<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1999.
REGISTRATION NO. 333-82997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------
HOMESERVICES.COM INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<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>
--------------
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 OCTOBER 6, 1999
3,750,000 SHARES
[GRAPHIC OMITTED]
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 Trading symbol: Nasdaq Stock National Market--HMSV
-------------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 12.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------- --------------
<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.
<PAGE>
[Edina Realty Logo] [Iowa Realty Logo] [J.C. Nichols Residential Logo]
[CBS Home Real Estate Logo] [Paul Semonin Realtors Logo]
[Long Realty Company Logo]
146 Office Locations
o = Office Location(s)
* = Major Market
[Map of HomeServices' branch offices]
Managing the Full Homeownership Life Cycle
(Median 7 Year Cycle)
[Computer graphic]
[Home Services.com Logo]
Prospecting/ Buy/Sell
Listing Home
the Home Transaction
Home Dividends Mortgage
Referrals for: Origination
o mechanical repair/replacement Transaction
o lawn maintenance
o roofing
CUSTOMER
FOR LIFE
Home Dividends Closing
Referrals for: Transaction
o decorating
o remodeling
o appliances
o repair
Home Connections
Referrals for:
o waste
o gas
o electric
o cable
o long-distance
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary .................................................... 2
Risk Factors ............................................... 12
Special Note Regarding Forward-looking Statements .......... 22
Use of Proceeds ............................................ 22
Dividend Policy ............................................ 22
Dilution ................................................... 23
Capitalization ............................................. 24
Unaudited Pro Forma Condensed Consolidated Financial
Information ................................................ 25
Selected Consolidated Financial Data ....................... 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 38
Business ................................................... 53
Management ................................................. 68
Principal and Selling Stockholders ......................... 81
Certain Relationships and Related Transactions ............. 82
Description of Capital Stock ............................... 86
Description of Indebtedness ................................ 91
Shares Eligible for Future Sale ............................ 93
United States Federal Tax Considerations Relating to
Non-United States Holders .................................. 94
Underwriting ............................................... 97
Legal Matters .............................................. 100
Experts .................................................... 100
Where You Can Find More Information ........................ 101
Index to Financial Statements .............................. F-1
</TABLE>
-------------------------------
You should rely only on the information contained in this prospectus.
HomeServices has 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.
1
<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 occurred on the date of this prospectus;
o assumes that the underwriters' over-allotment option is not
exercised; and
o that is pro forma gives effect to the historical acquisitions of
all of HomeServices' brokerage firm operating subsidiaries which
were completed during the third and fourth quarters of 1998 and the
third quarter of 1999 and to the offering as if they had occurred
at the beginning of the earliest period presented.
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. 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. HomeServices' operations are largely concentrated in the
Midwest. In addition to providing traditional residential real estate brokerage
services, HomeServices cross sells to its existing real estate customers
preclosing services, such as mortgage origination, closing administrative
services and title abstracting, 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 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.
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 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.
While HomeServices commenced operations in May 1998 with its acquisition of
Iowa Realty and Edina Realty, the real estate brokerage firms that currently
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
2
<PAGE>
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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 pursuant to a services agreement which will be on terms
HomeServices believes to be as favorable as it could obtain from an unrelated
third party. Under the services agreement, HomeServices will be 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 addition to the services agreement, HomeServices and
MidAmerican Holdings will enter into a registration rights agreement and a tax
indemnity agreement in connection with the offering.
GROWTH STRATEGY. HomeServices' business objective is to become a seamless
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 will
continue to seek acquisition and consolidation opportunities in the
highly fragmented United States residential real estate brokerage
industry.
o Expanding its presence in its existing markets. HomeServices will
seek to expand the coverage of its existing markets under the same
brand names, primarily through opening additional offices, hiring
additional sales associates and incremental acquisitions in
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.
o Offering referrals for various home care and other products 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 that
serve the needs of homeowners throughout the complete home
ownership cycle. By continuing to develop its E-commerce operations
which were launched in August 1999, HomeServices also seeks to
generate on-line banner advertising and sponsorship revenues.
3
<PAGE>
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HOMESERVICES' ORGANIZATIONAL STRUCTURE
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 merger. 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>
- -------------------------------
* 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.
4
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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 22 for an expanded
discussion.
Nasdaq National Market symbol.......... HMSV
5
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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 give 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.
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, in Louisville, Kentucky. In August 1999, HomeServices acquired Long
Realty, in Tucson, Arizona.
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.
6
<PAGE>
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HISTORICAL DATA
<TABLE>
<CAPTION>
PREDECESSOR HOMESERVICES
------------------------------------- --------------------------------------
SIX MONTHS
JAN 1 - MAY 28 - MAY 28 - ENDED
YEAR ENDED DECEMBER 31, MAY 27, DEC 31, JUNE 30, JUNE 30,
------------------------- ----------- ------------ ------------ -----------
1996 1997 1998 1998 1998 1999
------------ ------------ ----------- ------------ ------------ -----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Commission revenue ............................... $ 179,378 $ 191,083 $ 74,893 $ 169,647 $ 26,244 $148,979
Title fees ....................................... 14,821 16,203 7,575 14,154 2,455 10,644
Other(a) ......................................... 22,092 7,410 3,769 6,790 1,019 8,101
Total revenues .................................. 216,291 214,696 86,237 190,591 29,718 167,724
Commission expense ............................... 115,331 125,148 49,107 113,225 16,687 102,085
Amortization of pending real estate sales
contracts ....................................... -- -- -- 18,271 4,744 --
Depreciation and amortization .................... 5,103 5,619 2,293 4,177 600 3,718
All other operating expenses(a) .................. 85,162 72,808 31,126 59,265 7,878 52,242
Total operating expenses ...................... 205,596 203,575 82,526 194,938 29,909 158,045
Operating income (loss) .......................... 10,695 11,121 3,711 (4,347) (191) 9,679
Interest and other income (expense), net ......... (2,582) (903) (94) (1,334) (228) (1,775)
Income (loss) before income taxes ................ 8,113 10,218 3,617 (5,681) (419) 7,904
Income taxes (benefit) ........................... 3,263 4,725 1,664 (2,247) (166) 3,278
Minority interest ................................ 1,276 633 -- -- -- --
Net income (loss) ................................ $ 3,574 $ 4,860 $ 1,953 $ (3,434) $ (253) $ 4,626
Pro forma earnings (loss) per share:(b)
Basic and diluted ............................. $ 0.53 $ 0.72 $ 0.29 $ (0.51) $ (0.04) $ 0.68
Pro forma weighted average shares
outstanding:(b)
Basic and diluted ............................. 6,779 6,779 6,779 6,779 6,779 6,779
OTHER DATA:
EBITDA(c) ........................................ $ 15,798 $ 16,740 $ 6,004 $ 18,101 $ 5,153 $ 13,397
Net cash provided by (used in) operating
activities ...................................... 2,134 5,297 4,991 12,428 5,014 16,198
Net cash used in investing activities ............ (8,874) (6,759) (891) (99,126) (70,342) (5,890)
Net cash provided by (used in) financing
activities ...................................... 10,664 (1,575) (1,940) 89,812 72,133 (1,878)
</TABLE>
7
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HISTORICAL DATA
<TABLE>
<CAPTION>
PREDECESSOR HOMESERVICES
----------------------- ---------------------------
AS OF AS OF
AS OF DECEMBER 31, DECEMBER 31, JUNE 30,
----------------------- -------------- ----------
1996 1997 1998 1999
---------- ---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 5,627 $ 2,590 $ 3,114 $ 11,544
Total assets(a) ................................... 95,504 62,346 128,520 132,001
Long-term debt, including current portion ......... 16,397 7,651 61,445 59,567
Stockholders' equity .............................. 33,699 36,791 35,194 39,938
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR HOMESERVICES
----------------------------------- ---------------------------------
SIX MONTHS
MAY 28 - MAY 28 - ENDED
YEAR ENDED DECEMBER 31, JAN 1 - DEC 31, JUNE 30, JUNE 30,
----------------------- MAY 27, ---------- ---------- -----------
1996 1997 1998 1998 1998 1999
----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Closed transaction sides ........................... 47,836 48,631 18,578 41,580 6,530 33,393
Average home sales price (in thousands) ............ $ 120.9 $ 127.1 $ 132.3 $ 138.1 $ 130.8 $ 146.0
Closed transaction volume
(Closed transaction sides multiplied by
average home sales price) (in millions) ........... $ 5,783 $ 6,183 $ 2,458 $ 5,741 $ 854 $ 4,877
Average sales commission (%)
(Commission revenues divided by home sales
volume) ........................................... 3.1% 3.1% 3.0% 3.0% 3.1% 3.1%
Number of branch offices (at period end) ........... 103 103 98 124 97 123
Number of sales associates (at period end) ......... 3,063 3,298 3,056 4,282 3,032 4,303
</TABLE>
8
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PRO FORMA DATA
<TABLE>
<CAPTION>
HOMESERVICES PRO FORMA
-------------------------------------------
YEAR ENDED SIX MONTHS ENDED JUNE 30
DECEMBER 31, ---------------------------
1998 1998 1999
------------- ------------- -----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT
AMOUNTS PER SHARE)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Commission revenue .......................................... $ 356,433 $ 162,432 $188,952
Title fees .................................................. 22,965 10,344 10,644
Other(a) .................................................... 15,032 7,844 8,759
Total revenues ............................................. 394,430 180,620 208,355
Commission expense .......................................... 243,036 110,024 130,879
Amortization of pending real estate sales contracts ......... 21,026 21,026 --
Depreciation and amortization ............................... 9,410 4,215 4,609
All other operating expenses(a) ............................. 119,714 54,516 61,123
Total operating expenses ................................. 393,186 189,781 196,611
Operating income (loss) ..................................... 1,244 (9,161) 11,744
Interest and other income (expense), net .................... (3,118) (1,612) (2,012)
Income (loss) before income taxes ........................... (1,874) (10,773) 9,732
Income taxes (benefit) ...................................... (654) (4,307) 4,019
Net income (loss) ........................................... $ (1,220) $ (6,466) $ 5,713
Pro forma earnings (loss) per share:(b)
Basic .................................................... $ (0.12) $ (0.62) $ 0.55
Diluted .................................................. $ (0.12) $ (0.62) $ 0.54
Pro forma weighted average shares outstanding:(b)
Basic .................................................... 10,423 10,423 10,423
Diluted .................................................. 10,423 10,423 10,676
OTHER DATA:
EBITDA(c) ................................................... $ 31,680 $ 16,080 $ 16,353
Net cash provided by (used in) operating activities ......... 25,998 18,058 19,376
Net cash used in investing activities ....................... (128,377) (126,099) (6,011)
Net cash provided by (used in) financing activities ......... 116,308 108,041 (3,898)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------
HISTORICAL PRO FORMA
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 11,544 $ 29,877
Total assets(a) ................................... 132,001 183,052
Long-term debt, including current portion ......... 59,567 60,578
Stockholders' equity .............................. 39,938 78,688
</TABLE>
9
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PRO FORMA DATA
<TABLE>
<CAPTION>
HOMESERVICES PRO FORMA
-----------------------------------------
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1998 1998 1999
------------- ----------- -----------
<S> <C> <C> <C>
OPERATING DATA:
Closed transaction sides .................................... 87,974 39,282 42,482
Average home sales price (in thousands) ..................... $ 138.0 $ 136.7 $ 146.1
Closed transaction volume
(Closed transaction sides multiplied by average
home sales price) (in millions) ............................ $12,137 $ 5,368 $ 6,208
Average sales commission (%)
(Commission revenues divided by home sales volume) ......... 2.9% 3.0% 3.0%
Number of branch offices (at period end) .................... 148 148 146
Number of sales associates (at period end) .................. 5,769 5,608 5,822
</TABLE>
- ---------------------------
(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
the merger of the two which was consummated on the date of this
prospectus. 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 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.
10
<PAGE>
- --------------------------------------------------------------------------------
(footnote continued)
The following table presents the calculation of EBITDA on a historical
basis for each of the periods shown:
<TABLE>
<CAPTION>
PREDECESSOR HISTORICAL HOMESERVICES HISTORICAL
--------------------------------- -------------------------------------
SIX
YEAR ENDED DECEMBER MONTHS
31, JAN. 1- MAY 28- MAY 28- ENDED
--------------------- MAY 27, DEC 31, JUNE 30, JUNE 30,
1996 1997 1996 1998 1998 1999
--------- --------- --------- ------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) ..................... $ 3,574 $ 4,860 $1,953 $ (3,434) $ (253) $ 4,626
Minority interest ..................... 1,276 633 --
Income taxes (benefit) ................ 3,263 4,725 1,664 (2,247) (166) 3,278
Interest and other (income) expense,
net .................................. 2,582 903 94 1,334 228 1,775
------- ------- ------ -------- ------- -------
Operating income (loss) ............... 10,695 11,121 3,711 (4,347) (191) 9,679
Depreciation and amortization ......... 5,103 5,619 2,293 4,177 600 3,718
Amortization of pending real estate
sales contracts ...................... -- -- -- 18,271 4,744 --
------- ------- ------ -------- ------- -------
EBITDA ................................ $15,798 $16,740 $6,004 $ 18,101 $ 5,153 $13,397
</TABLE>
The following table presents the calculation of EBITDA on a pro forma
basis for each of the periods shown:
<TABLE>
<CAPTION>
HOMESERVICES PRO FORMA
---------------------------------------
YEAR
ENDED SIX MONTHS ENDED JUNE
DECEMBER 30,
31, ------------------------
1998 1998 1999
------------ ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss) ........................................... $ (1,220) $ (6,466) $ 5,713
Income taxes (benefit) ...................................... (654) (4,307) 4,019
Interest and other (income) expense, net .................... 3,118 1,612 2,012
-------- -------- -------
Operating income (loss) ..................................... 1,244 (9,161) 11,744
Depreciation and amortization ............................... 9,410 4,215 4,609
Amortization of pending real estate sales contracts ......... 21,026 21,026 --
-------- -------- -------
EBITDA ...................................................... $ 31,680 $ 16,080 $16,353
</TABLE>
11
<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
12
<PAGE>
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 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:
13
<PAGE>
o periods of economic slowdown or recession;
o natural disasters such as floods, hurricanes or tornadoes;
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.
14
<PAGE>
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.
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,
15
<PAGE>
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.
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
16
<PAGE>
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.
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' senior secured revolving credit
agreement and 7.12% senior notes 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 revolving credit
agreement 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 are pledged to secure borrowings under the senior
secured revolving credit agreement. As a
17
<PAGE>
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' senior secured revolving credit facility will have a prior
claim to the assets of its subsidiaries prior to the holders of HomeServices'
common stock.
HOMESERVICES RECORDS A SIGNIFICANT AMOUNT OF GOODWILL ON ITS BALANCE SHEET AND
CANNOT ASSURE YOU AS TO THE RECOVERABILITY OF THIS AMOUNT
As of June 30, 1999, goodwill, net of accumulated amortization, comprised
approximately 55.3% of HomeServices' total assets and approximately 186.0% of
stockholders' equity. Goodwill arises when an acquirer accounts for a business
acquisition under the purchase method of accounting and the purchase price is
more than the fair value of the tangible and separately measurable intangible
net assets of that business. Generally accepted accounting principles require
that this goodwill and all other intangible assets be amortized over the period
benefitted. Amortization represents a noncash deduction in the determination of
operating income and so reduces reported earnings, but it does not reduce cash
flows.
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. Management
has determined that the period of benefit to be derived from goodwill is at
least 30 years. If management had overlooked factors indicating that shorter
benefit periods were appropriate for material portions of goodwill, earnings
for periods immediately following the acquisition would be overstated. In later
years, HomeServices would then be burdened by the continuing charge against
earnings without receiving the associated benefits to income expected by
management earlier in arriving at the consideration paid for that business. In
that case, earnings in later years could even be impaired if management later
determines that the goodwill period selected earlier was not appropriate or if
management later determines that goodwill is not recoverable as a result of
events or changes in circumstances. The amount of the impairment or writeoff
would be the difference between the goodwill and the present value of the
estimated expected future cash flows over the remaining life of the goodwill.
Such writeoff could adversely affect HomeServices' business, financial
condition and the market price of its common stock.
Management has reviewed with its independent accountants all of the factors and
expected associated future cash flows which it considered in determining the
amount paid to acquire companies. Management has concluded that the expected
associated future cash flows from goodwill will continue for at least 30 years
and that there was no material evidence to indicate that any material portion
of the expected benefits from goodwill would dissipate in a shorter period.
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
18
<PAGE>
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:
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
19
<PAGE>
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, REGISTRATION RIGHTS AGREEMENT AND TAX INDEMNITY
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, a registration rights agreement and a tax indemnity 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 may not
unilaterally terminate the services agreement. As a result, HomeServices will
be required to make the monthly fee and reimbursement payments under the
services agreement to MidAmerican Holdings until the earlier of (a) the date
HomeServices and MidAmerican Holdings mutually agree to terminate the agreement
and (b) the 180th day after MidAmerican Holdings notifies HomeServices that it
no longer owns at least 5% of the HomeServices common stock. HomeServices
believes that the terms of its services agreement, registration rights
agreement and tax indemnity 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
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,"
"--Services Agreement" and "--Tax Indemnity 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' common stock has been approved for quotation on the Nasdaq
National Market, HomeServices does not know 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.
20
<PAGE>
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 up to
3,900,000 shares of common stock reserved for issuance under HomeServices'
employee stock option plan, the employee and non-employee stock purchase plans
and the options granted to directors for their initial agreement to serve. 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.
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.
21
<PAGE>
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
$0.19 per share in 1997. HomeServices did not pay any cash dividends on the
common stock during 1998 or 1999.
22
<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>
23
<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, 2,000,000 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, 38,000,000 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."
24
<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.
25
<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 ..........
<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.
26
<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 the merger of the two which was consummated on
the date of this prospectus and (c) the issuance of the 2,187,500 shares
to be sold by HomeServices in the offering after the merger.
27
<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 .......
<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.
28
<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 the merger of the two which was consummated on the date of this
prospectus and (c) the issuance of the 2,187,500 shares to be sold by
HomeServices in the offering after the merger.
29
<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 is 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
30
<PAGE>
(footnote continued)
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 the merger of the two which was consummated on the date of this
prospectus and (c) the issuance of the 2,187,500 shares to be sold by
HomeServices in the offering after the merger. A 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>
31
<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
======== ========
<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 62,797 -- 62,797
-------- -------- ------- --------
Total liabilities ............................ 10,518 104,364 -- 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.
32
<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.
33
<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
<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
</TABLE>
34
<PAGE>
<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 AND SHARES IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA: (CONT.)
Earnings (loss) per share:(b)
Basic and diluted ............ $ 0.54 $ 0.29 $ 0.76 $ 1.03 $ 0.41 $ (0.51) $ (0.04) $ 0.68
Weighted average shares
outstanding:(b)
Basic and diluted ............ 4,694 4,694 4,694 4,719 4,748 6,779 6,779 6,779
OTHER DATA:
EBITDA (c) .................... $ 6,456 $ 5,881 $ 15,798 $ 16,740 $ 6,004 $ 18,101 $ 5,153 $ 13,397
Net cash provided by (used in)
operating activities ......... 68 (2,503) 2,134 5,297 4,991 12,428 5,014 16,198
Net cash used in investing
activities ................... (4,004) (6,502) (8,874) (6,759) (891) (99,126) (70,342) (5,890)
Net cash provided by (used in)
financing activities ......... 3,820 9,571 10,664 (1,575) (1,940) 89,812 72,133 (1,878)
</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
----------- ----------- ----------- -----------
OPERATING DATA:
<S> <C> <C> <C> <C>
Closed transaction sides ............. 15,726 16,233 47,836 48,631
Average home sales price
(in thousands) ...................... $ 106.3 $ 118.8 $ 120.9 $ 127.1
Closed transaction volume
(Closed transaction sides
multiplied by average home
sales price) (in millions) .......... $ 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
<CAPTION>
PREDECESSOR HOMESERVICES
----------- ---------------------------------
SIX MONTHS
JAN 1 - MAY 28 - MAY 28 - ENDED
MAY 27, DEC. 31, JUNE 30, JUNE 30,
1998 1998 1998 1999
----------- ---------- ---------- -----------
OPERATING DATA:
<S> <C> <C> <C> <C>
Closed transaction sides ............. 18,578 41,580 6,530 33,393
Average home sales price
(in thousands) ...................... $ 132.3 $ 138.1 $ 130.8 $ 146.0
Closed transaction volume
(Closed transaction sides
multiplied by average home
sales price) (in millions) .......... $ 2,458 $ 5,741 $ 854 $ 4,877
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>
35
<PAGE>
- -------------------------------
(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 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) Earnings (loss) per share of the predecessor is computed using restated
weighted average shares outstanding, after giving effect to a
restructuring of its common stock which occurred in 1997. Earnings (loss)
per share of HomeServices 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 the merger of the two which was consummated on the
date of this prospectus.
(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
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.
36
<PAGE>
(footnote continued)
The following table presents the calculation of EBITDA for each of the
periods shown:
<TABLE>
<CAPTION>
PREDECESSOR HOMESERVICES
------------------------------------------------- -----------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------- SIX MONTHS
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>
37
<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 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.
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 Realty ........... $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;
38
<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 39 years using straight-line
and accelerated methods. As of June 30, 1999, goodwill, net of accumulated
amortization, comprised approximately 55.3% of HomeServices' total assets and
approximately 186.0% of stockholders' equity. Goodwill arises when an acquirer
accounts for a business acquisition under the purchase method of accounting and
the purchase price is more than the fair value of the tangible and separately
measurable intangible net assets of that business. Goodwill is an accumulation
of various factors that HomeServices believes will lead to profits above
39
<PAGE>
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. Generally accepted accounting principles
require that this goodwill and all other intangible assets be amortized over
the period benefitted. Amortization represents a noncash deduction in the
determination of operating income and so reduces reported earnings, but it does
not reduce cash flows.
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. Management
has determined that the period of benefit to be derived from goodwill is at
least 30 years. If management had overlooked factors indicating that shorter
benefit periods were appropriate for material portions of goodwill, earnings
for periods immediately following the acquisition would be overstated. In later
years, HomeServices would then be burdened by the continuing charge against
earnings without receiving the associated benefits to income expected by
management earlier in arriving at the consideration paid for that business. In
that case, earnings in later years could even be impaired if management later
determines that the goodwill period selected earlier was not appropriate or if
management later determines that goodwill is not recoverable as a result of
events or changes in circumstances. The amount of the impairment or writeoff
would be the difference between the goodwill and the present value of the
estimated expected future cash flows over the remaining life of the goodwill.
Such writeoff could adversely affect HomeServices' business, financial
condition and the market price of its common stock.
Management has reviewed with its independent accountants all of the factors and
expected associated future cash flows which it considered in determining the
amount paid to acquire companies. Management has concluded that the expected
associated future cash flows from goodwill will continue for at least 30 years
and that there was no material evidence to indicate that any material portion
of the expected benefits from goodwill would dissipate in a shorter period.
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.
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.
40
<PAGE>
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. 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.
41
<PAGE>
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 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.
42
<PAGE>
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 $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
43
<PAGE>
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.
44
<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 3.5%, 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.
45
<PAGE>
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 $2.5 million increase in office property and equipment.
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.
46
<PAGE>
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 noted.
<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.
47
<PAGE>
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.
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 $3.2 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 costs 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
48
<PAGE>
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 $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. As of December 31, 1998 and June 30, 1999, there were
no borrowings 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.
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."
49
<PAGE>
On September 20, 1999, HomeServices entered into a new $75 million senior
secured revolving credit agreement with its existing commercial bank and other
banks which amended and restated its then existing $25.0 million revolving
credit facility. The senior secured revolving credit agreement has a term of
three years and is secured by a pledge of the capital stock of all of the
existing and future subsidiaries of HomeServices. The terms of the $75.0
million senior secured 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 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. 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
---------- ---------- ----------- ---------- ----------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<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>
50
<PAGE>
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 $1.7 million in costs related to
addressing the year 2000 issue. HomeServices does not expect the total
remaining cost of readiness to exceed $500,000.
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 assessed over 70% 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
assess material third parties entails obtaining information about their year
2000 preparedness activities via correspondence, published reports and/or
websites, and by direct contact (in person or via telephone) as necessary for
additional details about their year 2000 readiness, supply chain assessment,
contingency planning activities and other relevant information. The results of
each assessment 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
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<PAGE>
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, 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.
52
<PAGE>
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 not
produced any revenues to date, HomeServices has been receiving mortgage and
referral applications on-line and has transactions in process. However, no
revenues will be recognized from these services until the transactions close.
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 many services
required in connection with settlement of a home purchase, such as real estate
listings, mortgage applications, inspections, appraisals, title insurance and
legal work, which the survey refers to as "one-stop shopping." HomeServices
provides many of the services that are considered by the survey to be "one-stop
shopping." 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
53
<PAGE>
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 median
seven-year home ownership life cycle and maintain its customers throughout the
home ownership experience. HomeServices 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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<PAGE>
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 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. HomeServices
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 these services for
loans or sales originated by it at no cost to the customer. As
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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
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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 a full-service provider in
the residential real estate industry. HomeServices believes its
ability to offer brokerage, preclosing and postclosing products and
services 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
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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.
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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.
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
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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.
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
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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.
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
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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;
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;
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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 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.
HomeServices has already established a hyperlink with Realtor.com, a leading
Internet real estate website. In addition, certain of HomeServices' brokerage
firm operating
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subsidiaries have established hyperlinks with Realtor.com and HomeAdvisor.com,
another leading Internet real estate website, and with websites of local
newspapers in HomeServices' existing markets. These hyperlinks enable
HomeServices and its 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.
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.
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EMPLOYEES AND SALES ASSOCIATES
As of June 30, 1999, HomeServices employed approximately 1,260 individuals,
including 360 part-time employees, and had more than 4,300 sales associates,
who are independent contractors and 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."
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
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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.
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.
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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 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
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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.
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.
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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, 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. Upon exercise of these
options, each of the directors will pay $294,500 to purchase 50,000 shares of
HomeServices common stock having an aggregate market value of $800,000,
assuming that the market value per share of common stock is $16.00, which is
the midpoint of the estimated range of the initial public offering price per
share.
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>
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- -------------------------------
(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.
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.
HomeServices expects, shortly following the consummation of the offering, to
amend the financial performance goals contained in the existing employment
agreement with Mr. Peltier so that the goals
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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.
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
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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.
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.
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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 its shareholders, including MidAmerican Holdings,
have 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 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 250,000 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 a specified percentage of the employee's base
pay or a whole dollar amount to be withheld from 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:
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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.
A brief summary of certain of the federal income tax consequences to the
participant and HomeServices with respect to the purchase of common stock under
the em ployee stock purchase plan may be found at page 79 under "Incentive
Stock Options."
NON-EMPLOYEE STOCK PURCHASE PLAN
HomeServices has adopted, and its shareholders, including MidAmerican Holdings,
have 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 250,000 shares of common stock has been
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.
A brief summary of certain of the federal income tax consequences to the
participant and HomeServices with respect to the purchase of common stock under
the non-employee stock purchase plan may be found at page 78 under
"Nonqualified Stock Options."
1999 EQUITY INCENTIVE PLAN
HomeServices has adopted, and its shareholders, including MidAmerican Holdings,
have approved, HomeServices' 1999 equity incentive plan. A maximum of 3,000,000
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.
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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 3,000,000 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. 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.
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No person may be granted restricted stock under the equity plan in any calendar
year representing an aggregate of more than 3,000,000 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. Shortly after the closing of the offering, HomeServices
expects to grant stock options pursuant to the 1999 equity incentive plan. As
of October 6, 1999, no decision has been made as to the number, the identity of
the recipients or the other terms of stock option awards.
CERTAIN FEDERAL INCOME TAX EFFECTS
The following is a brief summary of the federal income tax consequences to
persons who are granted options under the 1999 equity incentive plan or who are
participants in the employee stock purchase plan or the non-employee stock
purchase plan. It is recommended that holders of nonqualified stock options or
incentive stock options and participants in the employee stock purchase plan or
the non-employee stock purchase plan consult their tax advisers before the
exercise of any such option or the purchase of any such shares and before
disposing of any shares of common stock acquired upon the exercise of an option
or purchased under either of the stock purchase plans. Different rules may apply
in the case of a participant in the 1999 equity incentive plan, the employee
stock purchase plan or the non-employee stock purchase plan who is also subject
to Section 16 of the Exchange Act with respect to HomeServices.
NONQUALIFIED STOCK OPTIONS
An optionee generally will not be taxed upon the grant of a nonqualified stock
option. Rather, at the time of exercise of such nonqualified stock option (and
in the case of an untimely exercise of an incentive stock option), the optionee
will recog nize ordinary income for federal income tax purposes in an amount
equal to the excess of the fair market value of the shares purchased over the
option price.
HomeServices will generally be entitled to a tax deduction at such time and in
the same amount that the optionee recognizes ordinary income.
If shares of common stock acquired upon exercise of a nonqualified stock option
(or upon untimely exercise of an incentive stock option) are later sold or
exchanged, then the difference between the sales price and the fair market value
of such stock on the date that ordinary income was recognized with respect
thereto will generally be taxable as long-term or short-term capital gain or
loss (if the stock is a capital asset of the optionee) depending upon the length
of time the shares of common stock were held by the optionee.
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INCENTIVE STOCK OPTIONS
An optionee will not be in receipt of taxable income upon the grant of an
incentive stock option. Exercise of an incentive stock option will be timely if
made during its term and if the optionee remains an employee of HomeServices or
a subsidiary of HomeServices at all times during the period beginning on the
date of grant of the incentive stock option and ending on the date three months
before the date of exercise (or one year before the date of exercise in the case
of a disabled optionee). Exercise of an incentive stock option will also be
timely if made by the legal representative of an optionee who dies either while
in the employ of the Company or a subsidiary or within three months after
termination of employment. The tax consequences of an untimely exercise of an
incentive stock option will be determined in accordance with the rules
applicable to nonqualified stock options. (See "Certain Federal Income Tax
Effects - Nonqualified Stock Options.")
If common stock acquired pursuant to the timely exercise of an incentive stock
option is later disposed of, the optionee will, except as noted below, recognize
long-term capital gain or loss (if the stock is a capital asset of the optionee)
equal to the difference between the amount realized upon such sale and the
option price. HomeServices, under these circumstances, will not be entitled to
any federal income tax deduction in connection with either the exercise of the
incentive stock option or the sale of such common stock by the optionee.
If, however, common stock acquired pursuant to the exercise of an incentive
stock option is disposed of by the optionee prior to the expiration of two years
from the date of grant of the incentive stock option or within one year from the
date such common stock is transferred to him upon exercise (a "disqualifying
disposition"), any gain realized by the optionee generally will be taxable at
the time of such disqualifying disposition as follows: (i) the gain realized by
the optionee will be taxable at ordinary income rates to the extent of the
difference between the option price and the lesser of the fair market value of
the stock on the date the incentive stock option is exercised or the amount
realized on such disqualifying disposition and (ii) if the stock is a capital
asset of the optionee, the gain realized by the optionee will be taxable as
short-term or long-term capital gain to the extent of any excess of the amount
realized on such disqualifying disposition over the fair market value of the
stock on the date which governs the determination of his ordinary income. In
such case, HomeServices may claim a federal income tax deduction at the time of
such disqualifying disposition for the amount taxable to the optionee as
ordinary income. Any capital gain recognized by the optionee will be long-term
or short-term capital gain, depending on the length of time the shares of common
stock were held by the optionee.
The amount by which the fair market value of the stock on the exercise date of
an incentive stock option exceeds the option price will be an item of adjustment
for purposes of the "alternative minimum tax" imposed by Section 55 of the Code.
EXERCISE WITH SHARES
According to a published ruling of the Internal Revenue Service, an optionee who
pays the option price upon exercise of a nonqualified stock option, in whole or
in part, by delivering shares of common stock already owned by him will
recognize no gain or loss for federal income tax purposes on the shares
surrendered, but otherwise will be taxed according to the rules described above
for nonqualified stock options. (See "Certain Federal Income Tax
Effects--Nonqualified Stock Options.") With respect to shares of common stock
acquired upon exercise which are equal in number to the shares of common stock
surrendered in payment of the option price of the nonqualified stock option, the
basis of those shares of common stock will be equal to the basis of the shares
of common stock surrendered, and the holding period of the shares of common
stock acquired will include the holding period of the shares of common stock
surrendered. The basis of additional shares received upon exercise will be equal
to the fair market value of such shares on the date which governs the
determination of the optionee's ordinary income, and the holding period for such
additional shares will commence on such date.
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The Treasury Department has issued proposed regulations that, if adopted in
their current form, would appear to provide for the following rules with respect
to the exercise of an incentive stock option by surrender of previously owned
shares of common stock. If the shares of common stock surrendered in payment of
the exercise price of an incentive stock option are "statutory option stock"
(which includes stock acquired pursuant to the exercise of an incentive stock
option) and if, at the date of surrender, the applicable holding period for such
shares of common stock had not been met, the surrender of those shares of common
stock will consti tute a "disqualifying disposition" and any gain realized on
such transfer will be taxable to the optionee, as discussed above under "Certain
Federal Income Tax Effects -- Incentive Stock Options." Otherwise, when shares
of common stock are surrendered upon exercise of an incentive stock option, in
general, (i) no gain or loss will be recognized as a result of the exchange,
(ii) with respect to shares of common stock acquired upon exercise which are
equal in number to the shares of common stock surrendered in payment of the
option price of the nonqualified stock option will have a basis equal to the
shares surrendered and, except for purposes of deter mining whether a
disposition will be a disqualifying disposition, will have a holding period that
includes the holding period of the shares exchanged, and (iii) any additional
shares of common stock received will have a zero basis and will have a holding
period that begins on the date of exercise of the nonqualified stock option. If
any of the shares received are disposed of within two years of the date of grant
of the incentive stock option or within one year after exercise, the shares of
common stock with the lowest basis will be deemed to be disposed of first, and
the disposition will be a disqualifying disposition giving rise to ordinary
income as discussed above under "Certain Federal Income Tax Effects -- Incentive
Stock Options."
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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
(14 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
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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 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. The services agreement will terminate on the earlier to occur of (a)
the date HomeServices and MidAmerican Holdings mutually agree to terminate the
agreement and (b) the 180th day after MidAmerican Holdings notifies
HomeServices that it no longer owns at least 5% of the HomeServices common
stock.
TAX INDEMNITY AGREEMENT
HomeServices will enter into a tax indemnity agreement with MidAmerican Holdings
that reflects each party's rights and obligations with respect to payments and
refunds of taxes attributable to periods beginning prior to and including the
date of completion of the offering. The tax indemnity agreement will provide for
payments between the two companies for certain tax adjustments made after the
offering. HomeServices will be required to pay MidAmerican Holdings the amount
of taxes attributable to the business and operations of HomeServices and its
subsidiaries for any taxable year or period ending on or before the closing of
the offering, and MidAmerican Holdings will be required to pay HomeServices the
amount of tax benefits, including refunds, attributable to the business and
operations of HomeServices and its subsidiaries for any taxable year or period
ending on or before the closing of the offering. For purposes of calculating the
payments required to be made, the tax indemnity agreement requires MidAmerican
Holdings to compute its tax liability as if MidAmerican Holdings and
HomeServices were two separate tax group filers and as if they were both one
consolidated tax group. If MidAmerican Holdings' tax liability as one
consolidated group was greater than its tax liability if it were to file
separately from HomeServices, then HomeServices would be required under the tax
indemnity agreement to pay the difference to MidAmerican Holdings. If, however,
its tax liability as one consolidated group was less than its tax liability if
it were to file separately from HomeServices, then MidAmerican Holdings would be
required to pay the difference to HomeServices. HomeServices is unable to
estimate at this time the amount of tax liability that it may be required to pay
to MidAmerican Holdings or the amount of tax benefit that it may be entitled to
receive from MidAmerican Holdings under the actual terms of the tax indemnity
agreement. During 1998, HomeServices paid to MidAmerican Holdings $4,257,800 for
its estimated share of consolidated federal and state income tax liabilities.
If, however, the tax indemnity agreement had been in place during 1998,
HomeServices would have been required to pay the same amount to MidAmerican
Holdings based on the facts and circumstances that existed at the time of the
payments. Other provisions in the tax indemnity agreement cover the filing of
tax returns, handling of audits, settlements, elections and cooperation with
respect to these matters.
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
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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 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.
On the date of this prospectus, MidAmerican Realty Services Company, a then
95.2% owned subsidiary of MidAmerican Energy Holdings Company, was merged with
and into HomeServices, a then wholly owned subsidiary of MidAmerican Holdings.
HomeServices was the surviving corporation in the merger. In the merger,
HomeServices issued 677.87 shares of its common stock for each share
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of common stock of MidAmerican Realty Services Company. Accordingly,
HomeServices issued 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. Following this merger and before consummation of the offering,
HomeServices became the holding company for the HomeServices' real estate
brokerage firm operating subsidiaries and was 95.2% owned by MidAmerican
Holdings.
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.
<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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DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, HomeServices will have:
o 38,000,000 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 2,000,000 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
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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 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
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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.
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-thousandth of
a preferred share attached to it. The purchase price per one one-thousandth 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.
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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 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. The restated certificate of
incorporation of HomeServices contains a provision electing not to be governed
by Section 203.
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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;
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' common stock has been 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 AGREEMENT
On September 20, 1999, HomeServices entered into a $75.0 million senior secured
revolving credit agreement which amended and restated its then existing $25.0
million unsecured revolving credit facility. The revolving credit agreement has
a term of three years and is secured by a pledge of the capital stock of all of
the existing and future subsidiaries of HomeServices.
Under the revolving credit agreement, 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 revolving credit agreement 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 revolving credit agreement requires 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 revolving
credit agreement 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
as published by The Wall Street Journal. 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 revolving credit agreement contains a number of covenants, including
limitations on (1) restricted dividends and other payments and restricted
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 include limitations on changes in lines of business,
consolidations, mergers, asset dispositions, liens, loans and advances to
certain affiliates, transactions with affiliates and modifications of
HomeServices' certificate of incorporation. HomeServices is 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 for each completed fiscal year beginning
with 1998 plus 50% of the net proceeds received from sales of HomeServices'
stock from the closing of the offering. In addition, the revolving credit
agreement 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 revolving credit agreement 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.
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
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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.
On September 20, 1999, in connection with the amendment and restatement of the
revolving credit agreement, the 7.12% senior notes became secured by a pledge
of the capital stock of all of the subsidiaries of HomeServices. Prior to
September 20, 1999, the 7.12% senior notes were unsecured. The 7.12% senior
notes rank on an equal basis with borrowings outstanding under the revolving
credit agreement.
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 contained in the revolving credit agreement 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 up to
3,900,000 shares of common stock reserved for issuance under the employee stock
option plan, the employee and non-employee stock purchase plans and the options
granted to directors for their initial agreement to serve. 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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<PAGE>
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.
95
<PAGE>
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.
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.
96
<PAGE>
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 than $ 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.
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.
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
97
<PAGE>
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
closing of the offering. 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 Inc. 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' common stock has been approved for quotation on The Nasdaq Stock
Market's National Market under the symbol "HMSV."
Each of U.S. Bancorp Piper Jaffray Inc. 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. An affiliate of
U.S. Bancorp Piper Jaffray Inc. is a lender under HomeServices' $75 million
senior secured 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.
99
<PAGE>
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.
100
<PAGE>
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.
101
<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-52
Balance Sheets as of December 31, 1998 and 1997 ....................................... F-53
Statements of Income for the years ended December 31, 1998 and 1997 ................... F-54
Statements of Changes in Stockholders' Equity for the years ended December 31, 1998
and 1997 ............................................................................. F-55
Statements of Cash Flows for the years ended December 31, 1998 and 1997 ............... F-56
Notes to Financial Statements ......................................................... F-57
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS OF HOME REAL ESTATE COMPANY OF OMAHA
Report of Independent Accountants .................................................. F-64
Statement of Income for the period from May 8, 1998 through August 18, 1998 ........ F-65
Statement of Changes in Stockholders' Equity for the period from May 8, 1998 through
August 18, 1998 ................................................................... F-66
Statement of Cash Flows for the period from May 8, 1998 through August 18, 1998 .... F-67
Notes to Financial Statements ...................................................... F-68
CONSOLIDATED FINANCIAL STATEMENTS OF ROY H. LONG REALTY CO., INC.
Report of Independent Accountants .................................................. F-70
Consolidated Balance Sheet as of December 31, 1998 ................................. F-71
Consolidated Statement of Income for the year ended December 31, 1998 .............. F-72
Consolidated Statement of Changes in Stockholders' Equity for the year ended
December 31, 1998 ................................................................. F-73
Consolidated Statement of Cash Flows for the year ended December 31, 1998 .......... F-74
Notes to Consolidated Financial Statements ......................................... F-75
</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 may enter into branding agreements with third parties, which
allow the Company's tradenames and logos to be associated with the activities
conducted by the third parties. Revenue from these agreements is recognized as
service is provided or, in the case of up-front payments, when no additional
services or obligations are required of the Company.
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 to established
brokerage companies. In exchange for certain fees, the Company provides the
right to use certain names and related trademarks. 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, designed to cover
administrative costs incurred by the Company, is recognized as revenue when the
franchise agreement is effective, at which time all initial services are
provided, the Company has no remaining material conditions or obligations and
the franchisee has begun operating under the new name. Revenue related to
ongoing franchise revenue is recognized upon the closing of real estate sales
transactions. The Company provides advertising, supervision, training and
assistance in support of its ongoing franchisees.
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.
F-48
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
(9) INCOME TAXES
Income taxes for the years ended December 31, 1997 and 1996, were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current ................ $4,019 2,877
Deferred ............... 706 386
------ -----
Total .................. $4,725 3,263
====== =====
</TABLE>
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.
F-49
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (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 years ended
December 31, 1997 and 1996 (in thousands):
<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>
F-50
<PAGE>
IOWA REALTY CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 (CONTINUED)
(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.
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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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.
F-58
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-59
<PAGE>
PAUL SEMONIN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unrealized holding gains and losses on available-for-sale securities are
reported on the balance sheet in a separate component of stockholders' equity.
(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-60
<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-61
<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-62
<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-63
<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.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
July 2, 1999
F-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri ------------------------------
August 27, 1999 PricewaterhouseCoopers LLP
F-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<PAGE>
3,750,000 SHARES
HOMESERVICES.COM INC.
COMMON STOCK
[GRAPHIC OMITTED]
-----------------------------
PROSPECTUS
-----------------------------
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 .................................................... 7,831
----------
Nasdaq National Market listing fee .......................... 78,875
Accounting fees and expenses ................................ 1,245,000
Legal fees and expenses ..................................... 900,000
Printing and engraving ...................................... 475,000
Transfer agent's fees ....................................... 3,500
Blue sky fees and expenses (including counsel fees) ......... 5,000
Miscellaneous expenses ...................................... 9,112
----------
Total ..................................................... $2,743,500
==========
</TABLE>
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
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
II-1
<PAGE>
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 338,936
shares of common stock
at a purchase price of $4.50 per share, on a po`st-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
$1,525,657.
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 consummation of the offering, MidAmerican Realty Services
Company, a then 95.2% owned subsidiary of MidAmerican Energy Holdings Company,
will be merged with and into HomeServices, a then wholly owned subsidiary of
MidAmerican Holdings. HomeServices will be the surviving corporation in the
merger. In the merger, HomeServices will issue approximately 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.
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 Senior, Secured Revolving Credit Agreement by and between MidAmerican Realty
Services Company, as borrower, and La Salle Bank National Association, as a lender and
administrative agent and U.S. Bank National Association, as a lender and co-agent, and
Bank of America, N.A. as a lender, dated as of September 20, 1999.
10.7 + Employment Agreement dated as of May 27, 1998 between MidAmerican Realty
Services Company and Ronald J. Peltier.
10.8 + Employment Agreement, dated as of September 1, 1998, between J.C. Nichols
Residential, Inc. and Jack W. Frost.
10.9 + Employment Agreement, dated as of May 27, 1998, between MidAmerican Realty
Services Company and Arne Rovick.
10.10+ Employment Agreement, dated as of August 18, 1998, between Home Real Estate
Company of Omaha and Joseph J. Valenti.
10.11+ Employment Agreement, dated as of May 27, 1998, between MidAmerican Realty
Services Company and R. Michael Knapp.
10.12+ Form of Tax Indemnity Agreement.
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>
II-3
<PAGE>
- -------------------------------
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES:
None.
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. 5 TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN EDINA, MINNESOTA,
ON OCTOBER 6, 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. 5 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 October 6, 1999
- -----------------------------
David L. Sokol
/s/ Ronald J. Peltier President, Chief Executive Officer October 6, 1999
- ----------------------------- and Director
Ronald J. Peltier
/s/ Dwayne J. Coben Senior Vice President and Chief October 6, 1999
- ----------------------------- Financial Officer
Dwayne J. Coben (principal financial and
accounting officer)
* Director October 6, 1999
- -----------------------------
Jack W. Frost
* Director October 6, 1999
- -----------------------------
R. Michael Knapp
* Director October 6, 1999
- -----------------------------
Steven A. McArthur
* Director October 6, 1999
- -----------------------------
Gregory E. Abel
* Director October 6, 1999
- -----------------------------
Richard R. Jaros
* Director October 6, 1999
- -----------------------------
W. David Scott
* By: /s/ Dwayne J. Coben
------------------------
Dwayne J. Coben
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
October 6, 1999
HomeServices.Com Inc.
6800 France Avenue South, Suite 600
Edina, Minnesota 55435
Re: HomeServices.Com Inc.
Registration Statement on Form S-1
(File No. 333-82997)
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel to HomeServices.Com Inc., a Delaware
corporation (the "Company"), in relation to the initial public offering by the
Company of up to 2,515,625 shares (including 328,125 shares subject to an
over-allotment option) (the "Primary Shares") and the sale by MidAmerican Energy
Holdings Company, an Iowa corporation ("MidAmerican Holdings"), of up to
1,796,875 shares (including 234,375 shares subject to an over-allotment option)
(the "Secondary Shares" and, together with the Primary Shares, the "Shares"), of
the Company's common stock, par value $0.01 per share (the "Common Stock").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-82997) as filed with the Securities and
Exchange Commission (the "Commission") on July 16, 1999 under the Act; (ii)
Amendment No. 1 to the Registration Statement as filed with the Commission on
<PAGE>
HomeServices.Com Inc.
October 6, 1999
Page 2
August 24, 1999 under the Act; (iii) Amendment No. 2 to the Registration
Statement as filed with the Commission on August 31, 1999 under the Act; (iv)
Amendment No. 3 to the Registration Statement as filed with the Commission on
September 13, 1999 under the Act; (v) Amendment No. 4 to the Registration
Statement as filed with the Commission on September 20, 1999 under the Act; (vi)
Amendment No. 5 to the Registration Statement as filed with the Commission on
October 6, 1999 under the Act (such Registration Statement, as so amended, being
hereinafter referred to as the "Registration Statement"); (vii) a draft of the
Underwriting Agreement (the "Underwriting Agreement") proposed to be entered
into by and among the Company, as issuer, and U.S. Bancorp Piper Jaffray Inc.,
as representatives of the several underwriters named therein (the
"Underwriters"), in the form filed as Exhibit 1.1 to the Registration Statement;
(viii) a specimen certificate representing the Common Stock, in the form filed
as Exhibit 4.1 to the Registration Statement; (ix) the Certificate of
Incorporation of the Company, as currently in effect; (x) the By-Laws of the
Company, as currently in effect; (xi) a draft of the Amended and Restated
Certificate of Incorporation of the Company, in the form filed as Exhibit 3.3 to
the Registration Statement; (xii) a draft of the Amended and Restated By-Laws of
the Company, in the form filed as Exhibit 3.4 to the Registration Statement;
(xiii) a draft of the Agreement and Plan of Merger ("Merger Agreement") between
MidAmerican Realty Services Company, an Iowa corporation ("MidAmerican Realty"),
and the Company, relating to the merger of MidAmerican Realty with and into the
Company (the "Merger"), in the form filed as Exhibit 2.1 to the Registration
Statement; (xiv) a draft of the Certificate of Merger to be filed with the
Secretary of State of the State of Delaware in the form attached as an exhibit
to the draft Merger Agreement (the "Certificate of Merger"), which Certificate
of Merger also sets forth the changes to the Certificate of Incorporation of the
Company to be effected by the Merger; (xv) certain resolutions of the Board of
Directors of the Company, dated July 13, 1999, and drafts of certain resolutions
(the "Draft Resolutions") of the Pricing Committee of the Board of Directors of
the Company (the "Pricing Committee"), relating to the issuance and sale of the
Shares, the Merger and related matters; and (xvi) certain resolutions of the
stockholders of the Company, dated October 6, 1999, relating to the Merger and
related matters. We also have examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
<PAGE>
HomeServices.Com Inc.
October 6, 1999
Page 3
In our examination, we have assumed the legal capacity of all natural persons,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed by parties other than the Company, we have
assumed that such other parties had the power, corporate or other, to enter into
and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution and
delivery by such other parties of such documents and the validity and binding
effect thereof on such other parties. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Company and others.
Members of our firm are admitted to the bar in the State of New York
and we do not express any opinion as to the laws of any jurisdiction other than
the General Corporation Law of the State of Delaware, and we do not express any
opinion as to the effect of any other laws on the opinion stated herein.
Based upon and subject to the foregoing, we are of the opinion that:
1. When (i) the Registration Statement becomes effective under the Act;
(ii) the Draft Resolutions have been adopted by the Pricing Committee; (iii) the
price at which the Primary Shares are to be sold to the Underwriters pursuant to
the Underwriting Agreement and other matters relating to the issuance and sale
of the Primary Shares have been approved by the Pricing Committee in accordance
with the Draft Resolutions; (iv) the Underwriting Agreement has been duly
executed and delivered; (v) certificates representing the Primary Shares in the
form of the specimen certificate examined by us have been manually signed by an
authorized officer of the transfer agent and registrar for the Common Stock and
registered by such transfer agent and registrar, and have been delivered to and
paid for by the Underwriters at a price per share not less than the per share
par value of the Common Stock as contemplated by the Underwriting Agreement; and
(vi) the Merger Agreement has been duly executed and delivered and the
Certificate of Merger has been duly executed and filed with the Secretary of
State of the State of Delaware, the issuance and sale of the Primary Shares will
have been duly authorized, and the Primary Shares will be validly issued, fully
paid and nonassessable.
2. When (i) the Registration Statement becomes effective under the Act;
(ii) the certificates representing the Secondary Shares in the form of the
<PAGE>
HomeServices.Com Inc.
October 6, 1999
Page 4
specimen certificate examined by us have been manually signed by an authorized
officer of the transfer agent and registrar for the Common Stock and registered
by such transfer agent and registrar; and (iii) the Merger Agreement has been
duly executed and delivered and the Certificate of Merger has been duly executed
and filed with the Secretary of State of the State of Delaware, the issuance and
sale of the Secondary Shares will have been duly authorized, and the Secondary
Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
us under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
<PAGE>
HOMESERVICES.COM INC.
1999 EQUITY INCENTIVE PLAN
1. ESTABLISHMENT AND PURPOSE.
There is hereby adopted the HomeServices.Com Inc. 1999 Equity Incentive
Plan (the "Plan"). The Plan is intended to promote the interests of
HomeServices.Com Inc. (the "Company") by providing employees of the Company with
appropriate incentives and rewards to encourage them to enter into and continue
in the employ of the Company and to acquire a proprietary interest in the
long-term success of the Company; and to reward the performance of individual
officers, other employees, consultants and directors in fulfilling their
responsibilities for long-range achievements.
2. DEFINITIONS.
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Affiliate" shall mean an affiliate of the Company, as defined in
Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(b) "Agreement" shall mean the written agreement between the Company
and a Participant evidencing an Award.
(c) "Award" shall mean any Option, Restricted Stock or Other
Stock-Based Award granted under the Plan.
(d) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Cause" shall mean (1) the willful and continued failure by the
Participant substantially to perform his or her duties and
obligations to the Company (other than any such failure resulting
from his or her incapacity due to physical or mental illness);
(2) the willful engaging by the Participant in misconduct which
is materially injurious to the Company; (3) the commission by the
Participant of a felony; or (4) the commission by the Participant
of a crime against the Company which is materially injurious to
the Company. For purposes of this Section 2(f), no act, or
failure to act, on a Participant's part shall be considered
"willful" unless done, or omitted to
<PAGE>
be done, by the Participant in bad faith and without reasonable
belief that his or her action or omission was in the best
interest of the Company. Determination of Cause shall be made by
the Committee in its sole discretion.
(g) "Change in Control" shall mean the occurrence, following the
Initial Public Offering, of any one of the following events:
(i) any Person (other than Parent) is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
(not including in the securities beneficially owned by such
person any securities acquired directly from the Company or
its Affiliates) representing 25% or more of the combined
voting power of the Company's then outstanding voting
securities;
(ii) the following individuals cease for any reason to constitute
a majority of the number of directors then serving:
individuals who, on the Effective Date, constitute the Board
and any new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors
of the Company) whose appointment or election by the Board
or nomination for election by the Company's stockholders was
approved or recommended by a vote of at least two-thirds
(2/3) of the directors then still in office who either were
directors on the Effective Date or whose appointment,
election or nomination for election was previously so
approved or recommended;
(iii) there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company
with any other corporation, other than (A) a merger or
consolidation which results in the directors of the Company
immediately prior to such merger or consolidation continuing
to constitute at least a majority of the board of directors
of the Company, the surviving entity or any parent thereof
or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person (other than Parent), directly or indirectly,
acquired 25% or more of the combined voting power of the
Company's then outstanding securities (not including in the
securities beneficially owned by such person any securities
acquired directly from the Company or its Affiliates); or
2
<PAGE>
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or there is consummated an
agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets (or any
transaction having a similar effect), other than a sale or
disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 50% of the
combined voting power of the voting securities of which are
owned by stockholders of the Company in substantially the
same proportions as their ownership of the Company
immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not
include any transaction or series of transactions pursuant to
which Parent sells, exchanges or otherwise disposes of all or any
portion of the shares of Stock then beneficially owned by Parent,
including, but not limited to any public offering of Stock by
Parent, or a disposition of Stock by Parent by means of a spin-off
or other distribution to the Company's stockholders, excluding for
these purposes any transaction or series of transactions pursuant
to which the Company's other stockholders also are selling,
exchanging or otherwise disposing of (or are entitled to sell,
exchange or otherwise dispose of) all or any portion of the shares
of Stock then beneficially owned by such stockholders.
(h) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any regulations promulgated
thereunder.
(i) "Committee" shall mean the committee established by the
Board to administer the Plan. Following the Initial Public
Offering, to the extent permitted by Rule 16b-3 and Section
162(m) of the Code, the Committee may establish a
sub-committee to make grants and otherwise administer the
Plan with respect to the Executive Officers of the Company,
the composition of which sub-committee shall satisfy the
provisions of Rule 16b-3 and Section 162(m) of the Code, and
for all applicable purposes hereof, such sub-committee shall
be treated as the Committee.
(j) "Company"shall mean HomeServices.Com Inc., a corporation
organized under the laws of the State of Delaware, or any
successor corporation.
(k) "Director" shall mean a member of the Board.
3
<PAGE>
(l) "Disability" shall mean: (1) any physical or mental
condition that would qualify a Participant for a disability
benefit under the long-term disability plan maintained by
the Company and applicable to him or her; (2) when used in
connection with the exercise of an Incentive Stock Option
following termination of employment, disability within the
meaning of Section 22(e)(3) of the Code, or (3) such other
condition as may be determined in the sole discretion of the
Committee to constitute Disability.
(m) "Effective Date" shall mean the date on which the Plan is
approved by Parent, as sole stockholder of the Company.
(n) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(o) "Executive Officer" shall have the meaning set forth in Rule
3b-7 promulgated under the Exchange Act.
(p) The "Fair Market Value" of a share of Stock as of a
particular date shall mean (I) AS OF ANY DATE OCCURRING
PRIOR TO THE INITIAL PUBLIC OFFERING, THE BOOK VALUE PER
SHARE OF THE STOCK, AS DETERMINED BY THE COMMITTEE OR (ii)
from and after the date of the Initial Public Offering, the
average of the high and low sales prices per share of Stock
on the national securities exchange on which the Stock is
principally traded, for the last preceding date on which
there was a sale of such Stock on such exchange.
(q) "Incentive Stock Option" shall mean an Option that is an
"incentive stock option" within the meaning of Section 422
of the Code, or any successor provision, and that is
designated by the Committee as an Incentive Stock Option.
(r) "Initial Public Offering" shall mean the initial public
offering of shares of Stock of the Company, as registered
with the Securities and Exchange Commission.
(s) "Issue Date" shall mean the date established by the
Committee on which certificates representing Restricted
Stock shall be issued by the Company pursuant to the terms
of Section 8(e).
(t) "Non-Employee Director" shall mean a member of the Board who
is not and has never been an employee of the Company.
4
<PAGE>
(u) "Non-Qualified Option" shall mean an Option other than an
Incentive Stock Option.
(v) "Option" shall mean an option to purchase a number of shares
of Stock granted pursuant to Section 7.
(w) "Other Stock-Based Award" shall mean an award granted
pursuant to Section 9.
(x) "Parent" shall mean Mid-American Energy Holdings, Inc. and
its successors and assigns.
(y) "Partial Exercise" shall mean an exercise of an Award for
less than the full extent permitted at the time of such
exercise.
(z) "Participant" shall mean (1) a director, employee or
consultant of the Company to whom an Award is granted
pursuant to the Plan and (2) upon the death of an individual
described in (1), his or her successors, heirs, executors
and administrators, as the case may be.
(aa) "Performance Goals" shall mean performance goals based on
one or more of the following criteria: (i) pre-tax income or
after-tax income, (ii) operating profit, (iii) return on
equity, assets, capital or investment, (iv) earnings or book
value per share, (v) sales or revenues, (vi) operating
expenses, (vii) Stock price appreciation and (viii)
implementation or completion of critical projects or
processes. Where applicable, the Performance Goals may be
expressed in terms of attaining a specified level of the
particular criteria or the attainment of a percentage
increase or decrease in the particular criteria, and may be
applied to one or more of the Company, a Subsidiary or
Affiliate, or a division or strategic business unit of the
Company, or may be applied to the performance of the Company
relative to a market index, a group of other companies or a
combination thereof, all as determined by the Committee. The
Performance Goals may include a threshold level of
performance below which no vesting will occur, levels of
performance at which specified vesting will occur, and a
maximum level of performance at which full vesting will
occur. Each of the foregoing Performance Goals shall be
determined in accordance with generally accepted accounting
principles and shall be subject to certification by the
Committee; provided that the Committee shall have the
authority to make equitable adjustments to the Performance
Goals in recognition of unusual or non-recurring events
affecting the Company or any Subsidiary or Affiliate or the
financial statements of the Company or any Subsidiary or
5
<PAGE>
Affiliate, in response to changes in applicable laws or
regulations, or to account for items of gain, loss or
expense determined to be extraordinary or unusual in nature
or infrequent in occurrence or related to the disposal of a
segment of a business or related to a change in accounting
principles.
(bb) "Person" shall have the meaning set forth in Section 3(a)(9)
of the Exchange Act, as modified and used in Sections 13(d)
and 14(d) thereof, except that such term shall not include
(1) the Company, (2) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company,
(3) an underwriter temporarily holding securities pursuant
to an offering of such securities or (4) a corporation
owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their
ownership of shares of Stock of the Company.
(cc) "Plan" shall mean the HomeServices.Com Inc. 1999 Equity
Incentive Plan, as amended from time to time.
(dd) "Reload Option" shall mean a Non-Qualified Stock Option
granted pursuant to Section 7(c)(5).
(ee) "Restricted Stock" shall mean a share of Stock which is
granted pursuant to the terms of Section 8 and which is
subject to the restrictions set forth in Section 8(c).
(ff) "Rule 16b-3" shall mean the Rule 16b-3 promulgated under the
Exchange Act, as amended from time to time.
(gg) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
(hh) "Shareholders Agreement" shall mean an agreement that each
Participant shall have executed prior to the exercise of any
Option or issuance of shares of Stock under any other Award
granted hereunder, provided that such Option exercise or
Stock issuance occurs prior to the Initial Public Offering.
(ii) "Stock" shall mean shares of the common stock, par value $.01
per share, of the Company.
6
<PAGE>
(jj) "Subsidiary" shall mean any corporation in an unbroken chain
of corporations beginning with the Company if, at the time
of granting of an Award, each of the corporations (other
than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the
chain.
(kk) "Vesting Date" shall mean the date established by the
Committee on which Restricted Stock may vest.
3. STOCK SUBJECT TO THE PLAN.
The maximum number of shares of Stock reserved for the grant or
settlement of Awards under the Plan shall be [ ], subject to adjustment as
provided herein. No more than [ ] shares of Stock may be awarded in respect of
Options, no more than [ ] shares of Stock may be awarded in respect of
Restricted Stock and no more than [ ] shares of Stock may be awarded in respect
of Other Stock-Based Awards to a single individual, in any case, in any given
year during the life of the Plan, which amounts shall be subject to adjustment
as provided herein. Determinations made in respect of the limitation set forth
in the preceding sentence shall be made in a manner consistent with Section
162(m) of the Code. Such shares may, in whole or in part, be authorized but
unissued shares or shares that shall have been or may be reacquired by the
Company in the open market, in private transactions or otherwise. If any shares
subject to an Award are forfeited, cancelled, exchanged or surrendered or if an
Award otherwise terminates or expires without a distribution of shares to the
holder of such Award, the shares of Stock with respect to such Award shall, to
the extent of any such forfeiture, cancellation, exchange, surrender,
termination or expiration, again be available for Awards under the Plan.
In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Stock, or other property),
recapitalization, Stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of holders of Awards under the Plan, then the Committee shall make such
equitable changes or adjustments as it deems necessary or appropriate to any or
all of (i) the number and kind of shares of Stock or other property (including
cash) that may thereafter be issued in connection with Awards, (ii) the number
and kind of shares of Stock or other property (including cash) issued or
issuable in respect of outstanding Awards, (iii) the exercise price, grant
price, or purchase price relating to any Award; provided that, with respect to
Incentive Stock Options, such adjustment shall be made in accordance with
7
<PAGE>
Section 424(h) of the Code, (iv) the Performance Goals and (v) the individual
limitations applicable to Awards.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. The Committee shall
have the authority in its sole discretion, subject to and not inconsistent with
the express provisions of the Plan, to administer the Plan and to exercise all
the powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, the authority to grant Awards; to determine the persons to whom and
the time or times at which Awards shall be granted; to determine the type and
number of Awards to be granted, the number of shares of Stock to which an Award
may relate and the terms, conditions, restrictions and Performance Goals
relating to any Award; to determine whether, to what extent, and under what
circumstances an Award may be settled, canceled, forfeited, exchanged, or
surrendered; to make adjustments in the Performance Goals in recognition of
unusual or non-recurring events affecting the Company or the financial
statements of the Company (to the extent not inconsistent with Section 162(m) of
the Code, if applicable), or in response to changes in applicable laws,
regulations, or accounting principles; to construe and interpret the Plan and
any Award; to prescribe, amend and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of Agreements; and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The Committee may, in its absolute discretion, without amendment to the
Plan, (a) accelerate the date on which any Option granted under the Plan becomes
exercisable, waive or amend the operation of Plan provisions respecting the
exercise of such Option (whether before or after termination of employment), or
otherwise adjust any of the terms of such Option, (b) accelerate the Vesting
Date or waive any condition imposed hereunder with respect to any Restricted
Stock and (c) otherwise adjust any of the terms applicable to any Award;
provided, however, in each case, that in the event of the occurrence of a Change
in Control, the provisions of Section 10 shall govern the vesting and
exercisability schedule of any Award granted hereunder.
No member of the Committee shall be liable for any action, omission or
determination relating to the Plan, and the Company shall indemnify (to the
extent permitted under Delaware law) and hold harmless each member of the
Committee and each other director or employee of the Company to whom any duty or
power relating to the administration or interpretation of the Plan has been
delegated against any cost or expense (including counsel fees) or liability
(including any sum paid in settlement of a claim with the approval of the
Committee) arising out of any action, omission or determination relating to the
Plan, unless, in either case, such action, omission or determination was
8
<PAGE>
taken or made by such member, director or employee in bad faith and without
reasonable belief that it was in the best interests of the Company.
5. ELIGIBILITY.
Incentive Stock Options shall be granted only to key employees
(including officers and directors who are also employees) of the Company, its
parent or any of its Subsidiaries. All other Awards may be granted to officers,
independent contractors, key employees and non-employee directors of the Company
or of any of its Subsidiaries and Affiliates.
6. AWARDS UNDER THE PLAN; AGREEMENT.
The Committee may grant Options, Restricted Stock and Other Stock-Based
Awards in such amounts and with such terms and conditions as the Committee shall
determine, subject to the provisions of the Plan.
Each Award granted under the Plan shall be evidenced by an Agreement
which shall contain such provisions as the Committee may in its sole discretion
deem necessary or desirable. By accepting an Award, a Participant thereby agrees
that the award shall be subject to all of the terms and provisions of the Plan
and the applicable Agreement.
7. OPTIONS.
(a) Identification of Options. Each Option shall be clearly
identified in the applicable Agreement as either an Incentive
Stock Option or a Non-Qualified Option.
(b) Exercise Price. Each Agreement with respect to an Option shall
set forth the exercise price per share of Stock payable by the
grantee to the Company upon exercise of the Option. The
exercise price per share of Stock shall be determined by the
Committee; provided, however, that in no case shall an Option
have an exercise price per share of Stock that is less than the
Fair Market Value of a share of Stock on the date the Option is
granted.
(c) Term and Exercise of Options.
(1) At the time of the grant of an Option, the Committee may
impose such restrictions or conditions to the
exercisability of such Option as it, in its absolute
discretion, deems appropriate, including the
9
<PAGE>
attainment of Performance Goals. The Committee shall
determine the expiration date of each Option; provided,
however, that no Option shall be exercisable more than 10
years after the date of grant.
(2) An Option may be exercised for all or any portion of the
Stock as to which it is exercisable, provided that no
Partial Exercise of an Option shall be for an aggregate
exercise price of less than $100.00. The Partial Exercise
of an Option shall not cause the expiration, termination
or cancellation of the remaining portion thereof.
(3) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its
Secretary. Such notice shall be accompanied by the
applicable Agreement, shall specify the number of shares
of Stock with respect to which the Option is being
exercised and the effective date of the proposed exercise
and shall be signed by the Participant or other person
then having the right to exercise the Option. Payment for
Stock purchased upon the exercise of an Option shall be
made on the effective date of such exercise by one or a
combination of the following means: (i) in cash or by
personal check, certified check, bank cashier's check or
wire transfer; (ii) subject to the approval of the
Committee, in Stock owned by the Participant for at least
six months prior to the date of exercise and valued at
their Fair Market Value on the effective date of such
exercise; or (iii) subject to the approval of the
Committee, by such other provision as the Committee may
from time to time authorize.
(4) Certificates for Stock purchased upon the exercise of an
Option shall be issued in the name of the Participant or
other person entitled to receive such Stock, and delivered
to the Participant or such other person as soon as
practicable following the effective date on which the
Option is exercised.
(5) The Committee shall have the authority to specify, at the
time of grant or, with respect to Non-Qualified Options,
at or after the time of grant, that a Participant shall be
granted a new Non-Qualified Option (a "Reload Option") for
a number of shares of Stock equal to the number of shares
of Stock surrendered by the Participant upon exercise of
all or a part of an Option in the manner described
10
<PAGE>
in Section 7(c)(3)(ii) above, subject to the availability
of Stock under the Plan at the time of such exercise[;
PROVIDED, HOWEVER, THAT NO RELOAD OPTION SHALL BE GRANTED
TO A NON-EMPLOYEE DIRECTOR]. Reload Options shall be
subject to such conditions as may be specified by the
Committee in its discretion, subject to the terms of the
Plan.
(6) Prior to the Initial Public Offering, no portion of an
Option may be exercised until the holder thereof shall have
executed a Shareholders Agreement in such form as shall be
prescribed by the Committee in its discretion.
(d) Limitations on Incentive Stock Options.
(1) To the extent that the aggregate Fair Market Value of
Stock of the Company with respect to which Incentive Stock
Options are exercisable for the first time by a
Participant during any calendar year under the Plan and
any other option plan of the Company (or any Subsidiary)
shall exceed $100,000, such Options shall be treated as
Non-Qualified Options. Such Fair Market Value shall be
determined as of the date on which each such Incentive
Stock Option is granted.
(2) No Incentive Stock Option may be granted to an individual
if, at the time of the proposed grant, such individual
owns (or is attributed to own by virtue of the Code) Stock
possessing more than ten (10) percent of the total
combined voting power of all classes of stock of the
Company or any Subsidiary unless (i) the exercise price
per share of such Incentive Stock Option is at least 110
percent of the Fair Market Value of a share of Stock at
the time such Incentive Stock Option is granted and (ii)
such Incentive Stock Option is not exercisable after the
expiration of five years from the date such Incentive
Stock Option is granted.
(e) Effect of Termination of Employment.
(1) Unless the applicable Agreement provides otherwise, in the
event that the employment, directorship or consultancy
(together, hereinafter referred to as "employment") of a
Participant with the Company shall be terminated for any
reason other than (i) by the Company for Cause or (ii)
voluntarily by the Participant, (x)
11
<PAGE>
Options granted to such Participant, to the extent that
they were not exercisable as of the last day of the month
in which such termination occurs, shall expire as of the
close of business on the last day of such month and (y)
Options granted to such Participant, to the extent that
they are exercisable as of the last day of the month in
which such termination occurs, shall remain exercisable
until the expiration of their respective terms.
(2) Unless the applicable Agreement provides otherwise, in the
event that a Participant shall voluntarily terminate his
or her employment with the Company, (i) Options granted to
such Participant, to the extent that they are not
exercisable at the time of such termination, shall expire
at the close of business on the date of such termination
and (y) Options granted to such Participant, to the extent
that they are exercisable at the time of such termination,
shall remain exercisable until the date which is 90 days
following such termination, on which date they shall
expire; provided, however, that no Option shall be
exercisable after the expiration of its term.
(3) In the event of the termination of a Participant's
employment for Cause, all outstanding Options granted to
such Participant shall expire as of the commencement of
business on the date of such termination.
8. RESTRICTED STOCK.
(a) Issue Date and Vesting Date. At the time of the grant of
Restricted Stock, the Committee shall establish an Issue Date
or Issue Dates and a Vesting Date or Vesting Dates with
respect to such shares of Restricted Stock. The Committee
may divide such shares of Restricted Stock into classes and
assign a different Issue Date and/or Vesting Date for each
class. If the grantee is employed by the Company on an Issue
Date (which may be the date of grant), the specified number
of shares of Restricted Stock shall be issued in accordance
with the provisions of Section 8(f). Provided that all
conditions to the vesting of Restricted Stock imposed
pursuant to Section 8(c) are satisfied, and except as
provided in Section 8(h), upon the occurrence of the Vesting
Date with respect to Restricted Stock, such Restricted Stock
shall vest and the restrictions of Section 8(d) shall lapse.
(b) Conditionto Issuance. Prior to the Initial Public Offering, no
shares of Restricted Stock may be issued until the holder
thereof shall have executed
12
<PAGE>
a Shareholders Agreement in such form as shall be prescribed by
the Committee in its discretion.
(c) Conditions to Vesting. At the time of the grant of Restricted
Stock, the Committee may impose such restrictions or conditions
to the vesting of such Restricted Stock as it, in its absolute
discretion, deems appropriate, including the attainment of
Performance Goals.
(d) Restrictions on Transfer Prior to Vesting. Prior to the vesting
of any Restricted Stock, no transfer of a Participant's rights
with respect to such Restricted Stock, whether voluntary or
involuntary, by operation of law or otherwise, shall be
permitted. Immediately upon any attempt to transfer such
rights, such Restricted Stock, and all of the rights related
thereto, shall be forfeited by the Participant.
(e) Dividendson Restricted Stock. The Committee in its discretion
may require that any dividends or distributions paid on
Restricted Stock be held in escrow until all restrictions on
such Restricted Stock has lapsed.
(f) Issuance of Certificates.
(1) Reasonably promptly after the Issue Date with respect to
Restricted Stock (and if such issuance occurs prior to the
Initial Public offering, provided the condition of Section
8(b) has been satisfied), the Company shall cause to be
issued a certificate, registered in the name of the
Participant to whom such shares of Restricted Stock were
granted, evidencing such shares of Restricted Stock;
provided that the Company shall not cause such a
certificate to be issued unless it has received a power of
attorney duly endorsed in blank with respect to such
shares of Restricted Stock. Each such certificate shall
bear the following legend:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE STOCK
REPRESENTED HEREBY ARE SUBJECT TO THE RESTRICTIONS, TERMS
AND CONDITIONS (INCLUDING FORFEITURE PROVISIONS AND
RESTRICTIONS AGAINST TRANSFER) CONTAINED IN THE
HOMESERVICES.COM INC. 1999 EQUITY INCENTIVE PLAN AND AN
AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER OF
SUCH STOCK AND HOMESERVICES.COM INC. A COPY OF THE 1999
EQUITY INCENTIVE PLAN AND AGREEMENT IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
13
<PAGE>
Such legend shall not be removed until such Stock vests
pursuant to the terms hereof.
(2) Each certificate issued pursuant to this Section 8(f),
together with the powers relating to the Restricted Stock
evidenced by such certificate, shall be held by the
Company unless the Committee determines otherwise.
(g) Consequences of Vesting. Upon the vesting of any Restricted
Stock pursuant to the terms hereof, the restrictions of
Section 8(d) shall lapse with respect to such Restricted
Stock. Reasonably promptly after any Restricted Stock vests,
the Company shall cause to be delivered to the Participant
to whom such shares of Restricted Stock were granted a
certificate evidencing such Stock, free of the legend set
forth in Section 8(f).
(h) Effect of Termination of Employment.
(1) Unless the applicable Agreement provides otherwise, in the
event that the employment, directorship or consultancy
(together, hereinafter referred to as "employment") of a
Participant with the Company shall be terminated for any
reason other than (i) by the Company for Cause or (ii)
voluntarily by the Participant, any and all Stock to which
restrictions on transferability apply shall become
immediately vested and free of all restrictions.
(2) In the event that the employment of a Participant with the
Company shall be terminated (i) by the Company for Cause
or (ii) voluntarily by the Participant, all shares of
Restricted Stock granted to such Participant which are not
vested as of the date of such termination shall
immediately be returned to the Company, together with any
dividends or distributions paid on such shares of Stock,
in return for which the Company shall repay to the
Participant any amount paid by the Participant for such
shares of Stock.
9. OTHER STOCK-BASED AWARDS.
Other forms of Awards valued in whole or in part by reference to, or
otherwise based on, shares of Stock ("Other Stock-Based Awards") may be granted
either alone or in addition to other Awards under the Plan. Subject to the
provisions of the Plan, the
14
<PAGE>
Committee shall have sole and complete authority to determine the persons to
whom and the time or times at which such Other Stock-Based Awards shall be
granted, the number of shares of Stock to be granted pursuant to such Other
Stock-Based Awards and all other conditions of such Other Stock-Based Awards,
including the attainment of Performance Goals. Prior to the Initial Public
Offering, no shares of Stock may be issued pursuant to any Other Stock-Based
Award until the holder thereof shall have executed a Shareholders Agreement in
such form as shall be prescribed by the Committee in its discretion.
10. CHANGE IN CONTROL.
Notwithstanding anything in this Plan to the contrary, upon the
occurrence of a Change in Control, any Option that was not previously
exercisable and vested shall become fully exercisable and vested and the
restrictions and forfeiture conditions applicable to any other Award granted
under the Plan shall lapse and such Award shall be deemed fully vested.
Upon dissolution or liquidation of the Company, all Options and other
Awards granted under this Plan shall terminate, but each holder of an Option
shall have the right, immediately prior to such dissolution or liquidation, to
exercise his or her Option to the extent then exercisable.
11. RIGHTS AS A STOCKHOLDER.
No person shall have any rights as a stockholder with respect to any
shares of Stock covered by or relating to any Award until the date of issuance
of a certificate with respect to such shares of Stock. Except as otherwise
expressly provided in Section 3(b), no adjustment to any Award shall be made for
dividends or other rights prior to the date such certificate is issued.
12. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO AWARD.
Nothing contained in the Plan or any Agreement shall confer upon any
Participant any right with respect to the continuation of employment by the
Company or interfere in any way with the right of the Company, subject to the
terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
Participant.
No person shall have any claim or right to receive an Award hereunder.
The Committee's granting of an Award to a Participant at any time shall neither
require the Committee to grant any other Award to such Participant or other
person at any time or
15
<PAGE>
preclude the Committee from making subsequent grants to such Participant or any
other person.
13. SECURITIES MATTERS.
(a) The Company shall be under no obligation to effect the
registration pursuant to the Securities Act of any interests
in the Plan or any Stock to be issued hereunder or to effect
similar compliance under any state laws. Notwithstanding
anything herein to the contrary, the Company shall not be
obligated to cause to be issued or delivered any
certificates evidencing Stock pursuant to the Plan unless
and until the Company is advised by its counsel that the
issuance and delivery of such certificates is in compliance
with all applicable laws, regulations of governmental
authority and the requirements of any securities exchange on
which shares of Stock are traded. The Committee may require,
as a condition of the issuance and delivery of certificates
evidencing shares of Stock pursuant to the terms hereof,
that the recipient of such shares of Stock make such
agreements and representations, and that such certificates
bear such legends, as the Committee, in its sole discretion,
deems necessary or desirable.
(b) The transfer of any shares of Stock hereunder shall be
effective only at such time as counsel to the Company shall
have determined that the issuance and delivery of such
shares of Stock is in compliance with all applicable laws,
regulations of governmental authority, the requirements of
any securities exchange on which shares of Stock are traded.
The Committee may, in its sole discretion, defer the
effectiveness of any transfer of Stock hereunder in order to
allow the issuance of such Stock to be made pursuant to
registration or an exemption from registration or other
methods for compliance available under federal or state
securities laws. The Committee shall inform the Participant
in writing of its decision to defer the effectiveness of a
transfer. During the period of such deferral in connection
with the exercise of an Option, the Participant may, by
written notice, withdraw such exercise and obtain the refund
of any amount paid with respect thereto.
14. WITHHOLDING TAXES.
Whenever shares of Stock are to be delivered pursuant to an Award, the
Company shall have the right to require the Participant to remit to the Company
in cash an amount sufficient to satisfy any federal, state and local withholding
tax requirements related thereto. With the approval of the Committee, a
Participant may satisfy the foregoing
16
<PAGE>
requirement by electing to have the Company withhold from delivery shares of
Stock having a value equal to the amount of tax to be withheld; provided,
however, that the number of shares so withheld shall not have an aggregate Fair
Market Value in excess of the minimum federal and state withholding obligation.
Such shares of Stock shall be valued at their Fair Market Value on the date of
which the amount of tax to be withheld is determined. Fractional shares of Stock
amounts shall be settled in cash. Such a withholding election may be made with
respect to all or any portion of the Stock to be delivered pursuant to an Award.
15. NOTIFICATION OF ELECTION UNDER SECTION 83(B) OF THE CODE.
If any Participant shall, in connection with the acquisition of Stock
under the Plan, make the election permitted under Section 83(b) of the Code
(i.e., an election to include in gross income in the year of transfer the
amounts specified in Section 83(b)), such Participant shall notify the Company
of such election within 10 days of filing notice of the election with the
Internal Revenue Service, in addition to any filing and a notification required
pursuant to regulation issued under the authority of Section 83(b) of the Code.
16. NOTIFICATION UPON DISQUALIFYING DISPOSITION UNDER SECTION 421(B) OF THE
CODE.
Each Participant shall notify the Company of any disposition of Stock
issued pursuant to the exercise of an Incentive Stock Option under the
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), within 10 days of such disposition.
17. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may, at any time, suspend or terminate the Plan or revise or
amend it in any respect whatsoever; provided, however, that stockholder approval
shall be required if and to the extent the Board determines that such approval
is appropriate for purposes of satisfying Section 162(m) or 422 of the Code or
is otherwise required by law or applicable stock exchange requirements. Awards
may be granted under the Plan prior to the receipt of such approval but each
such grant shall be subject in its entirety to such approval and no award may be
exercised, vested or otherwise satisfied prior to the receipt of such approval.
Nothing herein shall restrict the Committee's ability to exercise its
discretionary authority pursuant to Section 4, which discretion may be exercised
without amendment to the Plan. No action hereunder may, without the consent of a
Participant, reduce the Participant's rights under any outstanding Award.
18. TRANSFERS UPON DEATH; NONASSIGNABILITY.
17
<PAGE>
Upon the death of a Participant, outstanding Awards granted to such
Participant may be exercised only by the executor or administrator of the
Participant's estate or by a person who shall have acquired the right to such
exercise by will or by the laws of descent and distribution. No transfer of an
Award by will or the laws of descent and distribution shall be effective to bind
the Company unless the Committee shall have been furnished with (a) written
notice thereof and with a copy of the will and/or such evidence as the Committee
may deem necessary to establish the validity of the transfer and (b) an
agreement by the transferee to comply with all the terms and conditions of the
Award that are or would have been applicable to the Participant and to be bound
by the acknowledgments made by the Participant in connection with the grant of
the Award and/or any Shareholders Agreement to which the Participant was a
party.
During a Participant's lifetime, the Committee may permit the transfer,
assignment or other encumbrance of an outstanding Option unless such Option is
an Incentive Stock Option and the Committee and the Participant intend that it
shall retain such status. Subject to any conditions as the Committee may
prescribe, a Participant may, upon providing written notice to the Secretary of
the Company, elect to transfer any or all Options granted to such Participant
pursuant to the Plan to members of his or her immediate family, including, but
not limited to, children, grandchildren and spouse or to trusts for the benefit
of such immediate family members or to partnerships in which such family members
are the only partners; provided, however, that no such transfer by any
Participant may be made in exchange for consideration.
19. EXPENSES AND RECEIPTS.
The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Award will be used for general
corporate purposes.
20. FAILURE TO COMPLY.
In addition to the remedies of the Company elsewhere provided for
herein, failure by a Participant (or beneficiary) to comply with any of the
terms and conditions of the Plan or the applicable Agreement, unless such
failure is remedied by such Participant (or beneficiary) within ten days after
notice of such failure by the Committee, shall be grounds for the cancellation
and forfeiture of such Award, in whole or in part, as the Committee, in its
absolute discretion, may determine.
18
<PAGE>
21. EFFECTIVE DATE AND TERM OF PLAN.
The Plan became effective on the Effective Date and, unless earlier
terminated by the Board, the right to grant Awards under the Plan will terminate
on the tenth anniversary of the Effective Date. Awards outstanding at Plan
termination will remain in effect according to their terms and the provisions of
the Plan.
22. APPLICABLE LAW.
Except to the extent preempted by any applicable federal law, the Plan
will be construed and administered in accordance with the laws of the State of
Delaware, without reference to its principles of conflicts of law.
23. PARTICIPANT RIGHTS.
No Participant shall have any claim to be granted any award under the
Plan, and there is no obligation for uniformity of treatment for Participants.
Except as provided specifically herein, a Participant or a transferee of an
Award shall have no rights as a stockholder with respect to any shares of Stock
covered by any award until the date of the issuance of a certificate or
certificates to him or her for such shares of Stock.
24. UNFUNDED STATUS OF AWARDS.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant pursuant to an Award, nothing contained in the Plan or any Agreement
shall give any such Participant any rights that are greater than those of a
general creditor of the Company.
25. BENEFICIARY.
A Participant may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. If no designated beneficiary
survives the Participant, the executor or administrator of the Participant's
estate shall be deemed to be the grantee's beneficiary.
26. INTERPRETATION.
The Plan is designed and intended to comply with Rule l6b-3 and, to the
extent applicable, with Section 162(m) of the Code, and all provisions hereof
shall be construed in a manner to so comply.
19
<PAGE>
27. SEVERABILITY.
If any provision of the Plan is held to be invalid or unenforceable,
the other provisions of the Plan shall not be affected but shall be applied as
if the invalid or unenforceable provision had not been included in the Plan.
20
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$75,000,000
SENIOR, SECURED REVOLVING CREDIT AGREEMENT
BY AND BETWEEN
MIDAMERICAN REALTY SERVICES COMPANY
AS BORROWER
AND
LASALLE BANK NATIONAL ASSOCIATION
AS A LENDER AND ADMINISTRATIVE AGENT
AND
U. S. BANK NATIONAL ASSOCIATION
AS A LENDER AND CO-AGENT
AND
BANK OF AMERICA, N.A.
AS A LENDER
DATED AS OF SEPTEMBER 20, 1999
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
SECTION 1. THE REVOLVING CREDIT..............................................................................1
SECTION 1.1. REVOLVING CREDIT.......................................................................1
SECTION 1.2. LOANS..................................................................................2
SECTION 1.3 LETTERS OF CREDIT.......................................................................2
SECTION 1.4. MANNER AND DISBURSEMENT OF BORROWING...................................................6
SECTION 1.5. MANNER OF OBTAINING LETTERS OF CREDIT..................................................7
SECTION 2. INTEREST ON LOANS AND CHANGE IN CIRCUMSTANCE......................................................7
SECTION 2.1. INTEREST RATE OPTIONS..................................................................7
SECTION 2.2. MINIMUM AMOUNTS........................................................................9
SECTION 2.3. COMPUTATION OF INTEREST................................................................9
SECTION 2.4. MANNER OF RATE SELECTION...............................................................9
SECTION 2.5. CHANGE OF LAW.........................................................................10
SECTION 2.6. UNAVAILABILITY OF DEPOSITS OR INABILITY TO ASCERTAIN ADJUSTED LIBOR...................10
SECTION 2.7. TAXES; INCREASED COSTS................................................................11
SECTION 2.8. CHANGE IN CAPITAL ADEQUACY REQUIREMENTS...............................................12
SECTION 2.9. FUNDING INDEMNITY.....................................................................13
SECTION 2.10. LENDING BRANCH........................................................................13
SECTION 2.11. DISCRETION OF LENDER AS TO MANNER OF FUNDING..........................................13
SECTION 2.12. LENDER'S DUTY TO MITIGATE.............................................................14
SECTION 3. FEES, PREPAYMENTS AND PAYMENTS...................................................................14
SECTION 3.1. CLOSING FEE...........................................................................14
SECTION 3.2. COMMITMENT FEE........................................................................14
SECTION 3.3. MANDATORY PREPAYMENTS.................................................................15
SECTION 3.4. VOLUNTARY PREPAYMENTS.................................................................15
SECTION 3.5. COMMITMENT REDUCTIONS.................................................................15
SECTION 3.6. PLACE AND APPLICATION OF PAYMENTS AND COLLECTIONS.....................................16
SECTION 3.7. NOTATIONS.............................................................................17
SECTION 3.8. ADMINISTRATIVE AGENT'S FEES...........................................................17
SECTION 4. DEFINITIONS, INTERPRETATION......................................................................17
SECTION 4.1. DEFINITIONS...........................................................................17
SECTION 4.2. INTERPRETATION........................................................................32
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................32
SECTION 5.1. ORGANIZATION; POWER AND AUTHORITY.....................................................32
</TABLE>
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SECTION 5.2. AUTHORIZATION, ETC....................................................................33
SECTION 5.3. FULL DISCLOSURE.......................................................................33
SECTION 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF COMPANY; SUBSIDIARIES; AFFILIATES.............33
SECTION 5.5. FINANCIAL STATEMENTS..................................................................34
SECTION 5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC..........................................34
SECTION 5.7. GOVERNMENTAL AUTHORIZATIONS, ETC......................................................34
SECTION 5.8. LITIGATION; OBSERVANCE OF AGREEMENTS; STATUTES AND ORDERS.............................34
SECTION 5.9. TAXES.................................................................................35
SECTION 5.10. TITLE TO PROPERTY LEASES..............................................................35
SECTION 5.11. LICENSES, PERMITS, ETC................................................................35
SECTION 5.12. COMPLIANCE WITH ERISA.................................................................36
SECTION 5.13. EXISTING DEBT; FUTURE LIENS...........................................................36
SECTION 5.14. FOREIGN ASSETS CONTROL REGULATIONS, ETC...............................................37
SECTION 5.15. STATUS UNDER CERTAIN STATUTES.........................................................37
SECTION 5.16. ENVIRONMENTAL MATTERS.................................................................37
SECTION 5.17. INTENTIONALLY OMITTED.................................................................38
SECTION 5.18. MARGIN STOCK..........................................................................38
SECTION 5.19. YEAR 2000.............................................................................38
SECTION 5.20. NO MATERIAL ADVERSE CHANGE............................................................38
SECTION 5.21. AFFILIATES............................................................................38
SECTION 5.22. COMPLIANCE WITH LAWS..................................................................38
SECTION 5.23. NO DEFAULT............................................................................39
SECTION 5.24. TRADENAMES AND TRADEMARKS.............................................................39
SECTION 6. CONDITIONS PRECEDENT.............................................................................39
SECTION 6.1. CONSOLIDATED NET WORTH................................................................39
SECTION 6.2. INTENTIONALLY OMITTED.................................................................40
SECTION 6.3. PLEDGE AGREEMENT AND PLEDGED SHARES...................................................40
SECTION 6.4. ALL ADVANCES..........................................................................40
SECTION 6.5. INITIAL ADVANCE.......................................................................41
SECTION 7. COVENANTS........................................................................................41
SECTION 7.1. FINANCIAL AND BUSINESS INFORMATION....................................................42
SECTION 7.2. OFFICER'S CERTIFICATE.................................................................44
SECTION 7.3. INSPECTION............................................................................45
SECTION 7.4. COMPLIANCE WITH LAW...................................................................45
SECTION 7.5. INSURANCE.............................................................................45
SECTION 7.6. MAINTENANCE OF PROPERTIES.............................................................46
SECTION 7.7. PAYMENT OF TAXES......................................................................46
SECTION 7.8. CORPORATE EXISTENCE, ETC..............................................................46
SECTION 7.9. CONSOLIDATED NET WORTH................................................................46
SECTION 7.10. FIXED CHARGES RATIO...................................................................47
SECTION 7.11. INTEREST CHARGES COVERAGE RATIO.......................................................47
SECTION 7.12. MAXIMUM LEVERAGE......................................................................47
</TABLE>
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SECTION 7.13. CONSOLIDATED TOTAL DEBT RATIO........................................................47
SECTION 7.14. CAPITAL EXPENDITURES.................................................................47
SECTION 7.15. INCURRENCE OF DEBT....................................................................47
SECTION 7.16. PRIORITY DEBT........................................................................48
SECTION 7.17. RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS.......................................48
SECTION 7.18. LIENS................................................................................48
SECTION 7.19. MERGER, CONSOLIDATION, ETC...........................................................50
SECTION 7.20. SALE OF ASSETS, ETC..................................................................51
SECTION 7.21. LINE OF BUSINESS.....................................................................51
SECTION 7.22. TRANSACTIONS WITH AFFILIATES.........................................................52
SECTION 7.23. AMENDMENT TO CERTIFICATE OF INCORPORATION............................................52
SECTION 7.24. USE OF PROCEEDS......................................................................52
SECTION 7.25. PARI PASSU RANK WITH OTHER SENIOR NOTES..............................................52
SECTION 7.26. PERMITTED ACQUISITIONS...............................................................53
SECTION 7.27. FORMATION OR ACQUISITION OF SUBSIDIARIES.............................................54
SECTION 7.28. PARENT COMPANY DEBT..................................................................54
SECTION 8. EVENTS OF DEFAULT AND REMEDIES...................................................................54
SECTION 8.1. EVENTS OF DEFAULT.....................................................................54
SECTION 8.2. NON-BANKRUPTCY DEFAULT REMEDIES.......................................................56
SECTION 8.3. BANKRUPTCY DEFAULT REMEDIES...........................................................56
SECTION 8.4. CASH COLLATERALIZATION OF LETTERS OF CREDIT IN DEFAULT................................57
SECTION 9. TO ADMINISTRATIVE AGENT AND CO-AGENT.............................................................57
SECTION 9.1. APPOINTMENT AND AUTHORIZATION.........................................................57
SECTION 9.2. RIGHTS AS A LENDER....................................................................57
SECTION 9.3. STANDARD OF CARE......................................................................58
SECTION 9.4. COSTS AND EXPENSES....................................................................59
SECTION 9.5. INDEMNITY.............................................................................59
SECTION 9.6. CO-AGENT .............................................................................59
SECTION 10. MISCELLANEOUS...................................................................................59
SECTION 10.1. HOLIDAYS.............................................................................59
SECTION 10.2. NO WAIVER, CUMULATIVE REMEDIES.......................................................59
SECTION 10.3. WAIVERS, MODIFICATIONS AND AMENDMENTS................................................60
SECTION 10.4. COSTS AND EXPENSES...................................................................60
SECTION 10.5. DOCUMENTARY TAXES....................................................................60
SECTION 10.6. SURVIVAL OF REPRESENTATIONS..........................................................61
SECTION 10.7. SURVIVAL OF INDEMNITIES..............................................................61
SECTION 10.8. NOTICES..............................................................................61
SECTION 10.9. HEADINGS.............................................................................62
SECTION 10.10. SEVERABILITY OF PROVISIONS...........................................................63
SECTION 10.11. COUNTERPARTS.........................................................................63
SECTION 10.12. BINDING NATURE, GOVERNING LAW, ETC...................................................63
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 10.13. ENTIRE UNDERSTANDING.................................................................63
SECTION 10.14. PARTICIPATION........................................................................63
SECTION 10.15. ASSIGNMENT AGREEMENTS................................................................63
SECTION 10.16. CONFIDENTIALITY......................................................................64
SECTION 10.17. CHANGE IN CONTROL....................................................................65
SECTION 10.18. CONSENT TO JURISDICTION..............................................................67
SECTION 10.19. WAIVER OF JURY TRIAL.................................................................67
</TABLE>
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SENIOR, SECURED REVOLVING CREDIT AGREEMENT
TO: LaSalle Bank National Association
individually as a Lender
and as Administrative Agent
and
U. S. Bank National Association
individually as a Lender and as
Co-Agent
and
Bank of America, N.A.,
individually as a Lender
and
Each other Lender from time
to time party hereto
Ladies and Gentlemen:
The undersigned MidAmerican Realty Services Company, an Iowa corporation (the
"Company"), applies to the Lenders for your several commitments, subject to all
the terms and conditions hereof and on the basis of the representations and
warranties hereinafter set forth, to make credit accommodations available to the
Company, all as more fully hereinafter set forth. Each of you is hereinafter
referred to individually as a "Lender", all of you are hereinafter referred to
collectively as the "Lenders". LaSalle Bank National Association, in its
capacity as administrative agent for the Lenders is hereinafter referred to as
the "Administrative Agent", and U. S. Bank National Association, in its capacity
as co-agent to the Lenders hereunder is referred to as "Co-Agent".
SECTION 1. THE REVOLVING CREDIT.
SECTION 1.1. REVOLVING CREDIT.
Subject to the terms and conditions hereof, each Lender severally agrees to
extend a revolving credit (the "Revolving Credit") to the Company which may be
availed of by the Company from time to time during the period from and including
the date hereof to but not including the Termination Date, at which time the
commitments of the Lenders to extend credit under the Revolving Credit shall
expire. The maximum amount of Revolving Credit which each Lender agrees to
extend to the Company shall be the amount set forth opposite such Lender's
signature hereto under the heading "Revolving Credit Commitment," as such amount
may be reduced pursuant hereto. During the period from and including the date
hereof to but not including the Termination Date, the Company may use the
Revolving Credit Commitment by borrowing, repaying and reborrowing Loans in
whole or in part. The obligations of the Lenders hereunder
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are several and not joint, and no Lender shall under any circumstances be
obligated to extend credit under the Revolving Credit in excess of its Revolving
Credit Commitment.
SECTION 1.2. LOANS.
Subject to the terms and conditions hereof, the Revolving Credit may be availed
of by the Company in the form of loans (individually a "Loan" and collectively
the "Loans"). Each Loan shall be in a minimum amount of $100,000 (subject to the
provisions of Section 2 hereof which require different minimum amounts in the
case of Loans bearing interest with reference to Adjusted LIBOR), and each Loan
shall be made pro rata by the Lenders in accordance with the amounts of their
Revolving Credit Commitments. Each advance made by a Lender of its pro rata
share of a Loan shall be made against and evidenced by a Revolving Credit Note
of the Company in the form (with appropriate insertions) attached hereto as
Exhibit A (individually, a "Note" and collectively the "Notes") payable to the
order of each Lender in the principal amount of its Revolving Credit Commitment.
Each Note shall be dated the date of issuance thereof, be expressed to bear
interest as set forth in Section 2 hereof, and be expressed to mature on the
Termination Date. Without regard to the principal amount of each Note stated on
its face, the actual principal amount at any time outstanding and owing by the
Company on account of any Note shall be the sum of all advances theretofore made
under this Section less all payments of principal actually received.
SECTION 1.3 LETTERS OF CREDIT.
(a) General Terms. Subject to all of the terms and conditions hereof,
the Revolving Credit may be available in the form of commercial and/or standby
letters of credit issued by the Administrative Agent or the Co-Agent (each, as
to any Letter of Credit issued by it, being hereinafter referred to as the
"Issuing Agent" for such Letter of Credit) for the account of the Company or, at
the direction of the Company, any Subsidiary of the Company, (individually a
"Letter of Credit" and collectively the "Letters of Credit"), provided that the
aggregate outstanding amount of Letters of Credit issued and outstanding shall
not at any time exceed $3,000,000. For all purposes of this Agreement, Letters
of Credit shall be deemed outstanding as of any one time in an amount equal to
the maximum amount which could be drawn thereunder under any circumstances and
over any period of time plus any unreimbursed drawings then outstanding with
respect thereto. If and to the extent any Letter of Credit expires or otherwise
terminates without having been drawn upon, the availability under the Revolving
Credit Commitments shall to such extent be reinstated. The Letters of Credit
shall be issued by an Issuing Agent, but each Lender shall be obligated to
reimburse such Issuing Agent for such Lender's pro rata share of the amount of
each draft drawn thereunder in accordance with this Section and, accordingly,
each Letter of Credit shall be deemed to utilize the Revolving Credit
Commitments of all Lenders pro rata in accordance with the amounts of the
Revolving Credit Commitments. Any Letter of Credit issued for the account of a
Subsidiary is so issued for the convenience of, and as an accommodation to, the
Company, and for all purposes of this Agreement shall be tantamount to issuing
such Letter of Credit for the account of the Company hereunder.
(b) Term. Each Letter of Credit issued hereunder shall expire not later
than the earlier of (i) twelve (12) months from the date of issuance (or be
cancelable not later than twelve (12) months from the date of issuance and each
renewal) (provided, that any Letter of Credit may be
2
<PAGE>
extended, automatically or otherwise, for successive periods of up to 12 months
on terms acceptable to the Issuing Agent) or (ii) the Termination Date.
(c) General Characteristics. Each Letter of Credit issued hereunder
shall be payable in U.S. Dollars, shall conform to the customary requirements of
the relevant Issuing Agent for the issuance of commercial and/or standby letters
of credit as to form and substance, and shall be a letter of credit which such
Issuing Agent may lawfully issue.
(d) Applications. At the time the Company requests each Letter of
Credit to be issued (or prior to the first issuance of a Letter of Credit, in
the case of a continuing application), the Company shall execute and deliver to
the relevant Issuing Agent an application for such Letter of Credit in the form
customarily prescribed by such Issuing Agent (individually an "Application" and
collectively the "Applications").
(e) Reimbursement Obligations. Subject to the other provisions of this
Section 1.3, the obligation of the Company to reimburse an Issuing Agent for
drawings under a Letter of Credit issued by such Issuing Agent shall be governed
by the Application for such Letter of Credit except that reimbursement for
drawings shall be made to the Issuing Agent by no later than 11:00 a.m. (Des
Moines time) on the Business Day following the date when such drawing was paid.
In the event an Issuing Agent is not reimbursed by the Company for the amount
such Issuing Agent pays on any draft drawn under a Letter of Credit issued
hereunder by 11: 00 a.m. (Des Moines time) on the Business Day following the
date when such drawing is paid, the obligation of the Company to reimburse such
Issuing Agent for the amount of such draft paid shall bear interest (which the
Company hereby promises to pay on demand) from and after the date the draft is
paid and until payment in full thereof at the fluctuating rate per annum
determined by adding 2% to the Domestic Rate as from time to time in effect.
This Agreement supersedes any terms of the Applications which are irreconcilably
inconsistent with the terms hereof. Notwithstanding anything contained in the
Applications to the contrary, (i) the Company shall pay fees in connection with
each Letter of Credit as set forth in Section 1.3(h) below, (ii) prior to the
occurrence of an Event of Default, unless otherwise required by this Agreement,
no Issuing Agent will call for any additional collateral security for the
obligations of the Company under the Applications other than collateral security
consisting of rights in goods (or documents of title evidencing the same)
financed under such Applications as provided in such Applications and (iii)
prior to the occurrence of a Default or an Event of Default, the Issuing Agent
will not call for the funding of a Letter of Credit by the Company prior to
being presented with a draft drawn thereunder (or, in the event the draft is a
time draft, prior to its due date). The Company hereby irrevocably authorizes
the Lenders or the Issuing Agent to charge any of the Company's deposit accounts
maintained with the Lenders or the Issuing Agent, as the case may be, for the
amount necessary to reimburse the Issuing Agent where required hereunder for any
drafts drawn under Letters of Credit issued hereunder.
The reimbursement obligations of the Company under this Section 1.3(e) and each
Application shall be absolute, unconditional and irrevocable, and shall be
performed strictly in accordance with the terms of this Agreement and the
Applications, under all circumstances whatsoever, including without limitation
the following circumstances:
(i) any lack of validity or enforceability of any Letter of Credit
document,
3
<PAGE>
(ii) any amendment or waiver of or any consent to or departure from
all or any of the provisions of any Letter of Credit document;
(iii) the existence of any claim, set-off, defense or other rights
that the Company may have at any time against a beneficiary of a
Letter of Credit (or any Person for whom such beneficiary may be
acting), any Agent, any Lender or any other Person, whether in
connection with this Agreement, another Letter of Credit or any
unrelated transaction;
(iv) any statement or any other document presented under a Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any
respect whatsoever;
(v) payment by the Issuing Agent under a Letter of Credit against
presentation to the Issuing Agent of a draft or certificate that does
not comply with the terms of the Letter of Credit, provided that the
Issuing Agent's determination that documents presented under the
Letter of Credit comply with the terms thereof shall not have
constituted negligence or willful misconduct of the Issuing Agent; or
(vi) any other act or omission to act or delay of any kind by any
Lender, any of the Agents or any other Person or any other event or
circumstance whatsoever that might, but for the provisions of this
Section, constitute a legal or equitable discharge of the Company's
obligations hereunder.
(f) Change in Laws. If any Issuing Agent or any Lender shall
determine in good faith that any change in any applicable law, regulation or
guideline (including without limitation, Regulation D of the Board of Governors
of the Federal Reserve System) or any new law, regulation or guideline, or any
interpretation of any of the foregoing by any governmental authority charged
with the administration thereof or any central bank or other fiscal, monetary or
other authority having jurisdiction over the Issuing Agent or such Lender
(whether or not having the force of law), in each case, occurring after the date
hereof and having general applicability to banks within the jurisdiction in
which such Issuing Agent or Lender operates, shall:
(i) impose, modify or deem applicable any reserve, special deposit
or similar requirement against the Letters of Credit, or such Issuing
Agent or such Lender or the liability of the Company with respect
thereto, or
(ii) impose on such Issuing Agent or such Lender any penalty with
respect to the foregoing or any other condition regarding the
Applications or the Letters of Credit;
and the Issuing Agent or such Lender shall determine in good faith that the
result of any of the foregoing is to materially increase the cost (whether by
incurring a cost or adding to a cost) to the Issuing Agent or such Lender of
issuing, maintaining or participating in the Letters of Credit hereunder, then
the Company shall pay within 15 days after written demand therefor from such
Issuing Agent or such Lender such additional amounts as the Issuing Agent or
such Lender shall determine are sufficient to compensate and indemnify it for
such increased cost in respect of each such Letter of Credit issued for the
Company's account or its Subsidiary's account; provided, that
4
<PAGE>
the Company shall not be required to compensate or indemnify the Issuing Agent
or such Lender for any increased costs incurred more than 90 days prior to the
date such Issuing Agent or such Lender notifies the Company of the event giving
rise to such increased costs. If the Issuing Agent or any Lender makes such a
claim for compensation, it shall provide the Company (with a copy to the Issuing
Agent in the case of any Lender) a certificate setting forth the computation of
the increased cost as a result of any event mentioned herein in reasonable
detail and such certificate shall be conclusive if reasonably determined.
(g) Participants in Letters of Credit. Letters of Credit will be issued
by the Issuing Agent, and each Lender shall participate on a pro rata basis in
the Letters of Credit issued by such Issuing Agent, which participation shall
automatically arise upon the issuance of each Letter of Credit. Each Lender
unconditionally agrees that in the event any Issuing Agent is not reimbursed by
the Company by the time required by Section 1.3(e) hereof for the amount paid by
such Issuing Agent on any draft presented under a Letter of Credit issued for
the Company's account, then in that event such Lender shall pay to such Issuing
Agent such Lender's pro rata share of the amount of each draft so paid based on
the percentage which its Revolving Credit Commitment bears to the aggregate of
the Revolving Credit Commitments and in return such Lender shall automatically
receive an equivalent percentage participation in the rights of the Issuing
Agent to obtain reimbursement from the Company for the amount of such draft,
together with interest thereon as provided for herein. The obligations of the
Lenders to the Issuing Agent under this subsection shall be absolute,
irrevocable and unconditional under any and all circumstances whatsoever and
shall not be subject to any set-off, counterclaim or defense to payment which
any Lender may have or have had against the Company, any of the Agents, any
Lender or any other Person whatsoever. In the event that any Lender falls to
honor its obligation to reimburse the Issuing Agent for its pro rata share of
the amount of any such draft, then in that event (i) each other Lender shall pay
to the Issuing Agent its pro rata share of the payment due the Issuing Agent
from the defaulting Lender, (ii) the defaulting Lender shall have no right to
participate in any recoveries from the Company in respect of such draft and
(iii) all amounts to which the defaulting Lender would otherwise be entitled
under the terms of this Agreement shall first be applied to reimbursing the
Lenders for their respective pro rata shares of the defaulting Lender's portion
of the draft, together with interest thereon payable by the defaulting Lender at
the rate provided for herein.
(h) Letter of Credit Fees. The Company shall pay the Issuing Agent
the following letter of credit fees for each Letter of Credit:
(i) on the date of issuance of such Letter of Credit, a fronting
fee of 0.15% multiplied by the stated amount of such Letter of Credit.
(ii) an issuance fee quarterly in arrears on the last day of the
first full calendar quarter following its issuance and each calendar
quarter thereafter so long as such Letter of Credit remains
outstanding in an amount equal to the then applicable rate per annum
set forth below opposite the then current Cash Flow Leverage Ratio of
the Company multiplied by the daily stated amount of such Letter of
Credit calculated on the basis of a 360 day year and the number of
actual days elapsed that such Letter of Credit is outstanding from and
including the first day of such quarter or, for the first such
payment, from and including the date of issuance.
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<PAGE>
Cash Flow Leverage Ratio Letter of Credit Rate
------------------------ ---------------------
Less than 1.50:1 1.25%
1.50:1 and greater, but not greater than 2.0:1 1.60%
Greater than 2.0:1 but not greater than 2.5:1 1.875%
Greater than 2.5:1 but not greater than 3.00:1 2.15%
Greater than 3.00:1 2.50%
The Letter of Credit rate so determined shall remain the same
throughout the following calendar quarter notwithstanding any
subsequent change in the Cash Flow Leverage Ratio. The Cash Flow
Leverage Ratio shall be calculated by the Company as of the last day
of each fiscal quarter and shall remain in effect until thirty days
after the end of the next fiscal quarter, or if sooner, the date the
Company furnishes its certified calculation of the Cash Flow Leverage
Ratio as at the fiscal quarter then ended pursuant to Section 7.2
hereof.
Such letter of credit fees shall be held by the Issuing Agent for the ratable
account of the Lenders. In addition to the letter of credit fees called for by
the preceding sentences, the Company further agrees to pay to the Issuing Agent
for its own use and benefit such standard documentation, amendment, negotiation,
processing and transaction fees and charges as the Issuing Agent may from time
to time customarily impose in connection with the processing and payment of
letter of credits and drafts drawn thereunder.
SECTION 1.4. MANNER AND DISBURSEMENT OF BORROWING.
The Company shall give written or telephonic notice to the Administrative Agent
(which notice shall be irrevocable once given and, if given by telephone, shall
be promptly confirmed in writing) by no later than 11:00 a.m. (Des Moines time)
on the date the Company requests that any Loan be made to it under the Revolving
Credit Commitments, and the Administrative Agent shall promptly notify each
Lender of the Administrative Agent's receipt of each such notice. Each such
notice shall specify the date of the Loan requested (which shall be a Business
Day) and the amount of such Loan. Each Loan shall initially constitute part of
the applicable Domestic Rate Portion except to the extent the Company has
otherwise timely elected a LIBOR Portion as provided in Section 2 hereof. The
Company agrees that the Administrative Agent may rely upon any written or
telephonic notice given by any person the Administrative Agent in good faith
believes is an Authorized Representative without the necessity of independent
investigation (other than reference to the list provided to the Administrative
Agent pursuant to Section 6.2 hereof or any update or notice with respect
thereto) and in the event any telephonic notice conflicts with any written
confirmation, such telephonic notice shall govern if the Administrative Agent
has acted in reliance thereon. Not later than 2:30 p.m. (Des Moines time) on the
date specified for any Loan to be made by a Lender hereunder, such Lender shall
make the proceeds of its pro rata share of such Loan available to the
Administrative Agent in immediately available funds. Subject to the provisions
of Section 6 hereof, the proceeds of each Loan shall be made available to the
Company at the principal office of the Administrative Agent in Chicago,
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<PAGE>
Illinois, in immediately available funds upon receipt by the Administrative
Agent from each Lender of its pro rata share of such Loan. Unless the
Administrative Agent shall have been notified by a Lender prior to 1:00 p.m.
(Des Moines time) on the date a Loan is to be made hereunder that such Lender
does not intend to make its pro rata share of such Loan available to the
Administrative Agent (which notice a Lender shall not be entitled to give unless
a condition precedent to lending has not been satisfied or waived), the
Administrative Agent may assume that such Lender has made such share available
to the Administrative Agent on such date and the Administrative Agent may in
reliance upon such assumption make available to the Company a corresponding
amount. If such corresponding amount is not in fact made available to the
Administrative Agent by such Lender and the Administrative Agent has made such
amount available to the Company, the Administrative Agent shall be entitled to
receive such amount from such Lender forthwith upon the Administrative Agent's
demand, together with interest thereon in respect of each day during the period
commencing on the date such amount was made available to the Company and ending
on but including the date the Administrative Agent recovers such amount at a
rate per annum equal to the effective rate charged to the Administrative Agent
for overnight federal funds transactions with member banks of the federal
reserve system for each day as determined by the Administrative Agent (or in the
case of a day which is not a Business Day, then for the preceding day). If such
amount is not received from such Lender by the Administrative Agent immediately
upon demand, the Company will, on demand, repay to the Administrative Agent the
proceeds of the Loan attributable to such Lender with interest thereon at a rate
per annum equal to the interest rate applicable to the relevant Loan, but
without such payment being considered a payment or prepayment of a Loan, so that
the Company will not have liability under Section 2.9 hereof with respect to
such payment.
SECTION 1.5. MANNER OF OBTAINING LETTERS OF CREDIT.
The Company shall provide at least three (3) Business Days' advance written
notice to the Issuing Agent in a form reasonably acceptable to the Issuing Agent
of its request for the issuance for its account, or its Subsidiary's account, of
a standby Letter of Credit and not later than 11:00 a.m. (local time of the
Issuing Agent) on any business day of its request for the issuance on such day
for its account or its Subsidiary's account of a commercial Letter of Credit,
such notice to be accompanied by a properly executed Application for such Letter
of Credit, in each case, together with the fees called for hereby in Section
1.3(h). The Issuing Agent shall promptly notify each Lender of the Issuing
Agent's receipt of such notice.
SECTION 2. INTEREST ON LOANS AND CHANGE IN CIRCUMSTANCE.
SECTION 2.1. INTEREST RATE OPTIONS.
(a) Subject to all of the terms and conditions of this Section 2,
portions of the principal indebtedness evidenced by the Notes (all of the
indebtedness evidenced by the Notes bearing interest at the same rate for the
same period of time being hereinafter referred to as a "Portion") may, at the
option of the Company, bear interest with reference to the Domestic Rate
("Domestic Rate Portions") or with reference to the Adjusted LIBOR ("LIBOR
Portions"), and Portions may be converted from time to time from one basis to
another. All of the indebtedness evidenced by a single class of the Notes which
is not a part of a LIBOR Portion shall constitute a single Domestic Rate
Portion. All of the indebtedness evidenced by a single class of the Notes which
bears interest with reference to a particular Adjusted LIBOR for a particular
Interest Period shall constitute a single LIBOR Portion. Anything contained
herein to the contrary
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notwithstanding, the obligation of the Lenders to create, maintain or effect by
conversion a LIBOR Portion shall be conditioned upon the fact that at the time
no Default or Event of Default shall have occurred and be continuing. The
Company promises to pay interest on each Portion at the rates and times
specified in this Section 2.
(b) Domestic Rate Portion. Each Domestic Rate Portion applicable to the
Notes shall bear interest (which the Company promises to pay at the times herein
provided) at the rate per annum equal to the Domestic Rate as in effect from
time to time plus the Domestic Rate Margin; provided that if any Domestic Rate
Portion or any part thereof is not paid when due (whether by lapse of time,
acceleration or otherwise) such Portion shall bear interest (which the Company
promises to pay at the times herein provided), whether before or after judgment,
until payment in full thereof at the rate per annum determined by adding two
percent (2%) per annum to the interest rate which would otherwise be applicable
thereto from time to time. Interest on each Domestic Rate Portion shall be
payable quarterly on the last day of each calendar quarter (commencing September
30, 1999) and at maturity of the Notes (whether by lapse of time, acceleration
or otherwise). Interest after maturity shall be due and payable upon demand. Any
change in the interest rate on any Domestic Rate Portion resulting from a change
in the Domestic Rate shall be effective as of the date of the relevant change in
the Domestic Rate. Lenders shall not be obligated to give notice to Company of
any change in the Domestic Rate.
(c) LIBOR Portions. Each LIBOR Portion shall bear interest (which the
Company promises to pay at the times herein provided) for each Interest Period
selected therefor at a rate per annum determined by adding the then applicable
LIBOR MARGIN determined at the rates and times specified in Section 2.4(b) to
the Adjusted LIBOR for such Interest Period, provided that if any LIBOR Portion
is not paid when due (whether by lapse of time, acceleration or otherwise) such
Portion shall bear interest (which the Company promises to pay at the times
herein provided), whether before or after judgment, until payment in full
thereof through the end of the Interest Period then applicable thereto at the
rate per annum determined by adding two percent (2%) per annum to the interest
rate which would otherwise be applicable thereto, and effective at the end of
such Interest Period such unpaid LIBOR Portion shall automatically be converted
into and added to the Domestic Rate Portion of the applicable Notes and shall
thereafter bear interest at the interest rate applicable to the Domestic Rate
Portion of the applicable Notes after default until such converted Portion is
paid in full. Interest on each LIBOR Portion shall be due and payable on the
last day of each Interest Period applicable thereto and at maturity (whether by
lapse of time, acceleration or otherwise), and with respect to any Interest
Period applicable to a LIBOR Portion in excess of three (3) months, then on the
date occurring every three (3) months after the date such Interest Period began
and at the end of such Interest Period, and interest after maturity, if any,
shall be due and payable upon demand. The Company shall notify the
Administrative Agent on or before 11:00 a.m. (Des Moines time) on the third
Business Day preceding the end of an Interest Period applicable to a LIBOR
Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which
event the Company shall notify the Administrative Agent of the new Interest
Period selected therefor, and in the event the Company shall fail to so notify
the Administrative Agent, such LIBOR Portion shall automatically be converted
into and added to the Domestic Rate Portion of the applicable Notes as of and on
the last day of such Interest Period. The Administrative Agent shall notify each
Lender of each such notice received from the Company pursuant to the foregoing
provision.
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(d) Conversion to Fixed Rate. The Company may convert, at any time and
from time to time, all or any portion of the outstanding Loans to a fixed rate,
for a term not extending beyond the Termination Date for all or any portion of
the period ending on or before the Termination Date pursuant to a Swap
Transaction with any Lender and on terms and conditions acceptable to such
Lender (including a prepayment penalty if any). The Lenders acknowledge that
$12,500,000 of the Loans are presently subject to a Swap Transaction with
LaSalle Bank National Association. The Lenders agree that so long as any Swap
Transaction between the Company and any Lender provides for payments of interest
to the Company based on LIBOR that is not adjusted by the Reserve Percentage,
then to the extent of such Lender's LIBOR Portion of Loans not in excess of the
dollar amount of such Swap Transaction, no adjustment for the Reserve Percentage
to LIBOR under this Agreement shall be made for the purpose of determining the
interest rate under Section 2.1 (c) payable to such Lender, and no increased
costs shall be payable to such Lender with respect to such LIBOR Portion of
Loans under Section 2.7 resulting from any changes affecting the Reserve
Percentage.
SECTION 2.2. MINIMUM AMOUNTS.
Each LIBOR Portion shall be in a minimum amount of $1,000,000 or such greater
amount, which is an integral multiple of $50,000.
SECTION 2.3. COMPUTATION OF INTEREST.
All interest on the Notes shall be computed on the basis of a year of 360 days
for the actual number of days elapsed.
SECTION 2.4. MANNER OF RATE SELECTION.
(a) The Company shall notify the Administrative Agent (i) by 11:00 a.m.
(Des Moines time) at least two (2) Business Days prior to the date upon which it
requests that any LIBOR Portion be created or that any part of the Domestic Rate
Portion be converted into a LIBOR Portion (each such notice to specify in each
instance the amount thereof and the Interest Period selected therefor). If any
request is made to convert a LIBOR Portion into the Domestic Rate Portion
available hereunder, such conversion shall only be made so as to become
effective as of the last day of the Interest Period applicable thereto. All
requests for the creation, continuance or conversion of Portions under this
Agreement shall be irrevocable. Such requests shall be written or telephonic and
may be given by facsimile. If telephonic, such notice shall be confirmed in
writing (which may be by facsimile) prior to end of the same Business Day.
(b) The applicable LIBOR Margin shall be the per annum percentage
amount set forth opposite the then current Cash Flow Leverage Ratio of the
Company at the time the Company provides its notice to the Lender pursuant to
subparagraph (a) above or pursuant to Section 2.1(c):
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Cash Flow Leverage Ratio LIBOR Margin
------------------------ ------------
Less than 1.50:1 1.25%
1.50:1 and greater, but not greater than 2.0:1 1.60%
Greater than 2.0:1 but not greater than 2.5:1 1.875%
Greater than 2.5:1 but not greater than 3.00:1 2.15%
Greater than 3.00:1 2.50%
The LIBOR Margin so determined shall remain the same throughout the Interest
Period selected notwithstanding any subsequent change in the Cash Flow Leverage
Ratio. The Cash Flow Leverage Ratio shall be calculated by the Company as of the
last day of each fiscal quarter and shall remain in effect until thirty days
after the end of the next fiscal quarter, or if sooner, the date Company
furnishes its certified calculation of the Cash Flow Leverage Ratio as at the
fiscal quarter then ended pursuant to Section 7.2 hereof.
SECTION 2.5. CHANGE OF LAW.
Notwithstanding any other provisions of this Agreement or of the Notes, if at
any time any Lender shall determine in good faith that any change in applicable
laws, treaties or regulations or in the interpretation thereof occurring after
the date hereof makes it unlawful for such Lender to create or continue to
maintain any LIBOR Portion, it shall promptly so notify the Administrative Agent
which in turn shall promptly so notify the Company and the obligation of such
Lender to create or continue to maintain such LIBOR Portion under this Agreement
shall terminate on the last day of the then current applicable Interest Period
or Periods (or, if earlier, the last day on which such Lender can lawfully
create or continue to maintain any LIBOR Portion) until it is no longer unlawful
for such Lender to create or continue to maintain such LIBOR Portion. If the
continued maintenance of any LIBOR Portion is unlawful, the Company shall
either, at its option, (x) prepay the outstanding principal amount of the
affected LIBOR Portion (without regard to the restrictions on the prepayment of
LIBOR Portions set forth in Section 3.4), together with all interest accrued
thereon and all other amounts payable to such Lender with respect thereto under
this Agreement, or (y) elect to convert the principal amount of the affected
LIBOR Portion into the Domestic Rate Portion available hereunder, subject to the
terms and conditions of this Agreement, in which case no prepayment of principal
or other payment with respect thereto (other than payment of interest on the
regularly scheduled interest payment date or dates) shall be required.
SECTION 2.6. UNAVAILABILITY OF DEPOSITS OR INABILITY TO ASCERTAIN ADJUSTED
LIBOR.
Notwithstanding any other provisions of this Agreement or of the Notes, if prior
to the commencement of any Interest Period:
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(a) any Lender shall determine that deposits in the amount of any LIBOR
Portion scheduled to be outstanding during such Interest Period are not readily
available to such Lender; or
(b) any Lender shall determine that by reason of circumstance beyond
the Lender's reasonable control adequate and reasonable means do not exist for
ascertaining Adjusted LIBOR, or
(c) any Lender in good faith shall determine that the Company shall
have failed to comply with requirements of Section 2.4 (b) and Section 7.2 (b)
regarding the certification or calculation of the LIBOR MARGIN.
then such Lender shall promptly give notice thereof to the Administrative Agent
(which in turn shall promptly give notice thereof to the Company and the other
Lenders) and the obligations of such Lender to create, continue or effect by
conversion any LIBOR Portion, in such amount and for such Interest Period shall
terminate until deposits in such amount and for the Interest Period selected by
the Company shall again be readily available in the relevant market, adequate
and reasonable means exist for ascertaining Adjusted LIBOR, or the Company shall
have complied with the requirements of Section 2.4 (b) and Section 7.2 (b)
hereof, as the case may be.
SECTION 2.7. TAXES; INCREASED COSTS.
With respect to any LIBOR Portion, if any Lender shall determine in good faith
that any change in any applicable law, treaty, regulation or guideline
(including, without limitation, Regulation D of the Board of Governors of the
Federal Reserve System) or any new law, treaty, regulation or guideline, or any
interpretation of any of the foregoing by any governmental authority charged
with the administration thereof or any central bank or other fiscal, monetary or
other authority having jurisdiction over any Lender or its lending branch or the
LIBOR Portion contemplated by this Agreement (whether or not having the force of
law), in each case after the date hereof and having general applicability to
banks in the jurisdiction in which such Lender operates, shall:
(i) impose, increase, or deem applicable any reserve, special deposit
or similar requirement against assets, held by, or deposits in or for
the account of, or loans by, or any other acquisition of funds or
disbursements by, such Lender which is not in any instance already
accounted for in computing the interest rate applicable to such LIBOR
Portion; or
(ii) subject such Lender, any LIBOR Portion or any Note to the extent
it evidences such LIBOR Portion to any tax (including, without
limitation, any United States interest equalization tax or similar tax
however named applicable to the acquisition or holding of debt
obligations), duty, charge, stamp tax, fee, deduction or withholding
in respect of this Agreement, any LIBOR Portion or the Note to the
extent it evidences such LIBOR Portion, except any franchise tax or
any taxes as may be measured by the overall net income or gross
receipts of such Lender or its lending branches and imposed by the
jurisdiction, or any political subdivision or taxing authority
thereof, in which such Lender or its lending branch is located, or
taxes in substitution thereof, and except taxes such Lender could have
avoided by filing of appropriate forms.
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and such Lender shall reasonably determine that the result of any of the
foregoing is to materially increase the cost (whether by incurring a cost or
adding to a cost) to such Lender of creating or maintaining any LIBOR Portion
hereunder or to reduce the amount of principal or interest received or
receivable by such Lender with respect to such LIBOR Portion, then within
fifteen (15) days after demand by such Lender, the Company shall pay to the
Lender from time to time as specified by such Lender such additional amounts as
such Lender shall reasonably determine are sufficient to compensate and
indemnify it for such increased cost or reduced amount; provided, however, that
the Company shall not be required to pay such additional amounts in respect of
any such change for any period ending prior to the date that is 90 days prior to
the giving of the notice of the determination of such additional amounts (unless
such period shall have commenced after the date that such Lender notified the
Company of the possibility that additional amounts may be payable as a result of
such change), except, if such change shall have been imposed retroactively, for
the period from the effective date of such change to the date that is 90 days
after the first date on which such Lender reasonably should have had knowledge
of such change. If a Lender makes such demand for compensation, it shall provide
to the Company (with a copy to the Administrative Agent) a certificate setting
forth the computation of the increased cost or reduced amount as a result of any
event mentioned herein in reasonable detail and such certificate shall be deemed
conclusive if reasonably determined. If any circumstances giving rise to a
Lender's demand for compensation are subsequently modified, amended or repealed
with effect of reducing or eliminating the increased costs to such Lender or
reducing the interest or principal received or receivable by such Lender, then
such Lender shall promptly give notice thereof to the Company.
SECTION 2.8. CHANGE IN CAPITAL ADEQUACY REQUIREMENTS.
If any Lender shall determine that the adoption after the date hereof of any
applicable law, rule or regulation regarding capital adequacy, or any change in
any existing law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof and having
general applicability to banks in the jurisdiction in which such Lender
operates, or compliance by such Lender (or any of its branches or any
corporation having control of such Lender) with any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
materially reducing the rate of return on such Lender's capital as a consequence
of its obligations hereunder or for the credit which is the subject matter
hereof to a level below that which such Lender could have achieved but for such
adoption, change or compliance (taking into consideration such Lender's policies
with respect to liquidity and capital adequacy) by an amount deemed by such
Lender to be material, then from time to time, within fifteen (15) days after
written demand by such Lender, the Company shall pay to such Lender such
additional amount or amounts reasonably determined by such Lender as will
compensate such Lender for the reduction; provided, however, that the Company
shall not be required to pay such additional amounts in respect of any such
adoption or change for any period ending prior to the date that is 90 days prior
to the giving of the notice of the determination of such additional amounts
(unless such period shall have commenced after the date that such Lender
notified the Company of the possibility that additional amounts may be payable
as a result of such adoption or change), except, if such adoption or change
shall have been imposed retroactively, for the period from the effective date of
such adoption or change to the date that is 90 days after the first date on
which such Lender reasonably should have had knowledge of such adoption or
change. If such Lender
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makes such a claim for compensation, it shall provide to the Company (with a
copy to the Administrative Agent) a certificate setting forth the computation of
the reduction as a result of any event mentioned herein in reasonable detail and
such certificate shall be deemed conclusive if reasonably determined. If any
changes giving rise to such Lender's demand for compensation are subsequently
modified, amended or repealed with effect of reducing or eliminating the
increased costs to such Lender or the reduction in interest or principal
received or receivable by such Lender, then such Lender shall promptly give
notice thereof to the Company.
SECTION 2.9. FUNDING INDEMNITY.
In the event any Lender shall incur any loss, cost or expense (including,
without limitation, any loss (excluding loss of profit), cost or expense
incurred by reason of the liquidation or re-employment of deposits or other
funds acquired or contracted to be acquired by such Lender to fund or maintain
any LIBOR Portion or the relending or reinvesting of such deposits or other
funds or amounts paid or prepaid to such Lender) as a result of:
(i) any payment of a LIBOR Portion on a date other than the last
day of the then applicable Interest Period for any reason, whether
before or after default, and whether or not such payment is required
by any provision of this Agreement; or
(ii) any failure by the Company to create, borrow, continue or
effect by conversion a LIBOR Portion on the date specified in a notice
given by the Company pursuant to this Agreement;
then upon demand of such Lender, the Company shall pay to such Lender such
amount as will reimburse such Lender for such reasonable loss, cost or expense
(such loss, cost or expense will not include any allocated salary of employees
of such Lender). If such Lender requests such a reimbursement it shall provide
the Company with a certificate setting forth the computation of the loss, cost
or expense giving rise to the request for reimbursement in reasonable detail and
such certificate shall be deemed conclusive if reasonably determined.
SECTION 2.10. LENDING BRANCH.
Each Lender may, at its option, elect to make, fund or maintain portions of the
Loans hereunder at such branches or offices specified on the signature pages
hereof or on any Assignment Agreement executed and delivered pursuant to Section
10.15 hereof or at such branches of offices as such Lender may from time to time
elect; provided, however, that the designation of a new lending office or branch
by any Lender shall not make operable the provisions of Section 2.7 or entitle
the Lender to make a claim under Sections, 2.5, 2.6, 2.7 or 2.8 if such
operability of such clause or such claim results solely from such designation
and not from any adoption or change specified in the applicable section
subsequent to such designation.
SECTION 2.11. DISCRETION OF LENDER AS TO MANNER OF FUNDING.
Notwithstanding any provision of this Agreement to the contrary, each Lender
shall be entitled to fund and maintain its funding of all or any part of its
Note in any manner it sees fit; provided such funding is in accordance with the
terms of this Agreement, it being understood, however, that for the purposes of
this Agreement all determinations hereunder (including, without limitation,
determinations under Sections 2.7, 2.8 and 2.9 hereof) shall be made as if such
Lender
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had actually funded and maintained each LIBOR Portion during each Interest
Period applicable thereto through the purchase of deposits in the relevant
market in the amount of such LIBOR Portion, having a maturity corresponding to
such Interest Period and bearing an interest rate equal to the LIBOR for such
Interest Period.
SECTION 2.12. LENDER'S DUTY TO MITIGATE.
Each Lender agrees that, as promptly as practicable after it becomes aware of
the occurrence of an event or the existence of a condition that would cause it
to be affected under Section 1.3(f), 2.5, 2.6, 2.7 or 2.8 hereof, such Lender
will, after notice to the Company, to the extent not inconsistent with such
Lender's internal policies and customary business practices, use its best
efforts to make, fund or maintain the affected Portion, through another lending
office of such Lender if as a result thereof the unlawfulness which would
otherwise require payment or conversion of such Portion pursuant to Section 2.5
hereof would cease to exist or the circumstances which would otherwise terminate
such Lender's obligation to make such affected Portion under Section 2.6 hereof
would cease to exist or the increased costs which would otherwise be required to
be paid in respect of such affected Portion pursuant to Section 2.7 hereof would
be materially reduced, and if as determined by such Lender, in its sole
discretion, the making, funding or maintaining of such Portion through such
other lending office would not otherwise adversely affect such Portion.
SECTION 3. FEES, PREPAYMENTS AND PAYMENTS
SECTION 3.1. CLOSING FEE.
On the date of this Agreement the Company shall pay to the Administrative Agent
to be shared pro rata by the Lenders on the basis of the ratio of each Lender's
Revolving Credit Commitment to the total Revolving Credit Commitments, a
one-time nonrefundable fee equal to .375% of the aggregate amount of the
Revolving Credit Commitments.
SECTION 3.2. COMMITMENT FEE.
For the period commencing on the date of this Agreement to and including the
Termination Date, the Company shall pay to the Administrative Agent to be shared
pro rata by the Lenders on the basis of the ratio of each Lender's Revolving
Credit Commitment to the total Revolving Credit Commitments a commitment fee in
an amount equal to the then applicable rate per annum set forth below on the
average daily unused amount of the Revolving Credit Commitments hereunder
calculated on the basis of a 360 day year and actual days elapsed. Such fee
shall be payable on December 31, 1999 and on the last day of March, June,
September, and December thereafter to and including, and on, the Termination
Date.
The applicable commitment fee rate shall be the per annum percentage amount set
forth opposite the then current Cash Flow Leverage Ratio of the Company as at
the end of each calendar quarter and shall apply throughout the following
calendar quarter:
CASH FLOW LEVERAGE RATIO COMMITMENT FEE RATE
------------------------ -------------------
Less than 1.50:1 .20%
1.50:1 and greater, but not greater than 2.0:1 .25%
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Greater than 2.0:1 but not greater than 2.5:1 .30%
Greater than 2.5:1 but not greater than 3.00:1 .375%
Greater than 3.00:1 .50%
The commitment fee rate so determined shall remain the same throughout the
following calendar quarter notwithstanding any subsequent change in the Cash
Flow Leverage Ratio.
SECTION 3.3. MANDATORY PREPAYMENTS.
In the event a reduction in the aggregate amount of Revolving Credit Commitments
pursuant to Section 3.5(b) hereof results in the aggregate principal amount of
Loans and Letters of Credit then outstanding being greater than the aggregate
amount of Revolving Credit Commitments, the Company shall immediately pay the
amount of the difference to the Administrative Agent as a mandatory prepayment
of such obligations, with such prepayments to be first applied to the principal
amount outstanding under the Notes until payment thereof in full, with any
remaining balance to be held as cash collateral security for the Letters of
Credit.
SECTION 3.4. VOLUNTARY PREPAYMENTS.
(a) The Company shall have the privilege of prepaying, without premium
or penalty and in whole or in part (but, if in part, then in an amount not less
than $100,000) the Domestic Rate Portion of the Notes at any time upon notice to
the Administrative Agent prior to 11:00 a.m. (Des Moines time) on the date fixed
for prepayment, such prepayment to be made by the payment of the principal
amount to be prepaid and accrued interest thereon to the date of prepayment.
(b) The Company may prepay any LIBOR Portion of the Notes only on the
last date of the then applicable Interest Period, without premium or penalty in
whole or in part (but, if in part, then in an amount not less than $250,000 or
such greater amount which is an integral multiple of $50,000) upon two (2)
Business Days' prior written notice to the Administrative Agent (which notice
shall be irrevocable once given, must be received by the Administrative Agent no
later than 11:00 a.m. (Des Moines time) on the second Business Day preceding the
date of such prepayment and shall specify the amount to be prepaid); provided,
however, that the outstanding principal amount of any LIBOR Portion applicable
to the Note prepaid in part shall not be less than $1,000,000 after giving
effect to such prepayment. Any such prepayment shall be effected by payment of
the principal amount to be prepaid and accrued interest thereon to the end of
the applicable Interest Period.
SECTION 3.5. COMMITMENT REDUCTIONS.
(a) Optional Reduction. The Company shall have the right as of the end
of any month, upon five (5) Business Days' prior notice to the Lender, to
terminate without premium or penalty and in whole or in part (but, if in part,
then in an amount not less than $5,000,000) the aggregate amount of Revolving
Credit Commitments, provided that the aggregate amount of Revolving Credit
Commitments may not be reduced to an amount less than the aggregate principal
amount of the Loans and the Letters of Credit then outstanding. Any termination
of the Revolving Credit Commitments pursuant to this Section may not be
reinstated.
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(b) Mandatory Reduction. The aggregate amount of Revolving Credit
Commitments shall be permanently reduced on the date of any principal payment
made by the Company on the Senior Notes, including any optional or required
prepayment, or any purchase of the Senior Notes by the Company or its
Subsidiaries, by an amount that equals a product of (i) a fraction, the
numerator of which is the principal amount of Senior Notes so paid or purchased,
and the denominator of which is the total principal amount of the Senior Notes
then outstanding immediately prior to such payment or purchase, times (ii) the
aggregate amount of Revolving Credit Commitments then in effect.
SECTION 3.6. PLACE AND APPLICATION OF PAYMENTS AND COLLECTIONS.
All payments of principal, interest, and all other Obligations payable hereunder
shall be made to the Administrative Agent at its principal office in Chicago,
Illinois, no later than 11:00 a.m. (Des Moines time) on the date any such
payment is due and payable. Payments received by the Administrative Agent after
11:00 a.m. shall be deemed received as of the opening of business on the next
Business Day. All such payments shall be made in lawful money of the United
States of America, in immediately available funds at the place of payment,
without set-off or counterclaim and without reduction for, and free from, any
and all present or future taxes, levies, imposts, duties, fees, charges,
deductions, withholdings, restrictions or conditions of any nature imposed by
any government or any political subdivision or taxing authority thereof (but
excluding any franchise tax and any taxes imposed or measured by the net income
of the Lenders). Except as otherwise provided in this Agreement, all payments
shall be received by the Administrative Agent for the ratable account of the
Lenders, and shall be promptly distributed by the Administrative Agent ratably
to the Lenders except that payments which pursuant to the terms hereof are for
the use and benefit of the Administrative Agent shall be retained by it for its
own account and payments received to reimburse a Lender for a cost peculiar to
that Lender shall be remitted to it. Unless the Company otherwise directs,
principal payments shall be first applied to the Domestic Rate Portion of the
Notes until payment in full thereof, with any balance applied to the LIBOR
Portions of the Notes in the order in which their Interest Periods expire. All
payments (whether voluntary or required) shall be accompanied by any amount due
the Lenders under Section 2.9 hereof, but no acceptance of such a payment
without requiring payment of amounts due under Section 2.9 shall preclude a
later demand by the Lenders for any amount due them under Section 2.9 in respect
of such payment. Anything contained herein to the contrary notwithstanding, all
payments and collections received in respect of the indebtedness evidenced by
the Notes or the Applications shall be remitted to the Administrative Agent and
distributed as follows:
(a) first, to the payment of any outstanding costs and expenses
reasonably incurred by the Agents in protecting, preserving or enforcing rights
under this Agreement, the Applications, or the Notes and in any event including
all costs and expenses of a character which the Company has agreed to pay under
Section 10.4 hereof and which are then due and payable (such funds to be
retained by the relevant Agent for its own account unless it has previously been
reimbursed for such costs and expenses by the Lenders, in which event such
amounts shall be remitted to the Lenders to reimburse them for payments
theretofore made to such Agent);
(b) second, to the payment of any outstanding interest or other fees or
amounts due under the Notes, the Applications or this Agreement (other than for
principal of the Notes or reimbursement of the principal amounts presented and
paid under the Letters of Credit) ratably as
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among the Lenders in accord with the amount of such interest and other fees or
amounts owing each;
(c) third, to the payment of the principal of the Notes ratably among
the Notes and the amounts of all drafts presented and paid under the Letters of
Credit;
(d) fourth, in the case of an Event of Default or repayment of all
Obligations and the termination of the Revolving Credit Commitments to be held
by the Administrative Agent up to the full undrawn amount of the Letters of
Credit and applied by the Administrative Agent to the payment of any drafts
presented and paid thereunder with any surplus distributed as hereinbelow
provided;
(e) fifth, to the Lenders ratably in accord with the amounts of any
other indebtedness, obligations or liabilities of the Company owing to each of
them unless and until all such indebtedness, obligations and liabilities have
been fully paid and satisfied; and
(f) sixth, to the Company or whoever may be lawfully entitled thereto.
SECTION 3.7. NOTATIONS.
All advances made against the Notes, the status of all amounts evidenced by the
Notes as constituting part of a Domestic Rate Portion or LIBOR Portion and the
rates of interest and Interest Periods applicable to such Portions shall be
recorded by the Lenders on their books or, at their option in any instance,
endorsed on the reverse side of the applicable Notes and the unpaid principal
balances and status, rates and Interest Periods so recorded or endorsed by the
Lenders shall be prima facie evidence in any court or other proceeding brought
to enforce the Notes of the principal amount remaining unpaid thereon, the
status of the borrowings evidenced thereby and the interest rates and Interest
Periods applicable thereto. Prior to any negotiation of any Note, the Lender
holding such Note shall endorse thereon the status of all amounts evidenced
thereby as constituting part of a Domestic Rate Portion or LIBOR Portion and the
rates of interest and Interest Periods applicable thereto.
SECTION 3.8. ADMINISTRATIVE AGENT'S FEES.
On the date of the initial extension of credit hereunder and on each yearly
anniversary date thereof when any credit, or commitment to extend credit, is
outstanding hereunder the Company shall pay to the Administrative Agent, for its
own use and benefit, an annual administrative fee of $25,000.
SECTION 4. DEFINITIONS, INTERPRETATION.
SECTION 4.1. DEFINITIONS.
The following terms when used herein shall have the following meanings:
"Adjusted LIBOR" means a rate per annum determined by the Administrative Agent
pursuant to the following formula:
Adjusted LIBOR= LIBOR
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------------------------
100% - Reserve Percentage
As used in the definition of "Adjusted LIBOR"
"Reserve Percentage" means, for the purpose of computing Adjusted
LIBOR, the maximum rate of all reserve requirements (including, without
limitation, any marginal, emergency, supplemental or other special
reserves) imposed by the Board of Governors of the Federal Reserve
System (or any successor) under Regulation D on Eurocurrency
liabilities (as such term is defined in Regulation D) for the
applicable Interest Period as of the first day of such Interest Period,
which shall remain the same throughout the Interest Period
notwithstanding any amendments to such reserve requirement by such
Board or its successor. For purposes of this definition, LIBOR Portions
shall be deemed to be Eurocurrency liabilities as defined in Regulation
D. "LIBOR" means, for each Interest Period (a) the LIBOR Index Rate for
such Interest Period, if such rate is available, and (b) if the LIBOR
Index Rate cannot be determined the arithmetic average of the rate of
interest per annum (rounded upward, if necessary, to nearest 1/100 of
1%) at which deposits in U.S. Dollars in immediately available funds
are offered to the Administrative Agent at 11:00 a.m. (London, England
time) two (2) Business Days before the beginning of such Interest
Period by three (3) or more major banks in the London interbank
eurodollar market selected by the Administrative Agent for a period
equal to such Interest Period and in an amount equal or comparable to
the applicable LIBOR Portion scheduled to be outstanding from the
Administrative Agent during such Interest Period.
"LIBOR Index Rate" means, for any Interest Period, the rate per annum
(rounded upwards, if necessary, to the next higher one hundred-
thousandth of a percentage point) for deposits in U.S. Dollars for a
period equal to such Interest Period, which appears on the Telerate
Page 3750 as of 11:00 a.m. (London, England time) on the day two (2)
Business Days before the commencement of such Interest Period.
"Telerate Page 3750" means the display designated as "Page 3750" on the
Telerate Service (or such other page as may replace Page 3750 on that
service or such other service as may be nominated by the British
Bankers' Association as the information vendor for the purpose of
displaying British Bankers' Association Interest Settlement Rates for
U.S. Dollar deposits. Each determination of LIBOR made by the
Administrative Agent shall be conclusive and binding absent manifest
error.
"Administrative Agent" means LaSalle Bank National Association and any successor
pursuant to Section 9.1 hereof.
"Affiliate" means, at any time, and with respect to any Person, (a) any other
Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, and (b) any Person beneficially owning or holding, directly
or indirectly, 10% or more of any class of voting or equity interests of the
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Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly,
10% or more of any class of voting or equity interests. As used in this
definition, "Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Unless the context otherwise clearly requires, any reference to an "Affiliate"
is a reference to an Affiliate of the Company.
"Agents" means the Administrative Agent, the Co-Agent and each Issuing Agent,
and "Agent" means any of the Agents.
"Agreement" means this Senior, Secured Revolving Credit Agreement, as the same
may be amended, modified or restated from time to time in accordance with the
terms hereof.
"Application" is defined in Section 1.3 hereof.
"Asset Disposition" means any Transfer except:
(a) any
(i) Transfer from a Subsidiary to the Company or a Wholly-Owned
Subsidiary;
(ii) Transfer from the Company to a Wholly-Owned Subsidiary; and
(iii) Transfer from the Company to a Subsidiary (other than a
Wholly-Owned Subsidiary) or from a Subsidiary to another
Subsidiary (other than a Wholly-Owned Subsidiary), which in
either case is for Fair Market Value, so long as immediately
before and immediately after the consummation of any such
Transfer and after giving effect thereto, no Default or Event
of Default exists; and
(b) any Transfer made in the ordinary course of business other than any
Transfer of accounts receivable.
"Authorized Representative" means those persons shown on the list of officers
provided by the Company pursuant to Section 6.2 hereof, or on any update of any
such list provided by the Company to the Administrative Agent, or any further or
different officer of the Company so named by any Authorized Representative of
the Company in a written notice to the Administrative Agent.
"Assignment Agreement" is defined in Section 10.15.
"Business Day" means a day (other than a Saturday or Sunday) on which neither
the Administrative Agent nor the Co-Agent is authorized or required to close,
and, when used with respect to LIBOR Portions, a day when the Administrative
Agent and Co-Agent both are also dealing in United States Dollar deposits in
London, England or Nassau, Bahamas.
"Capital Lease" means, at any time, a lease with respect to which the lessee is
required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
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"Cash Flow Leverage Ratio" means, as of any time the same is to be determined,
the ratio of (i) Debt of the Company then outstanding to (ii) EBITDA of the
Company for the preceding four fiscal quarters of the Company then ended.
"Change in Control" means the failure of MidAmerican Energy Holdings Company or
its successors or ultimate parent to own and control at least 51% of the
Company's shares of the voting stock outstanding, prior to, on or after the
consummation of an IPO. "IPO" means the initial public offering by the Company
of its voting shares of common stock.
"Co-Agent" means U. S. Bank National Association, and any successor pursuant to
Section 9.1 hereof.
"Code" means the Internal Revenue Code of 1986, as amended from time to time,
and the rules and regulations promulgated thereunder from time to time.
"Company" is defined in the introductory paragraph hereof.
"Consolidated Net Income" means, with reference to any period, the net income
(or loss) of the Company and its Subsidiaries for such period (taken as a
cumulative whole), as determined in accordance with GAAP, after eliminating all
offsetting debits and credits between the Company and its Subsidiaries and all
other items required to be eliminated in the course of the preparation of
consolidated financial statements of the Company and its Subsidiaries in
accordance with GAAP.
"Consolidated Net Worth" means, at any time,
(a) the sum of (i) the par value (or value stated on the books of the
corporation) of the capital stock (but excluding treasury stock and capital
stock subscribed and unissued) of the Company and its Subsidiaries plus (ii) the
amount of the paid-in capital and retained earnings of the Company and its
Subsidiaries, in each case as such amounts would be shown on a consolidated
balance sheet of the Company and its Subsidiaries as of such time prepared in
accordance with GAAP, minus
(b) to the extent included in clause (a), all amounts properly
attributable to minority interests, if any, in the stock and surplus of
Subsidiaries, plus
(c) non-cash expense from pending receivable allocation attributable to
the purchase price of any Permitted Acquisition made at any time following the
IPO.
"Consolidated Total Assets" means, at any time, the total assets of the Company
and its Subsidiaries which would be shown as assets on a consolidated balance
sheet of the Company and its Subsidiaries as of such time prepared in accordance
with GAAP, after eliminating all amounts properly attributable to minority
interests, if any, in the stock and surplus of Subsidiaries.
"Consolidated Total Capitalization" means, at any time, the sum of Consolidated
Net Worth and Consolidated Total Debt.
"Consolidated Total Debt" means, as of any date of determination, the total of
all Debt of the Company and its Subsidiaries outstanding on such date, after
eliminating all offsetting debits and
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credits between the Company and its Subsidiaries and all other items required to
be eliminated in the course of the preparation of consolidated financial
statements of the Company and its Subsidiaries in accordance with GAAP.
"Control Event" means
(i) the execution by the Company or any of its Subsidiaries or
Affiliates of any agreement or letter of intent with respect
to any proposed transaction or event or series of transactions
or events which, individually or in the aggregate, may
reasonably be expected to result in a Change in Control,
(ii) the execution of any written agreement which, when fully
performed by the parties thereto, would result in a Change of
Control, or
(iii) on or after the consummation of an IPO, the making of
any written offer by any person (as such term is used in
section 13(d) and section 14(d)(2) of the Exchange Act as in
effect on the date hereof) or related persons constituting a
group (as such term is used in Rule 13d-5 under the Exchange
Act as in effect on the date hereof) to the holders of the
common stock of the Company, which offer, if accepted by the
requisite number of holders, would result in a Change in
Control.
"Debt" with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money;
(b) its liabilities determined in accordance with GAAP for the deferred
purchase price of property acquired by such Person (excluding any part of such
deferred purchase price payable in equity interest of such Person and excluding
accounts payable arising in the ordinary course of business but including all
liabilities created or arising under any conditional sale or other title
retention agreement with respect to any such property);
(c) all liabilities appearing on its balance sheet in accordance with
GAAP in respect of Capital Leases;
(d) all liabilities for borrowed money secured by any Lien with respect
to any property owned by such Person (whether or not it has assumed or otherwise
become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments
serving a similar function issued or accepted for its account by banks and other
financial institutions (whether or not representing obligations for borrowed
money);
(f) any Guaranty of such Person with respect to liabilities of a type
described in any of clauses (a) through (e) hereof; and
(g) any liabilities of a type described in any of clauses (a) through
(f) hereof of such Person resulting from such Person being a general partner or
member of a joint venture, whether by provision of applicable law, contract or
otherwise.
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"Default" means an event or condition the occurrence or existence of which
would, with the lapse of time or the giving of notice or both, become an Event
of Default.
"Disposition Value" means, at any time, with respect to any property
(a) in the case of property that does not constitute Subsidiary Stock,
the book value thereof, valued at the time of such disposition in good faith by
the Company, and
(b) in the case of property that constitutes Subsidiary Stock, an
amount equal to that percentage of book value of the assets of the Subsidiary
that issued such stock as is equal to the percentage that the book value of such
Subsidiary Stock represents of the book value of all of the outstanding capital
stock of such Subsidiary (assuming, in making such calculations, that all
securities convertible into such capital stock are so converted and giving full
effect to all transactions that would occur or be required in connection with
such conversion) determined at the time of the disposition thereof, in good
faith by the Company.
"Distribution" means, in respect of any corporation, association or other
business entity:
(a) dividends or other distributions or payments on capital stock or
other equity interest of such corporation, association or other business entity
(except distributions in such stock or other equity interest); and
(b) the redemption or acquisition of such stock or other equity
interests or of warrants, rights or other options to purchase such stock or
other equity interests (except when solely in exchange for such stock or other
equity interests) unless made, contemporaneously, from the net proceeds of a
sale of such stock or other equity interests.
"Domestic Rate" means, for any day, the rate most recently published as the
"prime rate" in The Wall Street Journal as being the base rate on corporate
loans posted by at least 75% of the nation's 30 largest bank (or the average, if
more than one rate is published) or as that computation of "prime rate" may be
reformulated by The Wall Street Journal in the future, any such reformulation,
however, being subject to the approval thereof by the Required Lenders and the
Company. In the event such prime rate ceases to be published or in the event the
Required Lenders and the Company do not approve a reformulation, the "Domestic
Rate" shall mean the arithmetic average of the rates of interest announced by
the Administrative Agent and the Co-Agent from time to time as their prime
commercial rates or most closely equivalent publicly announced rates, as in
effect on such day.
"Domestic Rate Portion" is defined in Section 2.1.
"Domestic Rate Margin" means zero percent (0%) per annum.
"EBITDA" means, with respect to any period, Consolidated Net Income for such
period plus all amounts deducted in the computation thereof on account of all
(a) Interest Charges during such period, (b) income taxes of the Company and its
Subsidiaries during such period, (c) amortization and depreciation expense of
the Company and its Subsidiaries during such period, and (d) non-cash expense
from pending receivable allocations attributable to an acquisition's purchase
price and extraordinary non-recurring charges during such period, all determined
on a consolidated basis in accordance with GAAP, except that with respect to any
Subsidiary of the
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Company that was acquired during the four calendar quarters immediately
preceding the date of calculation of EBITDA, such Subsidiary shall be deemed to
have been a Subsidiary of the Company throughout such four calendar quarters
preceding the calculation date.
"Environmental Laws" means any and all Federal, state, local and foreign laws,
regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or governmental
restrictions relating to pollution and the protection of the environment or the
release of any materials into the environment, including but not limited to
those related to hazardous substances or wastes, air emissions and discharges to
waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time, and the rules and regulations promulgated thereunder from
time to time in effect.
"ERISA Affiliate" means any trade or business (whether or not incorporated) that
is treated as a single employer together with the Company under Section 414 of
the Code.
"European Community Countries" means Belgium, Denmark, France, Germany, Ireland,
Luxembourg, Netherlands, Spain and the United Kingdom.
"Event of Default" means any event or condition identified in Section 8 hereof.
"Fair Market Value" means, at any time and with respect to any property, the
sale value of such property that would be realized in an arm's-length sale at
such time between an informed and willing buyer and an informed and willing
seller (neither being under a compulsion to buy or sell).
"First Tier Subsidiary" is defined in the Pledge Agreement.
"Fixed Charges" means, with reference to any period, the sum of (i) the
aggregate amount of payments required to be made by the Company and the
Subsidiaries during such period in respect of principal on all Debt (whether at
maturity, as a result of mandatory sinking fund redemption, mandatory
prepayment, acceleration or otherwise), plus (ii) Interest Charges for such
period, plus (iii), without duplication to amounts included under (i) and (ii)
regarding Capital Leases, the aggregate amount of payments required to be made
by the Company and the Subsidiaries during such period in respect of the
principal portions of Capital Leases.
"Future Senior Notes" means any notes evidencing future senior term debt of the
Company issued in a private placement to institutional investors.
"GAAP" means generally accepted accounting principles as in effect from time to
time in the United States of America.
"Governmental Authority" means
(a) the government of the United States of America or any State or
other political subdivision thereof, or
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(b) any jurisdiction in which the Company or any Subsidiary conducts
all or any part of its business, or which asserts jurisdiction over any
properties of the Company or any Subsidiary, or
(c) any entity exercising executive, legislative, judicial, regulatory
or administrative functions of, or pertaining to, any such government.
"Hazardous Material" means any and all pollutants, toxic or hazardous wastes or
any other substances that might pose a hazard to health or safety, the removal
of which may be required or the generation, manufacture, refining, production,
processing, treatment, storage, handling, transportation, transfer, use,
disposal, release, discharge, spillage, seepage, or filtration of which is or
shall be restricted, prohibited or penalized by any applicable law (including,
without limitation, asbestos, urea formaldehyde foam insulation and
polychlorinated biphenyls).
"Interest Charges" means, with respect to any period, the sum (without
duplication) of the following (in each case, eliminating all offsetting debits
and credits between the Company and its Subsidiaries and all other items
required to be eliminated in the course of the preparation of consolidated
financial statements of the Company and its Subsidiaries in accordance with
GAAP): (a) all interest in respect of Debt of the Company and its Subsidiaries
(including imputed interest on Capital Leases) deducted in determining
Consolidated Net Income for such period, and (b) all debt discount and expense
amortized or required to be amortized in the determination of Consolidated Net
Income for such period, all determined in accordance with GAAP.
"Interest Charges Coverage Ratio" means, at any time, the ratio of (a) EBITDA
for the period of four consecutive fiscal quarters ending on, or most recently
ended prior to, such time to (b) Interest Charges for such period.
"Interest Period means, with respect to any LIBOR Portion, the period commencing
on, as the case may be, the creation, continuation or conversion date with
respect to such LIBOR Portion and ending one (1), two (2), three (3) or six (6)
months thereafter as selected by the Company in its notice as provided herein;
provided that, the foregoing provision relating to Interest Periods is subject
to the following:
(i) if any Interest Period would otherwise end on a day which
is not a Business Day that Interest Period shall be extended to the
next succeeding Business Day, unless the result of such extension would
be to carry such Interest Period into another calendar month in which
event such Interest Period shall end on the immediately preceding
Business Day;
(ii) no Interest Period may extend beyond the final maturity
date of the applicable Notes;
(iii) the interest rate to be applicable to each Portion for
each Interest Period shall apply from and including the first day of
such Interest Period to but excluding the last day thereof; and
(iv) no Interest Period may be selected if after giving effect
thereto the Company will be unable to make a principal payment
scheduled to be made during such
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Interest Period without paying part of a LIBOR Portion on a date other
than the last day of the Interest Period applicable thereto.
For purposes of determining an Interest Period, a month means a period starting
on one day in a calendar month and ending on a numerically corresponding day in
the next calendar month, provided, however, if an Interest Period begins on the
last day of a month or if there is no numerically corresponding day in the month
in which an Interest Period is to end, then such Interest Period shall end on
the last Business Day of such month.
"Investment" means any investment, made in cash or by delivery of property, by
the Company or any of its Subsidiaries (i) in any Person, whether by acquisition
of stock, indebtedness or other obligation or Security, or by loan, Guaranty,
advance, capital contribution or otherwise, or (ii) in any property.
"IPO" means the initial public offering by HomeServices.Com Inc. of its voting
shares of common stock.
"Issuing Agent" is defined in Section 1.3 hereof.
"Lenders" is defined in the introductory paragraph of this Agreement.
"Letter of Credit" means any and all letters of credit at any time issued by the
Issuing Agents for the account of the Company or any Subsidiary as provided in
this Agreement.
"LIBOR MARGIN" means the then applicable per annum percentage calculated at the
times and in the manner described in Section 2.4(b) hereof.
"LIBOR Portion" is defined in Section 2.1 hereof.
"Lien" means, with respect to any Person, any mortgage, lien, pledge, charge,
security interest or other encumbrance, or any interest or title of any vendor,
lessor, lender or other secured party to or of such Person under any conditional
sale or other title retention agreement or Capital Lease, upon or with respect
to any property or asset of such Person (including in the case of stock,
stockholder agreements, voting trust agreements and all similar arrangements).
"Loan Documents" means this Agreement, the Notes, the Applications, the Pledge
Agreement, and the Subordination Agreement.
"Loans" is defined in Section 1.2 hereof.
"Marks" means the Company's and each Subsidiary's name, all fictional business
names, trading names, registered and unregistered trademarks, service marks, and
applications at any time used by the Company or any Subsidiary.
"Material" means material in relation to the business, operations, affairs,
financial condition, assets, properties or prospects of the Company and its
Subsidiaries taken as a whole.
"Material Adverse Effect" means a material adverse effect on (a) the business,
operations, affairs, financial condition, assets, profits, prospects or
properties of the Company and its Subsidiaries taken as a whole, or (b) the
ability of the Company to perform its obligations under
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this Agreement, the Note and any other Loan Document, or (c) the validity or
enforceability of this Agreement, the Note or any other Loan Document.
"MidAmerican Energy Holdings Company" means MidAmerican Energy Holdings Company,
an Iowa corporation, the beneficial owner of 95% of the outstanding capital
stock of the Company as of the date of this Agreement.
"Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term
is defined in Section 4001(a)(3) of ERISA).
"Net Proceeds Amount" means, with respect to any Transfer of any Property by any
Person, an amount equal to the difference of
(a) the aggregate amount of the consideration (valued at the Fair
Market Value of such consideration at the time of the consummation of such
Transfer) received by such Person in respect of such Transfer, minus
(b) all ordinary and reasonable out-of-pocket costs and expenses
actually incurred by such Person in connection with such Transfer.
"Net Proceeds of Capital Stock" means, with respect to any period, cash proceeds
(net of all costs and out-of-pocket expenses in connection therewith, including,
without limitation, placement, underwriting and brokerage fees and expenses),
received by the Company and its Subsidiaries during such period, from the sale
of all capital stock (other than Redeemable capital stock) of the Company.
"Notes" means the Revolving Credit Notes.
"Obligations" means all obligations of the Company to pay principal and interest
on the Loans and all fees and charges payable hereunder, to reimburse for draws
on the Letters of Credit, and all other payment obligations of the Company
arising under or relating to any Loan Document, in each case, whether direct or
indirect absolute or contingent, due or to become due, and whether now existing
or hereafter arising and howsoever held, evidenced or acquired.
"Officer's Certificate" means a certificate of a Senior Financial Officer or of
any other officer of the Company whose responsibilities extend to the subject
matter of such certificate.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in
ERISA or any successor thereto.
"Permitted Acquisitions" is defined in Section 7.26 hereof.
"Person" means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization, or a government or
agency or political subdivision thereof.
"Plan" means an "employee benefit plan" (as defined in Section 3(3) of ERISA)
that is or, within the preceding five years, has been established or maintained,
or to which contributions are or, within the preceding five years, have been
made or required to be made, by the Company or any ERISA Affiliate or with
respect to which the Company or any ERISA Affiliate may have any liability.
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"Plaza Mortgage Facility" means the $10,000,000 Revolving Credit Agreement dated
September 8, 1998 by and between J. C. Nichols Residential Inc. and the Company.
"Pledge Agreement" is defined in Section 6.3 hereof.
"Pledged Shares" means all issued and outstanding capital stock and similar
equity interests of each and every Subsidiary of the Company.
"Portion" is defined in Section 2.1 hereof.
"Priority Debt" means, without duplication, the sum of (a) all Debt of the
Company secured by any Lien with respect to any property owned by the Company or
any of its Subsidiaries, and (b) all Debt of Subsidiaries (except Debt owed to
the Company or a Wholly-Owned Subsidiary); except for the following:
(a) any Debt secured by a Lien granted in favor of the Lenders and
the holders of the Senior Notes pursuant to the Pledge Agreement,
or any replacement or substitution therefor, or any security
agreement referred to in Section 7.27 hereof;
(b) purchase money Debt secured by a Lien permitted by Section
7.18(f) hereof;
(c) Debt evidenced by the Plaza Mortgage Facility; and
(d) any Future Senior Debt secured by a Lien; provided the
Obligations hereunder are equally and ratably secured with the
Senior Notes and such Future Senior Debt.
"property" or "properties" means, unless otherwise specifically limited, real or
personal property of any kind, tangible or intangible, choate or inchoate.
"Property Reinvestment Application" means, with respect to any Transfer of
property, the application of an amount equal to the Net Proceeds Amount with
respect to such Transfer to the acquisition by the Company or any Subsidiary of
long-term assets of a similar nature.
"Redeemable" means, with respect to the capital stock of any Person, each share
of such Person's capital stock that is:
(a) redeemable, payable or required to be purchased or otherwise
retired or extinguished, or convertible into Debt of such Person (i) at a fixed
or determinable date, whether by operation of sinking fund or otherwise, (ii) at
the option of any Person other than such Person, or (iii) upon the occurrence of
a condition not solely within the control of such Person; or
(b) convertible into other Redeemable capital stock.
"Required Lenders" means at any time those Lenders then holding at least 60
percent (except as provided below) of the then aggregate unpaid principal amount
of the Notes and interests in Letters of Credit or, if no such principal amount
is outstanding, Lenders having at least 60 percent (except as provided below) of
the Revolving Credit Commitments; provided, however, that with respect to any
waiver, change or modification of any covenant of the Company contained in
Section 7 hereof the required percentage shall be 100%.
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"Responsible Officer" means any Senior Financial Officer and any other officer
of the Company with responsibility for the administration of the relevant
portion of this Agreement.
"Restricted Investments" means all Investments except the following:
(a) Investments in commercial paper maturing in 270 days or less from
the date of issuance which, at the time of acquisition by the Company or any
Subsidiary, is accorded the highest rating by S&P, Moody's or other nationally
recognized credit rating agency of similar standing;
(b) Investments in direct obligations of the United States of America
or any agency or instrumentality of the United States of America, the payment or
guarantee of which constitutes a full faith and credit obligation of the United
States of America, in either case, maturing in twelve months or less from the
date of acquisition thereof, excluding, however, Investments which constitute
derivative securities such as mortgage-backed "Ios" or "Pos" and mortgage
pass-through certificates or Investments of a similar nature or type;
(c) Investments in certificates of deposit or similar instruments
maturing within one year from the date of issuance thereof, issued by a bank or
trust company organized under the laws of the:
(i) United States or any state thereof, having capital,
surplus and undivided profits aggregating at least
$1,000,000,000 and whose long-term certificates of deposit or
similar instruments are, at the time of acquisition thereof by
the Company or a Subsidiary, rated A or better by S&P, Duff &
Phelps or Fitch Investors' Service Incorporated or A2 or
better by Moody's; or
(ii) Canada, any European Community Country, Japan or any
other country, having capital, surplus and undivided profits
aggregating at least $1,000,000,000 and whose commercial paper
is, at the time of acquisition thereof by the Company or a
Subsidiary, rated A-1 or better by S&P or P-1 or better by
Moody's or whose long-term certificates of deposit or similar
instruments are, at the time of acquisition thereof by the
Company or a Subsidiary, rated AA or better by S&P or Aa2 or
better by Moody's;
(d) Investments in master note or deposit arrangements or money market
programs which invest solely in securities of the type described in the
subparagraphs (a), (b) or (c) hereof;
(e) Investments in money market programs of investment companies which,
at the time of acquisition by the Company or any Subsidiary, are rated A-1 or
better by S&P or P-1 or better by Moody's or, if such money market programs are
not rated, a substantial majority of the Investments of such money market
programs are rated A-1 or better by S&P or P-1 or better by Moody's;
(f) Investments by the Company and its Subsidiaries in and to
Subsidiaries, including any Investment in a Person which, after giving effect to
such Investment, will become a Subsidiary;
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(g) loans or advances of sales commissions and expenses in the usual
and ordinary course of business to real estate sales agents which are incidental
to carrying on the business of the Company or any Subsidiary;
(h) Investments existing on the date of the Closing and disclosed in
Schedule 7.17;
(i) Investments in Repurchase Agreements;
(j) Intentionally omitted.
(k) Investments in Swaps or interest rate agreements designed to
protect the Company and its Subsidiaries against (i) fluctuations in interest
rates in respect of Debt incurred or to be incurred, which obligations do not
exceed the aggregate principal amount of such Debt, or (ii) fluctuations in the
value of Investments in fixed-rate Securities resulting from a change in
interest rates, in each case entered into in the ordinary course of business and
not for speculation, provided that the long-term senior unsecured debt
obligations of the counterparty to such Investments are rated, at the time of
the making of such Investments, Aor better by S&P or A3 or better by Moody's;
(l) Investments in joint ventures or other entities engaged in the same
business as the Company and its Subsidiaries in which the Company and its
Subsidiaries shall have an equity ownership interest of less than a majority of
all outstanding equity ownership interests of such entities, provided that the
aggregate amount of all such Investments shall not at any time exceed
$10,000.000; and
(m) Permitted Acquisitions.
As of any date of determination, each Restricted Investment shall be valued at
the greater of:
(x) the amount at which such Restricted Investment is shown on
the books of the Company or any of its Subsidiaries (or zero
if such Restricted Investment is not shown on any such books);
and
(y) either
(i) in the case of any Guaranty of the obligation of
any Person, the amount which the Company or any of
its Subsidiaries has paid on account of such
obligation less any recoupment by the Company or such
Subsidiary of any such payments, or
(ii) in the case of any other Restricted Investment,
the excess of (x) the greater of (A) the amount
originally entered on the books of the Company or any
of its Subsidiaries with respect thereto and (B) the
cost thereof to the Company or its Subsidiary over
(y) any return of capital (after income taxes
applicable thereto) upon such Restricted Investment
through the sale or other liquidation thereof or part
thereof or otherwise.
As used in this definition of "Restricted Investments":
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"Acceptable Bank" means any bank or trust company (i) which is
organized under the laws of the United States of America or any State
thereof, (ii) which has capital, surplus and undivided profits
aggregating at least $1,000,000,000 and (iii) whose long-term unsecured
debt obligations (or the long-term unsecured debt obligations of the
bank holding company owning all of the capital stock of such bank or
trust company) shall have been given a rating of "A" or better by S&P,
"A2" or better by Moody's or an equivalent rating by any other credit
rating agency of recognized national standing.
"Acceptable Broker-Dealer" means any Person other than a
natural person (i) which is registered as a broker or dealer pursuant
to the Exchange Act and (ii) whose long-term unsecured debt obligations
shall have been given a rating of "A" or better by S&P, "A2" or better
by Moody's or an equivalent rating by any other credit rating agency of
recognized national standing.
"Moody's" means Moody's Investors Service, Inc.
"Repurchase Agreement" means any written agreement
(a) That provides for (i) the transfer of one or more United
States Governmental Securities in an aggregate principal amount at
least equal to the amount of the Transfer Price (defined below) to the
Company or any of its Subsidiaries from an Acceptable Bank or an
Acceptable Broker-Dealer against a transfer of funds (the "Transfer
Price") by the Company or such Subsidiary to such Acceptable Bank or
Acceptable Broker-Dealer, and (ii) a simultaneous agreement by the
Company or such Subsidiary, in connection with such transfer of funds,
to transfer to such Acceptable Bank or Acceptable Broker-Dealer the
same or substantially similar United States Governmental Securities for
a price not less than the Transfer Price plus a reasonable return
thereon at a date certain not later than 365 days after such transfer
of funds,
(b) in respect of which the Company or such Subsidiary shall
have the right, whether by contract or pursuant to applicable law, to
liquidate such agreement upon the occurrence of any default thereunder,
and
(c) in connection with which the Company or such Subsidiary,
or an agent thereof, shall have taken all action required by applicable
law or regulations to perfect a Lien in such United States Governmental
Securities.
"S&P" means Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc.
"United States Governmental Security" means any direct
obligation of, or obligation guaranteed by, the United States of
America, or any agency controlled or supervised by or acting as an
instrumentality of the United States of America pursuant to authority
granted by the Congress of the United States of America, so long as
such obligation or guarantee shall have the benefit of the full faith
and credit of the United States of America which shall have been
pledged pursuant to authority granted by the Congress of the United
States of America.
"Restricted Payment" means:
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(a) any Distribution in respect of the Company or any
Subsidiary of the Company (other than on account of capital stock or
other equity interests of a Subsidiary of the Company owned legally and
beneficially by the Company or another Subsidiary of the Company),
including, without limitation, any Distribution resulting in the
acquisition by the Company of securities which would constitute
treasury stock, and
(b) any payment, repayment, redemption, retirement, repurchase
or other acquisition, direct or indirect, by the Company or any
Subsidiary of, on account of, or in respect of, the principal of any
Subordinated Debt (or any installment thereof) prior to the regularly
scheduled maturity date thereof (as in effect on the date such
Subordinated Debt was originally incurred).
For purposes of this Agreement, the amount of any Restricted Payment made in
property shall be the greater of (x) the Fair Market Value of such property (as
determined in good faith by the board of directors (or equivalent governing
body) of the Person making such Restricted Payment) and (y) the net book value
thereof on the books of such Person, in each case determined as of the date on
which such Restricted Payment is made.
"Revolving Credit" is defined in Section 1.1 hereof.
"Revolving Credit Commitments" shall mean the commitments of the Lenders to make
loans under the Revolving Credit in the amounts set forth opposite their
signatures hereto under the heading "Revolving Credit Commitment", as such
amounts may be reduced pursuant hereto.
"Revolving Credit Loans" is defined in Section 1.2 hereof.
"Revolving Credit Note" means the "Note" as defined in Section 1.2 hereof.
"Senior Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or comptroller of the Company.
"Senior Notes" means the 7.12% Senior Notes due November 1, 2010, issued under
that certain Note Purchase Agreement dated as of November 1, 1998 between the
Company and the purchasers parties thereto.
"Subordinated Debt" means any Debt that is in any manner subordinated in right
of payment or security in any respect to Debt evidenced by the Note.
"Subsidiary" means, as to any Person, any corporation, association or other
business entity in which such Person or one or more of its Subsidiaries or such
Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to a
"Subsidiary" is a reference to a Subsidiary of the Company.
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"Subsidiary Stock" means, with respect to any Person, the stock (or any options
or warrants to purchase stock or other Securities exchangeable for or
convertible into stock) of any Subsidiary of such Person.
"Swaps" means, with respect to any Person, payment obligations with respect to
interest rate swaps and similar obligations obligating such Person to make
payments, whether periodically or upon the happening of a contingency.
"Swap Transaction" means any Swap with any Lender, including Swap Transaction
number INF 8479, between the Company and LaSalle Bank National Association.
"Termination Date" means (i) September 20, 2002, or (ii) such earlier date on
which the Revolving Credit is terminated pursuant to Section 8 hereof.
"Transfer" means, with respect to any Person, any transaction in which such
Person sells, conveys, transfers, leases (as lessor), licenses, sublicenses, or
franchises any of its property, including, without limitation, Subsidiary Stock
or the Marks. For purposes of determining the application of the Net Proceeds
Amount in respect of any Transfer, the Company may designate any Transfer as one
or more separate Transfers each yielding a separate Net Proceeds Amount.
"Wholly-Owned Subsidiary" means, at any time, any Subsidiary one hundred percent
(100%) of all of the equity interests (except directors' qualifying shares) and
voting interests of which are owned by any one or more of the Company and the
Company's other Wholly-Owned Subsidiaries at such time.
SECTION 4.2. INTERPRETATION.
The foregoing definitions are equally applicable to both the singular and plural
forms of the terms defined. All references to time of day herein are references
to Des Moines, Iowa, time unless otherwise specifically provided. Where the
character or amount of any asset or liability or item of income or expense is
required to be determined or any consolidation or other accounting computation
is required to be made for the purposes of this Agreement, the same shall be
done in accordance with GAAP, to the extent applicable, except where such
principles are inconsistent with the specific provisions of this Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Lenders as follows:
SECTION 5.1. ORGANIZATION; POWER AND AUTHORITY.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and is duly
qualified as a foreign corporation and is in good standing in each jurisdiction
in which such qualification is required by law, other than those jurisdictions
as to which the failure to be so qualified or in good standing could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. The Company has the corporate power and authority to own or hold
under lease the properties it purports to own or hold under lease, to transact
the business it transacts and proposes to transact, to execute and deliver this
Agreement, the Notes and the other Loan Documents and to perform the provisions
hereof and thereof.
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SECTION 5.2. AUTHORIZATION, ETC.
This Agreement, the Notes and the other Loan Documents to which the Company is a
party have been duly authorized by all necessary corporate action on the part of
the Company, and each of this Agreement, the Notes and the other Loan Documents
to which the Company is a party constitutes, a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and (ii) general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
SECTION 5.3. FULL DISCLOSURE.
This Agreement, the Notes, other Loan Documents, and the documents, certificates
or other writing delivered to any of the Lenders by or on behalf of the Company
in connection with the negotiation of this Agreement and the transactions
contemplated hereby and the financial statements listed in Schedule 5.5 do not
when taken as a whole contain any untrue statements of a material fact or omit a
material fact necessary to make the material statements contained herein or
therein not misleading in light of the circumstances under which they were made,
the Lenders acknowledging that as to any projections or other "forward-looking
information" furnished to the Lenders, the Company only represents that the same
were prepared on the basis of information and estimates the Company believed to
be reasonable.
SECTION 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF COMPANY; SUBSIDIARIES;
AFFILIATES
(a) Schedule 5.4 shows as to the Company the number of shares of each
class of its capital stock authorized or outstanding and the percentage thereof
owned by MidAmerican Energy Holdings Company on the date of this Agreement.
(b) As of the date hereof, Schedule 5.4 contains (except as noted
therein) complete and correct lists (i) of the Company's Subsidiaries, on the
date of this Agreement, showing, as to each Subsidiary, the correct name
thereof, the jurisdiction of its organization, and the percentage of shares of
each class of its capital stock or similar equity interests outstanding owned by
the Company and each other Subsidiary, (ii) of the Company's Affiliates, on the
date of this Agreement, other than Subsidiaries, and (iii) of the Company's
directors and senior officers on the date of this Agreement.
(c) All of the outstanding shares of capital stock or similar equity
interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company
and its Subsidiaries have been validly issued, are fully paid and nonassessable
and are owned by the Company or another Subsidiary free and clear of any Lien
(except as otherwise disclosed in Schedule 5.4). As of the date hereof, there
are outstanding no commitments or other obligations of the Company or any
Subsidiary to issue, and no options, warrants or other rights of any individual
or entity to acquire, any shares of any class of capital stock of the Company or
any Subsidiary.
(d) Each Subsidiary identified in Schedule 5.4 is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization, and is duly qualified as a foreign
corporation or other legal entity and is in good standing in each jurisdiction
in which such qualification is required by law, other than those
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jurisdictions as to which the failure to be so qualified or in good standing
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect. Each such Subsidiary has the corporate or other power
and authority to own or hold under lease the properties it purports to own or
hold under lease and to transact the business it transacts and proposes to
transact.
(e) No Subsidiary is a party to, or otherwise subject to, any legal
restriction or any agreement (other than this Agreement, any other Loan
Document, the agreements listed on Schedule 5.4 and customary limitations
imposed by corporate law statutes) restricting the ability of such Subsidiary to
pay dividends out of profits or make any other similar distributions of profits
to the Company or any of its Subsidiaries that owns outstanding shares of
capital stock or similar equity interests of such Subsidiary.
SECTION 5.5. FINANCIAL STATEMENTS.
The Company has delivered to each Lender copies of the financial statements
listed on Schedule 5.5. All of said financial statements (including in each case
the related schedules and note) fairly present in all material respects the
consolidated financial position of the respective companies and their
subsidiaries as of the respective dates specified in such financial statements
and the consolidated results of their operations and cash flows for the
respective periods so specified and have been prepared in accordance with GAAP
consistently applied throughout the periods involved except as set forth in the
notes thereto. The Company has no contingent liabilities which are material to
it other than as indicated on said financial statements.
SECTION 5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
The execution, delivery and performance by the Company of this Agreement, the
Notes and the other Loan Documents will not (a) contravene, result in any breach
of, or constitute a default under, or result in the creation of any Lien in
respect of any material property of the Company (except in favor of the Lenders
with respect to the Pledged Shares) or any Subsidiary under, any indenture,
mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate
charter or by-laws, or any other material agreement or instrument to which the
Company or any Subsidiary is bound or by which the Company or any Subsidiary or
any of their respective properties may be bound or affected, (b) conflict with
or result in a breach of any of the terms, conditions or provisions of any
order, judgment, decree, or ruling of any court, arbitrator or Governmental
Authority applicable to the Company or any Subsidiary or (c) violate any
provision of any statute or other rule or regulation of any Governmental
Authority applicable to the Company or any Subsidiary.
SECTION 5.7. GOVERNMENTAL AUTHORIZATIONS, ETC.
No consent, approval or authorization of, or registration, filing or declaration
with, any Governmental Authority is required in connection with the execution,
delivery or performance by the Company of this Agreement, the Notes or the other
Loan Documents.
SECTION 5.8. LITIGATION; OBSERVANCE OF AGREEMENTS; STATUTES AND ORDERS.
(a) There are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company or any
Subsidiary or any material
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property of the Company or any Subsidiary in any court or before any arbitrator
of any kind or before or by any Governmental Authority that, individually or in
the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) Neither the Company nor any Subsidiary is in default under any term
of any material agreement or instrument to which it is a party or by which it is
bound, or any order, judgment, decree or ruling of any court, arbitrator or
Governmental Authority or is in violation of any applicable law, ordinance, rule
or regulation (including without limitation Environmental Laws) of any
Governmental Authority, which default or violation, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect.
SECTION 5.9. TAXES.
The Company and its Subsidiaries have filed all tax returns (individually or on
a consolidated basis) that are required to have been filed in any jurisdiction,
and have paid all taxes shown to be due and payable on such returns
(individually or on a consolidated basis), and all other taxes and assessments
levied upon them or their properties, assets, income or franchises, to the
extent such taxes and assessments have become due and payable and before they
have become delinquent, except for any taxes and assessments (a) the amount of
which is not individually or in the aggregate Material or (b) the amount,
applicability or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which the Company or a Subsidiary,
as the case may be, has established adequate reserves in accordance with GAAP.
The Company knows of no basis for any other tax or assessment that could
reasonably be expected to have a Material Adverse Effect. The charges, accruals
and reserves on the books of the Company and its Subsidiaries in respect of
Federal, state or other taxes for all fiscal periods are adequate. The Company
does not have any income tax liabilities for any fiscal year ending on or prior
to December 31, 1998, which are not properly reserved for. The Federal income
tax liabilities of the Company's Subsidiaries have been determined by the
Internal Revenue Service and paid for all fiscal years up to and including the
fiscal year ended December 31, 1995.
SECTION 5.10. TITLE TO PROPERTY LEASES.
The Company and its Subsidiaries have good and valid title to their respective
properties that individually or in the aggregate are Material, including all
such properties reflected in the most recent audited balance sheet referred to
in Section 5.5 or purported to have been acquired by the Company or any
Subsidiary after said date (except as sold or otherwise disposed of in the
ordinary course of business), in each case free and clear of Liens prohibited by
this Agreement. All leases that individually or in the aggregate are Material
are valid and subsisting and are in full force and effect in all material
respects.
SECTION 5.11. LICENSES, PERMITS, ETC.
Except as disclosed in Schedule 5.11,
(a) the Company and its Subsidiaries own or possess all licenses,
permits, franchises, authorizations, patents, copyrights, service marks,
trademarks and trade names, or rights thereto, that individually or in the
aggregate are Material, without known conflict with the rights of others;
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(b) to the best knowledge of the Company, no product of the Company or
any of its Subsidiaries infringes in any material respect any license, permit,
franchise, authorization, patent, copyright, service mark, trademark, trade name
or other right owned by any other Person; and
(c) to the best knowledge of the Company, there is no Material
violation by any Person of any right of the Company or any of its Subsidiaries
with respect to any patent, copyright, service mark, trademark, trade name or
other right owned or used by the Company or any of its Subsidiaries.
SECTION 5.12. COMPLIANCE WITH ERISA.
(a) The Company and each ERISA Affiliate have operated and administered
each Plan in compliance with all applicable laws except for such instances of
noncompliance as have not resulted in and could not reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate
has incurred any liability pursuant to Title I or IV of ERISA or the penalty or
excise tax provisions of the Code relating to employee benefit plans (as defined
in Section 3 of ERISA), and no event, transaction or condition has occurred or
exists that could reasonably be expected to result in the incurrence of any such
liability by the Company or any ERISA Affiliate, or in the imposition of any
Lien on any of the rights, properties or assets of the Company or any ERISA
Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty
or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than
such liabilities or Liens as would not be individually or in the aggregate
Material.
(b) For each Plan that is a pension plan within the meaning of Section
3(2) of ERISA, the accumulated benefit obligation did not exceed the fair market
value of the Plan's assets. For this purpose, "Accumulated benefit obligation"
shall have the meaning given to that term in paragraph 18 of Statement of
Financial Accounting Standards No. 87.
(c) The Company and its ERISA Affiliates have not incurred withdrawal
liabilities (and are not subject to contingent withdrawal liabilities) under
Section 4201 or 4204 of ERISA in respect of Multiemployer Plans that
individually or in the aggregate are Material.
(d) The expected post-retirement benefit obligation (determined as of
the last day of the Company's most recently ended fiscal year in accordance with
Financial Accounting Standards Board Statement No. 106, without regard to
liabilities attributable to continuation coverage mandated by Section 4980B of
the Code) of the Company and its Subsidiaries is not Material.
(e) The execution and delivery of this Agreement and the issuance of
the Note hereunder will not involve any transaction that is subject to the
prohibitions of Section 406 of ERISA or in connection with which a tax could be
imposed pursuant to Section 4975(c)(1)(A)-(D) of the Code.
SECTION 5.13. EXISTING DEBT; FUTURE LIENS.
(a) Schedule 5.13 sets forth a complete and correct list of all
outstanding Debt and Priority Debt of the Company and its Subsidiaries as of
August 31, 1999, since which date there has been no Material change in the
amounts, interest rates, sinking funds, installment payments
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or maturities of the Debt of the Company or its Subsidiaries. Neither the
Company nor any Subsidiary is in default and no waiver of default is currently
in effect, in the payment of any principal or interest on any Debt of the
Company or such Subsidiary that could be reasonably be expected to result in a
Material Adverse Effect and no event or condition exists with respect to any
Debt of the Company or any Subsidiary that would permit (or that with notice or
the lapse of time, or both, would permit) one or more Persons to cause such Debt
to become due and payable before its stated maturity or before its regularly
scheduled dates of payment.
(b) Except as disclosed in Schedule 5.13, neither the Company nor any
Subsidiary has agreed or consented to cause or permit in the future (upon the
happening of a contingency or otherwise) any of its material property, whether
now owned or hereafter acquired, to be subject to a Lien not permitted by
Section 7.14.
SECTION 5.14. FOREIGN ASSETS CONTROL REGULATIONS, ETC.
Neither the issuance of the Note by the Company hereunder nor its use of the
proceeds thereof will violate the Trading with the Enemy Act, as amended, or any
of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
SECTION 5.15. STATUS UNDER CERTAIN STATUTES.
Neither the Company nor any Subsidiary is an "investment company" registered or
required to be registered under the Investment Company Act of 1940, as amended,
or is subject to regulation under the Public Utility Holding Company Act of
1935, as amended, the ICC Termination Act of 1995, as amended, or the Federal
Power Act, as amended.
SECTION 5.16. ENVIRONMENTAL MATTERS.
Neither the Company nor any Subsidiary has knowledge of any claim or has
received any notice of any claim, and no proceeding has been instituted raising
any claim against the Company or any of its Subsidiaries or any of their
respective real properties now or formerly owned, leased or operated by any of
them or other assets, alleging any damage to the environment or violation of any
Environmental Laws, except, in each case, such as could not reasonably be
expected to result in a Material Adverse Effect. Except as set forth in Schedule
5.16:
(a) neither the Company nor any Subsidiary has knowledge of any facts
which would give rise to any claim, public or private, of violation of
Environmental Laws or damage to the environment emanating from, occurring on or
in any way related to real properties now or formerly owned, leased or operated
by any of them or to other assets or their use, except, in each case, such as
could not reasonably be expected to result in a Material Adverse Effect;
(b) neither the Company nor any of its Subsidiaries has stored any
Hazardous Materials on real properties now or formerly owned, leased or operated
by any of them or has disposed of any Hazardous Materials in a manner contrary
to any Environmental Laws in each case in any manner that could reasonably be
expected to result in a Material Adverse Effect; and
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(c) all buildings on all real properties now owned, leased or operated
by the Company or any of its Subsidiaries are in compliance with applicable
Environmental Laws, except where failure to comply could not reasonably be
expected to result in a Material Adverse Effect.
SECTION 5.17. INTENTIONALLY OMITTED.
SECTION 5.18. MARGIN STOCK.
Neither the Company nor any Subsidiary is engaged in the business of extending
credit for the purpose of purchasing or carrying Margin Stock (within the
meaning of Regulation T, U or X of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Loan hereunder will be used to
purchase or carry any such Margin Stock or extend credit to others for the
purpose of purchasing or carrying any such Margin Stock.
SECTION 5.19. YEAR 2000.
The Company and its Subsidiaries have reviewed the areas within their business
and operations which could be adversely affected by, and have developed or are
developing a program to address on a timely basis, the "Year 2000 Problem" (that
is, the risk that computer applications used by the Company and its Subsidiaries
may be unable to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date on or after December 31, 1999),
and have made related appropriate inquiry of material suppliers and vendors.
Based on such review and program, the Company believes that the "Year 2000
Problem" will not have a Material Adverse Effect on the Company. From time to
time, at the request of the Administrative Agent, the Company and its
Subsidiaries shall provide to the Administrative Agent and the Co-Agent such
updated information or documentation as is reasonably requested regarding the
status of their efforts to address the "Year 2000 Problem".
SECTION 5.20. NO MATERIAL ADVERSE CHANGE.
Except as set forth on Schedule 5.20 and those changes occurring in the ordinary
course of business, there has been no change in the condition (financial or
otherwise) or business prospects of the Company since December 31, 1998, which
individually or, when considered with all such other changes, in the aggregate
has had a Material Adverse Effect on the Company.
SECTION 5.21. AFFILIATES.
The Company is not a party to any contracts or agreements with any of its
Affiliates on terms and conditions which are less favorable to the Company than
would be usual and customary in similar contracts or agreements between Persons
not affiliated with each other.
SECTION 5.22. COMPLIANCE WITH LAWS.
The Company and its Subsidiaries are in compliance in all material respects with
the requirements of all federal, state and local laws, rules and regulations
applicable to or pertaining to the Properties or business operations of the
Company and Subsidiaries (including, without limitation, the Occupational Safety
and Health Act of 1970, the Americans with Disabilities Act of 1990, and laws
and regulations establishing quality criteria and standards for air, water, land
and toxic or hazardous wastes or substances), non-compliance with which could
reasonably be expected to have a Material Adverse Effect on the Company. Neither
the Company nor any
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Subsidiary has received notice to the effect that its operations are not in
compliance with any of the requirements of applicable federal, state or local
environmental health and safety statutes and regulations or are the subject of
any governmental investigation evaluating whether any remedial action is needed
to respond to a release of any toxic or hazardous waste or substance into the
environment, which non-compliance or remedial action could reasonably be
expected to have a Material Adverse Effect on the Company.
SECTION 5.23. NO DEFAULT.
No Default or Event of Default has occurred and is continuing.
SECTION 5.24. TRADENAMES AND TRADEMARKS.
The Company and the Subsidiaries are the owners of all right, title and interest
in and to each of the Marks, free and clear of all liens, security interests,
charges, encumbrances, equities, and other adverse claims (other than liens
permitted under this Agreement, and except where the failure to so own such Mark
could not reasonably be expected to result in a Material Adverse Effect). All
Marks that have been registered with the United States Patent and Trademark
Office are currently in compliance with all formal legal requirements (including
the timely post-registration filing of affidavits of use and incontestability
and renewal applications) and are valid and enforceable except where
non-compliance, unvalidity or unenforceability could not reasonably be expected
to result in a Material Adverse Effect. No Mark has been or is now involved in
any opposition, invalidation, or cancellation and, to the Company's knowledge,
no such action is threatened with the respect to any of the Marks, except any
such event or circumstance which could not reasonably be expected to result in a
Material Adverse Effect. To the knowledge of the Company, there is not
potentially interfering trademark or trademark application of any third party,
except any such event or circumstance which could not reasonably be expected to
result in a Material Adverse Effect. No Mark is infringed or, to the knowledge
of the Company, has been challenged or threatened in any way, except any such
event or circumstance which could not reasonably be expected to result in a
Material Adverse Effect. None of the Marks used by Company or any Subsidiary
infringes or is alleged to infringe any trade name, trademark, or service mark
of any third party, except any such event or circumstance which could not
reasonably be expected to result in a Material Adverse Effect.
SECTION 6. CONDITIONS PRECEDENT.
The obligation of the Lender to make any Loan pursuant hereto shall be subject
to the following conditions precedent.
SECTION 6.1. CONSOLIDATED NET WORTH.
At or prior to the making of the initial Loan hereunder, the Administrative
Agent and Co-Agent shall have received such financial statements and other
financial information and certifications as they may reasonably require in order
to satisfy themselves that the Consolidated Net Worth of the Company as of the
date of the initial Loan made hereunder is not less than: (i) eighty-five
percent (85%) of Consolidated Net Worth of the Company as of the date of this
Agreement, or (ii) $25,500,000, whichever is greater.
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SECTION 6.2. INTENTIONALLY OMITTED.
SECTION 6.3. PLEDGE AGREEMENT AND PLEDGED SHARES.
At or prior to the making of the initial Loan hereunder:
(a) The Administrative Agent shall have received the Pledge Agreement
in the form of Exhibit B hereto (as amended, restated or otherwise modified from
time to time, the "Pledge Agreement") from the Company and its First Tier
Subsidiaries whereunder the Company and its First Tier Subsidiaries have pledged
to and granted first prior perfected security in the Pledged Shares in favor of
the Lenders and the holders of the Senior Notes.
(b) The Administrative Agent, as collateral agent, shall have received
the Pledged Shares existing on the date hereof and evidenced by a certificate,
together with stock powers duly endorsed in blank.
SECTION 6.4. ALL ADVANCES.
As of the time of the making of each Loan (including the initial Loan) or as of
the time of the issuance of each Letter of Credit hereunder:
(a) each of the representations and warranties set forth in Section 5
hereof and in the other Loan Documents shall be true and correct in all material
respects as of said time, provided that (i) to the extent any such
representation or warranty is stated to relate solely to an earlier date, such
representation or warranty shall be true and correct in all material respects
only as of such earlier date, and (ii) the representations and warranties made
under Section 5.5 shall be deemed to refer to the most recent financial
statements of the Company furnished to the Lender pursuant to Section 7.1
hereof;
(b) the Company and each Subsidiary shall be in full compliance with
all of the terms and conditions hereof and of the other Loan Documents, and no
Default or Event of Default shall have occurred and be continuing;
(c) after giving effect to the making of such Loan the aggregate
principal amount of all Loans and Letters of Credit shall not exceed the
aggregate amount of the Revolving Credit Commitments then in effect;
(d) such extension of credit shall not violate any order, judgment or
decree of any court or other governmental authority or any provision of law or
regulation applicable to the Lenders (including, without limitation, Regulation
U of the Board of Governors of the Federal Reserve System) as then in effect.
(e) in the case of the issuance of any Letter of Credit, the Issuing
Agent shall have received a properly completed Application together with the
fees called for hereby.
The execution and delivery of the Notes or the request for any Loan or Letter of
Credit pursuant hereto shall be and constitute the Company's warranty as to the
foregoing effects.
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SECTION 6.5. INITIAL ADVANCE.
At or prior to the making of the initial Loan hereunder, the following
conditions precedent shall also have been satisfied:
(a) the Administrative Agent shall have received the following (each to
be properly executed and completed) and the same shall have been approved as to
form and substance by the Administrative Agent and the Lenders:
(i) the Notes;
(ii) copies (executed or certified, as may be appropriate) of
all legal documents or proceedings taken in connection with
the execution and delivery of this Agreement and the other
Loan Documents to the extent the Administrative Agent and
Co-Agent and their respective counsel may reasonably request;
(iii) an incumbency certificate containing the name, title and
genuine signatures of each of the Company's Authorized
Representatives;
(b) legal matters incident to the execution and delivery of this
Agreement, the other Loan Documents and to the transactions contemplated hereby
and thereby shall be reasonably satisfactory to the Administrative Agent and
Co-Agent and their respective counsel;
(c) the Administrative Agent and Co-Agent shall have received a
certificate of existence for the Company (dated as of the date no earlier than
fifteen (15) days prior to the date hereof) from the Office of the Secretary of
State of Iowa and each state in which it is required to be qualified to do
business as a foreign corporation; and
(d) the Administrative Agent and Co-Agent shall have received the
favorable written opinion of counsel for the Company addressed to the
Administrative Agent, the Co-Agent and the other Lenders in form and substance
reasonably satisfactory to the Administrative Agent and Co-Agent and their
respective counsel;
(e) the Administrative Agent and the Co-Agent shall have received such
certifications as they may reasonably require in order to satisfy themselves as
to the financial condition of the Company and it Subsidiaries, and the lack of
material contingent liabilities of the Company and its Subsidiaries;
(f) the Administrative Agent and Co-Agent shall have received the
initial fees called for hereby;
(g) the Administrative Agent and Co-Agent shall have received such
other agreements, instruments, documents, certificates and opinions as the
Administrative Agent and Co-Agent may reasonably request.
SECTION 7. COVENANTS.
The Company agrees that, so long as any amount remains unpaid on the Notes or
the Letters of Credit or any credit is available to or in use by the Company
hereunder, except to the extent compliance in any case is waived in writing by
the Required Lenders:
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SECTION 7.1. FINANCIAL AND BUSINESS INFORMATION.
The Company shall deliver to the Administrative Agent and the Co-Agent (which in
turn shall deliver copies thereof to each Lender):
(a) Quarterly Statements - within 60 days after the end of each
quarterly fiscal period in each fiscal year of the Company (other than the last
quarterly fiscal period of each such fiscal year), duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated statements of income, changes in
shareholders' equity and cash flows of the Company and its
Subsidiaries, for such quarter and (in the case of the second
and third quarters) for the portion of the fiscal year ending
with such quarter,
setting forth in each case commencing with the quarter ended September 30, 1999
in comparative form the figures for the corresponding periods in the previous
fiscal year, all in reasonable detail, prepared in accordance with GAAP
applicable to quarterly financial statements generally, and certified by a
Senior Financial Officer as fairly presenting, in all material respects, the
financial position of the companies being reported on and their results of
operations and cash flows, subject to changes resulting from normal, recurring
year-end adjustments, provided that delivery within the time period specified
above of copies of the Company's Quarterly Report on Form 10-Q, if any, prepared
in compliance with the requirements therefor and filed with the Securities and
Exchange Commission shall be deemed to satisfy the requirements of this Section
7.1(a);
(b) Annual Statements - within 105 days after the end of each
fiscal year of the Company, duplicate copies of,
(i) a consolidated balance sheet of the Company and
its Subsidiaries, as at the end of such year, and
(ii) consolidated statements of income, changes in
shareholders' equity and cash flows of the Company
and its Subsidiaries, for such year,
setting forth in each case, commencing with the year ended December 31, 1999, in
comparative form the figures for the previous fiscal year, all in reasonable
detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of independent
certified public accountants of recognized
national standing, which opinion shall state
that such financial statements present
fairly, in all material respects, the
financial position of the companies being
reported upon and their results of
operations and cash flows and have been
prepared in conformity with GAAP, and that
the examination of such accountants in
connection with such financial statements
has been made in accordance with generally
accepted auditing
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standards, and that such audit provides a
reasonable basis for such opinion in the
circumstances, and
(B) a certificate of such accountants
stating that they have reviewed this
Agreement and stating further whether, in
making their audit, they have become aware
of any condition or event that then
constitutes a Default or an Event of
Default, and, if they are aware that any
such condition or event then exists,
specifying the nature and period of the
existence thereof (it being understood that
such accountants shall not be liable,
directly or indirectly, for any failure to
obtain knowledge of any Default or Event of
Default unless such accountants should have
obtained knowledge thereof in making an
audit in accordance with generally accepted
auditing standards or did not make such an
audit),
provided that the delivery within the time period specified above of the
Company's Annual Report on Form 10-K, for such fiscal year (together with the
Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3
under the Exchange Act) prepared in accordance with the requirements therefor
and filed with the Securities and Exchange Commission, together with the
accountant's certificate described in clause (B) above, shall be deemed to
satisfy the requirements of this Section 7.1(b);
(c) SEC and Other Reports, if any, - promptly upon their becoming
available, one copy of (i) each financial statement, report, notice or proxy
statement sent by the Company or any Subsidiary to public securities holders
generally, and (ii) each regular or periodic report, each registration statement
(without exhibits except as expressly requested by such holder), and each
prospectus and all amendments thereto filed by the Company or any Subsidiary
with the Securities and Exchange Commission and of all press releases and other
statements made available generally by the Company or any Subsidiary to the
public concerning developments that are Material;
(d) Notice of Default or Event of Default - promptly, and in any event
within five days after a Responsible Officer becoming aware of the existence of
any Default or Event of Default or that any Person has given any notice or taken
any action with respect to a claimed default hereunder or that any Person has
given any notice or taken any action with respect to a claimed default of the
type referred to in Section 8.1(f), a written notice specifying the nature and
period of existence thereof and what action the Company is taking or proposes to
take with respect thereto;
(e) ERISA Matters - promptly, and in any event within five days after a
Responsible Officer becoming aware of any of the following, a written notice
setting forth the nature thereof and the action, if any, that the Company or an
ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event,
as defined in Section 4043(c) of ERISA and the
regulations thereunder, for which notice thereof has
not been waived pursuant to such regulations as in
effect on the date hereof; or
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(ii) the taking by the PBGC of steps to institute, or
the threatening by the PBGC of the institution of,
proceedings under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Company
or any ERISA Affiliate of a notice from a
Multiemployer Plan that such action has been taken by
the PBGC with respect to such Multiemployer Plan; or
(iii) any event, transaction or condition that could
result in the incurrence of any liability by the
Company or any ERISA Affiliate pursuant to Title I or
IV of ERISA or the penalty or excise tax provisions
of the Code relating to employee benefit plans, or in
the imposition of any Lien on any of the rights,
properties or assets of the Company or any ERISA
Affiliate pursuant to Title I or IV of ERISA or such
penalty or excise tax provisions, if such liability
or Lien, taken together with any other such
liabilities or Liens then existing, could reasonably
be expected to have a Material Adverse Effect;
(f) Notices from Governmental Authority - promptly, and in any event
within 30 days of receipt thereof, copies of any notice to the Company or any
Subsidiary from any Federal or state Governmental Authority relating to any
order, ruling, statute or other law or regulation that could reasonably be
expected to have a Material Adverse Effect; and
(g) Requested Information - with reasonable promptness, such other data
and information relating to the business, operations, affairs, financial
condition, assets or properties of the Company or any of its Subsidiaries or
relating to the ability of the Company to perform its obligations hereunder and
under the Notes as from time to time may be reasonably requested by the
Administrative Agent or the Co-Agent on behalf of any Lender.
SECTION 7.2. OFFICER'S CERTIFICATE.
Each set of financial statements delivered to the Administrative Agent and the
Co-Agent pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be
accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance - the information (including detailed
calculations) required in order to establish whether the Company was in
compliance with the requirements of Section 7.9 through Section 7.13 hereof,
inclusive, and a statement that the Company was in compliance with the
requirement of Sections 7.14 through 7.17, inclusive, during the quarterly or
annual period covered by the statements then being furnished (including with
respect to each such Section, where applicable, the calculations of the maximum
or minimum amount, ratio or percentage, as the case may be, permissible under
the terms of such Sections, and the calculation of the amount, ratio or
percentage then in existence); and
(b) Cash Flow Leverage Ratio - the information (including detailed
calculations) required in order to establish the Cash Flow Leverage Ratio for
the preceding four fiscal quarters then ended.
(c) Event of Default - a statement that such officer has reviewed the
relevant terms hereof and has made, or caused to be made, under his or her
supervision, a review of the
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transactions and conditions of the Company and its Subsidiaries from the
beginning of the quarterly or annual period covered by the statements then being
furnished to the date of the certificate and that such review shall not have
disclosed the existence during such period of any condition or event that
constitutes a Default or an Event of Default or, if any such condition or event
existed or exists (including, without limitation, any such event or condition
resulting from the failure of the Company or any Subsidiary to comply with any
Environmental Law), specifying the nature and period of existence thereof and
what action the Company shall have taken or proposes to take with respect
thereto.
SECTION 7.3. INSPECTION.
The Company shall permit the representatives of each Lender:
(a) No Default - if no Default or Event of Default then exists, at the
expense of such Lender and upon reasonable prior notice to the Company, to visit
the principal executive office of the Company, to discuss the affairs, finances
and accounts of the Company and its Subsidiaries with the Company's officers,
and (with the consent of the Company, which consent will not be unreasonably
withheld) its independent public accountants, and (with the consent of the
Company, which consent will not be unreasonably withheld) to visit the other
offices and properties of the Company and each Subsidiary, all at such
reasonable times and as often as may be reasonably requested in writing so long
as such representatives are bound to the provisions of Section 10.16 hereof; and
(b) Default - if a Default or Event of Default then exists, at the
expense of the Company, to visit and inspect any of the offices or properties of
the Company or any Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers and independent public accountants (and by this provision the Company
authorizes said accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such times and as often as may be
requested.
SECTION 7.4. COMPLIANCE WITH LAW.
The Company will, and will cause each of its Subsidiaries to, comply with all
laws, ordinances or governmental rules or regulations to which each of them is
subject, including, without limitation, Environmental Laws, and will obtain and
maintain in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of their respective
properties or to the conduct of their respective businesses, in each case to the
extent necessary to ensure that non-compliance with such laws, ordinances or
governmental rules or regulations or failures to obtain or maintain in effect
such licenses, certificates, permits, franchises and other governmental
authorizations could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
SECTION 7.5. INSURANCE.
The Company will, and will cause each of its Subsidiaries to, maintain, with
financially sound and reputable insurers, insurance with respect to their
respective properties and businesses against such casualties and contingencies,
of such types, on such terms and in such amounts (including deductibles,
co-insurance and self-insurance, if adequate reserves are maintained with
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respect thereto) as is customary in the case of entities of established
reputations engaged in the same or a similar business and similarly situated.
SECTION 7.6. MAINTENANCE OF PROPERTIES.
The Company will, and will cause each of its Subsidiaries to, maintain and keep,
or cause to be maintained and kept, their respective properties in good repair,
working order and condition (other than ordinary wear and tear), so that the
business carried on in connection therewith may be properly conducted at all
times, provided that this Section shall not prevent the Company or any
Subsidiary from discontinuing the operation and the maintenance of any of its
properties if such discontinuance is desirable in the conduct of its business
and the Company has concluded that such discontinuance could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 7.7. PAYMENT OF TAXES.
The Company will, and will cause each of its Subsidiaries to, file all tax
returns, individually or on a consolidated basis, required to be filed in any
jurisdiction and to pay and discharge, individually or on a consolidated basis,
all taxes shown to be due and payable on such returns and all other taxes,
assessments, governmental charges, or levies imposed on them or any of their
properties, assets, income or franchises, to the extent such taxes and
assessments have become due and payable and before they have become delinquent
and all claims for which sums have become due and payable that have or might
become a Lien on properties or assets of the Company or any Subsidiary, provided
that neither the Company nor any Subsidiary need pay any such tax or assessment
or claims if (i) the amount, applicability or validity thereof is contested by
the Company or such Subsidiary on a timely basis in good faith and in
appropriate proceedings, and the Company or a Subsidiary has established
adequate reserves therefor in accordance with GAAP on the books of the Company
or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in
the aggregate could not reasonably be expected to have a Material Adverse
Effect.
SECTION 7.8. CORPORATE EXISTENCE, ETC.
Subject to Sections 7.19 and 7.20, the Company will at all times preserve and
keep in full force and effect its corporate existence, and the Company will at
all times preserve and keep in full force and effect the corporate existence of
each of its Subsidiaries (unless merged into the Company or a Wholly-Owned
Subsidiary) and all rights and franchises of the Company and its Subsidiaries
unless, in the good faith judgment of the Company, the termination of or failure
to preserve and keep in full force and effect such corporate existence, right or
franchise could not, individually or in the aggregate, have a Material Adverse
Effect.
SECTION 7.9. CONSOLIDATED NET WORTH.
The Company will maintain, as of the end of each fiscal quarter, Consolidated
Net Worth at an amount not less than the sum of:
(i) Eighty Five Percent (85%) of Consolidated Net Worth as at
the date of this Agreement, or $25,500,000, whichever is
greater; plus
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(ii) an aggregate amount equal to 50% of its Consolidated Net
Income (but, in each case, only if a positive number) for each
completed fiscal year beginning with the fiscal year ended
December 31, 1998; plus
(iii) an aggregate amount equal to 50% of net proceeds from
the IPO.
SECTION 7.10. FIXED CHARGES RATIO.
The Company will, as of the end of each fiscal quarter, maintain the ratio of
EBITDA for the four consecutive fiscal quarters then ended to Fixed Charges for
the same four fiscal quarters then ended to be not less than 1.25 to 1.
SECTION 7.11. INTEREST CHARGES COVERAGE RATIO.
The Company will not, as of the end of any fiscal quarter, permit the Interest
Charges Coverage Ratio for the period of four consecutive fiscal quarters then
ended to be less than 2.50 to 1.
SECTION 7.12. MAXIMUM LEVERAGE.
The Company will not, as of the end of any fiscal quarter, permit Consolidated
Total Debt to exceed 65% of Consolidated Total Capitalization.
SECTION 7.13. CONSOLIDATED TOTAL DEBT RATIO.
The Company will not, as of the end of any fiscal quarter, permit the ratio of
Consolidated Total Debt as of the end of such fiscal quarter to EBITDA for the
four consecutive fiscal quarters then ended to be greater than 3.25 to 1.
SECTION 7.14. CAPITAL EXPENDITURES.
The Company will not, nor will the Company permit any Subsidiary to, expend or
become obligated for capital expenditures (as determined in accordance with
GAAP), excluding Permitted Acquisitions, in an aggregate amount for the Company
and Subsidiaries together in excess of $15,000,000 during any fiscal year of the
Company.
SECTION 7.15. INCURRENCE OF DEBT.
The Company will not, and will not permit any Subsidiary to, directly or
indirectly, create, incur, assume, guarantee, or otherwise become directly or
indirectly liable with respect to, any Debt, unless on the date the Company or
such Subsidiary becomes liable with respect to any such Debt and immediately
after giving effect thereto and the concurrent retirement of any other Debt,
(a) no Default or Event of Default exists, and
(b) Consolidated Total Debt does not exceed 65% of Consolidated Total
Capitalization.
For the purposes of this Section 7.15 any Person becoming a Subsidiary after the
date hereof shall be deemed, at the time it becomes a Subsidiary, to have
incurred all of its then outstanding
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Debt, and any Person extending, renewing or refunding any Debt shall be deemed
to have incurred such Debt at the time of such extension, renewal or refunding.
SECTION 7.16. PRIORITY DEBT.
The Company will not at any time permit Priority Debt to exceed the greater (a)
$7,500,000 or (b) 15% of Consolidated Net Worth.
SECTION 7.17. RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS.
(a) Restricted Payments. Except to the extent permitted by Section 7.28
hereof, the Company will not, and will not permit any of its Subsidiaries to,
declare, make or incur any liability to make any Restricted Payment.
(b) Restricted Investments. The Company will not, and will not permit
any of its Subsidiaries to, make or authorize any Restricted Investment unless
immediately after giving effect to such action:
(i) the sum of (x) the aggregate value of all
Restricted Investments of the Company and its
Subsidiaries (valued immediately after such action),
plus (y) the aggregate amount of Restricted Payments
of the Company and its Subsidiaries declared or made
during the period commencing on June 30, 1998 and
ending on the date such Restricted Payment or
Restricted Investment is declared or made, inclusive,
would not exceed the sum of
(A) $5,000,000, plus
(B) 75% of Consolidated Net Income for such
period (or minus 100% of Consolidated Net
Income for such period if Consolidated Net
Income for such period is a loss), plus
(C) the aggregate amount of Net Proceeds of
Capital Stock for such period; and
(ii) no Default or Event of Default would exist.
SECTION 7.18. LIENS.
The Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly create, incur, assume or permit to exist (upon the happening of a
contingency or otherwise) any Lien on or with respect to any property or asset
(including, without limitation, any of the Marks, or any document or instrument
in respect of goods or accounts receivable) of the Company or any such
Subsidiary, whether now owned or held or hereafter acquired, or any income or
profits therefrom or assign or otherwise convey any right to receive income or
profits (unless in any such case it makes, or causes to be made, effective
provision whereby the Notes will be equally and ratably secured with any and all
other obligations thereby secured, such security to be pursuant to an agreement
reasonably satisfactory to the Administrative Agent and Co-Agent and, in any
such case, the Notes shall have the benefit, to the fullest extent that, and
with such priority as, the holders of the Notes may be entitled under applicable
law, of an equitable Lien on such property), except:
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(a) Liens for property taxes and assessments or governmental charges or
levies and Liens securing claims or demands of mechanics and materialmen
incurred in the ordinary course of business, provided payment thereof is not at
the time required by Section 7.7;
(b) Liens of or resulting from any judgment or award, the time for the
appeal or petition for rehearing of which shall not have expired, or in respect
of which the Company or a Subsidiary shall at any time in good faith be
prosecuting an appeal or proceeding for a review and in respect of which a stay
of execution pending such appeal or proceeding for review shall have been
secured, provided that the Company or such Subsidiary maintains any and all
reserves which may be required under GAAP in connection with any claims secured
by such Liens described in this Section 7.18 (b);
(c) Minor survey exceptions or minor encumbrances, easements or
reservations, or rights of others for rights-of-way, utilities and other similar
purposes, or zoning or other restrictions as to the use of real properties,
which are necessary for the conduct of the activities of the Company and its
Subsidiaries or which customarily exist on properties of corporations engaged in
similar activities and similarly situated and which do not materially impair
their use in the operation of the business of the Company and its Subsidiaries;
(d) Liens existing as of the date hereof and reflected in Schedule 7.18
hereto;
(e) Liens incidental to the conduct of business or the ownership of
properties and assets (including Liens in connection with worker's compensation,
unemployment insurance and other like laws, warehousemen's and attorneys' liens
and statutory landlords' liens) and Liens to secure the performance of bids,
tenders or trade contracts, or to secure statutory obligations, surety or appeal
bonds or other Liens of like general nature incurred in the ordinary course of
business and not in connection with the borrowing of money; provided in each
case, the obligation secured is not overdue or, if overdue, is being contested
in good faith by appropriate actions or proceedings and for which appropriate
reserves have been established;
(f) Liens incurred to secure the payment of the purchase price of
equipment acquired or purchased in the ordinary course of business by the
Company or any Subsidiary to be used in carrying on the business of the Company
or a Subsidiary, provided that (i) the Lien shall attach solely to the equipment
purchased or acquired, (ii) at the time of the purchase or acquisition of such
equipment, the aggregate amount remaining unpaid on all Debt secured by Liens on
such equipment shall not exceed an amount equal to 100% of the lesser of the
total purchase price or Fair Market Value at the time of purchase or acquisition
of such equipment (as determined in good faith by the Company), and (iii) the
aggregate principal amount of Debt secured by such Lien is permitted by Section
7.15;
(g) Liens incurred to secure the payment of the purchase price of real
property acquired as part of a Permitted Acquisition, provided that (i) the Lien
shall attach solely to the real property acquired, (ii) at the time of the
acquisition, the aggregate principal amount of Debt secured by such Lien shall
not exceed Fair Market Value as determined in good faith by the Company, and
(iii) the aggregate principal amount of Debt secured by such Liens is permitted
by Sections 7.15 and 7.16; and
(h) any Lien extending, renewing or replacing any Lien permitted by the
immediately preceding subparagraphs (a) through (g), inclusive, of this Section
7.18, provided that (i) the
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aggregate principal amount of Debt secured by such Lien immediately prior to
such extension, renewal or replacement is not increased or the maturity thereof
reduced, (ii) such Lien is not extended to any other property, except for the
substitution of property of a similar nature and equal or lesser value than the
property securing the Lien immediately prior to such extension, renewal or
replacement, and (iii) the aggregate principal amount of Debt being extended,
renewed or replaced is permitted by Sections 7.15 and 7.16;
For the purposes of this Section 7.18, any Person becoming a Subsidiary after
the date of this Agreement shall be deemed to have incurred all of its then
outstanding Liens at the time it becomes a Subsidiary, and any Person extending,
renewing or refunding any Debt secured by any Lien shall be deemed to have
incurred such Lien at the time of such extension, renewal or refunding.
SECTION 7.19. MERGER, CONSOLIDATION, ETC.
The Company will not, and will not permit any of its Subsidiaries to,
consolidate with or merge with any other corporation or convey, transfer or
lease substantially all of its assets in a single transaction or series of
transactions to any Person except that a Subsidiary of the Company may (x)
consolidate with or merge with, or convey, transfer or lease substantially all
of its assets in a single transaction or series of transactions to, the Company
or a Wholly-Owned Subsidiary and (y) convey, transfer or lease all of its assets
in compliance with the provisions of Section 7.20, provided that the foregoing
restriction does not apply to the consolidation or merger of the Company with,
or the conveyance, transfer or lease of substantially all of the assets of the
Company in a single transaction or series of transactions to, any Person so long
as:
(a) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Company as an entirety, as the case may
be (the "Successor Corporation"), shall be a solvent corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia;
(b) if the Company is not the Successor Corporation, such corporation
shall have executed and delivered to the Administrative Agent its assumption of
the due and punctual performance and observance of each covenant and condition
of this Agreement, the Notes and the other Loan Documents to which the Company
is a party (pursuant to such agreements and instruments as shall be reasonably
satisfactory to the Administrative Agent and Co-Agent), and the Company shall
have caused to be delivered to the Administrative Agent and Co-Agent an opinion
of nationally recognized independent counsel, or other independent counsel
reasonably satisfactory to the Administrative Agent and Co-Agent, to the effect
that all agreements or instruments effecting such transfer of assets and
assumption are enforceable in accordance with their terms (subject to customary
assumptions, qualifications and exceptions reasonably satisfactory to the
Administrative Agent and Co-Agent) and comply with the terms hereof; and in the
case of a merger, containing such other customary opinions relating to the
effectiveness of the merger; and
(c) immediately after giving effect to such transaction:
(i) no Default or Event of Default would exist, and
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(ii) the Successor Corporation would be permitted by the
provisions of Section 7.15 hereof to incur at least $1.00 of
additional Debt owing to a Person other than a Subsidiary of
the Successor Corporation.
No such conveyance, transfer or lease of substantially all of the assets of the
Company shall have the effect of releasing the Company or any Successor
Corporation from its liability under this Agreement or the Notes.
SECTION 7.20. SALE OF ASSETS, ETC.
Except as permitted under Section 7.19, the Company will not, and will not
permit any of its Subsidiaries to, make any Asset Disposition unless:
(a) in the good faith opinion of the Company, the Asset Disposition is
in exchange for consideration having a Fair Market Value at least equal to that
of the property exchanged and is in the best interest of the Company or such
Subsidiary; and
(b) immediately after giving effect to the Asset Disposition, no
Default or Event of Default would exist; and
(c) immediately after giving effect to the Asset Disposition,
(i) the Disposition Value of all property that was the subject
of any Asset Disposition occurring in the period of 12
calendar months then next ended would not exceed 10% of
Consolidated Total Assets as at the end of the most recently
ended fiscal quarter of the Company; and
(ii) the Disposition Value of all property that was the
subject of any Asset Disposition occurring on or after the
date of Closing would not exceed 25% of Consolidated Total
Assets as at the end of the most recently ended fiscal quarter
of the Company.
If the Net Proceeds Amount for any Transfer is applied to a
Property Reinvestment Application within 12 months before or
after such Transfer, then such Transfer, only for the purpose
of determining compliance with subsection (c) of this Section
7.20 as of any date on or after the date of such Transfer,
shall be deemed not to be an Asset Disposition.
(d) Within a reasonable period of time following any Asset Disposition,
the net proceeds therefrom shall be used either, at the option of the Company,
to make a Permitted Acquisition in accordance with the provisions of Section
7.26 or shall be used to prepay the Notes in accordance with Section 3.4 hereof.
SECTION 7.21. LINE OF BUSINESS.
The Company will not, and will not permit any of its Subsidiaries to, engage in
any business if, as a result, the general nature of the business in which the
Company and its Subsidiaries, taken as a whole, would then be engaged would be
materially changed from the general nature of the business in which the Company
and its Subsidiaries, taken as a whole, are engaged on the date of this
Agreement.
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SECTION 7.22. TRANSACTIONS WITH AFFILIATES.
Except as permitted under Section 7.19 hereof, the Company will not and will not
permit any Subsidiary to enter into directly or indirectly any transaction or
Material group of related transactions (including without limitation the
purchase, lease, sale or exchange of properties of any kind or the rendering of
any service) with any Affiliate (other than the Company or another Subsidiary),
except in the ordinary course and pursuant to the reasonable requirements of the
Company's or such Subsidiary's business and upon fair and reasonable terms no
less favorable to the Company or such Subsidiary than would be obtainable in a
comparable arm's-length transaction with a Person not an Affiliate.
SECTION 7.23. AMENDMENT TO CERTIFICATE OF INCORPORATION.
The Company will not and will not permit any Subsidiary to amend its certificate
of incorporation, articles of incorporation or bylaws if any such amendment
alone or in conjunction with any other amendment or amendments would have a
material adverse affect on the ability of the Company to discharge its
obligations to the Lenders or on the ability of the Lenders to collect, realize
upon, or enforce payment of any obligation to the Company to the Lenders.
SECTION 7.24. USE OF PROCEEDS.
The proceeds of the Loans will be used for any of the following:
(i) to finance Permitted Acquisitions;
(ii) and to refinance existing bank indebtedness owing to
LaSalle Bank National Association under a Credit Agreement
dated as of November 12, 1998; and
(iii) for the general corporate needs of the Company in the
ordinary course of business; provided however, the maximum
amount of Loan proceeds outstanding at any given time for the
purposes described in this clause (iii) shall not exceed
$10,000,000.
SECTION 7.25. PARI PASSU RANK WITH OTHER SENIOR NOTES.
The Obligations hereunder shall at all times rank pari passu with the Senior
Notes and any other Future Senior Notes of the Company. Notwithstanding any
provisions to the contrary contained in Section 25 of the Pledge Agreement, the
Company acknowledges and agrees that the agreement of the Lenders with respect
thereto relates only to Future Senior Notes of the Company, and that any
additional bank indebtedness (except Obligations incurred under this Credit
Agreement) shall not be secured under the Pledge Agreement without the prior
written consent of all of the Lenders.
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SECTION 7.26. PERMITTED ACQUISITIONS.
Except to the extent permitted by Section 7.19, neither the Company nor any
Subsidiary will acquire all or any substantial part of the assets of the
business of any other Person or permit any Person to merge with or into the
Company or any Subsidiary; provided, however, that the foregoing provisions
shall not apply to nor operate to prevent acquisitions which satisfy each of the
following criteria ("Permitted Acquisitions"):
(a) The acquisition is a nonhostile transaction;
(b) The Person to be acquired engages in a similar line of business with
the Company or one of its Subsidiaries;
(c) On a calendar year basis, the Company does not borrow in aggregate for
such acquisitions in excess of $25,000,000, plus voluntary prepayments
of principal;
(d) The total purchase price of the acquisition does not exceed
$18,000,000;
(e) Not more than 55% of the purchase price of the acquisition is funded
with Revolving Credit Loans;
(f) If the acquisition consists of capital stock or other equity
interests, including but not limited to interests in a limited
liability company, the Lenders shall be granted a first perfected
security interest therein (subject to Liens permitted hereunder)
pursuant to a security agreement in a form reasonably satisfactory to
the Administrative Agent and the Co-Agent.
(g) If the acquisition is an asset acquisition, such acquisition shall be
made by the Company, or by a Subsidiary whose shares have been pledged
pursuant to the Pledge Agreement.
(h) After giving effect to the acquisition, the Company on a pro forma
basis is in compliance with each of the covenants set forth in
Sections 7.9 through 7.16 hereof.
The Company shall provide the Administrative Agent and Co-Agent with written
notice of any Permitted Acquisition within ten (10) Business Days following its
consummation, accompanied by a certificate of Senior Financial Officer setting
forth the information (including detailed calculations) required in order to
establish a compliance with the requirements of this Section 7.26. The Company
may from time to time in writing request the Lenders to waive one or more of the
requirements set forth in subparagraphs (a) through (h) above. Such a request
shall be given in writing to the Administrative Agent and Co-Agent. The
Administrative Agent will promptly furnish a copy to the other Lenders. Each
Lender agrees to notify the Administrative Agent of its approval or disapproval
of the waiver request within seven (7) calendar days following its receipt of
the written request. The Administrative Agent agrees to communicate the request
status to the Company within seven (7) calendar days following its receipt of
the written request. The Lenders agree that approval of a request for a written
waiver of any of the
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provisions described in subparagraphs (a) through (h) above will not be
unreasonably withheld or delayed.
SECTION 7.27. FORMATION OR ACQUISITION OF SUBSIDIARIES.
The Company will not and will not permit any Subsidiary to form or incorporate
any Subsidiary or acquire any other Person, if after such formation, acquisition
or establishment such Person would constitute a Subsidiary of the Company whose
capital stock or other equity interest has not been pledged pursuant to the
Pledge Agreement or, if such Subsidiary is a limited liability company or other
entity which is not a corporation, pursuant to a security agreement in a form
reasonably satisfactory to the Administrative Agent and the Co-Agent. If stock
is to be owned by a Subsidiary which is not a First Tier Subsidiary, the
Borrower shall cause the Subsidiary owning such stock to become a party to the
Pledge Agreement prior to the formation or acquisition of any Subsidiary.
SECTION 7.28. PARENT COMPANY DEBT.
The Company will not, and will not permit any Subsidiary, to incur any Debt
payable to an Affiliate (other than between the Company and a Wholly-Owned
Subsidiary) if the aggregate amount of such Debt at any time outstanding would
exceed the greater of: (i) $10,000,000 or (ii) 20% of the Consolidated Net Worth
of the Company as of the end of the immediately preceding fiscal quarter. The
Company will not and will not permit any Subsidiary, to make any payments or
prepayments on any Debt owing to an Affiliate (other than a Wholly-Owned
Subsidiary): (i) at any time after November 1 of any calendar year and prior to
March 1 of the following calendar year, or (ii) if any Default or Event of
Default has occurred and is continuing.
SECTION 8. EVENTS OF DEFAULT AND REMEDIES
SECTION 8.1. EVENTS OF DEFAULT.
An "Event of Default" shall exist if any one or more of the following shall
occur or be continuing:
(a) the Company defaults in the payment of any principal on any Note
when the same becomes due and payable, whether at maturity or at a date fixed
for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note or
any fee or other Obligation payable by the Company hereunder, under any other
Loan Document or under any Swap Transaction for more than five Business Days
after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any
term contained in Section 7.9 through 7.18, inclusive; or
(d) the Company defaults in the performance of or compliance with any
term contained herein (other than those referred to in paragraphs (a), (b) and
(c) of this Section 8) or any other Loan Document or Swap Transaction and such
default is not remedied within 30 days after the earlier of (i) a Responsible
Officer obtaining actual knowledge of such default and (ii) the Company
receiving written notice of such default from the Administrative Agent (any such
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written notice to be identified as a "notice of default" and to refer
specifically to this paragraph (d) of Section 8); or
(e) any representation or warranty made in writing by or on behalf of
the Company or by any officer of the Company in this Agreement or in any writing
furnished in connection with the transactions contemplated hereby proves to have
been false or incorrect in any material respect on the date as of which made; or
(f) (i) the Company or any Subsidiary is in default (as principal or
other surety) in the payment of any principal of or premium or make-whole amount
or interest on any Debt that is outstanding in an aggregate principal amount of
at least $3,000,000 beyond any period of grace provided with respect thereto, or
(ii) the Company or any Subsidiary is in default in the performance of or
compliance with any term of any evidence of any Debt in an aggregate outstanding
principal amount of at least $3,000,000 or of any mortgage, indenture or other
agreement relating thereto or any other condition exists, and as a consequence
of such default or condition such Debt has become, or has been declared, due and
payable before its stated maturity or before its regularly scheduled dates of
payment, or (iii) as a consequence of the occurrence or continuation of any
event or condition (other than the passage of time or the right of the holder of
Debt to convert such Debt into equity interest) the Company or any Subsidiary
has become obligated to purchase or repay Debt before its regular maturity or
before its regularly scheduled dates of payment in an aggregate outstanding
principal amount of at least $3,000,000; or
(g) the Company or any Subsidiary (i) is generally not paying, or
admits in writing its inability to pay, its debts as they become due, (ii)
files, or consents by answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or any other petition in
bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency,
reorganization, moratorium or other similar law of any jurisdiction, (iii) makes
an assignment for the benefit of its creditors, (iv) consents to the appointment
of a custodian, receiver, trustee or other officer with similar powers with
respect to it or with respect to any substantial part of its property, (v) is
adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for
the purpose of any of the foregoing; or
(h) a court or governmental authority of competent jurisdiction enters
an order appointing, without consent by the Company or any of its Subsidiaries,
a custodian, receiver, trustee or other officer with similar powers with respect
to it or with respect to any substantial part of its property, or constituting
an order for relief or approving a petition for relief or reorganization or any
other petition in bankruptcy or for liquidation or to take advantage of any
bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution,
winding-up or liquidation of the Company or any of its Subsidiaries, or any such
petition shall be filed against the Company or any of its Subsidiaries and such
petition shall not be dismissed within 60 days; or
(i) a final judgment or judgments for the payment of money aggregating
in excess of $3,000,000 (to the extent such judgment or judgments are not
covered by an insurance policy underwritten by a solvent insurer who has
accepted in writing responsibility for such judgment or judgments) are rendered
against one or more of the Company and its Subsidiaries and which judgments are
not, within 30 days after entry thereof, bonded, discharged or stayed pending
appeal, or are not discharged within 30 days after the expiration of such stay;
or
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(j) If (i) any Plan shall fail to satisfy the minimum funding standards
of ERISA or the Code for any plan year or part thereof or a waiver of such
standards or extension of any amortization period is sought or granted under
Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall
have been or is reasonably expected to be filed with the PBGC or the PBGC shall
have instituted proceedings under Section 4042 of ERISA to terminate or appoint
a trustee to administer any Plan or the PBGC shall have notified the Company or
any ERISA Affiliate that a Plan may become a subject of any such proceedings,
(iii) with respect to Plans that are pension plans within the meaning of Section
3(2) of ERISA whose accumulated benefit obligation (determined in accordance
with Statement of Financial Accounting Standards No. 87) exceeds the fair market
value of Plan assets, the aggregate shortfall shall exceed $3,000,000, (iv)the
Company or any ERISA Affiliate shall have incurred or is reasonably expected to
incur any liability pursuant to Title I or IV of ERISA or the penalty or excise
tax provisions of the Code relating to employee benefit plans, (v) the Company
or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the
Company or any Subsidiary establishes or amends any employee welfare benefit
plan that provides post-employment welfare benefits in a manner that would
increase the liability of the Company or any Subsidiary thereunder; and any such
event or events described in clauses (i) through (vi) above, either individually
or together with any other such event or events, could reasonably be expected to
have a Material Adverse Effect.
As used in Section 8(j), the terms "employee benefit plan" and "employee welfare
benefit plan" shall have the respective meanings assigned to such terms in
Section 3 of ERISA.
SECTION 8.2. NON-BANKRUPTCY DEFAULT REMEDIES.
When an Event of Default described in Section 8.1 has occurred and is continuing
(other than Event of Default described in clauses (g) and (h)), the
Administrative Agent may or on request of the Required Lenders shall, in each
case, by notice to the Company, take either or both of the following actions:
(a) terminate the obligation of any Lender to extend any further credit
hereunder on the date (which may be the date thereof) stated in such notice; and
(b) declare the principal of and the accrued interest on any Note then
outstanding to be forthwith due and payable and thereupon such Note, including
both principal and interest and all fees, charges and other amounts payable
hereunder and under the other Loan Documents, shall be and become immediately
due and payable without further demand, presentment, protest or notice of any
kind.
SECTION 8.3. BANKRUPTCY DEFAULT REMEDIES.
When any Event of Default described in clauses (g) or (h) of Section 8.1 has
occurred and is continuing, then the Notes then outstanding, including both
principal and interest and all fees and charges payable hereunder and under the
other Loan Documents, shall immediately become due and payable without
presentment, demand, protest or notice of any kind, and the obligation of the
Lenders to extend further credit pursuant to any of the terms hereof shall
immediately terminate.
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SECTION 8.4. CASH COLLATERALIZATION OF LETTERS OF CREDIT IN DEFAULT.
When an Event of Default, other than an Event of Default in subsections (g) or
(h) of Section 8.1, has occurred the Company shall, upon demand of the
Administrative Agent, (which demand the Administrative Agent shall make if the
Required lenders or an Issuing Agent so directs) and when any Event of Default
described in clause (g) or (h) of Section 8.1 has occurred the Company shall,
without notice or demand from the Administrative Agent or any Lender,
immediately pay to Issuing Agent the full amount of each Letter of Credit then
outstanding, the Company agreeing to immediately make such payment and
acknowledging and agreeing that Issuing Agent would not have an adequate remedy
at law for failure of the Company to honor any such demand and that Issuing
Agent shall have the right to require the Company to specifically perform such
undertaking whether or not any draws have been made under any such Letters of
Credit.
SECTION 9. TO ADMINISTRATIVE AGENT AND CO-AGENT
SECTION 9.1. APPOINTMENT AND AUTHORIZATION.
Each Lender hereby appoints and authorizes the Administrative Agent and Co-Agent
to take such action as agent on its behalf and to exercise such powers hereunder
and under the other Loan Documents as are designated to such Agent by the terms
hereof and thereof together with such powers as are reasonably incidental
thereto. The Administrative Agent or Co-Agent may resign at any time by sending
twenty (20) days prior written notice to the Company and the Lenders and may be
removed by the Required Lenders (acting together) upon twenty (20) days prior
written notice to the Company. In the event of any such resignation or removal
the Required Lenders may appoint a new agent after consultation with the
Company, which shall succeed to all the rights, powers and duties of the
Administrative Agent or Co-Agent (as the case may be) hereunder and under the
other Loan Documents. Any resigning or removed Administrative Agent or Co-Agent
shall be entitled to the benefit of all the protective provisions hereof with
respect to its acts as an agent hereunder but no successor agent shall in any
event be liable or responsible for any actions of its predecessor. If the
Administrative Agent or Co-Agent resigns or is removed and no successor is
appointed, the rights and obligations of such Administrative Agent or Co-Agent
shall be automatically assumed by the Lenders and (i) the Company shall be
directed to make all payments due each Lender hereunder directly to such Lender
and (ii) the Administrative Agent's or Co-Agent's rights in the Loan Documents
shall be assigned without representation, recourse or warranty to the Lenders as
their interests may appear.
SECTION 9.2. RIGHTS AS A LENDER.
Administrative Agent and Co-Agent each has and reserves all the rights, power,
and duties hereunder and under its Notes and the Loan Documents as any Lender
may have and may exercise the same as though it were not the Administrative
Agent or Co-Agent and the terms "Lender" or "Lenders" as used herein and in all
of such documents shall, unless the context otherwise expressly indicates,
include the Administrative Agent or Co-Agent in its individual capacity as a
Lender.
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SECTION 9.3. STANDARD OF CARE.
The Lenders acknowledge that they have received and approved copies of this
Agreement and such other information and documents concerning the transactions
contemplated and financed hereby as they have requested to receive and/or
review. The Administrative Agent and Co-Agent make no representations or
warranties of any kind or character to the Lenders with respect to the validity,
enforceability, genuineness, perfection, value, worth or collectibility hereof
or of the Loan Documents or of any other documents called for hereby or thereby.
The Administrative Agent agrees to furnish the Lenders with copies of any field
audit reports made in connection with inspections which it may make pursuant to
this Agreement, but the Administrative Agent and Co-Agent make no
representations or warranties of any kind in connection therewith nor shall the
Administrative Agent or Co-Agent have any liability in connection therewith
except for its own gross negligence or willful misconduct. Neither the
Administrative Agent, nor Co-Agent, nor any director, officer, employee, agent
or representative thereof shall in any event be liable for any clerical errors
or errors in judgment, inadvertence or oversight, or for action taken or omitted
to be taken by it or them hereunder or under the other Loan Documents or in
connection herewith or therewith except for its or their own gross negligence or
willful misconduct. The Administrative Agent and Co-Agent shall incur no
liability under or in respect of this Agreement or the other Loan Documents by
acting upon any notice, certificate, warranty, instruction or statement (oral or
written) of anyone (including anyone in good faith believed by it to be
authorized to act on behalf of the Company), unless it has actual knowledge of
the untruthfulness of same. The Administrative Agent and/or Co-Agent each may
execute any of its duties hereunder or under any other Loan Documents by or
through employees, agents, and attorneys-in-fact and shall not be answerable to
the Lenders for the default or misconduct of any such agents or
attorneys-in-fact selected with reasonable care except for the gross negligence
or willful misconduct of its employees. The Administrative Agent and/or Co-Agent
shall each be entitled to advice of counsel concerning all matters pertaining to
the agencies hereby created and its duties hereunder or under any other Loan
Documents, and shall incur no liability to anyone and be fully protected in
acting upon the advice of such counsel. The Administrative Agent and/or Co-Agent
shall each be entitled to assume that no Default or Event of Default exists
unless notified to the contrary by a Lender. The Administrative Agent and/or
Co-Agent shall in all events each be fully protected in acting or failing to act
in accord with the instruction of the Required Lenders. The Administrative Agent
and/or Co-Agent shall in all cases each be fully justified in failing or
refusing to act hereunder unless it shall be indemnified to its satisfaction by
the Lenders against any and all liability and expense which may be incurred by
the Administrative Agent or Co-Agent by reason of taking or continuing to take
any such action. The Administrative Agent and/or Co-Agent each may treat the
owner of any Note as the holder thereof until written notice of transfer shall
have been filed with the Administrative Agent or Co-Agent signed by such owner
in form satisfactory to the Administrative Agent or Co-Agent. Each Lender
acknowledges that it has independently and without reliance on the
Administrative Agent or Co-Agent or any other Lender and based upon such
information, investigations and inquiries as it deems appropriate made its own
credit analysis and decision to extend credit to the Company. It shall be the
responsibility of each Lender to keep itself informed as to the creditworthiness
of the Company and the Administrative Agent and/or Co-Agent shall each have no
liability to any Lender with respect thereto.
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SECTION 9.4. COSTS AND EXPENSES.
Each Lender agrees to reimburse each Agent for all costs and expenses suffered
or incurred by each Agent in performing its duties hereunder and under the other
Loan Documents, or in the exercise of any right or power imposed or conferred
upon such Agent hereby or thereby, to the extent that such Agent is not promptly
reimbursed for same by the Company (and Agent's action does not constitute gross
negligence or willful misconduct), all such costs and expenses to be borne by
the Lenders ratably in accordance with the amounts of their respective Revolving
Credit Commitments. If any Lender fails to reimburse an Agent for such Lender's
share of any such costs and expenses, such costs and expenses shall be paid pro
rata by the remaining Lenders, but without in any manner releasing the
defaulting Lender from its liability hereunder.
SECTION 9.5. INDEMNITY.
The Lenders, to the extent not prohibited by applicable law, shall ratably
indemnify and hold each Agent, and its directors, officers, employees, agents or
representatives harmless from and against any liabilities, losses, costs and
expenses suffered or incurred by them hereunder or under the other Loan
Documents or in connection with the transactions contemplated hereby or thereby,
regardless of when asserted or arising, except to the extent they are promptly
reimbursed for the same by the Company and except to the extent that any event
giving rise to a claim was caused by the gross negligence or willful misconduct
of the party seeking to be indemnified. If any Lender defaults in its
obligations hereunder, its share of the obligation shall be paid pro rata by the
remaining Lenders, but without in any manner releasing the defaulting Lender
from its liability hereunder.
SECTION 9.6. CO-AGENT.
Nothing in this Agreement shall impose any obligation on U. S. Bank National
Association in its capacity as Co-Agent (as opposed to Issuing Agent) hereunder.
SECTION 10. MISCELLANEOUS
SECTION 10.1. HOLIDAYS.
If any payment of principal or interest on the Notes or any fee hereunder shall
fall due on day which is not a Business Day, principal together with interest at
the rate the Notes bears for the period prior to maturity or any fee at the rate
such fees accrues shall continue to accrue from the stated due date thereof to
and including the next succeeding Business Day, on which the same is payable.
SECTION 10.2. NO WAIVER, CUMULATIVE REMEDIES.
No delay or failure on the part of the Administrative Agent, Co-Agent, each
Lender or on the part of any other holder of any Note in the exercise of any
power or right shall operate as a waiver thereof, nor as an acquiescence in any
default, nor shall any single or partial exercise of any power or right preclude
any other or further exercise thereof, or the exercise of any other power or
right, and the rights and remedies hereunder of the Administrative Agent,
Co-Agent, each Lender and each holder of any Note are cumulative to, and not
exclusive of, any rights or remedies which any of them would otherwise have.
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SECTION 10.3. WAIVERS, MODIFICATIONS AND AMENDMENTS.
Any provision of the Loan Documents may be amended, modified, waived or released
and any Default or Event of Default and its consequences may be rescinded and
annulled upon the written consent of the Required Lenders; provided, however,
that no such amendment, supplement, modification or waiver shall (i) increase
the Revolving Credit Commitment of any Lender, (ii) extend the maturity of any
Note, (iii) decrease the rate of interest of, extend the time or change the
method of payment of or increase or forgive the principal amount of, or accrued
interest on, any Note, (iv) decrease the Commitment Fee, or extend the time of
payment thereof, (v) except as otherwise provided in Section 18 of the Pledge
Agreement, release all or any material part of the Collateral, (vi) change the
provisions of this Section 10.3, or (vii) change the definition of Required
Lenders, (viii) change, waive or modify any of the covenants of the Company in
Section 7 hereof, or anydefined term referred to therein without the consent of
all of the Lenders affected by such amendment, supplement modification or
waiver. No amendment, modification or waiver or of the Administrative Agent's
protective provisions shall be effective without the prior written consent of
the Agents.
SECTION 10.4. COSTS AND EXPENSES.
The Company agrees to pay on demand the reasonable costs and expenses of the
Agents and the Lenders in connection with the negotiation, preparation,
execution and delivery of this Agreement, the other Loan Documents and the other
instruments to be delivered hereunder or thereunder or in connection with the
transactions contemplated hereby or thereby or in connection with any consents
hereunder or waivers or amendments hereto or thereto, including the reasonable
fees and expenses of counsel for the Agents and the Lenders, with respect to all
of the foregoing (whether or not the transactions contemplated hereby are
consummated), and all costs and expenses (including reasonable attorneys' fees),
if any, incurred by any Lender in connection with a default under or the
enforcement of this Agreement, any other Loan Documents or any other instrument
or document to be delivered hereunder or thereunder. Provided, however, the
foregoing shall not include salaries, travel expenses and other-overhead of
Lenders' employees. The Company agrees to indemnify and save the Lenders and
Agents harmless from any and all direct liabilities, losses, costs and expenses
(collectively, "indemnified liabilities") incurred by the Lenders or the Agents
in connection with any action, suit or proceeding brought against the Agents or
any Lender by any Person other than the Company (but excluding attorneys' fees
for litigation solely between the Lenders and any successor or nominee of any
Lender or any other lender which may participate in any Loans or the Revolving
Credit Commitment to which the Company is not a party) which arises out of the
transactions contemplated or financed hereby or out of any action or inaction by
the Lender hereunder or thereunder, except for such thereof as is caused by the
negligence or willful misconduct of the party seeking to be indemnified. The
provisions of this Section hereof shall survive payment of the Obligations.
SECTION 10.5. DOCUMENTARY TAXES.
The Company agrees to pay on demand any documentary, stamp or similar taxes
payable in respect of this Agreement, or the Loan Documents, including interest
and penalties, in the event any such taxes are assessed, irrespective of when
such assessment is made and whether or not any credit is then in use or
available hereunder.
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SECTION 10.6. SURVIVAL OF REPRESENTATIONS.
All representations and warranties made herein or in any other Loan Documents or
in certificates given pursuant hereto or thereto shall survive the execution and
delivery of this Agreement and the other Loan Documents and shall continue in
full force and effect with respect to the date as of which they were made as
long as any Loans, Letters of Credit or the Revolving Credit Commitment are in
use or available hereunder.
SECTION 10.7. SURVIVAL OF INDEMNITIES.
All indemnities shall survive the termination of this Agreement and the payment
of the Obligations.
SECTION 10.8. NOTICES.
Except as otherwise specified herein, all notices hereunder shall be in writing
(including cable or telecopy) and shall be given to the relevant party at its
address or telecopier number set forth below, or such other address or
telecopier number as such party may hereafter specify by notice to the other
given by United States certified or registered mail, by telecopy or by other
telecommunication device capable of creating a written record of such notice and
its receipt. A copy of any notice required or permitted to be given by the
Company hereunder or under any other Loan Documents to the Administrative Agent
shall be given to the Co-Agent. Notices hereunder shall be addressed:
To the Company at:
MidAmerican Realty Services Company
666 Grand Avenue
Des Moines, Iowa 50303
Attention: Patrick J. Goodman, Senior Vice President,
Chief Financial Officer and Chief Accounting Officer
Telephone: (515) 281-2905
Facsimile: (515) 242-4295
With a copy to:
HomeServices.Com Inc.
Executive Offices
6800 France Avenue, South
Edina, MN 55435
Attention: Dwayne J. Coben, Senior Vice President and Chief Financial Officer
Telephone: (612) 928-5575
Facsimile: (612) 928-5572
To the Administrative Agent at:
LaSalle Bank National Association
135 S. LaSalle
Chicago, Illinois 60603
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Attention: Kurt Gibson, Vice President
Telephone: (312) 904-2633
Facsimile: (312) 904-1338
With a copy to:
LaSalle Bank National Association
801 Grand, Suite 3150
Des Moines, Iowa 50309
Attention: Kurt Gibson, Vice President
Telephone: (515) 698-8001
Facsimile: (515) 698-8017
To the Co-Agent at:
U.S. Bank National Association
NEWT0219
1700 Farnam Street
Omaha, Nebraska 68154
Attention: Richard M. Thomas, Senior Vice President
Telephone: (402) 348-6294
Facsimile: (402) 348-6841
To: Bank of America, N.A. at:
Bank of America, N.A.
MO8-010-01-14
14 West 10th Street
Kansas City, MO 64105
Attention: Charles W. Hunter, Senior Vice President
Telephone: (8167) 979-5268
Facsimile: (816) 979-7561
Each such notice, request or other communication shall be effective (i) if given
by facsimile, when such facsimile is transmitted to the facsimile number
specified in this Section and a confirmation of such facsimile has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section.
SECTION 10.9. HEADINGS.
Section headings used in this Agreement are for convenience of reference only
and are not a part of this Agreement for any other purpose.
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SECTION 10.10. SEVERABILITY OF PROVISIONS.
Any provision of this Agreement, which is unenforceable in any jurisdiction,
shall, as to such jurisdiction, be ineffective to the extent of such
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. All rights, remedies and powers provided in this Agreement, the
Note and other Loan Documents may be exercised only to the extent that the
exercise thereof does not violate any applicable mandatory provisions of law,
and all the provisions of this Agreement, the Note and other Loan Documents are
intended to be subject to all applicable mandatory provisions of law which may
be controlling and to be limited to the extent necessary so that they will not
render this Agreement, the Note or other Loan Documents invalid or
unenforceable.
SECTION 10.11. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and by different
parties hereto on separate counterpart signature pages, and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.
SECTION 10.12. BINDING NATURE, GOVERNING LAW, ETC.
This Agreement shall be binding upon the Company and to successors and assigns,
and shall inure to the benefit of each Lender and the benefit of its successors
and assigns, including any subsequent holder of an interest in any Note. This
Agreement and the rights and duties of the parties hereto shall be governed by,
and construed in accordance with the internal laws of the State of Iowa without
regard to principles of conflicts of laws. The Company may not assign its rights
hereunder without the written consent of the Required Lenders.
SECTION 10.13. ENTIRE UNDERSTANDING.
This Agreement, together with the Notes and other Loan Documents, constitutes
the entire understanding of the parties with respect to the subject matter
hereof and any prior agreements, whether written or oral, with respect thereto
are superseded hereby.
SECTION 10.14. PARTICIPATION.
Any Lender may grant participation in its extensions of credit hereunder to any
other bank or other lending institution (a "Participant"); provided however any
participation to a non-Affiliate shall not be permitted unless the participation
is first declined by the other Lenders; and provided, further however that such
Participants shall have voting rights only with respect to (1) a decrease in
fees, interest rate spreads or principal, (2) an increase in Revolving Credit
Commitments, if the Participant's commitment is increased, and (3) an extension
of the Termination Date.
SECTION 10.15. ASSIGNMENT AGREEMENTS.
Each Lender may, from time to time upon at least five (5) Business Days' prior
written notice to the Administrative Agent and Co-Agent, assign to other
commercial lenders part of its rights and obligations under this Agreement
(including without limitation the indebtedness evidenced by the Notes then owned
by such assigning lender, together with an equivalent proportion of its
Revolving Credit Commitments to make Loans hereunder) pursuant to written
agreements
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executed by such assigning Lender, such assignee lender or lenders, the Company
and the Administrative Agent, which agreements shall specify in each instance
the portion of the indebtedness evidenced by the Notes which is to be assigned
to each such assignee lender and the portion of the Revolving Credit Commitments
of the assigning Lender to be assumed by it (the "Assignment Agreements");
provided however that (i) each such assignment shall be of a constant, and not a
varying, percentage of the assigning Lender's rights and obligations under this
Agreement and the assignment shall cover the same percentage of such Lender's
Revolving Credit Commitment, Loans and Note; (ii) unless the Administrative
Agent, the Issuing Agents, and the Company otherwise consent, which in the case
of the Company shall not be unreasonably withheld, the aggregate amount of the
Revolving Credit Commitments, Loans and Notes of the assigning Lender being
assigned pursuant to each such assignment (determined as of the effective date
of the relevant Assignment Agreement) shall in no event be less than $5,000,000
and shall be an integral multiple of $1,000,000; (iii) the Administrative Agent,
each Lender originally party hereto and the Company must each consent, to each
such assignment to a party which was not an original signatory of this
Agreement; (iv) the assigning Lender shall retain at least $10,000,000 of its
Revolving Credit Commitment, unless it is assigning its entire interest in its
Revolving Credit Commitment, Note, and Loans; and (v) the assigning Lender must
pay to the Administrative Agent a processing and recordation fee of $3,500 and
any out-of-pocket attorneys' fees and expenses incurred by the Administrative
Agent in connection with such Assignment Agreement. Upon the execution of each
Assignment Agreement by the assigning Lender thereunder, the assignee Lender
thereunder, the Company and the Administrative Agent and payment to such
assigning Lender by such assignee Lender of the purchase price for the portion
of the indebtedness of the Company being acquired by it, (i) such assignee
Lender shall thereupon become a "Lender" for all purposes of this Agreement with
Revolving Credit Commitment in the amounts set forth in such Assignment
Agreement and with all the rights, powers and obligations afforded a Lender
hereunder, (ii) such assigning Lender shall have no further liability for
funding the portion of its Revolving Credit Commitment assumed by such other
Lender and (iii) the address for notices to such assignee Lender shall be as
specified in the Assignment Agreement executed by it. Concurrently with the
execution and delivery of such Assignment Agreement, the Company shall execute
and deliver a Note to the assignee Lender in the respective amounts of its
Revolving Credit Commitment under the Revolving Credit and a new Note to the
assigning Lender in the respective amounts of its Revolving Credit Commitment
under the Revolving Credit after giving effect to the reduction occasioned by
such assignment, all such Notes to constitute "Notes" for all purposes of this
Agreement.
SECTION 10.16. CONFIDENTIALITY.
Each Lender shall hold in confidence any material information delivered or made
available to them by the Company that is proprietary or confidential in nature.
The foregoing to the contrary notwithstanding, nothing herein shall prevent the
Lender from disclosing any information delivered or made available to it by the
Company (i) to any other Person if reasonably incidental to the administration
of the credit contemplated hereby, (ii) upon the order of any court or
administrative agency binding upon such Lender, (iii) upon the request or demand
of any regulatory agency or authority, (iv) which has been publicly disclosed
other than as result of a disclosure by such Lender which is not permitted by
this Agreement, (v) in connection with any litigation to which such Lender, or
any of their respective Affiliates may be a party, along with the Company, or
any of their respective Affiliates, (vi) to the extent reasonably required in
connection with the exercise of any right or remedy under this Agreement, the
other Loan
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Documents or otherwise, ,(vii) to such Lender's legal counsel and financial
consultants and independent auditors, and (viii) to any actual or proposed
participant or assignee of all or part of its rights under the credit
contemplated hereby provided such participant or assignee agrees in writing to
be bound by the duty of confidentiality under this Section to the same extent as
if it were a Lender hereunder. If any Lender receives a request or is aware of
any requirement to turn over confidential or proprietary information pursuant to
any order applicable to such Lender or in response to any subpoena or other
legal process or in connection with any litigation to which such Lender is a
party, such Lender, to the extent permitted by law, will use reasonable efforts
to notify the Company of any request or requirement prior to disclosing such
confidential or proprietary information.
SECTION 10.17. CHANGE IN CONTROL.
(a) Notice of Change in Control or Control Event. The Company will,
within one Business Day after any Responsible Officer has knowledge of the
occurrence of any Change in Control or Control Event, give written notice of
such Change in Control or Control Event to the Administrative Agent unless
notice in respect of such Change in Control (or the Change in Control
contemplated by such Control Event) shall have been given pursuant to
subparagraph (b) of this Section 10.17. If a Change in Control has occurred,
such notice shall contain and constitute an offer to prepay the Notes as
described in subparagraph (c) of this Section 10.17 and shall be accompanied by
the certificate described in subparagraph (h) of this Section 10.17. Any notice
provided under this Section 10.17 shall at all times remain subject to the
provisions of Section 10.16 hereof.
(b) Condition to Company Action. The Company will not take any action
that consummates or finalizes a Change in Control unless (i) at least 10 days
prior to such action it shall have given to the Administrative Agent written
notice containing and constituting an offer to prepay the Notes and to provide
cash collateral for outstanding Letters of Credit as described in subparagraph
(c) of this Section 10.17, accompanied by the certificate described in
subparagraph (h) of this Section 10.17, and (ii) contemporaneously with such
action, it prepays the Notes and provides cash collateral for outstanding
Letters of Credit.
(c) Offer to Prepay the Notes. The offer to prepay the Notes and
provide cash collateral contemplated by subparagraphs (a) and (b) of this
Section 10.17 shall be an offer to prepay on a date specified in such offer (the
"Proposed Prepayment Date"). If such Proposed Prepayment Date is in connection
with an offer contemplated by subparagraph (a) of this Section 10.17, such date
shall be not less than 5 Business Days after the date of such offer (if the
Proposed Prepayment Date shall not be specified in such offer, the Proposed
Prepayment Date shall be the 10th Business day after the date of such offer).
(d) Acceptance. The Required Lenders may accept the offer to prepay
made pursuant to this Section 10.17 by causing a notice of such acceptance to be
delivered to the Company at least 3 Business Days prior to the Proposed
Prepayment Date. A failure by any Lender to respond to an offer to prepay made
pursuant to this Section 10.17 shall be deemed to constitute an acceptance of
such offer by such Lender.
(e) Prepayment. Prepayment of the Notes to be prepaid pursuant to this
Section 10.17 shall be at 100% of the principal amount of the Loans outstanding
under such Notes, plus the accrued interest on such Loans then outstanding, plus
all fees, charges and other amounts
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payable hereunder and under the other Loan Documents, plus amounts payable under
Sections 2.9 and 10.4 if any. On the Business Day preceding the date of
prepayment, the Company shall deliver to the Administrative Agent a statement
showing the principal, interest, fees and charges due in connection with such
prepayment and setting forth the details of the computation of such amount. The
prepayment shall be made on the Proposed Prepayment Date except as provided in
subparagraph (g) of this Section 10.17.
(f) Cash Collateral. Cash collateral for Letters of Credit shall be the
full amount of each Letter of Credit outstanding, plus all fees and charges
payable hereunder, issued by an Issuing Agent who has accepted the offer to
prepay the Note On the Business Day preceding the date of prepayment of the
Notes, the Company shall deliver to such Issuing Agents a statement showing a
computation of the cash collateral. The cash collateral payment shall be made on
the proposed Prepayment Date except as provided in subparagraph (g) of this
Section 10.17.
(g) Deferral Pending Change in Control. The obligation of the Company
to prepay Notes and provide cash collateral pursuant to the offers required by
subparagraph (b) and accepted in accordance with subparagraph (d) of this
Section 10.17 is subject to the occurrence of the Change in Control in respect
of which such offers and acceptances shall have been made. In the event that
such Change in Control does not occur on the Proposed Prepayment Date in respect
thereof, the prepayment shall be deferred until and shall be made on the date on
which such Change in Control occurs. The Company shall keep the Administrative
Agent reasonably and timely informed of (i) any such deferral of the date of
prepayment, (ii) the date on which such Change in Control and the prepayment are
expected to occur, and (iii) any determination by the Company that efforts to
effect such Change in Control have ceased or been abandoned (in which case the
offers and acceptances made pursuant to this Section 10.17 in respect of such
Change in Control shall be deemed rescinded).
(h) Officer's Certificate. Each offer to prepay the Notes pursuant to
this Section 10.17 shall be accompanied by a certificate, executed by a Senior
Financial Officer of the Company and dated the date of such offer, specifying:
(i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this
Section 10.17; (iii) the principal amount of the Notes offered to be prepaid;
(iv) the fees and charges due in connection with such prepayment (calculated as
if the date of such notice were the date of the prepayment), setting forth the
details of such computation; (v) the interest that would be due on the Notes
offered to be prepaid, accrued to the Proposed Prepayment Date; (vi) that the
conditions of this Section 10.17 have been fulfilled; and (vii) in reasonable
detail, the nature and date or proposed date of the Change in Control.
(i) Termination of Credit. Upon a Change in Control, any Lender may, by
notice to the Company, terminate the obligation of such Lender to extend any
further credit hereunder on the date (which may be the date thereof) stated in
such notice. If the Required Lenders shall terminate the credit hereunder and
shall elect to accept the offer to prepay under (d) above, then this Agreement,
the Revolving Credit and the other Loan Documents shall terminate effective upon
such prepayment and provision of cash collateral without further payment or
liability on the part of the Company.
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SECTION 10.18. CONSENT TO JURISDICTION.
At the option of the Administrative Agent or the Required Lenders, this
Agreement may be enforced in any federal court or Iowa state court sitting in
Polk County, Iowa. The Company consents to the jurisdiction and venue of any
such court and waives any argument that venue in such forums is not convenient.
In the event the Company commences any actions in another jurisdiction or venue
under any tort or contract theory arising directly or indirectly from the
relationship created by this Agreement, the Administrative Agent or the Required
Lenders at its option shall be entitled to have the case transferred to one of
the jurisdictions and venues above-described, or if such transfer cannot be
accomplished under applicable law, to have such case dismissed without
prejudice.
SECTION 10.19. WAIVER OF JURY TRIAL.
THE AGENTS, THE LENDERS AND THE COMPANY, AFTER CONSULTING OR HAVING HAD THE
OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY
LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT OR ANY OF THE OTHER OBLIGATIONS, OR ANY OTHER AGREEMENT EXECUTED
OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THIS AGREEMENT, OR ANY COURSE
OF CONDUCT OR COURSE OF DEALING IN WHICH ANY AGENT, ANY LENDER AND THE COMPANY
ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS
GRANTING ANY FINANCIAL ACCOMMODATION TO THE COMPANY.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
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IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
Dated in Des Moines, Iowa as of the 20th day of September, 1999.
MidAmerican Realty Services Company
By: /s/ Dwayne J. Coben
---------------------------------
Its: VICE PRESIDENT - FINANCE
--------------------------------
Accepted and agreed to at Chicago, Illinois as of the day and year last
above written.
Each of the Lenders hereby agrees with each other Lender that if it should
receive or obtain any payment (whether by voluntary payment, by realization upon
collateral, by the exercise of rights of setoff or banker's lien, by
counterclaim or cross action, or by the enforcement of any rights under this
Agreement, Notes, Applications, other Loan Documents or otherwise) in respect of
the Obligations of the Company under this Agreement, Notes or Applications in a
greater amount than such Lender would have received had such payment been made
to the Administrative Agent and been distributed among the Lenders as
contemplated by Section 3.6 hereof then in that event the Lender receiving such
disproportionate payment shall purchase for cash without recourse from the other
Lenders an interest in the Obligations of the Company to such Lenders rising
under this Agreement, Applications and Notes in such amount as shall result in a
distribution of such payment as contemplated by Section 3.6 hereof. In the event
any payment made to a Lender and shared with the other Lenders pursuant to the
provisions hereof is ever recovered from such Lender, the Lenders receiving a
portion of such payment hereunder shall restore the same to the payor Lender,
but without interest.
Amount and Percentage of Commitments:
[SIGNATURE PAGES FOR LENDERS FOLLOW]
<PAGE>
SIGNATURE PAGE OF LENDER
Revolving Credit Percentage of the Total LaSalle Bank National Association
Commitment Revolving Credit 135 S. LaSalle
Commitments Chicago, Illinois 60603
$27,500,000 36.67% By: /s/ Kurt Gibson
------------------------------
Kurt Gibson
Its: Vice President
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SIGNATURE PAGE OF LENDER
Revolving Credit Percentage of the Total U.S. Bank National Association
Commitment Revolving Credit 1700 Farnam Street
Commitments Omaha, Nebraska 68154
$27,500,000 36.67% By: /s/ Richard M. Thomas
---------------------------
Richard M. Thomas
Its: Senior Vice President
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SIGNATURE PAGE OF LENDER
Revolving Credit Percentage of the Total Bank of America, N.A.
Commitment Revolving Credit 14 West 10th Street
Commitments Kansas City, MO 64105
$20,000,000 26.66% By: /s/ Charles W. Hunter
----------------------------
Charles W. Hunter
Its: Senior Vice President
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EXHIBIT A
MIDAMERICAN REALTY SERVICES COMPANY
REVOLVING CREDIT NOTE
$ Chicago, Illinois
------------------- , 1999
-----------------------
For value received, the undersigned, MidAmerican Realty Services
Company, an Iowa corporation (the "Company"), promises to pay to the order of
___________________(the "Lender"), on or before the Termination Date, at the
principal office of LaSalle Bank National Association, in Chicago, Illinois, or
at such other place as the Administrative Agent may from time to time in writing
designate, the principal sum of (i) _____________________Dollars ($ __________)
or (ii) such lesser amount as may at the time of the maturity hereof, whether by
acceleration or otherwise, constitute the aggregate unpaid principal amount of
all Loans owing from the Company to the Lender under the Revolving Credit
provided for in the Credit Agreement hereinafter mentioned.
This Note evidences indebtedness Loans constituting part of a "Domestic
Rate Portion" and "LIBOR Portions" as such terms are defined in that certain
Credit Agreement dated as of this same date, by and between the Company, LaSalle
Bank National Association, as Administrative Agent, U.S. Bank National
Association, as Co-Agent, Bank of America, N.A. and certain other lenders which
may from time to time become parties thereto (the "Credit Agreement") made and
to be made to the Company by the Lender under the Revolving Credit provided for
under the Credit Agreement and the Company hereby promises to pay interest at
the office specified above on each Loan evidenced hereby at the rates and times
specified therefor in the Credit Agreement. All capitalized terms not defined
herein shall have the meanings given them in the Credit Agreement.
Each Loan made under the Revolving Credit provided for in the Credit
Agreement by the Lender to the Company against this Note, any repayment of
principal hereon, the status of each such Loan from time to time as part of the
Domestic Rate Portion or a LIBOR Portion and the interest rates and interest
periods applicable thereto shall be endorsed by the holder hereof on the reverse
side of this Note or recorded on the books and records of the holder hereof
(provided that such entries shall be endorsed on the reverse side hereof prior
to any negotiations hereof) and the Company agrees that in any action or
proceeding instituted to collect or enforce collection of this Note, the entries
so endorsed on the reverse side hereof or recorded on the books and records of
the Lender shall be evidence of the unpaid balance of this Note and the status
of each Loan from time to time as part of a Domestic Rate Portion or a LIBOR
Portion and the interest rates and interest periods applicable thereto absent
manifest error.
This Note is issued by the Company under the terms and provisions of
the Credit Agreement, and this Note and the holder hereof are entitled to all of
the benefits and security provided for thereby or referred to therein, equally
and ratably with all other indebtedness thereby secured, to which reference is
hereby made for a statement thereof. This Note may be declared to
<PAGE>
be, or be and become, due prior to its expressed maturity upon the occurrence of
an Event of Default specified in the Credit Agreement, voluntary prepayments may
be made hereon, and certain prepayments are required to be made hereon, all in
the events, on the terms and with the effects provided in the Credit Agreement.
This Note and the other Obligations of the Company shall be secured by,
among other things, security interests granted to Lender pursuant to the Pledge
Agreement.
This Note shall be construed in accordance with, and governed by, the
internal laws of the State of Iowa without regard to principles of conflict of
law.
The Company hereby waives presentment for payment and demand.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
MIDAMERICAN REALTY SERVICES
COMPANY
By
---------------------------------------
Its
-------------------------------------
-2-
<PAGE>
EXHIBIT B
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT, dated as of September 20, 1999 (as amended, modified or
supplemented from time to time, this "Agreement"), is made by and between
MidAmerican Realty Services Company, an Iowa corporation (the "Borrower"); Iowa
Realty Co., Inc., an Iowa corporation; Edina Financial Services, Inc., a
Minnesota corporation; J. C. Nichols Residential, Inc., an Iowa corporation; CBS
Home Real Estate Company, a Nebraska corporation; Paul Semonin Company, a
Kentucky corporation; and Roy H. Long Realty Co., Inc., an Arizona corporation
(collectively, the "First Tier Subsidiaries" and together with the Borrower, the
"Companies"), in favor of LaSalle Bank National Association, as collateral agent
(together with any successor agent, the "Pledgee"), for the benefit of the
Secured Creditors (as defined below), and the Secured Creditors parties hereto.
WITNESSETH:
WHEREAS, the Borrower, various financial institutions from time to time party
thereto (the "Banks"), and LaSalle Bank National Association, as Administrative
Agent (together with any successor agent, the "Administrative Agent", U. S. Bank
National Association, as Co-Agent (together with any successor agent, the
"Co-Agent") and together with the Banks, the "Bank Lenders"), have entered into
a Senior Secured Revolving Credit Agreement, dated as of September 20, 1999 (as
amended, modified or supplemented from time to time, the "Credit Agreement"),
providing for the extending of a revolving credit to the Borrower as
contemplated therein;
WHEREAS, the Borrower desires to incur loans and obtain Letters of Credit
pursuant to the Credit Agreement;
WHEREAS, the Borrower has issued certain 7.12% Senior Notes due November 1, 2010
(the "Senior Notes") under that certain Note Purchase Agreement dated as of
November 1, 1998 (as amended, modified or supplemented from time to time, the
"Note Purchase Agreement") to various financial institutions (such holders of
the Senior Notes, together with any successor holder, collectively, the "Senior
Note Holders"; and together with the Bank Lenders, the "Secured Creditors").
WHEREAS, it is a condition precedent to the making of loans to the Borrower
under the Credit Agreement that the Borrower and the First Tier Subsidiaries
shall have executed and delivered this Agreement to the Pledgee;
WHEREAS, the Borrower desires to execute this Agreement to satisfy the
conditions described in the preceding paragraph;
WHEREAS, the First Tier Subsidiaries are wholly-owned Subsidiaries of the
Borrower and expect to derive benefits from the extension of credit
accommodations to the Borrower by the Bank Lenders and find it advantageous,
desirable and in their best interests to execute and deliver this Agreement to
the Pledgee;
<PAGE>
WHEREAS, the Borrower has agreed that the indebtedness evidenced by the Senior
Notes and the Note Purchase Agreement will at all times rank pari passu with all
other senior indebtedness of the Borrower;
WHEREAS, the Senior Note Holders, the Bank Lenders and the Pledgee desire to
enter into this Agreement and further desire that LaSalle Bank National
Association act as the collateral agent on behalf of all Secured Creditors
regarding the Collateral (as defined below), all as more fully provided herein;
and the Secured Creditors have entered into this Agreement to, among other
things, further define the rights, duties, authority and responsibilities of the
Pledgee and the relationship between the Secured Creditors regarding their pari
passu interests in the Collateral;
NOW, THEREFORE, in consideration of the benefits accruing to the Companies, the
receipt and sufficiency of which are hereby acknowledged, the Companies hereby
make the following representations and warranties to the Secured Creditors and
hereby covenant and agree with the Secured Creditors as follows:
1. SECURITY FOR OBLIGATIONS. This Agreement is made by the Companies for
the benefit of the Secured Creditors to secure:
(i) the full and prompt payment when due (whether at the stated
maturity, by acceleration or otherwise) of all obligations and
liabilities (including obligations which, but for the automatic
stay under Section 362(a) of the U.S. Bankruptcy Code, as amended
from time to time, would become due) of the Borrower, now
existing or hereafter incurred under, arising out of or in
connection with the Credit Agreement, the Revolving Credit Notes,
the Applications, and the Letters of Credit and the due
performance and compliance by the Borrower with the terms of the
Credit Agreement, the Revolving Credit Notes, the Applications
and the Letters of Credit (all such obligations and liabilities
under this clause (i), being herein collectively called the
"Credit Document Obligations");
(ii) the full and prompt payment when due (whether at the stated
maturity, by acceleration or otherwise) of all obligations
(including obligations which, but for the automatic stay under
Section 362(a) of the U.S. Bankruptcy Code, as amended, from time
to time, would become due) and liabilities of the Borrower, now
existing or hereafter incurred under, arising out of or in
connection with the Note Purchase Agreement and Senior Notes (all
such obligations and liabilities under this clause (ii) being
herein collectively called the "Senior Note Obligations");
(iii) any and all sums advanced by the Pledgee in order to preserve
the Collateral (as hereinafter defined) or preserve its security
interest in the Collateral;
(iv) in the event of any proceeding for the collection or enforcement
of any indebtedness, obligations, or liabilities referred to in
clauses (i), (ii) and (iii) above, after an Event of Default
(such term, as used in this
2
<PAGE>
Agreement, shall mean any Event of Default under, and as defined
in, the Credit Agreement, or any Event of Default under, and as
defined in, the Note Purchase Agreement and shall in any event
include, without limitation, any payment default (after the
expiration of any applicable grace period) on any of the
Obligations (as hereinafter defined)) shall have occurred and be
continuing, the reasonable expenses of retaking, holding,
preparing for sale or lease, selling or otherwise disposing or
realizing on the Collateral in accordance with the terms of this
Agreement, or of any exercise by the Pledgee of its rights
hereunder, together with reasonable attorneys' fees and court
costs incurred by the Pledgee in connection therewith; and
(v) all amounts paid by any Secured Creditor as to which such Secured
Creditor has the right to reimbursement under Section 11 of this
Agreement;
all such obligations, liabilities, sums and expenses set forth in clauses (i)
through (v) of this Section 1 being herein collectively called the
"Obligations".
2. DEFINITION OF STOCK. As used herein: (i) the term "Stock" shall mean
all of the issued and outstanding shares of capital stock and similar equity
interests now owned or hereafter acquired of each and every Subsidiary of the
Borrower, whether now existing or hereafter formed or acquired, or whether held
directly by Borrower or by a Subsidiary of the Borrower. The Companies represent
and warrant that on the date hereof (i) the Stock held by the Borrower directly
or by a Subsidiary consists of the number and type of shares of the stock as
described in Schedule A hereto; (ii) such Stock constitutes that percentage of
the issued and outstanding capital stock of the Subsidiary as is set forth in
Schedule A hereto; (iii) unless otherwise stated to be uncertificated in
Schedule A hereto, the stock is evidenced by one or more certificates described
in Schedule A hereto; and (iv) on the date hereof, except as described in
Schedule B hereto, neither the Borrower nor any Subsidiary owns any other Stock.
3. PLEDGE OF STOCK.
3.1. Pledge. To secure the Obligations and for the purposes set forth
in Section 1 hereof, until the first to occur of: (i) the Termination Date (as
defined below) or (ii) the date such Collateral is released from the security
interest created hereby pursuant to Section 18 hereof, the Companies hereby:
(a) grant to the Pledgee a security interest in all of the Collateral
now or hereafter owned by the Borrower or any Subsidiary;
(b) pledge and deposit as security with the Pledgee the Stock owned by
the Borrower or any Subsidiary on the date hereof (except as described in
Schedule C hereto), and deliver to the Pledgee certificates or instruments
therefor, accompanied by undated stock powers duly executed in blank by the
Borrower or the First Tier Subsidiary, as the case may be, or such other
instruments of transfer as are acceptable to the Pledgee; and
3
<PAGE>
(c) assign, transfer, hypothecate, mortgage, charge and set over to the
Pledgee all of the Borrower's and the First Tier Subsidiaries' right, title and
interest in and to such Stock (and in and to all certificates or instruments
evidencing such Stock), to be held by the Pledgee, upon the terms and conditions
set forth in this Agreement.
3.2. Subsequently Acquired Stock. If the Borrower or any Subsidiary
shall acquire (by purchase, stock dividend or otherwise) any additional Stock of
any Subsidiary, whether such Subsidiary shall be now existing or hereafter
formed or acquired, at any time or from time to time after the date hereof, the
Borrower will forthwith pledge and deposit, or cause its Subsidiary to forthwith
pledge and deposit, such Stock (or certificates or instruments representing such
Stock) as security with the Pledgee and deliver to the Pledgee certificates
therefor or instruments thereof, accompanied by undated stock powers duly
executed in blank, or such other instruments of transfer as are reasonably
acceptable to the Pledgee, and will promptly thereafter deliver to the Pledgee a
certificate executed by a Senior Financial Officer of the Borrower describing
such Stock and certifying that the same have been duly pledged with the Pledgee
hereunder.
3.3. Uncertificated Stock. Notwithstanding anything to the contrary
contained in Sections 3.1 and 3.2 hereof, if any Stock (whether now owned or
hereafter acquired) is uncertificated Stock, the Borrower shall promptly notify
the Pledgee thereof, and shall promptly take, or cause its Subsidiary to take,
all actions required to perfect the security interest of the Pledgee under
applicable law (including, in any event, under the applicable Uniform Commercial
Code) in such Stock. Each of the Companies further agrees to take such actions
as the Pledgee deems reasonably necessary or desirable to effect the foregoing
and to permit the Pledgee to exercise any of its rights and remedies hereunder,
and agrees to provide an opinion of counsel (with customary assumptions and
qualifications) reasonably satisfactory to the Pledgee with respect to any such
pledge of uncertificated Stock promptly upon request of the Pledgee.
3.4 Definitions of Pledged Stock, Collateral and Secured Debt
Agreement. All Stock at any time pledged or required to be pledged hereunder is
hereinafter called the "Pledged Stock." The Pledged Stock, together with all
proceeds of such Pledged Stock, including any securities and moneys received and
at the time held by the Pledgee hereunder, is herein called the "Collateral."
The term "Secured Debt Agreement" shall mean each of the Credit Agreement, the
Revolving Credit Notes, this Agreement, the Applications, the Senior Notes, and
the Note Purchase Agreement.
3.5 Lien Pari Passu. Each Secured Creditor and the Pledgee, severally,
acknowledges and agrees that the Lien of this Agreement secures, on a pari passu
basis, all of the Obligations, without preference or priority to any Secured
Creditor, regardless of (i) the failure of any party to make proper and timely
filings or recordations, (ii) the place or timing of any filing or recordation,
(iii) the timing or amount of any disbursement or advance under the Credit
Agreement or the Note Purchase Agreement, or (iv) any other reason.
4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. The Pledgee shall have
the right to appoint one or more sub-agents for the purpose of retaining
physical possession of the Pledged Stock, which may be held (in the discretion
of the Pledgee) in the name of the Borrower or one of the First Tier
Subsidiaries, as the case may be, endorsed or assigned in blank or in favor of
the Pledgee or any nominee or nominees of the Pledgee or a sub-
4
<PAGE>
agent appointed by the Pledgee. The Pledgee agrees to promptly notify the
Borrower, the Co-Agent and each other Secured Creditor after the appointment of
any sub-agent; provided, however, that the failure to give such notice shall not
affect the validity of such appointment.
5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until (i) an
Event of Default shall have occurred and be continuing and (ii) written notice
thereof shall have been given by any Secured Creditor to the Borrower and the
Pledgee (provided, that if an Event of Default specified in clauses (g) or (h)
of Section 8.1 of the Credit Agreement or clauses (g) and (h) of Section 11 of
the Note Purchase Agreement shall occur, no such notice shall be required), the
Borrower or one of its First Tier Subsidiaries, as the case may be, shall be
entitled to exercise any and all voting and other consensual rights pertaining
to the Pledged Stock and to give all consents, waivers or ratifications in
respect thereof; provided, that no vote shall be cast or any consent, waiver or
ratification given or any action taken which would violate or be inconsistent
with any of the terms of any Secured Debt Agreement, or which would have the
effect of impairing the position or interests of the Pledgee or any other
Secured Creditor with respect to the Collateral. All the rights of the Companies
to vote and to give consents, waivers and ratifications shall cease in case an
Event of Default shall occur and be continuing and, to the extent applicable,
written notice thereof shall have been given as provided in clause (ii) above,
in which case Section 7 shall become applicable.
6. DIVIDENDS AND OTHER DISTRIBUTIONS. Dividends and other distributions
in respect of the Pledged Stock may be paid to the Borrower or any First Tier
Subsidiary at any time only to the extent expressly permitted by the Credit
Agreement and the Note Purchase Agreement.
The Pledgee shall be entitled to receive directly, and to retain as part of the
Collateral:
(i) all other or additional stock or other securities or property
(other than cash) paid or distributed by way of dividend or
otherwise in respect of the Pledged Stock;
(ii) all other or additional stock or other securities or property
(including cash), which may be paid or distributed in respect
of the Pledged Stock by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar
rearrangement; and
(iii) all other or additional stock or other securities or property
(including cash) which may be paid in respect of the
Collateral by reason of any consolidation, merger, exchange
of stock, conveyance of assets, liquidation or similar
corporate reorganization.
All dividends, distributions or other payments which are received by any of the
Companies in contravention of the provisions of this Section 6 or Section 7
shall be received in trust for the benefit of the Pledgee, shall be segregated
from other property or funds of such Company and shall be forthwith paid over to
the Pledgee as Collateral in the same form as so received (with any necessary
endorsement).
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7. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of Default
shall have occurred and be continuing, the Pledgee, upon the written direction
of the Required Secured Creditors, shall be entitled to exercise all of the
rights, powers and remedies (whether vested in it by this Agreement or by any
other Secured Debt Agreement or by law) for the protection and enforcement of
its rights in respect of the Collateral, including, without limitation, all the
rights and remedies of a secured party upon default under the Uniform Commercial
Code of the State of Iowa, and the Pledgee shall be entitled, without
limitation, to exercise the following rights, which the Companies hereby agree
to be commercially reasonable:
(i) to receive all amounts payable in respect of the Collateral
payable to Borrower or any First Tier Subsidiary under Section
6 hereof;
(ii) to transfer all or any part of the Pledged Stock into the
Pledgee's name or the name of its nominee or nominees for the
purpose of securing its right to the Pledged Stock in
accordance with the terms of this Agreement (the Pledgee
agrees to promptly notify the Companies in writing after such
transfer; provided, however, that the failure to give such
notice shall not affect the validity of such transfer);
(iii) subject to the giving of written notice to the Companies to
the extent required in accordance with clause (ii) of Section
5 hereof, to vote all or any part of the Pledged Stock
(whether or not transferred into the name of the Pledgee) and
give all consents, waivers and ratifications in respect of the
Collateral and otherwise act with respect thereto as though it
were the outright owner thereof (the Companies hereby
irrevocably constituting and appointing the Pledgee the proxy
and attorney-in-fact of the Companies, with full power of
substitution to do so); and
(iv) at any time or from time to time to sell, assign and deliver,
or grant options to purchase, all or any part of the
Collateral, or any interest therein, at any public or private
sale, without demand of performance, advertisement or notice
of intention to sell or of the time or place of sale or
adjournment thereof (except as expressly provided below) or to
redeem or otherwise (all of which are hereby waived by the
Companies), for cash, on credit or for other property, for
immediate or future delivery without any assumption of credit
risk, and for such price or prices and on such terms as the
Pledgee, acting upon the written instructions of the Required
Secured Creditors, may determine; provided, that at least 10
days written notice of the time, place and manner of any such
sale shall be given to the Companies. The Companies hereby
waive and release to the fullest extent permitted by law any
right or equity of redemption with respect to the Collateral,
whether before or after sale hereunder, and all rights, if
any, of marshaling the Collateral and any other security for
the Obligations or otherwise. At any such sale, unless
prohibited by applicable law, the Pledgee on behalf of the
Secured Creditors may bid for and purchase all or any part of
the Collateral so sold free from any such right or equity of
redemption. Neither the Pledgee nor any Secured Creditor shall
be liable
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for failure to collect or realize upon any or all of the
Collateral or for any delay in so doing nor shall any of them
be under any obligation to take any action whatsoever with
regard thereto.
8. REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of the
Pledgee and each other Secured Creditor provided for in this Agreement or any
other Secured Debt Agreement or now or hereafter existing at law or in equity or
by statute shall be cumulative and concurrent and shall be in addition to every
other such right, power or remedy. The exercise or beginning of the exercise by
the Pledgee or any other Secured Creditor of any one or more of the rights,
powers or remedies provided for in this Agreement or any other Secured Debt
Agreement or now or hereafter existing at law or in equity or by statute or
otherwise shall not preclude the simultaneous or later exercise by the Pledgee
or any other Secured Creditor of all such other rights, powers or remedies, and
no failure or delay on the part of the Pledgee or any other Secured Creditor to
exercise any such right, power or remedy shall operate as a waiver thereof. The
Secured Creditors agree that this Agreement may be enforced against the
Companies only by the action of the Pledgee acting upon the written instructions
of the Required Secured Creditors, and that no Secured Creditor shall have any
right individually to seek to enforce or to enforce this Agreement or to realize
upon the security to be granted hereby, it being understood and agreed that such
rights and remedies may be exercised by the Pledgee for the benefit of the
Secured Creditors upon the terms of this Agreement. The Pledgee agrees that it
will not pursue any remedies provided for herein against the Companies without
the prior written consent of the Required Secured Creditors.
9. APPLICATION OF PROCEEDS.
(a) All moneys collected by the Pledgee upon any sale or other
disposition of the Collateral pursuant to the terms of this Agreement, together
with all other moneys received by the Pledgee hereunder, shall be applied as
follows:
(i) first, to the payment of all Obligations owing the Pledgee of
the type provided in clauses (iii) and (iv) of the definition
of Obligations;
(ii) second, to the extent proceeds remain after the application
pursuant to the preceding clause (i), an amount equal to the
outstanding Obligations shall be paid to the Secured Creditors
as provided in Section 9(b) hereof with each Secured Creditor
receiving an amount equal to its outstanding Obligations or,
if the proceeds are insufficient to pay in full all such
Obligations, its Pro Rata Share (as defined below) of the
amount remaining to be distributed; and
(iii) third, to the extent proceeds remain after the application
pursuant to the preceding clauses (i) and (ii) and following
the termination of this Agreement pursuant to Section 18
hereof, to the Borrower or, to the extent directed by the
Borrower or a court of competent jurisdiction, to whomever may
be lawfully entitled to receive such surplus.
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(b) For purposes of this Agreement, "Pro Rata Share" shall mean, when
calculating a Secured Creditor's portion of any distribution or amount, that
amount (expressed as a percentage) equal to a fraction the numerator of which is
the then unpaid amount of such Secured Creditor's Obligations and the
denominator of which is the then outstanding amount of all Obligations. For
purposes of determining the proportionate amounts of all Obligations sharing in
any such Pro Rata Share, (i) the amount of the outstanding Credit Document
Obligations shall be deemed to be the sum of the principal amount of all
Revolving Credit Notes outstanding under the Credit Agreement, together with any
breakage fees relating thereto and all accrued and unpaid interest with respect
thereto, the principal amount of unpaid draws on the Letters of Credit, and the
Outstanding Letter of Credit Exposure but excluding any fees, indemnities or
other expenses the payment of which is required by the Credit Agreement, and
(ii) the amount of the outstanding Senior Note Obligations shall be deemed to be
the sum of the principal amount of all Senior Notes outstanding under the Note
Purchase Agreement, together with any make-whole amount relating thereto and all
accrued and unpaid interest with respect thereto, but excluding any fees,
indemnities or other expenses the payment of which is required by the Note
Purchase Agreement. Any Pro Rata Share of proceeds applied pursuant to this
Section 9 shall be applied, first, to accrued and unpaid interest, and, second,
to the outstanding principal amount of the Obligations, any Letter of Credit
Collateral Obligations and any make-whole amount relating thereto. For the
purposes of this Section 9(b), any reduction in the Outstanding Letter of Credit
Exposure shall, to the extent of such reduction be deemed to be a payment
received by the Bank Lenders issuing such Letter of Credit with respect to
Obligations on the date of such reduction, and any amounts previously paid to
such Bank Lender due to the inclusion of such amount in the fraction for
determining such Bank Lenders "Pro Rata Share" shall be refunded by such Bank
Lender and redistributed in accordance with the provisions of subsection of (a)
above. If any amounts have been deposited with Administrative Agent as
collateral for Letters of Credit in accordance with Section 8.4 of the Credit
Agreement, then at such time as the amount of the Outstanding Letters of Credit
Exposure is reduced below the amount of the collateral held by the
Administrative Agent, such excess amount so held by the Administrative Agent
shall be distributed as provided in subsection (a) above.
(c) All payments required to be made to the Bank Lenders hereunder
shall be made to the Administrative Agent under the Credit Agreement for the
account of the Bank Lenders and all payments required to be made to the Senior
Note Holders hereunder shall be made directly to the respective Senior Note
Holder by wire transfer of immediately available funds to the bank account as
set forth on Schedule A to the Note Purchase Agreement (a copy of which has been
provided to the Pledgee) or such other bank account as such Senior Note Holder
shall have designated in writing to the Pledgee.
(d) For purposes of applying payments received in accordance with this
Section 9, the Pledgee shall be entitled to rely upon (i) the Administrative
Agent under the Credit Agreement and (ii) the Senior Note Holders for a
determination (which the Administrative Agent and each Senior Note Holder agrees
(or shall agree) to provide upon request of the Pledgee) of the outstanding
Obligations owed to the Bank Lenders or the Senior Note Holders, as the case may
be.
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(e) It is understood and agreed that the Borrower shall remain liable
to the extent of any deficiency between the amount of the proceeds of the
Collateral hereunder and the aggregate amount of the Obligations.
10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the
Pledgee hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial process or otherwise), the receipt of the Pledgee or the
officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold, and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Pledgee or such officer or be answerable in any way for the
misapplication or nonapplication thereof.
11. INDEMNITY. The Borrower agrees (i) to indemnify and hold harmless
the Pledgee in such capacity and each other Secured Creditor from and against
any and all claims, demands, losses, judgments and liabilities of whatsoever
kind or nature, and (ii) to reimburse the Pledgee and each other Secured
Creditor for all costs and expenses, including reasonable attorneys' fees, in
each case growing out of or resulting from this Agreement or the exercise by the
Pledgee of any right or remedy granted to it hereunder except, with respect to
clauses (i) and (ii) above, for those arising from the Pledgee's or such other
Secured Creditor's gross negligence or willful misconduct. In no event shall the
Pledgee be liable, in the absence of gross negligence or willful misconduct on
its part, for any matter or thing in connection with this Agreement other than
to account for moneys actually received by it in accordance with the terms
hereof. If and to the extent that the obligations of the Borrower under this
Section 11 are unenforceable for any reason, the Borrower hereby agrees to make
the maximum contribution to the payment and satisfaction of such obligations
which is permissible under applicable law.
12. FURTHER ASSURANCES, POWER OF ATTORNEY.
(a) Each of the Companies agrees that it will join with the Pledgee in
executing and, at the Borrower's own expense, file and refile under the
applicable Uniform Commercial Code or appropriate local equivalent, such
financing statements, continuation statements and other documents in such
offices as the Pledgee may reasonably deem necessary or appropriate and wherever
required or permitted by law in order to perfect and preserve the Pledgee's
security interest in the Collateral and hereby authorizes the Pledgee to file
financing statements and amendments thereto relative to all or any part of the
Collateral without the signature of the Borrower or any First Tier Subsidiary
where permitted by law, and agrees to do such further acts and things and to
execute and deliver to the Pledgee such additional conveyances, assignments,
agreements and instruments as the Pledgee may reasonably require or deem
advisable to carry into effect the purposes of this Agreement or to further
assure and confirm unto the Pledgee its rights, powers and remedies hereunder.
The Borrower will pay any applicable filing fees, recordation taxes and related
expenses relating to the Collateral.
(b) The Companies hereby appoint the Pledgee, the Companies attorney in
fact, with full authority in the place and stead of the Companies and in their
name or otherwise, from time to time after the occurrence and during the
continuance of an Event of Default, in the Pledgee's discretion to take any
action and to execute any instrument which the Pledgee may reasonably deem
necessary or advisable to accomplish the purposes of this Agreement.
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13. THE PLEDGEE AS AGENT. The Pledgee will hold in accordance with this
Agreement all items of the Collateral at any time received under this Agreement.
It is expressly understood and agreed that the obligations of the Pledgee as
holder of the Collateral and interests therein and with respect to the
disposition thereof, and otherwise under this Agreement, are only those
expressly set forth in this Agreement. The Pledgee shall act hereunder on the
terms and conditions set forth herein and in Section 9 of the Credit Agreement.
14. TRANSFER BY THE COMPANIES. Except for sales and other dispositions
of Collateral permitted pursuant to the Credit Agreement and the Note Purchase
Agreement, the Companies will not, and will cause their Subsidiaries not to,
sell or otherwise dispose of, grant any option with respect to, or mortgage,
pledge or otherwise encumber any of the Collateral or any interest therein
(except in accordance with the terms of this Agreement).
15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANIES.
(a) The Companies represent, warrant and covenant that (i) they are the
legal, record and beneficial owner of, and have good and marketable title to,
all Stock pledged by them hereunder, subject to no pledge, lien, mortgage,
hypothecation, security interest, charge, option or other encumbrance
whatsoever, except the liens and security interests created by this Agreement;
(ii) they have full power, authority and legal right to pledge all the Stock
pledged by them pursuant to this Agreement; (iii) this Agreement has been duly
authorized, executed and delivered by each of them and constitutes a legal,
valid and binding obligation of the Companies enforceable against each of them
in accordance with its terms, except to the extent that the enforceability
hereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and by
equitable principles (regardless of whether enforcement is sought in equity or
at law); (iv) no consent of any other party (including, without limitation, any
stockholder or creditor of any of the Companies or any of their Subsidiaries)
and no consent, license, permit, approval or authorization of, exemption by,
notice or report to, or registration, filing or declaration with, any
governmental authority is required to be obtained by any of them in connection
with the execution, delivery or performance of this Agreement, or in connection
with the exercise of the Pledgee's rights and remedies pursuant to this
Agreement, except as may be required in connection with the disposition of the
Stock by laws affecting the offering and sale of securities generally; (v) the
execution, delivery and performance of this Agreement by the Companies does not
violate any provision of any applicable law or regulation or of any order,
judgment, writ, award or decree of any court, arbitrator or governmental
authority, domestic or foreign, or of the certificate of incorporation or
by-laws of the Companies or of any Stock issued by any of the Subsidiaries, or
of any mortgage, indenture, lease, deed of trust, agreement, instrument or
undertaking to which any of the Companies or any of their Subsidiaries is a
party or which purports to be binding upon any of the Companies or any of their
Subsidiaries or upon any of their respective assets and will not result in the
creation or imposition of any lien or encumbrance on any of the assets of any of
the Companies or any of their Subsidiaries except as contemplated by this
Agreement; (vi) all of the shares of Pledged Stock have been duly and validly
issued and are fully paid and nonassessable; and (vii) the pledge and assignment
of the Stock pursuant to this Agreement, together with the delivery of such
Stock pursuant to this Agreement (which delivery has been made), creates a valid
and perfected first security interest in such Stock and the proceeds thereof
(subject to the release of proceeds constituting dividends as provided in
Section 6), subject to no prior lien or
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encumbrance or to any agreement purporting to grant to any third party a lien or
encumbrance on the property or assets of the any of the Companies which would
include the Stock. The Companies covenant and agree that they will defend the
Pledgee's right, title and security interest in and to the Stock and the
proceeds thereof against the claims and demands of all persons whomsoever; and
the Companies covenant and agree that they will have like title to and right to
pledge any other property at any time hereafter pledged to the Pledgee as
Collateral hereunder and will likewise defend the right thereto and security
interest therein of the Pledgee and the other Secured Creditors.
(b) The Companies represent, warrant, and covenant that all filings,
registrations and recordings necessary or appropriate to create, preserve and
perfect the security interest granted by the Companies to the Pledgee hereby in
respect of the Collateral have been accomplished (except filings of certain
Uniform Commercial Code financing statements, which have been duly executed and
delivered by the Companies for filing) and the security interest granted to the
Pledgee pursuant to this Agreement in and to the Collateral creates a perfected
security interest therein prior to the rights of all other Persons therein and
subject to no other Liens and is entitled to all the rights, priorities and
benefits afforded by the Uniform Commercial Code or other relevant law as
enacted in any relevant jurisdiction to perfected security interests.
(c) The Companies represent, warrant, and covenant that as of the date
hereof, there is no financing statement (or similar statement or instrument of
registration under the law of any jurisdiction) covering or purporting to cover
any interest of any kind in the Collateral, and so long as the Revolving Credit
Commitments have not been terminated, any Revolving Credit Note remains unpaid,
any Senior Note remains unpaid or any of the Obligations remain unpaid, none of
the Companies will execute or authorize to be filed in any public office any
financing statement (or similar statement or instrument of registration under
the law of any jurisdiction) relating to the Collateral, except financing
statements filed or to be filed in respect of and covering the security
interests granted hereby by the Companies and as expressly permitted by the
Credit Agreement and the Note Purchase Agreement.
16. COMPANIES' OBLIGATIONS ABSOLUTE, ETC. The obligations of the
Companies under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation: (i) any renewal,
extension, amendment or modification of or addition or supplement to or deletion
from any Secured Debt Agreement or any other instrument or agreement referred to
therein, or any assignment or transfer of any thereof; (ii) any waiver, consent,
extension, indulgence or other action or inaction under or in respect of any
such agreement or instrument or this Agreement; (iii) any furnishing of any
additional security to the Pledgee or its assignee or any acceptance thereof or
any release of any security by the Pledgee or its assignee; (iv) any limitation
on any party's liability or obligations under any such instrument or agreement
or any invalidity or unenforceability, in whole or in part, of any such
instrument or agreement or any term thereof; or (v) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other like
proceeding relating to any of the Companies or any Subsidiary of any of the
Companies, or any action taken with respect to this Agreement by any trustee or
receiver, or by any court, in any such proceeding, whether or not the Companies
shall have notice or knowledge of any of the foregoing.
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17. REGISTRATION, ETC.
(a) If an Event of Default shall have occurred and be continuing and
the Companies shall have received from the Pledgee a written request or requests
that the Companies cause any registration, qualification or compliance under any
Federal or state securities law or laws to be effected with respect to all or
any part of the Pledged Stock, the Borrower as soon as practicable and at its
expense will use its reasonable efforts to cause such registration to be
effected (and be kept effective) and will use its reasonable efforts to cause
such qualification and compliance to be effected (and be kept effective) as may
be so requested and as would permit or facilitate the sale and distribution of
such Pledged Stock, including, without limitation, registration under the
Securities Act of 1933 as then in effect (or any similar statute then in
effect), appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with any other government
requirements; provided, that the Pledgee shall furnish to the Borrower such
information regarding the Pledgee as the Borrower may request in writing and as
shall be required in connection with any such registration, qualification or
compliance. The Borrower will cause the Pledgee to be kept reasonably advised in
writing as to the progress of each such registration, qualification or
compliance and as to the completion thereof, will furnish to the Pledgee such
number of prospectuses, offering circulars or other documents incident thereto
as the Pledgee from time to time may reasonably request, and will indemnify the
Pledgee, each other Secured Creditor and all others participating in the
distribution of the Pledged Stock against all claims, losses, damages and
liabilities caused by any untrue statement (or alleged untrue statement) of a
material fact contained therein (or in any related registration statement,
notification or the like) or by any omission (or alleged omission) to state
therein (or in any related registration statement, notification or the like) a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances under which made, not misleading, except
insofar as the same may have been caused by an untrue statement or omission
based upon information furnished in writing to the Borrower by the Pledgee or
such other Secured Creditor expressly for use therein.
(b) If at any time when the Pledgee shall determine to exercise its
right to sell all or any part of the Pledged Stock pursuant to Section 7 hereof,
such Pledged Stock or the part thereof to be sold shall not, for any reason
whatsoever, be effectively registered under the Securities Act of 1933, as then
in effect, the Pledgee shall, in the sole and absolute discretion of the
Required Secured Creditors, sell such Pledged Stock or part thereof by private
sale in such manner and under such circumstances as the Pledgee may deem
necessary or advisable in order that such sale may legally be effected without
such registration; provided, that at least 10 days written notice of the time,
place and manner of any such sale shall be given to the Companies. Without
limiting the generality of the foregoing, in any such event the Pledgee, in the
sole and absolute discretion of the Required Secured Creditors: (i) may proceed
to make such private sale notwithstanding that a registration statement for the
purpose of registering such Pledged Stock or part thereof shall have been filed
under such Securities Act; (ii) may approach and negotiate with a single
possible purchaser to effect such sale; and (iii) may restrict such sale to a
purchaser who will represent and agree that such purchaser is purchasing for its
own account, for investment, and not with a view to the distribution or sale of
such Pledged Stock or part thereof. In the event of any such sale, the Pledgee
shall incur no responsibility or liability for selling all or any part of the
Pledged Stock at a price which the Pledgee, in its sole and absolute discretion,
may in good faith deem reasonable under the circumstances, notwithstanding the
possibility that a
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substantially higher price might be realized if the sale were deferred until
after registration as aforesaid.
18. TERMINATION, RELEASE.
(a) On the Termination Date (as defined below), this Agreement shall
terminate (provided that all indemnities set forth herein including, without
limitation, in Sections 11 and 24 hereof shall survive any such termination) and
the Pledgee, at the request and expense of the Borrower, will duly release from
the security interest created hereby and assign, transfer and deliver to the
Borrower (without recourse and without any representation or warranty) such of
the Collateral as may be in the possession of the Pledgee and as has not
theretofore been sold or otherwise applied or released pursuant to this
Agreement. As used in this Agreement, "Termination Date" shall mean the date
upon which the Revolving Credit Commitments have been terminated in full, no
Credit Document Obligations remain unpaid, and after giving effect to the
foregoing, the Senior Financial Officer of the Borrower shall have certified to
Pledgee and each Secured Creditor that no Default or Event of Default exists
under any Senior Note or the Note Purchase Agreement.
(b) In the event that any part of the Collateral is requested by the
Borrower to be released in connection with a permitted merger or asset
disposition under the applicable provisions of the Credit Agreement and the Note
Purchase Agreement, the Pledgee, at the request and expense of the Borrower,
will promptly and without undue delay, duly release from the security interest
created hereby and assign, transfer and deliver to the Borrower (without
recourse and without any representation or warranty) such of the Collateral as
is then being (or has been) so sold or released and as may be in possession of
the Pledgee and has not theretofore been released pursuant to this Agreement.
(c) At any time that the Borrower desires that Collateral be released
as provided in the foregoing Section 18(a) or (b), it shall deliver to the
Pledgee and each Secured Creditor a certificate signed by the Senior Financial
Officer of the Borrower stating that the release of the respective Collateral is
permitted pursuant to Section 18(a) or (b), and setting forth the information
(including detailed calculations) required in order to establish compliance with
each of the covenants referred to in Section 18(a) or (b), as applicable. The
Pledgee shall be entitled to rely on such certificates, unless it has actual
knowledge of the untruthfulness of the same.
19. NOTICES, ETC. All notices and other communications hereunder shall
be in writing and shall be delivered or mailed by first class mail, postage
prepaid, or telecopied, addressed:
(a) if to the Borrower or the Companies, at:
MidAmerican Realty Services Company
666 Grand Avenue
Des Moines, Iowa 50303
Attention: Patrick J. Goodman, Senior Vice President,
Chief Financial Officer and Chief Accounting Officer
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With a copy to:
HomeServices.Com Inc.
Executive Officers
6800 France Avenue South
Edina, MN 55435
Attention: Dwayne J. Coben, Senior Vice President
And Chief Financial Officer
(b) if to the Pledgee, at:
LaSalle Bank National Association
135 S. LaSalle
Chicago, Illinois 60603
Attention: Kurt Gibson, Vice President
With a copy to:
La Salle Bank National Association
801 Grand, Suite 3150
Des Moines, Iowa 50309
Attention: Kurt Gibson, Vice President
With a copy to:
U.S. Bank National Association
NEWT0219
1700 Farnam Street
Omaha, Nebraska 68154
Attention: Timothy P. Sullivan, Vice President, Business Banking
Telephone: (402) 348-6294
Facsimile: (402) 348-6841
(c) if to any Bank Lender (other than the Pledgee), at such address as
such Bank Lender shall have specified in the Credit Agreement;
(d) if to any Senior Note Holder, at such address as such Senior Note
Holder shall have specified in Schedule A to the Note Purchase Agreement or such
other address as such Senior Note Holder shall have specified in writing to the
Pledgee;
or at such other address as shall have been furnished in writing by any Person
described above to the party required to give notice hereunder.
20. WAIVER; AMENDMENT. None of the terms and conditions of this
Agreement may be changed, waived, modified or varied in any manner whatsoever
unless in writing duly signed by the Companies and the Pledgee with the written
consent of the Required Secured
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Creditors. A copy of each waiver, amendment, or modification of this Agreement
shall be promptly provided by the Borrower to each Secured Creditor.
21. COMPANIES' DUTIES. It is expressly agreed, anything herein
contained to the contrary notwithstanding, that the Companies shall remain
liable to perform all of the obligations, if any, assumed by them with respect
to the Collateral, and the Pledgee shall not have any obligations or liabilities
with respect to any Collateral by reason of or arising out of this Agreement,
nor shall the Pledgee be required or obligated in any manner to perform or
fulfill any of the obligations of any of the Companies under or with respect to
any Collateral.
22. CONSENT TO JURISDICTION. At the option of the Required Secured
Creditors, this Agreement may be enforced in any federal court or Iowa state
court sitting in Polk County, Iowa. The Companies consent to the jurisdiction
and venue of any such court and waive any argument that venue in such forums is
not convenient. In the event any of the Companies commences any actions in
another jurisdiction or venue under any tort or contract theory arising directly
or indirectly from the relationship created by this Agreement, the Pledgee
acting under the instructions of the Required Secured Creditors shall be
entitled to have the case transferred to one of the jurisdictions and venues
above-described, or if such transfer cannot be accomplished under applicable
law, to have such case dismissed without prejudice.
23. WAIVER OF JURY TRIAL. THE COMPANIES, AFTER CONSULTING OR HAVING HAD
THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY
LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT OR ANY OF THE OTHER OBLIGATIONS, OR ANY OTHER AGREEMENT EXECUTED
OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THIS AGREEMENT, OR ANY COURSE
OF CONDUCT OR COURSE OF DEALING IN WHICH THE PLEDGEE OR ANY SECURED CREDITOR AND
ANY OF THE COMPANIES ARE ADVERSE PARTIES.
24. THE PLEDGEE
(a) Appointment and Authorization.
Each Secured Creditor hereby appoints and authorizes the Pledgee to
take such action as agent on its behalf and to exercise such powers hereunder as
are designated to the Pledgee by the terms hereof together with such powers as
are reasonably incidental thereto, and the Pledgee accepts such appointment on
the terms and conditions herein provided. The Pledgee may resign at any time by
sending twenty (20) days prior written notice to the Companies and the Secured
Creditors. The Pledgee may be removed upon twenty (20) days prior written notice
to the Companies and the Pledgee from (i) the Required Bank Lenders or (ii) the
Required Senior Note Holders. In the event of any such resignation or removal
the Required Senior Creditors may appoint a successor collateral agent after
consultation with the Borrower, which shall succeed to all the rights, powers
and duties of the Pledgee. Any resigning or removed Pledgee shall be entitled to
the benefit of all the protective provisions hereof with respect to its acts as
an agent hereunder but no successor agent shall in any event be liable or
responsible for any actions of its predecessor.
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(b) Rights as a Bank Creditor.
The Pledgee has and reserves all the rights, power, and duties
hereunder and under its Revolving Credit Note and the Credit Agreement, and this
Agreement as any Bank Lender may have and may exercise the same as though it
were not the Pledgee and the terms "Bank Lender" or "Bank Lenders" as used
herein and in all of such documents shall, unless the context otherwise
expressly indicates, include the Pledgee in its individual capacity as a Bank
Lender.
(c) Standard of Care.
The Secured Creditors acknowledge that they have received and approved
copies of this Agreement and such other information and documents concerning the
transactions contemplated as they have requested to receive and/or review. The
Pledgee makes no representations or warranties of any kind or character to the
Secured Creditors with respect to the validity, enforceability, genuineness,
perfection, value, worth or collectibility hereof. Neither the Pledgee, nor any
director, officer, employee, agent or representative thereof shall in any event
be liable for any clerical errors or errors in judgment, inadvertence or
oversight, or for action taken or omitted to be taken by it or them hereunder or
in connection herewith except for its or their own gross negligence or willful
misconduct. The Pledgee shall incur no liability under or in respect of this
Agreement by acting upon any notice, certificate, warranty, instruction or
statement (oral or written) of anyone (including anyone in good faith believed
by it to be authorized to act on behalf of the Borrower, any First Tier
Subsidiary or any Secured Creditor), unless it has actual knowledge of the
untruthfulness of same. The Pledgee may execute any of its duties hereunder by
or through employees, agents, and attorneys-in-fact and shall not be answerable
to the Secured Creditors for the default or misconduct of any such agents or
attorneys-in-fact selected with reasonable care except for the gross negligence
or willful misconduct of its employees. The Pledgee shall be entitled to advice
of counsel concerning all matters pertaining to the agencies hereby created and
its duties hereunder, and shall incur no liability to anyone and be fully
protected in acting upon the advice of such counsel. Unless the Pledgee has
actual knowledge of any Default or Event of Default, the Pledgee shall be
entitled to assume that no Default or Event of Default exists unless notified to
the contrary by the Borrower or a Secured Creditor. The Pledgee shall in all
events be fully protected in acting or failing to act in accord with the
instruction of the Required Secured Creditors. The Pledgee shall in all cases be
fully justified in failing or refusing to act hereunder unless it shall be
indemnified to its satisfaction by the Secured Creditors against any and all
liability and expense which may be incurred by the Pledgee by reason of taking
or continuing to take any such action. The Pledgee may treat the owner of any
Revolving Credit Note or Senior Note as the holder thereof until written notice
of transfer shall have been filed with the Pledgee signed by such owner in form
reasonably satisfactory to the Pledgee.
(d) Costs and Expenses.
To the extent not reimbursed pursuant to Section 9(a)(i), each Secured
Creditor agrees to reimburse the Pledgee for all costs and expenses suffered or
incurred by the Pledgee in performing its duties hereunder following and during
the continuance of any Event of Default, or in the exercise of any right or
power imposed or conferred upon the Pledgee hereby, to the extent that the
Pledgee is not promptly reimbursed for same by the Borrower (and Pledgee's
action does
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not constitute gross negligence or willful misconduct), all such costs and
expenses to be borne by the Secured Creditors ratably in accordance with their
Pro Rata Share of the Obligations.
(e) Indemnity.
In case any Event of Default shall have occurred and be continuing, the
Secured Creditors, to the extent not prohibited by applicable law, shall ratably
indemnify and hold the Pledgee, and its directors, officers, employees, agents
or representatives harmless from and against any liabilities, losses, costs and
expenses suffered or incurred by them hereunder or in connection with the events
arising in connection therewith and thereafter except to the extent they are
promptly reimbursed for the same by the Borrower and except to the extent that
any event giving rise to a claim was caused by the gross negligence or willful
misconduct of the party seeking to be indemnified.
25. ADDITIONAL SECURED CREDITORS. If the Borrower incurs senior
indebtedness from and after the date hereof which is permitted by the Credit
Agreement and the Note Purchase Agreement, each Secured Creditor agrees to enter
into an amendment to this Agreement, which agreement shall be satisfactory in
scope and form to the Required Senior Creditors to allow such senior
indebtedness to be secured by the lien of this Agreement on a pari passu basis
with all existing Obligations secured hereby.
26. MISCELLANEOUS. This Agreement shall be binding upon the successors
and assigns of the Companies and the Secured Creditors and shall inure to the
benefit of the Secured Creditors and their respective successors and assigns and
be enforceable by the Pledgee and its successors and assigns. THIS AGREEMENT
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF
THE STATE OF IOWA. The headings in this Agreement are for purposes of reference
only and shall not limit or define the meaning hereof. This Agreement may be
executed in any number of counterparts, each of which shall be an original, but
all of which shall constitute one instrument.
27. DEFINITIONS. The following terms when used in this Agreement shall
have the following meanings:
"Administrative Agent" is defined in the preamble hereof.
"Agreement" is defined in the introductory paragraph hereof.
"Applications" means the agreements evidencing reimbursement obligations arising
out of or in connection with the Letters of Credit.
"Bank Lenders" is defined in the preamble hereof.
"Borrower" is defined in the introductory paragraph hereof.
"Co-Agent" is defined in the preamble hereof.
"Collateral" is defined in Section 3.4 hereof.
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"Companies" is defined in the introductory paragraph hereof.
"Credit Document Obligations" is defined in Section 1(i) hereof.
"Credit Agreement" is defined in the preamble hereof.
"Default" means an event or condition, the occurrence or existence of which
would, with the lapse of time or the giving of notice, or both, become an Event
of Default.
"Event of Default" is defined in Section 1(iv) hereof.
"First Tier Subsidiaries" is defined in the preamble hereof.
"Letter of Credit Collateral Obligations" shall mean all of the obligations of
the Borrower under Sections 1.3 or 8.4 of the Credit Agreement to deposit cash
collateral with respect to Outstanding Letters of Credit Exposure.
"Letters of Credit" means commercial and/or standby letters of credit issued
under Section 1.3 of the Credit Agreement for the account of the Borrower or, at
the direction of the Borrower, any Subsidiary of the Borrower.
"Note Purchase Agreement" is defined in the preamble hereof.
"Obligations" is defined in Section 1 hereof.
"Outstanding Letters of Credit Exposure" means at any time the undrawn full
amount of all outstanding Letters of Credit at such time.
"Person" means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization, or a government or
agency or political subdivision thereof.
"Pledged Stock" is defined in Section 3.4 hereof.
"Pledgee" is defined in the introductory paragraph hereof.
"Pro Rata Share" is defined in the Section 9(b) hereof.
"Required Bank Lenders" means at any time those Bank Lenders then holding at
least 60 percent (except as provided below) of the then aggregate unpaid
principal amount of the Revolving Credit Notes and interests in Letters of
Credit or, if no such principal amount is outstanding, Lenders having at least
60 percent (except as provided below) of the revolving credit commitments as
specified in the Credit Agreement; provided, however, except as otherwise
provided in Section 18 hereof, with respect to any release of all or any
material part of the Collateral, the required percentage shall be 100%.
"Required Secured Creditors" means (i) the Required Bank Lenders (voting
separately as a class) and (ii) the Required Senior Note Holders (voting
separately as a class).
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"Required Senior Note Holders" means at any time those Senior Note Holders then
holding at least 51% of the principal amount of the Senior Notes outstanding.
"Revolving Credit Notes" means the notes evidencing advances and loans under the
Credit Agreement.
"Secured Creditors" is defined in the preamble hereof.
"Secured Debt Agreement" is defined in Section 3.4 hereof.
"Secured Lenders" means the "Secured Creditors" as defined in the preamble
hereof.
"Senior Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or comptroller of the Company.
"Senior Notes" is defined in the preamble hereof.
"Senior Note Holders" is defined in the preamble hereof.
"Senior Note Obligations" is defined in Section 1(ii) hereof.
"Stock" is defined in Section 2 hereof.
"Subsidiary" means, as to any Person, any corporation, association or other
business entity in which such Person or one or more of its Subsidiaries or such
Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to a
"Subsidiary" is a reference to a Subsidiary of the Borrower.
"Termination Date" is defined in Section 18(a) hereof.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Borrower, each of the First Tier Subsidiaries the
Pledgee and each of the Secured Creditors have caused this Agreement to be
executed by their duly elected officers duly authorized as of the date first
above written.
MIDAMERICAN REALTY SERVICES COMPANY
By:
----------------------------------------
Title: Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
LASALLE BANK NATIONAL ASSOCIATION, as Pledgee
By:
----------------------------------------
Title: Vice President
[Signature Pages for First Tier Subsidiaries and Secured Creditors follow]
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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
October 6, 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
October 6, 1999
