for the Firm Securities. The Company and the Selling
Stockholder agree, severally and not jointly, to sell to the Underwriters the
respective numbers of Optional Securities obtained by multiplying the number of
shares specified in such notice by a fraction the numerator of which is
_________ in the case of the Company and ____________ in the case of the
Selling Stockholder and the denominator of which is the total number of
Optional Securities (subject to adjustment by U.S. Bancorp Piper Jaffray Inc.
to eliminate fractions). Such Optional Securities shall be purchased from the
Company and the Selling Stockholder for the account of each Underwriter in the
same proportion as the number of Firm Securities set forth opposite such
Underwriter's name bears to the total number of Firm Securities (subject to
adjustment by U.S. Bancorp Piper Jaffray Inc. to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be
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surrendered and terminated at any time upon notice by U.S. Bancorp Piper Jaffray
Inc. to the Company and the Selling Stockholder.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by U.S.
Bancorp Piper Jaffray Inc. but shall be not later than seven full business days
after written notice of election to purchase Optional Securities is given. The
Company and the Selling Stockholder will deliver the Optional Securities being
purchased on each Optional Closing Date to the Representatives for the accounts
of the several Underwriters, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to U.S. Bancorp Piper Jaffray Inc. drawn to the
order of HomeServices.Com Inc. in the case of Optional Securities sold by the
Company and MidAmerican Energy Holdings Company in the case of Optional
Securities sold by the Selling Stockholder, at the above office of Chadbourne &
Parke LLP. The certificates for the Optional Securities being purchased on each
Optional Closing Date will be in definitive form, in such denominations and
registered in such names as U.S. Bancorp Piper Jaffray Inc. requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of Chadbourne & Parke LLP at a
reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholder. The
Company and, to the extent set forth on the signature page hereto, the Selling
Stockholder, agree with the several Underwriters and each other that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement,
the Company will file the Prospectus with the Commission pursuant to
and in accordance with subparagraph (1) (or, if applicable and if
consented to by U.S. Bancorp Piper Jaffray Inc., subparagraph (4)) of
Rule 424(b) not later than the second business day following the
execution and delivery of this Agreement.
The Company will advise U.S. Bancorp Piper Jaffray Inc.
promptly of any such filing pursuant to Rule 424(b). If the Effective
Time of the Initial Registration Statement is prior to the execution
and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities
under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional
registration statement or , if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance
with Rule 462 (b) on or prior to 10:00P.M., New York time, on the date
of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by U.S.
Bancorp Piper Jaffray Inc.
(b) The Company will advise U.S. Bancorp Piper Jaffray Inc.
promptly of any proposal to amend or supplement the initial or any
additional registration statement as filed or the related prospectus
or the Initial Registration Statement, the Additional Registration
Statement (if any) or the Prospectus and will not effect such
amendment or supplementation without U.S. Bancorp Piper Jaffray Inc.'s
consent, which consent shall not be unreasonably withheld; and the
Company will also advise U.S. Bancorp Piper Jaffray Inc. promptly of
the effectiveness of each Registration Statement (if its Effective
Time is subsequent to the execution and delivery of this Agreement)
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and of any amendment or supplementation of a Registration Statement or
the Prospectus and of the institution by the Commission of any stop
order proceedings in respect of a Registration Statement and will use
its reasonable best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required, in the opinion of counsel for the
Underwriters, to be delivered under the Act in connection with sales
by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify U.S. Bancorp Piper Jaffray Inc. of
such event and will promptly prepare and file with the Commission, at
its own expense, an amendment or supplement which will correct such
statement or omission or an amendment which will effect such
compliance. Neither U.S. Bancorp Piper Jaffray Inc.'s consent to, nor
the Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than 16 months after
the date of this Agreement, the Company will make generally available
to its securityholders an earnings statement covering a period of at
least 12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions
of Section 11(a) of the Act.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (two of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter
or dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as U.S. Bancorp Piper
Jaffray Inc. requests. Such documents shall be so furnished as soon as
available. The Prospectus shall be so furnished as soon as practicable
but no later than on or prior to 3:00 P.M., New York time, on the
second business day following the later of the execution and delivery
of this Agreement or the Effective Time of the Initial Registration
Statement. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions in
the United States as U.S. Bancorp Piper Jaffray Inc. designates and
will continue such qualifications in effect so long as required for
the distribution, provided that, in connection therewith the Company
shall not, with respect to any such jurisdiction, be required to
qualify as a foreign corporation, to file a general consent to service
of process or to take any other action that would subject it to
service of process in suits other than those arising out of the
offering of the Offered Securities or to taxation in respect of doing
business in any jurisdiction in which it is not otherwise subject.
(g) During the period of three years hereafter, the Company
will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each
fiscal year, a copy of its annual report to stockholders for such
year; and the Company will furnish to the Representatives as soon as
available, a copy of each report and any
10
<PAGE>
definitive proxy statement of the Company filed with the Commission
under the Securities Exchange Act of 1934 or mailed to stockholders.
(h) For a period of 180 days after the date of the initial
public offering of the Offered Securities, neither the Company nor any
of its directors or officers will offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or
representing the right to receive shares of the Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of U.S.
Bancorp Piper Jaffray Inc., except (i) issuances of Securities
pursuant to the conversion or exchange of convertible or exchangeable
securities or the exercise of warrants or options, in each case
outstanding on the date hereof; (ii) grants of employee stock options
pursuant to the terms of a plan in effect on the date hereof, or
issuances of Securities pursuant to the exercise of such options;
(iii) sales of Securities pursuant to employee stock benefit plans in
effect on the date hereof, (iv) filing with the Commission a
registration statement relating to the Securities described in the
preceding clauses (i), (ii) and (iii); (v) pledges of Securities made
to secure debt issued by the Selling Stockholder in connection with
any future public or private financings; and (vi) any transfer of
Securities by a director or officer of the Company to a member of such
director's or officer's immediate family, to a trust of which such
director or officer or an immediate family member thereof is the
beneficiary, to the estate of such director or officer upon his death
or to any other person as a bona fide gift, provided, in the case of
(v) and (vi) above, that the acquiring entity, pledgee or transferee
agree in writing to be bound by the foregoing transfer limitations.
The Company shall, concurrently with the execution of this Agreement,
deliver to U.S. Bancorp Piper Jaffray Inc. an agreement in the form of
Exhibit A hereof executed by each of the directors and officers of the
Company pursuant to which each such person agrees not to offer, sell,
contract to sell, pledge, grant any option to purchase, or otherwise
dispose of any of the Company's Securities or any securities
convertible into or exercisable or exchangeable for such Securities
for a period of 180 days after the date of the initial public offering
of the Offered Securities.
(i) The Company agrees with the several Underwriters that the
Company will pay all expenses incident to the performance of the
obligations of the Company and the Selling Stockholder under this
Agreement, for any filing fees and other expenses (including
reasonable fees and disbursements of counsel) in connection with
qualification of the Offered Securities for sale under the laws of
such jurisdictions as U.S. Bancorp Piper Jaffray Inc. designates and
the printing of memoranda relating thereto for the filing fee incident
to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. ("NASD") of the Offered
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Stockholder of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(j) The Selling Stockholder agrees to deliver to U.S. Bancorp
Piper Jaffray Inc., attention: Investment Banking on or prior to the
First Closing Date a properly completed and executed United States
Treasury Department Form W9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
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(k) The Selling Stockholder agrees, for a period of 180 days
after the date of the initial public offering of the Offered
Securities, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of the Securities or
securities convertible into or exchangeable or exercisable for any
shares of Securities, or representing the right to receive shares of
the Securities or publicly disclose the intention to make any such
offer, sale pledge or disposition, without the prior written consent
of U.S. Bancorp Piper Jaffray Inc. provided, however, that the Selling
Stockholder may (i) offer, sell, pledge or otherwise dispose of
Securities to any of its affiliates so long as the acquiring affiliate
agrees in writing to be bound by the foregoing transfer limitations
and (ii) pledge Securities to secure any existing or future debt
issued by the Selling Stockholder or any of its affiliates, provided
further, however, that the pledgee agrees in writing to be bound by
the foregoing transfer limitations.
(l) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of 180 days following
the date of the effectiveness of the Registration Statement. The
Designated Underwriter will notify the Company as to which
Participants will need to be so restricted. The Company will direct
the transfer agent to place stop transfer restrictions upon such
securities for such period of time.
(m) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed
Share Program.
(n) The Company will comply with all applicable securities and
other applicable laws, rules and regulations in each foreign
jurisdiction in which the Directed Shares are offered in connection
with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholder of their
obligations hereunder and to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to
the registration statement to be filed shortly prior to such Effective
Time), from each of PricewaterhouseCoopers LLP, KPMG Peat Marwick LLP
and Deloitte & Touche LLP in a form previously agreed.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or such later
date as shall have been consented to by U.S. Bancorp Piper Jaffray
Inc. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter, or
12
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shall have occurred at such later date as shall have been consented to
by U.S. Bancorp Piper Jaffray Inc. If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Selling Stockholder, the
Company or the Representatives, shall be contemplated by the
Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the financial
condition, business or results of operations of the Company and its
Subsidiaries taken as one enterprise which, in the judgment of a
majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities; (ii) any downgrading
in the rating of any debt securities or preferred stock of the Company
by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act), or any public
announcement that any such organization has under surveillance or
review its rating of any debt securities or preferred stock of the
Company (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading, of
such rating); (iii) any suspension or limitation of trading in
securities generally on the New York Stock Exchange, or any setting of
minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S.
Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any
declaration of war by the United States Congress or any other
substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency on the financial markets makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP,
counsel for the Company, to the effect that:
(i) the Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of its incorporation, with corporate power and authority
to own its properties and conduct its business as described in
the Prospectus;
(ii) the Offered Securities delivered on such Closing
Date when paid for in accordance with this Agreement have been
duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained
in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Offered Securities which
have not been waived;
(iii) the Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof by the Company as
described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940;
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(iv) under the Delaware General Corporation Law and
such laws of the State of New York and the laws of the United
States of America that in such counsel's experience are
normally applicable to transactions of the type contemplated
by this Agreement (except for state and foreign securities or
Blue Sky laws and the rules and regulations of the National
Association of Securities Dealers, Inc.) but without having
made any investigation regarding any other laws, no consent,
approval, authorization or order of, or filing with, any
governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement;
(v) the execution and delivery by the Company of this
Agreement and the performance by the Company of its
obligations hereunder do not (i) conflict with the Certificate
of Incorporation or By-laws of the Company or (ii) constitute
a violation of or default under any Applicable Contracts (as
hereinafter defined). Such counsel need not express any
opinion, however, as to whether the execution, delivery or
performance by the Company of this Agreement will constitute a
violation of or a default under any covenant, restriction or
provision with respect to financial ratios or tests or any
aspect of the financial condition or results of operations of
the Company. "APPLICABLE CONTRACTS" mean those agreement or
instruments set forth on a schedule to such opinion which have
been identified to such counsel by the Company as all the
agreements and instruments which are material to the business
or financial condition of the Company (including all contracts
filed as exhibits to the Registration Statement);
(vi) neither the execution, delivery or performance
by the Company of its obligations under this Agreement nor
compliance by the Company with the terms hereof will
contravene any statute, rule, regulation or order of any
federal or New York governmental agency or body or any federal
or New York court having jurisdiction over the Company or any
Subsidiary or any of their properties, which orders have been
identified to such counsel by the Company and set forth on a
schedule to such opinion;
(vii) Such counsel has been orally advised by the
Commission that the Initial Registration Statement was
declared effective under the Act as of the date and time
specified in such opinion, the Additional Registration
Statement, if any, was filed and became effective under the
Act as of the date and time (if determinable) specified in
such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and
such counsel was orally advised by the Commission that no stop
order suspending the effectiveness of a Registration Statement
or any part thereof has been issued and no proceedings for
that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement
and the Prospectus, and each amendment or supplement thereto,
as of their respective effective or issue dates, complied as
to form in all material respects with the requirements of the
Act and the Rules and Regulations, except that, in each case,
such counsel does not express an opinion as to the financial
statements, schedules and other financial and statistical data
included therein or excluded therefrom or the exhibits
thereto, and, such counsel does not assume any responsibility
for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus;
such counsel has no reason to believe that the Registration
Statement or any amendment thereto, as of its effective date,
or as of the Closing Date, contained any untrue statement of a
material fact or omitted to
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state any material fact required to be stated therein or
necessary to make the statements therein not misleading; or
that the Prospectus or any amendment or supplement thereto,
as of its issue date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; except that, in each case, such
counsel does not express an opinion as to the financial
statements, schedules and other financial and statistical
data included therein or excluded therefrom or the exhibits
thereto;
(viii) based solely on such counsel's discussions
with the officers or other appropriate representatives of the
Company or any Subsidiary responsible for the matters
discussed herein and such counsel's review of documents
furnished to it by the Company or any Subsidiary and its
reliance on an officer's certificate and, without having made
any other inquiries or investigations or any search of the
public docket records of any court, governmental agency or
body or administrative agency, there is no action, suit or
proceeding before any court, governmental agency, body or
authority, domestic or foreign, now pending or, to such
counsel's knowledge. threatened, against the Company or any
Subsidiary that is required to be disclosed in the Prospectus
other than those disclosed in the Prospectus;
(ix) the Company has all requisite corporate power
and authority to enter into this Agreement, to issue the
Offered Securities and to consummate the transactions
contemplated by this Agreement;
(x) to such counsel's knowledge, there are no
contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statement by the Act or by the Rules and
Regulations which have not been described or filed as exhibits
to the Registration Statement;
(xi) this Agreement has been duly authorized,
executed and delivered by the Company;
(xii) assuming that U.S. Bancorp Piper Jaffray does
not have notice of any adverse claims with respect to
certificate number ___ registered in the name of the Selling
Stockholder and evidencing _________ shares of the Offered
Securities of the Company (the "Purchased Shares") then, upon
delivery to U.S. Bancorp Piper Jaffray in the State of New
York, such certificate indorsed to U.S. Bancorp Piper Jaffray
or indorsed in blank, U.S. Bancorp Piper Jaffray will acquire
such certificate (and the shares represented thereby) free of
any adverse claims (under Section 8-305 of the Uniform
Commercial Code as in effect on the Closing Date in the State
of New York); and
(xiii) the merger of MidAmerican Realty Services
Company, an Iowa corporation, with and into the Company has
been consummated as described in the Prospectus.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Steven A. McArthur, in his capacity as Senior
Vice President and General Counsel for the Company and the Selling
Stockholder, to the effect that:
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(i) each of the Company and its Subsidiaries has been
duly incorporated and is an existing corporation in good
standing under the laws of the State of its incorporation,
with corporate power and authority to own its properties and
conduct its business as described in the Prospectus; and each
of the Company and its Subsidiaries is duly qualified to do
business as a foreign corporation in good standing in each
jurisdiction in which such registration or qualification or
good standing is required (whether by reason of the ownership
or leasing of property, the conduct of business or otherwise),
except where the failure to so qualify or be in good standing
is not reasonably likely to have a Material Adverse Effect;
(ii) to such counsel's knowledge and except as
disclosed in the prospectus, there are no contracts,
agreements or understandings which have not been satisfied or
waived between the Company and any person granting such person
the right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities
registered pursuant to the Registration Statement;
(iii) under the Delaware General Corporation Law and
such laws of the State of New York and the laws of the United
States of America that in such counsel's experience are
normally applicable to transactions of the type contemplated
by this Agreement (except for state and foreign securities or
Blue Sky laws and the rules and regulations of the National
Association of Securities Dealers, Inc.) but without having
made any investigation regarding any other laws, no consent,
approval, authorization or order of, or filing with, any
governmental agency or body or any court is required to be
obtained or made by the Selling Stockholder for the
consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered
Securities sold by the Selling Stockholder;
(iv) such counsel has no reason to believe that the
Registration Statement, or any amendment thereto, as of its
effective date contained any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein
not misleading; or that the Prospectus or any amendment or
supplement thereto, as of its date or as of such Closing
Date, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading; except that, in
each case, such counsel does not express an opinion as to the
financial statements, schedules and other financial and
statistical data included therein or excluded therefrom or
the exhibits thereto;
(v) all outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are
fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; and the stockholders of
the Company have no preemptive rights with respect to such
capital stock which have not been waived;
(vi) to the best knowledge of such counsel, all the
outstanding shares of capital stock of each Subsidiary have
been duly and validly authorized and issued and are fully paid
and non-assessable; and to the best knowledge of such counsel,
except as disclosed in or contemplated by the Prospectus, all
outstanding shares of capital stock of each such Subsidiary
are owned beneficially by the Company free and clear of any
material claims, liens, encumbrances and security interests;
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<PAGE>
(vii) except as disclosed in or contemplated by the
Prospectus, each of the Company and its Subsidiaries has good
and marketable title to, or valid and enforceable leasehold or
contractual interests in, all real properties and all other
properties and assets owned or leased by each of them that are
material to the business of the Company and its Subsidiaries
taken as a whole, in each case free from all liens,
encumbrances, and defects that would materially interfere with
the use made or to be made thereof by them;
(viii) to such counsel's knowledge, there is no legal
or governmental action, suit or proceeding before any court,
governmental agency, body or authority, domestic or foreign,
now pending, threatened against, or involving, the Company or
any Subsidiary (i) of a character required to be disclosed in
the Prospectus which is not adequately disclosed in the
Prospectus or (ii) that, if determined adversely to the
Company or any Subsidiary, is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect;
(ix) to such counsel's knowledge, the Company and
each Subsidiary (i) has obtained each license, permit,
certificate, franchise or other governmental authorization
which is material to the ownership of their properties or to
the conduct of their businesses as described in the Prospectus
and (ii) is in compliance with all terms and conditions of
such license, permit, certificate, franchise or other
governmental authorization, except in either case where the
failure to do so is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect;
(x) to such counsel's knowledge, there are no
contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statement by the Act or by the Rules and
Regulations which have not been described or filed as exhibits
to the Registration Statement;
(xi) the execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated will not, to the best of such counsel's
knowledge, (i) result in a breach or violation of any of the
terms and provisions of, or constitute a default under (A) any
statute, any rule, regulation or order of any governmental
agency or body or any court having jurisdiction over the
Selling Stockholder or any of its properties or (B) any
agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder is bound or to which
any of the properties of the Selling Stockholder is subject or
(ii) conflict with the charter or by-laws of the Selling
Stockholder where, in the case of the foregoing clause (i)
only, any such breaches, defaults or violations, individually
or in the aggregate, is reasonably likely to (1) have a
material adverse effect on the financial condition, business
or results of operation of the Selling stockholder and its
subsidiaries taken as a whole or (2) impair the validity or
enforceability of the Offered Securities under the Act; and
(xii) this Agreement has been duly authorized,
executed and delivered by the Selling Stockholder.
(f) The Representatives shall have received from Chadbourne &
Parke LLP, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the
Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives
17
<PAGE>
may require, and the Selling Stockholder and the Company shall have
furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the
Prospectus was printed and distributed to any Underwriter; and,
subsequent to the respective dates of the most recent financial
statements in the Prospectus, there has been no material adverse
change, nor any development or event involving a prospective material
adverse change, in the financial condition, business or results of
operations of the Company and its Subsidiaries taken as a whole except
as set forth in or contemplated by the Prospectus or as described in
such certificate.
(h) The Representatives shall have received a letter, dated
such Closing Date, of PricewaterhouseCoopers LLP, KPMG Peat Marwick
LLP and Deloitte & Touche LLP which meets the requirements of
subsection (a) of this Section, except that the specified date
referred to in such subsection will be a date not more than three days
prior to such Closing Date for the purposes of this subsection.
(i) The merger of MidAmerican Realty Services Company, an Iowa
corporation, with and into the Company shall have been consummated in
the manner described in the Prospectus.
The Selling Stockholder and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. U.S. Bancorp Piper Jaffray Inc. may in
its sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein (with respect to the Prospectus, in light of the
circumstances under which they were made) not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability or action arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with
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<PAGE>
written information furnished to the Company by or on behalf of any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (c) below; and provided,
further, that with respect to any untrue statement or alleged untrue statement
in or omission or alleged omission from the preliminary prospectus dated
_______, the indemnity agreement contained in this subsection shall not inure to
the benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the Offered Securities concerned, to
the extent that a prospectus relating to such Offered Securities was required to
be delivered by such Underwriter under the Act in connection with such purchase
and any such loss, claim, damage or liability of such Underwriter results from
the fact that there was not sent or given to such person, at or prior to the
written confirmation of the sale of such Offered Securities to such person, a
copy of the Prospectus if the Company had previously furnished copies thereof to
such Underwriter.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "Designated Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person who controls
such Underwriter within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact regarding the Selling Stockholder contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact regarding the Selling
Stockholder required to be stated therein or necessary to make the statements
therein (with respect to the Prospectus, in the light of the circumstances under
which they were made) not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any preliminary prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement thereto with
respect to the Selling Stockholder Information; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Selling Stockholder will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; provided, further,
however, that with respect to any untrue statement or alleged untrue statement
in or omission or alleged omission from the preliminary prospectus dated
_______, the indemnity agreement
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<PAGE>
contained in this subsection shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages or liabilities
purchased the Offered Securities concerned, to the extent that a prospectus
relating to such Offered Securities was required to be delivered by such
Underwriter under the Act in connection with such purchase and any such loss,
claim, damage or liability of such Underwriter results from the fact that there
was not sent to given to such person, at or prior to the written confirmation of
the sale of such Offered Securities to such person, a copy of the Prospectus if
the Company had previously furnished copies thereof to such Underwriter.
Notwithstanding anything in this Agreement to the contrary, the liability of the
Selling Stockholder pursuant to this subsection shall not exceed the product of
(a) the number of Offered Securities sold by the Selling Stockholder and (b) the
difference between the per share public offering price and per share
underwriting discount of the Offered Securities sold by the Selling Stockholder
as set forth on the cover page to the Prospectus.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless (i) the Company, its directors and officers and each person, if any,
who controls the Company within the meaning of Section 15 of the Act, and (ii)
the Selling Stockholder , its directors and officers and each person, if any,
who controls the Selling Stockholder within the meaning of Section 15 of the
Act, in each case against any losses, claims, damages or liabilities to which
the Company or the Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein (with respect to the Prospectus, in
the light of the circumstances, under which they were made) not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of such Underwriter through the Representatives specifically for use
therein, and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company and the Selling Stockholder in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred, it being understood and agreed that the
only such information furnished by any Underwriter consists of the following
information in the Prospectus furnished on behalf of each Underwriter: the
concession and re-allowance figures appearing in the second and seventh
paragraphs under the caption "Underwriting".
Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to the last paragraph in Section 7(a) hereof in
respect of such action or proceeding, then in addition to such separate firm for
the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in addition to
any local counsel) for the Designated Underwriter for the defense of any losses,
claims, damages and liabilities arising out of the Directed Share Program, and
all persons, if any, who control the Designated Underwriter within the meaning
of either Section 15 of the Act or Section 20 of the Exchange Act.
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above, except to the extent it
has been materially prejudiced by such failure. In case any such action is
brought against any indemnified party and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
20
<PAGE>
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the indemnified party shall have
the right to employ counsel to represent the indemnified party and its
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the indemnified party against the
indemnifying party under this Section 7 if the employment of such counsel shall
have been authorized in writing by the indemnifying party in connection with the
defense of such action or, if in the written opinion of counsel to either the
indemnifying party or the indemnified party, representation of both parties by
the same counsel would be inappropriate due to actual or likely conflicts of
interest between them, and in that event the fees and expenses of one firm of
separate counsel (in addition to the fees and expenses of local counsel) shall
be paid by the indemnifying party. No indemnifying party shall, without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld, effect any settlement of any pending or threatened action
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party unless such
settlement includes an unconditional release of such indemnified party from all
liability on any claims that are the subject matter of such action. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholder on the one hand and the Underwriters on the
other hand from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Stockholder on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other hand shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Stockholder
bear to the total underwriting discounts and commissions received by the
Underwriters; provided, however, that the liability of the Selling Stockholder
pursuant to this subsection shall not exceed the product of (a) the number of
Offered Securities sold by the Selling Stockholder and (b) the difference
between the per share public offering price and per share underwriting discounts
of the Offered Securities sold by the Selling Stockholder as set forth on the
cover page to the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholder or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim which is the subject of this subsection (e). Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within
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the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder under
this Section 7 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, U.S.
Bancorp Piper Jaffray Inc. may make arrangements satisfactory to the Company and
the Selling Stockholder for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default and
the aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to U.S. Bancorp Piper Jaffray Inc., the Company
and the Selling Stockholder for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholder, except as provided in Section 9 (provided
that if such default occurs with respect to Optional Securities after the First
Closing Date, this Agreement will not terminate as to the Firm Securities or any
Optional Securities purchased prior to such termination). As used in this
Agreement, the term "UNDERWRITER" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholder, the Company or its officers and of the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the Selling Stockholder, the Company or
any of their respective representatives, officers or directors or any
controlling person, and will survive delivery of and payment for the Offered
Securities. If this Agreement is terminated pursuant to Section 8 or if for any
reason the purchase of the Offered Securities by the Underwriters is not
consummated, the Company shall remain responsible for the expenses to be paid or
reimbursed by it pursuant to Section 5 and the respective obligations of the
Company, the Selling Stockholder and the Underwriters pursuant to Section 7
shall remain in effect and if any Offered Securities have been purchased
hereunder the representations and warranties in Section 2 and all obligations
under Section 5 shall also remain in effect. If the purchase of the Offered
Securities by the Underwriters is not consummated for any reason other than
solely because of the termination of this Agreement pursuant to Section 8 or the
occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(c),
the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees
22
<PAGE>
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities in excess of $250,000.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department - Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it c/o HomeServices.Com Inc.,
6800 France Avenue South, Suite 600, Edina, MN 55435, Attention: Ronald J.
Peltier, President and CEO; or, if sent to the Selling Stockholder, will be
mailed, delivered or telegraphed and confirmed to MidAmerican Energy Holdings
Co., 306 South 36th Street, Suite 400, Omaha, NA 68131. Attention: Steven A.
McArthur, Senior Vice President provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7 and no other
person will have any right or obligation hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
U.S. Bancorp Piper Jaffray Inc. will be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
23
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Company, the Selling Stockholder but, in the case of the Selling Stockholder,
only with respect to the Selling Stockholder's several obligations under
Sections 1, 2(b), 3, 4, 5(j), 5(k), 6, 7(b), (c), (d), (e) and (f), 8, 9, 10,
11, 12, 13 and 14, and the several Underwriters in accordance with its terms.
Very truly yours,
HOMESERVICES.COM INC.
By __________________________________________
Name:
Title:
MIDAMERICAN ENERGY HOLDINGS COMPANY
By __________________________________________
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
U.S. Bancorp Piper Jaffray Inc.
Credit Suisse First Boston Corporation
Acting on behalf of themselves
and as the Representatives of the
several Underwriters.
U.S. Bancorp Piper Jaffray Inc.
By _________________________________________
Name:
Title:
24
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM SECURITIES
TO BE SOLD BY
-------------------------
TOTAL NUMBER OF
UNDERWRITER SELLING FIRM SECURITIES TO
----------- COMPANY STOCKHOLDER BE PURCHASED
------- ----------- ------------------
<S> <C> <C> <C> <C>
U.S. Bancorp Piper Jaffray Inc.
Credit Suisse First Boston Corporation
--------- ---------- ---------------
TOTAL
========= ========== ===============
</TABLE>
<PAGE>
SCHEDULE B
26
<PAGE>
EXHIBIT A
[Insert date]
U.S. Bancorp Piper Jaffray Inc.
Credit Suisse First Boston Corporation
As Representatives of the Several Underwriters,
c/o U.S. Bancorp Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, MN 55402
HomeServices.Com Inc.
6800 France Avenue South, Suite 600
Edina, MN 55435
Attention: Ronald J. Peltier, President and CEO
Dear Sirs:
As an inducement to the Underwriters to execute the
Underwriting Agreement, pursuant to which an offering will be made that is
intended to result in the establishment of a public market for shares of Common
Stock, par value $0.01 per share (the "Securities") of HomeServices.Com Inc.
(the "Company"), the undersigned hereby agrees that, for a period of 180 days
after the initial public offering (the "Commencement Date") of the Securities
pursuant to the Underwriting Agreement to which you are or expect to become
parties, the undersigned will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of Securities or
securities convertible into or exchangeable or exercisable for any shares of
Securities, or publicly disclose the intention to make any such offer, sale,
pledge or disposal without the prior written consent of U.S. Bancorp Piper
Jaffray Inc., except any transfer to a member of the undersigned's immediate
family, to a trust of which the undersigned or an immediate family member of the
undersigned is the beneficiary, to the estate of the undersigned upon his or her
death or to any other person as a bona fide gift, provided, that the transferee
agree in writing to be bound by the foregoing transfer limitations.
In furtherance of the foregoing, the Company and its transfer
agent and registrar are hereby authorized to decline to make any transfer of
shares of Securities if such transfer would constitute a violation or breach of
this agreement.
This agreement shall be binding on the undersigned and the
respective successors, heirs, personal representatives and assigns of the
undersigned. This agreement shall lapse and become null and void if the
Commencement Date shall not have occurred on or before [insert date].
Very truly yours,
----------------------------------------
27
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), dated
as of September , 1999, between MidAmerican Realty Services Company, an Iowa
corporation ("MidAmerican Realty"), and HomeServices.Com Inc., a Delaware
corporation (the "Company"). MidAmerican Realty and the Company are hereinafter
sometimes collectively referred to as the "Constituent Entities."
WHEREAS, MidAmerican Energy Holdings Company, an Iowa
corporation ("Parent"), owns 95% of the issued and outstanding shares of common
stock, par value $.01 per share, of MidAmerican Realty (the "MidAmerican Realty
Common Stock");
WHEREAS, Parent has caused the incorporation of the Company
under the Delaware General Corporation Law (the "DGCL") and owns 100% of the
issued and outstanding shares of common stock, par value $.01 per share, of the
Company (the "Company Common Stock");
WHEREAS, MidAmerican Realty desires to merge with and into the
Company pursuant to the DGCL and the Iowa Corporation Law (the "ICL") and
pursuant to the terms and conditions set forth in this Merger Agreement;
WHEREAS, the Board of Directors of each of MidAmerican Realty
and the Company has, by resolutions duly adopted, approved and advised this
Merger Agreement; and
WHEREAS, all of the stockholders of MidAmerican Realty,
including Parent, in its capacity as the 95% stockholder of MidAmerican Realty,
and Parent as the sole stockholder of the Company, has approved and adopted this
Merger Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for the purpose of merging MidAmerican Realty
with and into the Company (the "Merger"), and setting forth certain terms and
conditions of the Merger and the mode of carrying the same into effect,
MidAmerican Realty and the Company hereby agree as follows:
1
<PAGE>
1. Merger. Subject to the terms and conditions hereof and in accordance
with the applicable provisions of the DGCL and the ICL, MidAmerican Realty shall
be merged with and into the Company, and the Company shall be, and is herein
referred to as, the "Surviving Corporation." The name of the Surviving
Corporation shall be "HomeServices.Com Inc." The Merger shall become effective
at the time and on the date that (i) a Certificate of Merger, substantially in
the form attached hereto as Exhibit A, shall have been filed in accordance with
the DGCL and (ii) a [Certificate][Articles] of Merger shall have been filed in
accordance with the ICL (the "Effective Time").
2. Effects of the Merger. At the Effective Time, MidAmerican Realty
shall be merged with and into the Company, and the separate corporate existence
of MidAmerican Realty shall cease. From and after the Effective Time, the
certificate of incorporation of the Company as amended and restated in its
entirety as set forth in Exhibit B hereto (the "Certificate of Incorporation")
shall be the certificate of incorporation of the Surviving Corporation until
thereafter amended as provided by the DGCL and the Certificate of Incorporation.
The Bylaws of the Company as amended and restated in its entirety as set forth
in Exhibit C hereto (the "Bylaws") shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by the DGCL and the Certificate
of Incorporation and the Bylaws of the Surviving Corporation. The officers and
the directors of the Company immediately prior to the Effective Time shall be
the officers and directors of the Surviving Corporation from and after the
Effective Time, to serve in accordance with the DGCL and the terms of the
Certificate of Incorporation and Bylaws of the Surviving Corporation, until
their successors are duly elected or appointed or qualified or until their
earlier death, resignation or removal, in each case, in accordance with the DGCL
and the Certificate of Incorporation and Bylaws of the Surviving Corporation.
The consummation of the Merger will have the effects provided in the DGCL and
the ICL.
3. Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof (i) each of the
issued and outstanding shares of MidAmerican Realty Common Stock shall be
converted into [ ___________ ] fully paid and nonassessable shares of common
stock, par value $0.01 per share, of the Surviving Corporation (the "Surviving
Corporation Common Stock"); and (ii) each of the issued and outstanding shares
of Company Common Stock shall be cancelled and retired and shall cease to exist
and no Surviving Corporation Common Stock or cash consideration shall be
delivered in exchange therefor.
2
<PAGE>
4. Further Assurances. From time to time, as and when required by the
Surviving Corporation or by its successors and assigns, there shall be executed
and delivered on behalf of MidAmerican Realty such deeds and other instruments,
and there shall be taken or caused to be taken by it all such further and other
action as shall be appropriate or necessary in order to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation the title to and
possession of all property, interests, assets, rights, privileges, immunities,
powers, franchises and authority of MidAmerican Realty and otherwise to carry
out the purposes of this Merger Agreement, and the directors and officers of
the Surviving Corporation are fully authorized in the name and on behalf of
MidAmerican Realty or otherwise to take any and all such action to execute and
deliver any and all such deeds and other instruments.
5. Amendment and Modification. Subject to the DGCL and the ICL, this
Merger Agreement may be amended or modified at any time by the parties hereto,
but only pursuant to an instrument in writing signed by the parties.
6. Termination. This Merger Agreement may be terminated and the Merger
contemplated herein may be abandoned at any time prior to the Effective Time,
whether before or after stockholder approval thereof, by the mutual consent in
writing of MidAmerican Realty and the Company.
7. Entire Agreement; Assignment. This Merger Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes all other prior agreements and understandings, both
written and oral, between the parties hereto with respect to the subject matter
hereof.
8. Validity. The invalidity or unenforceability of any term or
provision of this Merger Agreement in any situation or jurisdiction shall not
affect the validity or enforceability of the other terms or provisions in any
other situation or in any other jurisdiction.
9. Governing Law. This Merger Agreement shall be governed by, enforced
under and construed in accordance with the laws of the State of New York,
without giving effect to any choice or conflict of law provision or rule
thereof, except that the Merger shall be governed by the DGCL and the ICL.
10. Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only and shall in no way be construed to define,
limit, describe, explain, modify, amplify or add to the interpretation,
construction or
3
<PAGE>
meaning of any provision of, or scope or intent of, this Merger Agreement nor in
any way affect this Merger Agreement.
11. Counterparts. This Merger Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SIGNATURE PAGE FOLLOWS
4
<PAGE>
IN WITNESS WHEREOF, MidAmerican Realty and the Company have caused this
Merger Agreement to be signed by their respective duly authorized officers as of
the date first above written.
MIDAMERICAN REALTY SERVICES COMPANY
By:_______________________________________
Name:
Title:
HOMESERVICES.COM INC.
By:_______________________________________
Name:
Title:
5
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF MERGER
OF
MIDAMERICAN REALTY SERVICES COMPANY
INTO
HOMESERVICES.COM INC.
________________________________________
Pursuant to Section 252 of the General
Corporation Law of the State of Delaware
________________________________________
HomeServices.Com Inc., a Delaware corporation, does hereby certify:
FIRST: The names and states of incorporation of the constituent
corporations to this merger are as follows:
State of
Name Incorporation
---- -------------
MidAmerican Realty
Services Company Iowa
HomeServices.Com Inc. Delaware
SECOND: An Agreement and Plan of Merger has been approved, adopted,
certified, executed and acknowledged by each of the constituent corporations in
accordance with Section 252(c) of the General Corporation Law of the State of
Delaware.
THIRD: The name of the corporation surviving the merger is
HomeServices.Com Inc.
6
<PAGE>
FOURTH: The Certificate of Incorporation of HomeServices.Com
Inc. shall be amended to read in its entirety as set forth in Exhibit A attached
hereto.
FIFTH: The executed agreement of merger is on file at the
following office address of the surviving corporation:
HomeServices.Com Inc.
6800 France Avenue South, Suite 600
Edina, Minnesota 55435
A copy will be provided, upon request and without cost, to any stockholder of
either constituent corporation.
SIXTH: The authorized capital stock of MidAmerican Realty
Services Company consists of 1,000,000 shares of common stock each having no par
value.
SEVENTH: The Merger shall become effective at [ ____________ ]
a.m., Eastern Daylight Time, on the date on which this Certificate of Merger is
filed with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, HomeServices.Com Inc. has caused this
Certificate of Merger to be executed in its corporate name this day of
, 1999.
HOMESERVICES.COM INC.
By:_____________________________
Name:
Title:
7
<PAGE>
EXHIBIT B
---------
[FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION]
8
<PAGE>
EXHIBIT C
---------
[FORM OF AMENDED AND RESTATED
BYLAWS]
9
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOMESERVICES.COM INC.
-----------------------------------------
Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware
-----------------------------------------
HomeServices.Com Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the "GCL"),
does hereby certify as follows:
FIRST: The name of the Corporation is HomeServices.Com Inc. The name
under which the Corporation was originally incorporated was HomeServices.Com
Inc. and the original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on July 13, 1999.
SECOND: This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors and by the stockholders of the Corporation
under the provisions of Sections 228, 242 and 245 of the GCL.
THIRD: This Amended and Restated Certificate of Incorporation amends
and restates the Certificate of Incorporation of the Corporation, as heretofore
amended.
FOURTH: The text of the Restated Certificate of Incorporation is
amended and restated in its entirety as follows:
ARTICLE I: The name of the Corporation is HomeServices.Com Inc.
(hereinafter, the "Corporation").
ARTICLE II: The address of the registered office of the Corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
<PAGE>
ARTICLE III: The purpose of the Corporation is to engage in any lawful
act or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware
Code (the "GCL").
ARTICLE IV: (a) The total number of shares of stock which the
Corporation shall have authority to issue is [ ] shares of Common Stock, each
having a par value of $0.01, and [ ] shares of Preferred Stock, each having a
par value of $0.01.
(b) The powers, preferences and rights, and the qualifications,
limitations and restrictions, of each class of the Common Stock are as follows:
(1) The holders of shares of Common Stock shall not have cumulative
voting rights.
(2) Subject to the rights of the holders of Preferred Stock, and
subject to any other provisions of this Amended and Restated Certificate of
Incorporation, as it may be amended from time to time, holders of shares of
Common Stock shall be entitled to receive such dividends and other distributions
in cash, stock or property of the Corporation when, as and if declared thereon
by the Board of Directors from time to time out of assets or funds of the
Corporation legally available therefor.
(3) In the event of any liquidation, dissolution or winding up (either
voluntary or involuntary) of the Corporation, the holders of shares of Common
Stock shall be entitled to receive the assets and funds of the Corporation
available for distribution after payments to creditors and to the holders of any
Preferred Stock of the Corporation that may at the time be outstanding, in
proportion to the number of shares held by them, respectively.
(4) In the event of a merger or consolidation of the Corporation with
or into another entity (whether or not the Corporation is the surviving entity),
the holders of each share of Common Stock shall be entitled to receive the same
per share consideration on a per share basis.
(5) No holder of shares of Common Stock shall be entitled to
preemptive or subscription rights.
(6) Subject to the requirements of applicable law, the Corporation
shall have the power to issue and sell all or any part of any shares of any
class of stock herein or hereafter authorized to such persons, and for such
consideration, as the Board of Directors shall from time to time, in its
discretion, determine, whether or not greater consideration could be received
upon the issue or sale of the same number of shares of another class, and as
otherwise permitted by law. Subject to the requirements of applicable law, the
Corporation shall have the power to purchase any shares of any class of stock
herein or hereafter authorized from such persons, and for such consideration, as
the Board of
2
<PAGE>
Directors shall from time to time, in its discretion, determine, whether or not
less consideration could be paid upon the purchase of the same number of shares
of another class, and as otherwise permitted by law.
(c) The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the Preferred Stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to receive dividends (which may be
cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; or (iv) convertible into, or exchangeable for, shares of any
other class or classes of stock, or of any other series of the same or any other
class or classes of stock, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments; all as may be stated in such
resolution or resolutions.
ARTICLE V: (a) The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be no fewer than
three, nor more than fifteen, the exact number of which shall be fixed from time
to time by the Board of Directors. Election of directors need not be by written
ballot unless the Bylaws so provide.
(c) The directors shall be divided into three classes, designated Class
I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. The initial division of the Board of Directors into classes
shall be made by the decision of the affirmative vote of a majority of the
entire Board of Directors. The term of the initial Class I directors shall
terminate on the date of the 2000 annual meeting of stockholders; the term of
the initial Class II directors shall terminate on the date of the 2001 annual
meeting of stockholders; and the term of the initial Class III directors shall
terminate on the date of the 2002 annual meeting of stockholders. At each
succeeding annual meeting of stockholders beginning in 2000, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a three-year term. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible. A director shall hold
office until the annual meeting for the
3
<PAGE>
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
(d) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors caused by death,
resignation, retirement, disqualification or removal or any other cause
(including an increase in the number of directors) may be filled by resolution
adopted by a majority of the Board of Directors then in office whether or not
such majority constitutes less than quorum, or by a sole remaining director. Any
director of any class elected to fill a vacancy resulting from an increase in
the number of directors of such class shall hold office for a term that shall
coincide with the remaining term of that class. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of his predecessor. No decrease in the size of the
Board of Directors shall have the effect of shortening the term of any incumbent
director.
(e) Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the Corporation
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting power of
the Corporation's then outstanding capital stock entitled to vote generally in
the election of directors. Notwithstanding the foregoing, whenever the holders
of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Amended and Restated Certificate of Incorporation
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this Article V unless expressly provided by such terms.
ARTICLE VI: In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the GCL,
this Amended and Restated Certificate of Incorporation, and any Bylaws adopted
by the stockholders; provided, however, that no Bylaws hereafter adopted by the
stockholders shall invalidate any prior act of the directors which would have
been valid if such Bylaws had not been adopted. The directors shall have
concurrent power with the stockholders to make, alter, amend, change, add to or
repeal the Bylaws of the Corporation except as otherwise provided therein.
ARTICLE VII: No director shall be personally liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholder, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law, (iii) pursuant to Section 174 of the GCL and
4
<PAGE>
(iv) for any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this Article VII by the stockholders of
the Corporation shall not adversely affect any right or protection of a director
of the Corporation existing at the time of such repeal or modification with
respect to acts or omissions occurring prior to such repeal or modification.
ARTICLE VIII: The Corporation shall indemnify its directors and
officers to the fullest extent authorized or permitted by law, as now or
hereafter in effect, and such right to indemnification shall continue as to a
person who has ceased to be a director or officer of the Corporation and shall
inure to the benefit of his or her heirs, executors and personal and legal
representatives; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnify
any director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors. The right to indemnification conferred
by this Article VIII shall include the right to be paid by the Corporation the
expenses incurred in defending or otherwise participating in any proceeding as
incurred in advance of its final disposition
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article VIII to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred
in this Article VIII shall not be exclusive of any other right which any person
may have or hereafter acquire under this Restated Certificate of Incorporation,
the Bylaws of the Corporation, any statute, agreement, vote of stockholders or
disinterested directors, contract or otherwise.
Any repeal or modification of this Article VIII by the stockholders of
the Corporation shall not adversely affect any rights to indemnification and to
the advancement of expenses of a director or officer of the Corporation existing
at the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
ARTICLE IX: The Corporation hereby elects not to be governed by Section
203 of the GCL pursuant to Section 203(b) therein.
ARTICLE X: Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such
5
<PAGE>
place or places as may be designated from time to time by the Board of Directors
or in the Bylaws of the Corporation.
ARTICLE XI: Any action required or permitted to be taken by the
stockholders of the Corporation may be effected only upon the vote of the
stockholders at an annual or special meeting of stockholders of the Corporation,
duly noticed and called under the Bylaws of the Corporation and the ability of
the stockholders to consent in writing to the taking of any action is hereby
specifically denied.
ARTICLE XII: In furtherance and not in limitation of the powers
conferred upon it by the laws of the State of Delaware, the Board of Directors
shall have the power to adopt, amend, alter or repeal the Corporation's Bylaws.
The affirmative vote of at least a majority of the directors then in office
shall be required to adopt, amend, alter or repeal the Corporation's Bylaws. The
Corporation's Bylaws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of the shares entitled to vote at an election of directors.
ARTICLE XIII: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Amended and Restated
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation; provided, however, that notwithstanding any other
provision of this Amended and Restated Certificate of Incorporation (and in
addition to any other vote required by law), the affirmative vote of at least
eighty percent (80%) of the voting power of the shares entitled to vote at an
election of directors shall be required to amend, alter, change or repeal, or to
adopt any provision as part of this Amended and Restated Certificate of
Incorporation inconsistent with the purpose and intent of Articles V, VIII, XI
and XII of this Amended and Restated Certificate of Incorporation or this
Article XIII.
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed on its behalf this ___ day
of __________, 1999.
HOMESERVICES.COM INC.
By: __________________________
Name:
Title:
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AMENDED AND RESTATED
BYLAWS
OF
HOMESERVICES.COM INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. Annual meetings of stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of
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Directors and stated in the notice of the meeting, at which meetings the
stockholders shall elect a Board of Directors (or specified classes thereof),
and transact such other business as may properly be brought before the meeting.
Written notice of the annual meeting stating the place, date and hour of the
meeting shall be given to each stockholder of record entitled to vote at such
meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by
the certificate of incorporation of the Corporation (as amended and restated
from time to time and including any certificate of designation for any series of
preferred stock, the "Certificate of Incorporation"), special meetings of
stockholders, for any purpose or purposes, may be called by (i) the Chairman of
the Board of Directors or (ii) the Board of Directors. The ability of the
stockholders to call a special meeting of stockholders is hereby specifically
denied. At a special meeting of stockholders, only such business shall be
conducted as shall be specified in the notice of meeting (or any supplement
thereto). Written notice of a special meeting stating the place, date and hour
of the meeting and the purpose or purposes for which the meeting is called shall
be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A
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quorum, once established, shall not be broken by the withdrawal of enough votes
to leave less than a quorum.
Section 5. Adjournment. If a quorum shall not be present or represented
at any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. The chairman of any
meeting of stockholders shall also have the power to adjourn such meeting if (i)
a quorum is not present or represented or (ii) the Board of Directors determines
that adjournment is necessary or appropriate to enable stockholders to consider
fully information which the Board of Directors determines has not been made
sufficiently or timely available to stockholders or to otherwise enable
stockholders to exercise effectively their voting rights. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.
Section 6. Voting. Unless otherwise required by law or provided by the
Certificate of Incorporation or these Bylaws, any question brought before any
meeting of stockholders, other than the election of directors, shall be decided
by the vote of the holders of a majority of the total number of votes of the
capital stock represented and entitled to vote thereat. Each stockholder
represented at a meeting of stockholders shall be entitled to cast one vote for
each share of the capital stock entitled to vote thereat held by such
stockholder.
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Such votes may be cast in person or by proxy but no proxy shall be voted on or
after three years from its date, unless such proxy provides for a longer period.
The Board of Directors, in its discretion, or the officer of the Corporation
presiding at a meeting of stockholders, in such officer's discretion, may
require that any votes cast at such meeting shall be cast by written ballot.
Section 7. Nature of Business at Annual Meetings of Stockholders. No
business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 7
and on the record date for the determination of stockholders entitled to vote at
such annual meeting and (ii) who complies with the notice procedures set forth
in this Section 7.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Company. To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Company not less than ninety (90) days nor more than one hundred twenty (120)
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders; provided, however, that in the event that the annual meeting is
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called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs. To be in proper written form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of such stockholder,
(iii) the class or series and number of shares of capital stock of the Company
which are owned beneficially or of record by such stockholder, (iv) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with the
proposal of such business by such stockholder and any material interest of such
stockholder in such business and (v) a representation that such stockholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 7, provided, however, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 7 shall be deemed to preclude discussion by
any stockholder of any such business. If the chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the chairman shall declare to the
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meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Section 8. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders of record entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 8 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 10. Conduct of Meetings. The Board of Directors of the
Corporation may adopt by resolution such rules and regulations for the conduct
of the meeting of the stockholders as it shall deem appropriate. At each meeting
of the stockholders of the Corporation, the Chairman of the Board of Directors
or the President of the Corporation, or,
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in their absence, a director chosen by a majority of the directors present,
shall act as chairman. The Secretary of the Corporation shall act as secretary
at each meeting of stockholders of the Corporation. In case the Secretary shall
be absent from any meeting of Stockholders, an Assistant Secretary shall perform
the duties of secretary at such meeting; and in the absence from any such
meeting of the Secretary and all the Assistant Secretaries, the chairman of the
meeting may appoint any person to act as secretary of the meeting. Except to the
extent inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of the stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of Directors
shall consist of not less than three nor more than fifteen members, the exact
number of which shall be fixed from time to time by the Board of Directors.
Except as provided in Section 2 of this Article III, directors shall be elected
by a plurality of the votes cast at the Annual Meeting of Stockholders, and each
director so elected shall hold office until such director's successor is duly
elected and qualified, or until such director's earlier death, resignation or
removal. Any director may resign at any time upon notice to the Corporation.
Directors need not be stockholders.
Section 2. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the
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Company, except as may be otherwise provided in the Certificate of Incorporation
with respect to the right of holders of preferred stock of the Corporation to
nominate and elect a specified number of directors in certain circumstances.
Nominations of persons for election to the Board of Directors may be made at any
annual meeting of stockholders, or at any special meeting of stockholders called
for the purpose of electing directors, (a) by or at the direction of the Board
of Directors (or any duly authorized committee thereof) or (b) by any
stockholder of the Company (i) who is a stockholder of record on the date of the
giving of the notice provided for in this Section 2 and on the record date for
the determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 2.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Company. To be timely, a
stockholder's notice to the Secretary must be delivered to or mailed and
received at the principal executive offices of the Company (a) in the case of an
annual meeting, not less than ninety (90) days nor more than one hundred twenty
(120) days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; provided, however, that in the event that the annual
meeting is called for a date that is not within thirty (30) days before or after
such anniversary date, notice by the stockholder in order to be timely must be
so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special
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meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth (10th) day following the day on which
notice of the date of the special meeting was mailed or public disclosure of the
date of the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Company which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Company which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in
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connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act and the rules and regulations promulgated
thereunder. Such notice must be accompanied by a written consent of each
proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the Company
unless nominated in accordance with the procedures set forth in this Section 2.
If the chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 3. Vacancies. Unless otherwise required by law or the
Certificate of Incorporation, vacancies arising through death, resignation,
removal, an increase in the authorized number of directors or otherwise may be
filled only by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and qualified, or until their earlier death, resignation or removal.
Section 4. Duties and Powers. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 5. Meetings. The Board of Directors may hold meetings, both
regular and special, either within or without the State of Delaware. Regular
meetings of the
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Board of Directors may be held without notice at such time and at such place as
may from time to time be determined by the Board of Directors. Special meetings
of the Board of Directors may only be called by the Chairman of the Board of
Directors, the President, or by a majority of directors then in office. Notice
thereof stating the place, date and hour of the meeting shall be given to each
director either by mail not less than forty-eight (48) hours before the date of
the meeting, by telephone, facsimile or telegram on twenty-four (24) hours'
notice, or on such shorter notice as the person or persons calling such meeting
may deem necessary or appropriate in the circumstances.
Section 6. Inclusion of Business. Any director may require
that any one or more proposals of such director shall be discussed at any
meeting of the Board of Directors by delivering notice as provided in Article VI
hereof to each director and the Corporation either within one day after such
director receives notice of such meeting or in the notice by such director
calling a special meeting of the Board of Directors.
Section 7. Quorum. Except as may be otherwise specifically
provided by law, the Certificate of Incorporation or these Bylaws, at all
meetings of the Board of Directors, a majority of the entire Board of Directors
shall constitute a quorum for the transaction of business. The act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors. If a quorum shall not be present at any meeting
of the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
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Section 8. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 9. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 8 shall
constitute presence in person at such meeting.
Section 10. Committees. The Board of Directors may by resolution passed
by a majority of the entire Board of Directors designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. In the absence or disqualification of a member of
a committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may
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unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to the
extent permitted by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each committee shall keep regular minutes and report to the
Board of Directors when required.
Section 11. Compensation. The directors shall be paid their
reasonable out-of-pocket expenses, if any, of attendance at each meeting of the
Board of Directors and each meeting of any committee thereof and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director, payable in cash or securities. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
Section 12. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because the director or
officer's vote is counted for such purpose if (i) the material facts as to the
director or officer's relationship or interest and as to
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the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to the director or officer's
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall include a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a Chairman
of the Board of Directors (who must be a director), a Chief Executive Officer
and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and
other officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these Bylaws.
The officers of the Corporation need not be stockholders of the Corporation nor,
except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation.
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Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors or by the Chairman of the Board of Directors, and all
officers of the Corporation shall hold office until their successors are chosen
and qualified, or until their earlier death, resignation or removal. Any officer
elected by the Board of Directors may be removed at any time by the affirmative
vote of a majority of the Board of Directors or by the Chairman of the Board of
Directors. Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors or by the Chairman of the Board of Directors.
The salaries of all officers of the Corporation shall be fixed by the Board of
Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President or any
other officer authorized to do so by the Board of Directors and any such officer
may, in the name of and on behalf of the Corporation, take all such action as
any such officer may deem advisable to vote in person or by proxy at any meeting
of security holders of any corporation in which the Corporation may own
securities and at any such meeting shall possess and may exercise any and all
rights and power incident to the ownership of such securities and which, as the
owner thereof, the Corporation might have exercised and possessed if present.
The Board of
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Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
Board of Directors shall preside at all meetings of the stockholders and of the
Board of Directors. The Chairman of the Board of Directors shall be the Chief
Executive Officer of the Corporation, unless the Board of Directors designates
the President as the Chief Executive Officer, and except where by law the
signature of the President is required, the Chairman of the Board of Directors
shall possess the same power as the President to sign all contracts,
certificates and other instruments of the Corporation which may be authorized by
the Board of Directors. During the absence or disability of the President, the
Chairman of the Board of Directors shall exercise all the powers and discharge
all the duties of the President. The Chairman of the Board of Directors shall
also perform such other duties and may exercise such other powers as from time
to time may be assigned to him by these Bylaws or by the Board of Directors.
Section 5. President. The President shall, subject to the direction and
control of the Chairman of the Board of Directors or the Board of Directors,
have general supervision of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect. In
the absence or disability of the Chairman of the Board of Directors, the
President shall preside at all meetings of the stockholders and the Board of
Directors. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these Bylaws or
by the Chairman of the Board of Directors or by the Board of Directors.
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Section 6. Vice Presidents. Each Vice President shall perform such
duties and have such other powers as the Chairman of the Board of Directors or
the Board of Directors from time to time may prescribe.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for committees of the Board of
Directors. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Chairman of the
Board of Directors or the Board of Directors, under whose supervision the
Secretary shall be. If the Secretary shall be unable or shall refuse to cause to
be given notice of all meetings of the stockholders and special meetings of the
Board of Directors, and if there be no Assistant Secretary, then either the
Board of Directors or the Chairman of the Board of Directors may choose another
officer to cause such notice to be given. The Secretary shall have custody of
the seal of the Corporation and the Secretary or any Assistant Secretary, if
there be one, shall have authority to affix the same to any instrument requiring
it and when so affixed, it may be attested by the signature of the Secretary or
by the signature of any such Assistant Secretary. The Board of Directors hereby
gives general authority to any other officer to affix the seal of the
Corporation and to attest the affixing by such officer's signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
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Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all transactions as Treasurer and of the financial condition of the Corporation.
Section 9. Assistant Secretaries. Assistant Secretaries, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
or the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of the Treasurer's disability or refusal to act, shall perform the duties
of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer.
Section 11. Other Officers. Such other officers as the Board of
Directors or the Chairman of the Board of Directors may choose shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors. The Board
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of Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors and (ii) by the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such stockholder in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
Section 3. Lost Certificates. The Secretary may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Secretary may, in his discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or the
owner's legal representative, to advertise the same in such manner as the
Secretary shall require and/or to give the Corporation a bond in such sum as he
may direct as indemnity
19
<PAGE>
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed or the issuance of
such new Certificate.
Section 4. Transfers. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by such person's attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, properly endorsed for transfer and
payment of all necessary transfer taxes; provided, however, that such surrender
and endorsement or payment of taxes shall not be required in any case in which
the officers of the Corporation shall determine to waive such requirement. Every
which shall be cancelled before a new certificate exchanged, returned or
surrendered to the Corporation shall be marked "Cancelled," with the date of
cancellation, by the Secretary or Assistant Secretary of the Corporation or the
transfer agent thereof. No transfer of stock shall be valid as against the
Corporation for any purpose until it shall have been entered in the stock
records of the Corporation by an entry showing from and to whom transferred.
Section 5. Record Date.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders
20
<PAGE>
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; providing, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to a corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
law, the record date for determining stockholders entitled to consent to
corporate action in writing without a
21
<PAGE>
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolutions taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty days nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
22
<PAGE>
Section 6. Record Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any beneficial, equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise required by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Attendance of a person at a
meeting, present in person or represented by proxy, shall constitute a waiver of
notice of such meeting, except where the person attends
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<PAGE>
the meeting for the express purpose of objecting at the beginning of the meeting
to the transaction of any business because the meeting is not lawfully called or
convened.
Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice unless
so required by law, the Certificate of Incorporation or these Bylaws.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the requirements of the DGCL and provisions of the
Certificate of Incorporation, if any, may be declared by the Board of Directors
at any regular or special meeting of the Board of Directors (or any action by
written consent in lieu thereof in accordance with Section 6 of Article III
hereof), and may be paid in cash, in property, or in shares of the Corporation's
capital stock. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
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<PAGE>
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings
other Than Those by or in the Right of the Corporation. Subject to Section 3 of
this Article VIII, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termina-
25
<PAGE>
tion of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that such person's conduct was
unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation;
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled
26
<PAGE>
to indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made with respect to a person who is a director or
officer at the time of such determination, (i) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (ii) by a committee of such directors designated by a
majority vote of such directors, even though less than a quorum, or (iii) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (iv) by the stockholders. Such
determination shall be made, with respect to former directors and officers, by
any person or persons having the authority to act on the matter on behalf of the
Corporation. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith, without the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a
27
<PAGE>
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe such person's conduct was
unlawful, if such person's action is based on the records or books of account of
the Corporation or another enterprise, or on information supplied to such person
by the officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent. The
provisions of this Section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a person may be deemed to have met the
applicable standard of conduct set forth in Sections 1 or 2 of this Article
VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable standards
of conduct
28
<PAGE>
set forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a
contrary determination in the specific case under Section 3 of this Article VIII
nor the absence of any determination thereunder shall be a defense to such
application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a director
or officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or granted
pursuant to this Article VIII shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under the Certificate of Incorporation, any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
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<PAGE>
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such person would have with respect to
30
<PAGE>
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to
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indemnification and to the advancement of expenses to employees and agents of
the Corporation similar to those conferred in this Article VIII to directors and
officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These Bylaws may be altered, amended or repealed, in
whole or in part, or new Bylaws may be adopted by a majority of the entire Board
of Directors or by the stockholders as provided in the Certificate of
Incorporation.
Section 2. Entire Board of Directors. As used in this Article IX and in
these Bylaws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
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<PAGE>
FRONT
HSC
HomeServices.Com Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN
NEW YORK, NY AND RIDGEFIELD PARK, NJ
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 437606 10 6
THIS CERTIFIES THAT IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE,
OF HomeServices.Com Inc.
(the"Corporation") transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar. WITNESS the
facsimile seal of the Corporation and the facsimile signatures of its duly
authorized officers.
Dated:
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
---------------------------------
AUTHORIZED SIGNATURE
<PAGE>
BACK
HomeServices.Com Inc.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office. Such request may be made to the
Corporation or the Transfer Agent.
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in the Rights Agreement between the Corporation and the Rights
Agent thereunder, the terms of which are hereby incorporated by reference and a
copy of which is on file at the principal offices of the Corporation and may be
obtained upon written request.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- Custodian
-------------------------- -------------------
(Cust) (Minor)
under Uniform Gifts to Minors Act
-----------------------
(State)
UNIF TRF MIN ACT -- Custodian (until age )
---------------------------- --
(Cust)
under Uniform Transfers
----------------------------
(Minor)
to Minors Act
--------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint Attorney to transfer
the said stock on the books of the within named Corporation with full power of
substitution in the premises. Dated
X
X
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
---------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE>
------------------------------------------------------
HOMESERVICES.COM INC.
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
Rights Agent
----------------
Rights Agreement
Dated as of ____________, 1999
------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. Certain Definitions................................................. 2
2. Appointment of Rights Agent.........................................12
3. Issuance of Rights Certificates.....................................13
4. Form of Rights Certificates.........................................16
5. Countersignature and Registration...................................18
6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates............19
7. Exercise of Rights; Purchase Price; Expiration Date of Rights.......21
8. Cancellation and Destruction of Rights
Certificates........................................................26
9. Reservation and Availability of Capital Stock.......................27
10. Preferred Stock Record Date.........................................30
11. Adjustment of Purchase Price, Number and Kind of Shares or Number
of Rights...........................................................31
12. Certificate of Adjusted Purchase Price or Number of Shares..........50
13. Consolidation, Merger or Sale or Transfer of Assets, Cash Flow or
Earning Power.......................................................51
14. Fractional Rights and Fractional Shares.............................56
15. Rights of Action....................................................59
16. Agreement of Rights Holders.........................................60
17. Rights Certificate Holder Not Deemed a Stockholder..................61
18. Concerning the Rights Agent.........................................62
<PAGE>
19. Merger or Consolidation or Change of Name of Rights Agent...........63
20. Duties of Rights Agent..............................................64
21. Change of Rights Agent..............................................69
22. Issuance of New Rights Certificates.................................71
23. Redemption and Termination..........................................72
24. Exchange............................................................72
25. Notice of Certain Events............................................76
26. Notices.............................................................78
27. Supplements and Amendments..........................................79
28. Successors..........................................................81
29. Determinations and Action by the Board, etc.........................81
30. Benefits of this Agreement..........................................82
31. Severability........................................................82
32. Governing Law.......................................................83
33. Counterparts........................................................84
34. Descriptive Headings................................................84
EXHIBITS
Exhibit A -- Form of Certificate of Designation,
Preferences and Rights
Exhibit B -- Form of Rights Certificates
Exhibit C -- Form of Summary of Rights
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of ____________, 1999 (the
"Agreement"), between HomeServices.Com Inc., a Delaware corporation (the
"Company"), and ChaseMellon Shareholder Services, L.L.C., a [ ] corporation
(the "Rights Agent").
W I T N E S S E T H
WHEREAS, on ______________, 1999 (the "Rights Dividend
Declaration Date"), the Board of Directors of the Company authorized and
declared a dividend distribution of one Right (as hereinafter defined) for each
share of common stock, par value $0.01 per share, of the Company (the "Common
Stock") outstanding at the close of business on the date of the consummation of
the initial public offering of the Common Stock of the Company (the "Record
Date"), and has authorized the issuance of one Right (as such number may
hereinafter be adjusted pursuant to the provisions of Section 11(p) hereof) for
each share of Common Stock of the Company issued between the Record Date
(whether originally issued or delivered from the Company's treasury) and the
Distribution Date (as hereinafter defined), each Right initially representing
the right to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company (the "Preferred Stock") having the
rights, powers and preferences set forth in the form of Certificate of
Designation,
2
<PAGE>
Preferences and Rights attached hereto as Exhibit A, upon the terms and subject
to the conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement,
the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding,
but shall not include (i) the Company, (ii) any Subsidiary of the Company,
(iii) any employee benefit plan of the Company, or of any Subsidiary of the
Company, or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan, (iv) MidAmerican Energy
Holdings Company, a Delaware corporation ("MidAmerican Holdings") and its
affiliates and any successors thereof, (v) any Person who becomes the
Beneficial Owner of fifteen percent (15%) or more of the shares of Common Stock
then outstanding as a result of a reduction in the number of shares of Common
Stock outstanding due to the repurchase of shares of Common Stock by the
Company unless and until such Person, after becoming aware that such Person has
become the Beneficial Owner of fifteen percent (15%) or more of the then
outstanding shares of Common Stock, acquires
3
<PAGE>
beneficial ownership of additional shares of Common Stock representing one
percent (1%) or more of the shares of Common Stock then outstanding, (vi) any
Person who acquires shares of Common Stock from the Beneficial Owner of at least
15% or more of the shares of Common Stock that was outstanding immediately upon
consummation of the initial public offering of the Common Stock of the Company,
and as a result such acquisition such Person also becomes the Beneficial Owner
of 15% or more of the then outstanding shares of Common Stock, or (vii) any such
Person who has reported or is required to report such ownership (but less than
15%) on Schedule 13G under the Securities and Exchange Act of 1934, as amended
and in effect on the date of the Agreement (the "Exchange Act") (or any
comparable or successor report) or on Schedule 13D under the Exchange Act (or
any comparable or successor report) which Schedule 13D does not state any
intention to or reserve the right to control or influence the management or
policies of the Company or engage in any of the actions specified in Item 4 of
such schedule (other than the disposition of the Common Stock) and, within 10
Business Days of being requested by the Company to advise it regarding the
same, certifies to the Company that such Person acquired shares of Common Stock
in excess of 14.9% inadvertently or without knowledge of the terms of the Rights
and who, together with all Affiliates and Associates, thereafter does not
acquire additional shares of Common Stock while the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding;
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provided, however, that if the Person requested to so certify fails to do so
within 10 Business Days, then such Person shall become an Acquiring Person
immediately after such 10-Business-Day period.
(b) "Act" shall mean the Securities Act of 1933, as amended.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act.
(d) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether
such right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding
(whether or not in writing) or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," (A) securities tendered pursuant
to a tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange, (B) securities issuable upon
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exercise of Rights at any time before the occurrence of a Triggering
Event (as hereinafter defined), or (C) securities issuable upon
exercise of Rights from and after the occurrence of a Triggering Event
which Rights were acquired by such Person or any of such Person's
Affiliates or Associates before the Distribution Date (as hereinafter
defined) or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection
with an adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose
of or has "beneficial ownership" of (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Exchange Act),
including pursuant to any agreement, arrangement or understanding,
whether or not in writing; provided, however, that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable
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provisions of the General Rules and Regulations under the Exchange Act,
(B) is not reportable by such Person on Schedule 13D under the Exchange
Act (or any comparable or successor report) and (C) does not constitute
a trust, proxy, power of attorney or other device with the purpose or
effect of allowing two or more persons, acting in concert, to avoid
being deemed "beneficial owners" of such security or otherwise avoid
the status of "Acquiring Person" under the terms of this Agreement or
as part of a plan or scheme to evade the reporting requirements under
Schedule 13D or Section 13(d) or 13(g) of the Exchange Act; or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which
such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing),
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in the proviso to subparagraph (ii) of
this paragraph (d)) or disposing of any voting securities of the
Company; provided, however, that nothing in this paragraph (d) shall
cause a Person engaged in business as an underwriter of securities to
be the "Beneficial Owner" of, or to "beneficially own," any
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securities acquired through such Person's participation in good faith
in a firm commitment underwriting until the expiration of forty days
after the date of such acquisition, and then only if such securities
continue to be owned by such Person at such expiration of forty days
and provided further, however, that any stockholder of the Company,
with affiliate(s), associate(s) or other person(s) who may be deemed
representatives of it serving as director(s) of the Company, shall not
be deemed to beneficially own securities held by other Persons as a
result of (i) persons affiliated or otherwise associated with such
stockholder serving as directors or taking any action in connection
therewith, (ii) discussing the status of its shares with the Company or
other stockholders of the Company similarly situated or (iii) voting or
acting in a manner similar to other stockholders similarly situated,
absent a specific finding by the Board of Directors of an express
agreement among such stockholders to act in concert with one another as
stockholders so as to cause, in the good faith judgment of the Board of
Directors, each such stockholder to be the Beneficial Owner of the
shares held by the other stockholder(s).
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<PAGE>
(e) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(f) "Close of business" on any given date shall mean 5:00 p..m.,
New York City time, on such date; provided, however, that if such date is not a
Business Day, it shall mean 5:00 p.m., New York City time, on the next
succeeding Business Day.
(g) "Common Stock" shall mean the common stock, par value $0.01
per share, of the Company, except that "Common Stock" when used with reference
to any Person other than the Company shall mean the capital stock of such
Person with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person.
(h) "Common Stock Equivalents" shall have the meaning set forth
in Section 11(a)(iii) hereof.
(i) "Current Market Price" shall have the meaning set forth in
Section 11(d)(i) hereof.
(j) "Current Value" shall have the meaning set forth in Section
11(a)(iii) hereof.
(k) "Distribution Date" shall have the meaning set forth in
Section 3(a) hereof.
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<PAGE>
(l) "Equivalent Preferred Stock" shall have the meaning set
forth in Section 11(b) hereof.
(m) "Exchange Act" shall mean the Securities and Exchange Act
of 1934, as amended.
(n) "Exchange Ratio" shall have the meaning set forth in
Section 24 hereof.
(o) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(p) "Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(q) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(r) "Preferred Stock" shall mean shares of Series A Junior
Participating Preferred Stock, par value $0.01 per share, of the Company, and,
to the extent that there are not a sufficient number of shares of Series A
Junior Participating Preferred Stock authorized to permit the full exercise of
the Rights, any other series of preferred stock of the Company designated for
such purpose containing terms substantially similar to the terms of the Series
A Junior Participating Preferred Stock.
(s) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
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<PAGE>
(t) "Purchase Price" per one one-hundredth of a share shall mean
the amount equal to the product of four times the average daily closing price
of the Common Stock for the first five days of trading subsequent to the
consummation of the initial public offering of the Common Stock), subject to
adjustment in accordance with Section 4(a)(ii) and the other provisions
contained herein.
(u) "Qualified Offer" shall have the meaning set forth in
Section 11(a)(ii) hereof.
(v) "Record Date" shall have the meaning set forth in the
Recitals at the beginning of this Agreement.
(w) "Rights" shall have the meaning set forth in the Recitals at
the beginning of this Agreement.
(x) "Rights Agent" shall have the meaning set forth in the
parties clause at the beginning of this Agreement.
(y) "Rights Certificate" shall have the meaning set forth in
Section 3(a) hereof.
(z) "Rights Dividend Declaration Date" shall have the meaning
set forth in the Recitals at the beginning of this Agreement.
(aa) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii) hereof.
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(bb) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.
(cc) "Spread" shall have the meaning set forth in Section
11(a)(iii) hereof.
(dd) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed or amended pursuant to Section 13(d) under
the Exchange Act) by the Company or an Acquiring Person that an Acquiring
Person has become such other than pursuant to a Qualified Offer.
(ee) "Subsidiary" shall mean, with reference to any Person, any
corporation of which an amount of voting securities sufficient to elect at
least a majority of the directors of such corporation is beneficially owned,
directly or indirectly, by such Person, or otherwise controlled by such Person.
(ff) "Substitution Period" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(gg) "Summary of Rights" shall have the meaning set forth in
Section 3(b) hereof.
(hh) "Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.
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(ii) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of
the Rights (who, in accordance with Section 3 hereof, shall before the
Distribution Date also be the holders of the Common Stock) in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-rights agents as
it may deem necessary or desirable.
Section 3. Issuance of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth
Business Day after the Stock Acquisition Date or (ii) the close of business on
the tenth Business Day (or such later date as the Board shall determine) after
the date that a tender or exchange offer by any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan of the Company or of
any Subsidiary of the Company, or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any such plan) is
first published or sent or given within the meaning of Rule 14d-2(a) of the
General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person would become an Acquiring Person, in either instance other
than pursuant to a Qualified Offer (the
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earlier of (i) and (ii) being herein referred to as the "Distribution Date"),
(x) the Rights will be evidenced (subject to the provisions of paragraph (b) of
this Section 3) by the certificates for the Common Stock registered in the
names of the holders of the Common Stock (which certificates for Common Stock
shall be deemed also to be certificates for Rights) and not by separate
certificates, and (y) the Rights will be transferable only in connection with
the transfer of the underlying shares of Common Stock (including a transfer to
the Company). As soon as practicable after the Distribution Date, the Rights
Agent will send by first-class, insured, postage-prepaid mail, to each record
holder of the Common Stock as of the close of business on the Distribution
Date, at the address of such holder shown on the records of the Company, one
or more right certificates, in substantially the form of Exhibit B hereto (the
"Rights Certificates"), evidencing one Right for each share of Common Stock so
held, subject to adjustment as provided herein. If an adjustment in the number
of Rights per share of Common Stock has been made pursuant to Section 11(p)
hereof, at the time of distribution of the Rights Certificates, the Company
shall make the necessary and appropriate rounding adjustments (in accordance
with Section 14(a) hereof) so that Rights Certificates representing only whole
numbers of Rights are distributed and cash is paid in lieu of any fractional
Rights. As of and after the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates.
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<PAGE>
(b) The Company will make available a copy of a Summary of
Rights, in substantially the form attached hereto as Exhibit C (the "Summary of
Rights"), to any holder Rights who may so request from time to time before the
Expiration Date. With respect to certificates for the Common Stock outstanding
as of the Record Date, until the Distribution Date, the Rights will be
evidenced by such certificates for the Common Stock and the registered holders
of the Common Stock shall also be the registered holders of the associated
Rights. Until the earlier of the Distribution Date or the Expiration Date (as
such term is defined in Section 7(a) hereof), the transfer of any certificates
representing shares of Common Stock in respect of which Rights have been issued
shall also constitute the transfer of the Rights associated with such shares of
Common Stock.
(c) Rights shall be issued in respect of all shares of Common
Stock which are issued (whether originally issued or from the Company's
treasury) after the Record Date but before the earlier of the Distribution Date
or the Expiration Date. Certificates representing such shares of Common Stock
shall also be deemed to be certificates for Rights, and shall bear the
following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in the Rights Agreement between
HomeServices.Com Inc. (the "Company") and the Rights Agent thereunder
(the "Rights Agreement"), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal
offices of the Company and the Rights Agent. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
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<PAGE>
be evidenced by separate certificates and will no longer be evidenced
by this certificate. The Company or the Rights Agent will mail to the
holder of this certificate a copy of the Rights Agreement, as in
effect on the date of mailing, without charge, promptly after receipt
of a written request therefor. Under certain circumstances set forth
in the Rights Agreement, Rights issued to, or held by, any Person who
is, was or becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any subsequent
holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable
16
<PAGE>
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Rights may from time to time be
listed, or to conform to usage. Subject to the provisions of Section 11 and
Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated
as of the Record Date and on their face shall entitle the holders thereof to
purchase such number of one one-hundredths of a share of Preferred Stock as
shall be set forth therein at the Purchase Price per one one-hundredth of a
share, but the amount and type of securities purchasable upon the exercise of
each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a),
Section 11(i) or Section 22 hereof that represents Rights beneficially owned
by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee before or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer
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<PAGE>
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect avoidance
of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6
or Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Rights Certificate referred to in this sentence, shall contain (to the
extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were benefi
cially owned by a Person who was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of the Rights Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be countersigned by the Rights Agent,
either manually or by facsimile signature, and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Rights Certificates shall cease to be such officer of
the Company before countersignature by the
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<PAGE>
Rights Agent and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificates may be signed on behalf of the Company by any person
who, at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Rights Agreement any such person was not such an
officer.
(b) Following the Distribution Date, the Rights Agent will keep,
or cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and
Section 14 hereof, at any time after the close of business on the Distribution
Date, and at or before the close of business on the Expiration Date, any Rights
Certificate
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<PAGE>
or Certificates (other than Rights Certificates representing Rights that may
have been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Rights Certificate or Certificates, entitling
the registered holder to purchase a like number of one one-hundredths of a share
of Preferred Stock (or, following a Triggering Event, Common Stock, other
securities, cash or other assets, as the case may be) as the Rights Certificate
or Certificates surrendered then entitles such holder (or former holder in the
case of a transfer) to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Rights Certificate or Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Certificates to be transferred, split up, combined or
exchanged at the principal office or offices of the Rights Agent designated for
such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e), Section 14 hereof and
Section 24 hereof, countersign and deliver to the Person entitled thereto a
Rights Certificate or Rights
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Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Rights Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to the
Company and the Rights Agent of all reasonable expenses incidental thereto, and
upon surrender to the Rights Agent and cancellation of the Rights Certificate
if mutilated, the Company will execute and deliver a new Rights Certificate of
like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights.
(a) Subject to Section 7(e) hereof, at any time after the
Distribution Date the registered holder of any Rights Certificate may exercise
the Rights evidenced thereby (except as otherwise provided herein including,
without limitation, the restrictions on exercisability set forth in Section
9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole or in part upon
surrender of the Rights
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Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
or offices of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of
one one-hundredths of a share (or other securities, cash or other assets, as
the case may be) as to which such surrendered Rights are then exercisable, at
or before the earlier of (i) 5:00 p.m., New York City time, on the tenth
anniversary of the date of the consummation of the initial public offering of
the Common Stock of the Company, or such later date as may be established by
the Board of Directors before the expiration of the Rights (such date, as it
may be extended by the Board, the ("Final Expiration Date"), or (ii) the time
at which the Rights are redeemed or exchanged as provided in Section 23 and
Section 24 hereof (the earlier of (i) and (ii) being herein referred to as the
"Expiration Date").
(b) The Purchase Price for each one one-hundredth of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be the
amount equal to the product of four times the average daily closing price of
the Common Stock for the first five days of trading subsequent to the
consummation of the initial public offering of the Common Stock and shall be
subject to adjustment from time to time as provided in Section 11 and Section
13(a) hereof and shall be payable in accordance with paragraph (c) below.
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<PAGE>
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one one-hundredth of a share of Preferred Stock (or
other shares, securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer
tax, the Rights Agent shall, subject to Section 20(k) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the shares of Preferred
Stock (or make available, if the Rights Agent is the transfer agent for such
shares) certificates for the total number of one one-hundredths of a share of
Preferred Stock to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests, or (B) if the Company
shall have elected to deposit the total number of shares of Preferred Stock
issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one one-hundredths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company will direct the depositary agent to comply
with such request, (ii) requisition from the Company the amount of cash, if
any, to be paid in lieu of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to
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<PAGE>
be delivered to or, upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon
the order of the registered holder of such Rights Certificate. The payment of
the Purchase Price (as such amount may be reduced pursuant to Section
11(a)(iii) hereof) shall be made in cash or by certified bank check or bank
draft payable to the order of the Company. If the Company is obligated to issue
other securities (including Common Stock) of the Company, pay cash and/or
distribute other property pursuant to Section 11(a) hereof, the Company will
make all arrangements necessary so that such other securities, cash and/or
other property are available for distribution by the Rights Agent, if and when
appropriate. The Company reserves the right to require before the occurrence of
a Triggering Event that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 14
hereof.
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<PAGE>
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of a Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of
an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee before or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the
Board of Directors of the Company has determined is part of a plan, arrangement
or understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to insure that the provisions of this Section
7(e) and Section 4(b) hereof are complied with, but shall have no liability to
any holder of Rights Certificates or any other Person as a result of its
failure to make any determi-
25
<PAGE>
nations with respect to an Acquiring Person or its Affiliates, Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall
have (i) completed and signed the certificate contained in the form of election
to purchase set forth on the reverse side of the Rights Certificate surrendered
for such exercise, and (ii) provided such additional evidence of the identity
of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates.
All Rights Certificates surrendered for the purpose of exercise, transfer,
split-up, combination or exchange shall, if surrendered to the Company or any
of its agents, be delivered to the Rights Agent for cancellation or in
cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by
it, and no Rights Certificates shall be issued in lieu thereof except as
expressly permitted by any of the provisions of this Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Rights Certificate
purchased or acquired by the Company otherwise than upon the exercise thereof.
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<PAGE>
The Rights Agent shall deliver all cancelled Rights Certificates to the Company,
or shall, at the written request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of
its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares held in its treasury), the number of
shares of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) that, as provided in this Agreement
including Section 11(a)(iii) hereof, will be sufficient to permit the exercise
in full of all outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following
the occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on any
national securities exchange, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares reserved
for such issuance to be listed on such exchange upon official notice of
issuance upon such exercise.
<PAGE>
(c) The Company shall use its best efforts to (i) file, as soon
as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, a registration statement under the Act, with respect
to the securities purchasable upon exercise of the Rights on an appropriate
form, (ii) cause such registration statement to become effective as soon as
practicable after such filing, and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of
the Act) until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the date of the expiration of the
Rights. The Company will also take such action as may be appropriate under, or
to ensure compliance with, the securities or "blue sky" laws of the various
states in connection with the exercisability of the Rights. The Company may
temporarily suspend, for a period of time not to exceed ninety (90) days after
the date set forth in clause (i) of the first sentence of this Section 9(c),
the exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement at
such time as the suspension has been rescinded. In addition, if the Company
shall determine that a registration statement is required
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following the Distribution Date, the Company may temporarily suspend the
exercisability of the Rights until such time as a registration statement has
been declared effective. Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification in such jurisdiction shall not have been obtained, the
exercise thereof shall not be permitted under applicable law, or a registration
statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all one one-hundredths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of one one-hundredths of a
share of Preferred Stock (or Common Stock and/or other securities, as the case
may be) upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Rights Certificates
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to a Person other than, or the issuance or delivery of a number of one
one-hundredths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in respect of a name other than that of the
registered holder of the Rights Certificates evidencing Rights surrendered for
exercise or to issue or deliver any certificates for a number of one
one-hundredths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose
name any certificate for a number of one one-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preferred Stock (or Common Stock
and/or other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the
30
<PAGE>
case may be) transfer books of the Company are closed, such Person shall be
deemed to have become the record holder of such shares (fractional or otherwise)
on, and such certificate shall be dated, the next succeeding Business Day on
which the Preferred Stock (or Common Stock and/or other securities, as the case
may be) transfer books of the Company are open. Before the exercise of the
Rights evidenced thereby, the holder of a Rights Certificate shall not be
entitled to any rights of a stockholder of the Company with respect to shares
for which the Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the number and kind of shares
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
Preferred Stock, (C) combine the outstanding Preferred Stock into a
smaller number of shares, or (D) issue any shares of its capital stock
in a reclassification of the Preferred Stock (including any
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such reclassification in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation), except
as otherwise provided in this Section 11(a) and Section 7(e) hereof,
the Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Pre ferred Stock
or capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the
Purchase Price then in effect, the aggregate number and kind of shares
of Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately before such date and at a time
when the Preferred Stock transfer books of the Company were open, such
holder would have owned upon such exercise and been entitled to receive
by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an adjustment
under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the
adjustment provided for in this Section 11(a)(i) shall be in addition
to, and shall be made before, any adjustment required pursuant to
Section 11(a)(ii) hereof.
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(ii) In the event any Person shall, at any time after the
Rights Dividend Declaration Date, become an Acquiring Person, unless
the event causing such Person to become an Acquiring Person is a
transaction set forth in Section 13(a) hereof, or is an acquisition of
shares of Common Stock pursuant to a tender offer or an exchange offer
for all outstanding shares of Common Stock at a price and on terms
determined by at least a majority of the members of the Board of
Directors who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of an Acquiring
Person, after receiving advice from one or more investment banking
firms, to be (a) at a price which is fair to stockholders and not
inadequate (taking into account all factors which such members of the
Board deem relevant, including, without limitation, prices which could
reasonably be achieved if the Company or its assets were sold on an
orderly basis designed to realize maximum value) and (b) otherwise in
the best interests of the Company and its stockholders (a "Qualified
Offer"), then, promptly following the occurrence of such event, proper
provision shall be made so that each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the
right to receive, upon exercise thereof at the then current
33
<PAGE>
Purchase Price in accordance with the terms of this Agreement, in lieu
of a number of one one-hundredths of a share of Preferred Stock, such
number of shares of Common Stock of the Company as shall equal the
result obtained by (x) multiplying the then current Purchase Price by
the then number of one one-hundredths of a share of Preferred Stock for
which a Right was exercisable immediately before the first occurrence
of a Section 11(a)(ii) Event, and (y) dividing that product (which,
following such first occurrence, shall thereafter be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement)
by 50% of the Current Market Price (determined pursuant to Section
11(d) hereof) per share of Common Stock on the date of such first
occurrence (such number of shares, the "Adjustment Shares").
(iii) If the number of shares of Common Stock which are
authorized by the Company's Restated Certificate of Incorporation,
but which are not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights, are not sufficient to permit
the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii) of this Section 11(a), the Company shall (A)
determine the value of the Adjustment Shares issuable upon the
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<PAGE>
exercise of a Right (the "Current Value"), and (B) with respect to
each Right (subject to Section 7(e) hereof), make adequate provision
to substitute for the Adjustment Shares, upon the exercise of a Right
and payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or
units of shares, of preferred stock, such as the Preferred Stock,
which the Board has deemed to have essentially the same value or
economic rights as shares of Common Stock (such shares of preferred
stock being referred to as "Common Stock Equivalents")), (4) debt
securities of the Company, (5) other assets, or (6) any combination of
the foregoing, having an aggregate value equal to the Current Value
(less the amount of any reduction in the Purchase Price), where such
aggregate value has been determined by the Board based upon the advice
of a nationally recognized investment banking firm selected by the
Board; provided, however, that if the Company shall not have made
adequate provision to deliver value pursuant to clause (B) above
within thirty (30) days following the later of (x) the first
occurrence of a Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the
later of (x) and (y)
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<PAGE>
being referred to herein as the "Section 11(a)(ii) Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase
Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value
equal to the Spread. For purposes of the preceding sentence, the term
"Spread" shall mean the excess of (i) the Current Value over (ii) the
Purchase Price. If the Board determines in good faith that it is
likely that sufficient additional shares of Common Stock could be
authorized for issuance upon exercise in full of the Rights, the
thirty (30) day period set forth above may be extended to the extent
necessary, but not more than ninety (90) days after the Section
11(a)(ii) Trigger Date, in order that the Company may seek shareholder
approval for the authorization of such additional shares (such thirty
(30) day period, as it may be extended, is herein called the
"Substitution Period"). To the extent that action is to be taken
pursuant to the first and/or third sentences of this Section
11(a)(iii), the Company (1) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding
Rights, and (2) may suspend the exercisability of the Rights until the
expiration of the Substitution
36
<PAGE>
Period in order to seek such shareholder approval for such
authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such first
sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended, as
well as a public announcement at such time as the suspension is no
longer in effect. For purposes of this Section 11(a)(iii), the value
of each Adjustment Share shall be the current market price per share
of the Common Stock on the Section 11(a)(ii) Trigger Date and the per
share or per unit value of any Common Stock Equivalent shall be deemed
to equal the current market price per share of the Common Stock on
such date.
(b) In case the Company shall fix a record date for the issuance
of rights, options or warrants to all holders of Preferred Stock entitling them
to subscribe for or purchase (for a period expiring within forty-five (45)
calendar days after such record date) Preferred Stock (or shares having the
same rights, privileges and preferences as the shares of Preferred Stock
("Equivalent Preferred Stock")) or securities convertible into Preferred Stock
or Equivalent Preferred Stock at a price per share of Preferred Stock or per
share of Equivalent Preferred Stock (or
37
<PAGE>
having a conversion price per share, if a security convertible into Preferred
Stock or Equivalent Preferred Stock) less than the Current Market Price (as
determined pursuant to Section 11(d) hereof) per share of Preferred Stock on
such record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
before such record date by a fraction, the numerator of which shall be the
number of shares of Preferred Stock outstanding on such record date, plus the
number of shares of Preferred Stock which the aggregate offering price of the
total number of shares of Preferred Stock and/or Equivalent Preferred Stock so
to be offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such Current Market Price, and
the denominator of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of additional shares of
Preferred Stock and/or Equivalent Preferred Stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
by delivery of consideration, part or all of which may be in a form other than
cash, the value of such consideration shall be as determined in good faith by
the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights. Shares of Preferred Stock owned by or held
for the account of the Company shall not
38
<PAGE>
be deemed outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed, and if such
rights or warrants are not so issued, the Purchase Price shall be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a
regular quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
evidences of indebtedness, or of subscription rights or warrants (excluding
those referred to in Section 11(b) hereof), the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in
effect immediately before such record date by a fraction, the numerator of
which shall be the Current Market Price (as determined pursuant to Section
11(d) hereof) per share of Preferred Stock on such record date, less the fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent) of the portion of the cash, assets or evidences of indebtedness
so to be distributed or of such subscription rights or warrants applicable to a
share of Preferred Stock, and the
39
<PAGE>
denominator of which shall be such Current Market Price (as determined pursuant
to Section 11(d) hereof) per share of Preferred Stock. Such adjustments shall
be made successively whenever such a record date is fixed, and if such
distribution is not so made, the Purchase Price shall be adjusted to be the
Purchase Price which would have been in effect if such record date had not been
fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the Current Market
Price per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the thirty (30)
consecutive Trading Days immediately before such date, and for purposes of
computations made pursuant to Section 11(a)(iii) hereof, the Current Market
Price per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the ten (10)
consecutive Trading Days immediately following such date; provided, however,
that if the Current Market Price per share of the Common Stock is determined
during a period following the announcement by the issuer of such Common Stock
of (A) a dividend or distribution on such Common Stock payable in shares of
such Common Stock or securities convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision, combination or
reclassification of such Common Stock, and the ex-dividend date for such
dividend or distribution, or the record date for such subdivision,
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<PAGE>
combination or reclassification shall not have occurred before the commencement
of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set
forth above, then, and in each such case, the Current Market Price shall be
properly adjusted to take into account ex-dividend trading. The closing price
for each day shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are
not listed or admitted to trading on the New York Stock Exchange, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading or, if the shares of
Common Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common Stock selected by the Board. If on any such date no
market maker is making a market in the Common
41
<PAGE>
Stock, the fair value of such shares on such date as determined in good faith
by the Board shall be used. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading is open for the transaction of business or,
if the shares of Common Stock are not listed or admitted to trading on any
national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, Current Market Price per share shall
mean the fair value per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
Current Market Price per share of Preferred Stock shall be determined
in the same manner as set forth above for the Common Stock in clause
(i) of this Section 11(d) (other than the last sentence thereof). If
the Current Market Price per share of Preferred Stock cannot be
determined in the manner provided above or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause
(i) of this Section 11(d), the Current Market Price per share of
Preferred Stock shall be conclusively deemed to be an amount equal to
100 (as such number may be appropriately adjusted for such events as
stock splits, stock dividends and recapitalizations with respect to
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<PAGE>
the Common Stock occurring after the date of this Agreement)
multiplied by the Current Market Price per share of the Common Stock.
If neither the Common Stock nor the Preferred Stock is publicly held or
so listed or traded, Current Market Price per share of the Preferred
Stock shall mean the fair value per share as determined in good faith
by the Board, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes.
For all purposes of this Agreement, the Current Market Price of a Unit
shall be equal to the Current Market Price of one share of Preferred
Stock divided by 100.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest ten-thousandth of a share
of Common Stock or other share or one-millionth of a share of Preferred Stock,
as the case may be. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this
43
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Section 11 shall be made no later than the earlier of (i) three (3) years from
the date of the transaction which mandates such adjustment, or (ii) the
Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immedi ately before the making of such adjustment shall thereafter
evidence the right to
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purchase, at the adjusted Purchase Price, that number of one one-hundredths of
a share of Preferred Stock (calculated to the nearest one-millionth) obtained
by (i) multiplying (x) the number of one one-hundredths of a share covered by a
Right immediately before this adjustment, by (y) the Purchase Price in effect
immediately before such adjustment of the Purchase Price, and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in lieu of any adjustment
in the number of one one-hundredths of a share of Preferred Stock purchasable
upon the exercise of a Right. Each of the Rights outstanding after the
adjustment in the number of Rights shall be exercisable for the number of one
one-hundredths of a share of Preferred Stock for which a Right was exercisable
immediately before such adjustment. Each Right held of record before such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-ten-thousandth) obtained by dividing the
Purchase Price in effect immediately before adjustment of the Purchase Price by
the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announce ment of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This
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record date may be the date on which the Purchase Price is adjusted or any day
thereafter, but, if the Rights Certificates have been issued, shall be at least
ten (10) days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(i), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to Section 14 hereof, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders before the date of adjustment, and upon
surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the
option of the Company, the adjusted Purchase Price) and shall be registered in
the names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-hundredths of a share of Preferred Stock
issuable upon the exercise of the Rights, the Rights Certificates theretofore
and thereafter issued may continue to express the Purchase Price per one
one-hundredth
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of a share and the number of one one-hundredth of a share which were expressed
in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated value, if any, of the number
of one one-hundredths of a share of Preferred Stock issuable upon exercise of
the Rights, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable such number of one one-hundredths of
a share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-hundredths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-hundredths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon
such exercise on the basis of the Purchase Price in effect before such
adjustment; provided, however, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such
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holder's right to receive such additional shares (fractional or otherwise) or
securities upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the Current Market Price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities which by their terms are
convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Preferred Stock
shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets,
cash flow or earning power aggregating more than 50%
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of the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section
11(o) hereof), if (x) at the time of or immediately after such consolidation,
merger or sale there are any rights, warrants or other instruments or
securities outstanding or agreements in effect which would substantially
diminish or otherwise eliminate the benefits intended to be afforded by the
Rights or (y) before, simultaneously with or immediately after such
consolidation, merger or sale, the shareholders of the Person who constitutes,
or would constitute, the "Principal Party" for purposes of Section 13(a) hereof
shall have received a distribution of Rights previously owned by such Person or
any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 26
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by
the Rights.
(p) Anything in this Agreement to the contrary notwithstanding,
if the Company shall at any time after the Rights Dividend Declaration Date and
before the Distribution Date (i) declare a dividend on the outstanding shares
of Common Stock payable in shares of Common Stock, (ii) subdivide the outstand-
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ing shares of Common Stock, or (iii) combine the outstanding shares of Common
Stock into a smaller number of shares, the number of Rights associated with
each share of Common Stock then outstanding, or issued or delivered thereafter
but before the Distribution Date, shall be proportionately adjusted so that the
number of Rights thereafter associated with each share of Common Stock
following any such event shall equal the result obtained by multiplying the
number of Rights associated with each share of Common Stock immediately before
such event by a fraction the numerator which shall be the total number of
shares of Common Stock outstanding immediately before the occurrence of the
event and the denominator of which shall be the total number of shares of
Common Stock outstanding immediately following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 and Section
13 hereof, the Company shall (a) promptly prepare a certificate setting forth
such adjustment and a brief statement of the facts accounting for such
adjustment, (b) promptly file with the Rights Agent, and with each transfer
agent for the Preferred Stock and the Common Stock, a copy of such certificate
and (c) if a Distribution Date has occurred, mail a brief summary thereof to
each holder of a Rights Certificate in accordance with Section 27 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained.
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Section 13. Consolidation, Merger or Sale or Transfer of Assets,
Cash Flow or Earning Power.
(a) If, following the Stock Acquisition Date, directly or
indirectly, (x) the Company shall consolidate with, or merge with and into, any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the
continuing or surviving corporation of such consolidation or merger, (y) any
Person (other than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof) shall consolidate with, or merge with or into, the
Company, and the Company shall be the continuing or surviving corporation of
such consolidation or merger and, in connection with such consolidation or
merger, all or part of the outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other Person or cash or
any other property, or (z) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer), in one
transaction or a series of related transactions, assets, cash flow or earning
power aggregating more than 50% of the assets, cash flow or earning power of
the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof), then, and in
each such case (except as may be contemplated by Section 13(d) hereof) proper
provision shall be made so
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that: (i) each holder of a Right, except as provided in Section 7(e) hereof,
shall thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price in accordance with the terms of this Agreement, such
number of validly authorized and issued, fully paid, non-assessable and freely
tradeable shares of Common Stock of the Principal Party (as such term is
hereinafter defined), not subject to any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one one-hundredths
of a share of Preferred Stock for which a Right is exercisable immediately
before the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii)
Event has occurred before the first occurrence of a Section 13 Event,
multiplying the number of such one one-hundredths of a share for which a Right
was exercisable immediately before the first occurrence of a Section 11(a)(ii)
Event by the Purchase Price in effect immediately before such first occurrence),
and dividing that product (which, following the first occurrence of a Section 13
Event, shall be referred to as the "Purchase Price" for each Right and for all
purposes of this Agreement) by (2) 50% of the Current Market Price (determined
pursuant to Section 11(d)(i) hereof) per share of the Common Stock of such
Principal Party on the date of consummation of such Section 13 Event; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such Section 13 Event, all the obligations and duties of the Company pursuant to
this Agreement; (iii) the term "Company"
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shall thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 hereof shall apply only
to such Principal Party following the first occurrence of a Section 13 Event;
(iv) such Principal Party shall take such steps (including, but not limited to,
the reservation of a sufficient number of shares of its Common Stock) in
connection with the consummation of any such transaction as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to its shares of Common Stock thereafter
deliverable upon the exercise of the Rights; and (v) the provisions of Section
11(a)(ii) hereof shall be of no effect following the first occurrence of any
Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of Section 13(a), the Person that is the
issuer of any securities into which shares of Common Stock of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in clause (z)
of the first sentence of Section 13(a), the Person that is the
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party receiving the greatest portion of the assets, cash flow or
earning power transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such
Person is not at such time and has not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the Common
Stock of which is and has been so registered, "Principal Party" shall refer to
such other Person; and (2) in case such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Stocks of two or more of which
are and have been so registered, "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Stock having the greatest aggregate
market value.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will
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(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause su7ch registration statement to (A) become effective
as soon as practicable after such filing and (B) remain effective
(with a prospectus at all times meeting the requirements of the Act)
until the Expiration Date; and
(ii) take such all such other action as may be necessary to
enable the Principal Party to issue the securities purchasable upon
exercise of the Rights, including but not limited to the registration
or qualification of such securities under all requisite securities
laws of jurisdictions of the various states and the listing of such
securities on such exchanges and trading markets as may be necessary
or appropriate; and
(iii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its Affili
ates which comply in all respects with the requirements for registra
tion on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers
or consolidations or sales or other transfers. If a Section 13 Event shall
occur at any
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time after the occurrence of a Section 11(a)(ii) Event, the Rights which have
not theretofore been exercised shall thereafter become exercisable in the manner
described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction is consummated with a
Person or Persons who acquired shares of Common Stock pursuant to a tender
offer or exchange offer for all outstanding shares of Common Stock which is a
Qualified Offer as such term is defined in Section 11(a)(ii) hereof (or a
wholly owned subsidiary of any such Person or Persons), (ii) the price per
share of Common Stock offered in such transaction is not less than the price
per share of Common Stock paid to all holders of shares of Common Stock whose
shares were purchased pursuant to such tender offer or exchange offer and (iii)
the form of consideration being offered to the remaining holders of shares of
Common Stock pursuant to such transaction is the same as the form of
consideration paid pursuant to such tender offer or exchange offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights, except before the Distribution Date as provided in Section 11(p)
hereof, or
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to distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, the Company shall pay to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately before the date on which such fractional Rights would have been
otherwise issuable. The closing price of the Rights for any day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading, or
if the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by NASDAQ
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market
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maker making a market in the Rights, selected by the Board of Directors of the
Company. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith
by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-hundredth of a share of Preferred Stock) upon exercise of the Rights or
to distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-hundredth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock that
are not integral multiples of one one-hundredth of a share of Preferred Stock,
the Company may pay to the registered holders of Rights Certificates at the
time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one one-hundredth of a share
of Preferred Stock. For purposes of this Section 14(b), the current market
value of one one-hundredth of a share of Preferred Stock shall be one
one-hundredth of the closing price of a share of Preferred Stock (as determined
pursuant to Section 11(d)(ii) hereof) for the Trading Day immediately before
the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company
shall not be required to issue fractions of shares of Common Stock upon
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exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one (1) share of Common Stock. For
purposes of this Section 14(c), the current market value of one share of Common
Stock shall be the closing price of one share of Common Stock (as determined
pursuant to Section 11(d)(i) hereof) for the Trading Day immediately before the
date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of
this Agreement are vested in the respective registered holders of the Rights
Certificates (and, before the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, before
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, before the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate
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in the manner provided in such Rights Certificate and in this Agreement.
Without limiting the foregoing or any remedies available to the holders of
Rights, it is specifically acknowledged that the holders of Rights would not
have an adequate remedy at law for any breach of this Agreement and shall be
entitled to specific performance of the obligations hereunder and injunctive
relief against actual or threatened violations of the obligations hereunder of
any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a
Right by accepting the same consents and agrees with the Company and the Rights
Agent and with every other holder of a Right that:
(a) before the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, before the Distribution Date, the associated Common Stock
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certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute0, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Rights Certificate shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of the number of one
one-hundredths of a share of Preferred Stock or any other securities of the
Company which may at any
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time be issuable on the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Rights Certificate be construed to confer
upon the holder of any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in Section 25 hereof),
or to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this
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Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any
Rights Certificate or certificate for Common Stock or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights
Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust, stock transfer or other shareholder services business of
the Rights Agent or any successor Rights Agent, shall be the successor to the
Rights Agent under this Agreement without the execution or filing of any paper
or any further act on the part of any of the parties hereto; but only if such
corporation would be eligible
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for appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have
been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such
Rights Certificates so countersigned; and in case at that time any of the
Rights Certificates shall not have been countersigned, any successor Rights
Agent may countersign such Rights Certificates either in the name of the
predecessor or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and
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conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter (including, without limitation, the identity of any Acquiring Person
and the determination of Current Market Price) be proved or established by the
Company before taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a certificate signed
by the Chairman of the Board, the President, any Vice President, the Treasurer,
any Assistant Treasurer, the Secretary or any Assistant Secretary of the
Company and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
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(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights
Certificate; nor shall it be responsible for any adjustment required under the
provisions of Section 11, Section 13 or Section 24 hereof or responsible for
the manner, method or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment (except with respect
to the exercise of Rights evidenced by Rights Certificates after actual notice
of any such adjustment); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any
shares of Common Stock or Preferred Stock to be issued pursuant to this
Agreement or any Rights Certificate or as to whether any shares of Common Stock
or Preferred
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Stock will, when so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reason ably be required by the Rights Agent for the carrying out or performing
by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
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(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct; provided, however, reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to
such requested exercise or transfer without first consulting with the Company.
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Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company, and
to each transfer agent of the Common Stock and Preferred Stock, by registered
or certified mail, and, if such resignation occurs after the Distribution Date,
to the registered holders of the Rights Certificates by first-class mail. The
Company may remove the Rights Agent or any successor Rights Agent upon thirty
(30) days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Stock and
Preferred Stock, by registered or certified mail, and, if such removal occurs
after the Distribution Date, to the holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after giving notice of such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then any registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
legal
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business entity organized and doing business under the laws of the United
States or of the State of Delaware or of any other state of the United States,
in good standing, having an office in the State of Delaware, which is
authorized under such laws to exercise corporate trust or stock transfer or
shareholder services powers and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $50,000,000 or (b) an
affiliate of a legal business entity described in clause (a) of this sentence.
After appointment, the successor Rights Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
as Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and the Preferred Stock, and, if such appointment occurs after the Distribution
Date, mail a notice thereof in writing to the registered holders of the Rights
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent, as the case may be.
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Section 22. Issuance of New Rights Certificates. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by the Board of Directors to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock
following the Distribution Date and before the redemption or expiration of the
Rights, the Company (a) shall, with respect to shares of Common Stock so issued
or sold pursuant to the exercise of stock options or under any employee plan or
arrangement, granted or awarded as of the Distribution Date, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii)
no such Rights Certificate
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shall be issued if, and to the extent that, appropriate adjustment shall
otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at
any time before the earlier of (i) the close of business on the tenth Business
Day following the Stock Acquisition Date or (ii) the Final Expiration Date,
redeem all but not less than all of the then outstanding Rights at a redemption
price of $.01 per Right, as such amount may be appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such redemption price being hereinafter referred to as the
"Redemption Price"). Notwithstanding anything contained in this Agreement to
the contrary, the Rights shall not be exercisable after the first occurrence of
a Section 11(a)(ii) Event until such time as the Company's right of redemption
hereunder has expired. The Company may, at its option, pay the Redemption Price
in cash, shares of Common Stock (based on the Current Market Price, as defined
in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or
any other form of consideration deemed appropriate by the Board of Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and without any further action and without any
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notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to all such holders at each holder's last address as it appears upon
the registry books of the Rights Agent or, before the Distribution Date, on the
registry books of the transfer agent for the Common Stock. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the method
by which the payment of the Redemption Price will be made.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at
any time after any Person becomes an Acquiring Person, exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights
that have become void pursuant to the provisions of Section 7(e) hereof) for
Com mon Stock at an exchange ratio of one share of Common Stock per Right,
appropri ately adjusted to reflect any stock split, stock dividend or similar
transaction occur ring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors of the
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Company shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Stock for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such exchange;
provided, however, that the failure to give, or any defect in, such notice
shall not affect the validity of such exchange. The Company promptly shall mail
a notice of any such exchange to all of the holders of such Rights at their
last addresses as they appear upon the registry books of the Rights Agent. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of the Common Stock for Rights will
be effected and, in the event of any partial exchange, the
<PAGE>
number of Rights which will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights which have
become void pursuant to the provisions of Section 7(e) hereof) held by each
holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at
its option, may substitute Preferred Stock (or Equivalent Preferred Stock, as
such term is defined in paragraph (b) of Section 11 hereof) for Common Stock
exchangeable for Rights, at the initial rate of one one-hundredth of a share of
Preferred Stock (or Equivalent Preferred Stock) for each share of Common Stock,
as appropriately adjusted to reflect stock splits, stock dividends and other
similar transactions after the date hereof.
(d) If there shall not be sufficient shares of Common Stock
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the shares of
Company shall take all such action as may be necessary to authorize additional
shares of Common Stock for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of
shares of Common Stock or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of such fractional shares of Common Stock,
there shall be paid to the registered holders of the Rights Certificates with
regard to which such fractional shares of Common Stock would otherwise be
issuable, an amount in
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cash equal to the same fraction of the current market value of a whole share of
Common Stock. For the purposes of this subsection (e), the current market value
of a whole share of Common Stock shall be the closing price of a share of
Common Stock (as determined pursuant to the second sentence of Section 11(d)(i)
hereof) for the Trading Day immediately before the date of exchange pursuant to
this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings
or retained earnings of the Company), or (ii) to offer to the holders of
Preferred Stock rights or warrants to subscribe for or to purchase any
additional shares of Preferred Stock or shares of stock of any class or any
other securities, rights or options, or (iii) to effect any reclassification of
its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding shares of Preferred Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), or
to effect any sale or other transfer (or to permit one or more of its
Subsidiaries to effect any sale or other transfer), in one transaction or a
series of related
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transactions, of more than 50% of the assets, cash flow or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), or (v) to
effect the liquidation, dissolution or winding up of the Company, then, in each
such case, the Company shall give to each holder of a Rights Certificate, to
the extent feasible and in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Preferred Stock, if any such date is to
be fixed, and such notice shall be so given in the case of any action covered
by clause (i) or (ii) above at least twenty (20) days before the record date
for determining holders of the shares of Preferred Stock for purposes of such
action, and in the case of any such other action, at least twenty (20) days
before the date of the taking of such proposed action or the date of
participation therein by the holders of the shares of Preferred Stock whichever
shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii)
4hereof shall occur, then, in any such case, (i) the Company shall as soon as
practicable thereafter give to each holder of a Rights Certificate, to the
extent feasible and in
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accordance with Section 26 hereof, a notice of the occurrence of such event,
which shall specify the event and the consequences of the event to holders of
Rights under Section 11(a)(ii) hereof, and (ii) all references in the preceding
paragraph to Pre ferred Stock shall be deemed thereafter to refer to Common
Stock and/or, if appropri ate, other securities.
Section 26. Notices. Notices or demands authorized by this Agree
ment to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing by the Rights Agent with the Company) as follows:
HomeServices.Com Inc.
6800 France Avenue South, Suite 600
Edina, Minnesota 55435
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by
this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Rights Agent with the Company) as follows:
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ChaseMellon Shareholder Services, L.L.C.
2323 Bryan Street, Suite 2300
Dallas, Texas 75201-2656
Attention: Corporate Trust Department
Notices or demands authorized by this Agreement to be given or
made by the Company or the Rights Agent to the holder of any Rights Certificate
(or, if before the Distribution Date, to the holder of certificates
representing shares of Common Stock) shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed to such holder at the
address of such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Before the Distribution
Date, and subject to the last sentence of this Section 27, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date, the
Company and the Rights Agent shall, if the Company so directs, supplement or
amend this Agreement without the approval of any holders of Rights Certificates
in order (i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder, or
(iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not
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adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person or an Affiliate or Associate of an Acquiring Person);
provided, this Agreement may not be supplemented or amended to lengthen any
time period hereunder, pursuant to clause (iii) of this sentence, (A) a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable, or (B) any other time period unless such lengthening
is for the purpose of protecting, enhancing or clarifying the rights of, and/or
the benefits to, the holders of Rights. Upon the delivery of a certificate from
an appropriate officer of the Company which states that the proposed supplement
or amendment is in compliance with the terms of this Section 27, the Rights
Agent shall execute such supplement or amendment. Before the Distribution Date,
the interests of the holders of Rights shall be deemed coincident with the
interests of the holders of Common Stock. Notwithstanding anything herein to
the contrary, this Agreement may not be amended at a time when the Rights are
not redeemable.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of
Directors, etc. For all purposes of this Agreement, any calculation of the
number of shares of Common Stock outstanding at any particular time, including
for purposes of deter-
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mining the particular percentage of such outstanding shares of Common Stock of
which any Person is the Beneficial Owner, shall be made in accordance with the
last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under
the Exchange Act. The Board of Directors of the Company shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board or to the Company, or as
may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to (i) interpret the
provisions of this Agreement, and (ii) make all determinations deemed necessary
or advisable for the administration of this Agreement (including a
determination to redeem or not redeem the Rights or to amend the Agreement).
All such actions, calculations, interpretations and determinations (including,
for purposes of clause (y) below, all omissions with respect to the foregoing)
which are done or made by the Board in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (y) not subject the Board, or any of the
directors on the Board to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, before
the Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy
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<PAGE>
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders
of the Rights Certificates (and, before the Distribution Date, registered
holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated; provided, however, that notwithstanding anything in this
Agreement to the contrary, if any such term, provision, covenant or restriction
is held by such court or authority to be invalid, void or unenforceable and the
Board of Directors of the Company determines in its good faith judgment that
severing the invalid language from this Agreement would adversely affect the
purpose or effect of this Agreement, the right of redemption set forth in
Section 23 hereof shall be reinstated and shall not expire until the close of
business on the tenth Business Day following the date of such determination by
the Board of Directors. Without limiting the foregoing, if any provision
requiring a specific group of Directors of the Company to act is held to by any
court of competent jurisdiction or other authority to be invalid, void or
unenforceable, such determination shall then be
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made by the Board of Directors of the Company in accordance with applicable law
and the Company's Restated Certificate of Incorporation and Restated By-laws.
Section 32. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts
made and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the
several sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
HomeServices.Com Inc.
By
-------------------------------
Name:
Title:
ChaseMellon Shareholder
Services, L.L.C.
By
-------------------------------
Name:
Title:
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<PAGE>
Exhibit A
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
HomeServices.Com Inc.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
The undersigned officers of HomeServices.Com Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors by the Restated Certificate of Incorporation of the said Corporation,
the said Board of Directors on , 1999, adopted the following resolution
creating a series of shares of Preferred Stock designated as Series A Junior
Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its Restated
Certificate of Incorporation, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" and the
number of shares constituting such series shall be [insert twice the IPO
outstanding number of shares].
<PAGE>
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series A Junior Participating Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of January, April, July and October in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Junior Participating
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $10.00 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassifica tion or otherwise), declared on the Common Stock, par
value $0.01 per share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Junior Participating Preferred Stock. In the
event the Corporation shall at any time after , 1999[insert IPO date] (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately before such event under
clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denomi nator of which is
the number of shares of Common Stock that were outstanding immediately before
such event.
(B) The Corporation shall declare a dividend or distribution on
the Series A Junior Participating Preferred Stock as provided in Paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent
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<PAGE>
Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A
Junior Participating Preferred Stock shall nevertheless be payable on such
subse quent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series A Junior Participating Preferred Stock, unless the date of issue of
such shares is before the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the
date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series A Junior Participating Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Junior Participating Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days before the date fixed for the payment
thereof.
Section 3. Voting Rights. The holders of shares of Series A
Junior Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Junior Participating Preferred Stock shall
entitle the holder thereof to 100 votes on all matters submitted to a vote of
the stockholders of the Corporation. In the event the Corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series A Junior Participating Preferred Stock were entitled immediately
before such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the
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<PAGE>
number of shares of Common Stock that were outstanding immediately before such
event.
(B) Except as otherwise provided herein or by law, the holders
of shares of Series A Junior Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior
Participating Preferred Stock shall be in arrears in an amount equal to six
(6) quarterly dividends thereon, the occurrence of such contingency shall mark
the beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on all
shares of Series A Junior Participating Preferred Stock then outstanding shall
have been declared and paid or set apart for payment. During each default
period, all holders of Preferred Stock (including holders of the Series A
Junior Participating Preferred Stock) with dividends in arrears in an amount
equal to six (6) quarterly dividends thereon, voting as a class, irrespective
of series, shall have the right to elect two (2) directors.
(ii) During any default period, such voting right of the holders
of Series A Junior Participating Preferred Stock may be exercised initially at
a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or
at any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting right nor the right of the
holders of any other series of Preferred Stock, if any, to increase, in certain
cases, the authorized number of directors shall be exercised unless the holders
of ten percent (10%) in number of shares of Preferred Stock outstanding shall
be present in person or by proxy. The absence of a quorum of the holders of
Common Stock shall not affect the exercise by the holders of Preferred Stock of
such voting right. At any meeting at which the holders of Preferred Stock shall
exercise such voting right initially during an existing default period, they
shall have the right, voting as a class, to elect directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
directors or, if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting does
not amount to the required number, the holders of the Preferred Stock shall
have the right to make such increase in the number of directors as shall be
necessary to permit the election by them of the required number. After the
holders of the Preferred Stock shall have exercised their right to elect
directors in any default period and during the continu ance of such period, the
number of directors shall not be increased or decreased except by vote of the
holders of Preferred Stock as herein provided or pursuant to the
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<PAGE>
rights of any equity securities ranking senior to or pari passu with the Series
A Junior Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the President, a Vice-President or the Secretary
of the Corporation. Notice of such meeting and of any annual meeting at which
holders of Preferred Stock are entitled to vote pursuant to this Paragraph
(C)(iii) shall be given to each holder of record of Preferred Stock by mailing
a copy of such notice to him at his last address as the same appears on the
books of the Corporation. Such meeting shall be called for a time not earlier
than 20 days and not later than 60 days after such order or request or in
default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of the
total number of shares of Preferred Stock outstanding. Notwithstanding the
provisions of this Paragraph (C)(iii), no such special meeting shall be called
during the period within 60 days immediately preceding the date fixed for the
next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of directors until the holders of Preferred
Stock shall have exercised their right to elect two (2) directors voting as a
class, after the exercise of which right (x) the directors so elected by the
holders of Preferred Stock shall continue in office until their successors
shall have been elected by such holders or until the expiration of the default
period, and (y) any vacancy in the Board of Directors may (except as provided
in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the
remaining directors theretofore elected by the holders of the class of stock
which elected the director whose office shall have become vacant. References in
this Paragraph (C) to directors elected by the holders of a particular class of
stock shall include directors elected by such directors to fill vacancies as
provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect directors shall
cease, (y) the term of any directors elected by the holders of Preferred Stock
as a class shall
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<PAGE>
terminate, and (z) the number of directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3
(such number being subject, however, to change thereafter in any manner
provided by law or in the certificate of incorporation or by-laws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
directors.
(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series A Junior Participating Preferred Stock outstanding shall have been paid
in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior
Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Junior Participating Preferred Stock, except dividends paid
ratably on the Series A Junior Participating Preferred Stock and all
such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Junior Participating Preferred Stock, provided that the
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<PAGE>
Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior
Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any shares
of stock ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corpora tion to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under Paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior
Participating Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued
as part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon
any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount equal to $100 per share of Series A Participating
Preferred Stock, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of the full amount of
the Series A Liquidation Preference, no additional distributions shall
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<PAGE>
be made to the holders of shares of Series A Junior Participating Preferred
Stock unless, prior thereto, the holders of shares of Common Stock shall have
received an amount per share (the "Common Adjustment") equal to the quotient
obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as
appropriately adjusted as set forth in subparagraph (C) below to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock) (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series A
Junior Participating Preferred Stock and Common Stock, respectively, holders of
Series A Junior Participating Preferred Stock and holders of shares of Common
Stock shall receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to 1 with
respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series A Junior Participating Preferred Stock,
then such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences. In
the event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately before such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately before such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the shares
of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter
8
<PAGE>
set forth) equal to 100 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Series A
Junior Participating Preferred Stock shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immedi ately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately before
such event.
Section 8. No Redemption. The shares of Series A Junior
Participating Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred
Stock shall rank junior to all other series of the Corporation's Preferred
Stock as to the payment of dividends and the distribution of assets, unless the
terms of any such series shall provide otherwise.
Section 10. Amendment. At any time when any shares of Series A
Junior Participating Preferred Stock are outstanding, neither the Restated
Certificate of Incorporation of the Corporation nor this Certificate of
Designation shall be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series A Junior Participating Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. Series A Junior Participating
Preferred Stock may be issued in fractions of a share which shall entitle the
holder, in proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the benefit
of all other rights of holders of Series A Junior Participating Preferred
Stock.
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties of perjury
this day of , 1999.
9
<PAGE>
---------------------
Chairman of the Board
Attest:
- ---------------
Secretary
10
<PAGE>
Exhibit B
[Form of Rights Certificate]
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER _________ __, 2009 (THE TENTH ANNIVERSARY OF THE DATE OF
THE CONSUMMATION OF THE INITIAL PUBLIC OFFERING OF THE COMMON STOCK OF THE
COMPANY) UNLESS EXTENDED PRIOR THERETO BY THE BOARD OF DIRECTORS OR EARLIER IF
REDEEMED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF
THE COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON
(AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSE QUENT HOLDER OF
SUCH RIGHTS MAY BECOME NULL AND VOID.
Rights Certificate
HomeServices.Com Inc.
This certifies that , or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of ________ __, 1999 (the "Rights Agreement"), between
HomeServices.Com Inc., a Delaware corporation (the "Company"), and ChaseMellon
Shareholder Services, L.L.C., a Delaware banking corporation (the
<PAGE>
"Rights Agent"), to purchase from the Company at any time before 5:00 p.m. (New
York City time) on _________ __, 2009 (the tenth anniversary of the date of
consummation of the initial public offering of the Common Stock) (unless such
date is extended prior thereto by the Board of Directors) at the office or
offices of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one one-hundredth of a fully paid, non-assessable share of Series
A Junior Participating Preferred Stock (the "Preferred Stock") of the Company,
at the Purchase Price (as defined in the Rights Agreement), which shall
initially be $_____ [insert the amount equal to the product of four times the
average daily closing price of the Common Stock for the first five days of
trading subsequent to the consummation of the initial public offering of the
Common Stock] per one one-hundredth of a share, upon presentation and surrender
of this Rights Certificate with the Form of Election to Purchase and related
Certificate duly executed. The number of Rights evidenced by this Rights
Certificate (and the number of shares which may be purchased upon exercise
thereof) set forth above, and the Purchase Price per share set forth above, are
the number and Purchase Price as of _________ __, 1999, [the close of business
on the fifth day of trading subsequent to the consummation of the initial
public offering of the Common Stock] based on the Preferred Stock as
constituted at such date. The Company reserves the right to require before the
occurrence of a Triggering Event
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<PAGE>
(as such term is defined in the Rights Agreement) that a number of Rights be
exercised so that only whole shares of Preferred Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term
is defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate
or Associate of any such Acquiring Person (as such terms are defined in the
Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right
with respect to such Rights from and after the occurrence of such Section
11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the
number and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain
events, including Triggering Events.
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights
3
<PAGE>
Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the principal office or offices of the Rights
Agent designated for such purpose, may be exchanged for another Rights
Certificate or Rights Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number of one one-hundredths
of a share of Preferred Stock as the Rights evidenced by the Rights Certificate
or Rights Certificates surrendered shall have entitled such holder to purchase.
If this Rights Certificate shall be exercised in part, the holder shall be
entitled to receive upon surrender hereof another Rights Certificate or Rights
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at
a redemption price of $.01 per Right at any time before the earlier of the
close of business on (i) the tenth Business Day following the Stock Acquisition
Date (as such
4
<PAGE>
time period may be extended pursuant to the Rights Agreement), and (ii) the
Final Expiration Date. In addition, under certain circumstances following the
Stock Acquisition Date, the Rights may be exchanged, in whole or in part, for
shares of the Common Stock, or shares of preferred stock of the Company having
essentially the same value or economic rights as such shares. Immediately upon
the action of the Board of Directors of the Company authorizing any such
exchange, and without any further action or any notice, the Rights (other than
Rights which are not subject to such exchange) will terminate and the Rights
will only enable holders to receive the shares issuable upon such exchange.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which
are integral multiples of one one-hundredth of a share of Preferred Stock,
which may, at the election of the Company, be evidenced by depositary
receipts), but in lieu thereof a cash payment will be made, as provided in the
Rights Agreement. The Company, at its election, may require that a number of
Rights be exercised so that only whole shares of Preferred Stock would be
issued.
No holder of this Rights Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of shares of
Preferred Stock or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be
5
<PAGE>
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
consent to or withhold consent from any corporate action, or, to receive notice
of meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by this Rights Certificate shall
have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
6
<PAGE>
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal.
Dated as of _________ __, ____
ATTEST: HomeServices.Com Inc.
By
- ------------------------------------------- ------------------------
Secretary Title:
Countersigned:
ChaseMellon Shareholder Services, L.L.C.
By
-----------------------------
Authorized Signature
7
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ______________________________________
hereby sells, assigns and transfers unto _______________________________
________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________________ Attorney,
to transfer the within Rights Certificate on the books of HomeServices.Com
Inc., with full power of substitution.
Dated: __________________, _____
--------------------------
Signature
Signature Guaranteed:
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.
Dated: _______________, _____
--------------------------
Signature
Signature Guaranteed:
<PAGE>
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights repre
sented by the Rights Certificate.)
To: HomeServices.Com Inc.:
The undersigned hereby irrevocably elects to exercise
__________ Rights represented by this Rights Certificate to purchase the shares
of Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be
issued in the name of and delivered to:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced
by this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
<PAGE>
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Dated: _______________, _____
--------------------------
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
<PAGE>
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: ______________, _____
--------------------------
Signature
Signature Guaranteed:
<PAGE>
NOTICE
The signature to the foregoing Election to Purchase and
Certificate must correspond to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any
change whatsoever.
<PAGE>
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
SERIES A PREFERRED STOCK
On , 1999 , the Board of Directors of HomeServices.Com Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of Company Common Stock to stockholders of record at the close of
business on , 1999 (the date of the consummation of the initial
public offering of the Common Stock (the "Record Date"). Each Right entitles
the registered holder to purchase from the Company a unit consisting of one
one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred
Stock, par value $0.01 per share (the "Series A Preferred Stock") at a Purchase
Price of $ per Unit (the amount equal to the product of four times the average
daily closing price of the Common Stock for the first five days of trading
subsequent to the consummation of the initial public offering of the Common
Stock), subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement") between the Company and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
<PAGE>
Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. Subject to certain exceptions specified in
the Rights Agreement, the Rights will separate from the Common Stock and a
Distribution Date will occur upon the earlier of (i) 10 business days following
a public announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") has acquired beneficial ownership of 15% or
more of the outstanding shares of Common Stock (the "Stock Acquisition Date"),
other than (A) the Company, (B) any subsidiary of the Company, (C) any
employee benefit plan of the Company or any subsidiary of the Company, or any
person or entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan, (D) MidAmerican Energy Holdings
Company, (E) persons who acquire 15% beneficial ownership as a result of
repurchases of stock by the Company or certain inadvertent actions by
institutional or certain other stockholders, (F) in certain circumstances,
persons who acquire shares of Common Stock from the beneficial owner of at
least 15% or more of the shares of Common Stock that were outstanding
immediately upon consummation of the initial public offering of the Common
Stock of the Company, and as a result of such acquisition such acquiring person
also becomes the Beneficial Owner of 15% or more of the then outstanding shares
of Common Stock or (G) in certain circumstances, persons who report or are
required to report such ownership (but less than 20%) on Schedule 13G or
Schedule 13D under the Securities and Exchange Act of 1934, as amended and in
effect on the date of the Rights Agreement, and which
2
<PAGE>
Schedule does not state any intention to or reserve the right to control or
influence the management or policies of the Company or engage in any of the
actions specified in Item 4 of such Schedule (other than the disposition of the
Common Stock), or (ii) 10 business days (or such later date as the Board shall
determine) following the commencement of a tender offer or exchange offer that
would result in a person or group becoming an Acquiring Person. Until the
Distribution Date, (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after the Record Date
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate. Pursuant to the Rights
Agreement, the Company reserves the right to require before the occurrence of a
Triggering Event (as defined below) that, upon any exercise of Rights, a number
of Rights be exercised so that only whole shares of Preferred Stock will be
issued.
The Rights are not exercisable until the Distribution Date and
will expire at 5:00 p.m. (New York City time) on , 2009, (the tenth
anniversary of the date of the consummation of the initial public offering of
the Common Stock) unless such date is extended or the Rights are earlier
redeemed or exchanged by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Stock as of the
close of business
3
<PAGE>
on the Distribution Date and, thereafter, the separate Rights Certificates
alone will represent the Rights. Except as otherwise determined by the Board of
Directors, only shares of Common Stock issued before the Distribution Date will
be issued with Rights.
If a Person becomes an Acquiring Person, except pursuant to an
offer for all outstanding shares of Common Stock which the independent
directors determine to be fair and not inadequate to and to otherwise be in the
best interests of the Company and its stockholders, after receiving advice from
one or more investment banking firms (a "Qualified Offer"), each holder of a
Right will thereafter have the right to receive, upon exercise, Common Stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a value equal to two times the exercise price of the Right.
Notwithstanding any of the foregoing, following the occurrence of the event set
forth in this paragraph, all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by any Acquiring
Person will be null and void. However, Rights are not exercisable following the
occurrence of the event set forth above until such time as the Rights are no
longer redeemable by the Company as set forth below.
If, at any time following the Stock Acquisition Date, (i) the
Company engages in a merger or other business combination transaction in which
the Company is not the surviving corporation (other than with an entity which
acquired the shares pursuant to a Qualified Offer), (ii) the Company engages in
a merger or other business combination transaction in which the Company is the
surviving corporation
4
<PAGE>
and the Common Stock of the Company is changed or exchanged, or (iii) 50% or
more of the Company's assets, cash flow or earning power is sold or
transferred, each holder of a Right (except Rights which have previously been
voided as set forth above) shall thereafter have the right to receive, upon
exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the Right. The events set forth in this paragraph
and in the second preceding paragraph are referred to as the "Triggering
Events."
At any time after a person becomes an Acquiring Person and
before the acquisition by such person or group of fifty percent (50%) or more
of the outstanding Common Stock, the Board may exchange the Rights (other than
Rights owned by such person or group which have become void), in whole or in
part, at an exchange ratio of one share of Common Stock, or one one-hundredth
of a share of Preferred Stock (or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjust ment).
At any time until ten business days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but not in part,
at a price of $.01 per Right (payable in cash, Common Stock or other
consideration deemed appropriate by the Board of Directors). Immediately upon
the action of the Board of Directors ordering redemption of the Rights, the
Rights will terminate and the only right of the holders of Rights will be to
receive the $.01 redemption price.
5
<PAGE>
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to the Company, stockholders may,
depending upon the circumstances, recognize taxable income if the Rights
become exercisable for Common Stock (or other consideration) of the Company or
for common stock of the acquiring company or in the event of the redemption of
the Rights as set forth above.
Any of the provisions of the Rights Agreement may be amended by
the Board of Directors of the Company before the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, to make changes which do not adversely
affect the interests of holders of Rights, or to shorten or lengthen any time
period under the Rights Agreement. The foregoing notwithstanding, no amendment
may be made at such time as the Rights are not redeemable.
A form of the Rights Agreement will be filed with the Securities
and Exchange Commission as an Exhibit to a Registration Statement on Form S-1
dated , 1999. A copy of the Rights Agreement is available free of charge
from the Rights Agent. This summary description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, which is incorporated herein by reference.
6
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of September ____ , 1999
between MidAmerican Energy Holdings Company ("MidAmerican Holdings") and
HomeServices.Com Inc. (the "Company").
WHEREAS, as of the date of this Agreement, MidAmerican Holdings owns
_________ shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock")(1);
WHEREAS, the Company is consummating on the date hereof an initial
public offering (the "Offering") of shares of the Company's Common Stock;
WHEREAS, the Board of Directors of the Company has authorized the
officers of the Company to execute and deliver this Agreement in the name and
on behalf of the Company;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties to this Agreement hereby agree as
follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
"days" means calendar days.
"Holder" means MidAmerican Holdings, including its successors and
assigns who acquire Registrable Securities, directly or indirectly, from
MidAmerican Holdings; provided, however, that for purposes of exercising the
demand and incidental registration rights set forth in Sections 2 and 3 of this
Agreement, a "Holder" means MidAmerican Holdings or its successors and assigns
so long as it holds Registrable Securities constituting at least 5.0% of the
total number of shares of Common Stock then outstanding. For purposes of this
Agreement, the Company may deem and treat the registered holder of a
Registrable Security as the Holder and absolute owner thereof, and the Company
shall not be affected by any notice to the contrary.
- --------
(1) Share ownership to be post-Merger so this Agreement must be executed
after the Merger occurs.
<PAGE>
"Registrable Securities" means (a) the Common Stock owned by (i)
MidAmerican Holdings upon completion of the Offering, (ii) any pledgee of
Common Stock under a bona fide pledge arrangement with MidAmerican Holdings (or
its successors and assigns) or (iii) any transferee that receives Registrable
Securities from MidAmerican Holdings (or its successors and assigns) to the
extent that MidAmerican Holdings (or its successors and assigns) assigns to
such transferee registration rights in writing relating to the Registrable
Securities transferred to such transferee (a "Permitted Transferee")), (b) any
Common Stock acquired by MidAmerican Holdings in the open market at a time when
MidAmerican Holdings is deemed to be an Affiliate (as such term is defined
under Rule 144 under the Securities Act) of the Company so long as MidAmerican
Holdings continues to be deemed an Affiliate of the Company, (c) any debt,
equity or other securities (including without limitation any options, rights,
warrants or similar securities) issued by MidAmerican Holdings or any other
person that are or may be exchangeable or exercisable for or convertible into
the Common Stock and (d) any securities issued or issuable in respect of the
Common Stock referred to in clauses (a) and (b) above, by way of stock dividend
or stock split or in connection with a combination of shares, recapitalization,
reclassification, merger or consolidation, and any other securities issued
pursuant to any other pro rata distribution with respect to such Common Stock.
For purposes of this Agreement, a Registrable Security ceases to be a
Registrable Security when (1) a registration statement with respect to the sale
of such security shall have become effective under the Securities Act and such
security shall have been sold or distributed to the public in accordance with
such registration statement (and has not been reacquired in the manner
described in clause (b) above), (2) such security is sold or distributed to the
public pursuant to Rule 144 (or any successor or similar provision) under the
Securities Act, (3) such security shall have been otherwise transferred, a new
certificate for it not bearing a legend restricting further transfer shall have
been delivered by the Company and the subsequent disposition of it shall, in
the opinion of MidAmerican Holdings' counsel, not require registration or
qualification of it under the Securities Act or any similar state law then in
force or (4) it shall have ceased to be outstanding.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
2. Demand Registration. (a) Subject to Section 5 hereof, if at any
time any Holder shall request the Company in writing to register under the
2
<PAGE>
Securities Act all or a part of the Registrable Securities held by such Holder
(a "Demand Registration"), the Company shall use its best efforts to cause to
be filed and declared effective as soon as reasonably practicable (but in no
event filed later than the 60th day after such Holder's request is made) a
registration statement, on such appropriate form as the Company shall
reasonably determine, providing for the sale of all such Registrable Securities
by such Holder. The Company agrees to use its best efforts to keep any such
registration statement continuously effective and usable for resale of
Registrable Securities until the earlier of (a) the date the Holder whose
Registrable Securities are included therein shall request and (b) the
expiration of 180 days after such registration statement becomes effective,
subject to extension as provided in Section 4(d). The Company shall be
obligated to file registration statements pursuant to this Section 2(a) until
all Registrable Securities have ceased to be Registrable Securities. Each
registration statement filed pursuant to this Section 2(a) is hereinafter
referred to as a "Demand Registration Statement." Holders shall be entitled to
two effective Demand Registration Statements per year.
(b) The Company agrees (i) not to effect any public or private sale,
distribution or purchase of any of its securities which are the same as or
similar to the Registrable Securities, including a sale pursuant to Regulation
D or Regulation S under the Securities Act, during the 60-day period prior to
(or shorter if the Holder's notice precedes the offering by less than 60 days),
and during the 90-day period beginning on, the closing date of each
underwritten offering under any Demand Registration Statement, and (ii) to use
reasonable best efforts to cause each holder of its securities purchased from
the Company, at any time on or after the date of this Agreement (other than in
a registered public offering) to agree not to effect any public sale or
distribution of any such securities during such period, including a sale
pursuant to Rule 144 under the Securities Act; it being understood that the
registration rights granted hereunder are intended to take precedence over any
other registration or distribution rights granted to any other purchasers of
the Company's securities.
(c) ______ The Company may postpone for a reasonable period of time,
not to exceed 30 days, the filing or the effectiveness of any Demand
Registration Statement if the Board of Directors of the Company in good faith
determines that (A) such registration might have a material adverse effect on
any plan or proposal by the Company with respect to any financing, acquisition,
recapitalization, reorganization or other material transaction, or (B) the
Company is in possession of material non-public information that, if publicly
disclosed, could result in a material disrup-
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<PAGE>
tion of a major corporate development or transaction then pending or in
progress or in other material adverse consequences to the Company.
(d) If at any time any Holder of Registrable Securities to be
covered by a Demand Registration Statement desires to sell Registrable
Securities in an underwritten offering, such Holder shall have the right to
select any nationally recognized investment banking firm(s) to manage the
offering, subject to the approval of the Company, which approval shall not be
unreasonably withheld, and the Company shall enter into underwriting agreements
with the underwriter(s) of such offering, which agreements shall contain such
representations and warranties by the Company, and such other terms, conditions
and indemnities as are similar to those of the Company contained in the
underwriting agreement dated September ____ , 1999 relating to the Offering or
otherwise are at the time customarily contained in underwriting agreements for
similar offerings.
(e) A Demand Registration Statement requested pursuant to
Section 2(a) shall not be deemed to have been effected (i) if such Demand
Registration Statement has not become effective, (ii) if, after it has become
effective, such Demand Registration Statement becomes subject to, any stop
order, injunction or other order of the SEC or other governmental agency or
court for any reason or (iii) if the conditions to closing specified in the
purchase agreement or underwriting agreement entered into in connection with
such registration are not satisfied, other than solely by reason of some act or
omission by the Holders.
3. Incidental Registration. Subject to Section 5 hereof and the other
terms and conditions set forth in this Section 3, if the Company proposes at
any time to register any shares of Common Stock (the "Initially Proposed
Shares") under the Securities Act for sale, whether or not for its own account,
pursuant to an underwritten offering, the Company will promptly give written
notice to the Holders of the Company's intention to effect such registration
(such notice to specify, among other things, the proposed offering price, the
kind and number of securities proposed to be registered and the proposed lead
distribution arrangements, including identification of the proposed lead
underwriter(s)). The Holders shall be entitled to include in such registration
statements, as a part of such underwritten offering, such number of shares (the
"Holder Shares") to be sold for the account of the Holders (on the same terms
and conditions as the Initially Proposed Shares) as shall be specified in a
request in writing delivered to the Company within 20 days after the date upon
which the Company gave the aforementioned notice and to designate a co-lead
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<PAGE>
managing underwriter of the offering who shall be compensated on the same basis
as the Company's designated co-lead managing underwriter.
The Company agrees to use its reasonable efforts to keep any such
registration statement continuously effective and usable for resale of
Registrable Securities for a period of 90 days after such registration
statement becomes effective.
The Company's obligations to include Holder Shares in a registration
statement pursuant to this Section 3 is subject to each of the following
limitations, conditions and qualifications:
(i) If, at any time after giving written notice of its
intention to effect a registration of any of its shares of Common
Stock and prior to the effective date of any registration statement
filed in connection with such registration, the Company shall
reasonably determine not to register any of such shares, the Company
may, at its election, give written notice of such determination to the
Holders and thereupon it shall be relieved of its obligation to use
any efforts to register any Holder Shares in connection with such
aborted registration.
(ii) If the offering is underwritten and the co-lead managing
underwriter of such offering designated by the Company shall inform
the Company and the Holders of the Holder Shares by letter of its
belief that the distribution of all or a specified portion of the
Holder Shares would materially interfere with the registration and
sale in accordance with the intended method thereof, of the Initially
Proposed Shares (such letter to state the bases of belief and the
approximate number of shares of Common Stock which may be included for
such offering without having such interference), then the number of
Holder Shares to be included in such registration statement and the
number of Initially Proposed Shares shall each be reduced to such
number, if any, that is 50%, respectively, of the number that such
co-lead managing underwriter has stated in the letter that can be
marketed successfully. If, as a result of the cutback provisions of
the preceding sentence, the Holders are not entitled to include all of
the Holder Shares in such registration, such Holders may elect to
withdraw their request to include Holder Shares in such registration
(a "Withdrawal Election").
4. Registration Procedures. (a) Whenever the Company is required to
effect the registration of any Registrable Securities under the Securities
5
<PAGE>
Act pursuant to the terms and conditions of Section 2(a) or 3 (such Registrable
Securities being hereinafter referred to as "Subject Shares"), the Company will
use its best efforts, in the case of a registration pursuant to Section 2(a),
and all reasonable efforts, in the case of a registration pursuant to Section
3, to effect the registration and sale of the Subject Shares in accordance with
the intended method of disposition thereof. Without limiting the generality of
the foregoing, the Company will as soon as practicable:
(i) prepare and file with the SEC a registration statement
with respect to the Subject Shares in form and substance satisfactory
to the Holders of the Subject Shares, and use all reasonable or best
efforts, as the case may be, to cause such registration statement to
become effective as soon as possible;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the applicable period and to comply with the
provisions of the Securities Act with respect to the disposition of
all Subject Shares and other securities covered by such registration
statement;
(iii) furnish the Holders covered by such registration
statement, without charge, such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies
of the prospectus included in such registration statement (including
each preliminary prospectus), such documents incorporated by reference
in such registration statement or prospectus, and such other
documents, as such Holders may reasonably request in order to
facilitate the public sale or other disposition of the Registrable
Securities;
(iv) use all reasonable efforts to register or qualify the
Subject Shares covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the managing
underwriter(s) shall reasonably recommend, and do any and all other
acts and things which may be reasonably necessary or advisable to
enable the Holders to consummate the disposition in such jurisdictions
of the Subject Shares covered by such registration statement;
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<PAGE>
(v) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC;
(vi) cause its President, Chief Financial Officer and other
senior officers reasonably requested by the Holders or managing
underwriters to participate in "roadshow" meetings with prospective
buyers and other sales and marketing efforts, consistent, with the
recommendations of the managing underwriter designated by the Holders
(with respect to a Demand Registration Statement filed pursuant to
Section 2 of this Agreement) or the co-lead managing underwriters
designated by the Company and the Holders (with respect to a
registration statement filed pursuant to Section 3 of this Agreement);
(vii) furnish, at the Company's expense, unlegended
certificates representing ownership of the securities being sold in
such denominations as shall be requested and instruct the transfer
agent to release any stop transfer orders with respect to the Subject
Shares being sold;
(viii) notify in writing each Holder promptly at any time
when a prospectus relating to the Subject Shares is required to be
delivered under the Securities Act of the happening of any event as a
result of which the prospectus included in such Registration Statement
contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein (in the case of
the prospectus or any preliminary prospectus, in light of the
circumstances under which they were made) not misleading, and the
Company will, as promptly as practicable thereafter, prepare and file
with the SEC and furnish a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of Subject Shares
such prospectus will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(ix) notify in writing each Holder and the managing
underwriter(s), promptly of (A) the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or
the initiation or threat of any proceedings by any person for that
purpose and (B) the receipt by the Company of any notification with
respect to the suspension of the qualifications of any Subject Shares
for sale under the securities or blue sky
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<PAGE>
laws of any jurisdiction or the initiation or threat of any proceeding
for such purpose;
(x) enter into customary agreements (including an
underwriting agreement in customary form in the case of an
underwritten offering) and make such representations and warranties
and indemnities to the sellers and underwriter(s) as in form and
substance and scope are customarily made by issuers to underwriters in
underwritten offerings and take such other actions as the Holders or
the managing underwriter(s) or agent, if any, reasonably require in
order to expedite or facilitate the disposition of such Subject
Shares;
(xi) make available for inspection by the Holders, any
underwriter or agent participating in any disposition pursuant to such
Registration Statement, and any attorney, accountant or other similar
professional advisor retained by any such holders or underwriter
(collectively the "Inspectors"), all pertinent financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause
the Company's officers, directors and employees to supply all
information reasonably requested by any such Inspector in connection
with such Registration Statement. The Holders agree that Records and
other information which the Company determines, in good faith, to be
confidential or privileged and of which determination the Inspectors
are so notified shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in the Registration Statement, (ii) the
release of such Records is ordered pursuant to a subpoena, court order
or regulatory or agency request or (iii) the information in such
Records has been generally disseminated to the public. Each Holder
agrees that it will, upon learning that disclosure of such Record is
sought in a court of competent jurisdiction or by a governmental
agency, give notice to the Company and allow the Company, at the
Company's expense, to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
(xii) make available for "due diligence" questions its
President, Chief Financial Officer and other senior officers
reasonably requested by the Holders or managing underwriters;
8
<PAGE>
(xiii) obtain for delivery to the Company, the underwriter(s)
or their agent, with copies to the Holders, a "cold comfort" letter
from the Company's independent public accountants in customary form
and covering such matters of the type customarily covered by "cold
comfort" letters as the Holders or the managing underwriter(s)
reasonably request;
(xiv) obtain for delivery to the Holders and the
underwriter(s) or their agent an opinion or opinions from in-house and
special outside counsel for the Company in customary form and
reasonably satisfactory to the Holder, underwriters or agents and
their counsel;
(xv) make available to its security holders earnings
statements, which need not be audited, satisfying the provisions of
Section 11(a) of the Securities Act no later than 90 days after the
end of the 12-month period beginning with the first month of the
Company's first quarter commencing after the effective date of the
Registration Statement, which earnings statements shall cover said
12-month period;
(xvi) make every reasonable effort to prevent the issuance of
any stop order suspending the effectiveness of the registration
statement or of any order preventing or suspending the effectiveness
of such registration statement at the earliest possible moment;
(xvii) cause the Subject Shares to be registered with or
approved by such other governmental agencies or authorities within the
United States as may be necessary to enable the sellers thereof or the
underwriters(s), if any, to consummate the disposition of such Subject
Shares;
(xviii) cooperate with the Holders and the managing
underwriter(s), if any, or any other interested party (including any
interested broker-dealer) in making any filings or submission required
to be made, and the furnishing of all appropriate information in
connection therewith, with the National Association of Securities
Dealers, Inc. ("NASD");
(xix) cause its subsidiaries to take action necessary to
effect the registration of the Subject Shares contemplated hereby,
including filing any required financial information;
9
<PAGE>
(xx) effect the listing of the Subject Shares on The Nasdaq
Stock Market's National Market or such other national securities
exchange or over-the-counter market on which shares of the Common
Stock shall then be listed; and
(xviii) take all other steps necessary to effect the
registration of the Subject Shares contemplated hereby.
(b) The Holders shall provide (in writing and signed by the
Holders and stated to be specifically for use in the related registration
statement, preliminary prospectus, prospectus or other document incident
thereto) the information regarding registered ownership and the number of
shares being sold as is customarily contained in a "Principal and Selling
Securityholders" table in a prospectus.
(c) The Holders shall, if requested by the Company and the
managing underwriters designated by the Company and the Holders in connection
with any proposed registration and distribution pursuant to this Agreement, (i)
agree to sell the Subject Shares on the basis provided in any underwriting
arrangements entered into in connection therewith and (ii) complete and execute
all questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents similar to those executed in the Offering or otherwise
customary in similar offerings.
(d) Upon receipt of any notice from the Company that the
Company has become aware that the prospectus (including any preliminary
prospectus) included in any registration statement filed pursuant to Section
2(a) or 3, as then in effect, contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, the Holders shall forthwith
discontinue disposition of Subject Shares pursuant to the registration
statement covering the same until the Holders' receipt of copies of a
supplemented or amended prospectus and, if so directed by the Company, deliver
to the Company (at the Company's expense) all copies other than permanent file
copies then in the Holder's possession, of the prospectus covering the Subject
Shares that was in effect prior to such amendment or supplement. If the Company
provides such notice, the periods mentioned in Sections 2(a) or 3 of this
Agreement for maintaining the effectiveness of the Registration Statement shall
be extended by the length of the period from and including the date when the
Holders shall have received such notice to the date on which such Holders have
received the
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<PAGE>
copies of the supplemented or amended prospectus required to be delivered by
the Company under Section 4(a)(vii) of this Agreement.
(e) The Company shall pay all reasonable out-of-pocket
expenses incurred in connection with any Demand Registration Statements filed
pursuant to Section 2(a) of this Agreement and any registration statement filed
pursuant to Section 3 of this Agreement, including, without limitation, all (i)
SEC and blue sky registration and filing fees (including NASD fees), (ii)
printing expenses, (iii) transfer agents and registrars' fees, (iv) fees and
disbursements of the Company's counsel and accountants, (v) fees and
disbursements of experts used by the Company in connection with such
registration statement, (vi) the Company's internal expenses (including without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties, the expense of any annual audits of the Company or
its subsidiaries and the expense of any additional liability insurance), (vii)
reasonable fees and disbursements of one counsel, other than the Company's
counsel, selected to represent all Holders by Holders owning a majority in
number of the Registrable Securities being registered, (viii) fees and expenses
associated with "roadshows" or otherwise customarily reimbursed or paid by
issuers on behalf of underwriters in underwritten offerings; provided, however,
that the Holders shall pay all underwriting discounts and commissions
attributable to securities sold for the account of the Holders pursuant to such
Demand Registration Statement or other registration statement filed pursuant to
Section 3 of this Agreement.
5. Indemnification.
(a) In the event of any registration of any securities of the
Company under the Securities Act, the Company will, and hereby does, indemnify
and hold harmless (i) in the case of any registration statement filed pursuant
to Sections 2 or 3, the Holder of any Common Stock covered by such registration
statement, its directors and officers, each broker who participates in such
offering or sale on behalf of a holder, each other person who participates as
an underwriter in the offering or sale of such securities, its directors and
officers and each other person, if any, who controls such Holder or any such
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such Holder or any
such director or officer or underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement
11
<PAGE>
or alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such Holder and each such director, officer, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by any
Holder or any underwriter participating in the offering specifically for use in
the registration statement, and provided further that the Company shall not be
liable to any person who participates as an underwriter in the offering or sale
of Common Stock or to any other person, if any, who controls such underwriter
within the meaning of the Securities Act, in any such case to the extent that
any such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of such person's failure to send or give a copy
of the final prospectus, as the same may be then supplemented or amended,
within the time required by the Securities Act to the person asserting an
untrue statement or alleged untrue statement or omission or alleged omission at
or prior to the written confirmation of the sale of Common Stock to such person
if such statement or omission was corrected in such final prospectus. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Holder or any such director, officer, underwriter
or controlling person and shall survive the transfer of such securities by such
Holder.
(b) Unless the Company otherwise notifies the Holders as a
condition to including the Subject Shares in a registration statement, each
Holder agrees to indemnify and hold harmless (in the same manner and to the
same extent as set forth in subdivision (a) of this Section 5) the Company,
each director of the Company, each officer of the Company and each other
person, if any, who controls the Company within the meaning of the Securities
Act and each other person who participates as an underwriter in the offering or
sale of such securities, its directors and officers and each other person, if
any, who controls any such underwriter within
12
<PAGE>
the meaning of the Securities Act, with respect to any statement or alleged
statement in or omission or alleged omission from such registration statement,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such seller
specifically for use in the registration statement. Any such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of the Company or any such director, officer or controlling person and
shall survive the transfer of such securities by such seller. Such indemnity
shall be limited to the net proceeds from such offering received by such
indemnifying party. The parties expressly agree that for purposes of this
Agreement, the only information furnished to the Company by the Holders selling
Registrable Securities specifically for use in the registration statement will
be the information concerning such seller contained in the Prospectus under the
caption, "Principal and Selling Securityholders" (or substantially similar
caption).
(c) Promptly after receipt by an indemnified party of notice
of the commencement of any action or proceeding involving a claim referred to
in the preceding subdivisions of this Section 5, such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action, provided that
the failure of any indemnified party to give notice as provided herein shall
not relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 5, except to the extent that the indemnifying
party has been materially prejudiced by such failure to give notice. In case
any such action is brought against an indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that the
indemnifying party may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation; provided,
however, that the indemnified party shall have the right to employ counsel to
represent the indemnified party and its controlling persons who may be subject
to liability arising out of any claim in respect of which indemnity may be
sought by the indemnified party against the indemnifying party under this
Section 5 if the employment of such counsel shall have been authorized in
13
<PAGE>
writing by the indemnifying party in connection with the defense of such action
or, if in the written opinion of counsel to either the indemnifying party or
the indemnified party, representation of both parties by the same counsel would
be inappropriate due to actual or likely conflicts of interest between them,
and in that event the fees and expenses of one firm of separate counsel (in
addition to the fees and expenses of local counsel) for the indemnified parties
shall be paid as incurred by the indemnifying party. No indemnifying party
shall, without the prior written consent of the indemnified party, which
consent shall not be unreasonably withheld, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action.
(d) If the indemnification provided for in the preceding
subdivisions of this Section 5 is unavailable to an indemnified party in
respect of any expense, loss, claim, damage or liability referred to therein,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such expense, loss, claim, damage or liability. In determining the
amount of contribution to which an indemnified party is entitled, there shall
be considered such indemnified party's relative knowledge and access to
information concerning the matter with respect to which the claim was asserted,
the opportunity to correct and prevent any statement or omission, and other
equitable considerations appropriate under the circumstances. It is hereby
agreed that it would not necessarily be equitable if the amount of such
contribution were determined by pro rata or per capita allocation.
Notwithstanding the foregoing, no Holder of Registrable Securities shall be
required to contribute any amount in excess of the net proceeds received by
such Holder (net of underwriting discounts and commissions) from the sale of
such Registrable Securities in the offering which forms the basis for such
action or proceeding. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation.
6. Condition to Company's Obligations. Notwithstanding any
other provision in this Agreement to the contrary, the Company shall have no
obligation to effect any registration of Registrable Securities pursuant to
this Agreement within 180 days of the date of the prospectus for the Offerings,
unless U.S.
14
<PAGE>
Bancorp Piper Jaffray Inc. on behalf of the underwriters in the Offering shall
have given its prior written consent to such filing.
7. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or delivery by telex (with correct answerback received),
telecopy or facsimile at the address or number designated below (if delivered
on a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the third business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
If to the Company, to:
HomeServices.Com Inc.
6800 France Avenue South, Suite 600
Edina, Minnesota 55435
Attn: Ronald Peltier
Telecopy: (612) 928-5900
If to MidAmerican Holdings, to:
MidAmerican Energy Holdings Company
306 South 36th Street, Suite 400
Omaha, Nebraska 68131
Attn: Senior Vice President, Mergers and Acquisitions
Telecopy: (402) 341-4500
If to any other Holder,
to such name at such address as such Holder shall have
indicated in a written notice delivered to the other parties
to this Agreement.
Any party hereto may from time to time change its address for notices under this
Section 7 by giving at least 10 days' notice of such changes to the other
parties hereto.
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<PAGE>
8. Waivers. No waiver by any party of any default
with respect to any provision, condition or requirement hereof shall be deemed
to be a continuing waiver in the future thereof or a waiver of any other
provision, condition or requirement hereof; nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
9. Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
10. Successors and Assigns; Amendments. (a) This Agreement
shall be binding upon and inure to the benefit of the parties and their
successors and assigns, including for the benefit of those persons specified in
Section 11 hereof. If the Company is a party to a merger, consolidation or
other transaction in which all or part of the Registrable Securities are
converted or changed into securities of any other person, the Company shall
make appropriate provision for such other person to become a party to this
Agreement and to provide the registration and other rights with respect to the
securities of such other person. Except as provided in this Section 10, the
Company shall not assign this Agreement without the prior written consent of
the other parties hereto.
(b) This Agreement may not be amended except by a written
instrument executed by the parties hereto.
11. Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person other than a Permitted Transferee.
12. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Delaware without regard to the principles of conflicts of laws.
13. Entire Agreement. This Agreement contains the entire
agreement of the parties hereto in respect of the subject matter hereof and
supersedes all prior agreements and understandings between the parties with
respect to the subject matter hereof.
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<PAGE>
14. Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
date hereof.
HOMESERVICES.COM INC.
By:
--------------------------------
Name: Steven A. McArthur
Title: Senior Vice President
MIDAMERICAN ENERGY HOLDINGS COMPANY
By:
--------------------------------
Name: Ronald Peltier
Title: President
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SERVICES AGREEMENT
SERVICES AGREEMENT dated as of September , 1999 between
HomeServices.Com Inc. (the "Company") and MidAmerican Energy Holdings
Company (the "MidAmerican Holdings").
WHEREAS, the Company and MidAmerican Holdings desire that
MidAmerican Holdings assume and perform the Services (as defined below).
NOW THEREFORE, MidAmerican Holdings and the Company hereby
agree as follows:
1. Defined Terms.
"Commencement Date" shall mean the first date after
the consummation of the Initial Public Offering.
"Losses" shall have the meaning given to it in
Section 6 of this Agreement.
"Material Adverse Effect" shall mean, with respect
to any person, any loss or interference that could, individually or in the
aggregate, have a material adverse effect on the condition (financial or
other), business, properties, prospects or results of operations of such person
and its subsidiaries, taken as a whole.
"person" shall mean an individual, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"Services" shall have the meaning given to it in
Section 3 of this Agreement.
"Termination Date" shall mean the earlier of (a) the
180th day following notice provided to the Company by MidAmerican Holdings that
MidAmerican Holdings is no longer a holder of at least 5% of the Common Stock of
the Company and (b) the date both parties mutually agree that this Agreement is
terminated.
<PAGE>
2. Retention.
(a) The Company hereby retains MidAmerican
Holdings to provide Services to the Company beginning on the Commencement Date.
(b) MidAmerican Holdings hereby agrees that it shall
provide Services to the Company until the Termination Date.
3. Duties and Rights of MidAmerican Holdings.
(a) Beginning on the Commencement Date and until
the Termination Date, MidAmerican Holdings shall provide management, advisory,
financial, accounting, legal, employee benefit plan and insurance administration
and other services (the "Services"), as mutually agreed upon between the Company
and MidAmerican Holdings, for the benefit of the Company.
(b) To the extent necessary or appropriate to
perform any of the Services, MidAmerican Holdings shall have the power to
execute and deliver all necessary and appropriate documents and instruments on
behalf of the Company with respect to Services.
(c) Notwithstanding any other provision of this
Agreement, MidAmerican Holdings need not make available any service agreed to be
provided herein to the extent doing so would unreasonably and materially
interfere with the use of or access to any personnel, equipment, office space
or facility by MidAmerican Holdings or otherwise cause an unreasonable burden
to MidAmerican Holdings.
4. Compensation and Reimbursement.
(a) Beginning on the Commencement Date and until
the Termination Date, the Company shall pay to MidAmerican Holdings monthly, ten
days following the end of each month, a fee in an amount equal to $50,000.
(b) In addition, the Company shall reimburse
MidAmerican Holdings for all reasonable employee and out-of-pocket costs and
expenses(including, without limitation, payments made to third parties) incurred
by MidAmerican Holdings in connection with providing the Services to the
Company. MidAmerican Holdings shall provide the Company with a detailed invoice
which invoice or a schedule thereto sets forth in reasonable detail on an
itemized basis the out-of-pocket costs and expenses to be reimbursed by the
Company pursuant to this Section 4(b). Payment shall be due within [ _______ ]
days following the receipt of each such invoice. Invoices may be provided on a
monthly or quarterly basis.
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<PAGE>
(c) It is expressly agreed that the out-of-pocket
costs and expenses that are to be reimbursed by the Company pursuant to
Section 4(b) shall not include any mark-up or profit factor for MidAmerican
Holdings but shall include all indirect costs and an appropriate allocation for
overhead costs associated with performing the Services.
5. Nonliability of Advisor. MidAmerican Holdings shall
perform on behalf of the Company only the duties that have been specifically
delegated to MidAmerican Holdings in this Agreement and MidAmerican Holdings
shall have no implied covenants or obligations to perform any other duties under
this Agreement. MidAmerican Holdings shall not be responsible for any losses,
liabilities, damages, claims or expenses (collectively, the "Losses") incurred
by the Company arising from any acts or omissions by MidAmerican Holdings in
connection with the performance of its duties under this Agreement other than
Losses resulting solely from its gross negligence or willful misconduct.
6. Notice. Any notice or other communication required
or permitted to be given hereunder shall be in writing and shall be effective
(a) upon hand delivery or delivery by telex (with correct answerback received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the third business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual service, fully prepaid, addressed to such address, or upon actual receipt
of such mailing, whichever shall first occur. The addresses for such
communications shall be:
If to the Company, to:
HomeServices.Com Inc.
6800 France Avenue South, Suite 600
Edina, Minnesota 55435
Attn: Ronald Peltier
Telecopy: (612) 928-5900
If to MidAmerican Holdings, to:
MidAmerican Energy Holdings Company
306 South 36th Street, Suite 400
Omaha, Nebraska 68131
Attn: Senior Vice President, Mergers and Acquisitions
Telecopy: (402) 341-4500
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<PAGE>
Either party hereto may from time to time change its address for notices under
this Section 6 by giving at least 10 days' notice of such changes to the other
party hereto.
7. Section Headings. The section headings used in this
Agreement are inserted for convenience of reference only and are not intended to
be a part of or to affect the meaning or interpretation of this Agreement.
8. Multiple Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
9. Invalidity. In the event that any one or more of
the provisions contained in this Agreement or in any other instrument referred
to herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement or any other such instrument.
10. Successors and Assigns. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and their
respective successors, endorsees, transferees and assigns, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement. Further, it is expressly agreed that any
of the Services to be provided by MidAmerican Holdings may be provided to the
Company by any subsidiary of MidAmerican Holdings (other than the Company or its
subsidiaries) and in such case, such subsidiary of MidAmerican Holdings shall be
entitled to the same rights, benefits and remedies hereunder as MidAmerican
Holdings.
11. Entire Agreement; Amendment and Waiver. This
Agreement constitutes the entire agreement among the parties pertaining to the
subject matter hereof and supersedes all prior agreements, understandings,
negotiations and discussions, whether oral or written, of the parties. No
amendment, supplement, modification or waiver of this Agreement shall be binding
unless executed in writing by the party to be bound thereby. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
12. Governing Law. This Agreement shall be construed,
interpreted and the rights of the parties determined in accordance with the laws
of the State of Delaware, regardless of the laws that might otherwise govern
under applicable principles of conflicts of laws thereof.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be duly executed and delivered as of the date first above written.
HOMESERVICES.COM INC.
By: _______________________________
Name: Ronald J. Peltier
Title: President
MIDAMERICAN ENERGY HOLDINGS COMPANY
By: _______________________________
Name: Steven A. McArthur
Title: Senior Vice President
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EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into on
this 27th day of May, 1998, by and between MidAmerican Realty Services Company
(the "Company"), a subsidiary of MidAmerican Energy Holdings Company
("MidAmerican") and Ronald J. Peltier (the "Employee").
WHEREAS, the Company believes that the Employee's contribution to the
growth and success of the Company as a member of its management team will be
substantial and desires to employ the Employee in that role; and
WHEREAS, the Employee is desirous of serving the Company in said
capacity on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Employment and Term. The Company hereby agrees to employ the
Employee as a member of its management team and the Employee
hereby agrees to serve the Company in such capacity, on the
terms and conditions set forth herein for the period
commencing on the date of this Agreement and continuing for a
period of five years from that date, unless earlier terminated
by the Employee or the Company in accordance with paragraph 6
herein. Upon the expiration of the initial term of this
Agreement, it shall be automatically extended for one-year
periods, unless on or before the date which is one year prior
to the expiration of the initial term of the Agreement or any
subsequent one-year extension period, either party has
delivered to the other written notice of intent to terminate
this Agreement upon its next expiration date. The purpose of
the automatic extension is to assure that the parties have at
least one year prior notice of termination of the Agreement.
This Agreement is subject at all times to the provisions of
paragraph 6.
2. Waiver of Rights. The Employee specifically acknowledges and
agrees that upon the effective date of this Agreement, his
prior Employment Agreement with Edina Financial Services,
Inc. (formerly known as E&E Acquisition Company) and its
successors and assigns
<PAGE>
is canceled and no longer in effect. Further, the Employee
waives any and all rights, claims or other causes of action he
may have against Company, its affiliates, parents and its and
their predecessors and successors on account of any contract,
liability or other thing done or omitted, from all time in the
past until the effective date of this Agreement.
3. Duties. The Employee is engaged by the Company to be
responsible for such duties related to the Company's
management as may from time to time be assigned by its Board
of Directors (the "Board"), and shall report to the Board. The
Employee will, during his term of employment hereunder:
a. Faithfully and diligently do and perform all such
acts and duties and furnish such services for the
Company as the Board or its designated representative
shall direct from time to time;
b. Devote his full time, energy and skill to the
business of the Company and to the promotion of its
best interests, except for vacations, absences made
necessary because of illness, and service on other
corporate, civic, or charitable boards or committees
not significantly interfering with his duties
hereunder.
4. Compensation. The Company shall pay the Employee base, and,
when earned in accordance with the provisions of this
paragraph, incentive compensation for the performance of his
duties under this Agreement, as follows:
a. Annual base salary of $325,000, payable at the
Company's regular payroll intervals. The Chief
Executive Officer of MidAmerican Energy Holdings
Company shall not less than annually during the
Employee's employment review his annual salary and
consider possible increases, taking into account
inflation factors, performance of the Company,
salaries paid for positions of similar responsibility
for other companies, and other relevant factors, and
shall recommend such increases when deemed
appropriate, for approval of the Compensation
Committee of the Board of Directors of MidAmerican
(the "Committee").
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<PAGE>
b. Short-term incentive compensation to be determined as
provided in Exhibit A attached hereto.
With respect to the calculation of short-term
incentives under this subparagraph, if it becomes
apparent that the stated earnings thresholds cannot
be achieved for unforeseen reasons and in spite of
diligent management effort, the Employee may
nonetheless be awarded short-term incentive payments,
if approved by the Committee as recommended by the
Chief Executive Officer of MidAmerican Energy
Holdings Company, to reward exemplary performance.
In the event the Company terminates the Employee's
employment for any reason other than Good Cause, as
defined in subparagraph 6(c) other than due to
Employee's death or disability, or the Employee
terminates his employment for Good Reason, as defined
in subparagraph 6(d), prior to the end of any
calendar year, he shall be entitled to a short-term
incentive payment if the earnings thresholds
described in Exhibit A have been achieved as of the
last day of the calendar year in which his
termination of employment occurs, provided, however,
that the amount of such payment shall be calculated
by multiplying the incentive amount that would have
been payable to the Employee pursuant to Exhibit A,
had his employment not terminated during the
calendar year, by a fraction, the numerator of which
is the number of full weeks of employment completed
by the Employee during such calendar year and the
denominator of which is 52. If the Employee's
employment is terminated for Good Cause, as defined
in subparagraph 6(c), other than due to death or
disability, or the Employee terminates his
employment for other than Good Reason, as defined in
subparagraph 6(d), prior to the end of any calendar
year, no short-term incentive shall be payable for
such year.
c. Long-term incentive compensation as provided in
Exhibit B attached hereto.
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<PAGE>
d. If the Employee's employment continues subsequent to
the fifth anniversary of the date of this Agreement,
the Employee and the Chief Executive Officer of
MidAmerican Energy Holdings Company shall negotiate
the amount of the Employee's future base salary and
the terms of any further short-term and long-term
incentive arrangements at that time, with all such
compensation to be subject to approval of the
Committee.
5. Additional Benefits.
a. The Company shall reimburse the Employee for up to
$5,000 per year of the premium cost of any life
insurance maintained by the Employee, and up to
$2,000 per year of the premium cost of any long term
disability insurance maintained by the Employee. In
addition, the Employee shall be eligible to
participate in the ERISA qualified retirement and
welfare benefit plans of the Company in accordance
with the terms and conditions of such plans. The
Employee shall also be entitled to paid vacations and
holidays consistent with the Company's customary
practice.
b. The Company shall promptly pay (or reimburse the
Employee for) all reasonable expenses incurred by him
in the performance of his duties hereunder in
accordance with policies from time to time adopted by
the Board, including business travel and
entertainment expenses. The Employee shall furnish
to the Company such receipts and records as the
Company may require to verify the foregoing expenses.
c. The Company shall pay the Employee a vehicle
allowance of $800 per month. In addition, the Company
shall pay the Employee's monthly dues at Dellwood
Hills Country Club.
6. Termination.
a. The Employee may resign his employment with the
Company effective upon two months' advance written
notice to the Board. If the Employee resigns under
this paragraph, the
4
<PAGE>
Board (by the vote of a majority of its members other
than the resigning Employee and other members who
have given notice of resignation as an employee)
retains the right to terminate the Employee's
employment, effective upon written notice to the
Employee, at any time during the notice period for
Good Cause, as defined in subparagraph 6(c).
b. The employment of the Employee with the Company may
be terminated, for other than Good Cause, as defined
in subparagraph 6(c), by the Board directing such
termination (by the vote of a majority of its members
other than the Employee and other members who have
given notice of resignation as an employee) and upon
two months' advance written notice to Employee,
provided, however, that Employee may be terminated,
effective upon written notice to Employee, for Good
Cause during the notice period. The Board may require
Employee to cease reporting to work during the
notice period, even without Good Cause.
c. The employment of the Employee may be terminated for
Good Cause by the Board directing such termination
(by the vote of a majority of its members other than
the Employee and other members who have given notice
of resignation as an employee) and effective upon
written notice to the Employee. Good Cause shall mean
(1) the Employee's conviction of any gross
misdemeanor involving dishonesty, fraud or breach of
trust or a felony; (2) the Employee's engagement in
gross misconduct that materially injures the Company,
monetarily or otherwise; (3) the Employee's gross
neglect of his duties under this Agreement, including
Employee's failure to physically appear for work; (4)
the Employee's death or Disability; or (5) the
Employee's violation of paragraph 8 of this
Agreement. The Employee shall be considered to have
come under a Disability if he, by reason of physical
or mental disability, becomes unable to perform the
services required of him hereunder for six
consecutive months or more than nine (9) months in
the aggregate during any 12-month period, excluding
absences resulting from ordinary transitory
illnesses or injury, and a qualified physician
certifies the Disability.
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<PAGE>
d. The Employee may terminate his employment with the
Company at any time for Good Reason, effective
immediately upon written notice to the Board. Good
Reason shall exist if the Employee terminates his
employment because (1) the Company has materially
breached any of the terms of this Agreement; (2) the
Employee is assigned duties which are materially
inconsistent with his position, duties,
responsibilities and status as a member of the
Company's management team; or (3) the Employee's
office location as assigned to him by the Company is
relocated to a location more than 50 miles from
Edina, Minnesota; (4) the Company is acquired by
Cendant Corporation, or entities controlled by
Cendant Corporation and the Employee is unable to
reach agreement on a modified employment agreement
within thirty (30) days following acquisition.
7. Severance.
a. If the Employee's employment is terminated by the
Company for other than Good Cause or the Employee
terminates his employment with the Company for Good
Reason, the Company shall continue to pay the
Employee his base salary as in effect as of his
termination date at the Company's normal payroll
intervals during the Non-Competition Period, as
defined in subparagraph 8(a). In addition, during the
Non-Competition Period, the Company shall also pay
to the Employee annually a short-term incentive
payment as described in Exhibit A, equal to the
average annual short-term incentive payments made to
the Employee under this Agreement prior to the
Employee's termination. During this period, the
Company shall also; (1) continue to reimburse the
Employee for the premium cost of any life or long
term disability insurance maintained by the Employee
(subject to the dollar limitations set forth in
subparagraph 5(a); and (2) if the Employee is
eligible for and elects continuation coverage under
one or more group health plans sponsored by the
Company or its subsidiaries, pay the same portion of
the premium cost of such coverage, if any, as is paid
by the Company for members of its management team who
are actively employed.
6
<PAGE>
b. If the Employee terminates his employment with the
Company for other than Good Reason, the Company shall
pay the Employee his base salary only through his
termination date and the Non-Competition Period shall
continue for the full period specified in
sub-paragraph 8(a) without additional consideration
other than payments made prior to the Employee's
termination date.
c. If the Employee is terminated by the Company for Good
Cause, the Company shall pay the Employee his base
salary only through his termination date and the
Non-Competition Period shall continue for the full
period specified in subparagraph 8(a) without
additional consideration other than the payments made
prior to the Employee's termination date.
d. Except as provided in this paragraph 7 or in
subparagraph 4(b), or as otherwise required pursuant
to the laws applicable to the retirement and welfare
plans sponsored by the Company or its subsidiaries,
the Employee shall receive no compensation or
additional benefits following his termination date.
8. Non-Competition and Non-Solicitation.
a. Employee covenants and agrees that, during his
employment and from the date of his termination of
employment with the Company for any reason until the
third anniversary of such date (the "Non-Competition
Period"), he will not, directly or indirectly, own,
manage, operate, control, invest in, be employed by
or under contract with, participate in, consult with
or render services to, or be connected in any manner
with the operation, ownership, management or control
of any enterprise which competes with any business
engaged in by Company during his employment and
within the states of Minnesota, North Dakota,
Wisconsin, Missouri and Iowa and such other states in
which Company conducts business during his
employment. Employee agrees that he will promptly
notify the Board of his employment or other
affiliation with any other business or entity during
the Non-Competition Period.
7
<PAGE>
b. Employee also certifies that he is not currently
subject to a noncompetition agreement with a former
employer or any other person or entity which
prohibits him from working with the Company in the
capacity contemplated by this Agreement.
c. The Employee specifically acknowledges that he has
obtained and will, in the course of his employment,
continue to obtain and have access to confidential
data pertaining to customers and prospective
customers of the Company, that such data is a
valuable and unique asset of Company's business and
that the success or failure of Company's specialized
business is dependent to a significant degree upon
the ability of Company to establish and maintain
close and continuing personal contacts and working
relationships with its customers and prospective
customers and to develop proposals which are
specifically devised, refined and adjusted to meet,
satisfy and coincide with the interests and
requirements of its customers and prospective
customers. Therefore, this paragraph is specifically
intended to prohibit, during the Non-Competition
Period, solicitation, either directly or indirectly,
of any or all of Company's customers and clients at
the time of the Employee's termination of employment
and prospective customers and clients of Company with
whom Employee had contact, or was in a position to
have contact with, during the two years preceding
his termination of employment.
d. Employee further agrees that during his employment
and during the Non-Competition Period, Employee will
not solicit on his own behalf or on behalf of any
other person, the services of any person who is an
employee or agent of Company or was an employee or
agent of Company during the two years preceding the
Non-Competition Period or solicit any of Company's
employees or agents to terminate their employment or
agency with Company, without advance written approval
of the Board of the Company.
e. Employee further acknowledges that he has obtained
and will, in the course of his employment, continue
to obtain and have
8
<PAGE>
access to confidential data relating to Company's
special vendors and procurers and their
representatives and that this information is a
valuable and unique asset of Company, also developed
over time. Employee agrees that, during the Non-
Competition Period, he will not solicit on his own
behalf or on behalf of any other person, any such
vendor, procurer or representative for the purposes
of either providing products or services or
terminating their relationship or agency with
Company.
f. Employee further agrees that, during the
Non-Competition Period, he will do nothing to
interfere with any of Company's business
relationships or its goodwill or reputation.
g. Employee hereby acknowledges and agrees that all
non-public information and data of Company, including
without limitation that related to products,
customers, pricing, sales and financial results
(collectively "Trade Secrets") are of substantial
value to Company, provide it with a substantial
competitive advantage in its business, and are and
have been maintained in strictest confidence as
trade secrets. Except as otherwise approved in
writing by the Board, the Employee shall not divulge,
furnish, or make accessible to anyone (other than the
Company, its directors and officers or to others
during the course of Employee's employment with the
Company if, in good faith, the Employee determines
that such disclosure is in the best interest of the
Company) any Trade Secrets.
9. Remedies. Employee acknowledges that the restrictions set
forth in paragraph 8 are reasonably necessary to protect a
legitimate business interest of the Company. It is understood
that if the Employee violates his obligations under any of
these paragraphs, Company would suffer irreparable harm for
which a recovery of money damages would be an incomplete and
inadequate remedy. It is therefore agreed that in the case of
any violation or threatened violation of paragraph 8 of this
Agreement, Company may apply for and secure injunctive relief,
temporary or provisional, in court, without bond but upon due
notice, pending final resolution on the merits pursuant to
arbitration as set forth in paragraph 16 below. No waiver of
any violation of this
9
<PAGE>
Agreement shall be implied from any failure by Company to take
action under this paragraph.
10. Severability. The parties intend that the covenants and
agreements contained herein shall be deemed to be a series of
separate covenants and agreements, one for each and every
state of the United States and political subdivision outside
the United States when the business described is conducted.
If, in any judicial proceeding, a court shall refuse to
enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed
eliminated from the provisions of this Agreement for the
purpose of such proceeding to the extent necessary to permit
the remaining covenants to be enforced in such proceeding.
Further, in the event that any provision is held to be over
broad as written, such provision shall be deemed amended to
narrow its application to the extent necessary to make the
provision enforceable according to applicable law and enforced
as amended.
11. Binding Effect. The covenants and agreements of paragraph 8
shall survive the termination of this Agreement for any reason
and shall not be terminated by the voluntary dissolution of
the Company (or any parent, subsidiary or successor of the
Company) or merger whereby the Company (or such parent,
subsidiary or successor of the Company) is not the surviving
or resulting corporation, or any transfer of substantially all
the assets of the Company, unless no transferee or successor
continues to carry on the business activities of the Company.
In the event of any such merger or consolidation or transfer
of assets, the provisions of this Agreement shall inure to the
benefit of and shall be binding upon the surviving or
resulting corporation or the corporation to which such assets
shall be transferred.
12. Entire Agreement. From and after the date of this Agreement,
the terms and provisions of this Agreement constitute the
entire agreement between the parties. This Agreement
supersedes any previous oral or written communications,
representations, or agreements with respect to any subject,
including the subject matter of compensation, incentive,
participation and profit sharing and termination
compensation.
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<PAGE>
13. Waiver. No waiver by either party at any time of any breach by
the other party of, or compliance with, any condition or
provision of this Agreement to be performed by the other party
shall be deemed a waiver of any other provisions or conditions
at the same time or at any prior or subsequent time.
14. Applicable Law. All questions pertaining to the validity,
construction, execution and performance of this Agreement
shall be construed and governed in accordance with the laws of
the State of Iowa. The parties consent to the personal
jurisdiction of the State of Iowa, waive any argument that
such a forum is not convenient, and agree that any litigation
or arbitration relating to this Agreement shall be venued in
Polk County, Iowa.
15. Tax Withholding. The Company may withhold from any payment of
benefits under this Agreement (and forward to the appropriate
taxing authority) any taxes required to be withheld under
applicable law.
16. Disputes. Any and all claims or disputes between Employee and
Company (including the validity, scope, and enforceability of
this paragraph), except as otherwise provided under paragraph
9 herein, shall be submitted for arbitration and resolution to
an arbitrator. No demand for arbitration may be made after the
date when the institution of legal or equitable proceedings
based on such claim or dispute would be barred by the
applicable statute of limitation. The arbitrator shall be
selected by mutual agreement of the parties. Unless otherwise
provided for in this Agreement, the Expedited Labor
Arbitration Rules of the American Arbitration Association
shall apply. If the parties are unable to agree upon an
arbitrator, any such dispute shall be solely and finally
settled by arbitration in accordance with the Expedited Labor
Arbitration Rules of the American Arbitration Association
("AAA"), except (1) the arbitrator shall be selected by the
AAA as follows: (a) the AAA shall submit a list of names of
five arbitrators with significant experience in arbitrating
executive employment disputes; (b) each party shall have the
right to exercise unlimited challenges to said named
arbitrators for cause, the AAA to determine, if disputed,
whether any such challenge for cause is justifiable and to
replace any such stricken arbitrator name with another name so
that the parties are presented with five names, none of which
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<PAGE>
can be stricken for cause; (c) each party hereto may exercise
up to two peremptory challenges to names on the submitted list
of five names; and (d) the AAA shall selected the arbitrator
from the remaining names; and (2) the arbitrator shall render
an Award in writing with sufficient detail to determine the
arbitrator's decision on each issue submitted to arbitration.
The parties agree that no punitive damages shall be awarded
hereunder. The parties also agree that all awards, decisions
and remedies in favor of a winning party hereunder with
respect to any issue shall be proportional to the violation
caused by the losing party with respect to that issue. All
costs in conducting the arbitration, including but not limited
to the arbitration filing fee, the arbitrator's fees and
expenses, and the reasonable attorney's fees and expenses of
the prevailing party (including the attorney's fees and costs
incurred by the prevailing party in seeking or resisting
temporary or provisional court relief as set out in paragraph
9 above), shall be the responsibility of the losing party. In
the event there is more than one issue in dispute and there is
no one prevailing party with respect to all issues in dispute,
costs and attorneys' fees shall be prorated by the arbitrator
according to the relative dollar value of each issue. The
arbitrator's Award shall be final and binding. In the event
either party must resort to the judicial process to enforce
the provisions of this Agreement, the award of an arbitrator
or equitable relief granted by an arbitrator, the party
seeking enforcement shall be entitled to recover from the
other party all costs of litigation including, but not
limited to, reasonable attorney's fees and court costs. The
arbitration proceedings and Award shall be maintained by both
parties as strictly confidential, except as otherwise required
by court order and with respect to the parties' attorneys and
tax advisors, and, with respect to Company, members of its
management, and, with respect to Employee, his family and
close confidants.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
effective as of the day and year first above written.
MIDAMERICAN REALTY SERVICES COMPANY
By: /s/ A. Wells
---------------------------------
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Title: Vice President and Chief Financial Officer
RONALD J. PELTIER
/s/ Ronald J. Peltier
---------------------------------------------------
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<PAGE>
EXHIBIT A
Short-Term Incentive Compensation Plan for
Senior Executives of MidAmerican Realty Services Company
Participants:
Start Date: January 1, 1998
Term of Plan: 5 years
Award Opportunity: Target award of 30% of base salary, with a
maximum award equal to 45% of base salary
Definition of EBITDA: Operating profit before depreciation; amortiza-
tion of transaction costs and goodwill; interest
income or expense; income taxes and unusual
non-recurring gains or expenses (e.g., legal
settlements, provisions for contingencies, effect
of accounting changes and severance costs).
Payment: Payment of the award will be made upon
achievement of the performance criteria and
after the Compensation Committee of the
Board of Directors of MidAmerican Energy
Holdings Company (the "Committee") ap-
proves the incentive award computations, based
upon the recommendation of the Chief Execu-
tive Officer ("CEO") of MidAmerican Energy
Holdings Company.
Purpose: The intent of the incentive award and its under-
lying formula is to focus senior executives on
maximizing "enterprise value".
Award Determination: Award to be recommended to the Committee
will be determined by the CEO and based upon
objective performance criteria to be established
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<PAGE>
at the beginning of each calendar year. Such
criteria will also be recommended by the CEO to the
Committee for approval. For 1998, the performance
criteria in effect will be based upon "EBITDA"
level, which will be established by the CEO
following acquisition of AmerUs Home Services, Inc.
by MidAmerican Energy Holdings Company. During a
calendar year, performance criteria may be adjusted
at the sole discretion of the CEO, with the concur-
rence of the Committee, to reflect modifications to
MidAmerican Realty Services Company's operations,
resulting from items such as acquisitions or other
items such as acquisitions or other items for which
an adjustment is deemed appropriate. The CEO and the
Committee will be under no obligation to make any
such adjustments to the performance criteria.
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<PAGE>
EXHIBIT B
LONG TERM INCENTIVE COMPENSATION PLAN
FOR SENIOR EXECUTIVES OF
MIDAMERICAN REALTY SERVICES COMPANY
This Exhibit B (this "Exhibit Agreement") constitutes a part of the
employment agreement (the "Employment Agreement") dated May 27, 1998, between
MidAmerican Realty Services Company ("MRSC"), a subsidiary of MidAmerican Energy
Holdings Company ("MidAmerican") and Ronald J. Peltier ("Shareholder").
1. Stock Subscription. Shareholder agrees to purchase from MidAmerican
Realty Services Company ("MRSC"), and MRSC hereby agrees to sell to Shareholder,
in accordance with the terms of this Exhibit Agreement, a total of 125 shares of
MRSCs common stock (the "Shares").
2. Purchase Price and Manner of Payment.
(a) The total purchase price for the Shares shall be Three Hundred
Eighty-One Thousand Three Hundred Seventy-Six and No/100
Dollars ($381,376.00) (the "Original Purchase Price") which
amount will be payable to MRSC contemporaneously with the
execution of the Employment Agreement by delivery to MRSC of
Shareholder's Promissory Note (the "Promissory Note") in such
amount, which Promissory Note shall be substantially in the
form of Attachment A hereto.
(b) MRSC shall establish a bookkeeping account for the benefit of
Shareholder (the "Account") for the purpose of establishing a
credit towards payment of the Promissory Note. In [March] of
each of the five years commencing in 1999, a credit shall be
made to the Account if certain performance goals are achieved
with respect to the preceding fiscal year as hereinafter set
forth. Additionally, all dividends declared and paid with
respect to the Shares shall be credited to the Account Bal-
ance. Aggregate amounts credited to the Account shall be
referred to herein as the "Account Balance." The Promissory
Note shall become due and payable on the fifth anniversary
thereof (the "Fifth Anniversary"); provided, however, that in
the event that Shareholder's employment with MRSC is
terminated for any reason, including, without
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limitation, death or disability, prior to the Fifth
Anniversary ("Termination"), the Promissory Note shall become
due and payable on the Closing Date (as hereinafter defined)
following the Termination and, provided further, that in the
event MRSC exercises the Call Option, as hereinafter defined,
prior to the Fifth Anniversary, the Promissory Note shall
become due and payable on the Closing Date following such
exercise (the "Call Option Closing Date"). If Shareholder is
employed by MRSC on the Fifth Anniversary, the Account Balance
shall be offset against amounts owing under the Promissory
Note and any remaining amounts in the Account Balance shall be
paid to Shareholder within [30] days following the Fifth
Anniversary. In the event of Termination for Good Cause, other
than due to death or Disability or without Good Reason, the
Account Balance shall be deemed to be zero, and MRSC shall
repurchase the Shares for the Original Purchase Price plus
accrued interest on the Promissory Note pursuant to Section 9
of this Exhibit Agreement, which shall be offset against
amounts owing under the Promissory Note. In the event of
Termination for Good Reason or not for Good Cause, other than
due to death or Disability, the Account Balance shall be
credited with the target credit, determined in accordance with
subparagraph (c) below, with respect to any further period for
which such credit may be made, and the Account Balance shall
be offset against amounts owing under the Promissory Note. In
the event of Termination due to death or Disability, the
Account Balance shall be offset against amounts owing under
the Promissory Note. In the event of exercise of the Call
Option prior to the Fifth Anniversary, the Account Balance
shall be credited with the target credit, determined in
accordance with subparagraph (c) below, with respect to any
further period for which such credit may be made, and the
Account Balance shall be offset against amounts owing under
the Promissory Note on the Call Option Closing Date and, if
the Call Option is exercised with respect to all of the
Shares, any remaining amounts in the Account Balance shall be
paid to Shareholder within (30) days following the Call Option
Closing Date; provided that if the Call Option is exercised
with respect to a portion of the Shares, any amounts remaining
in the Account Balance shall not be paid until the earlier of
the Fifth Anniversary or the exercise of the Call Option with
respect to all of the Shares.
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(c) For purposes of determining credits to the Account, the
performance goals shall be based on achievement of (a) utility
service integration goals (the "Utility Goals") and (b) Realty
Co. EBITDA (as hereinafter defined) goals (the "Realty
Goals"), each as approved annually by the Compensation
Committee of the Board of Directors of MidAmerican (the
"Committee"), and upon the recommendation of the Chief Execu-
tive Officer ("CEO") of MidAmerican. The target credit for
each fiscal year shall be 20% of the amount that shall be due
on the Promissory Note on the Fifth Anniversary. The maximum
credit for each fiscal year shall be 40%. The actual credit
made with respect to each fiscal year from 1998 through 2002
shall be based on achievement of the Utility Goals and Realty
Goals, with the relative weight of importance for each such
goal with respect to each of the fiscal years as set forth
below:
Fiscal Year
-------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Utility Goals 30% 35% 40% 45% 50%
Realty Goals 70% 65% 60% 55% 50%
"EBITDA" means earnings of MRSC for a fiscal year before
interest, taxes, depreciation and amortization; provided, however, that the CEO
of MidAmerican may, with the concurrence of the Committee, make such adjustments
as he, in his sole discretion, deems appropriate in connection with intercompany
charges and revenues and the effect of business acquisitions and combinations by
MRSC and the impact of other extraordinary items on financial results.
3. Share Register. Upon receipt from Shareholder of the Promissory
Note, MRSC shall record Shareholder's ownership in the shares in its share
register, which shall be the sole evidence of such ownership. So long as
Shareholder is not in default in the payment of principal or interest on the
Promissory Note, the Shares shall be entitled to full voting rights and to share
in all dividends payable on the Shares.
4. Stock Pledge. To secure the full performance of Shareholder's
obligation to MRSC under the Promissory Note, Shareholder hereby grants to MRSC
a security interest in the Shares.
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5. Restriction on Transfer of Shares. No Shares shall be sold, trans-
ferred, assigned, pledged, hypothecated or otherwise disposed of or in any
manner transferred upon the books of MRSC, nor shall any purchaser or other
transferee thereof have any right to demand or require the transfer of any of
the Shares attempted to be sold or transferred or otherwise disposed of to him
or her or any of the rights of a shareholder of MRSC, without the prior written
consent of MRSC as expressed in a resolution of the MRSC Board of Directors. Any
such purported disposition or encumbrance without compliance with the provisions
of this Exhibit Agreement shall be null and void and shall not be effected on
the books of MRSC.
6. Investment Representations. Shareholder hereby represents and agrees
as follows:
(a) The Shares are being acquired for investment purposes and not
with the view toward the distribution or sale thereof in a
public offering within the meaning of the Securities Act of
1933 (the "Securities Act") or any rule of regulation under
the Securities Act.
(b) Shareholder has had an adequate opportunity to obtain from
representatives of MRSC the information necessary to permit
Shareholder to evaluate the merits and risks of Shareholder's
investment in MRSC.
(c) Shareholder has sufficient experience in business, financial
and investment matters to be able to evaluate the risks
involved in the purchase of the Shares and to make an informed
investment decision with respect to that purchase, and can
afford a complete loss of the value of the Shares and is able
to bear the economic risk of holding the Shares for an
indefinite period.
(d) Shareholder acknowledges that:
(i) The Shares have not been registered under either the
Securities Act or applicable state securities law,
and MRSC will be relying upon the foregoing
investment representations in issuing the Shares to
Shareholder;
(ii) MRSC has no obligation or current intention to
register the Shares under the Securities Act;
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(iii) The Shares cannot be sold, transferred or otherwise
disposed of unless they are subsequently registered
under the Securities Act or an exemption from
registration is then available; and
(iv) The transferability of the Shares will be subject to
restrictions imposed by all applicable federal and
state securities laws, as well as restrictions
contained in this Exhibit Agreement and in the event
MRSC chooses, in its sole discretion, to issue
certificates with respect to the Shares, the
certificates evidencing such Shares will be imprinted
with a legend substantially in the following form:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, and may not be sold, transferred or
otherwise disposed of in the absence of an effective
registration statement under that Act or an opinion
of counsel satisfactory to the corporation to the
effect that registration is not required. The shares
represented by this certificate are further subject
to certain restrictions contained in an agreement
relating to such shares between the shareholder and
the Company dated."
7. Put Option.
(a) On and after the fifth anniversary of the Employment
Agreement, Shareholder shall have the option (the "Put
Option") at any time to require MRSC to purchase all of the
Shares, subject to the terms and conditions of this Exhibit
Agreement. The purchase price, closing date and similar
matters in connection with exercise of the Put Option are as
set forth in Section 9 of this Exhibit Agreement.
(b) In the event of Termination, the Shareholder shall be deemed
to have exercised the Put Option on the date of Termination
(the "Mandatory Put Exercise"). The purchase price, closing
date and similar matters in connection with the Mandatory Put
Exercise are as set forth in Section 9 of this Exhibit
Agreement.
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8. Call Option. On and after the second anniversary of the Employment
Agreement, MRSC and its successors and assigns shall have the option (the "Call
Option") at any time and from time to time to purchase any or all of the Shares,
subject to the terms and conditions of this Exhibit Agreement. The purchase
price, closing date and similar matters in connection with exercise of the Call
Option are as set forth in Section 9 of this Exhibit Agreement. Prior to the
fifth anniversary of the Employment Agreement, MRSC shall be able to exercise
the Call Option only in the event of corporate need, as defined and addressed by
the MidAmerican Energy Holdings Company Board of Directors.
9. Put Option, Mandatory Put Exercise and Call Option Terms. Share-
holder shall exercise the Put Option, if at all, by delivering a written notice
of exercise to MRSC; provided, however, that such exercise shall be deemed to
occur upon the date of Termination in the case of the Mandatory Put Exercise.
MRSC or its successor or assign shall exercise the Call Option, if at all, by
delivering a written notice of exercise to Shareholder or its permitted
transferee. Any such exercise of the Put Option or the Call Option is referred
to herein as the "Exercise."
The purchase price for the Shares that are repurchased pursuant to the
Exercise (the "Purchase Price") shall be the fair market value of the Shares as
mutually agreed upon by Shareholder and MRSC, but in no event greater than the
product of (x) the decimal representing the percentage ownership of MRSC voting
capital stock held by Shareholder (based on percentage of votes) at the time of
Exercise multiplied by (y) the Corporate Value (as hereinafter defined) at the
time of Exercise. "Corporate Value" shall mean the market value of the Company
less outstanding liabilities; provided that in no event shall the value exceed
the product of (x) 7 multiplied by (y) the average EBITDA for the two
twelve-month periods immediately preceding the date of the calculation. In the
event the Call Option is exercised in connection with the sale of the Company,
the Corporate Value shall be the sale price for all of the equity of the
Company. In the event that Shareholder and MRSC do not agree on the calculation
of the Purchase Price or the Corporate Value, any dispute shall be resolved
pursuant to arbitration in accordance with the rules of the American Arbitration
Association then in effect. Such arbitration result shall be binding on the
parties. The Purchase Price for the Shares that are repurchased pursuant to the
Mandatory Put Exercise shall be the Purchase Price determined above, except when
the Mandatory Put Exercise results from a Termination for Good Cause, other than
death or Disability or not for Good Reason, the purchase price shall be the
Original Purchase Price plus accrued interest on the Promissory Note.
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MRSC shall make payment of the purchase price for any Shares reacquired
pursuant to the Exercise or the Mandatory Put Exercise by offsetting and
reducing the outstanding principal balance of, and any accrued interest on, the
Promissory Note delivered to MRSC by Shareholder pursuant to Section 2 of this
Exhibit Agreement. The closing of the Exercise or the Mandatory Put Exercise
shall be not less than 30 and not more than 45 days following notice of such
exercise on a date mutually agreeable to MRSC and Shareholder (the "Closing
Date"); provided, however, that in the event of a dispute regarding the Purchase
Price or the inability to determine Corporate Value, the Closing Date shall be a
date not less than 30 and not more than 45 days following resolution of such
dispute. The balance of the purchase price owing to Shareholder, if any, shall
be paid on the Closing Date by delivering to Shareholder MRSC's check in the
amount of the balance of such purchase price.
On the Closing Date, the Share ownership relating to the shares
repurchased recorded in MRSC's share register shall be canceled by MRSC.
10. No Restriction on MRSC's Accounting; Adjustments. This Exhibit
Agreement shall not in any way interfere with the right of MRSC to select among,
adopt or change accounting practices or procedures, whether or not such
accounting practices or procedures have not been previously employed by MRSC, or
to consummate any business investments, acquisitions or divestitures or to
adopt any other policies or plans, at any time or from time to time in its sole
and absolute discretion. In order to carry out the intent and purpose of this
Exhibit Agreement, the CEO of MidAmerian may, in his sole and absolute
discretion, make such adjustments to computations made pursuant to this Exhibit
Agreement in connection with changes in accounting practices or procedures as he
deems necessary or appropriate to prevent dilution or enlargements of the
benefits provided pursuant to this Exhibit Agreement. Such adjustments may be in
connection with changes in accounting practices and procedures, fundamental
transactions and other matters of a similar nature.
11. Unsecured Interest. It is intended that MRSC is only under a
contractual obligation with respect to the Account. The Account Balance shall
not be financed through a trust fund, insurance contracts, or otherwise, and all
such credits shall be satisfied out of the general funds of MRSC, but only if
and to the extent such funds are legally available therefore. Shareholder shall
not have any interest whatsoever in the specific assets of MRSC pursuant to
this Exhibit Agreement and all rights of Shareholder shall be no greater than
the right of any unsecured general creditor of MRSC.
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12. Shareholder's Rights in Future Financing. For a period commencing
on the date of the Employment Agreement and ending on the fifth anniversary of
the Employment Agreement, in the event of any proposed sale of securities of
MRSC (including, without limitation, the sale of Common Stock, preferred stock,
convertible securities and debt instruments, other than commercial loans or
extensions of credit made by a bank, insurance company or other third-party
financial institution, or the issuance of securities in connection with a
capital contribution by an affiliate of MRSC), other than pursuant to grants of
employee stock options, Shareholder shall be provided at least 10 days' advance
notice and have the right to invest in such sale of securities, on the same
terms as offered to any third party (which shall include affiliates of MRSC), in
a percentage amount equal to the percentage ownership of voting capital stock
held by Shareholder immediately prior to such sale; provided, however, that such
right does not include any sale of the Company's equity securities in connection
with a public offering pursuant to a registration statement filed with the
Securities and Exchange Commission. Nothing in this Section shall limit the
right of MRSC, as determined by its Board of Directors, to issue shares of
capital stock of MRSC and determine all of the terms of such issuance in its
discretion.
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PROMISSORY NOTE
$381,376.00 May 27, 1998
FOR VALUE RECEIVED, the undersigned, Ronald J. Peltier (the "Maker"),
whose address is _____________________________________________________, promises
to pay to the order of MidAmerican Realty Services Company, an Iowa corporation
(the "Lender"), at its office at Des Moines, Iowa, in lawful money of the United
States, or at such other address as the holder hereof may from time to time
designate in writing, the principal amount of Three Hundred Eighty-One Thousand
Three Hundred Seventy-Six and No/100 Dollars ($381,376.00). The amount and date
of the loan evidenced hereunder shall be entered by the Lender into its records,
which records shall be conclusive evidence of the subject matter thereof absent
manifest error.
This Note matures on May 27, 2003 (the "Maturity Date"). Principal and
interest due on the Note on the Maturity Date will be offset by the amount, if
any, in the Account Balance [as defined in the Exhibit Agreement dated May 27,
1998, between Maker and Lender (the "Agreement")] in accordance with terms of
the Agreement. Notwithstanding the foregoing, the Maturity Date shall be deemed
to be the "Closing Date" in the event of exercise of the"Put Option" or the
"Call Option" or in the event of a "Mandatory Put Exercise" as each term is
defined in the Agreement. If the Call Option is exercised with respect to a
portion of the Shares (as defined in the Agreement), the Principal and interest
due on the Note on such Maturity Date shall be equal to the pro rata amount due
on the Promissory Note with respect to the Shares purchased pursuant to the
exercise of such option.
Interest on the unpaid principal balance of this Note shall accrue from
the date hereof at a per annum rate equal to MRSC's average annual borrowing
rate. The Maker also shall pay interest on any overdue installment of principal
from the due date thereof until paid at an interest rate per annum equal at all
times to six percent (6.0%) per annum in excess of the interest rate set forth
above, which interest shall be payable upon demand. Interest shall accrue on the
basis of actual days elapsed in a year consisting of 360 days. No provision of
this Note shall require the payment or permit the collection of interest in
excess of the rate permitted by applicable law.
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Both principal and interest are payable in lawful money of the United
States of America in immediately available funds, subject to the provisions set
forth above in connection with the Account Balance.
All payments under this Note shall be applied initially against accrued
interest and thereafter in reduction of principal.
The Maker warrants and represents to the Lender that this Note is the
Maker's legal, valid and binding obligation, enforceable in accordance with its
terms.
If this Note or any payment required to be made thereunder is not paid
on the due date, the holder hereof shall have, in addition to any other rights
it may have under applicable laws, the right to set off the indebtedness
evidenced by this Note against any indebtedness of such holder to the Maker,
including, without limitation, any salary or other compensation owing by the
Lender to the Maker.
No failure or delay on the part of the holder of this Note in
exercising any power or right under this Note shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power or right preclude any
other or further exercise thereof of the exercise of any other power or right.
No notice to or demand on the Maker in any case shall entitle the Maker to any
notice or demand in similar or other circumstances.
The Maker agrees to reimburse the holder of this Note, upon demand, for
all reasonable out-of-pocket expenses, including reasonable attorneys' fees, in
connection with such holder's enforcement of the obligations of the Maker
hereunder.
Presentment and demand for payment, notice of dishonor, protest and
notice of protest are hereby waived.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Iowa (without giving effect to the conflicts of
laws principles thereof). The Maker hereby submits himself to the jurisdiction
of the courts of the State of Iowa and the federal courts of the United States,
located in such state in respect of all actions arising out of or in connection
with the interpretation or enforcement of this Note, waives any argument that
venue in such forums is not convenient and agrees that any actions initiated by
the Maker shall be venued in such forums.
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/s/ Ronald J. Peltier
RONALD J. PELTIER (Maker)
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EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
on this 1st day of September, 1998, by and between J.C. Nichols Residential,
Inc. (the "Company"), a subsidiary of MidAmerican Realty Services Company
("MRSC"), which is a subsidiary of MidAmerican Energy Holdings Company
("MidAmerican") and Jack Frost (the "Employee").
WHEREAS, the Company believes that the Employee's contribution to the
growth and success of the Company as a member of its management team will be
substantial and desires to employ the Employee in that role; and
WHEREAS, the Employee is desirous of serving the Company in said
capacity on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein contained, the
parties hereto agree as follows:
1. Employment and Term. The Company hereby agrees to employ the
Employee as a member of its management team and the Employee
hereby agrees to serve the Company in such capacity, on the
terms and conditions set forth herein for the period
commencing on the date of this Agreement and continuing
for a period of five (5) years from that date, unless
earlier terminated by the Employee or the Company in
accordance with paragraph 5 herein. Upon the expiration of
the initial term, this Agreement shall automatically be
extended for one-year periods, unless on or before the date
which is one year prior to the expiration of the initial term
of the Agreement or any subsequent one-year extension period,
either party has delivered to the other written notice of
intent to terminate this Agreement upon its next expiration
date. The purpose of the automatic extension is to assure
that the parties have at least one year prior notice of
termination of the Agreement. Irrespective of whether the
Agreement is in its initial term or a subsequent one-year
extension period, it is at all times subject to the
termination provisions of paragraph 5.
2. Duties. The Employee is engaged by the Company to be
responsible for oversight of Company's real estate operations
in the Greater
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Kansas City Metropolitan area and for such duties related to
the Company's management as may from time to time be assigned
by its Board of Directors (the "Board"), and shall report to
the Board. The Employee will, during his term of employment
hereunder:
a. Faithfully and diligently do and perform all such
acts and duties and furnish such services for the
Company as the Board or its designated
representative shall direct from time to time;
b. Devote his full time, energy and skill to the
business of the Company and to the promotion of its
best interests, except for vacations, absences made
necessary because of illness, and service on other
corporate, civic, or charitable boards or
committees not significantly interfering with his
duties hereunder.
3. Compensation. During the initial term of this Agreement, the
Company shall pay the Employee base, and, when earned in
accordance with the provisions of this paragraph, incentive
compensation for the performance of his duties under this
Agreement, as follows:
a. The Company shall pay Employee a base salary at the
annual rate of $250,000, payable at the Company's
regular payroll intervals and in accordance to
Company's regular payroll procedures. If the
Agreement is extended following the initial period
of the Agreement, then the Chief Executive Officer
of MidAmerican Energy Holdings Company shall review
Employee's annual base salary and consider possible
increases, taking into account inflation factors,
performance of the Company, salaries paid for
positions of similar responsibility for other
companies, and other relevant factors, and shall
recommend such increases when deemed appropriate,
for approval of the Compensation Committee of the
Board of Directors of MidAmerican (the "Committee").
b. Short-term incentive compensation to be determined
as provided in Exhibit A attached hereto.
With respect to the calculation of short-term
incentives under this subparagraph, if it becomes
apparent that the stated earn-
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ings thresholds cannot be achieved for unforeseen
reasons and in spite of diligent management effort,
the Employee may nonetheless be awarded short-term
incentive payments, if approved by the Committee as
recommended by the Chief Executive Officer of
MidAmerican Energy Holdings Company, to reward
exemplary performance.
In the event the Company terminates the Employee's
employment for any reason other than Good Cause, as
defined in subparagraph 5(c) other than due to
Employee's death or disability, or the Employee
terminates his employment for Good Reason, as
defined in subparagraph 5(d), prior to the end of
any calendar year, he shall be entitled to a
short-term incentive payment if the earnings
thresholds described in Exhibit A have been achieved
as of the last day of the calendar year in which his
termination of employment occurs, provided, however,
that the amount of such payment shall be calculated
by multiplying the incentive amount that would have
been payable to the Employee pursuant to Exhibit A,
had his employment not terminated during the
calendar year, by a fraction, the numerator of
which is the number of full weeks of employment
completed by the Employee during such calendar year
and the denominator of which is 52. If the
Employee's employment is terminated for Good Cause,
as defined in subparagraph 5(c), other than due to
death or disability, or the Employee terminates his
employment for other than Good Reason, as defined
in subparagraph 5(d), prior to the end of any
calendar year, no short-term incentive shall be
payable for such year.
c. If the Employee's employment continues subsequent to
the fifth anniversary of the date of this Agreement,
the Employee and the Chief Executive Officer of
MidAmerican Energy Holdings Company shall negotiate
the amount of the Employee's future base salary and
the terms of any further short-term incentive
arrangements at that time, with all such compensation
to be subject to approval of the Committee.
4. Additional Benefits.
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a. The Employee shall be eligible to participate in the
ERISA qualified retirement and welfare benefit plans
of the Company in accordance with the terms and
conditions of such plans. The Employee shall also be
entitled to paid vacations and holidays consistent
with the company's customary practice.
b. The Company shall promptly pay (or reimburse the
Employee for) all reasonable expenses incurred by
him in the performance of his duties hereunder in
accordance with policies from time to time adopted
by the Board, including business travel and
entertainment expenses. The Employee shall furnish
to the Company such receipts and records as the
Company may require to verify the foregoing expenses.
c. The Company shall provide Employee a vehicle with a
standard monthly lease rate of not more than
$1,200. In addition, the Company shall pay the
Employee's monthly membership dues at Indian Hills
Country Club ("Country Club") and reimburse him for
expenses incurred at the Country Club which are
related to conduct of Company business. The Employee
shall furnish to the Company such receipts and
records as the Company may require to verify the
foregoing expenses.
5. Termination.
a. The Employee may resign his employment with the
Company effective upon two months' advance written
notice to the Board. If the Employee resigns under
this paragraph, the Board (by the vote of a majority
of its members other than the resigning Employee, if
Employee is then a Board member, and other members
who have given notice of resignation as an employee)
retains the right to terminate the Employee's
employment, effective upon written notice to the
Employee, at any time during the notice period for
Good Cause, as defined in subparagraph 5(c).
b. The employment of the Employee with the Company may
be terminated, for other than Good Cause, as defined
in subpara-
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graph 5(c), by the Board directing such termination
(by the vote of a majority of its members other than
the Employee, if Employee is then a Board member,
and other members who have given notice of
resignation as an employee) and upon two months'
advance written notice to Employee, provided,
however, that Employee may be terminated, effective
upon written notice to Employee, for Good Cause
during the notice period. The Board may require
Employee to cease reporting to work during the
notice period, even without Good Cause.
c. The employment of the Employee may be terminated for
Good Cause by the Board directing such termination
(by the vote of a majority of its members, if
Employee is then a Board member, other than the
Employee and other members who have given notice of
resignation as an employee) and effective upon
written notice to the Employee. Good Cause shall
mean (1) the Employee's conviction of any gross
misdemeanor involving dishonesty, fraud or breach of
trust or a felony; (2) the Employee's engagement in
gross misconduct that materially injures the
Company, monetarily or otherwise; (3) the Employee's
gross neglect of his duties under this Agreement,
including Employee's failure to physically appear
for work; (4) the Employee's death or Disability; or
(5) the Employee's violation of paragraph 7 of this
Agreement. The Employee shall be considered to have
come under a Disability if he, by reason of physical
or mental disability, becomes unable to perform the
services required of him hereunder for more than
three (3) months during any 12-month period.
d. The Employee may terminate his employment with the
Company at any time for Good Reason, effective
immediately upon written notice to the Board. Good
Reason shall exist if the Employee terminates his
employment because (1) the Company has materially
breached any of the terms of this Agreement; (2)
the Employee is assigned duties which are materially
inconsistent with his position, duties,
responsibilities and status as a member of the
Company's management team; (3) the Company's
principal office or the Employee's office location
as assigned to him by the Company is relocated to a
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location more than 50 miles from the Greater Kansas
City Metropolitan area; or (4) within the three (3)
year period beginning on the effective date of this
Agreement, the Company is directly or indirectly
acquired by National Realty Trust, GMAC or Cendant
Corporation, its affiliates or other persons or
entities acting on its behalf and Employee acting in
good faith is unable to reach agreement on a modified
Employment Agreement within thirty (30) days
following acquisition.
6. Severance.
a. If the Employee's employment is terminated by the
Company for other than Good Cause or the Employee
terminates his employment with the Company for Good
Reason, the Company shall continue to pay the
Employee his base salary as in effect as of his
termination date at the Company's normal payroll
intervals during the Non-Competition Period, as
defined in subparagraph 7(a). In addition, during the
Non-Competition Period, the Company shall also pay
to the Employee annually a short-term incentive
payment as described in Exhibit A, equal to the
average annual short-term incentive payments made to
the Employee under this Agreement prior to the
Employee's termination. During this period, if the
Employee is eligible for and elects continuation
coverage under one or more group health plans
sponsored by the Company or its subsidiaries, the
Company shall pay the same portion of the premium
cost of such coverage, if any, as is paid by the
Company for members of its management team who are
actively employed.
b. If the Employee terminates his employment with the
Company for other than Good Reason, the Company
shall pay the Employee his base salary only through
his termination date and the Non-Competition Period
shall continue for the full period specified in
subparagraph 7(a) without additional consideration
other than payments made prior to the Employee's
termination date.
6
<PAGE>
c. If the Employee is terminated by the Company for
Good Cause, the Company shall pay the Employee his
base salary only through his termination date and
the Non-Competition Period shall continue for the
full period specified in subparagraph 7(a) without
additional consideration other than the payments
made prior to the Employee's termination date.
d. Except as provided in this paragraph 6 or in
subparagraph 3(b), or as otherwise required pursuant
to the laws applicable to the retirement and welfare
plans sponsored by the Company or its subsidiaries,
the Employee shall receive no compensation or
additional benefits following his termination date.
7. Non-Competition and Non-Solicitation.
a. Employee covenants and agrees that, during his
employment and from the date of his termination of
employment with the Company for any reason until the
third anniversary of such date (the "Non-Competition
Period"), he will not, directly or indirectly, own,
manage, operate, control, invest in, be employed by
or under contract with, participate in, consult with
or render services to, or be connected in any manner
with the operation, ownership, management or control
of any enterprise which competes with any business
engaged in by J.C. Nichols Residential, Inc. or its
affiliates during his employment and within the
states of Missouri and Kansas. Employee agrees that
he will promptly notify the Board of his employment
or other affiliation with any other business or
entity during the Non-Competition Period.
b. Employee also certifies that he is not currently
subject to a noncompetition agreement with a former
employer or any other person or entity which
prohibits him from working with the Company in the
capacity contemplated by this Agreement.
c. The Employee specifically acknowledges that he has
obtained and will, in the course of his employment,
continue to obtain and have access to confidential
data pertaining to customers and prospective
customers of the Company, that such data is a
7
<PAGE>
valuable and unique asset of Company's business and
that the success or failure of Company's specialized
business is dependent to a significant degree upon
the ability of Company to establish and maintain
close and continuing personal contacts and working
relationships with its customers and prospective
customers and to develop proposals which are
specifically devised, refined and adjusted to meet,
satisfy and coincide with the interests and
requirements of its customers and prospective
customers. Therefore, this paragraph is specifically
intended to prohibit, during the Non-Competition
Period, solicitation, either directly or indirectly,
of any or all of Company's customers and clients at
the time of the Employee's termination of employment
and prospective customers and clients of Company
with whom Employee had contact, or was in a position
to have contact with, during the two years preceding
his termination of employment.
d. Employee further agrees that during his employment
and during the Non-Competition Period, Employee will
not solicit on his own behalf or on behalf of any
other person, the services of any person who is an
employee or agent of Company or was an employee or
agent of Company during the two years preceding the
Non-Competition Period or solicit any of Company's
employees or agents to terminate their employment or
agency with Company, without advance written
approval of the Board of the Company.
e. Employee further acknowledges that he has obtained
and will, in the course of his employment, continue
to obtain and have access to confidential data
relating to Company's special vendors and procurers
and their representatives and that this information
is a valuable and unique asset of Company, also
developed over time. Employee agrees that, during
the Non-Competition Period, he will not solicit on
his own behalf or on behalf of any other person, any
such vendor, procurer or representative for the
purposes of either providing products or services or
terminating their relationship or agency with
Company. It is not the intent of this paragraph to
prohibit the solicitation of common vendors such as
vendors of telephone
8
<PAGE>
and electric services and such other vendors that
are common to the operation of any business.
f. Employee further agrees that, during the
Non-Competition Period, he will do nothing to
interfere with any of Company's business
relationships or its goodwill or reputation.
g. Employee hereby acknowledges and agrees that all
non-public information and data of Company,
including without limitation that related to
products, customers, pricing, sales and financial
results (collectively "Trade Secrets") are of
substantial value to Company, provide it with a
substantial competitive advantage in its business,
and are and have been maintained in strictest
confidence as trade secrets. Except as otherwise
approved in writing by the Board, the Employee shall
not divulge, furnish, or make accessible to anyone
(other than the Company, its directors and officers
or to others during the course of Employee's
employment with the Company if, in good faith, the
Employee determines that such disclosure is in the
best interest of the Company) any Trade Secrets.
8. Remedies. Employee acknowledges that the restrictions set
forth in paragraph 7 are reasonably necessary to protect a
legitimate business interest of the Company. It is understood
that if the Employee violates his obligations under any of
these paragraphs, Company would suffer irreparable harm for
which a recovery of money damages would be an incomplete and
inadequate remedy. It is therefore agreed that in the case of
any violation or threatened violation of paragraph 7 of this
Agreement, Company may apply for and secure injunctive
relief, temporary or provisional, in court, without bond but
upon due notice, pending final resolution on the merits
pursuant to arbitration as set forth in paragraph 15 below.
No waiver of any violation of this Agreement shall be implied
from any failure by Company to take action under this
paragraph.
9. Severability. The parties intend that the covenants and
agreements contained herein shall be deemed to be a series of
separate covenants and agreements, one for each and every
state of the United States and political subdivision outside
the United States when the business
9
<PAGE>
described is conducted. If, in any judicial proceeding, a
court shall refuse to enforce any of the separate covenants
deemed included in such action, then such unenforceable
covenants shall be deemed eliminated from the provisions of
this Agreement for the purpose of such proceeding to the
extent necessary to permit the remaining covenants to be
enforced in such proceeding. Further, in the event that any
provision is held to be over broad as written, such provision
shall be deemed amended to narrow its application to the
extent necessary to make the provision enforceable according
to applicable law and enforced as amended.
10. Binding Effect. The covenants and agreements of paragraph 7
shall survive the termination of this Agreement for any
reason and shall not be terminated by the voluntary
dissolution of the Company (or any parent, subsidiary or
successor of the Company) or merger whereby the Company (or
such parent, subsidiary or successor of the Company) is not
the surviving or resulting corporation, or any transfer of
substantially all the assets of the Company, unless no
transferee or successor continues to carry on the business
activities of the Company. In the event of any such merger
or consolidation or transfer of assets, the provisions of
this Agreement shall inure to the benefit of and shall be
binding upon the surviving or resulting corporation or the
corporation to which such assets shall be transferred.
11. Entire Agreement. From and after the date of this Agreement,
the terms and provisions of this Agreement constitute the
entire agreement between the parties. This Agreement
supersedes any previous oral or written communications,
representations, or agreements with respect to any subject,
including the subject matter of compensation, incentive,
participation and profit sharing and termination
compensation.
12. Waiver. No waiver by either party at any time of any breach
by the other party of, or compliance with, any condition or
provision of this Agreement to be performed by the other
party shall be deemed a waiver of any other provisions or
conditions at the same time or at any prior or subsequent
time.
10
<PAGE>
13. Applicable Law. All questions pertaining to the validity,
construction, execution and performance of this Agreement
shall be construed and governed in accordance with the laws
of the State of Iowa. The parties consent to the personal
jurisdiction of the State of Iowa, waive any argument that
such a forum is not convenient, and agree that any litigation
or arbitration relating to this Agreement shall be venued in
Polk County, Iowa.
14. Tax Withholding. The Company may withhold from any payment of
benefits under this Agreement (and forward to the appropriate
taxing authority) any taxes required to be withheld under
applicable law.
15. Disputes. Any and all claims or disputes between Employee and
Company (including the validity, scope, and enforceability of
this paragraph), except as otherwise provided under paragraph
8 herein, shall be submitted for arbitration and resolution
to an arbitrator. No demand for arbitration may be made after
the date when the institution of legal or equitable
proceedings based on such claim or dispute would be barred by
the applicable statute of limitation. The arbitrator shall be
selected by mutual agreement of the parties. Unless otherwise
provided for in this Agreement, the Expedited Labor
Arbitration Rules of the American Arbitration Association
shall apply. If the parties are unable to agree upon an
arbitrator, any such dispute shall be solely and finally
settled by arbitration in accordance with the Expedited labor
Arbitration Rules of the American Arbitration Association
("AAA"), except (1) the arbitrator shall be selected by the
AAA as follows: (a) the AAA shall submit a list of names of
five arbitrators with significant experience in arbitrating
executive employment disputes; (b) each party shall have the
right to exercise unlimited challenges to said named
arbitrators for cause, the AAA to determine, if disputed,
whether any such challenge for cause is justifiable and to
replace any such stricken arbitrator name with another name
so that the parties are presented with five names, none of
which can be stricken for cause; (c) each party hereto may
exercise up to two peremptory challenges to names on the
submitted list of five names; and (d) the AAA shall selected
the arbitrator from the remaining names; and (2) the
arbitrator shall render an Award in writing with sufficient
detail to determine the arbitrator's decision on each issue
submitted to arbitration. The parties agree that no punitive
damages
11
<PAGE>
shall be awarded hereunder. The parties also agree that all
awards, decisions and remedies in favor of a winning party
hereunder with respect to any issue shall be proportional to
the violation caused by the losing party with respect to that
issue. All costs in conducting the arbitration, including but
not limited to the arbitration filing fee, the arbitrator's
fees and expenses, and the reasonable attorney's fees and
expenses of the prevailing party (including the attorney's
fees and costs incurred by the prevailing party in seeking or
resisting temporary or provisional court relief as set out
in paragraph 8 above), shall be the responsibility of the
losing party. In the event there is more than one issue in
dispute and there is no one prevailing party with respect to
all issues in dispute, costs and attorneys' fees shall be
prorated by the arbitrator according to the relative dollar
value of each issue. The arbitrator's Award shall be final
and binding. In the event either party must resort to the
judicial process to enforce the provisions of this
Agreement, the award of an arbitrator or equitable relief
granted by an arbitrator, the party seeking enforcement shall
be entitled to recover from the other party all costs of
litigation including, but not limited to, reasonable
attorney's fees and court costs. The arbitration proceedings
and Award shall be maintained by both parties as strictly
confidential, except as otherwise required by court order and
with respect to the parties' attorneys and tax advisors, and,
with respect to Company, members of its management, and, with
respect to Employee, his family and close confidants.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement effective as of the day and year first above written.
J.C. NICHOLS RESIDENTIAL, INC.
By:
------------------------------
/s/
Title:
------------------------------
JACK FROST
/s/ Jack Frost
-------------------------------------
13
<PAGE>
EXHIBIT A
Short-Term Incentive Compensation Plan for Jack Frost
Start Date: September 1, 1998
Term of Plan: Five (5) years
Award Opportunity: Target award of 40% of base salary, with a
maximum award equal to 60% of base salary
Definition of EBITDA: MidAmerican Realty Services Company's
profit before depreciation; amortization of
transaction costs and goodwill; interest income
or expense; income taxes and unusual
non-recurring gains or expenses (e.g., legal settle-
ments, provisions for contingencies, effect of
accounting changes and severance costs).
Payment: Payment of the award will be made upon
achievement of the performance criteria and
after the Compensation Committee of the
Board of Directors of MidAmerican Energy
Holdings Company (the "Committee") approves the
incentive award computations, based upon the
recommendation of the Chief Executive Officer ("CEO")
of MidAmerican Energy Holdings Company. In making
recommendation to the Committee, the CEO will
consider the award proposed by Jack Frost and any
other factors that the CEO in the CEO's sole discre-
tion deems relevant.
Purpose: The intent of the incentive award and its underlying
formula is to focus senior executives on maximizing
"enterprise value".
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<PAGE>
Award Determination: Award to be recommended to the Committee
will be determined by the CEO and based upon
objective performance criteria to be established
at the beginning of each calendar year. Such
criteria will also be recommended by the CEO
to the Committee for approval. For 1998, the
performance criteria in effect will be based
upon "EBITDA" level, which will be established by
the CEO following acquisition of J.C. Nichols
Real Estate by MidAmerican Realty Services Company.
During a calendar year, performance criteria may be
adjusted at the sole discretion of the CEO, with the
concurrence of the Committee, to reflect
modifications to MidAmerican Realty Services
Company's operations, resulting from items such as
acquisitions or other items such as acquisitions or
other items for which an adjustment is deemed
appropriate. The CEO and the Committee will be
under no obligation to make any such adjustments
to the performance criteria.
15
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into on
this 27th day of May, 1998, by and between MidAmerican Realty Services Company
(the "Company"), a subsidiary of MidAmerican Energy Holdings Company
("MidAmerican") and Arne Rovick (the "Employee").
WHEREAS, the Company believes that the Employee's contribution to the
growth and success of the Company as a member of its management team will be
substantial and desires to employ the Employee in that role; and
WHEREAS, the Employee is desirous of serving the Company in said capacity
on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Employment and Term. The Company hereby agrees to employ the
Employee as a member of its management team and the Employee hereby
agrees to serve the Company in such capacity, on the terms and
conditions set forth herein for the period commencing on the date
of this Agreement and continuing for a period of five years from
that date, unless earlier terminated by the Employee or the Company
in accordance with paragraph 6 herein. Upon the expiration of the
initial term of this Agreement, it shall be automatically extended
for one-year periods, unless on or before the date which is one
year prior to the expiration of the initial term of the Agreement
or any subsequent one-year extension period, either party has
delivered to the other written notice of intent to terminate this
Agreement upon its next expiration date. The purpose of the
automatic extension is to assure that the parties have at least one
year prior notice of termination of the Agreement. This Agreement
is subject at all times to the provisions of paragraph 6.
2. Waiver of Rights. The Employee specifically acknowledges and agrees
that upon the effective date of this Agreement, his prior
Employment Agreement with Edina Financial Services, Inc. (formerly
known as E&E Acquisition Company) and its successors and assigns
<PAGE>
is canceled and no longer in effect. Further, the Employee waives
any and all rights, claims or other causes of action he may have
against Company, its affiliates, parents and its and their
predecessors and successors on account of any contract, liability
or other thing done or omitted, from all time in the past until the
effective date of this Agreement.
3. Duties. The Employee is engaged by the Company to be responsible
for such duties related to the Company's management as may from
time to time be assigned by its Board of Directors (the "Board"),
and shall report to the Board. The Employee will, during his term
of employment hereunder:
a. Faithfully and diligently do and perform all such acts and
duties and furnish such services for the Company as the Board
or its designated representative shall direct from time to
time;
b. Devote his full time, energy and skill to the business of the
Company and to the promotion of its best interests, except for
vacations, absences made necessary because of illness, and
service on other corporate, civic, or charitable boards or
committees not significantly interfering with his duties
hereunder.
4. Compensation. The Company shall pay the Employee base, and, when
earned in accordance with the provisions of this paragraph,
incentive compensation for the performance of his duties under this
Agreement, as follows:
a. Annual base salary of $250,000, payable at the Company's
regular payroll intervals. The Chief Executive Officer of
MidAmerican Energy Holdings Company shall not less than
annually during the Employee's employment review his annual
salary and consider possible increases, taking into account
inflation factors, performance of the Company, salaries paid
for positions of similar responsibility for other companies,
and other relevant factors, and shall recommend such increases
when deemed appropriate, for approval of the Compensation
Committee of the Board of Directors of MidAmerican (the
"Committee").
2
<PAGE>
b. Short-term incentive compensation to be determined as
provided in Exhibit A attached hereto.
With respect to the calculation of short-term incentives under
this subparagraph, if it becomes apparent that the stated
earnings thresholds cannot be achieved for unforeseen reasons
and in spite of diligent management effort, the Employee may
nonetheless be awarded short-term incentive payments, if
approved by the Committee as recommended by the Chief
Executive Officer of MidAmerican Energy Holdings Company, to
reward exemplary performance.
In the event the Company terminates the Employee's employment
for any reason other than Good Cause, as defined in
subparagraph 6(c) other than due to Employee's death or
disability, or the Employee terminates his employment for Good
Reason, as defined in subparagraph 6(d), prior to the end of
any calendar year, he shall be entitled to a short-term incen-
tive payment if the earnings thresholds described in Exhibit A
have been achieved as of the last day of the calendar year in
which his termination of employment occurs, provided, however,
that the amount of such payment shall be calculated by
multiplying the incentive amount that would have been pay able
to the Employee pursuant to Exhibit A, had his employment not
terminated during the calendar year, by a fraction, the
numerator of which is the number of full weeks of employment
completed by the Employee during such calendar year and the
denominator of which is 52. If the Employee's employment is
terminated for Good Cause, as defined in subparagraph 6(c),
other than due to death or disability, or the Employee
terminates his employment for other than Good Reason, as
defined in subparagraph 6(d), prior to the end of any calendar
year, no short-term incentive shall be payable for such year.
c. Long-term incentive compensation as provided in Exhibit B
attached hereto.
3
<PAGE>
d. If the Employee's employment continues subsequent to the fifth
anniversary of the date of this Agreement, the Employee and
the Chief Executive Officer of MidAmerican Energy Holdings
Company shall negotiate the amount of the Employee's future
base salary and the terms of any further short-term and
long-term incentive arrangements at that time, with all such
compensation to be subject to approval of the Committee.
5. Additional Benefits.
a. The Company shall reimburse the Employee for up to $5,000 per
year of the premium cost of any life insurance maintained by
the Employee, and up to $2,000 per year of the premium cost of
any long term disability insurance maintained by the Employee.
In addition, the Employee shall be eligible to participate in
the ERISA qualified retirement and welfare benefit plans of
the Company in accordance with the terms and conditions of
such plans. The Employee shall also be entitled to paid
vacations and holidays consistent with the company's customary
practice.
b. The Company shall promptly pay (or reimburse the Employee for)
all reasonable expenses incurred by him in the performance of
his duties hereunder in accordance with policies from time to
time adopted by the Board, including business travel and
entertainment expenses. The Employee shall furnish to the
Company such receipts and records as the Company may require
to verify the foregoing expenses.
c. The Company shall pay the Employee a vehicle allowance of $800
per month. In addition, the Company shall pay the Employee's
monthly dues at Interlachen Country Club.
6. Termination.
a. The Employee may resign his employment with the Company
effective upon two months' advance written notice to the
Board. If the Employee resigns under this paragraph, the
4
<PAGE>
Board (by the vote of a majority of its members other than the
resigning Employee and other members who have given notice of
resignation as an employee) retains the right to terminate the
Employee's employment, effective upon written notice to the
Employee, at any time during the notice period for Good Cause,
as defined in subparagraph 6(c).
b. The employment of the Employee with the Company may be
terminated, for other than Good Cause, as defined in subpara-
graph 6(c), by the Board directing such termination (by the
vote of a majority of its members other than the Employee and
other members who have given notice of resignation as an
employee) and upon two months' advance written notice to
Employee, provided, however, that Employee may be terminated,
effective upon written notice to Employee, for Good Cause
during the notice period. The Board may require Employee to
cease reporting to work during the notice period, even without
Good Cause.
c. The employment of the Employee may be terminated for Good
Cause by the Board directing such termination (by the vote of
a majority of its members other than the Employee and other
members who have given notice of resignation as an employee)
and effective upon written notice to the Employee. Good Cause
shall mean (1) the Employee's conviction of any gross
misdemeanor involving dishonesty, fraud or breach of trust or
a felony; (2) the Employee's engagement in gross misconduct
that materially injures the Company, monetarily or otherwise;
(3) the Employee's gross neglect of his duties under this
Agreement, including Employee's failure to physically appear
for work; (4) the Employee's death or Disability; or (5) the
Employee's violation of paragraph 8 of this Agreement. The
Employee shall be considered to have come under a Disability
if he, by reason of physical or mental disability, becomes
unable to perform the services required of him hereunder for
six consecutive months or more than nine (9) months in the
aggregate during any 12-month period, excluding absences
resulting from ordinary transitory illnesses or injury, and a
qualified physician certifies the Disability.
5
<PAGE>
d. The Employee may terminate his employment with the Company at
any time for Good Reason, effective immediately upon written
notice to the Board. Good Reason shall exist if the Employee
terminates his employment because (1) the Company has
materially breached any of the terms of this Agreement; (2)
the Employee is assigned duties which are materially
inconsistent with his position, duties, responsibilities and
status as a member of the Company's management team; or (3)
the Employee's office location as assigned to him by the
Company is relocated to a location more than 50 miles from
Edina, Minnesota; (4) the Company is acquired by Cendant
Corporation, or entities controlled by Cendant Corporation and
the Employee is unable to reach agreement on a modified
employment agreement within thirty (30) days following
acquisition.
7. Severance.
a. If the Employee's employment is terminated by the Company for
other than Good Cause or the Employee terminates his
employment with the Company for Good Reason, the Company
shall continue to pay the Employee his base salary as in
effect as of his termination date at the Company's normal
payroll intervals during the Non-Competition Period, as de
fined in subparagraph 8(a). In addition, during the Non-
Competition Period, the Company shall also pay to the Employee
annually a short-term incentive payment as described in
Exhibit A, equal to the average annual short-term incentive
payments made to the Employee under this Agreement prior to
the Employee's termination. During this period, the Company
shall also; (1) continue to reimburse the Employee for the
premium cost of any life or long term disability insurance
maintained by the Employee (subject to the dollar limitations
set forth in subparagraph 5(a); and (2) if the Employee is
eligible for and elects continuation coverage under one or
more group health plans sponsored by the Company or its
subsidiaries, pay the same portion of the premium cost of such
coverage, if any, as is paid by the Company for members of its
management team who are actively employed.
6
<PAGE>
b. If the Employee terminates his employment with the Company for
other than Good Reason, the Company shall pay the Employee
his base salary only through his termination date and the
Non-Competition Period shall continue for the full period
specified in sub-paragraph 8(a) without additional consider
ation other than payments made prior to the Employee's
termination date.
c. If the Employee is terminated by the Company for Good Cause,
the Company shall pay the Employee his base salary only
through his termination date and the Non-Competition Period
shall continue for the full period specified in subparagraph
8(a) without additional consideration other than the payments
made prior to the Employee's termination date.
d. Except as provided in this paragraph 7 or in subparagraph
4(b), or as otherwise required pursuant to the laws applicable
to the retirement and welfare plans sponsored by the Company
or its subsidiaries, the Employee shall receive no
compensation or additional benefits following his termination
date.
8. Non-Competition and Non-Solicitation.
a. Employee covenants and agrees that, during his employment and
from the date of his termination of employment with the
Company for any reason until the third anniversary of such
date (the "Non-Competition Period"), he will not, directly or
indirectly, own, manage, operate, control, invest in, be
employed by or under contract with, participate in, consult
with or render services to, or be connected in any manner with
the operation, ownership, management or control of any
enterprise which competes with any business engaged in by
Company during his employment and within the states of
Minnesota, North Dakota, Wisconsin, Missouri and Iowa and such
other states in which Company conducts business during his
employment. Employee agrees that he will promptly notify the
Board of his employment or other affiliation with any other
business or entity during the Non-Competition Period.
7
<PAGE>
b. Employee also certifies that he is not currently subject to a
noncompetition agreement with a former employer or any other
person or entity which prohibits him from working with the
Company in the capacity contemplated by this Agreement.
c. The Employee specifically acknowledges that he has obtained
and will, in the course of his employment, continue to obtain
and have access to confidential data pertaining to customers
and prospective customers of the Company, that such data is a
valuable and unique asset of Company's business and that the
success or failure of Company's specialized business is
dependent to a significant degree upon the ability of Company
to establish and maintain close and continuing personal
contacts and working relationships with its customers and
prospective customers and to develop proposals which are
specifically devised, refined and adjusted to meet, satisfy
and coincide with the interests and requirements of its
customers and prospective customers. Therefore, this paragraph
is specifically intended to prohibit, during the
Non-Competition Period, solicitation, either directly or
indirectly, of any or all of Company's customers and clients
at the time of the Employee's termination of employment and
prospective customers and clients of Company with whom
Employee had contact, or was in a position to have contact
with, during the two years preceding his termination of
employment.
d. Employee further agrees that during his employment and during
the Non-Competition Period, Employee will not solicit on his
own behalf or on behalf of any other person, the services of
any person who is an employee or agent of Company or was an
employee or agent of Company during the two years preceding
the Non-Competition Period or solicit any of Company's
employees or agents to terminate their employment or agency
with Company, without advance written approval of the Board of
the Company.
e. Employee further acknowledges that he has obtained and will,
in the course of his employment, continue to obtain and have
8
<PAGE>
access to confidential data relating to Company's special
vendors and procurers and their representatives and that this
information is a valuable and unique asset of Company, also
developed over time. Employee agrees that, during the Non-
Competition Period, he will not solicit on his own behalf or
on behalf of any other person, any such vendor, procurer or
representative for the purposes of either providing products
or services or terminating their relationship or agency with
Company.
f. Employee further agrees that, during the Non-Competition
Period, he will do nothing to interfere with any of Company's
business relationships or its goodwill or reputation.
g. Employee hereby acknowledges and agrees that all non-public
information and data of Company, including without limitation
that related to products, customers, pricing, sales and
financial results (collectively "Trade Secrets") are of
substantial value to Company, provide it with a substantial
competitive advantage in its business, and are and have been
maintained in strictest confidence as trade secrets. Except
as otherwise approved in writing by the Board, the Employee
shall not divulge, furnish, or make accessible to anyone
(other than the Company, its directors and officers or to
others during the course of Employee's employment with the
Company if, in good faith, the Employee determines that such
disclosure is in the best interest of the Company) any Trade
Secrets.
9. Remedies. Employee acknowledges that the restrictions set forth in
paragraph 8 are reasonably necessary to protect a legitimate
business interest of the Company. It is understood that if the
Employee violates his obligations under any of these paragraphs,
Company would suffer irreparable harm for which a recovery of money
damages would be an incomplete and inadequate remedy. It is
therefore agreed that in the case of any violation or threatened
violation of paragraph 8 of this Agreement, Company may apply for
and secure injunctive relief, temporary or provisional, in court,
without bond but upon due notice, pending final resolution on the
merits pursuant to arbitration as set forth in paragraph 16 below.
No waiver of any violation of this
9
<PAGE>
Agreement shall be implied from any failure by Company to take
action under this paragraph.
10. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate
covenants and agreements, one for each and every state of the
United States and political subdivision outside the United States
when the business described is conducted. If, in any judicial
proceeding, a court shall refuse to enforce any of the separate
covenants deemed included in such action, then such unenforceable
covenants shall be deemed eliminated from the provisions of this
Agreement for the purpose of such proceeding to the extent
necessary to permit the remaining covenants to be enforced in such
proceeding. Further, in the event that any provision is held to be
over broad as written, such provision shall be deemed amended to
narrow its application to the extent necessary to make the
provision enforceable according to applicable law and enforced as
amended.
11. Binding Effect. The covenants and agreements of paragraph 8 shall
survive the termination of this Agreement for any reason and shall
not be terminated by the voluntary dissolution of the Company (or
any parent, subsidiary or successor of the Company) or merger
whereby the Company (or such parent, subsidiary or successor of the
Company) is not the surviving or resulting corporation, or any
transfer of substantially all the assets of the Company, unless no
transferee or successor continues to carry on the business
activities of the Company. In the event of any such merger or
consolidation or transfer of assets, the provisions of this
Agreement shall inure to the benefit of and shall be binding upon
the surviving or resulting corporation or the corporation to which
such assets shall be transferred.
12. Entire Agreement. From and after the date of this Agreement, the
terms and provisions of this Agreement constitute the entire
agreement between the parties. This Agreement supersedes any
previous oral or written communications, representations, or
agreements with respect to any subject, including the subject
matter of compensation, incentive, participation and profit sharing
and termination compensation.
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<PAGE>
13. Waiver. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of
this Agreement to be performed by the other party shall be deemed a
waiver of any other provisions or conditions at the same time or at
any prior or subsequent time.
14. Applicable Law. All questions pertaining to the validity,
construction, execution and performance of this Agreement shall be
construed and governed in accordance with the laws of the State of
Iowa. The parties consent to the personal jurisdiction of the State
of Iowa, waive any argument that such a forum is not convenient,
and agree that any litigation or arbitration relating to this
Agreement shall be venued in Polk County, Iowa.
15. Tax Withholding. The Company may withhold from any payment of
benefits under this Agreement (and forward to the appropriate
taxing authority) any taxes required to be withheld under
applicable law.
16. Disputes. Any and all claims or disputes between Employee and
Company (including the validity, scope, and enforceability of this
paragraph), except as otherwise provided under paragraph 9 herein,
shall be submitted for arbitration and resolution to an arbitrator.
No demand for arbitration may be made after the date when the
institution of legal or equitable proceedings based on such claim
or dispute would be barred by the applicable statute of limitation.
The arbitrator shall be selected by mutual agreement of the
parties. Unless otherwise provided for in this Agreement, the
Expedited Labor Arbitration Rules of the American Arbitration
Association shall apply. If the parties are unable to agree upon an
arbitrator, any such dispute shall be solely and finally settled by
arbitration in accordance with the Expedited Labor Arbitration
Rules of the American Arbitration Association ("AAA"), except (1)
the arbitrator shall be selected by the AAA as follows: (a) the AAA
shall submit a list of names of five arbitrators with significant
experience in arbitrating executive employment disputes; (b) each
party shall have the right to exercise unlimited challenges to said
named arbitrators for cause, the AAA to determine, if disputed,
whether any such challenge for cause is justifiable and to replace
any such stricken arbitrator name with another name so that the
parties are presented with five names, none of which
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<PAGE>
can be stricken for cause; (c) each party hereto may exercise up to
two peremptory challenges to names on the submitted list of five
names; and (d) the AAA shall selected the arbitrator from the
remaining names; and (2) the arbitrator shall render an Award in
writing with sufficient detail to determine the arbitrator's
decision on each issue submitted to arbitration. The parties agree
that no punitive damages shall be awarded hereunder. The parties
also agree that all awards, decisions and remedies in favor of a
winning party hereunder with respect to any issue shall be
proportional to the violation caused by the losing party with
respect to that issue. All costs in conducting the arbitration,
including but not limited to the arbitration filing fee, the
arbitrator's fees and expenses, and the reasonable attorney's fees
and expenses of the prevailing party (including the attorney's fees
and costs incurred by the prevailing party in seeking or resisting
temporary or provisional court relief as set out in paragraph 9
above), shall be the responsibility of the losing party. In the
event there is more than one issue in dispute and there is no one
prevailing party with respect to all issues in dispute, costs and
attorneys' fees shall be prorated by the arbitrator according to
the relative dollar value of each issue. The arbitrator's Award
shall be final and binding. In the event either party must resort
to the judicial process to enforce the provisions of this
Agreement, the award of an arbitrator or equitable relief granted
by an arbitrator, the party seeking enforcement shall be entitled
to recover from the other party all costs of litigation including,
but not limited to, reasonable attorney's fees and court costs. The
arbitration proceedings and Award shall be maintained by both
parties as strictly confidential, except as otherwise required by
court order and with respect to the parties' attorneys and tax
advisors, and, with respect to Company, members of its management,
and, with respect to Employee, his family and close confidants.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
effective as of the day and year first above written.
MIDAMERICAN REALTY SERVICES COMPANY
By: /s/ Paul J. Leighton
--------------------------
12
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Title: Secretary
--------------------------
ARNE ROVICK
/s/ Arne Rovick
---------------------------
13
<PAGE>
EXHIBIT A
Short-Term Incentive Compensation Plan for
Senior Executives of MidAmerican Realty Services Company
Participants:
Start Date: January 1, 1998
Term of Plan: 5 years
Award Opportunity: Target award of 30% of base salary, with a
maximum award equal to 45% of base salary
Definition of EBITDA: Operating profit before depreciation;
amortization of transaction costs and goodwill;
interest income or expense; income taxes and
unusual non-recurring gains or expenses (e.g.,
legal settlements, provisions for contingencies,
effect of accounting changes and severance costs).
Payment: Payment of the award will be made upon
achievement of the performance criteria and
after the Compensation Committee of the
Board of Directors of MidAmerican Energy
Holdings Company (the "Committee")
approves the incentive award computations, based
upon the recommendation of the Chief
Executive Officer ("CEO") of MidAmerican Energy
Holdings Company.
Purpose: The intent of the incentive award and its
underlying formula is to focus senior executives
on maximizing "enterprise value".
Award Determination: Award to be recommended to the Committee
will be determined by the CEO and based upon
objective performance criteria to be established
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<PAGE>
at the beginning of each calendar year. Such
criteria will also be recommended by the CEO to
the Committee for approval. For 1998, the
performance criteria in effect will be based
upon "EBITDA" level, which will be established
by the CEO following acquisition of AmerUs Home
Services, Inc. by MidAmerican Energy Holdings
Company. During a calendar year, performance
criteria may be adjusted at the sole discretion
of the CEO, with the concurrence of the
Committee, to reflect modifications to
MidAmerican Realty Services Company's
operations, resulting from items such as
acquisitions or other items such as acquisitions
or other items for which an adjustment is deemed
appropriate. The CEO and the Committee will be
under no obligation to make any such adjustments
to the performance criteria.
15
<PAGE>
EXHIBIT B
LONG TERM INCENTIVE COMPENSATION PLAN
FOR SENIOR EXECUTIVES OF
MIDAMERICAN REALTY SERVICES COMPANY
This Exhibit B (t his "Exhibit Agreement") constitutes a part of the
employment agreement (the "Employment Agreement") dated May 27, 1998, between
MidAmerican Realty Services Company ("MRSC"), a subsidiary of MidAmerican
Energy Holdings Company ("MidAmerican") and Arne Rovick ("Shareholder").
1. Stock Subscription. Shareholder agrees to purchase from MidAmerican
Realty Services Company ("MRSC"), and MRSC hereby agrees to sell to
Shareholder, in accordance with the terms of this Exhibit Agreement, a total of
125 shares of MRSCs common stock (the "Shares").
2. Purchase Price and Manner of Payment.
(a) The total purchase price for the Shares shall be Three Hundred
Eighty-One Thousand Three Hundred Seventy-Six and No/100 Dollars
($381,376.00) (the "Original Purchase Price") which amount will be
payable to MRSC contemporaneously with the execution of the
Employment Agreement by delivery to MRSC of Shareholder's Promissory
Note (the "Promissory Note") in such amount, which Promissory Note
shall be substantially in the form of Attachment A hereto.
(b) MRSC shall establish a bookkeeping account for the benefit of Share
holder (the "Account") for the purpose of establishing a credit
towards payment of the Promissory Note. In [March] of each of the
five years commencing in 1999, a credit shall be made to the Account
if certain performance goals are achieved with respect to the
preceding fiscal year as hereinafter set forth. Additionally, all
dividends declared and paid with respect to the Shares shall be
credited to the Account Balance. Aggregate amounts credited to the
Account shall be referred to herein as the "Account Balance." The
Promissory Note shall become due and payable on the fifth anniversary
thereof (the "Fifth Anniver sary"); provided, however, that in the
event that Shareholder's employment with MRSC is terminated for any
reason, including, without
16
<PAGE>
limitation, death or disability, prior to the Fifth Anniversary
("Termination"), the Promissory Note shall become due and payable on
the Closing Date (as hereinafter defined) following the Termination
and, provided further, that in the event MRSC exercises the Call
Option, as hereinafter defined, prior to the Fifth Anniversary, the
Promissory Note shall become due and payable on the Closing Date
following such exercise (the "Call Option Closing Date"). If
Shareholder is employed by MRSC on the Fifth Anniversary, the Account
Balance shall be offset against amounts owing under the Promissory
Note and any remaining amounts in the Account Balance shall be paid
to Shareholder within [30] days following the Fifth Anniversary. In
the event of Termination for Good Cause, other than due to death or
Disability or without Good Reason, the Account Balance shall be
deemed to be zero, and MRSC shall repurchase the Shares for the
Original Purchase Price plus accrued interest on the Promissory Note
pursuant to Section 9 of this Exhibit Agreement, which shall be
offset against amounts owing under the Promissory Note. In the event
of Termination for Good Reason or not for Good Cause, other than due
to death or Disability, the Account Balance shall be credited with
the target credit, determined in accordance with subparagraph (c)
below, with respect to any further period for which such credit may
be made, and the Account Balance shall be offset against amounts
owing under the Promissory Note. In the event of Termination due to
death or Disability, the Account Balance shall be offset against
amounts owing under the Promissory Note. In the event of exercise of
the Call Option prior to the Fifth Anniversary, the Account Balance
shall be credited with the target credit, determined in accordance
with subparagraph (c) below, with respect to any further period for
which such credit may be made, and the Account Balance shall be
offset against amounts owing under the Promissory Note on the Call
Option Closing Date and, if the Call Option is exercised with respect
to all of the Shares, any remaining amounts in the Account Balance
shall be paid to Shareholder within (30) days following the Call
Option Closing Date; provided that if the Call Option is exercised
with respect to a portion of the Shares, any amounts remaining in the
Account Balance shall not be paid until the earlier of the Fifth
Anniversary or the exercise of the Call Option with respect to all of
the Shares.
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<PAGE>
(c) For purposes of determining credits to the Account, the performance
goals shall be based on achievement of (a) utility service
integration goals (the "Utility Goals") and (b) Realty Co. EBITDA (as
hereinafter defined) goals (the "Realty Goals"), each as approved
annually by the Compensation Committee of the Board of Directors of
MidAmerican (the "Committee"), and upon the recommendation of the
Chief Executive Officer ("CEO") of MidAmerican. The target credit
for each fiscal year shall be 20% of the amount that shall be due on
the Promissory Note on the Fifth Anniversary. The maximum credit for
each fiscal year shall be 40%. The actual credit made with respect to
each fiscal year from 1998 through 2002 shall be based on achievement
of the Utility Goals and Realty Goals, with the relative weight of
importance for each such goal with respect to each of the fiscal
years as set forth below:
<TABLE>
<CAPTION>
Fiscal Year
-------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Utility Goals 30% 35% 40% 45% 50%
Realty Goals 70% 65% 60% 55% 50%
</TABLE>
"EBITDA" means earnings of MRSC for a fiscal year before interest, taxes,
depreciation and amortization; provided, however, that the CEO of MidAmerican
may, with the concurrence of the Committee, make such adjustments as he, in his
sole discretion, deems appropriate in connection with intercompany charges and
revenues and the effect of business acquisitions and combinations by MRSC and
the impact of other extraordinary items on financial results.
3. Share Register. Upon receipt from Shareholder of the Promissory Note,
MRSC shall record Shareholder's ownership in the shares in its share register,
which shall be the sole evidence of such ownership. So long as Shareholder is
not in default in the payment of principal or interest on the Promissory Note,
the Shares shall be entitled to full voting rights and to share in all dividends
payable on the Shares.
4. Stock Pledge. To secure the full performance of Shareholder's obligation
to MRSC under the Promissory Note, Shareholder hereby grants to MRSC a security
interest in the Shares.
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<PAGE>
5. Restriction on Transfer of Shares. No Shares shall be sold,
transferred, assigned, pledged, hypothecated or otherwise disposed of or in any
manner transferred upon the books of MRSC, nor shall any purchaser or other
transferee thereof have any right to demand or require the transfer of any of
the Shares attempted to be sold or transferred or otherwise disposed of to him
or her or any of the rights of a shareholder of MRSC, without the prior written
consent of MRSC as expressed in a resolution of the MRSC Board of Directors. Any
such purported disposition or encumbrance without compliance with the provisions
of this Exhibit Agreement shall be null and void and shall not be effected on
the books of MRSC.
6. Investment Representations. Shareholder hereby represents and agrees
as follows:
(a) The Shares are being acquired for investment purposes and not with
the view toward the distribution or sale thereof in a public offering
within the meaning of the Securities Act of 1933 (the "Securities
Act") or any rule of regulation under the Securities Act.
(b) Shareholder has had an adequate opportunity to obtain from
representatives of MRSC the information necessary to permit
Shareholder to evaluate the merits and risks of Shareholder's
investment in MRSC.
(c) Shareholder has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the
purchase of the Shares and to make an informed investment decision
with respect to that purchase, and can afford a complete loss of the
value of the Shares and is able to bear the economic risk of holding
the Shares for an indefinite period.
(d) Shareholder acknowledges that:
(i) The Shares have not been registered under either the Securities
Act or applicable state securities law, and MRSC will be relying
upon the foregoing investment representations in issuing the
Shares to Shareholder;
(ii) MRSC has no obligation or current intention to register the
Shares under the Securities Act;
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<PAGE>
(iii) The Shares cannot be sold, transferred or otherwise disposed of
unless they are subsequently registered under the Securities
Act or an exemption from registration is then available; and
(iv) The transferability of the Shares will be subject to
restrictions imposed by all applicable federal and state
securities laws, as well as restrictions contained in this
Exhibit Agreement and in the event MRSC chooses, in its sole
discretion, to issue certificates with respect to the Shares,
the certificates evidencing such Shares will be imprinted with
a legend substantially in the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be sold, transferred or otherwise disposed of in the
absence of an effective registration statement under that Act
or an opinion of counsel satisfactory to the corporation to the
effect that registration is not required. The shares
represented by this certificate are further subject to certain
restrictions contained in an agreement relating to such shares
between the shareholder and the Company dated."
7. Put Option.
(a) On and after the fifth anniversary of the Employment Agreement,
Shareholder shall have the option (the "Put Option") at any time to
require MRSC to purchase all of the Shares, subject to the terms and
conditions of this Exhibit Agreement. The purchase price, closing
date and similar matters in connection with exercise of the Put
Option are as set forth in Section 9 of this Exhibit Agreement.
(b) In the event of Termination, the Shareholder shall be deemed to have
exercised the Put Option on the date of Termination (the "Mandatory
Put Exercise"). The purchase price, closing date and similar matters
in connection with the Mandatory Put Exercise are as set forth in
Section 9 of this Exhibit Agreement.
20
<PAGE>
8. Call Option. On and after the second anniversary of the Employment
Agreement, MRSC and its successors and assigns shall have the option (the "Call
Option") at any time and from time to time to purchase any or all of the Shares,
subject to the terms and conditions of this Exhibit Agreement. The purchase
price, closing date and similar matters in connection with exercise of the Call
Option are as set forth in Section 9 of this Exhibit Agreement. Prior to the
fifth anniversary of the Employment Agreement, MRSC shall be able to exercise
the Call Option only in the event of corporate need, as defined and addressed by
the MidAmerican Energy Holdings Company Board of Directors.
9. Put Option, Mandatory Put Exercise and Call Option Terms. Shareholder
shall exercise the Put Option, if at all, by delivering a written notice of
exercise to MRSC; provided, however, that such exercise shall be deemed to occur
upon the date of Termination in the case of the Mandatory Put Exercise. MRSC or
its successor or assign shall exercise the Call Option, if at all, by delivering
a written notice of exercise to Shareholder or its permitted transferee. Any
such exercise of the Put Option or the Call Option is referred to herein as the
"Exercise."
The purchase price for the Shares that are repurchased pursuant to
the Exercise (the "Purchase Price") shall be the fair market value of the Shares
as mutually agreed upon by Shareholder and MRSC, but in no event greater than
the product of (x) the decimal representing the percentage ownership of MRSC
voting capital stock held by Shareholder (based on percentage of votes) at the
time of Exercise multiplied by (y) the Corporate Value (as hereinafter defined)
at the time of Exercise. "Corporate Value" shall mean the market value of the
Company less outstanding liabilities; provided that in no event shall the value
exceed the product of (x) 7 multiplied by (y) the average EBITDA for the two
twelve-month periods immediately preceding the date of the calculation. In the
event the Call Option is exercised in connection with the sale of the Company,
the Corporate Value shall be the sale price for all of the equity of the
Company. In the event that Shareholder and MRSC do not agree on the calculation
of the Purchase Price or the Corporate Value, any dispute shall be resolved
pursuant to arbitration in accordance with the rules of the American Arbitration
Association then in effect. Such arbitration result shall be binding on the
parties. The Purchase Price for the Shares that are repurchased pursuant to the
Mandatory Put Exercise shall be the Purchase Price determined above, except when
the Mandatory Put Exercise results from a Termination for Good Cause, other than
death or Disability or not for Good Reason, the purchase price shall be the
Original Purchase Price plus accrued interest on the Promissory Note.
21
<PAGE>
MRSC shall make payment of the purchase price for any Shares
reacquired pursuant to the Exercise or the Mandatory Put Exercise by offsetting
and reducing the outstanding principal balance of, and any accrued interest on,
the Promissory Note delivered to MRSC by Shareholder pursuant to Section 2 of
this Exhibit Agreement. The closing of the Exercise or the Mandatory Put
Exercise shall be not less than 30 and not more than 45 days following notice of
such exercise on a date mutually agreeable to MRSC and Shareholder (the "Closing
Date"); provided, however, that in the event of a dispute regarding the Purchase
Price or the inability to determine Corporate Value, the Closing Date shall be a
date not less than 30 and not more than 45 days following resolution of such
dispute. The balance of the purchase price owing to Shareholder, if any, shall
be paid on the Closing Date by delivering to Shareholder MRSC's check in the
amount of the balance of such purchase price.
On the Closing Date, the Share ownership relating to the shares
repurchased recorded in MRSC's share register shall be canceled by MRSC.
10. No Restriction on MRSC's Accounting; Adjustments. This Exhibit
Agreement shall not in any way interfere with the right of MRSC to select among,
adopt or change accounting practices or procedures, whether or not such
accounting practices or procedures have not been previously employed by MRSC, or
to consummate any business investments, acquisitions or divestitures or to
adopt any other policies or plans, at any time or from time to time in its sole
and absolute discretion. In order to carry out the intent and purpose of this
Exhibit Agreement, the CEO of MidAmerian may, in his sole and absolute
discretion, make such adjustments to computations made pursuant to this Exhibit
Agreement in connection with changes in accounting practices or procedures as he
deems necessary or appropriate to prevent dilution or enlargements of the
benefits provided pursuant to this Exhibit Agreement. Such adjustments may be in
connection with changes in accounting practices and procedures, fundamental
transactions and other matters of a similar nature.
11. Unsecured Interest. It is intended that MRSC is only under a
contractual obligation with respect to the Account. The Account Balance shall
not be financed through a trust fund, insurance contracts, or otherwise, and all
such credits shall be satisfied out of the general funds of MRSC, but only if
and to the extent such funds are legally available therefore. Shareholder shall
not have any interest whatso ever in the specific assets of MRSC pursuant to
this Exhibit Agreement and all rights of Shareholder shall be no greater than
the right of any unsecured general creditor of MRSC.
22
<PAGE>
12. Shareholder's Rights in Future Financing. For a period commencing on
the date of the Employment Agreement and ending on the fifth anniversary of the
Employment Agreement, in the event of any proposed sale of securities of MRSC
(including, without limitation, the sale of Common Stock, preferred stock,
convertible securities and debt instruments, other than commercial loans or
extensions of credit made by a bank, insurance company or other third-party
financial institution, or the issuance of securities in connection with a
capital contribution by an affiliate of MRSC), other than pursuant to grants of
employee stock options, Shareholder shall be provided at least 10 days' advance
notice and have the right to invest in such sale of securities, on the same
terms as offered to any third party (which shall include affiliates of MRSC), in
a percentage amount equal to the percentage ownership of voting capital stock
held by Shareholder immediately prior to such sale; provided, however, that such
right does not include any sale of the Company's equity securities in connection
with a public offering pursuant to a registration statement filed with the
Securities and Exchange Commission. Nothing in this Section shall limit the
right of MRSC, as determined by its Board of Directors, to issue shares of
capital stock of MRSC and determine all of the terms of such issuance in its
discretion.
23
<PAGE>
PROMISSORY NOTE
$381,376.00 May 27, 1998
- -----------
FOR VALUE RECEIVED, the undersigned, Arne Rovick (the "Maker"), whose
address is _____________________________________________________, promises to
pay to the order of MidAmerican Realty Services Company, an Iowa corporation
(the "Lender"), at its office at Des Moines, Iowa, in lawful money of the United
States, or at such other address as the holder hereof may from time to time
designate in writing, the principal amount of Three Hundred Eighty-One Thousand
Three Hundred Seventy-Six and No/100 Dollars ($381,376.00). The amount and date
of the loan evidenced hereunder shall be entered by the Lender into its records,
which records shall be conclusive evidence of the subject matter thereof absent
manifest error.
This Note matures on May 27, 2003 (the "Maturity Date"). Principal and
interest due on the Note on the Maturity Date will be offset by the amount, if
any, in the Account Balance [as defined in the Exhibit Agreement dated May 27,
1998, between Maker and Lender (the "Agreement")] in accordance with terms of
the Agreement. Notwithstanding the foregoing, the Maturity Date shall be deemed
to be the "Closing Date" in the event of exercise of the"Put Option" or the
"Call Option" or in the event of a "Mandatory Put Exercise" as each term is
defined in the Agreement. If the Call Option is exercised with respect to a
portion of the Shares (as defined in the Agreement), the Principal and interest
due on the Note on such Maturity Date shall be equal to the pro rata amount due
on the Promissory Note with respect to the Shares purchased pursuant to the
exercise of such option.
Interest on the unpaid principal balance of this Note shall accrue from the
date hereof at a per annum rate equal to MRSC's average annual borrowing rate.
The Maker also shall pay interest on any overdue installment of principal from
the due date thereof until paid at an interest rate per annum equal at all times
to six percent (6.0%) per annum in excess of the interest rate set forth above,
which interest shall be payable upon demand. Interest shall accrue on the basis
of actual days elapsed in a year consisting of 360 days. No provision of this
Note shall require the payment or permit the collection of interest in excess of
the rate permitted by applicable law.
24
<PAGE>
Both principal and interest are payable in lawful money of the United
States of America in immediately available funds, subject to the provisions set
forth above in connection with the Account Balance.
All payments under this Note shall be applied initially against accrued
interest and thereafter in reduction of principal.
The Maker warrants and represents to the Lender that this Note is the
Maker's legal, valid and binding obligation, enforceable in accordance with its
terms.
If this Note or any payment required to be made thereunder is not paid
on the due date, the holder hereof shall have, in addition to any other rights
it may have under applicable laws, the right to set off the indebtedness
evidenced by this Note against any indebtedness of such holder to the Maker,
including, without limitation, any salary or other compensation owing by the
Lender to the Maker.
No failure or delay on the part of the holder of this Note in exercising
any power or right under this Note shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power or right preclude any other or
further exercise thereof of the exercise of any other power or right. No notice
to or demand on the Maker in any case shall entitle the Maker to any notice or
demand in similar or other circumstances.
The Maker agrees to reimburse the holder of this Note, upon demand, for all
reasonable out-of-pocket expenses, including reasonable attorneys' fees, in
connection with such holder's enforcement of the obligations of the Maker
hereunder.
Presentment and demand for payment, notice of dishonor, protest and notice
of protest are hereby waived.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Iowa (without giving effect to the conflicts of
laws principles thereof). The Maker hereby submits himself to the jurisdiction
of the courts of the State of Iowa and the federal courts of the United States,
located in such state in respect of all actions arising out of or in connection
with the interpretation or enforcement of this Note, waives any argument that
venue in such forums is not convenient and agrees that any actions initiated by
the Maker shall be venued in such forums.
25
<PAGE>
--------------------------
/s/ Arne Rovick
ARNE ROVICK (Maker)
26
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into on
this 18th day of August, 1998, by and between Home Real Estate Company of Omaha
(the "Company"), a subsidiary of MidAmerican Realty Services Company ("MRSC"),
which is a subsidiary of MidAmerican Energy Holdings Company ("MidAmerican") and
Joseph J. Valenti (the "Employee").
WHEREAS, the Company believes that the Employee's contribution to the
growth and success of the Company as a member of its management team will be
substantial and desires to employ the Employee in that role; and
WHEREAS, the Employee is desirous of serving the Company in said capacity
on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Employment and Term. The Company hereby agrees to employ the Employee
as a member of its management team and the Employee hereby agrees to
serve the Company in such capacity, on the terms and conditions set
forth herein for the period commencing on the date of this Agreement
and continuing for a period of four (4) years from that date, unless
earlier terminated by the Employee or the Company in accordance with
paragraph 6 herein. Upon the expiration of the initial term of this
Agreement, it shall be automatically extended for one-year periods,
unless on or before the date which is one year prior to the
expiration of the initial term of the Agreement or any subsequent
one-year extension period, either party has delivered to the other
written notice of intent to terminate this Agreement upon its next
expiration date. The purpose of the automatic extension is to assure
that the parties have at least one year prior notice of termination
of the Agreement. Irrespective of whether the Agreement is in its
initial term or a subsequent one-year extension period, it is at all
times subject to the termination provisions of paragraph 6.
2. Waiver of Rights. The Employee specifically acknowledges and agrees
that upon the effective date of this Agreement, any prior
<PAGE>
employment agreement or agreements with Home Realty Company of Omaha,
AmerUs Home Services, Inc., and their affiliates, successors and
assigns are canceled and no longer in effect. Further, the Employee
waives any and all rights, claims or other causes of action he may
have against Company, Home Realty Company of Omaha and AmerUs Home
Services, Inc., their affiliates, parents and its and their
predecessors and successors on account of any contract, liability or
other thing done or omitted, from all time in the past until the
effective date of this Agreement.
3. Duties. The Employee is engaged by the Company to be responsible for
oversight of Company's real estate operations in Omaha, Nebraska and
if acquired by Company or MRSC, the operations of other realty
companies in Omaha, and for such other duties related to the
Company's management as may from time to time be assigned by its
Board of Directors (the "Board") and shall report to the Board.
Duties assigned to Employee shall not be materially inconsistent
with the duties described in Exhibit "A." The Employee will, during
his term of employment hereunder:
a. Faithfully and diligently do and perform all such acts and
duties and furnish such services for the Company as the Board or
its designated representative shall direct from time to time;
b. Except as provided hereinafter, devote his full time, energy and
skill to the business of the Company and to the promotion of its
best interests, except for vacations, absences made necessary
because of illness, and service on other corporate, civic or
charitable boards or committees not significantly interfering
with his duties hereunder. Also, the parties agree that the
Employee may continue to spend time on other real estate and
personal ventures as described in Exhibit "B"; and any new
ventures of similar nature may be undertaken to the extent that
the new ventures when combined with the ventures listed on
Exhibit "B," do not interfere or conflict with Employee's duties
under this Agreement. Future listing policies with respect to
these personal ventures will be consistent with historical
listing policies under which Company continues to be the
predominant listing broker.
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4. Compensation. During the initial term of this Agreement, the Company
shall pay the Employee base, supplemental, and, when earned and
payable in accordance with the provisions of paragraph 4.(c),
incentive compensation for the performance of his duties under this
Agreement, as follows:
a. The Company shall pay Employee a base salary at the annual rate
of $175,000, and an annual supplement to base annual salary of
$75,000, such that employee is paid a minimum gross compensation
of $250,000 per year. Total annual gross minimum compensation
shall be payable at the Company's regular payroll intervals and
in accordance to Company's regular payroll procedures.
b. Short-term incentive compensation to be determined as provided
in Exhibit "C" attached hereto.
With respect to the calculation of short-term incentives under
this subparagraph, if it becomes apparent that the stated
income goals cannot be achieved for unforeseen reasons and in
spite of diligent management effort, the Employee may
nonetheless be awarded short-term incentive payments, if
approved by the Compensation Committee of the Board of Directors
of MidAmerican ("Committee"), as recommended by the Chief
Executive Officer of MidAmerican Energy Holdings Company, to
reward exemplary performance.
In the event the Company terminates the Employee's employment
for any reason other than Good Cause, as defined in subparagraph
6(c) other than due to Employee's death or disability, or the
Employee terminates his employment for Good Reason, as defined
in subparagraph 6(d), prior to the end of any calendar year, he
shall be entitled to a short-term incentive payment if the
income goals described in Exhibit B have been achieved as of the
last day of the calendar year in which his termination of
employment occurs, provided, however, that the amount of such
payment shall be calculated by multiplying the incentive amount
that would have been payable to the
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Employee pursuant to Exhibit B, had his employment not
terminated during the calendar year, by a fraction, the
numerator of which is the number of full weeks of employment
completed by the Employee during such calendar year and the
denominator of which is 52. If the Employee's employment is
terminated for Good Cause, as defined in subparagraph 6(c),
other than due to death or disability, or the Employee
terminates his employment for other than Good Reason, as
defined in subparagraph 6(d), prior to the end of any calendar
year, no short-term incentive shall be payable for such year.
c. The parties agree that Employee is to receive minimum gross
compensation of $250,000 per year. Therefore, if the total of
Employee's annual base salary ($175,000) and annual short-term
incentive payments do not exceed $250,000 for any year, Company
will not pay to Employee any incentive compensation for that
year. If the total of Employee's annual base salary and
incentive compensation for any year exceeds $250,000, then the
Company shall pay Employee the excess as incentive compensation.
d. If the Employee's employment continues subsequent to the fourth
anniversary of the date of this Agreement, the Employee and the
Chief Executive Officer of MidAmerican Energy Holdings Company
shall negotiate the amount of the Employee's future base salary
and the terms of any further short-term incentive arrangements
at that time, with all such compensation to be subject to
approval of the Committee.
5. Additional Benefits.
a. The Employee shall be eligible to participate in the ERISA
qualified retirement and welfare benefit plans of the Company in
accordance with the terms and conditions of such plans. The
Employee shall also be entitled to paid vacations and holidays
consistent with the Company's customary practice for executives
as provided in Exhibit "D."
4
<PAGE>
b. The Company shall promptly pay (or reimburse the Employee for)
all reasonable expenses incurred by him in the performance of
his duties hereunder in accordance with policies from time to
time adopted by the Board, including business travel and
entertainment expenses. The Employee shall furnish to the
Company such receipts and records as the Company may require to
verify the foregoing expenses.
6. Termination.
a. The Employee may resign his employment with the Company
effective upon two months' advance written notice to the Board.
If the Employee resigns under this paragraph, the Board (by the
vote of a majority of its members other than the resigning
Employee and other members who have given notice of resignation
as an employee) retains the right to terminate the Employee's
employment, effective upon written notice to the Employee, at
any time during the notice period for Good Cause, as defined in
subparagraph 6(c).
b. The employment of the Employee with the Company may be
terminated, for other than Good Cause, as defined in
subparagraph 6(c), by the Board directing such termination (by
the vote of a majority of its members other than the Employee
and other members who have given notice of resignation as an
employee) and upon two months' advance written notice to
Employee, provided, however, that Employee may be terminated,
effective upon written notice to Employee, for Good Cause
during the notice period. The Board may require Employee to
cease reporting to work during the notice period, even without
Good Cause.
c. The employment of the Employee may be terminated for Good Cause
by the Board directing such termination (by the vote of a
majority of its members other than the Employee and other
members who have given notice of resignation as an employee) and
effective upon written notice to the Employee. Good Cause shall
mean (1) the Employee's conviction of any gross misdemeanor
involving dishonesty, fraud or breach of
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<PAGE>
trust or a felony; (2) the Employee's engagement in gross
misconduct that materially injures the Company, monetarily or
otherwise; (3) the Employee's gross neglect of his duties under
this Agreement;(4) the Employee's death or Disability; (5)
Employee's failure to physically appear for work; or (6) the
Employee's violation of paragraph 8 of this Agreement. The
Employee shall be considered to have come under a Disability if
he, by reason of physical or mental disability, becomes unable
to perform the services required of him hereunder for three (3)
consecutive months during any 12-month period. With respect to
"Good Cause" as described in (5) and (6) of this paragraph 6(c),
termination shall not occur unless Employee, within thirty days
of notice to desist, fails to do so.
A violation of paragraph 3(a) and 3(b) shall not constitute good
cause hereunder unless Employee, within thirty (30) days of
notice to desist, fails to do so. No notice shall be required if
material, irreparable damage has already resulted from the
Employee's conduct.
d. The Employee may terminate his employment with the Company at
any time for Good Reason, effective immediately upon written
notice to the Board. Good Reason shall exist if the Employee
terminates his employment because (1) the Company has materially
breached any of the terms of this Agreement and has failed to
cure within thirty (30) days following receipt of Employee's
written notice of breach; (2) the Employee is assigned duties
which are materially inconsistent with his position, duties,
responsibilities and status as a member of the Company's
management team; (3) the Company's principal office or the
Employee's own office location as assigned to him by the Company
is relocated to a location more than 50 miles from Omaha,
Nebraska; or (4) the majority of the common stock or
substantially all of the assets of the Company or MRSC are sold
or transferred, and the Employee is unable in good faith to
reach agreement with the purchaser on an employment arrangement
which, with respect to duties, responsibilities and
compensation, is substantially similar to this Agreement within
thirty (30) days of the sale. It
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<PAGE>
is specifically understood and acknowledged by the parties
hereto that such sale or transfer shall not constitute "Good
Reason," if such sale or transfer is the result of taking
Company or MRSC public or a merger or acquisition involving
MidAmerican, provided that following the merger or acquisition,
MidAmerican or its successors continues, directly or indirectly,
to own Company.
7. Severance.
a. If the Employee's employment is terminated by the Company for
other than Good Cause or the Employee terminates his employment
with the Company for Good Reason, the Company shall continue to
pay the Employee his base salary as in effect as of his
termination date at the Company's normal payroll intervals
during the remaining term of the Agreement and the
Non-Competition Period, as defined in subparagraph 8(a). In
addition, during the Non-Competition Period, the Company shall
also pay to the Employee annually a short-term incentive payment
as described in Exhibit "C", equal to the average annual
short-term incentive payments made to the Employee under this
Agreement prior to the Employee's termination. During this
period, if the Employee is eligible for and elects continuation
coverage under one or more group health plans sponsored by the
Company or its subsidiaries, the Company shall pay the same
portion of the premium cost of such coverage, if any, as is paid
by the Company for members of its management team who are
actively employed. Upon the occurrence of an event which causes
the commencement of continuation pay and the non-compensation
period, Company will escrow 120% of the remaining balance owed
to the Employee in a separate account to be used solely for the
purpose of paying the benefits due under this paragraph 7(a).
b. If the Employee terminates his employment with the Company for
other than Good Reason, the Company shall pay the Employee his
base salary only through his termination date and the
Non-Competition Period shall continue for the full period
specified in sub-paragraph 8(a) without additional
7
<PAGE>
consideration other than payments made prior to the Employee's
termination date.
c. If the Employee is terminated by the Company for Good Cause, the
Company shall pay the Employee his base salary only through his
termination date and the Non-Competition Period shall continue
for the full period specified in subparagraph 8(a) without
additional consideration other than the payments made prior to
the Employee's termination date.
d. Except as provided in this paragraph 7 or in subparagraph 4(b),
or as otherwise required pursuant to the laws applicable to the
retirement and welfare plans sponsored by the Company or its
subsidiaries, the Employee shall receive no compensation or
additional benefits following his termination date.
8. Non-Competition and Non-Solicitation.
a. So long as Company continues in full performance of its
obligations hereunder, Employee covenants and agrees that,
during his employment and, at the election of the Company, from
the date of his termination of employment with the Company for
any reason for a period to be determined by Company not to
extend beyond the date which is the third anniversary of such
date (the "Non-Competition Period"), he will not, directly or
indirectly, own, manage, operate, control, invest in, be
employed by or under contract with, participate in, consult with
or render services to, or be connected in any manner with the
operation, ownership, management or control of any enterprise
which competes with any business engaged in by Company during
his employment and within the states of Nebraska and Iowa.
Employee agrees that he will promptly notify the Board of his
employment or other affiliation with any other business or
entity during the Non-Competition Period.
b. Employee also certifies that he is not currently subject to a
noncompetition agreement with a former employer or any
8
<PAGE>
other person or entity which prohibits him from working with the
Company in the capacity contemplated by this Agreement.
c. The Employee specifically acknowledges that he has obtained and
will, in the course of his employment, continue to obtain and
have access to confidential data pertaining to customers and
prospective customers of the Company, that such data is a
valuable and unique asset of Company's business and that the
success or failure of Company's specialized business is
dependent to a significant degree upon the ability of Company to
establish and maintain close and continuing personal contacts
and working relationships with its customers and prospective
customers and to develop proposals which are specifically
devised, refined and adjusted to meet, satisfy and coincide with
the interests and requirements of its customers and prospective
customers. Therefore, this paragraph is specifically intended to
prohibit, during the Non-Competition Period, solicitation,
either directly or indirectly, of any or all of Company's
customers and clients at the time of the Employee's termination
of employment and prospective customers and clients of Company
with whom Employee had contact, or was in a position to have
contact with, during the two years preceding his termination of
employment.
d. Employee further agrees that during his employment and during
the Non-Competition Period, Employee will not solicit on his own
behalf or on behalf of any other person, the services of any
person who is an employee or agent of Company or was an employee
or agent of Company during the two years preceding the
Non-Competition Period or solicit any of Company's employees or
agents to terminate their employment or agency with Company,
without advance, written approval of the Board of the Company.
e. Employee further acknowledges that he has obtained and will, in
the course of his employment, continue to obtain and have access
to confidential data relating to Company's special vendors and
procurers and their representatives and that this information is
a valuable and unique asset of Company, also
9
<PAGE>
developed over time. Employee agrees that, during the Non-
Competition Period, he will not solicit on his own behalf or on
behalf of any other person, any such vendor, procurer or
representative for the purposes of either providing products or
services or terminating their relationship or agency with
Company.
f. Employee further agrees that, during the Non-Competition Period,
he will do nothing to interfere with any of Company's business
relationships or its goodwill or reputation.
g. Employee hereby acknowledges and agrees that all non-public
information and data of Company, including without limitation
that related to products, customers, pricing, sales and
financial results (collectively "Trade Secrets") are of
substantial value to Company, provide it with a substantial
competitive advantage in its business, and are and have been
maintained in strictest confidence as trade secrets. Except as
otherwise approved in writing by the Board, the Employee shall
not divulge, furnish, or make accessible to anyone (other than
the Company, its directors and officers or to others during the
course of Employee's employment with the Company if, in good
faith, the Employee determines that such disclosure is in the
best interest of the Company) any Trade Secrets.
9. Remedies. Employee acknowledges that the restrictions set forth in
paragraph 8 are reasonably necessary to protect a legitimate business
interest of the Company. It is understood that if the Employee
violates his obligations under any of these paragraphs, Company would
suffer irreparable harm for which a recovery of money damages would
be an incomplete and inadequate remedy. It is therefore agreed that
in the case of any violation or threatened violation of paragraph 8
of this Agreement, Company may apply for and secure injunctive
relief, temporary or provisional, in court, without bond but upon due
notice, pending final resolution on the merits pursuant to
arbitration as set forth in paragraph 16 below. No waiver of any
violation of this Agreement shall be implied from any failure by
Company to take action under this paragraph.
10
<PAGE>
10. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in
such action, then such unenforceable covenants shall be deemed
eliminated from the provisions of this Agreement for the purpose of
such proceeding to the extent necessary to permit the remaining
covenants to be enforced in such proceeding. Further, in the event
that any provision is held to be over broad as written, such
provision shall be deemed amended to narrow its application to the
extent necessary to make the provision enforceable according to
applicable law and enforced as amended.
11. Binding Effect. The covenants and agreements of paragraph 8 shall
survive the termination of this Agreement for any reason and shall
not be terminated by the voluntary dissolution of the Company (or any
parent, subsidiary or successor of the Company) or merger whereby the
Company (or such parent, subsidiary or successor of the Company) is
not the surviving or resulting corporation, or any transfer of
substantially all the assets of the Company, unless no transferee or
successor continues to carry on the business activities of the
Company. In the event of any such merger or consolidation or transfer
of assets, the provisions of this Agreement shall inure to the
benefit of and shall be binding upon the surviving or resulting
corporation or the corporation to which such assets shall be
transferred.
12. Entire Agreement. From and after the date of this Agreement, the
terms and provisions of this Agreement constitute the entire
agreement between the parties. This Agreement supersedes any previous
oral or written communications, representations, or agreements with
respect to any subject, including the subject matter of compensation,
incentive, participation and profit sharing and termination
compensation.
13. Waiver. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of
this
11
<PAGE>
Agreement to be performed by the other party shall be deemed a waiver
of any other provisions or conditions at the same time or at any
prior or subsequent time.
14. Applicable Law. All questions pertaining to the validity,
construction, execution and performance of this Agreement shall be
construed and governed in accordance with the laws of the State of
Iowa. The parties consent to the personal jurisdiction of the State
of Iowa, waive any argument that such a forum is not convenient, and
agree that any litigation or arbitration relating to this Agreement
shall be venued in Polk County, Iowa.
15. Tax Withholding. The Company may withhold from any payment of
benefits under this Agreement (and forward to the appropriate taxing
authority) any taxes required to be withheld under applicable law.
16. Disputes. Any and all claims or disputes between Employee and Company
(including the validity, scope, and enforceability of this
paragraph), except as otherwise provided under paragraph 9 herein,
shall be submitted for arbitration and resolution to an arbitrator.
No demand for arbitration may be made after the date when the
institution of legal or equitable proceedings based on such claim or
dispute would be barred by the applicable statute of limitation. The
arbitrator shall be selected by mutual agreement of the parties.
Unless otherwise provided for in this Agreement, the Expedited Labor
Arbitration Rules of the American Arbitration Association shall
apply. If the parties are unable to agree upon an arbitrator, any
such dispute shall be solely and finally settled by arbitration in
accordance with the Expedited labor Arbitration Rules of the American
Arbitration Association ("AAA"), except (1) the arbitrator shall be
selected by the AAA as follows: (a) the AAA shall submit a list of
names of five arbitrators with significant experience in arbitrating
executive employment disputes; (b) each party shall have the right to
exercise unlimited challenges to said named arbitrators for cause,
the AAA to determine, if disputed, whether any such challenge for
cause is justifiable and to replace any such stricken arbitrator name
with another name so that the parties are presented with five names,
none of which can be stricken for cause; (c) each party hereto may
exercise up to two peremptory challenges to names on the submitted
list of five
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<PAGE>
names; and (d) the AAA shall select the arbitrator from the remaining
names; and (2) the arbitrator shall render an Award in writing with
sufficient detail to determine the arbitrator's decision on each
issue submitted to arbitration. The parties agree that no punitive
damages shall be awarded hereunder. The parties also agree that all
awards, decisions and remedies in favor of a winning party hereunder
with respect to any issue shall be proportional to the violation
caused by the losing party with respect to that issue. All costs in
conducting the arbitration, including but not limited to the
arbitration filing fee, the arbitrator's fees and expenses, and the
reasonable attorney's fees and expenses of the prevailing party
(including the attorney's fees and costs incurred by the prevailing
party in seeking or resisting temporary or provisional court relief
as set out in paragraph 9 above), shall be the responsibility of the
losing party. In the event there is more than one issue in dispute
and there is no one prevailing party with respect to all issues in
dispute, costs and attorneys' fees shall be prorated by the
arbitrator according to the relative dollar value of each issue. The
arbitrator's Award shall be final and binding. In the event either
party must resort to the judicial process to enforce the provisions
of this Agreement, the award of an arbitrator or equitable relief
granted by an arbitrator, the party seeking enforcement shall be
entitled to recover from the other party all costs of litigation
including, but not limited to, reasonable attorney's fees and court
costs. The arbitration proceedings and Award shall be maintained by
both parties as strictly confidential, except as otherwise required
by court order and with respect to the parties' attorneys and tax
advisors, and, with respect to Company, members of its management,
and, with respect to Employee, his family and close confidants.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
effective as of the day and year first above written.
HOME REAL ESTATE COMPANY OF OMAHA
By:
-----------------------------
Title:
-----------------------------
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JOSEPH J. VALENTI
/s/ Joseph J. Valenti
-------------------------------------
THE UNDERSIGNED HEREBY guarantees Company's performance under this
Agreement.
MIDAMERICAN REALTY SERVICES COMPANY
By:
-----------------------------
Title:
-----------------------------
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<PAGE>
EXHIBIT A
JOE VALENTI
JOB DESCRIPTION & RESPONSIBILITIES
President and Designated Broker for HOME Real Estate Company of Omaha,
Nebraska. Responsible for the operation of the brokerage company. Involves the
following:
1. Five residential office managers.
2. 270 sales associates in six offices.
3. HFS Mobility Services relationship.
4. PHM Mortgage relationship and four financial service representatives.
5. Recruiting program - Ward Peters
6. Administration and Accounting departments - involves three managers and
35-40 employees (including sales office employees).
7. Budget and Salary establishment and review.
8. Advertising and Marketing Coordinator with the advertising agency
involving all media and marketing efforts. Lavonne Tripp, Marketing
Manager
9. Coordination of legal matters involving HOME Real Estate Company with
in-house attorney, managers and other attorneys. Doug Ruge, In-house
Attorney
10. Education department - involves the training of new agents and the
development of on going education programs for our existing agents.
Lavonne Tripp, Manager
11. Coordination and integration of our land development projects with the
brokerage to include both agent and builder relations.
12. Any other responsibilities, which involve the operation of a
residential brokerage company.
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EXHIBIT C
Short-Term Incentive Compensation Plan for Joseph J. Valenti
Start Date: August 18, 1998
Term of Plan: 4 years
Award Opportunity: Target award of 70% of base salary, with a
maximum award equal to 100% of base salary
Definition of EBITDA: Operating profit before depreciation;
amortization of transaction costs and goodwill;
interest income or expense; income taxes and
unusual non-recurring gains or expenses (e.g.,
legal settlements, provisions for contingencies,
effect of accounting changes and severance
costs). The 1998 bonus will be based on the
time period from Closing through December
31, 1998.
Payment: Payment of the award will be made upon
achievement of the performance criteria and
after the Compensation Committee of the
Board of Directors of MidAmerican Energy
Holdings Company (the "Committee")
approves the incentive award computations,
based upon the recommendation of the Chief
Executive Officer ("CEO") of MidAmerican
Energy Holdings Company.
Purpose: The intent of the incentive award and its
underlying formula is to focus senior
executives on maximizing "enterprise value".
Award Determination: Award to be recommended to the Committee
will be determined by the CEO and based upon
objective performance criteria to be established
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<PAGE>
at the beginning of each calendar
year. Such criteria will also be
recommended by the CEO to the
Committee for approval. For 1998,
the performance criteria in effect
will be based upon "EBITDA" level,
which will be established by the CEO
following acquisition of Home Real
Estate Company of Omaha by
MidAmerican Realty Services Company.
During a calendar year, performance
criteria may be adjusted at the sole
discretion of the CEO, with the
concurrence of the Committee, to
reflect modifications to MidAmerican
Realty Services Company's
operations, resulting from items
such as acquisitions or other items
such as acquisitions or other items
for which an adjustment is deemed
appropriate. The CEO and the
Committee will be under no
obligation to make any such
adjustments to the performance
criteria.
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<PAGE>
EXHIBIT "D"
EXECUTIVE VACATION AND HOLIDAY SCHEDULE
VACATION
25 days a year accrued as of January 1st of each year
15 days maximum may be carried over per year
HOLIDAY SCHEDULE
New Year's Day Friday after Thanksgiving
Memorial Day Christmas Day
Independence Day (July 4) Day before or after Christmas*
Labor Day
Thanksgiving Day Floating Holidays
* The Human Resources Department will determine the beginning of each year
whether the day before or after Christmas is taken as a holiday. This is
dependent on which day of the week Christmas falls.
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<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into on
this 27th day of May, 1998, by and between MidAmerican Realty Services Company
(the "Company"), a subsidiary of MidAmerican Energy Holdings Company
("MidAmerican") and R. Michael Knapp (the "Employee").
WHEREAS, the Company believes that the Employee's contribution to the
growth and success of the Company as a member of its management team will be
substantial and desires to employ the Employee in that role; and
WHEREAS, the Employee is desirous of serving the Company in said
capacity on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Employment and Term. The Company hereby agrees to employ the Employee
as a member of its management team and the Employee hereby agrees to
serve the Company in such capacity, on the terms and conditions set
forth herein for the period commencing on the date of this Agreement
and continuing for a period of five years from that date, unless
earlier terminated by the Employee or the Company in accordance with
paragraph 6 herein. Upon the expiration of the initial term of this
Agreement, it shall be automatically extended for one-year periods,
unless on or before the date which is one year prior to the expiration
of the initial term of the Agreement or any subsequent one-year
extension period, either party has delivered to the other written
notice of intent to terminate this Agreement upon its next expiration
date. The purpose of the automatic extension is to assure that the
parties have at least one year prior notice of termination of the
Agreement. This Agreement is subject at all times to the provisions of
paragraph 6.
2. Waiver of Rights. The Employee specifically acknowledges and agrees
that upon the effective date of this Agreement, his prior Employment
Agreement with AmerUs Home Services, Inc. (formerly known as Iowa
Realty Co.) and its successors and assigns is canceled
<PAGE>
and no longer in effect. Further, the Employee waives any and all
rights, claims or other causes of action he may have against Company,
its affiliates, parents and its and their predecessors and successors
on account of any contract, liability or other thing done or omitted,
from all time in the past until the effective date of this Agreement.
3. Duties. The Employee is engaged by the Company to be responsible for
such duties related to the Company's management as may from time to
time be assigned by its Board of Directors (the "Board"), and shall
report to the Board. The Employee will, during his term of employment
hereunder:
a. Faithfully and diligently do and perform all such acts and duties
and furnish such services for the Company as the Board or its
designated representative shall direct from time to time;
b. Devote his full time, energy and skill to the business of the
Company and to the promotion of its best interests, except for
vacations, absences made necessary because of illness, and
service on other corporate, civic, or charitable boards or
committees not significantly interfering with his duties
hereunder.
4. Compensation. The Company shall pay the Employee base, and, when
earned in accordance with the provisions of this paragraph, incentive
compensation for the performance of his duties under this Agreement,
as follows:
a. Annual base salary of $225,000, payable at the Company's regular
payroll intervals. The Chief Executive Officer of MidAmerican
Energy Holdings Company shall not less than annually during the
Employee's employment review his annual salary and consider
possible increases, taking into account inflation factors,
performance of the Company, salaries paid for positions of
similar responsibility for other companies, and other relevant
factors, and shall recommend such increases when deemed
appropriate, for approval of the Compensation Committee of the
Board of Directors of MidAmerican (the "Committee").
2
<PAGE>
b. Short-term incentive compensation to be determined as provided
in Exhibit A attached hereto.
With respect to the calculation of short-term incentives under
this subparagraph, if it becomes apparent that the stated
earnings thresholds cannot be achieved for unforeseen reasons and
in spite of diligent management effort, the Employee may
nonetheless be awarded short-term incentive payments, if approved
by the Committee as recommended by the Chief Executive Officer of
MidAmerican Energy Holdings Company, to reward exemplary
performance.
In the event the Company terminates the Employee's employment for
any reason other than Good Cause, as defined in subparagraph 6(c)
other than due to Employee's death or disability, or the Employee
terminates his employment for Good Reason, as defined in
subparagraph 6(d), prior to the end of any calendar year, he
shall be entitled to a short-term incentive payment if the
earnings thresholds described in Exhibit A have been achieved as
of the last day of the calendar year in which his termination of
employment occurs, provided, however, that the amount of such
payment shall be calculated by multiplying the incentive amount
that would have been payable to the Employee pursuant to Exhibit
A, had his employment not terminated during the calendar year, by
a fraction, the numerator of which is the number of full weeks of
employment completed by the Employee during such calendar year
and the denominator of which is 52. If the Employee's employment
is terminated for Good Cause, as defined in subparagraph 6(c),
other than due to death or disability, or the Employee
terminates his employment for other than Good Reason, as defined
in subparagraph 6(d), prior to the end of any calendar year, no
short-term incentive shall be payable for such year.
c. Long-term incentive compensation as provided in Exhibit B
attached hereto.
3
<PAGE>
d. If the Employee's employment continues subsequent to the fifth
anniversary of the date of this Agreement, the Employee and the
Chief Executive Officer of MidAmerican Energy Holdings Company
shall negotiate the amount of the Employee's future base salary
and the terms of any further short-term and long-term incentive
arrangements at that time, with all such compensation to be
subject to approval of the Committee.
5. Additional Benefits.
a. The Employee shall be eligible to participate in the ERISA
qualified retirement and welfare benefit plans of the Company in
accordance with the terms and conditions of such plans. The
Employee shall also be entitled to paid vacations and holidays
consistent with the company's customary practice.
b. The Company shall promptly pay (or reimburse the Employee for)
all reasonable expenses incurred by him in the performance of
his duties hereunder in accordance with policies from time to
time adopted by the Board, including business travel and
entertainment expenses. The Employee shall furnish to the
Company such receipts and records as the Company may require to
verify the foregoing expenses.
6. Termination.
a. The Employee may resign his employment with the Company effective
upon two months' advance written notice to the Board. If the
Employee resigns under this paragraph, the Board (by the vote of
a majority of its members other than the resigning Employee and
other members who have given notice of resignation as an
employee) retains the right to terminate the Employee's
employment, effective upon written notice to the Employee, at any
time during the notice period for Good Cause, as defined in
subparagraph 6(c).
b. The employment of the Employee with the Company may be
terminated, for other than Good Cause, as defined in subpara-
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graph 6(c), by the Board directing such termination (by the vote
of a majority of its members other than the Employee and other
members who have given notice of resignation as an employee) and
upon two months' advance written notice to Employee, provided,
however, that Employee may be terminated, effective upon written
notice to Employee, for Good Cause during the notice period. The
Board may require Employee to cease reporting to work during the
notice period, even without Good Cause.
c. The employment of the Employee may be terminated for Good Cause
by the Board directing such termination (by the vote of a
majority of its members other than the Employee and other members
who have given notice of resignation as an employee) and
effective upon written notice to the Employee. Good Cause shall
mean (1) the Employee's conviction of any gross misdemeanor
involving dishonesty, fraud or breach of trust or a felony; (2)
the Employee's engagement in gross misconduct that materially
injures the Company, monetarily or otherwise; (3) the Employee's
gross neglect of his duties under this Agreement, including
Employee's failure to physically appear for work; (4) the
Employee's death or Disability; or (5) the Employee's violation
of paragraph 8 of this Agreement. The Employee shall be
considered to have come under a Disability if he, by reason of
physical or mental disability, becomes unable to perform the
services required of him hereunder for six consecutive months or
more than nine (9) months in the aggregate during any 12-month
period, excluding absences resulting from ordinary transitory
illnesses or injury, and a qualified physician certifies the
Disability.
d. The Employee may terminate his employment with the Company at
any time for Good Reason, effective immediately upon written
notice to the Board. Good Reason shall exist if the Employee
terminates his employment because (1) the Company has materially
breached any of the terms of this Agreement; (2) the Employee is
assigned duties which are materially inconsistent with his
position, duties, responsibilities and status as a member of the
Company's management team; or (3)
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the Employee's office location as assigned to him by the Company
is relocated to a location more than 50 miles from Des Moines,
Iowa; (4) the Company is acquired by Cendant Corporation, or
entities controlled by Cendant Corporation and the Employee is
unable to reach agreement on a modified employment agreement
within thirty (30) days following acquisition.
7. Severance.
a. If the Employee's employment is terminated by the Company for
other than Good Cause or the Employee terminates his employment
with the Company for Good Reason, the Company shall continue to
pay the Employee his base salary as in effect as of his
termination date at the Company's normal payroll intervals during
the Non-Competition Period, as defined in subparagraph 8(a). In
addition, during the Non-Competition Period, the Company shall
also pay to the Employee annually a short-term incentive payment
as described in Exhibit A, equal to the average annual
short-term incentive payments made to the Employee under this
Agreement prior to the Employee's termination. During this
period, if the Employee is eligible for and elects continuation
coverage under one or more group health plans sponsored by the
Company or its subsidiaries, the Company shall pay the same
portion of the premium cost of such coverage, if any, as is paid
by the Company for members of its management team who are
actively employed.
b. If the Employee terminates his employment with the Company for
other than Good Reason, the Company shall pay the Employee his
base salary only through his termination date and the
Non-Competition Period shall continue for the full period
specified in subparagraph 8(a) without additional consideration
other than payments made prior to the Employee's termination
date.
c. If the Employee is terminated by the Company for Good Cause, the
Company shall pay the Employee his base salary
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<PAGE>
only through his termination date and the Non-Competition Period
shall continue for the full period specified in subparagraph
8(a) without additional consideration other than the payments
made prior to the Employee's termination date.
d. Except as provided in this paragraph 7 or in subparagraph 4(b),
or as otherwise required pursuant to the laws applicable to the
retirement and welfare plans sponsored by the Company or its
subsidiaries, the Employee shall receive no compensation or
additional benefits following his termination date.
8. Non-Competition and Non-Solicitation.
a. Employee covenants and agrees that, during his employment and
from the date of his termination of employment with the Company
for any reason until the third anniversary of such date (the
"Non-Competition Period"), he will not, directly or indirectly,
own, manage, operate, control, invest in, be employed by or
under contract with, participate in, consult with or render
services to, or be connected in any manner with the operation,
ownership, management or control of any enterprise which competes
with any business engaged in by Company during his employment and
within the states of Minnesota, North Dakota, Wisconsin, Missouri
and Iowa and such other states in which Company conducts business
during his employment. Employee agrees that he will promptly
notify the Board of his employment or other affiliation with any
other business or entity during the Non-Competition Period.
b. Employee also certifies that he is not currently subject to a
noncompetition agreement with a former employer or any other
person or entity which prohibits him from working with the
Company in the capacity contemplated by this Agreement.
c. The Employee specifically acknowledges that he has obtained and
will, in the course of his employment, continue to obtain and
have access to confidential data pertaining to customers and
prospective customers of the Company, that such data is a
valuable and unique asset of Company's business and that the
7
<PAGE>
success or failure of Company's specialized business is
dependent to a significant degree upon the ability of Company to
establish and maintain close and continuing personal contacts and
working relationships with its customers and prospective
customers and to develop proposals which are specifically
devised, refined and adjusted to meet, satisfy and coincide with
the interests and requirements of its customers and prospective
customers. Therefore, this paragraph is specifically intended to
prohibit, during the Non-Competition Period, solicitation, either
directly or indirectly, of any or all of Company's customers and
clients at the time of the Employee's termination of employment
and prospective customers and clients of Company with whom
Employee had contact, or was in a position to have contact with,
during the two years preceding his termination of employment.
d. Employee further agrees that during his employment and during the
Non-Competition Period, Employee will not solicit on his own
behalf or on behalf of any other person, the services of any
person who is an employee or agent of Company or was an employee
or agent of Company during the two years preceding the
Non-Competition Period or solicit any of Company's employees or
agents to terminate their employment or agency with Company,
without advance written approval of the Board of the Company.
e. Employee further acknowledges that he has obtained and will, in
the course of his employment, continue to obtain and have access
to confidential data relating to Company's special vendors and
procurers and their representatives and that this information is
a valuable and unique asset of Company, also developed over time.
Employee agrees that, during the Non-Competition Period, he will
not solicit on his own behalf or on behalf of any other person,
any such vendor, procurer or representative for the purposes of
either providing products or services or terminating their
relationship or agency with Company.
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<PAGE>
f. Employee further agrees that, during the Non-Competition Period,
he will do nothing to interfere with any of Company's business
relationships or its goodwill or reputation.
g. Employee hereby acknowledges and agrees that all non-public
information and data of Company, including without limitation
that related to products, customers, pricing, sales and financial
results (collectively "Trade Secrets") are of substantial value
to Company, provide it with a substantial competitive advantage
in its business, and are and have been maintained in strictest
confidence as trade secrets. Except as otherwise approved in
writing by the Board, the Employee shall not divulge, furnish, or
make accessible to anyone (other than the Company, its directors
and officers or to others during the course of Employee's
employment with the Company if, in good faith, the Employee
determines that such disclosure is in the best interest of the
Company) any Trade Secrets.
9. Remedies. Employee acknowledges that the restrictions set forth in
paragraph 8 are reasonably necessary to protect a legitimate business
interest of the Company. It is understood that if the Employee
violates his obligations under any of these paragraphs, Company would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that in
the case of any violation or threatened violation of paragraph 8 of
this Agreement, Company may apply for and secure injunctive relief,
temporary or provisional, in court, without bond but upon due notice,
pending final resolution on the merits pursuant to arbitration as set
forth in paragraph 16 below. No waiver of any violation of this
Agreement shall be implied from any failure by Company to take action
under this paragraph.
10. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States when the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in
such action, then such unenforceable covenants shall be deemed
9
<PAGE>
eliminated from the provisions of this Agreement for the purpose of
such proceeding to the extent necessary to permit the remaining
covenants to be enforced in such proceeding. Further, in the event
that any provision is held to be over broad as written, such provision
shall be deemed amended to narrow its application to the extent
necessary to make the provision enforceable according to applicable
law and enforced as amended.
11. Binding Effect. The covenants and agreements of paragraph 8 shall
survive the termination of this Agreement for any reason and shall not
be terminated by the voluntary dissolution of the Company (or any
parent, subsidiary or successor of the Company) or merger whereby the
Company (or such parent, subsidiary or successor of the Company) is
not the surviving or resulting corporation, or any transfer of
substantially all the assets of the Company, unless no transferee or
successor continues to carry on the business activities of the
Company. In the event of any such merger or consolidation or transfer
of assets, the provisions of this Agreement shall inure to the benefit
of and shall be binding upon the surviving or resulting corporation or
the corporation to which such assets shall be transferred.
12. Entire Agreement. From and after the date of this Agreement, the terms
and provisions of this Agreement constitute the entire agreement
between the parties. This Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, incentive,
participation and profit sharing and termination compensation.
13. Waiver. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party shall be deemed a waiver
of any other provisions or conditions at the same time or at any prior
or subsequent time.
14. Applicable Law. All questions pertaining to the validity,
construction, execution and performance of this Agreement shall be
construed and governed in accordance with the laws of the State of
Iowa. The parties consent to the personal jurisdiction of the State of
Iowa, waive
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<PAGE>
any argument that such a forum is not convenient, and agree that any
litigation or arbitration relating to this Agreement shall be venued
in Polk County, Iowa.
15. Tax Withholding. The Company may withhold from any payment of benefits
under this Agreement (and forward to the appropriate taxing authority)
any taxes required to be withheld under applicable law.
16. Disputes. Any and all claims or disputes between Employee and Company
(including the validity, scope, and enforceability of this paragraph),
except as otherwise provided under paragraph 9 herein, shall be
submitted for arbitration and resolution to an arbitrator. No demand
for arbitration may be made after the date when the institution of
legal or equitable proceedings based on such claim or dispute would be
barred by the applicable statute of limitation. The arbitrator shall
be selected by mutual agreement of the parties. Unless otherwise
provided for in this Agreement, the Expedited Labor Arbitration Rules
of the American Arbitration Association shall apply. If the parties
are unable to agree upon an arbitrator, any such dispute shall be
solely and finally settled by arbitration in accordance with the
Expedited Labor Arbitration Rules of the American Arbitration
Association ("AAA"), except (1) the arbitrator shall be selected by
the AAA as follows: (a) the AAA shall submit a list of names of five
arbitrators with significant experience in arbitrating executive
employment disputes; (b) each party shall have the right to exercise
unlimited challenges to said named arbitrators for cause, the AAA to
determine, if disputed, whether any such challenge for cause is
justifiable and to replace any such stricken arbitrator name with
another name so that the parties are presented with five names, none
of which can be stricken for cause; (c) each party hereto may exercise
up to two peremptory challenges to names on the submitted list of five
names; and (d) the AAA shall selected the arbitrator from the
remaining names; and (2) the arbitrator shall render an Award in
writing with sufficient detail to determine the arbitrator's decision
on each issue submitted to arbitration. The parties agree that no
punitive damages shall be awarded hereunder. The parties also agree
that all awards, decisions and remedies in favor of a winning party
hereunder with respect to any issue shall be proportional to the
violation caused by the losing party with respect to that issue. All
costs in conducting the
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<PAGE>
arbitration, including but not limited to the arbitration filing fee,
the arbitrator's fees and expenses, and the reasonable attorney's fees
and expenses of the prevailing party (including the attorney's fees
and costs incurred by the prevailing party in seeking or resisting
temporary or provisional court relief as set out in paragraph 9
above), shall be the responsibility of the losing party. In the event
there is more than one issue in dispute and there is no one prevailing
party with respect to all issues in dispute, costs and attorneys' fees
shall be prorated by the arbitrator according to the relative dollar
value of each issue. The arbitrator's Award shall be final and
binding. In the event either party must resort to the judicial process
to enforce the provisions of this Agreement, the award of an
arbitrator or equitable relief granted by an arbitrator, the party
seeking enforcement shall be entitled to recover from the other party
all costs of litigation including, but not limited to, reasonable
attorney's fees and court costs. The arbitration proceedings and Award
shall be maintained by both parties as strictly confidential, except
as otherwise required by court order and with respect to the parties'
attorneys and tax advisors, and, with respect to Company, members of
its management, and, with respect to Employee, his family and close
confidants.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
effective as of the day and year first above written.
MIDAMERICAN REALTY SERVICES COMPANY
By: /s/ A. Wells
-------------------------------------------
Title: Vice President and Chief Financial Officer
-------------------------------------------
R. MICHAEL KNAPP
/s/ R. Michael Knapp
----------------------------------------------------
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EXHIBIT A
Short-Term Incentive Compensation Plan for
Senior Executives of MidAmerican Realty Services Company
Participants:
Start Date: January 1, 1998
Term of Plan: 5 years
Award Opportunity: Target award of 70% of base salary, with a
maximum award equal to 100% of base salary
Definition of EBITDA: Operating profit before depreciation; amortization
of transaction costs and goodwill; interest
income or expense; income taxes and unusual
non-recurring gains or expenses (e.g., legal
settlements, provisions for contingencies, effect
of accounting changes and severance costs).
Payment: Payment of the award will be made upon
achievement of the performance criteria and
after the Compensation Committee of the
Board of Directors of MidAmerican Energy
Holdings Company (the "Committee") approves the
incentive award computations, based upon the
recommendation of the Chief Executive Officer
("CEO") of MidAmerican Energy Holdings Company.
Purpose: The intent of the incentive award and its
underlying formula is to focus senior executives
on maximizing "enterprise value".
Award Determination: Award to be recommended to the Committee
will be determined by the CEO and based upon
objective performance criteria to be established
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at the beginning of each calendar year. Such
criteria will also be recommended by the CEO to the
Committee for approval. For 1998, the performance
criteria in effect will be based upon "EBITDA"
level, which will be established by the CEO
following acquisition of AmerUs Home Services, Inc.
by MidAmerican Energy Holdings Company. During a
calendar year, performance criteria may be adjusted
at the sole discretion of the CEO, with the
concurrence of the Committee, to reflect
modifications to MidAmerican Realty Services
Company's operations, resulting from items such as
acquisitions or other items such as acquisitions or
other items for which an adjustment is deemed
appropriate. The CEO and the Committee will be
under no obligation to make any such adjustments to
the performance criteria.
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EXHIBIT B
LONG TERM INCENTIVE COMPENSATION PLAN
FOR SENIOR EXECUTIVES OF
MIDAMERICAN REALTY SERVICES COMPANY
This Exhibit B (this "Exhibit Agreement") constitutes a part of the
employment agreement (the "Employment Agreement") dated May 27, 1998, between
MidAmerican Realty Services Company ("MRSC"), a subsidiary of MidAmerican Energy
Holdings Company ("MidAmerican") and R. Michael Knapp ("Share holder").
1. Stock Subscription. Shareholder agrees to purchase from
MidAmerican Realty Services Company ("MRSC"), and MRSC hereby agrees to sell to
Shareholder, in accordance with the terms of this Exhibit Agreement, a total of
125 shares of MRSCs common stock (the "Shares").
2. Purchase Price and Manner of Payment.
(a) The total purchase price for the Shares shall be Three Hundred
Eighty-One Thousand Three Hundred Seventy-Six and No/100 Dollars
($381,376.00) (the "Original Purchase Price") which amount will
be payable to MRSC contemporaneously with the execution of the
Employment Agreement by delivery to MRSC of Shareholder's
Promissory Note (the "Promissory Note") in such amount, which
Promissory Note shall be substantially in the form of Attachment
A hereto.
(b) MRSC shall establish a bookkeeping account for the benefit of
Shareholder (the "Account") for the purpose of establishing a
credit towards payment of the Promissory Note. In [March] of each
of the five years commencing in 1999, a credit shall be made to
the Account if certain performance goals are achieved with
respect to the preceding fiscal year as hereinafter set forth.
Additionally, all dividends declared and paid with respect to the
Shares shall be credited to the Account Balance. Aggregate
amounts credited to the Account shall be referred to herein as
the "Account Balance." The Promissory Note shall become due and
payable on the fifth anniversary thereof (the "Fifth
Anniversary"); provided, however, that in the event that
Shareholder's em-
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<PAGE>
ployment with MRSC is terminated for any reason, including,
without limitation, death or disability, prior to the Fifth
Anniversary ("Termination"), the Promissory Note shall become
due and payable on the Closing Date (as hereinafter defined)
following the Termination and, provided further, that in the
event MRSC exercises the Call Option, as hereinafter defined,
prior to the Fifth Anniversary, the Promissory Note shall become
due and payable on the Closing Date following such exercise (the
"Call Option Closing Date"). If Shareholder is employed by MRSC
on the Fifth Anniversary, the Account Balance shall be offset
against amounts owing under the Promissory Note and any remaining
amounts in the Account Balance shall be paid to Shareholder
within [30] days following the Fifth Anniversary. In the event of
Termination for Good Cause, other than due to death or Disability
or without Good Reason, the Account Balance shall be deemed to be
zero, and MRSC shall repurchase the Shares for the Original
Purchase Price plus accrued interest on the Promissory Note
pursuant to Section 9 of this Exhibit Agreement, which shall be
offset against amounts owing under the Promissory Note. In the
event of Termination for Good Reason or not for Good Cause, other
than due to death or Disability, the Account Balance shall be
credited with the target credit, determined in accordance with
subparagraph (c) below, with respect to any further period for
which such credit may be made, and the Account Balance shall be
offset against amounts owing under the Promissory Note. In the
event of exercise of the Call Option prior to the Fifth
Anniversary, the Account Balance shall be credited with the
target credit, determined in accordance with subparagraph (c)
below, with respect to any further period for which such credit
may be made, and the Account Balance shall be offset against
amounts owing under the Promissory Note on the Call Option
Closing Date and, if the Call Option is exercised with respect to
all of the Shares, any remaining amounts in the Account Balance
shall be paid to Shareholder within (30) days following the Call
Option Closing Date; provided that if the Call Option is
exercised with respect to a portion of the Shares, any amounts
remaining in the Account Balance shall not be paid until the
earlier of the Fifth Anniversary or the exercise of the Call
Option with respect to all of the Shares.
(c) For purposes of determining credits to the Account, the
performance goals shall be based on achievement of (a) utility
service integration
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goals (the "Utility Goals") and (b) Realty Co. EBITDA (as
hereinafter defined) goals (the "Realty Goals"), each as approved
annually by the Compensation Committee of the Board of Directors
of MidAmerican (the "Committee"), and upon the recommendation of
the Chief Executive Officer ("CEO") of MidAmerican. The target
credit for each fiscal year shall be 20% of the amount that shall
be due on the Promissory Note on the Fifth Anniversary. The
maximum credit for each fiscal year shall be 40%. The actual
credit made with respect to each fiscal year from 1998 through
2002 shall be based on achievement of the Utility Goals and
Realty Goals, with the relative weight of importance for each
such goal with respect to each of the fiscal years as set forth
below:
Fiscal Year
-------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Utility Goals 30% 35% 40% 45% 50%
Realty Goals 70% 65% 60% 55% 50%
"EBITDA" means earnings of MRSC for a fiscal year before
interest, taxes, depreciation and amortization; provided, however, that the CEO
of MidAmerican may, with the concurrence of the Committee, make such adjustments
as he, in his sole discretion, deems appropriate in connection with intercompany
charges and revenues and the effect of business acquisitions and combinations by
MRSC and the impact of other extraordinary items on financial results.
3. Share Register. Upon receipt from Shareholder of the
Promissory Note, MRSC shall record Shareholder's ownership in the shares in its
share register, which shall be the sole evidence of such ownership. So long as
Shareholder is not in default in the payment of principal or interest on the
Promissory Note, the Shares shall be entitled to full voting rights and to share
in all dividends payable on the Shares.
4. Stock Pledge. To secure the full performance of
Shareholder's obligation to MRSC under the Promissory Note, Shareholder hereby
grants to MRSC a security interest in the Shares.
5. Restriction on Transfer of Shares. No Shares shall be sold,
transferred, assigned, pledged, hypothecated or otherwise disposed of or in any
manner
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<PAGE>
transferred upon the books of MRSC, nor shall any purchaser or other transferee
thereof have any right to demand or require the transfer of any of the Shares at
tempted to be sold or transferred or otherwise disposed of to him or her or any
of the rights of a shareholder of MRSC, without the prior written consent of
MRSC as expressed in a resolution of the MRSC Board of Directors. Any such
purported disposition or encumbrance without compliance with the provisions of
this Exhibit Agreement shall be null and void and shall not be effected on the
books of MRSC.
6. Investment Representations. Shareholder hereby represents
and agrees as follows:
(a) The Shares are being acquired for investment purposes and not
with the view toward the distribution or sale thereof in a public
offering within the meaning of the Securities Act of 1933 (the
"Securities Act") or any rule of regulation under the Securities
Act.
(b) Shareholder has had an adequate opportunity to obtain from
representatives of MRSC the information necessary to permit
Shareholder to evaluate the merits and risks of Shareholder's
investment in MRSC.
(c) Shareholder has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in
the purchase of the Shares and to make an informed investment
decision with respect to that purchase, and can afford a complete
loss of the value of the Shares and is able to bear the economic
risk of holding the Shares for an indefinite period.
(d) Shareholder acknowledges that:
(i) The Shares have not been registered under either the
Securities Act or applicable state securities law, and MRSC
will be relying upon the foregoing investment
representations in issuing the Shares to Shareholder;
(ii) MRSC has no obligation or current intention to register the
Shares under the Securities Act;
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<PAGE>
(iii) The Shares cannot be sold, transferred or otherwise
disposed of unless they are subsequently registered under
the Securities Act or an exemption from registration is
then available; and
(iv) The transferability of the Shares will be subject to
restrictions imposed by all applicable federal and state
securities laws, as well as restrictions contained in this
Exhibit Agreement and in the event MRSC chooses, in its
sole discretion, to issue certificates with respect to the
Shares, the certificates evidencing such Shares will be
imprinted with a legend substantially in the following
form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended,
and may not be sold, transferred or otherwise disposed of
in the absence of an effective registration statement
under that Act or an opinion of counsel satisfactory to
the corporation to the effect that registration is not
required. The shares represented by this certificate are
further subject to certain restrictions contained in an
agreement relating to such shares between the shareholder
and the Company dated."
7. Put Option.
(a) On and after the fifth anniversary of the Employment Agreement,
Shareholder shall have the option (the "Put Option") at any time
to require MRSC to purchase all of the Shares, subject to the
terms and conditions of this Exhibit Agreement. The purchase
price, closing date and similar matters in connection with
exercise of the Put Option are as set forth in Section 9 of this
Exhibit Agreement.
(b) In the event of Termination, the Shareholder shall be deemed to
have exercised the Put Option on the date of Termination (the
"Mandatory Put Exercise"). The purchase price, closing date and
similar matters in connection with the Mandatory Put Exercise are
as set forth in Section 9 of this Exhibit Agreement.
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<PAGE>
8. Call Option. On and after the second anniversary of the Employment
Agreement, MRSC and its successors and assigns shall have the option (the "Call
Option") at any time and from time to time to purchase any or all of the Shares,
subject to the terms and conditions of this Exhibit Agreement. The purchase
price, closing date and similar matters in connection with exercise of the Call
Option are as set forth in Section 9 of this Exhibit Agreement. Prior to the
fifth anniversary of the Employment Agreement, MRSC shall be able to exercise
the Call Option only in the event of corporate need, as defined and addressed by
the MidAmerican Energy Holdings Company Board of Directors.
9. Put Option, Mandatory Put Exercise and Call Option Terms.
Shareholder shall exercise the Put Option, if at all, by delivering a written
notice of exercise to MRSC; provided, however, that such exercise shall be
deemed to occur upon the date of Termination in the case of the Mandatory Put
Exercise. MRSC or its successor or assign shall exercise the Call Option, if at
all, by delivering a written notice of exercise to Shareholder or its permitted
transferee. Any such exercise of the Put Option or the Call Option is referred
to herein as the "Exercise."
The purchase price for the Shares that are repurchased pursuant to the
Exercise (the "Purchase Price") shall be the fair market value of the Shares as
mutually agreed upon by Shareholder and MRSC, but in no event greater than the
product of (x) the decimal representing the percentage ownership of MRSC voting
capital stock held by Shareholder (based on percentage of votes) at the time of
Exercise multiplied by (y) the Corporate Value (as hereinafter defined) at the
time of Exercise. "Corporate Value" shall mean the market value of the Company
less outstanding liabilities; provided that in no event shall the value exceed
the product of (x) 7 multiplied by (y) the average EBITDA for the two
twelve-month periods immediately preceding the date of the calculation. In the
event the Call Option is exercised in connection with the sale of the Company,
the Corporate Value shall be the sale price for all of the equity of the
Company. In the event that Shareholder and MRSC do not agree on the calculation
of the Purchase Price or the Corporate Value, any dispute shall be resolved
pursuant to arbitration in accordance with the rules of the American Arbitration
Association then in effect. Such arbitration result shall be binding on the
parties. The Purchase Price for the Shares that are repurchased pursuant to the
Mandatory Put Exercise shall be the Purchase Price determined above, except when
the Mandatory Put Exercise results from a Termination for Good Cause, other than
death or Disability or not for Good Reason, the purchase price shall be the
Original Purchase Price plus accrued interest on the Promissory Note.
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MRSC shall make payment of the purchase price for any Shares reacquired
pursuant to the Exercise or the Mandatory Put Exercise by offsetting and
reducing the outstanding principal balance of, and any accrued interest on, the
Promissory Note delivered to MRSC by Shareholder pursuant to Section 2 of this
Exhibit Agreement. The closing of the Exercise or the Mandatory Put Exercise
shall be not less than 30 and not more than 45 days following notice of such
exercise on a date mutually agreeable to MRSC and Shareholder (the "Closing
Date"); provided, however, that in the event of a dispute regarding the Purchase
Price or the inability to determine Corporate Value, the Closing Date shall be a
date not less than 30 and not more than 45 days following resolution of such
dispute. The balance of the purchase price owing to Shareholder, if any, shall
be paid on the Closing Date by delivering to Shareholder MRSC's check in the
amount of the balance of such purchase price.
On the Closing Date, the Share ownership relating to the shares
repurchased recorded in MRSC's share register shall be canceled by MRSC.
10. No Restriction on MRSC's Accounting; Adjustments. This
Exhibit Agreement shall not in any way interfere with the right of MRSC to
select among, adopt or change accounting practices or procedures, whether or not
such accounting practices or procedures have not been previously employed by
MRSC, or to consummate any business investments, acquisitions or divestitures
or to adopt any other policies or plans, at any time or from time to time in its
sole and absolute discretion. In order to carry out the intent and purpose of
this Exhibit Agreement, the CEO of MidAmerian may, in his sole and absolute
discretion, make such adjustments to computations made pursuant to this Exhibit
Agreement in connection with changes in accounting practices or procedures as he
deems necessary or appropriate to prevent dilution or enlargements of the
benefits provided pursuant to this Exhibit Agreement. Such adjustments may be in
connection with changes in accounting practices and procedures, fundamental
transactions and other matters of a similar nature.
11. Unsecured Interest. It is intended that MRSC is only under a
contractual obligation with respect to the Account. The Account Balance shall
not be financed through a trust fund, insurance contracts, or otherwise, and all
such credits shall be satisfied out of the general funds of MRSC, but only if
and to the extent such funds are legally available therefore. Shareholder shall
not have any interest whatsoever in the specific assets of MRSC pursuant to
this Exhibit Agreement and all rights of Shareholder shall be no greater than
the right of any unsecured general creditor of MRSC.
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12. Shareholder's Rights in Future Financing. For a period
commencing on the date of the Employment Agreement and ending on the fifth
anniversary of the Employment Agreement, in the event of any proposed sale of
securities of MRSC (including, without limitation, the sale of Common Stock,
preferred stock, convertible securities and debt instruments, other than
commercial loans or extensions of credit made by a bank, insurance company or
other third-party financial institution, or the issuance of securities in
connection with a capital contribution by an affiliate of MRSC), other than
pursuant to grants of employee stock options, Shareholder shall be provided at
least 10 days' advance notice and have the right to invest in such sale of
securities, on the same terms as offered to any third party (which shall include
affiliates of MRSC), in a percentage amount equal to the percentage ownership of
voting capital stock held by Shareholder immediately prior to such sale;
provided, however, that such right does not include any sale of the Company's
equity securities in connection with a public offering pursuant to a
registration statement filed with the Securities and Exchange Commission.
Nothing in this Section shall limit the right of MRSC, as determined by its
Board of Directors, to issue shares of capital stock of MRSC and determine all
of the terms of such issuance in its discretion.
22
<PAGE>
PROMISSORY NOTE
$381,376.00 May 27, 1998
- -----------
FOR VALUE RECEIVED, the undersigned, R. Michael Knapp (the "Maker"),
whose address is _________________________________________ ____________,
promises to pay to the order of MidAmerican Realty Services Company, an Iowa
corporation (the "Lender"), at its office at Des Moines, Iowa, in lawful money
of the United States, or at such other address as the holder hereof may from
time to time designate in writing, the principal amount of Three Hundred
Eighty-One Thousand Three Hundred Seventy-Six and No/100 Dollars ($381,376.00).
The amount and date of the loan evidenced hereunder shall be entered by the
Lender into its records, which records shall be conclusive evidence of the
subject matter thereof absent manifest error.
This Note matures on May 27, 2003 (the "Maturity Date"). Principal and
interest due on the Note on the Maturity Date will be offset by the amount, if
any, in the Account Balance [as defined in the Exhibit Agreement dated May 27,
1998, between Maker and Lender (the "Agreement")] in accordance with terms of
the Agreement. Notwithstanding the foregoing, the Maturity Date shall be deemed
to be the "Closing Date" in the event of exercise of the "Put Option" or the
"Call Option" or in the event of a "Mandatory Put Exercise" as each term is
defined in the Agreement. If the Call Option is exercised with respect to a
portion of the Shares (as defined in the Agreement), the Principal and interest
due on the Note on such Maturity Date shall be equal to the pro rata amount due
on the Promissory Note with respect to the Shares purchased pursuant to the
exercise of such option.
Interest on the unpaid principal balance of this Note shall accrue from
the date hereof at a per annum rate equal to MRSC's average annual borrowing
rate. The Maker also shall pay interest on any overdue installment of principal
from the due date thereof until paid at an interest rate per annum equal at all
times to six percent (6.0%) per annum in excess of the interest rate set forth
above, which interest shall be payable upon demand. Interest shall accrue on the
basis of actual days elapsed in a year consisting of 360 days. No provision of
this Note shall require the payment or permit the collection of interest in
excess of the rate permitted by applicable law.
23
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Both principal and interest are payable in lawful money of the United
States of America in immediately available funds, subject to the provisions set
forth above in connection with the Account Balance.
All payments under this Note shall be applied initially against accrued
interest and thereafter in reduction of principal.
The Maker warrants and represents to the Lender that this Note is the
Maker's legal, valid and binding obligation, enforceable in accordance with its
terms.
If this Note or any payment required to be made thereunder is not paid
on the due date, the holder hereof shall have, in addition to any other rights
it may have under applicable laws, the right to set off the indebtedness
evidenced by this Note against any indebtedness of such holder to the Maker,
including, without limitation, any salary or other compensation owing by the
Lender to the Maker.
No failure or delay on the part of the holder of this Note in
exercising any power or right under this Note shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power or right preclude any
other or further exercise thereof of the exercise of any other power or right.
No notice to or demand on the Maker in any case shall entitle the Maker to any
notice or demand in similar or other circumstances.
The Maker agrees to reimburse the holder of this Note, upon demand, for
all reasonable out-of-pocket expenses, including reasonable attorneys' fees, in
connection with such holder's enforcement of the obligations of the Maker
hereunder.
Presentment and demand for payment, notice of dishonor, protest and
notice of protest are hereby waived.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Iowa (without giving effect to the conflicts of
laws principles thereof). The Maker hereby submits himself to the jurisdiction
of the courts of the State of Iowa and the federal courts of the United States,
located in such state in respect of all actions arising out of or in connection
with the interpretation or enforcement of this Note, waives any argument that
venue in such forums is not convenient and agrees that any actions initiated by
the Maker shall be venued in such forums.
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/s/ R. Michael Knapp
-----------------------------------
R. MICHAEL KNAPP (Maker)
25
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Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated May 28, 1999, relating to the consolidated financial statements of
MidAmerican Realty Services Company, of our report dated June 30, 1999, relating
to the consolidated financial statements of J.C. Nichols Real Estate, of our
report dated July 2, 1999, relating to the financial statements of HOME Real
Estate Company of Omaha, of our report dated July 13, 1999, relating to the
financial statements of HomeServices.Com Inc., of our report dated July 14,
1999, relating to the financial statements of Paul Semonin Company, and of our
report dated August 27, 1999, relating to the consolidated financial statements
of Roy H. Long Realty Co., Inc., which appear in such Registration Statement. We
also consent to the references to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
Kansas City, Missouri
September 13, 1999
<PAGE>
Exhibit 23.3
[LETTERHEAD OF KPMG LLP]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MidAmerican Realty Services Company:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
------------------------
KPMG LLP
KPMG LLP
Des Moines, Iowa
September 13, 1999
