SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File No. 1-9874
HomeServices.Com Inc.
(Exact name of registrant as specified in its charter)
Delaware 41-1945806
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6800 France Ave. South, Suite 600, Edina, Minnesota 55435
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 928-5900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange
Common Stock, $0.01 on which registered
par value ("Common Stock") Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Based on the closing sales price of Common Stock on the Nasdaq Stock
Market on March 24, 2000 the aggregate market value of the Common Stock held by
non-affiliates of the Company was $23,586,662.
8,922,942 shares of Common Stock were outstanding on March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into this Form 10-K, in response to Items 10
through 13 of Part III, are the portions of the Company's proxy statement dated
on or about April 10, 2000 for the Annual Meeting of Shareholders to be held on
May 17, 2000 (the "Proxy Statement").
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TABLE OF CONTENTS
Part I.........................................................................1
ITEM 1. BUSINESS...............................................................1
General.....................................................................1
Recent Acquisitions.........................................................2
Strategy....................................................................2
Competitive Strengths.......................................................4
Industry....................................................................4
Sales Associates............................................................6
Mortgage Operations.........................................................6
Title, Escrow and Closing Services..........................................7
Relocation Services.........................................................7
The Hook Up(TM).............................................................8
The Fix Up(TM)..............................................................9
e-mortgages................................................................10
Marketing..................................................................10
Competition................................................................10
Employees and Sales Associates.............................................11
Regulation.................................................................11
ITEM 2. PROPERTIES............................................................12
ITEM 3. LEGAL PROCEEDINGS.....................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................13
Part II.......................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.13
ITEM 6. SELECTED FINANCIAL DATA...............................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS.......................................................15
Acquisition History........................................................15
Overview...................................................................15
Results of Operations......................................................16
Results of Operations of HomeServices.Com for the year ended
December 31, 1999...........................................................16
Results of Operations of HomeServices.Com for the Period from
May 28, 1998 Through December 31, 1998......................................17
Results of Operations of Predecessor for the Period from January 1, 1998
Through May 27, 1998........................................................18
Liquidity and Capital Resources............................................18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................20
Consolidated Balance Sheets................................................20
Consolidated Statements of Income..........................................21
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income........................................................22
Consolidated Statements of Cash Flows......................................23
Notes to Consolidated Financial Statements.................................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................................40
Part III......................................................................41
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES.....................41
PART IV.......................................................................45
Report of Independent Accountants..........................................45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...45
Valuation and Qualifying Accounts and Reserves.............................46
SIGNATURES....................................................................47
EXHIBIT INDEX.................................................................49
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Part I
Item 1. Business.
General
HomeServices.Com Inc. ("HomeServices" or "Company") 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 term used by industry participants
and publications to rank real estate brokerage firms. 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 and title services, including title insurance, title search, escrow
and other closing administrative services, assists in securing other preclosing
and postclosing services provided by third parties, such as home warranty, home
inspection, home security, property and casualty insurance, home maintenance,
repair and remodeling and is developing various related e-commerce services.
HomeServices currently operates primarily under the Edina Realty, Iowa Realty,
J.C. Nichols Residential, CBSHOME, Paul Semonin Realtors, Long Realty and
Champion Realty brand names in the following twelve states: Minnesota, Iowa,
Arizona, Kansas, Missouri, Kentucky, Nebraska, Wisconsin, Indiana, Maryland,
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; Tucson, Arizona and Annapolis, Maryland. 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 160 branch offices, have approximately 6,350
sales associates and have operated for between 12 and 84 years, with an average
operating history of approximately 49 years in our major markets. Sales
associates are not employees of HomeServices, but operate under independent
contractor agreements.
HomeServices is approximately 65% owned by MidAmerican Energy Holdings Company
("MidAmerican Holdings"), a midwestern utility holding company. As a result,
MidAmerican Holdings has 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, pursuant to a services agreement which is on terms HomeServices
believes to be as favorable as it could obtain from an unrelated third party.
Under the services agreement, HomeServices is required to pay MidAmerican
Holdings a monthly fee in an amount equal to $50,000 plus reimbursement for all
reasonable employee and out-of-pocket costs and expenses incurred by MidAmerican
Holdings in connection with providing these services to HomeServices. In
addition to the services agreement, HomeServices and MidAmerican Holdings have
entered into a registration rights agreement and a tax indemnity agreement. As a
holding company, HomeServices conducts all of its operations through its real
estate brokerage subsidiaries.
According to the National Association of Realtors, the median length of the
homeownership 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 homeownership life cycle
includes the process of buying a home, maintaining, repairing, remodeling the
home over the years, and eventually reselling and purchasing a new home. Of this
homeownership 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
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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, contacts 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 advertising and service revenues from the
service providers under contracts entered into with the service providers.
HomeServices believes that by offering these additional services to its
customers, particularly by means of e-commerce, it can assist its customers
through each stage of the average seven-year homeownership life cycle and
maintain its customers throughout the homeownership 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 homebuyer's
specific needs. In addition, as HomeServices further develops its e-commerce
operations, it will seek to generate banner advertising and sponsorship revenues
from its e-commerce operations.
The business of the Company is subject to various risks and uncertainties, more
specifically described in the Company's form 8-K, dated March 17, 2000. The
Company's Common Stock is traded on the Nasdaq Stock Market. HomeServices'
principal executive offices are located at 6800 France Avenue South, Suite 600,
Edina, Minnesota 55435 and its telephone number is (612) 928-5900. The Company
was incorporated in 1999 under the laws of the state of Delaware.
Recent Acquisitions
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 CBSHOME 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.
In December 1999, the Company acquired Champion Realty, a real estate brokerage
with 14 offices operating in the Chesapeake Bay and eastern shore of Maryland
region.
Growth Strategy
HomeServices' business objective is to become a seamless provider of a
comprehensive menu of products and services for the total homeownership
experience, particularly by means of e-commerce. HomeServices' growth strategy
currently is comprised of the following elements:
Organic Growth. 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 intends to
leverage the competitive strengths of its brokerage firms to expand the coverage
area in existing markets by opening additional offices, hiring additional sales
associates and engaging in incremental local acquisitions. These firms also
benefit from the sharing of resources, ideas and talent with the HomeServices
family of companies and, in doing so, create additional fee income opportunities
from cross selling value-added services. The most common of these opportunities
is mortgage origination and title services. In addition, HomeServices will
provide its sales associates with technological and online productivity tools to
improve and expand their business.
Selective acquisitions. HomeServices intends to continue to expand into new
geographic markets within the highly fragmented United States residential real
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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,
experienced operators and quality 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.
e-commerce products such as The Hook Up(TM) and The Fix Up(TM). While
HomeServices derived less than 1% of its revenues from third-party and related
e-commerce products and services in 1999, HomeServices plans to significantly
expand its available third-party e-commerce services to include various
additional home care products and services that serve the needs of homeowners
throughout the complete homeownership life cycle, including The Hook Up(TM), The
Fix Up(TM) and additional e-commerce realty 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
homeownership cycle. HomeServices expects these third-party services and
products to be accessible by telephone as well as the Internet. HomeServices
will provide these services to its customers at no cost while generating
advertising and services revenues from third-party providers of such products
and services. In addition, as HomeServices continues to develop its e-commerce
operations, 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:
- The Hook Up(TM) assists home purchasers at and after closing. Through
The Hook Up(TM) services, HomeServices offers 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: 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 such
services to its customers.
- The Fix Up(TM) assists home purchasers with remodeling, home
maintenance and repair. Through The Fix Up(TM), HomeServices plans to
offer contacts for home remodeling, maintenance and repair products and
services that homeowners generally need shortly following a home
purchase and throughout the homeownership life cycle. HomeServices
intends to offer customers contacts for quality products and services
such as roofing, siding, decking, remodeling, windows, landscaping,
plumbing, electrical, heating, ventilation and air conditioning and
painting.
- Broad-based e-commerce services. Through its developing e-commerce
operations, HomeServices currently offers e-mortgage and The Hook
Up(TM) to its existing real estate customers and other Internet users,
and expects to also provide third-party contacts for other products and
services to be offered as part of HomeServices' The Fix Up(TM) program.
- Nonrealty related contacts. HomeServices believes that as an
extension of its The Hook Up(TM) and The Fix Up(TM) programs, it will
have the opportunity to offer contacts with vendors of products and
services that are not directly related to homeownership. 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 home warranty, home inspection and home
security, it believes that as it continues to develop its e-commerce platform,
this aspect of its business will grow proportionately.
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Competitive Strengths
HomeServices believes that the following competitive strengths differentiate it
from its real estate brokerage competitors:
Long-established presence in its markets with well-recognized brand names and
leading market shares. While HomeServices 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 49
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.
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.
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.
Experienced management. The seven 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.
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 HomeServices. 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 continue to recruit additional highly
qualified sales associates, targeting, in particular, sales associates with
experience in the real estate industry and longstanding relationships with
third-party service providers within the community. Since January 1, 1999, the
brokerage firm operating subsidiaries that comprise HomeServices have added
approximately 298 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 the most important of these
industry characteristics and trends are:
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.
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
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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 The Hook Up(TM) and The Fix Up(TM) 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.
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.
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:
* assisting the seller in pricing the property and preparing it for
sale;
* advertising the property and showing it to the buyer;
* assisting the seller in negotiating the terms of the sale;
* ensuring that the transaction is in compliance with any
applicable federal, state and local regulations; and
* 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:
* assisting the buyer in locating properties that come within the
buyer's personal and financial specifications;
* showing properties to the buyer;
* assisting the buyer in negotiating the terms of the sale;
* monitoring compliance of the transaction and the property with
any applicable federal, state and local regulations; and
* closing the transaction.
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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 in most instances, share
approximately 40 to 50% of the sales commission with the other broker. In
certain circumstances, and only with the consent of both the buyer and seller,
HomeServices may act as the buyer's broker and the seller's broker in the same
transaction. HomeServices receives 100% of the sales commission in transactions
in which it acts as the sole broker.
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 67.5% over the past three years.
Sales Associates
HomeServices had approximately 6,350 sales associates as of December 31, 1999
after giving effect to the Paul Semonin Realtors, Long Realty and Champion
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. Sales associates will be eligible to participate in
HomeServices' non-employee stock purchase plan. Sales associates have
participated in prior stock purchase plans maintained on their behalf.
HomeServices maintains errors and omissions insurance coverage, referred to
herein as E&O insurance, for each of its sales associates. Some of HomeServices'
real estate brokerage subsidiaries require their sales associates to contribute
towards the maintenance of such E&O insurance.
HomeServices is dedicated to the recruitment, training and retention of its
sales associates. HomeServices provides extensive training programs for its new
and experienced sales associates aimed at improving their marketing skills and
increasing their knowledge and awareness of the issues and laws affecting the
real estate industry and their productivity. New sales associates attend a
four-week training program which prepares them for entry into the real estate
brokerage industry. Additional training is provided after sales associates have
worked in the field. Finally, more seasoned sales associates have access to an
eight-week program which is structured to improve their business and
professional skills. While industry results vary widely, from 1996 to 1999, the
annual productivity of the sales associates employed by the individual companies
that comprise HomeServices increased by 10% from 14.0 to 15.4 transaction sides
per sales associate, 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.
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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 Residential, 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 or obtain the benefits if the interest rate
paid by HomeServices on borrowings made by it to fund the loan at closing is
higher or lower than the interest rate paid on the mortgage by the mortgagee.
On a pro forma basis for the year ended December 31, 1999, HomeServices
originated approximately $835.2 million in mortgages, of which approximately 66%
represented mortgages originated by HomeServices through its joint venture with
Norwest Mortgage, 15% represented mortgages originated and underwritten by Plaza
Mortgage and approximately 19% represented mortgages originated through
relationships with other partners. On a pro forma basis for the year ended
December 31, 1998 and the year ended December 31, 1999 approximately $2.8
million and $3.4 million, respectively, of HomeServices' revenues were generated
by its mortgage operations.
Title, Escrow and Closing Services
In all markets in which it operates other than Iowa and Kansas, HomeServices
performs abstracting, examination, search, endorsements, recordation,
preparation of title policy documents when acting as agent for Chicago Title and
other title insurance companies and closing administrative services as part of
its title 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 approximately 30%
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 year ended December 31, 1999, approximately
$26.0 million and $24.9 million of HomeServices' revenues were generated by its
title, escrow and closing services.
Relocation Services
<PAGE>
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:
* home-finding assistance;
* home-selling assistance;
* group-move coordination;
* inspection services;
* international relocation assistance;
* cost-of-living comparisons;
* school and neighborhood comparisons;
* moving services;
* mortgage services; and
* 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 long-standing relationships with the transferred employees
themselves. HomeServices believes that these transferred employees are
particularly in need of The Hook Up(TM) and The Fix Up(TM) 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 and the year ended December 31, 1999,
HomeServices generated approximately $258,000 and $450,000, respectively, in
fees for relocation services.
The Hook Up(TM)
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 The Hook Up(TM), at no cost to the
customers. The Hook Up(TM) program arranges for the initiation at closing of
basic home services necessary to the home buyer, such as local and long-distance
telephone service. HomeServices believes it is especially well-positioned to
offer The Hook Up(TM), 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 third-party products and services under the The
Hook Up(TM) program through Edina Realty, Long Realty and CBSHOME. The program
is expected to be implemented at other existing HomeServices brokerage
operations in 2000. HomeServices is currently offering third-party products and
services for the following through The Hook Up(TM) services:
* local and long distance telephone service;
* Internet service account establishment;
* cable television account establishment;
* newspaper delivery;
* home security, including monthly monitoring;
<PAGE>
* 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;
* home inspection;
* property and casualty insurance;
* electricity
* natural gas
* waste disposal;
* lawn service;
* moving; and
* locksmith.
HomeServices currently provides third-party products and services to all
existing real estate customers through traditional means and in several of its
brokerage subsidiaries, also through The Hook Up(TM) program. HomeServices
intends to make these Services available to all its existing realty customer
base and Internet customers generally by means of e-commerce.
HomeServices continues to evaluate the types of The Hook Up(TM) services that it
provides and opportunities for expansion. HomeServices receives revenues 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 year ended December 31, 1999,
approximately $805,000 and $1,224,000 of HomeServices' revenues were generated
by basic home connection services, either through traditional means or through
the Internet. HomeServices plans to significantly expand the types of services
that it provides and expects to derive a greater percentage of its revenues in
the future from The Hook Up(TM) services.
The Fix Up(TM)
As part of promoting a "one-stop shopping" experience for its customers at
closing and throughout the seven-year homeownership cycle, HomeServices plans to
provide to its existing customers and to Internet customers generally, through
e-commerce, at no cost, referrals for house maintenance, repair and remodeling
related products and services. These products and services will be provided by
third-party providers. HomeServices believes that The Fix Up(TM) services will
assist a new homeowner through each stage of the homeownership 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:
* roofing;
* siding;
* decking;
* remodeling;
* windows;
* landscaping;
* plumbing;
* electrical;
* heating, ventilation and air conditioning; and
<PAGE>
* appliances.
In exchange for connecting its existing customers to these third-party
providers, HomeServices will receive service fees from the actual third-party
providers. HomeServices plans to make The Fix Up(TM) 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
other service fees it receives.
e-mortgages
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 more of these services on-line through e-mortgages. HomeServices
believes its e-commerce operations will position it to earn banner advertising
revenues from its websites in addition to the fee-based origination.
Marketing
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 and 1999, on a pro forma basis, HomeServices incurred $19.1 million and
$19.0 million, respectively, 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.
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-mortgages and third-party
contacts for home warranty, home security, home inspection and property and
casualty insurance and will include additional products and services offered as
a part of HomeServices' The Hook Up(TM) and The Fix Up(TM), 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 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 their respective major markets. The different
types of real estate operations include independent brokers, franchises and
co-owned stores.
<PAGE>
In the residential real estate brokerage business, HomeServices' real estate
brokerage firms compete in their existing markets with regional multi-office
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 market 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-mortgage 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 The Hook Up(TM) and The Fix Up(TM) services, HomeServices will continue
to compete with other third-party services, such as the yellow pages. However,
these competitors, unlike HomeServices, typically do not have a direct
relationship with the customer.
In the e-commerce business more generally, HomeServices will compete with
Internet websites such as Realtor.com and Homestore.com that provide access to
similar products or services. HomeServices believes it will have a competitive
advantage over these competitors because, unlike HomeServices, these others are
not licensed real estate brokers and therefore, typically do not have a direct
relationship with the customer.
Employees and Sales Associates
As of December 31, 1999, HomeServices employed approximately 1,575 individuals
and had approximately 6,350 sales associates, who are independent contractors
and not employees. 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.
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:
* disclosure when acting in an agency and dual agency capacity
(i.e., representing a seller and a buyer in a transaction);
* collecting commissions;
* continuing broker and sales associate education;
* administering trust funds;
* advertising; and
<PAGE>
* disclosing information in real estate forms.
Under state law, each of HomeServices' realty companies has a duty to supervise
and is responsible for the conduct of its sales associates. The states enforce
their regulatory authority by responding to consumer complaints and, if
appropriate, by taking action against the licensee. The action may include a
warning letter or reprimand, a temporary suspension of license or a revocation
of license with fines imposed. Each of HomeServices' licensed realty companies
strives to avert regulatory complaints by educating its sales associates about
state regulations with established training programs. HomeServices' in-house
legal department takes primary responsibility for handling any regulatory
complaints received by the realty companies concerning their operations and
sales associates. HomeServices believes that to date none of the regulatory
complaints received by the realty companies have been material. Further, the
majority of those complaints have not resulted in any action being taken by the
regulatory authority. There are currently no regulatory investigations that, if
found to merit regulatory action, would adversely affect HomeServices' ability
to conduct business.
On the federal level, HomeServices' real estate brokerage activities are subject
to the Real Estate Settlement Procedures Act and the regulations promulgated
thereunder which prohibit discrimination and require the disclosure of certain
information to borrowers concerning settlement costs.
HomeServices mortgage loan organization activities are subject on the federal
level to the Real Estate Settlement Procedures Act, the Equal Credit Opportunity
Act, the Federal Truth-in-Lending Act and the regulations promulgated thereunder
which prohibit discrimination and require the disclosure of certain information
to borrowers concerning credit and settlement costs. As an approved Fannie Mae
and Federal Home Loan Mortgage Corporation mortgage seller, HomeServices is
required to comply with Fannie Mae and Federal Home Loan Mortgage Corporation
seller guidelines for secondary sale of mortgages. Additionally, there are
various state laws affecting HomeServices' mortgage operations, including
licensing requirements and substantive limitations on the interest and fees that
may be charged. States also have the right to conduct financial and regulatory
audits of the loans under their jurisdiction. HomeServices, through its
subsidiaries, is licensed to provide mortgage origination services in the
jurisdictions in which it operates.
HomeServices' title 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.
Item 2. 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 160 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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock is listed on the Nasdaq Stock Exchange under the symbol "HMSV,"
The high and low last reported sale prices of the Common Stock in the 4th
Quarter of 1999, since the initial public offering of Common Stock on October 8,
1999, was $16.50 and $14.50.
On March 24, 2000, the last reported sale price of the Common Stock was $11.00
per share. As of March 24, 2000, there were approximately 84 holders of record
of the Common Stock.
HomeServices' predecessor paid cash dividends on its common stock of $0.19 per
share in 1997. HomeServices did not pay any cash dividends on the common stock
during 1998 or 1999. The Company's present policy is to reinvest earnings in the
Company and pay no dividends on its Common Stock.
<PAGE>
Item 6. Selected Financial Data.
The following table presents selected consolidated financial data of the Company
as of and for the periods ended December 31, 1999 and 1998 and May 27, 1998.
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Company Predecessor
--------------------------------------------------------------- ----------------------------
Year Ended December 31, 1999 May 28 Through December 31, 1998 January 1 Through May 27,1998
---------------------------- -------------------------------- ----------------------------
Statement of Income Data:
Commission revenue
<S> <C> <C> <C> <C> <C> <C>
Title Fees 21,313 5.4% 14,154 7.4% 7,575 8.8%
Other 16,854 4.3% 6,790 3.6% 3,769 4.4%
------ ---- ----- ---- ----- ----
Total Revenues 393,291 100.0% 190,591 100.0% 86,237 100.0%
------- ------ ------- ------ ------ ------
Commission expense 246,475 62.7% 113,225 59.4% 49,107 56.9%
Amortization of pending real estate 3,088 0.8% 18,271 9.6% - -
Depreciation and amortization 8,881 2.3% 4,177 2.2% 2,293 2.7%
All other operating expenses 118,042 30.0% 59,265 31.1% 31,126 36.1%
------- ----- ------ ----- ------ -----
Total operating expenses 376,486 95.8% 194,938 102.3% 82,526 95.7%
------- ----- ------- ------ ------ -----
Operating income (loss) 16,805 4.2% (4,347) (2.3%) 3,711 4.3%
Other income (expense), net (3,128 (0.8%) (1,334) (0.7%) (94) (0.1%)
Income (loss) before income taxes 13,677 3.4% (5,681) (3.0%) 3,617 4.2%
Income tax expense (benefit) 6,025 1.5% (2,247) (1.2%) 1,664 1.9%
----- ---- ------ ------ ----- ----
Net income (loss) $ 7,652 1.9% $ (3,434) (1.8%) $1,953 2.3%
======= ==== ====== ====== ====== ====
Net income (loss) per share-basic and $ 0.96 $ (0.51) $ 0.41
Balance Sheet Data:
Cash and cash equivalents $10,318 $3,114
Total assets $166,658 $128,520
Long term debt including current portion $ 48,817 $61,445
Stockholders' Equity $ 82,352 $35,194
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Acquisition History
HomeServices.Com Inc., as successor by merger to MidAmerican Realty Services
Company, entered the real estate brokerage business in May 1998 by acquiring
Iowa Realty and Edina Realty, both formerly part of AmerUs Home Services Inc.
Iowa Realty operates in Iowa and Missouri, and Edina Realty operates in
Minnesota, Wisconsin, North Dakota and South Dakota. In August 1998, the Company
expanded its business with the purchases of two established real estate
brokerage firms in Omaha, Nebraska, HOME Real Estate and CBS Real Estate, which
were merged to form CBSHOME Real Estate. In September 1998, the Company acquired
J.C. Nichols Residential, a brokerage firm operating in the greater Kansas City
area. In December 1998, the Company acquired Nebraska Land Title & Abstract. The
Company acquired Paul Semonin Realtors, a real estate brokerage firm operating
in Kentucky and southern Indiana in July 1999 and Long Realty, a real estate
brokerage firm operating in southern Arizona in August 1999. The Company
concluded the acquisition of Champion Realty, a real estate brokerage firm
operating in Maryland, in December 1999.
Overview
Revenues. The Company's 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 the Company 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,
the Company will, in most instances, share approximately 40% to 50% of the sales
commission with the third-party broker. In transactions in which the Company is
acting as the sole broker, the Company receives 100% of the sales commission.
Commission revenue is recorded upon the closing of the home sale transaction.
For the year ended December 31, 1999, commission revenue represented
approximately 90% of total revenues.
In addition, to a lesser extent, the Company earns fee revenue by providing the
following services:
o Title services, including title insurance, title search, escrow
and other closing administrative services, for which the Company
receives a fee from the home buyer or seller - approximately 6%
of total revenues for the year ended December 31, 1999;
o Mortgage origination services for which the Company receives
various fees - approximately 1% of total revenues for the year
ended December 31, 1999;
o Relocation services for corporate customers; franchise services,
and advertising services to third party providers of home care
related services - approximately 3% of total revenues for the
year ended December 31, 1999. Franchise services entail the
Company providing 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 the Company
receives a fee from such third parties.
Revenue derived from title and other services are recognized at the time that
the services are performed.
A substantial portion of the Company's revenue has been derived from traditional
real estate brokerage services. While the Company has not presently derived any
significant revenues from its e-commerce operations, it expects that in the
future, a larger percentage of its revenue will be derived from services other
than traditional real estate brokerage services as the Company develops its
e-commerce platform.
Expenses. Commission expense represents commissions paid to the Company's sales
associates and is based on a percentage of the sales commissions earned by the
Company. Typically, the percentage of the sales commissions that is paid to the
Company's 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 the Company or its
predecessors have paid to sales associates was approximately 69.4% of commission
revenue for the year ended December 31, 1999. Similar to commission revenue,
commission expense is recorded 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, the
<PAGE>
Company establishes an asset for the value of pending real estate sales
contracts. The Company amortizes pending real estate sales contracts over the
three-month period subsequent to an acquisition, reflecting the period over
which the Company estimates that such contracts result in closed real estate
transactions.
Each director of the Company 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. The exercise price represents the book value
of the common stock on June 30, 1999, after giving effect to the issuance of
approximately 677.87 shares of the Company's common stock in exchange for each
share of common stock of MidAmerican Realty Service Company, in the merger of
HomeServices and MidAmerican Realty Service Company on October 7, 1999. The
Company took a one-time non-cash after tax charge against net income of
approximately $2.2 million in the fourth quarter of 1999 related to these
options.
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 operating expenses, including
telecommunications, office supplies, professional and management fees, and
corporate charges for services provided by MidAmerican Holdings, the holder of
approximately 65% of HomeServices.Com's common stock.
Results of Operations
Results of operations of the Company are significantly influenced by the timing
of the entities acquired as described above. The results of operations reflect
the revenues and expenses of each of the entities from their respective dates of
acquisition.
The Company's real estate brokerage business is subject to seasonal fluctuations
because more home sale transactions tend to close during the second and third
quarters of the year. As a result, the Company's operating results and
profitability are higher in the second and third quarters relative to the
remainder of the year.
Results of Operations of HomeServices.Com for the year ended December 31, 1999
Revenues. Total revenues for the year ended December 31, 1999 were $393.3
million. Commission revenue totaling $355.1 million accounted for 90.3% of total
revenues and title fees totaling $21.3 million accounted for 5.4% of total
revenues. Title fee revenue is affected by the number of brokerage refinancing
transactions. The number of brokerage refinancing transactions during the period
was unfavorably affected by interest rate increases in the later half of 1999.
Other revenues totaling $16.9 million accounted for 4.3% of total revenues and
included escrow and closing revenue, mortgage origination fee income, franchise
fees, relocation and service-provider generated revenue and various other
revenues.
Commission Expense. Commission expense totaled $246.5 million or 69.4% of
commission revenue for the year ended December 31, 1999. Commission expense as a
percentage of commission revenue will vary due to sales associate productivity,
seasonality and pay scales at the various subsidiaries and new subsidiaries
acquired.
Amortization of Pending Real Estate Sales Contracts. Upon acquiring the real
estate brokerage companies, the Company establishes an asset for the value of
pending real estate sales contracts. The value of these acquired contracts for
the 1999 acquisitions was $3.8 million of which $3.1 million was amortized to
expense in the year ended December 31, 1999.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 1999 totaled $8.9 million, excluding the amortization of pending
real estate sales contracts. Depreciation and amortization in 1999 included $0.4
million of goodwill amortization related to business acquisitions. The Company
amortizes goodwill over its projected useful life of 30 years on a straight-line
basis.
All Other Operating Expenses. All other operating expenses for the year ended
December 31, 1999 totaled $118.0 million. All other operating expenses included
salaries and employee benefits of $58.1 million, occupancy expense of $19.2
million, business promotion and advertising expense of $16.5 million, and other
operating expenses of $24.2 million. Included in salaries and employee benefits
for the year ended December 31, 1999 was a one time pre-tax and non-cash charge
of $3.6 million related to options granted in connection with the Company's
initial public offering (IPO) in October 1999. Also included in other operating
expenses is additional occupancy and start-up costs due to the expansion of the
title business in Omaha and telecommunications, offices supplies, management
fees, and corporate charges for services provided by MidAmerican Holdings.
<PAGE>
Other Income (Expense), Net. Other income (expense), net for the year ended
December 31, 1999 consisted primarily of interest expense. Interest expense for
the year ended December 31, 1999 was $4.1 million. Interest expense in 1999
reflected a full year of interest related to debt used to finance 1998
acquisitions. Initial financing was obtained through borrowings from MidAmerican
Holdings. In the fourth quarter of 1998, these borrowings were refinanced with
the proceeds of $35.0 million private placement 7.12% senior notes and
borrowings of $25.0 million under a revolving credit facility. An additional
$8.0 million of debt was borrowed by the Company from MidAmerican Holdings in
August 1999 to finance the acquisition of Long Realty. In September 1999, the
Company replaced the $25 million revolving credit facility with a $75 million
facility. In October 1999, the Company repaid the MidAmerican Holdings and
revolving credit facility loans with proceeds from the IPO and cash on hand. In
December 1999, the revolving credit facility was used by the Company, together
with other funds, to finance the acquisition of Champion Realty
Income Tax Expense (Benefit). The effective income tax rate for the year ended
December 31, 1999 was 44.1% which is higher than the Company's statutory rate
due to permanent tax differences for certain goodwill amortization and other
non-deductible expenses.
Net Income. Net income for the year ended December 31, 1999 was $7.7 million,
reflecting operations of the entities acquired in 1998 for the full year in 1999
and Paul Semonin Realtors, Long Realty, and Champion Realty from the dates of
acquisition through December 31, 1999.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the
twelve months ended December 31, 1999 is $28.8 million. EBITDA is defined as net
income (loss) before income taxes, interest and other income (expense), net,
plus depreciation and amortization and amortization of pending real estate sales
contracts.
Results of Operations of HomeServices.Com 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 non-predecessor entities acquired from their
dates of acquisition through December 31, 1998.
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. 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 service
provider generated 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, the Company establishes 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.
Depreciation and Amortization. Depreciation and amortization for the period was
$4.2 million, of which $1.3 million was the amortization of goodwill related to
the 1998 business acquisitions.
All Other Operating Expenses. All other operating expenses for the period
totaled $59.3 million, or 31.1% of total revenues. All other operating expenses
included salaries and employee benefits of $27.6 million, occupancy costs of
$9.1 million, business promotion and advertising expenses of $8.6 million and
other operating costs of $14.0 million. Although the overall operations of the
entities acquired by the Company 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), net 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 $35.0
million in private placement 7.12% senior notes and borrowings of $25.0 million
under a revolving credit facility.
<PAGE>
Income Tax Expense (Benefit). The effective income tax rate for the period was a
benefit of 39.6% which is lower than the Company's statutory rate due to
permanent tax differences for certain goodwill amortization and other
non-deductible expenses.
Net Income (Loss). The Company's net loss for the period from May 28, 1998,
through December 31, 1998, was $3.4 million.
EBITDA. EBITDA for the period of May 28, 1998 through December 31, 1998 was
$18.1 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 $74.8 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 service provider generated 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 $14.5 million, occupancy costs of
$5.6 million, business promotion and advertising expenses of $5.2 million and
other operating costs of $5.8 million.
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 predecessor's net income for the period from January 1,
1998, through May 27, 1998, was $2.0 million.
EBITDA. EBITDA for the period of January 1, 1998 through May 27, 1998 was $6.0
million.
Liquidity and Capital Resources
The Company's capital requirements consist primarily of working capital, capital
expenditures and acquisitions. Historically, the Company has funded its working
capital and capital expenditures using cash and cash equivalents on hand.
Acquisitions have historically been financed through borrowings under its
revolving credit facility, the private placement of the 7.12% senior notes,
loans from MidAmerican Holdings, capital contributions and cash on hand. The
Company's cash and cash equivalents totaled $10.3 million and $3.1 million at
December 31, 1999 and 1998, respectively. On October 14, 1999, the Company
closed the initial public offering of its common stock. Net proceeds to the
Company from the offering were approximately $27.1 million.
The Company's cash provided by operating activities was $33.1 million for the
year ended December 31, 1999, $12.4 million for the period May 28, 1998 through
December 31, 1998 and $5.0 million for the period January 1, 1998 through May
27, 1998. The increase in 1999 is due primarily to the significant acquisitions
over the last two years.
The Company's cash used in investing activities was $46.6 million for the year
ended December 31, 1999, $99.1 million for the period May 28, 1998 through
December 31, 1998 and $0.9 million for the period January 1, 1998 through May
27, 1998. The Company's cash used in investing activities for the year ended
1999 was primarily a result of the acquisitions of Paul Semonin Realtors, Long
Realty, and Champion Realty for a combined $36.8 million, net of cash and cash
equivalents acquired. The Company's cash used in investing activities for the
1998 periods was primarily a result of the acquisitions of Iowa Realty, Edina
Realty, Home Real Estate, CBS Real Estate, J.C. Nichols Residential, and
Nebraska Land Title & Abstract for a combined $96.5 million, net of cash
acquired.
<PAGE>
The Company's cash provided by (used in) financing activities was $20.7 million
for the year ended December 31, 1999, $89.8 million for the period May 28, 1998
through December 31, 1998 and $(1.9) million for the period January 1, 1998
through May 27, 1998. The Company's cash provided by financing activities for
the year ended 1999 was primarily a result of proceeds from the issuance of
common stock through a public offering and capital contributions. The Company's
cash provided by (used in) financing activities for the 1998 periods was
primarily a result of capital contributions, loans from MidAmerican Holdings,
and advances under the revolving credit agreement.
In May 1998, HomeServices entered into a revolving credit agreement with
MidAmerican Holdings to borrow funds from time to time, primarily to support the
acquisitions. As of December 31, 1999 and 1998, there were no borrowings under
this agreement. The interest rate on borrowings is equal to the 30-day LIBOR
rate (5.8% on December 31, 1999) plus 1%. On June 24, 1999, the revolving credit
agreement with MidAmerican Holdings was amended to reduce MidAmerican Holdings'
total commitment and the Company's borrowing capacity thereunder from $100
million to $10 million.
In November 1998, the Company obtained a $25 million, five-year revolving credit
facility. On September 20, 1999, the Company entered into a new $75 million
senior secured revolving credit agreement which replaced the then existing $25
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 the Company. Amounts outstanding
under this revolving credit facility bear interest, at the Company's option, at
either the prime lending rate or LIBOR plus a fixed spread of 1.25% to 2.50%,
which varies based on the Company's cash flow leverage ratio. As of December 31,
1999, the blended average interest rate on the revolving credit facility
borrowings of $11 million was 8.1%.
The Company believes that the net proceeds that it received from its initial
public offering of common stock, together with its cash flow from operations and
available borrowings under its $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. If, however, net proceeds from the offering and cash flow from
operations and borrowings under the Company's revolving credit facility are
insufficient to satisfy the Company's liquidity requirements, it may need to
raise additional funds through public or private financings or the formation of
strategic ventures.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is subject to changes in interest rates which could negatively
impact its business. The Company's fixed rate long-term debt does not expose the
Company to the risk of earnings loss from increased interest expense as a result
of changes in the market interest rate. The Company 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 debt. The fair value of the
interest rate swap at December 31, 1999 was $346,000. Assuming a 10% increase in
interest rates, the fair value of the swap agreement would have been $426,000 at
December 31, 1999. In the future, the Company 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.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
HOMESERVICES.COM INC.
Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
as of December 31,
--------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 10,318 $ 3,114
Commissions and other trade receivables, net of allowance of $1,332 and $1,346 7,077 3,937
Mortgage loans held for sale 2,974 13,383
Pending real estate sales contracts 673 -
Cash held in trust 6,549 7,932
Income taxes receivable 534 3,902
Other current assets 3,236 2,143
--------------- --------------
Total current assets 31,361 34,411
--------------- --------------
Other Assets:
Office property and equipment, net 22,943 15,453
Intangible assets, net 106,706 75,122
Investments in non-consolidated entities 845 269
Held-to-maturity securities 944 651
Available-for-sale securities 264 297
Restricted assets 255 -
Deferred income taxes 2,679 2,148
Other assets 661 169
--------------- --------------
Total other assets 135,297 94,109
--------------- --------------
Total Assets $ 166,658 $ 128,520
=============== ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts and commissions payable $ 7,172 $ 5,448
Accrued expenses 12,668 11,345
Payable to affiliates 1,042 367
Cash held in trust 6,549 7,932
Current portion of long-term debt 707 3,436
Other current liabilities 862 1,624
--------------- --------------
Total current liabilities 29,000 30,152
--------------- --------------
Other Liabilities:
Long-term debt 48,110 58,009
Agent profit-sharing 6,282 5,074
Other noncurrent liabilities 914 91
--------------- --------------
Total other liabilities 55,306 63,174
--------------- --------------
Total liabilities 84,306 93,326
--------------- --------------
Commitments and contingencies (Note 13)
Stockholders' Equity:
Common stock, $0.01 par value, 38,000,000 shares authorized; 10,422,942 and
6,778,700 shares issued and outstanding at December 31, 1999 and 1998,
respectively 104 68
Additional paid-in capital 78,705 39,447
Notes receivable (651) (896)
Accumulated other comprehensive (loss) income (24) 9
Retained earnings (accumulated deficit) 4,218 (3,434)
--------------- --------------
Total stockholders' equity 82,352 35,194
--------------- --------------
Total Liabilities and Stockholders' Equity $ 166,658 128,520
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
HOMESERVICES.COM INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Company Predecessor
------------------------------------------------
May 28, 1998 January 1, 1998
Year Ended Through Through
December 31, December 31, May 27,
1999 1998 1998
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commission revenue $ 355,124 $ 169,647 $ 74,893
Title fees 21,313 14,154 7,575
Other 16,854 6,790 3,769
--------- --------- ---------
Total revenues 393,291 190,591 86,237
--------- --------- ---------
Operating expenses:
Commission expense 246,475 113,225 49,107
Salaries and employee benefits 58,075 27,603 14,620
Occupancy 19,189 9,081 5,564
Business promotion and advertising 16,543 8,632 5,184
Other operating expenses 24,235 13,949 5,758
Amortization of pending real estate sales contracts 3,088 18,271 -
Depreciation and amortization 8,881 4,177 2,293
--------- --------- ---------
Total operating expenses 376,486 194,938 82,526
--------- --------- ---------
Other income (expense):
Interest income 1,006 595 169
Interest expense (4,134) (1,929) (263)
---------- ---------- ----------
Total other income (expense), net (3,128) (1,334) (94)
Income (loss) before income taxes 13,677 (5,681) 3,617
Income tax expense (benefit) 6,025 (2,247) 1,664
--------- ---------- ---------
Net income (loss) $ 7,652 $ (3,434) $ 1,953
========================================
Net income (loss) per share:
Basic and diluted $ 0.96 $ (0.51) $ 0.41
========================================
Weighted average shares outstanding - Basic 7,956 6,779 4,748
========================================
Weighted average shares outstanding - Diluted 8,012 6,779 4,748
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESERVICES.COM INC.
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income
(dollars in thousands, except share amounts)
<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 and comprehensive 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 - $ - $ - $ - $ - $ - $ -
Initial capitalization 6,778,700 68 30,447 (1,525) 28,990
Capital contribution 9,000 9,000
Comprehensive income (loss):
Net loss (3,434) (3,434)
Unrealized gain on investments
(gross $15, net of $6 taxes) 9 9
------------
Total comprehensive loss (3,425)
Allowance for forgiveness of notes
receivable, net of accrued interest 629 629
---------------------------------------------------------------------------------
Balance, December 31, 1998 6,778,700 68 39,447 (896) 9 (3,434) 35,194
Comprehensive income:
Net income 7,652 7,652
Unrealized loss on investments
(gross $55, net of $22 taxes) (33) (33)
------------
Total comprehensive income 7,619
Allowance for forgiveness of notes
receivable, net of accrued interest 245 245
Proceeds from capital transactions 1,456,742 14 8,487 8,501
Issuance of common stock in
public offering, net of expenses 2,187,500 22 27,127 27,149
Non-cash expense for vested director's
options 3,644 3,644
---------------------------------------------------------------------------------
Balance, December 31, 1999 10,422,942 $ 104 $ 78,705 $ (651) $ (24) $ 4,218 $ 82,352
=================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESERVICES.COM INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Company Predecessor
-----------------------------------------
May 28, 1998 January 1, 1998
Year Ended Through Through
December 31, December 31, May 27,
1999 1998 1998
------------------------------------------
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net income (loss) $ 7,652 $ (3,434) $ 1,953
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,881 4,177 2,293
Amortization of pending real estate sales contracts 3,088 18,271 -
Earnings from equity method investments (480) - -
Loss (gain) on sale of office property and equipment 121 197 (6)
Decrease in notes receivable 245 630 -
Provision for deferred income taxes (515) (2,224) 79
Non-cash expense for vested director's options 3,644 - -
Change in assets and liabilities, net of effects
from companies purchased:
Commission and other trade
receivables, net of allowance (3,122) - (281)
Mortgage loans held for sale 10,409 (7,287) -
Income taxes receivable 3,368 (5) -
Other assets 1,659 728 1,252
Payable to affiliates 704 - -
Agent profit sharing 1,208 1,169 (164)
Accounts payable, accrued expenses and
other liabilities (3,808) 206 (135)
------------------------------------------
Net cash provided by operating activities 33,054 12,428 4,991
------------------------------------------
Cash flows used in investing activities:
Purchases of companies, net of cash and cash
equivalents (36,820) (96,478) -
Purchases of office property and equipment (9,396) (2,650) (900)
Other investing (353) 2 9
-------------------------------------------
Net cash used in investing activities (46,569) (99,126) (891)
-------------------------------------------
Cash flows provided by (used in) financing activities:
Issuance of common stock in public offering,
net of expenses 27,149 - -
Payments of long-term debt (32,084) (7,753) (872)
Proceeds from long-term debt 31,647 35,000 -
Net change in revolving credit facility (14,000) 25,000 -
Proceeds from capital transactions 8,501 37,990 -
Distributions and dividends paid to parent - - (1,068)
Loan costs (494) (425) -
-------------------------------------------
Net cash provided by (used in) financing activities 20,719 89,812 (1,940)
-------------------------------------------
Net increase in cash and cash equivalents 7,204 3,114 2,160
Cash and cash equivalents at beginning of period 3,114 - 2,590
-------------------------------------------
Cash and cash equivalents at end of period $ 10,318 $ 3,114 $ 4,750
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESERVICES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business Activities and Significant Accounting Policies and
Practices
Corporate Overview and Basis of Presentation
HomeServices.Com Inc. (the "Company" or "HomeServices"), was formed on July 13,
1999, for the purpose of merging with MidAmerican Realty Services Company
("MidAmerican Realty"). On October 7, 1999, the Company merged with MidAmerican
Realty. The accompanying financial statements include the financial position,
results of operations and cash flows of HomeServices, MidAmerican Realty, and
the wholly owned subsidiaries as if the Company was consolidated for all periods
presented. The Company is currently owned approximately 65% by MidAmerican
Energy Holdings Company ("MidAmerican Holdings").
The accompanying financial statements include the operations of Iowa Realty Co.,
Inc., including Edina Realty Home Services, prior to being acquired by
MidAmerican Realty 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 the Company reflect its operations
from May 28, 1998, the date it commenced operations.
Principles of Consolidation
The consolidated financial statements include HomeServices and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
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
short-term investments purchased with maturities of three months or less,
excluding cash held in trust.
Supplemental disclosure of cash flow information (in thousands) -
Company Predecessor
---------------------------------- ---------------
May 28, 1998 January 1, 1998
Year Ended Through Through
December 31, 1999December 31, 1998 May 27, 1998
Cash paid for interest $ 4,269 $ 1,292 $ 695
Cash paid for taxes $ 3,188 $ 4,258 $ 1,648
Supplemental schedule of noncash investing and financing activities (in
thousands) -
Company Predecessor
----------------------------- -----------
May 28, 1998 January 1, 1998
Year Ended Through Through
December 31, 1999 December 31, 1998 May 27, 1998
----------------- ----------------- -------------
Purchase of property and equipment
through capital leases $ 345 - -
Acquisition payment in accounts
payable - $ 919 -
Common stock issued to minority
shareholders - $ 1,525 -
Investments
Non-consolidated entities
The Company accounts for its non-consolidated 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.
<PAGE>
Investment in marketable 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 income. 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
Office 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:
Buildings 18 - 31 years
Furniture and equipment 3 - 10 years
Leasehold improvements. Shorter of the life of the
underlying lease or the
estimated useful life
of the improvement.
Upon sale or retirement of office property and equipment, the cost and related
accumulated depreciation are eliminated from the accounts and the resulting gain
or loss is included in the Statement of Income.
Intangible Assets
Intangible assets include 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 that have a value to the Company are stated at cost and
are amortized over the lives of the agreements.
Cash Held in Trust
The Company maintains separately designated trust accounts for homebuyers'
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, 1999 and 1998, the Company held
approximately $6.5 million and $7.9 million, respectively, 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 bases of existing assets and liabilities.
Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average shares
outstanding during the periods. The difference between basic and diluted
weighted average shares outstanding for the year ended December 31, 1999 is
solely attributable to the dilutive effect of stock options.
<PAGE>
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.
Fees related to loan originations are recognized when the related loan is
delivered to the third party purchasers. At December 31, 1999 and 1998, the
Company had $3.0 million and $13.4 million, respectively, in mortgage loans held
for sale related to undelivered loans for which purchase commitments have been
received.
Business Promotion and Advertising
Advertising and promotion costs are expensed as incurred.
Restricted assets
Restricted assets include an investment account funded by a subsidiary 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.
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 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.
Commissions and other trade receivables
The carrying amount of commissions and other trade receivables approximates
the estimated fair value due to the short-term nature of the investments.
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.
Securities
Fair values of securities 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. The securities are
stated at market value with the unrealized gain or loss included as a
component of accumulated other comprehensive income.
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 private placement notes. The fair value of the
private placement notes was approximately $31.0 million at December 31,
1999.
The carrying value of the revolving credit facility at December 31, 1999
approximated fair value as the facility has a floating rate based upon the
current interest rate.
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. The fair value of the interest rate swap at December 31, 1999 and
1998 was $346,000 and $10,000, respectively using the cash termination
value.
<PAGE>
Accounting for Computer Software Costs
In accordance with Statement of Position (SOP) No. 98-1, Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use, the Company
capitalizes qualified software costs and amortizes these costs over three years.
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 1999, the Company recognized net
revenue of $810,000 related to the franchise operation. In 1998, the Company
recognized net revenue of $602,000 related to the franchise operation. Through
May 27, 1998, the Predecessor had recognized net revenues of $282,000 related to
franchise operations.
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 and the
Company has no remaining material conditions or obligations and the franchisee
has begun operating under the new name. Revenue related to ongoing franchise
operations is recognized upon the closing of real estate sales transactions and
is included as a component of other revenue. The Company provides advertising,
supervision, training and assistance in support of its ongoing franchisees.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued 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 the first quarter of 1999 and expensed
applicable unamortized costs of $145,000 previously capitalized in connection
with the start-up of all acquired companies. 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 (SFAS) No. 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.
2. Operating Segments
The Company conducts its business activity in a single operating segment.
Commission revenue from real estate brokerage services for the Company comprised
approximately 90% and 89% of total revenue in 1999 and 1998, respectively while
the Predecessor approximated 87%. The Company has no other single source of
revenue greater than 7%.
<PAGE>
3. Acquisitions
In 1998 and 1999, 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 Minnesota Springfield, MO
(Predecessor)
August 18, 1998 CBS Real Estate Company Omaha, NE $ 5,630
August 18, 1998 HOME Real Estate Company of
Omaha Omaha, NE $ 5,200
September 1, 1998 J.C. Nichols Residential Real
Estate Kansas City, MO $ 17,300
December 18, 1998 Nebraska Land Title & Abstract Omaha, NE $ 900
July 9, 1999 Paul Semonin Realtors Louisville, KY $ 13,348
August 23, 1999 Long Realty Tucson, AZ $ 16,191
December 1, 1999 Champion Realty, Inc. Annapolis, MD $ 8,137
</TABLE>
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 (dollars in thousands) reconciles the fair value of assets
acquired and the liabilities assumed to the purchase price:
<TABLE>
<CAPTION>
HOME J.C.
Iowa CBS Real Real Nichols Nebraska Paul Champion
Realty Estate Estate Real Land Title Semonin Long Realty, Other
Co., Inc. Co. Co. Estate & AbstractRealtors Realty Inc. Acquisitions Total
---------- ------- ------- ----------- ------- ------- ---------- ------------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash, cash held in trust
and Investments $12,701 $ 504 $ 452 $ 2,106 $ 357 $ 1,268 $ 918 $ 1,377 $ - $ 19,683
Pending real estate sales
contracts 14,231 1,052 1,157 1,831 - 1,700 1,055 998 22 22,046
Other receivables 12,281 52 225 4,799 13 - 461 254 - 18,085
Fixed assets 12,706 618 502 1,734 62 1,429 1,413 673 30 19,167
Other intangibles and
prepaid 3,415 199 20 910 295 13 238 187 - 5,277
Goodwill 54,607 3,842 3,145 13,628 446 11,038 15,808 6,773 113 109,400
-------- ------ ------- ----------- ------- ------- ---------- ------------ ------ ---------
Fair value of assets 109,941 6,267 5,501 25,008 1,173 15,448 19,893 10,262 165 193,658
Liabilities assumed 31,641 637 301 7,708 273 2,100 3,702 2,125 - 48,487
-------- ------ ------- ----------- ------- ------- ---------- ------------ ------ ---------
Purchase price $78,300 $5,630 $5,200 $17,300 $ 900 $13,348 $16,191 $ 8,137 $ 165 $145,171
======== ====== ====== =========== ======= ======= ========== ============ ====== =========
</TABLE>
Upon acquisition of the real estate brokerage companies, the Company established
an asset for the value of pending real estate sales contracts. The asset is
amortized over three months, the period in which the related revenue is earned.
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. In connection with 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 stockholders' 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.
Immediately prior to the acquisition of the Predecessor by the Company, the
Predecessor's parent acquired the 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.
<PAGE>
The following pro forma financial information represents the unaudited pro forma
results of operations as if the acquisitions had been completed on January 1 for
each period presented, after giving effect to certain adjustments related to 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 of each period, nor are the results indicative of the Company's future
results of operations (dollars in thousands, except per share amounts):
Year Ended December 31,
1999 1998
---- ----
Revenues $ 459,482 $ 410,061
Operating expenses 439,989 412,383
Net income (loss) 10,214 (2,587)
Earnings per share - Basic $ 1.28 $ (0.38)
4. Equity Transactions
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
stockholders' 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.
In 1998, the acquisitions were partially funded through the issuance of 10,000
shares (6,778,700 after giving effect to exchange of shares) of MidAmerican
Realty's common stock to its parent, valued at approximately $29 million.
Additional financing was provided through a $9 million capital contribution from
MidAmerican Holdings, the issuance of private placement notes and a revolving
credit facility provided by third party lenders.
On August 8, 1999, an aggregate of 2,149 shares of common stock of MidAmerican
Realty were issued in connection with the acquisition of Paul Semonin Realtors
at a purchase price of $3,955.90 per share. The per share value was based on
MidAmerican Realty's estimated June 30, 1999 book value, based on preliminary
financial results, which is equivalent to a purchase price of $5.84 per share
(1,456,742 shares) of HomeServices stock after giving effect to the exchange of
677.87 shares of HomeServices common stock for each share of MidAmerican
Realty's common stock in the merger described in Note 1.
On October 14, 1999, the Company completed its initial public offering in which
it sold 2,187,500 newly issued shares of common stock and its majority
shareholder, MidAmerican Holdings, sold 1,062,500 shares. Net proceeds to the
Company were approximately $27.1 million.
On October 14, 1999, each director of HomeServices 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. The exercise price
represents 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, in the
merger of HomeServices and MidAmerican Realty on October 7, 1999. HomeServices
recorded a one-time non-cash after tax charge against income of approximately
$2.2 million ($3.6 million pre-tax) related to these options.
5. Sale-Leaseback Transactions
The Company is party to sale-leaseback transactions from 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, 1999 and
1998, deferred income related to these transactions was $23,000 and $14,000,
respectively.
6. Other Current Assets
<PAGE>
Other current assets consisted of the following (dollars in thousands):
As of December 31,
1999 1998
---- ----
Receivables from affiliates $12 $69
Prepaid assets 1,577 1,103
Other 1,647 971
----- ---
$3,236 $2,143
====== ======
7. Office Property and Equipment
Office property and equipment consisted of the following (dollars in thousands):
As of December 31,
1999 1998
---- ----
Land $1,561 $ 219
Buildings 6,814 3,929
Furniture and equipment 21,976 13,914
------ ------
30,351 18,062
Less accumulated depreciation 7,408 2,609
----- -----
$22,943 $15,453
======= =======
Depreciation expense for the Company in 1999 and 1998 totaled $5,373,000 and
$2,609,000 while the Predecessor charged $1,488,000 against income for
depreciation through May 27, 1998.
The Company rents office space for its various brokerage offices. Future minimum
rental payments under noncancelable operating leases at December 31, 1999, were
as follows (dollars in thousands):
To Related Parties To Third Parties Total
2000 $1,162 $13,529 $14,691
2001 1,186 11,158 12,344
2002 1,153 9,192 10,345
2003 1,074 7,025 8,099
2004 620 4,707 5,327
Thereafter 2,051 9,978 12,029
----- ----- ------
$7,246 $55,589 $62,835
====== ======= =======
8. Intangible Assets
Intangible assets consisted of the following (dollars in thousands):
As of December 31,
1999 1998
---- ----
Goodwill $109,400 $74,738
Non-compete agreements 1,503 1,350
Other intangibles 729 602
-------- -------
111,632 76,690
Less accumulated amortization 4,926 1,568
-------- -------
$106,706 $75,122
======== =======
The Company amortized $3,508,000 and $1,568,000 in 1999 and 1998, respectively
while the Predecessor recorded amortization of $805,000 for intangible assets
through May 27, 1998.
<PAGE>
9. Investments in Non-Consolidated Entities
Condensed unaudited financial information for entities accounted for under the
equity method is as follows (dollars in thousands):
As of December 31,
1999 1998
---- ----
Current assets $1,094 $984
Total assets 2,008 1,633
Current liabilities 61 364
Total liabilities 61 364
Company Predecessor
----------------------------------- -------------------
Year Ended May 28, 1998 January 1, 1998
December 31, Through through
1999 December 31, 1998 May 27, 1998
----------- --------------- ------------
Total revenues $13,318 $1,701 $ -
Operating expenses 11,592 1,142 -
Net income $3,358 $ 521 $ -
====== ===== ===
Net earnings in entities accounted for under the equity method were $1,672,000
and $260,000 for the years ended December 31, 1999 and the period ended December
31, 1998 and $0 for the Predecessor.
10. Long-term Debt
As of December 31,
1999 1998
(dollars in thousands) ---- ----
7.12% Private placement notes $35,000 $35,000
Revolving credit facility 11,000 25,000
Other 2,817 1,445
------ ------
48,817 61,445
Less current portion 707 3,436
------- -------
$48,110 $58,009
======= =======
7.12% 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.
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 declined $1.5 million every six months for five years, and a
commitment fee of 0.3% was charged on any unused portion of the facility. The
credit agreement had a variable interest rate (LIBOR) plus a credit spread based
on certain financial ratios.
On September 20, 1999, the Company entered into a new $75 million senior secured
revolving credit agreement which replaced the then existing $25 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 the Company. Amounts outstanding under
this revolving credit facility bear interest, at the Company's option, at either
the prime lending rate or LIBOR plus a fixed spread of 1.25% to 2.50% which
varies based on the Company's cash flow leverage ratio. As of December 31, 1999,
the blended average interest rate on the revolving credit facility borrowings
was 8.1%.
During 1998, the Company entered into a three year 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 $12.5 million. This agreement effectively changes the
Company's interest rate exposure on $12.5 million 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
<PAGE>
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. At December 31, 1999 and
1998, respectively, the fair value of this swap agreement was $346,000 and
$10,000 using the cash termination value.
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 (dollars in thousands):
2000 $ 707
2001 730
2002 11,694
2003 482
2004 5,084
Thereafter 30,120
------
$48,817
In May 1998, HomeServices entered into a revolving credit agreement with
MidAmerican Holdings to borrow funds from time to time, primarily to support
acquisitions. As of December 31, 1999 and 1998, there were no borrowings under
this agreement. The interest rate on borrowings is equal to the 30-day LIBOR
rate (5.8% on December 31, 1999) plus 1%. On June 24, 1999 the revolving credit
agreement with MidAmerican Holdings was amended to reduce MidAmerican Holdings
total commitment and Company's borrowing capacity thereunder from $100 million
to $10 million.
11. Income Taxes
Company Predecessor
-------------------------------- -------------------
May 28, 1998 January 1, 1998
(dollars in thousands) Year Ended Through Through
December 31, 1999 December 31, 1998 May 27, 1998
-------------- ----------------- ---------------
Current $6,540 $ (23) $1,585
Deferred (515) (2,224) 79
------- ------- --
Total expense (benefit) $6,025 $(2,247) $1,664
====== ======== ======
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset and deferred tax liabilities were as follows (dollars
in thousands):
As of December 31,
1999 1998
---- ----
Deferred tax assets related to:
Employee benefits $3,218 $2,275
Directors options 1,479 -
Bad debt reserves 1,141 334
Self-insurance reserves 356 377
Unrealized losses 138 -
NOL carryforward - 1,888
Other 431 170
--- ---
Total deferred tax assets $6,763 $5,044
------ ------
Deferred tax liabilities related to:
Intangibles $3,669 $2,824
Depreciable property - 72
Other 415 -
--- -----
Total deferred tax liabilities 4,084 2,896
----- -----
Net deferred tax asset $2,679 $2,148
====== ======
The following table is a reconciliation between the effective income tax rate
and statutory federal income tax rate for the year ended December 31, 1999 and
period ended December 31, 1998:
Company Predecessor
--------------------------- --------------
January 1,
May 28, 1998 1998
Year Ended Through Through
December 31, 1999 December 31, 1998 May 27, 1998
----------------- ----------------- ------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income
tax benefit 8.5 5.4 7.0
Amortization of acquisition costs 0.3 0.3 -
Other 0.3 (1.1) 4.0
--- ----- -----
Effective federal and state income tax
rate 44.1% 39.6% 46.0%
===== ===== =====
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.
12. Benefit Plans
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 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 percentage 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 periods ended December 31, 1999 and 1998, the Company
recognized expense of $1.3 million and $1.2 million for the plans, respectively
while the Predecessor recognized expense of $100,000 through May 27, 1998.
<PAGE>
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 had accrued
$467,000 related to this plan. The Company had net post-retirement 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, 1999, the Company had accrued approximately
$5.1 million for estimated future payments to qualifying sales agents and
incurred expenses of $922,000 for the sales agents' deferred compensation plan.
At December 31, 1998, the Company had 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, 1999,
the Company had accrued $1.1 million for estimated future payments to qualifying
sales agents and incurred expenses of $215,000 for the sales agents' deferred
compensation plan. The Company holds U.S. Treasury Strips (principal only) to
fund this obligation. At December 31, 1998, the Company had accrued $851,000 for
estimated future payments to qualifying sales agents. For 1998, the Company
incurred expenses of $200,000 for the sales agents' deferred compensation plan.
<PAGE>
13. 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, 1999
and 1998 (dollars in thousands):
Company Predecessor
May 28, 1998 January 1, 1998
Year Ended Through Through
December 31, December 31, May 27, 1998
1999 1998
----------------------- ---------------
Assets:
Advances receivable $ 12 $ 69 $ -
========== ========== ==========
Liabilities:
Accounts Payable $ 1,042 $ 354 $ -
Accrued Expenses - 13 -
---------- ---------- ----------
$ 1,042 $ 367 $ -
========== ========== ==========
Stockholders' Equity:
Notes receivable for shares sold $ 651 $ 896 $ -
========== ========== ==========
Revenues:
Title fees $ - $ - $ 387
Other - - 11
---------- ---------- ----------
$ - $ - $ 398
========== ========== ==========
Expenses:
Occupancy $ 821 $ 913 $ 292
Corporate allocations 1,656 1,552 359
---------- ---------- ----------
$ 2,477 $ 2,465 $ 651
========== ========== ==========
Other income (expenses):
Interest income $ - $ 64 $ 25
Interest expense $ (58) $ (1,246) $ (485)
----------- ----------- -----------
$ (58) $ (1,182) $ (460)
=========== =========== ===========
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 1999 and 1998, the amount accrued to the allowance for
estimated forgiveness and expensed as compensation was $245,000 and $629,000,
respectively. The balance of the notes receivable at December 31, 1999 and 1998
was $651,000 and $896,000, respectively. The Company charges interest on the
outstanding receivable balance at a rate equal to its average annual borrowing
rate (6.87% at December 31, 1999). Interest income recorded on the notes was
$110,000 and $64,000 in 1999 and 1998, respectively.
In 1998 and through October 31, 1999, the Company was charged for direct costs
incurred by MidAmerican Holdings on its behalf for legal, accounting, cash
management and human resource services. MidAmerican Holdings also allocated
indirect costs for corporate overhead such as executive costs, director's fees,
and MidAmerican Holdings interest. MidAmerican Holdings allocated indirect costs
to its subsidiaries based on their individual total assets and payroll.
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.
Beginning November 1, 1999, the Company is charged $50,000 per month for costs
incurred by MidAmerican Holdings on its behalf for legal, accounting, cash
management and human resource services.
The officers of several subsidiaries of the Company are members of the Board of
Directors of banks that hold investments of the Company.
<PAGE>
The officers of several subsidiaries of the Company are owners of buildings
within which the Company leases office space. The future lease obligations to
these related parties are disclosed further in Note 7.
14. Investment Securities
The investment securities held at December 31, 1999 were (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
Highwoods Properties Inc $288 $- ($24) $264
==== == ===== ====
Held-to-maturity:
U.S. Treasury Strips
(principal only) $418 $9 $ - $427
Agency obligation 526 4 - 530
--- --- --- ---
$944 $13 $ - $957
==== === ==== ===
The investment securities held at December 31, 1998 were (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
==== ==== === ====
The maturities of held-to-maturity investment securities and their approximate
fair value at December 31, 1999 were as follows (dollars in thousands):
Amortized Fair
Cost Value
Due after five years through ten years $ 944 $ 957
15. Commitments and Contingencies
The Company is a party to a number of lawsuits, claims and assessments arising
from the operations 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 J.C. Nichols Residential asset purchase agreement requires installment
payments to be made based on certain profitability levels achieved. The payments
are required 60 days after each close of calendar years 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. For the year ended December
31, 1999, there was no obligation because certain profitability levels were not
achieved.
The CBS Real Estate stock purchase agreement requires certain installment and
retention payments be made after the closing date based on agent retention and
profitability. A $250,000 payment was made in late 1998, with subsequent net
payments of $200,000 made in early 1999. The required payments have been made
and recorded as additional costs of acquisition.
<PAGE>
The Long Realty stock purchase agreement also requires installment payments be
made after the closing date, if certain profitability levels are achieved. These
payments are required after the close of calendar year 1999 and 2000. The
maximum amount payable under the agreement is $1.5 million per year. These
payments will be recorded as additional costs of acquisition upon achieving such
profitability levels.
The Champion Realty asset purchase agreement requires a payment to be made based
on certain EBITDA levels achieved in the fiscal year ending December 31, 2000.
These payments are required within 120 days after the close of the calendar year
2000. The maximum amount payable under the agreement is $400,000. These payments
will be recorded as additional costs of acquisition.
16. Stock-Based Compensation Plans
The Company has a stock option plan that provides for the granting of either
incentive stock options or non-qualified stock options to key employees and
non-employee members of the Company's Board of Directors. The Company may grant
up to 3,000,000 stock options to its employees. The options granted under these
plans are to purchase common stock at not less than fair-market value at the
date of grant with the exception of the October 14, 1999 award of stock options
to the Board of Directors. On October 14, 1999, each director of the Company
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. The exercise price represents the book value of the common stock on June
30, 1999, after giving effect to the issuance of approximately 677.87 shares of
the Company's common stock in exchange for each share of common stock of
MidAmerican Realty, in the merger of HomeServices and MidAmerican Realty on
October 7, 1999. HomeServices recorded a one-time non-cash after tax charge
against income of approximately $2.2 million ($3.6 million pre-tax) related to
these options. Employee options vest either monthly over four years from the
date of grant or in annual installments of 25% and they generally fully vest
upon a change of control of the Company. The stock options expire ten years from
date of grant.
Following is a summary of the employee stock options activity for 1999:
(Shares in thousands) Weighted Average
Options outstanding Exercise Price
Balance at October 13, 1999 - $ -
Options granted 2,216 13.36
Options exercised - -
Options canceled/forfeited 25 15.00
-- ------
Balance at December 31, 1999 2,191 $13.34
===== ======
Number of shares exercisable as of
December 31, 1999 506 $7.80
=== =====
For the number of shares exercisable as of December 31, 1999, the range of
exercise prices is $5.89 to $15.00. The weighted average remaining contractual
life is 9.8 years.
The Company applies the intrinsic value based method of accounting for its
stock-based employee compensation plans. If the fair value method had been
applied, incremental non-cash compensation expense would have been $1.2 million
in 1999. Net income and earnings per share would have been $6.9 million and
$0.86 per share, respectively in 1999.
The fair value of options granted during 1999 was $6.98. The fair value for
stock options was estimated using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rate of 6.31%; expected dividend
yield of 0%; expected option life of 5 years; and expected stock price
volatility of 34.1%.
<PAGE>
17. Quarterly Financial Data (Unaudited)
Following is a summary of the Company's quarterly results of operations for the
year ended December 31, 1999 and period from May 28, 1998 through December 31,
1998 (dollars in thousands except per share data). The Company was formed May
28, 1998. Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is defined as net income (loss) before income taxes, interest and other
income (expense), net, plus depreciation and amortization and amortization of
pending real estate sales contracts.
<TABLE>
<CAPTION>
Three Months Ended
------------------- -------------------- --------------------- ---------------------
1999 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues $64,685 $103,039 $123,373 $102,194
Operating expenses 66,229 91,816 114,414 104,027
EBITDA 437 12,960 13,473 1,904
Net income (loss) $(1,427) $6,053 $4,865 $(1,839)
======== ====== ====== ========
Net income (loss) per
share: basic and diluted $(0.21) $ .89 $0.62 $(0.19)
======== === ===== =======
</TABLE>
Three Months Ended
-------------------- ---------------------
1998 May 28 - June 30 September 30 December 31
- ---- ---------------- ------------ -----------
Total revenues $29,718 $81,337 $79,536
Operating expenses 29,909 82,752 82,277
EBITDA 5,153 2,024
Net income (loss) $(253) $(1,163) $(2,018)
====== ======== ========
Net income (loss) per
share: basic and diluted $ (0.04) $ (0.17) $ (0.30)
======= ======= =======
18. Subsequent Event:
On January 12, 2000, the Company issued 1,500 shares of its Series A Non-Voting
Convertible Preferred Stock (the "Preferred Stock") to U.S. Bancorp Piper
Jaffray Inc. ("Piper Jaffray") in exchange for 1,500,000 shares of the Company's
common stock. The exchange of Preferred Stock for common stock enables Piper
Jaffray, which is an affiliate of U.S. Bancorp, to satisfy the Bank Holding
Company Act of 1956 requirements that a bank holding company and its affiliates
own less than 5% of the voting stock of a publicly traded corporation. Each
share of Preferred Stock is convertible into 1,000 shares of common stock at any
time at Piper Jaffray's option and is also subject to automatic conversion upon
transfer by Piper Jaffray to any person that is not a bank holding company or an
affiliate thereof and upon the liquidation of the Company. The Preferred Stock
does not have any redemption preference or voting rights (except as required by
law). The Preferred Stock has the same right to dividends as the common stock.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of HomeServices.Com Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 51 present fairly, in all material
respects, the financial position of HomeServices.Com Inc. and its subsidiaries
(the "Company") as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999, for the
period from May 28, 1998 through December 31, 1998, and for the period from
January 1, 1998 through May 27, 1998, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule appearing under Item 14(a)(2) on page 51 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule 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
financial statements in accordance with auditing standards generally accepted in
the United States 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 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 comprehensive income,
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 the "Predecessor".
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 25, 2000
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
Part III.
Item 10. 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 March 31, 2000.
There are no family relationships among any of HomeServices' executive officers,
directors and key employees.
NAME AGE POSITION
David L. Sokol(1)(2) 43 Chairman; Director
Ronald J. Peltier(1) 50 President and Chief Executive Officer;
Steven A. McArthur(1)(2)(3) 42 Senior Vice President, General Counsel
Dwayne J. Coben 41 Senior Vice President and Chief
Douglas R. Carey 41 Vice President, e-commerce
Jack W. Frost 66 President and Chief Executive Officer
R. Michael Knapp 48 President and Chief Executive Officer
Arne M. Rovick 55 Vice Chairman and General Counsel of
Joseph J. Valenti 51 President and Chief Executive Officer
George E. Gans III 60 President and Chief Executive Officer
Stephen E. Quinlan 46 President and Chief Executive Officer
Christopher C. Coile 55 President and Chief Executive Officer
Gregory E. Abel 37 Director
Richard R. Jaros(1)(2)(3) 48 Director
W. David Scott(2)(3) 38 Director
(1) Member of the executive committee.
(2) Member of the compensation committee.
(3) Member of the audit committee.
<PAGE>
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. From 1988 to
1991, he was an attorney in the Corporate Finance Group at Shearman & Sterling
in San Francisco. From 1984 to 1988, Mr. McArthur was an attorney in the
Corporate Finance Group at Winthrop, Stimson, Putnam & Roberts in New York.
Dwayne J. Coben has been Senior Vice President and Chief Financial Officer of
HomeServices since its inception in July 1999. He has also been the Vice
President, Utility Development of MidAmerican Energy Company since April 1999.
He was a Corporate Development Vice President from April 1998 to March 1998 and
Director, Corporate Development from August 1997 to March 1998. 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.
Douglas R. Carey has been Vice President of e-commerce since joining
HomeServices in November 1999. Prior to joining HomeServices, Mr. Carey was an
independent consultant serving in various leadership roles for technology
companies. From 1992 to 1998, Mr. Carey was Director of Corporate Development
for Circon Corporation, a then publicly held medical technology company. Mr.
Carey holds an MBA from Stanford University and a BS with high distinction from
the University of Minnesota and is a Certified Public Accountant and Certified
Management Accountant.
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 Residential 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 Financial
Services, Inc. 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.
<PAGE>
Joseph J. Valenti has been President and Chief Executive Officer of CBSHOME
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 CBSHOME, the merged entity. Mr. Valenti is a
past President of the Omaha Area Board of Realtors. He has also been a member
and chairperson of multiple local and state realtor committees from 1979 to the
present. Mr. Valenti is active in the Omaha Chamber of Commerce and several
charities in the Omaha area.
George E. Gans III has been President and Chief Executive Officer of Paul
Semonin Realtors since 1985. Mr. Gans also serves as a director for Realty
Alliance and the National Association of Realtors, serves as a member of the
Board of Governors for Norton Health Care and for the Norton Hospital Advisory
Board and serves on the Advisory Board and Executive Committee for Bank One,
Kentucky, NA. Mr. Gans joined Paul Semonin Realtors in 1973 as a sales
associate, became an office manager in 1979 and Executive Vice President in
1984.
Stephen E. Quinlan has been President and Chief Executive Officer of Long Realty
since August of 1994. From 1976 through 1994, Mr. Quinlan has held a variety of
positions at Long Realty including Sales Associate in residential and commercial
areas, Branch Manager, General Manager, and Designated Broker. Mr. Quinlan
serves as a member of the Boards of Directors and/or Advisory Boards for
Sotheby's International Realty, Cendant Mobility Services, Arizona Compass Bank
and Southern Arizona Leadership Council. Mr. Quinlan is also Vice President of a
local Realtor Association and a member of the Vision Group.
Chris C. Coile has been President and Chief Executive Officer of Champion Realty
since its inception 1987. Prior to his role at Champion Realty, Mr. Coile was
sole owner and Chief Executive Officer of Chris Coile & Associates from 1970 to
1980. In 1980, Chris Coile & Associates was acquired by Merrill Lynch Realty at
which time Mr. Coile provided a leadership role including Regional President.
Mr. Coile has a GRI, CRS, CRB designation and was a senior instructor for the
Realtors National Marketing Institute.
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
investment and management company, in October 1994 and has served as its
President and Chief Executive Officer since its inception. 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.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements and Schedules
1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and 1998.
Consolidated Statements of Income for the year ended
December 31, 1999, and the periods ended May 27, 1998
and December 31, 1998.
Consolidated Statements of Cash Flows for the year
ended December 31, 1999 and the periods ended May 27,
1998 and December 31, 1998.
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the year ended
December 31, 1999 and the periods ended May 27, 1998
and December 31, 1998.
Notes to Consolidated Financial Statements.
Report of Independent Accountants
2. Financial Statement Schedules
Schedules not included have been omitted because of
the absence of the conditions under which they are
required.
See Schedule II Valuation and Qualifying Accounts
and Reserves
<PAGE>
Schedule II
HomeServices.Com Inc.
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Additions
----------------------------
Balance at Charged to Charged Balance at
Beginning costs and to end of
(dollars in thousands) of period expenses reserves Other period
- --------------------------------------------- --------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful trade accounts $ 1,346 $ 87 $ (106) $ $ 1,332
Period ended December 31, 1998
Allowance for doubtful trade accounts $ $ 27 $ $ $ 1,346
- --------------------------------------------- --------------- -------------- ------------- ------------- -------------
</TABLE>
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are
filed as part of this Annual Report.
(d) Financial statements required by Regulations S-X, which are
excluded from the Annual Report by Rule 14a-3(b).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Edina State
of Minnesota, on this 29 day of March, 2000.
HOMESERVICES.COM INC.
By: /s/ Ronald J. Peltier*
---------------------------------
Ronald J. Peltier
President, Chief Executive Officer
and Director
*By: /s/ Dwayne J. Coben
Dwayne J. Coben
Attorney-in-Fact
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Date
/s/ Ronald J. Peltier* March 29, 2000
- ----------------------
Ronald J. Peltier
President, Chief Executive Officer and
Director
/s/ Dwayne J. Coben* March 29, 2000
- ---------------------
Dwayne J. Coben
Senior Vice President and
Chief Financial Officer
<PAGE>
/s/ Jack W. Frost* March 29, 2000
- --------------------
Jack W. Frost
Director
/s/ R. Michael Knapp* March 29, 2000
- ----------------------
R. Michael Knapp
Director
/s/ Steven A. McArthur* March 29, 2000
- -----------------------
Steven A. McArthur
Director
/s/ Gregory E. Abel* March 29, 2000
- ---------------------
Gregory E. Abel
Director
/s/ W. David Scott* March 29, 2000
- ---------------------
W. David Scott
Director
*By: /s/ Dwayne J. Coben March 29, 2000
--------------------
Dwayne J. Coben
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1
of of Amendment No. 3 to the Company's Registration Statement on Form
S-1, dated July 16, 1999).
3.2 Amended and Restated Certificate of Incorporation of HomeServices.Com
Inc. (incorporated by reference to Exhibit 3.3 of Amendment No. 3 to
the Company's Registration Statement on Form S-1, dated September 13,
1999).
3.3 Amended and Restated Bylaws of HomeServices.Com Inc. (incorporated by
reference to Exhibit 3.4 of Amendment No. 3 to the Company's
Registration Statement on Form S-1, dated September 13, 1999).
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of Amendment No. 3 to the Company's Registration Statement
on Form S-1, dated September 13, 1999).
4.2 Form of Rights Agreement (incorporated by reference to Exhibit 4.2 of
Amendment No. 3 to the Company's Registration Statement on Form S-1,
dated September 13, 1999).
10.1 Credit Agreement, dated as of November 12, 1998, between MidAmerican
Realty Services Company and LaSalle National Bank (incorporated by
reference to Exhibit 10.1 of the Company's Registration Statement on
Form S-1, dated July 16, 1999).
10.2 Note Purchase Agreement dated as of November 1, 1998 between
MidAmerican Realty Services Company and the purchasers listed in
Schedule A thereto (incorporated by reference to Exhibit 10.2 of the
Company's Registration Statement on Form S-1, dated July 16, 1999).
10.3 Form of Registration Rights Agreement (incorporated by reference to
Exhibit 10.3 of Amendment No. 3 to the Company's Registration Statement
on Form S-1, dated September 13, 1999).
10.4 Form of Services Agreement (incorporated by reference to Exhibit 10.4
of Amendment No. 3 to the Company's Registration Statement on Form S-1,
dated September 13, 1999).
10.5 Form of Stock Option Plan (incorporated by reference to Exhibit 10.5 of
Amendment No. 5 to the Company's Registration Statement on Form S-1,
dated October 6, 1999).
10.6 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 (incorporated by
reference to Exhibit 10.6 of Amendment No. 5 to the Company's
Registration Statement on Form S-1, dated October 6, 1999).
10.7 Employment Agreement dated as of May 27, 1998 between MidAmerican
Realty Services Company and Ronald J. Peltier (incorporated by
reference to Exhibit 10.7 of Amendment No. 3 to the Company's
Registration Statement on Form S-1, dated September 13, 1999).
10.8 Employment Agreement, dated as of September 1, 1998, between J.C.
Nichols Residential, Inc. and Jack W. Frost (incorporated by reference
to Exhibit 10.9 of Amendment No. 3 to the Company's Registration
Statement on Form S-1, dated September 13, 1999).
10.9 Employment Agreement, dated as of May 27, 1998, between MidAmerican
Realty Services Company and Arne Rovick (incorporated by reference to
Exhibit 10.10 of Amendment No. 3 to the Company's Registration
Statement on Form S-1, dated September 13, 1999).
<PAGE>
10.10 Employment Agreement, dated as of August 18, 1998, between Home Real
Estate Company of Omaha and Joseph J. Valenti (incorporated by
reference to Exhibit 10.11 of Amendment No. 3 to the Company's
Registration Statement on Form S-1, dated September 13, 1999).
10.11 Employment Agreement, dated as of May 27, 1998, between MidAmerican
Realty Services Company and R. Michael Knapp (incorporated by reference
to Exhibit 10.12 of Amendment No. 3 to the Company's Registration
Statement on Form S-1, dated September 13, 1999).
10.12 Form of Tax Indemnity Agreement.
21.0 Subsidiaries of Registrant.
24.0 Power of Attorney.
27.0 Financial Data Schedule.
EXHIBIT 21
SUBSIDIARIES OF HOMESERVICES.COM INC.
COMPANY NAME STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION
Arizona Home Services, LLC Arizona
CBS Brokerage Systems, Inc. Nebraska
CBS HOME Real Estate Company Nebraska
Cendant Home Funding - Nebraska LLC Delaware
Champion Realty, Inc. Maryland
Chancellor Mortgage Services, Inc. Maryland
Chancellor Title Services, Inc. Maryland
Edina Corporate Services, Inc. Minnesota
Edina Financial Services, Inc. Minnesota
Edina Realty Foundation Minnesota
Edina Realty, Inc. Minnesota
Edina Realty Insurance Agency, Inc. Minnesota
Edina Realty Mortgage, Inc. Minnesota
Edina Realty Mortgage, LLC Delaware
Edina Realty of Wisconsin, Inc. Wisconsin
Edina Realty Title, Inc. Minnesota
First Realty, Ltd. Iowa
IMO Co., Inc. Missouri
Iowa Realty Co., Inc. Iowa
Iowa Realty Insurance Agency, Inc. Iowa
Iowa Title Company Iowa
J.C. Nichols Alliance, Inc. Kansas
J.C. Nichols Residential, Inc. Iowa
J.C. Nichols Residential Peculiar, LLC Missouri
Kansas City Title Services LLC Missouri
Leasing Associates, Inc. Nebraska
MidAmerican Commercial Real Estate Services, Inc. Kansas
MidAmerican Home Services Mortgage, LLC Delaware
Midland Escrow Services, Inc. Iowa
MRSCT, Inc. Kentucky
Nebraska Land Title and Abstract Co. Nebraska
Paul Semonin Company Kentucky
Plaza Financial Services, L.L.C. Kansas
Plaza Mortgage Services, L.L.C. Kansas
Professional Referral Organization Inc. Maryland
Real Estate Referral Network, Inc. Nebraska
RHL Referral Company, LLC Arizona
Roy H. Long Realty Co., Inc. Arizona
Select Relocation Services, Inc. Nebraska
Semonin Mortgage Services, Inc. Kentucky
The Referral Co. Iowa
Exhibit 24
POWER OF ATTORNEY
The undersigned, a member of the Board of Directors and/or as Officer
of HOMESERVICES.COM INC., a corporation registered in the State of Delaware (the
"Company"), hereby constitutes and appoints Steven A. McArthur, Douglas L.
Anderson and Dwayne J. Coben and each of them, as his/her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for and in his/her stead, in any and all capacities, to sign on his/her behalf
the Company's Form 10-K Annual Report for the fiscal year ending December 31,
1999 and to execute any amendments thereto and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
United States Securities and Exchange Commission and applicable stock exchanges,
with the full power and authority to do and perform each and every act and thing
necessary or advisable to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his/her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated as of March 27, 2000.
/s/ Ronald J. Peltier /s/ Jack W. Frost
- ------------------------- -----------------
Ronald J. Peltier Jack W. Frost
/s/ R. Michael Knapp /s/ Steven A. McArthur
- ------------------------- ----------------------
R. Michael Knapp Steven A. McArthur
/s/ Gregory E. Abel
- ------------------------- --------------------
Gregory E. Abel Richard R. Jaros
/s/ W. David Scott
- -------------------------
W. David Scott
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,318
<SECURITIES> 0
<RECEIVABLES> 8,409
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<CURRENT-ASSETS> 31,361
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