-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AP/LFtkSwhsZMVXj9/Ab+7/HAr5bw87fQGRgUlLI2LB9sPAAf/S428064EwtQG+Q xPH1zI4YaK0Hj1ou71HjhQ== 0000940180-99-000123.txt : 19990211 0000940180-99-000123.hdr.sgml : 19990211 ACCESSION NUMBER: 0000940180-99-000123 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 19990210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NRT INC CENTRAL INDEX KEY: 0001067584 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330769705 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-72093 FILM NUMBER: 99527663 BUSINESS ADDRESS: STREET 1: 6 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9734965700 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on February 10, 1999. Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- NRT INCORPORATED (Exact Name of Registrant as Specified in Its Charter) Delaware 6531 33-0769705 (State or Other (Primary Standard Industrial (I.R.S. Employer Jurisdiction of Classification Code Number) Identification No.) Incorporation or Organization) 6 Sylvan Way Parsippany, New Jersey 07054 (973) 496-5700 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Steven L. Barnett, Esq. Senior Vice President, General Counsel and Secretary NRT Incorporated 6 Sylvan Way Parsippany, New Jersey 07054 (973) 496-5700 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ----------- Copies to: Stephen F. Arcano, Esq. Mark L. Weissler, Esq. Skadden, Arps, Slate, Meagher & Milbank, Tweed, Hadley & McCloy Flom LLP One Chase Manhattan Plaza 919 Third Avenue New York, New York 10005 New York, New York 10022 (212) 530-5000 (212) 735-3000 (212) 530-5219 (fax) (212) 735-2000 (fax) ----------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. ----------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ----------- CALCULATION OF FILING FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Amount of Securities to be Registered Offering Price (1) Registration Fee - ---------------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share................. $225,000,000 $62,550
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. ----------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +We will amend and complete the information in this prospectus. Although we + +are permitted by U.S. federal securities laws to offer these securities using + +this prospectus, we may not sell them or accept your offer to buy them until + +the registration statement filed with the Securities and Exchange Commission + +relating to these securities has been declared "effective" by the SEC. This + +prospectus is not an offer to sell these securities or our solicitation of + +your offer to buy these securities in any State or other jurisdiction where + +that would not be permitted or legal. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION-- , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Prospectus , 1999 NRT Incorporated Shares of Common Stock - -------------------------------------------------------------------------------- Certain Data on the Certain Terms of Company: the Offering: . NRT is the . NRT is offering largest residential of the shares real estate and Apollo is brokerage company offering in the United of the shares. States, with approximately . The underwriters 690 offices have an option to operating under the purchase an COLDWELL BANKER(R), additional ERA(R) and CENTURY shares from Cendant 21(R) brand names. and Apollo to cover over-allotments. . NRT has grown rapidly, in large . This is NRT's part through its initial public acquisitions of 64 offering, and residential real no public market estate brokerage currently exists companies for NRT's shares. (including 6 of the 25 largest based on . NRT plans to use home sales volume), the net proceeds representing a from this offering total of over 500 (1) to redeem its offices. outstanding junior preferred stock . Affiliates of held by Apollo and Apollo Management, (2) for general L.P. and Cendant corporate purposes, Corporation which may include currently own all acquisitions. of NRT's NRT will not outstanding capital receive any stock and are proceeds from the parties to various shares sold by agreements with Apollo or Cendant. NRT. . Closing: , . Principal 1999. Executive Offices: NRT Incorporated 6 Sylvan Way Parsippany, New Jersey 07054 (973) 496-5700 Proposed Symbol/Proposed Market: . NRS/NYSE
------------------------------------------------- Per Share Total ------------------------------------------------- Public offering price (estimated): $ $ Underwriting fees: $ $ Proceeds to the Company: $ $ Proceeds to selling stockholders: $ $ -------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on Page 15. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. Merrill Lynch & Co. Morgan Stanley Dean Witter [MAP OF NRT OFFICE LOCATIONS] NRT and its subsidiaries own and operate franchised real estate brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) are registered service marks of a wholly owned subsidiary of Cendant Corporation. As used in this prospectus, unless the context otherwise requires, (1) "NRT" and the "Company" mean NRT Incorporated and its subsidiaries and predecessors, (2) "Cendant" means Cendant Corporation and its subsidiaries and predecessors, (3) the "Franchisors" means Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc. and Century 21 Real Estate Corporation, each a wholly owned subsidiary of Cendant, and (4) "Apollo" means Apollo Management, L.P. and its affiliated investment funds, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. ------------ TABLE OF CONTENTS Prospectus Summary................... 3 Risk Factors......................... 15 Special Note Regarding Forward- Looking Statements.................. 24 Use of Proceeds...................... 25 Dividend Policy...................... 25 Dilution............................. 26 Capitalization....................... 27 Unaudited Pro Forma Condensed Consolidated Financial Information.. 28 Selected Consolidated Financial Data................................ 38 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 39 Business............................. 51
Management.......................... 67 Principal and Selling Stockholders.. 76 Certain Transactions................ 78 Description of Capital Stock........ 94 Description of Certain Indebtedness....................... 102 Shares Eligible for Future Sale..... 104 Certain United States Federal Tax Considerations Relating to Non-U.S. Holders............................ 105 Underwriting........................ 108 Notice to Canadian Residents........ 112 Legal Matters....................... 115 Experts............................. 115 Additional Information.............. 117 Index to Financial Statements....... F-1
PROSPECTUS SUMMARY This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the financial data and related notes, before making an investment decision. Unless otherwise indicated, the information contained in this prospectus (1) gives effect to a -for-1 split of the Common Stock that will be effected immediately prior to the closing of the offering and (2) assumes the underwriters' over-allotment option is not exercised. Statistical information regarding the residential real estate brokerage industry has been derived from publicly available sources, which the Company has not independently verified but believes to be reliable. The Company NRT is the largest residential real estate brokerage company in the United States, with approximately 690 offices and over 30,000 sales associates throughout the country. The Company is approximately five times larger than its next largest competitor in terms of the dollar volume of home sales and believes that it is the only national residential real estate brokerage company. The Company operates in 18 of the 30 largest domestic markets measured by population and believes, based on reported revenues and number of offices, that it is either the largest or second largest residential real estate brokerage in each market in which it operates. NRT operates full service brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. As a full service brokerage, the Company offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems and other services. When compared to other real estate brokerages, NRT believes it benefits from several competitive advantages, including operating economies of scale, national brand identity, extensive training programs for its sales associates, more sophisticated technology and information systems, a wide variety of brokerage-related services and greater access to capital. With these competitive advantages, the Company recruits, retains and develops highly productive sales associates. In 1997, the Company acted as broker in transactions representing over $36.8 billion in home sales volume, $1.0 billion in gross commission income and 154,066 "sides" (each real estate transaction has two sides, the selling side and the buying side). For the twelve-month period ended September 30, 1998, after giving effect to certain acquisitions completed by the Company, the Company had pro forma revenues of $2.4 billion and operating income before depreciation and amortization (after eliminating redundant selling, general and administrative costs related to such acquisitions) of $84.6 million. The Company operates all of its brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names pursuant to long-term franchise agreements with the Franchisors. The Company operates approximately 85% of its offices under the COLDWELL BANKER(R) brand 3 name, 12% of its offices under the ERA(R) brand name and 3% of its offices under the CENTURY 21(R) brand name. The Company operates its COLDWELL BANKER(R) offices throughout the country, its ERA(R) offices in New Jersey and the Mid- Atlantic region and its CENTURY 21(R) offices in Northern California. Based on gross commission income, the Company is the largest individual real estate brokerage franchisee for each of these three brands. The Company believes that the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names provide the Company with consumer recognition and credibility on a national and international basis. Based on publicly available information, COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) are three of the five largest national real estate franchise systems in the United States, measured by the number of franchised real estate brokerage offices. NRT believes that the fragmented nature of the real estate brokerage industry offers substantial consolidation opportunities, and NRT's objective is to continue to expand its presence as the leading national real estate brokerage company. When it was formed in August 1997, the Company acquired the assets of National Realty Trust, which included the former real estate brokerage operations of Coldwell Banker Corporation. At that time, National Realty Trust was the largest residential real estate brokerage in the United States, with approximately 370 offices, $648 million of revenues and $21 million of operating income before depreciation and amortization for the year ended December 31, 1996. The operations acquired from National Realty Trust provided NRT with a strong core business and a proven operating history from which to expand by acquiring additional real estate brokerage firms. The Company has grown rapidly, in large part through its 28 acquisitions of multi-office brokerages and 36 acquisitions of single-office brokerages from September 1, 1997 through December 31, 1998, representing a total of over 500 brokerage offices and $1.14 billion in gross commission income on an annualized basis. The Company's significant acquisitions to date include Jon Douglas Real Estate Services Group, Inc., the third largest residential real estate brokerage company in the United States, Burnet Financial Group, the fourth largest, Hunneman Real Estate Corporation, the ninth largest, Cornish & Carey Residential, Inc., the tenth largest, and O'Conor, Piper & Flynn, Inc., the fifteenth largest (rankings based on the dollar volume of home sales in the last completed calendar year prior to being acquired by NRT). NRT and Cendant have an agreement that reduces the Company's effective purchase price for brokerage acquisitions in which Cendant agrees to participate. When NRT and Cendant cooperate to jointly fund an acquisition, the Company acquires the brokerage operations of the acquired brokerage, while Cendant acquires the trademarks and mortgage operations (if any). As with its existing offices, NRT is required to operate all acquired offices under one of the Franchisors' brand names and pay royalties for such offices under the franchise agreements. From NRT's formation through December 31, 1998, Cendant has provided an average of 66% of the total acquisition cost for all of NRT's brokerage acquisitions (excluding the National Realty Trust acquisition). While Cendant can decline to participate in any brokerage acquisition, it has participated in all of NRT's brokerage acquisitions to date (excluding the National Realty Trust acquisition). Upon NRT's formation in August 1997, Cendant committed approximately $445 million for the Company's brokerage acquisitions. Through December 31, 1998, Cendant had provided 4 approximately $420 million of its original commitment and NRT had used approximately $230 million of its own capital for acquisitions. Cendant has committed an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate pursuant to an Acquisition Cooperation Agreement, which amends NRT's prior agreement with Cendant by reducing the percentage of the purchase price payable by Cendant in future NRT brokerage acquisitions. The $1 billion commitment is available in two $500 million tranches. The first $500 million (of which Cendant has provided approximately $23 million) is currently available, and the second $500 million would become available after the first $500 million has been completely used by NRT but in no case earlier than February 9, 2004, unless otherwise agreed to by Cendant. See "Business-- Acquisitions" and "Certain Transactions--Acquisition Cooperation Agreement." In addition to the franchise agreements with the Franchisors and the Acquisition Cooperation Agreement, the Company has entered into various other agreements with Cendant or its subsidiaries. These agreements include a Program Outsourcing Agreement under which Cendant acts as the Company's exclusive agent in negotiating arrangements with third party service and product providers, a Stockholders Agreement relating to the voting, transfer and registration of shares of the Company's capital stock owned by Apollo and Cendant, a Marketing Agreement relating to the marketing of Cendant's mortgage origination services and other agreements. NRT intends to enter into a joint venture with Cendant to provide mortgage services, at which time the Marketing Agreement will be terminated. See "Certain Transactions." NRT continually explores and discusses with third parties potential acquisitions and other strategic corporate transactions. NRT is currently engaged in discussions with third parties regarding possible acquisitions in the real estate brokerage industry. Completion of any such transactions would be subject to the negotiation and signing of final agreements, the receipt of any necessary regulatory approvals and third party consents and the satisfaction of other conditions. The Company cannot guarantee the timing, likelihood or financial or business effect of any possible transaction. The Industry According to industry data, the 1998 domestic residential real estate industry generated approximately $940 billion in home sales and over 11 million sides. Assuming an average commission rate of 5 1/2%, the industry generated over $50 billion of gross commission income in 1998. Existing home sales in the United States have exceeded 3.5 million homes sold every year since 1992 and over 4.0 million homes sold in each of 1996, 1997 and 1998. Since 1991, the number of new and existing homes sold per year in the United States has grown at an average annual rate of 5.4%. Recent years have been among the strongest ever for existing home sales. According to the National Association of Realtors, the 1993-1998 period represents six of the eight strongest years on record for annual existing home sales. Real estate brokerage companies typically realize revenues as a commission that is based on a percentage of the price of each home sold. As a result, the real estate brokerage industry generally benefits from rising home prices. In 1998, the national median price for existing, single-family homes, as reported by the National Association of Realtors, an industry trade association, was $130,600, up 5.2% from 1997. Since 1981, median home prices have increased an average of 4.0% annually. 5 The highly fragmented real estate brokerage industry consists primarily of a large number of relatively small brokerage companies and a small number of multi-office regional brokerage companies. The 482 real estate brokerage firms included in the Real Facts (an industry publication) listing of the largest real estate brokerage companies in the United States represented less than 19% of the total number of sides closed in 1997. In addition, according to the National Association of Realtors, approximately 87% of all real estate brokerage firms existing on December 31, 1997 consisted of a single office. The Company believes that the future of the real estate brokerage industry will be dominated by (1) large companies offering multiple services and (2) smaller, niche-oriented firms. NRT believes that larger firms, such as NRT, will benefit from their ability to offer consumers a "full service brokerage" approach to the complex process of purchasing or selling a home by offering home buyers and sellers a wide variety of homeowner services. Growth Strategy The Company's growth strategy is to expand its operations and improve profitability through the following strategic initiatives: Internal Growth Strategy Leverage Well Known, National Brand Names. The Company believes that its ability to operate under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names provides it with substantial benefits, including: (1) the enhanced name recognition and reputation of the brands among consumers for quality and consistency; (2) access to the Franchisors' well developed sales associate training and educational programs; and (3) the approximately $65 million of annual marketing expenditures by national advertising funds promoting the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. The Company believes that brand recognition is important in the real estate business because (1) home buyers and sellers are generally infrequent users of brokerage services and typically rely on reputation as well as word-of-mouth recommendations and (2) real estate sales associates believe that a brokerage firm's image with customers is its most important attribute. Continue to Broaden Range of Services Offered. As a full service brokerage company, NRT offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems, temporary housing, temporary storage, moving truck rentals and telephone services. The Company intends to capitalize on the purchasing power of home buyers and sellers and take advantage of the relationship between homeowners and the Company's sales associates to market a wide range of homeowner services. The Company believes that by offering a wide range of brokerage and related services it can improve the home purchase or sale experience, enhance its relationship with its customers and increase its service revenues. The Company intends to continue to broaden the range of services that it offers. See "Certain Transactions--Program Outsourcing Agreement," "--Marketing Agreement" and "--Relocation Management." 6 Recruit, Retain and Develop High-Quality Sales Associates. The success of the Company's business is largely driven by its ability to recruit, retain and develop high-quality real estate sales associates. The Company believes that its strong reputation and ability to offer consumers a wide range of real estate brokerage-related services, coupled with its ability to provide its sales associates with extensive training and educational programs, marketing support, sophisticated information technology and other resources, help the Company recruit, retain and develop highly productive sales associates. The Company believes its sales associates generally have a reputation for quality of service and professionalism. While individual results vary widely, the productivity of the Company's sales associates has increased by 13.4% to an average of 9.3 closed sides per sales associate in 1997 from 8.2 closed sides per sales associate in 1996. Continue to Enhance Productivity with Information Technology. The Company's technology-based systems combine software applications with features such as prospective customer management, location mapping, financial analysis, property information, photographs and forms. The Company believes that these systems, which provide the Company's sales associates with quick access to current market information, are powerful productivity enhancing and marketing tools. The Company intends to continue to upgrade its information technology and to use technology to enhance the productivity of its sales associates. Acquisition Strategy NRT intends to grow by making selected acquisitions of residential real estate brokerages, title insurance agencies and escrow operations in existing and new geographic markets. The Company believes that smaller brokerage firms, which comprise a large segment of the real estate brokerage industry, generally are not as well positioned as the Company to compete in their markets, do not have the same access to capital as does the Company and are less able to respond to changes in the real estate industry. Enter New Markets. NRT intends to enter new markets by selectively acquiring high-quality, leading real estate brokerage firms that it believes will enable it to establish a strong presence in target markets. In evaluating potential acquisitions, the Company considers a number of factors, including financial performance, quality of management and sales associates, demographics and economic conditions of the new market and competitive position of the acquisition target. Expand Within Existing Markets. NRT seeks to expand its presence within its existing markets through acquisitions of additional local and regional brokerages, as well as smaller "roll-in" acquisitions. "Roll-in" acquisitions are acquisitions of smaller firms, often consisting of a single office, whose businesses can be integrated into the Company's operations, while eliminating many duplicative costs, such as advertising, rent and administrative support. By utilizing its existing infrastructure to support a broader network of sales associates and revenue base, the Company believes it can enhance the profitability of its consolidated operations. Since its formation, NRT has completed over 35 "roll-in" acquisitions. 7 Improve Operations of Acquired Companies. The Company seeks to improve the operating profitability of acquired companies through the consolidation of offices, elimination of duplicative costs, reduction in personnel and centralization of back office functions. The limited availability of capital has constrained expansion and modernization at many small and mid-sized real estate brokerage firms. The Company believes that it can increase internal growth at many of the acquired companies through its (1) affiliation with nationally recognized brand names, (2) offering of a wide range of brokerage- related services, (3) improved use of information technology, (4) sales associate training and educational programs, (5) marketing and business promotion and (6) skilled senior management. From September 1, 1997 through December 31, 1998, the Company completed 25 acquisitions of brokerages which each had over $5 million of annual gross commission income. Through September 30, 1998, the Company had taken actions to reduce the annual operating costs of acquired companies by an aggregate of approximately $55.4 million, representing approximately 15.7% of the acquired companies' selling, general and administrative expenses for the twelve month period preceding their acquisition. Other Growth Opportunities The Company intends to seek other growth opportunities and has identified the following areas for possible expansion. International. The Company believes that the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names are highly regarded in a number of industrialized countries, including Canada, the United Kingdom and France, which have real estate brokerage industries that operate in a manner similar to the real estate brokerage industry in the United States. The Company may seek to enter such markets by (1) acquiring master franchise rights in such markets, (2) entering into partnerships with brokers operating in such markets or (3) making acquisitions of brokers operating in such markets. Commercial. Approximately 400 of the Company's sales associates concentrate principally on commercial real estate sales. The Company may pursue opportunities to expand its network of commercial real estate sales associates by making strategic acquisitions of regional and local commercial brokerage companies. 8 The Offering Common Stock offered by: The Company........... shares The selling stockholders(a)...... shares Total............... shares Common Stock to be outstanding after the offering............... shares(b)(c) Use of proceeds......... The Company intends to use the net proceeds of the offering (1) to redeem all outstanding shares of the Company's junior preferred stock held by Apollo and (2) for general corporate purposes, which may include acquisitions. The Company will not receive any of the proceeds from the sale of shares by the selling stockholders. Risk factors............ See "Risk Factors" for a discussion of certain risks you should consider before investing in the Common Stock. Proposed New York Stock Exchange symbol........ NRS
- -------------------- (a) Represents shares being offered by Apollo. If the underwriters' over- allotment option is exercised, additional shares of Common Stock will be offered by Cendant and Apollo. (b) Excludes (1) currently outstanding options to purchase approximately shares of Common Stock pursuant to the Company's 1997 Equity Participation Plan at a weighted average exercise price of $ per share and (2) shares of Common Stock available for future awards under the 1997 Equity Participation Plan. (c) Assumes the conversion by Cendant of all of the outstanding shares of the Company's convertible preferred stock held by it into shares of Common Stock, based on an assumed offering price of $ , the mid-point of the expected range of initial public offering price per share. 9 Summary Financial and Other Data The following tables present summary historical, combined and pro forma financial and other data of the Company. For additional information, you should refer to "Selected Consolidated Financial Data," "Unaudited Pro Forma Condensed Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and its predecessors and related notes. The pro forma data are provided for informational purposes only and are not necessarily indicative of the financial position or the results of operations of the Company had the events described in the notes below occurred on the dates specified, nor are such data indicative of the Company's future financial condition or results of operations. Historical Data
Predecessors(a) --------------------------------------------- Coldwell Banker NRT Residential Brokerage National Realty Trust Incorporated NRT Incorporated --------------------- ----------------------- ------------ --------------------------- Five Seven Eight Four One Nine Months Months Months Months Month Months Year Ended Ended Ended Ended Ended Ended Ended December 31, May 31, December 31, August 31, December 31, September 30, September 30, 1995 1996 1996 1997 1997 1997 1998 ------------ -------- ------------ ---------- ------------ ------------- ------------- (in thousands) Statement of Operations Data: Real estate commissions............ $540,302 $228,005 $400,076 $570,150 $446,134 $100,592 $1,488,932 Other revenues.......... 16,042 7,810 12,101 14,636 17,380 2,428 77,017 -------- -------- -------- -------- -------- -------- ---------- Total revenues........ 556,344 235,815 412,177 584,786 463,514 103,020 1,565,949 Commissions and royalties.............. 333,869 141,404 276,364 393,235 330,169 73,346 1,091,039 Selling, general and administrative expenses............... 212,013 93,532 119,862 168,863 124,785 26,750 406,161 Amortization of good- will................... 532 482 104 1,162 637 160 3,220 Acquisition related costs(b)............... 4,240 26 22,188 10,735 78,462 32,264 48,225 -------- -------- -------- -------- -------- -------- ---------- Operating income (loss)............... 5,690 371 (6,341) 10,791 (70,539) (29,500) 17,304 Interest expense, net... (137) 11 44 117 (2,843) (757) (2,068) Provision (benefit) for income taxes........... 2,459 156 -- 4,432 (25,453) (11,656) 8,444 -------- -------- -------- -------- -------- -------- ---------- Net income (loss)..... $ 3,368 $ 204 $ (6,385) $ 6,242 $(42,243) $(17,087) $ 10,928 ======== ======== ======== ======== ======== ======== ========== Other Data: Acquisition Related Costs: Amortization of pending real estate sales contracts and real estate listing contracts(b)........... $ 2,848 $ 26 $ 21,449 $ 9,314 $ 69,896 $ 26,221 $ 32,170 Office conversion costs(b)............... 1,392 -- 739 1,421 8,566 6,043 16,055 -------- -------- -------- -------- -------- -------- ---------- Total acquisition related costs.......... $ 4,240 $ 26 $ 22,188 $ 10,735 $ 78,462 $ 32,264 $ 48,225 ======== ======== ======== ======== ======== ======== ========== Operating income before amortization of goodwill and acquisition related costs(b)............... $ 10,462 $ 879 $ 15,951 $ 22,688 $ 8,560 $ 2,924 $ 68,749 Depreciation............ 9,111 3,812 1,129 3,026 2,998 557 12,964
- -------------------- (a) In May 1996, Cendant acquired Coldwell Banker Corporation and contributed the real estate brokerage operations owned by Coldwell Banker Residential Brokerage Corporation to National Realty Trust. Cendant retained ownership of all trademarks utilized in connection with the transferred real estate brokerage operations and franchised the right to conduct business under the COLDWELL BANKER(R) brand name to National Realty Trust. Cendant subsequently franchised the right to conduct business under the ERA(R) and CENTURY 21(R) brand names to National Realty Trust. In August 1997, NRT Incorporated was formed and acquired all of the real estate brokerage operations owned by National Realty Trust, including real estate brokerage offices acquired after May 1996. (b) Acquisition related costs reflect primarily the amortization of acquired companies' pending real estate sales contracts and real estate listing contracts and office conversion costs, which include primarily signage change, name change advertising and other transitional costs. NRT amortizes acquired companies' pending real estate sales contracts over a three-month period and real estate listing contracts over a six-month period, reflecting the respective periods over which the Company estimates that such contracts will result in closed real estate transactions. 10 Combined and Pro Forma Data
Pro Forma As Adjusted(e) ---------------------------------------- Combined Combined Combined Combined Nine Months Nine Months Combined Nine Months Nine Months Year Ended Year Ended Year Ended Ended Ended Year Ended Ended Ended December 31, December 31, December 31, September 30, September 30, December 31, September 30, September 30, 1995 1996(b) 1997(c) 1997(d) 1998(d) 1997 1997 1998 ------------ ------------ ------------ ------------- ------------- ------------ ------------- ------------- (dollars in thousands, except per share amounts) Statement of Operations Data: Real estate commissions..... $540,302 $628,081 $1,016,284 $ 670,742 $1,488,932 $2,006,418 $1,505,145 $1,763,269 Other revenues... 16,042 19,911 32,016 17,064 77,017 115,312 83,204 111,847 -------- -------- ---------- --------- ---------- ---------- ---------- ---------- Total revenues.. 556,344 647,992 1,048,300 687,806 1,565,949 2,121,730 1,588,349 1,875,116 Commissions and royalties....... 333,869 417,768 723,404 466,581 1,091,039 1,499,196 1,114,356 1,340,339 Selling, general and administrative expenses........ 212,013 213,394 293,648 195,613 406,161 645,676 478,688 474,553 Amortization of goodwill........ 532 586 1,799 1,322 3,220 5,688 4,408 3,566 Acquisition related costs... 4,240 22,214 89,197 42,999 48,225 151,822 151,822 1,255 -------- -------- ---------- --------- ---------- ---------- ---------- ---------- Operating income (loss)(a)...... 5,690 (5,970) (59,748) (18,709) 17,304 (180,652) (160,925) 55,403 Interest expense, net............. (137) 55 (2,726) (640) (2,068) 349 4,352 (1,424) Provision (benefit) for income taxes.... 2,459 156 (21,021) (7,224) 8,444 (71,232) (66,843) 23,613 -------- -------- ---------- --------- ---------- ---------- ---------- ---------- Net income (loss).......... $ 3,368 $ (6,181) $ (36,001) $ (10,845) $ 10,928 $ (109,769) $ (98,434) $ 33,214 ======== ======== ========== ========= ========== ========== ========== ========== Weighted average shares outstanding(f): Basic............ Diluted.......... Income (loss) per share: Basic............ Diluted.......... Other Data: Sides(g)......... 100,339 109,994 154,066 105,936 220,297 Average sales price per home(h)......... $ 192.8 $ 205.4 $ 239.0 $ 232.2 $ 247.3 Home sales volume(i) (in millions)....... $ 19,345 $ 22,593 $ 36,822 $ 24,598 $ 54,479 Average sales commission rate per side(j)..... 2.77% 2.78% 2.76% 2.74% 2.73% Number of offices (at period end)............ 325 353 463 366 630 Number of sales associates (at period end)..... 13,368 13,765 19,914 18,939 29,078 Real estate listing contracts (at period end)(k).. 28,877 27,170 33,256 36,370 65,248 Cash Flow Data: Net cash provided by operating activities...... $ 12,756 $ 34,665 $ 30,152 $ 19,402 $ 19,576 Net cash used in investing activities...... (12,933) (33,190) (152,270) (140,180) (117,692) Net cash provided by (used in) financing activities...... (936) 10,624 294,067 295,254 (3,199)
As of September 30, 1998 ----------------------------- Historical Pro Forma(l) -------------- ------------- (in thousands) Balance Sheet Data: Cash and cash equivalents.............. $ 64,045 $ 108,473 Total assets........................... 470,418 514,846 Long-term debt......................... 13,753 13,753 Redeemable preferred stock............. 242,875 181,591 Stockholders' equity (deficit)......... (50,623) 25,089
(Footnotes on following page) 11 (a) EBITDA is defined as operating income (loss) plus depreciation and amortization of goodwill and other intangibles. Adjusted EBITDA is defined as EBITDA plus office conversion costs (i.e., the costs of converting acquired brokerages operating under the franchise agreements with the Franchisors), which include primarily signage change, name change advertising and other transitional costs, plus the effect of eliminating redundant selling, general and administrative costs that have resulted or will result from the implementation of plans to restructure and consolidate certain operations of acquired companies, had the acquisitions and related restructuring and consolidation actions taken place on January 1, 1997. These actions include the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. See Note (i) under "Unaudited Pro Forma Condensed Consolidated Financial Information." EBITDA and Adjusted EBITDA are calculated as follows:
Pro Forma As Adjusted ---------------------------------------- Combined Combined Combined Combined Nine Months Nine Months Combined Nine Months Nine Months Year Ended Year Ended Year Ended Ended Ended Year Ended Ended Ended December 31, December 31, December 31, September 30, September 30, December 31, September 30, September 30, 1995 1996 1997 1997 1998 1997 1997 1998 ------------ ------------ ------------ ------------- ------------- ------------ ------------- ------------- (in thousands) Operating income (loss)......... $ 5,690 $(5,970) $(59,748) $(18,709) $17,304 $(180,652) $(160,925) $55,403 Depreciation.... 9,111 4,941 6,024 3,583 12,964 18,824 14,149 15,610 Amortization of goodwill....... 532 586 1,799 1,322 3,220 5,688 4,408 3,566 Amortization of pending real estate contracts and real estate listing contracts...... 2,848 21,475 79,210 35,535 32,170 125,317 125,317 1,225 ------- ------- -------- -------- ------- --------- --------- ------- EBITDA.......... 18,181 21,032 27,285 21,731 65,658 (30,823) (17,051) 75,834 Office conversion costs.......... 1,392 739 9,987 7,464 16,055 26,505 26,505 -- ------- ------- -------- -------- ------- --------- --------- ------- EBITDA before office conversion costs.......... $19,573 $21,771 $ 37,272 $ 29,195 $81,713 (4,318) 9,454 75,834 ======= ======= ======== ======== ======= Selling, general and administrative cost savings... 61,807 46,356 7,066 --------- --------- ------- Adjusted EBITDA before office conversion costs.......... $ 57,489 $ 55,810 $82,900 ========= ========= =======
The Company believes that EBITDA is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA and Adjusted EBITDA are not intended to represent cash flows for the periods presented, nor have they been presented as alternatives to operating income as indicators of operating performance and measures of cash flow, and they should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The Company understands that, while EBITDA is frequently used by securities analysts in the evaluation of companies, EBITDA and Adjusted EBITDA, as used above, are not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation. 12 (b) Summary financial information for the combined year ended December 31, 1996 represents the combined historical results of the Company's predecessors, Coldwell Banker Residential Brokerage Corporation from January 1, 1996 through May 31, 1996, and National Realty Trust from June 1, 1996 through December 31, 1996 and is not in conformity with generally accepted accounting principles because such combined results reflect different historical basis; however, the Company believes such information is appropriate and informative for certain comparative purposes. Such information does not include the pro forma effects of the Company's acquisitions or the offering. (c) Summary financial information for the combined year ended December 31, 1997 represents the combined historical results of National Realty Trust from January 1, 1997 through August 31, 1997 and the Company from September 1, 1997 through December 31, 1997 and is not in conformity with generally accepted accounting principles because such combined results reflect different historical basis; however, the Company believes such information is appropriate and informative for certain comparative purposes. Such information does not include the pro forma effects of the Company's acquisitions or the offering. (d) Summary financial information for the combined nine months ended September 30, 1997 represents the combined historical results of operations of National Realty Trust from January 1, 1997 through August 31, 1997 and the Company from September 1, 1997 through September 30, 1997 and is not in conformity with generally accepted accounting principles because such combined results reflect different historical basis; however, the Company believes such information is appropriate and informative for certain comparative purposes. Summary financial information for the nine months ended September 30, 1998 represents actual historical results of operations of the Company. (e) The pro forma statement of operations data for the combined year ended December 31, 1997 and the nine-month periods ended September 30, 1997 and 1998 give effect to the following transactions as if such transactions occurred on January 1, 1997: (1) the offering at an assumed offering price per share of $ , the mid-point of the range of expected initial public offering price per share, and the application of the estimated net proceeds therefrom; and (2) the acquisitions described under "Unaudited Pro Forma Condensed Consolidated Financial Information." The Company has also completed certain smaller acquisitions that did not have a material effect on the Company's results of operations and are not reflected in the pro forma data. The pro forma statement of operations data do not give effect to the interest income that would have been earned on non-utilized proceeds of the offering had such transaction occurred on January 1, 1997. (f) Weighted average shares outstanding (basic) represents the weighted average number of shares of Common Stock outstanding and is determined by measuring (1) the shares outstanding during each portion of the respective reporting period that shares of Common Stock have been outstanding relative to (2) the total amount of time in such reporting period. For purposes of the pro forma data, all shares issued in the offering are assumed to be outstanding for the entire period presented. Weighted average shares outstanding (diluted) represents the basic weighted average shares outstanding, adjusted to include the number of additional shares of Common Stock that would have been outstanding if the dilutive shares of Common Stock issuable upon conversion of the Company's convertible preferred stock and exercise of the Company's stock options had been issued. (g) Each real estate transaction has two sides, the selling side and the buying side. The Company may participate as broker on one or both sides of a transaction. (h) Represents the average sales price per home sold during the period presented and is calculated by dividing home sales volume by the aggregate number of homes sold. (i) Represents the aggregate purchase price of all homes sold in transactions in which the Company participated as broker. (j) Represents the average sales commission rate received by the Company per side in home sale transactions in which the Company participated as broker and is calculated by dividing (1) real estate sales commissions earned by the Company by (2) the product of the Company's total sides and the average sales price of homes sold by the Company. (k) Represents the aggregate number of listing contracts entered into by the Company with homeowners. 13 (l) The pro forma balance sheet data as of September 30, 1998 give effect to the following transactions as if they had occurred on September 30, 1998: (1) the offering at an assumed offering price per share of $ , the mid- point of the range of expected initial public offering price per share, and the application of the estimated net proceeds therefrom; (2) the receipt by the Company on February 10, 1999 of a $30 million payment from Cendant for certain services that the Company is obligated to perform under an Acquisition Services Agreement in connection with future acquisitions by the Company pursuant to the Acquisition Cooperation Agreement; and (3) the payment by the Company of $45 million of cash dividends on its Common Stock to Apollo prior to the closing of the offering. 14 RISK FACTORS You should consider carefully the following factors and other information in this prospectus before deciding to invest in shares of Common Stock. Limited Operating History While the Company's predecessors have conducted real estate brokerage operations for a significant period of time, NRT Incorporated has conducted operations only since August 1997, when it acquired the assets of National Realty Trust. Through December 31, 1998, the Company completed an additional 28 acquisitions of multi-office brokerages and 36 acquisitions of single-office brokerages, including 55 acquisitions in 1998. As a result, the Company and its acquired brokerages have a limited operating history on a combined basis upon which an evaluation of the Company and its prospects can be based. Recent Operating Losses The Company recorded operating losses of approximately $70.5 million for the four months ended December 31, 1997 and $6.3 million for the seven months ended December 31, 1996. In addition, on a combined pro forma as adjusted basis, the Company had an operating loss of $180.7 million for the year ended December 31, 1997. The Company's operating losses were due primarily to the large number of acquisitions completed by NRT and NRT's amortization of a significant portion of the purchase price for such acquisitions during the first year following completion of the acquisition. As a result, while the Company recorded operating income rather than operating loss for the nine months ended September 30, 1998, the Company may incur significant operating losses in the future. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Royalty Payments; Franchisee Status As a franchisee of the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) real estate franchise systems, the Company is required to pay royalties to the Franchisors. The Company paid royalties of $57.7 million for the year ended December 31, 1997 and $89.9 million for the nine months ended September 30, 1998. Under its franchise agreements with the Franchisors (the "Franchise Agreements"), following the closing of the offering, the Company will be required to pay certain additional royalties that were not payable during such periods. On an unaudited pro forma basis, if the Company had paid such additional royalties beginning on January 1, 1997, the Company would have been required to pay approximately $80.8 million for the year ended December 31, 1997 and $107.3 million for the nine-month period ended September 30, 1998. In addition, net income would have been reduced by approximately $13.7 million for the year ended December 31, 1997 and $10.3 million for the nine-month period ended September 30, 1998. Because the Company's royalties are based in large part on a percentage of the Company's gross commission income, the Company's strategy to increase profitability may conflict with the Franchisors' interest in increasing gross commission income. See "Certain Transactions--Franchise Agreements--Royalties." As a franchisee, the Company operates each of its offices under one of the Franchisors' brand names, but does not own any of the brand names under which it operates. The Franchisors have significant rights with respect to the use of the franchised service marks by the Company and the 15 conduct of the Company's business. Under the Franchise Agreements, the Company is required, among other things, to: . coordinate with the Franchisors significant matters relating to the Company's operations, including the opening and closing of offices; . contribute significant amounts to national advertising funds maintained by the Franchisors; . indemnify the Franchisors against losses arising out of its business; and . maintain certain standards and comply with certain guidelines relating to its operations which are applicable to all franchisees of the Franchisors' real estate franchise systems. The Franchise Agreements also restrict the Company's ability to incur indebtedness and pay dividends, and permit the Franchisors to prevent the Company's acquisition of one or more new offices if, among other things, such acquisition would have an adverse impact on existing franchisees of the Franchisors. In addition, subject to certain limitations, Cendant has the right to cause the Company to sell one or more of the brokerage offices that were acquired in connection with a brokerage acquisition. See "Certain Transactions--Franchise Agreements" and "--Acquisition Cooperation Agreement." Each of the Franchisors has the right to terminate the Company's franchise for certain violations of its Franchise Agreement, including certain bankruptcy or insolvency events, any transfer by the Company of any right or obligation under the Franchise Agreement, a change in control of the Company, the affiliation by NRT with another real estate franchisor that is not an affiliate of any of the Franchisors or the failure of the Company to promptly pay monies owed to the Franchisor under the stated terms of the Franchise Agreement. If a Franchisor terminates any of the Franchise Agreements due to (1) a change in control of the Company, (2) the affiliation by NRT with another real estate franchisor that is not an affiliate of any of the Franchisors, (3) a payment default, (4) the willful closure of a number of offices by the Company without the prior consent of Cendant in excess of the number of offices permitted to be closed under the Franchise Agreement, or (5) any other breach by the Company that has, or is reasonably expected to have, a material adverse effect on the relevant Franchisor's brand, the Company could be required to pay liquidated damages equal to the Franchisor's lost future royalties for the remaining term of the Franchise Agreement, up to 25 years, based on the average monthly royalty paid. In addition, the Company would be required to pay liquidated damages (calculated in the same manner) if it failed to operate one or more of its offices under a Franchisor's brand name or closed one or more of its offices in violation of the Franchise Agreement, except that the liquidated damages in respect of such violation would be limited to the offices involved. The Franchisors can seek damages and/or equitable relief for other violations of the Franchise Agreements. Any termination of the Franchise Agreements would have a material adverse effect on the Company. See "Certain Transactions-- Franchise Agreements." Cyclical Nature of Residential Real Estate Market; Impact of Seasonality In recent years, existing home sales have risen to their highest levels in history. The National Association of Realtors has cited lower mortgage interest rates, higher median family income and low unemployment as reasons for historically strong existing home sales. However, the residential real estate market tends to be cyclical and typically is affected by changes in general economic conditions which are beyond the Company's control. Periods of economic slowdown or recession, rising interest rates, decreasing home ownership rates or declining demand for real estate could have 16 a material adverse effect on the Company's business by causing a general decline in the number of home sales and/or prices which, in turn, would adversely affect revenues and profitability. A reduction in home sales could also lead to a reduction in the Company's revenues. In addition, the Company would be adversely affected if economic conditions do not continue to be favorable or an economic slowdown in the United States or elsewhere occurs. In this regard, the National Association of Realtors has forecasted that existing home sales will be lower in 1999 than in 1998, although higher than every other year on record. The residential real estate brokerage business is subject to seasonal fluctuations. Historically, revenues have been strongest in the second and third quarters of the calendar year. While the Company pays commissions to its sales associates only upon the sale of a home, many of the Company's other expenses, such as rent and personnel, are fixed and cannot be reduced during a seasonal slowdown. The Company may be required to borrow in order to fund its operations during seasonal slowdowns or at other times. The Franchise Agreements and the Company's bank facility restrict the ability of the Company to incur indebtedness. See "Certain Transactions--Franchise Agreements" and "Description of Certain Indebtedness." The Company's inability to finance its funding needs could have a material adverse effect on the Company. Geographic Concentration of the Company's Operations The Company owns real estate brokerage offices located in and around large metropolitan markets in the United States. Substantially all of the Company's offices operate within these markets. Local and regional economic conditions in these markets could differ materially from prevailing conditions in other parts of the country. While the Company believes that its offices are located in geographically diverse metropolitan markets of the United States, the Company has more offices and realizes more of its revenues in Northern and Southern California and the New York metropolitan area than any other regions of the country. In 1997, the Company realized approximately 71% of its gross commission income in California and the New York metropolitan area. A downturn in residential real estate markets or economic conditions in these regions could have a material adverse effect on the Company. Risks in Pursuing Acquisitions The Company has pursued an active acquisition strategy as a means of entering or strengthening its position within various metropolitan markets and integrating acquisitions within the Company's operations to achieve economies of scale. As a result, the Company has derived a substantial portion of its revenues and profits from acquired brokerages. The success of the Company's future acquisition strategy will continue to depend upon the Company's ability to find suitable acquisition candidates on favorable terms and finance and complete these transactions. The inability of the Company to complete such brokerage acquisitions could have a material adverse effect on the Company. The Company's ability to complete future acquisitions will depend in large part on Cendant's continued participation in such acquisitions pursuant to the Acquisition Cooperation Agreement. The Company cannot guarantee, however, that Cendant will participate in any future brokerage acquisition or that the Company will obtain alternative sources of financing if Cendant does not participate in any brokerage acquisition. In addition, Cendant and the Company may agree to pursue an acquisition on terms different from those set forth in the Acquisition Cooperation Agreement, in 17 which case the Company may be required to pay a greater share of the total purchase price than it otherwise would pay. If Cendant does not participate in an acquisition that the Company wishes to pursue, the Company would be required to pay the total purchase price for such acquisition, although the franchise royalty rate payable by the Company with respect to the acquired offices would be lower than the rate payable if Cendant were to participate in such acquisition. In addition, due to a change in the purchase price calculation applicable to Cendant's $1 billion commitment for future brokerage acquisitions under the Acquisition Cooperation Agreement, NRT is expected to pay a higher percentage of the total purchase price in such brokerage acquisitions than it historically has paid. As a result, the terms of Cendant's additional $1 billion commitment may adversely affect the Company's ability to find acquisition candidates on terms acceptable to the Company and to finance and complete such transactions. See "Certain Transactions--Acquisition Cooperation Agreement." The Franchise Agreements limit the ability of the Company to incur indebtedness and, in certain circumstances, open new offices. These restrictions may prevent the Company from completing acquisitions that it otherwise wishes to pursue. See "Certain Transactions--Franchise Agreements." The Company may finance future brokerage acquisitions with internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities (including payment of purchase price in stock), or a combination of these financing sources. Any issuance of Common Stock in connection with an acquisition could result in dilution to the Company's stockholders. The Company cannot guarantee that it will successfully complete any future acquisitions. In addition, upon completion of an acquisition, the Company will encounter various associated risks, including risks related to the possible inability of the Company to integrate the acquired business and accounting systems into the Company's operations, the possible defection of a significant number of sales associates, the increased amortization of intangibles, the diversion of management's attention and unanticipated problems or liabilities, which could have a material adverse effect on the Company. These risks may adversely affect the Company's ability to realize anticipated synergies from its acquisitions. Restrictions Imposed by Program Outsourcing and Marketing Agreements Under the Program Outsourcing Agreement with Cendant, the Company has appointed Cendant as its exclusive outsourcing agent to negotiate the terms of the Company's participation in purchasing and marketing programs. The Program Outsourcing Agreement restricts the ability of the Company to pursue alternative marketing arrangements and, in certain cases, product and service providers. Under the Program Outsourcing Agreement, Cendant negotiates with third party providers fee arrangements applicable to each program (which typically include fees payable by third parties to Cendant), as well as the other terms of such arrangements. In addition, Cendant may cancel or modify existing programs in its sole discretion. The inability of the Company to pursue alternative arrangements or the termination or modification of any program or fee arrangement could have a material adverse effect on the Company. The terms of the programs established under the Program Outsourcing Agreement may differ materially from the terms of programs that the Company could have obtained absent the Program Outsourcing Agreement. See "Certain Transactions-- Program Outsourcing Agreement." 18 Under the Marketing Agreement with Cendant Mortgage Corporation ("Cendant Mortgage"), a subsidiary of Cendant, the Company assists in the marketing of Cendant Mortgage's mortgage origination services. The Marketing Agreement restricts the ability of the Company to enter into alternative mortgage marketing arrangements with other parties. In addition, although Cendant Mortgage may terminate the Marketing Agreement at any time in its sole discretion, the Company may terminate the Marketing Agreement only for cause. NRT intends to enter into a joint venture with Cendant to provide mortgage services, at which time the Marketing Agreement will be terminated. See "Certain Transactions--Marketing Agreement." Risks of Expansion into New Markets As part of its business strategy, the Company from time to time evaluates opportunities involving businesses in which the Company has little or no prior operating experience, but which the Company believes to be a natural extension of its existing business. These opportunities include, for example, expanding the Company's commercial real estate operations and acquiring master franchise rights and/or operating brokerage offices in international markets. The Company cannot guarantee that it will enter any of such markets or, upon entry, that it will be able to compete successfully in such markets. In general, the entry of the Company into new businesses or markets would require the consent of the Franchisors. See "Certain Transactions--Franchise Agreements." In addition, the expansion of the Company's business into international markets would subject the Company to certain additional risks associated with economic, political and governmental conditions in the countries in which such business is conducted, including currency exchange rate fluctuations, trade barriers, exchange controls, national labor strikes, increased taxes on earnings, and laws and policies governing operations of foreign-based companies. Such risks could have a material adverse effect on the Company. Dependence on Key Employees and Sales Associates The ability of the Company to continue to expand its business largely depends on the skills, experience and efforts of its key employees and sales associates. The loss of the services of the Company's key employees or a significant number of sales associates could have a material adverse effect on the Company's growth and development. In 1997, the Company experienced turnover of sales associates who collectively generated approximately 10% of the Company's gross commission income. The Company believes this level of turnover is consistent with the industry average. The Company generally replaces departing sales associates through the recruitment of new sales associates. Competitive Nature of Industry The residential real estate brokerage industry is highly competitive, particularly in the densely populated metropolitan markets in which the Company competes. In addition, the industry has relatively low barriers to entry for new participants, including participants pursuing non-traditional methods of marketing real estate, such as internet-based listing services. The Company competes primarily with (1) franchisees of local and regional real estate franchisors, (2) franchisees of the Franchisors and other national franchisors, such as RE/MAX, Prudential Real Estate and Better Homes and Gardens, (3) regional independent real estate organizations, such as Weichert, Realtors 19 Long & Foster and Fred Sands Realtors, and (4) smaller niche companies competing in local areas. Companies compete for sales and marketing business primarily on the basis of services offered, reputation, personal contacts and, to a lesser extent, brokerage commissions. Compliance with Government Regulation The Company's business activities are subject to substantial regulation by governmental authorities. The jurisdictions in which the Company does business have established requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses. In addition, the Real Estate Settlement Procedures Act and comparable state statutes impose certain restrictions on the manner in which the Company may conduct its business. There is a risk that the Company could be adversely affected by current laws, regulations or interpretations or that more restrictive laws, regulations or interpretations will be adopted in the future that could make compliance more difficult or expensive. In addition, regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend the Company from carrying on some or all of its activities or otherwise penalize the Company in a given jurisdiction if its practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. The Company's failure to comply with any of these requirements or interpretations could have a material adverse effect on the Company's operations and financial performance. See "Business--Government Regulation." Year 2000 Compliance Many existing computer programs will be unable to properly recognize dates in the year 2000 and beyond. In the course of executing its strategy, both internally and through acquisitions, the Company determined that its existing systems did not contain the features and capacity necessary to implement its business plan. Accordingly, the Company is in the process of completing the installation of a new financial accounting and reporting system. The Company anticipates that installation will be substantially completed by the first quarter of 1999 and will not have a material adverse effect on the Company's financial condition or results of operations. The new system is year 2000 compliant and therefore will enable data from and after January 1, 2000 to be recognized and processed correctly. In connection with each of the Company's acquisitions, NRT evaluates the systems of the acquired company to determine whether such systems are year 2000 compliant. If an acquired company's systems are not year 2000 compliant, the Company will prepare a plan to bring the systems into compliance. While the Company cannot guarantee that all acquired companies will be year 2000 compliant on a timely basis, the cost of bringing such companies into compliance is not expected to have a material adverse effect on the Company's financial condition or results of operations. The Company is in the process of contacting third party vendors and service providers on whom it relies to confirm that their systems will be converted in a timely fashion to ensure year 2000 compliance. However, the Company cannot guarantee that the systems of such companies will be converted in a timely fashion, or that any such failure to convert by another company would not have 20 an adverse effect on the Company's systems. Furthermore, the Company cannot guarantee that the installation of the Company's system will be completed on a timely basis, that it will be fully effective or that year 2000 issues will not have a material adverse effect on the Company. Restrictions Imposed by the Terms of the Company's Indebtedness The Company has entered into a $50 million bank credit facility, the terms and conditions of which restrict the Company's ability, among other things, to incur debt, pay dividends and other distributions, create liens, sell assets and make certain investments. The terms of the bank credit facility also require the Company to maintain specified financial ratios. Such provisions will limit the Company's ability to obtain additional funds for its operations or future acquisitions and pay dividends, which could have a material adverse effect on the Company and the rights of holders of the Common Stock. The Company will seek to replace its bank credit facility with a new facility providing for approximately $150 million of borrowing capacity, which may have terms that are different from or more restrictive than those of the current facility. See "Description of Certain Indebtedness." No Public Market for Common Stock; Determination of Public Offering Price Prior to the offering, there has not been a public market for the Common Stock. Although the Company intends to apply to have the Common Stock approved for listing on the New York Stock Exchange, the Company does not know whether its listing application will be approved or, if it is approved, whether a liquid trading market for the Common Stock will develop. Investors may not be able to resell their shares at or above the initial public offering price. The initial public offering price for the shares of Common Stock will be determined through negotiations among the Company, Apollo, Cendant and representatives of the underwriters, and may not be indicative of the market price of the Common Stock after the offering. See "Underwriting." Immediate and Substantial Dilution to New Investors New investors will experience immediate dilution of $ per share in the net tangible book value per share of the Common Stock from the initial public offering price. See "Dilution." No Dividend Payments are Expected The Company does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. Any payment of future dividends and the amounts thereof will depend upon the Company's earnings, financial requirements and other factors deemed relevant by the Company's Board of Directors. In addition, future dividends will be subject to the terms of the Company's bank credit facility, which restricts the Company's ability to pay dividends on its Common Stock, and the Franchise Agreements, which prevent the Company from incurring indebtedness to pay dividends and prohibit the payment of certain extraordinary dividends unless certain financial ratio tests are satisfied. See "Certain Transactions--Franchise Agreements" and "Description of Certain Indebtedness." The terms of the Company's preferred stock also restrict the ability of the Company to pay dividends on its Common Stock in certain circumstances. See "Description of Capital Stock--Preferred Stock." The Company has declared a total of $45 million of cash dividends on its Common Stock to Apollo, which will be paid prior to the closing of the offering. Past dividends are not indicative of the dividends, if any, that may be paid by the Company in the future. See "Dividend Policy." 21 Relationship with Apollo and Cendant The ownership of the Company's capital stock by Apollo and Cendant, the ownership of Cendant's common stock or options to purchase Cendant's common stock by certain directors or officers of the Company and the service by certain directors and officers of the Company as directors or officers of both the Company and Apollo or Cendant could create conflicts of interest when those directors and officers are faced with decisions that could have different implications for the Company and Apollo or Cendant. Such decisions could impact potential acquisitions of businesses, the issuance of additional securities, the entry into or modification of contractual or other arrangements, the election of new or additional directors, the payment of dividends by the Company and other matters. The Company has not instituted any formal plan or arrangement to address potential conflicts of interest that may arise among the Company, Apollo, Cendant and their affiliates. However, under Delaware law, officers and directors of the Company owe fiduciary duties to the Company and its stockholders. See "Certain Transactions" and "Principal and Selling Stockholders." In addition, the Company has entered into various agreements with Cendant, including the Franchise Agreements, the Stockholders Agreement (to which Apollo is also a party), the Acquisition Cooperation Agreement, the Program Outsourcing Agreement, the Marketing Agreement, lease agreements and an information services agreement. Each of these agreements was entered into when Apollo and Cendant owned all of the outstanding capital stock of the Company. The Company and Cendant also intend to implement a joint venture that will provide mortgage services, at which time the Marketing Agreement will be terminated. The terms of such agreements may be materially different from the terms that would have been obtained absent such ownership. See "Certain Transactions." Following the discovery of accounting irregularities in the former CUC International Inc. business units of Cendant, lawsuits have been filed against Cendant, its predecessor, HFS Incorporated, certain of their current and former officers and directors and others, including Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, asserting various claims under the federal securities laws and state common and statutory law. If, as a result of these proceedings, Cendant is unable to perform its obligations under its agreements with the Company, including its obligations under the Acquisition Cooperation Agreement, its failure to perform could have a material adverse effect on the Company's operations and financial performance, including the Company's ability to implement its growth strategy. See "Certain Transactions." Control of NRT by Apollo and Cendant Immediately following the offering, after giving effect to the conversion of the Convertible Preferred Stock held by Cendant, Apollo will beneficially own % of the Common Stock ( % if the underwriters' over-allotment option is exercised in full) and Cendant will beneficially own % of the outstanding Common Stock ( % if the underwriters' over-allotment option is exercised in full). Apollo and Cendant, acting together, will have the power to elect the entire Board of Directors of the Company and approve other matters submitted to a vote of the Company's stockholders, including extraordinary corporate matters. In addition, pursuant to the Stockholders Agreement, the Board of Directors will consist of twelve directors, including five directors designated by Apollo, five directors designated by Cendant and two directors jointly designated by 22 Apollo and Cendant. Apollo and Cendant have agreed to vote all of their shares in favor of the other's director designees. As a result of restrictions imposed by the Franchise Agreements, the voting agreement of Apollo and Cendant under the Stockholders Agreement and the exclusivity provisions of the Program Outsourcing Agreement and the Marketing Agreement, Apollo and Cendant will likely continue to exercise significant influence over the Company and its operations for the foreseeable future. See "Management--Directors and Executive Officers," "Principal and Selling Stockholders," "Certain Transactions-- Stockholders Agreement," "--Program Outsourcing Agreement" and "--Marketing Agreement." Shares Eligible for Future Sale by Apollo and/or Cendant Subject to applicable federal securities laws, the transfer restrictions of the Stockholders Agreement and the restrictions described below, Apollo and Cendant may sell any or all of the shares of Common Stock (or, in the case of Cendant, the Company's convertible preferred stock) owned by them. In addition, under the Stockholders Agreement, Apollo and Cendant have certain registration rights with respect to the shares of Common Stock and convertible preferred stock owned by them, which would facilitate any future disposition. See "Certain Transactions--Stockholders Agreement--Registration Rights." The Company does not know what effect future sales of Common Stock, or the availability of Common Stock for future sales, will have on the market price of the Common Stock prevailing from time to time. Sales in the public market of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Apollo, Cendant, the Company and certain executive officers and directors of the Company have agreed with the underwriters, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of this prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, as representative of the underwriters. The Company cannot predict the period of time during which Apollo and Cendant will maintain their ownership of Common Stock following the offering. See "Shares Eligible for Future Sale." Certain Anti-Takeover Effects Following the offering, the Company's certificate of incorporation and by- laws will contain certain provisions which could delay or impede the removal of incumbent directors or discourage a third party from attempting to acquire control of the Company. Such provisions could limit the price that certain investors might be willing to pay for shares of the Common Stock. See "Description of Capital Stock--Anti-Takeover Provisions." Similarly, the Stockholders Agreement limits Apollo's ability to transfer its shares of Common Stock to certain persons that Cendant believes may have an intent to acquire or influence control of the Company. The Franchise Agreements include as an event of default the acquisition by any person or group (other than Apollo and Cendant) of over 30% of the outstanding Common Stock and provide that liquidated damages would be payable if such beneficial ownership were acquired. See "Certain Transactions--Stockholders Agreement" and "--Franchise Agreements." 23 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein under "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" constitute forward-looking statements, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import. Such statements relate to, among other things, (1) the Company's strategy, (2) the Company's acquisition plans and expectation of benefits from prior or future acquisitions, (3) factors affecting the markets in which the Company operates and (4) cross-marketing opportunities with Cendant and other third party product and service providers. Because such statements involve risks and uncertainties, actual results may differ materially from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed under "Risk Factors" in this prospectus. The forward-looking statements are made as of the date of this prospectus, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. 24 USE OF PROCEEDS The net proceeds to the Company from the offering, after deducting applicable underwriting discounts and commissions and estimated offering expenses payable by the Company, are estimated to be approximately $140.3 million. The Company expects that (1) approximately $84.5 million of the net proceeds from the offering will be used to redeem all of the outstanding shares of the Company's 18.00% Series C Cumulative Junior Redeemable Preferred Stock (the "Junior Preferred Stock") held by Apollo, including a redemption premium of $12.3 million, and (2) the remainder of the net proceeds of the offering to the Company will be used for general corporate purposes, which may include acquisitions. The Company will not receive any proceeds from the sale of shares by Apollo and Cendant. DIVIDEND POLICY The Company currently intends to retain all of its earnings for use in the operation and expansion of its business and does not anticipate paying cash dividends to its common stockholders in the foreseeable future. The timing, amount and form of dividends, if any, will be at the discretion of the Board of Directors and will depend, among other things, on the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. The Company's ability to pay dividends is restricted under the Franchise Agreements, the terms of its preferred stock and the Company's bank credit facility. See "Risk Factors--No Dividend Payments are Expected" "--Restrictions Imposed by the Terms of the Company's Indebtedness," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Description of Capital Stock-- Preferred Stock," "Description of Certain Indebtedness" and "Certain Transactions--Franchise Agreements." The Company has paid dividends to the holders of the Company's 9.00% Series A Cumulative Senior Redeemable Preferred Stock (the "Senior Preferred Stock"), 5.00% Series B Cumulative Convertible Redeemable Preferred Stock (the "Convertible Preferred Stock") and Junior Preferred Stock in accordance with the terms thereof since issuance. See "Description of Capital Stock--Preferred Stock." The Company intends to use a portion of the proceeds of the offering to redeem all outstanding shares of the Junior Preferred Stock and intends to continue to pay regularly scheduled dividends on the Senior Preferred Stock and Convertible Preferred Stock when due. The Company has declared a total of $45 million of cash dividends on its Common Stock to Apollo, which will be paid prior to the closing of the offering. Past dividends are not indicative of the dividends, if any, that may be paid by the Company in the future. 25 DILUTION At September 30, 1998, the net tangible book value of the Company was approximately $32.7 million, or $ per share. "Net tangible book value" is defined as the book value of all assets of the Company, less (1) all liabilities and (2) intangible assets, which consist primarily of goodwill and real estate listing contracts. Without taking into account any changes in net tangible book value after September 30, 1998, other than to give effect to the offering and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Common Stock as of September 30, 1998 would have been approximately $47.2 million, or $ per share. The following table gives effect to the offering as if it had occurred on September 30, 1998 at an assumed initial public offering price of $ and illustrates the immediate increase in net tangible book value of $ per share to the Company's existing stockholders and an immediate dilution of $ per share to new investors: Public offering price per share.................................... $ Net tangible book value per share as of September 30, 1998......... $ Increase in net tangible book value per share attributable to the offering.......................................................... --- Pro forma net tangible book value per share as of September 30, 1998, after giving effect to the offering......................... $ --- Immediate dilution per share to new investors...................... $ ===
The calculation in the table above includes shares issuable upon conversion of the Convertible Preferred Stock held by Cendant, but excludes shares reserved for issuance under the Company's 1997 Equity Participation Plan. See "Management--Equity Participation Plan." In addition, the above calculations do not give effect to dividends paid by the Company on its Common Stock prior to the closing of the offering. See "Dividend Policy." The following table sets forth as of September 30, 1998, on a pro forma basis after giving effect to the offering, the respective positions of existing common stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid therefor and the average price paid per share, at an assumed initial public offering price of $ per share, assuming no participation by Cendant in the offering.
Shares Purchased Total Consideration Average ----------------- ----------------------- Price per Number Percentage Amount Percentage Share ------ ---------- --------- ----------- --------- New investors........... % $ % $ Existing common stockholders........... --- --- --------- --------- --- Total................. % $ % $ === === ========= ========= ===
26 CAPITALIZATION The following table sets forth the Company's cash and cash equivalents, short-term debt and capitalization as of September 30, 1998 (1) on an actual basis and (2) on a pro forma basis after giving effect to the offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with the Company's consolidated financial statements and the notes thereto, "Unaudited Pro Forma Condensed Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of September 30, 1998 ------------------- Actual Pro Forma -------- --------- (in thousands) Cash and cash equivalents(a)............................... $ 64,045 $108,473 ======== ======== Restricted cash(b)......................................... $ 68,157 $ 68,157 ======== ======== Short-term debt: Cash secured bank loans(b)............................... $ 68,157 $ 68,157 Other.................................................... 11,238 11,238 -------- -------- Total short-term debt.................................. $ 79,395 $ 79,395 ======== ======== Long-term debt(c).......................................... $ 13,753 $ 13,753 Redeemable preferred stock, $0.01 par value, 405,000 shares authorized: 9.00% Series A Cumulative Senior Redeemable Preferred Stock, 157,591 shares issued and outstanding............ 157,591 157,591 5.00% Series B Cumulative Convertible Redeemable Preferred Stock, 24,000 shares issued and outstanding... 24,000 24,000 18.00% Series C Cumulative Junior Redeemable Preferred Stock, net, 68,510 shares issued and outstanding (redemption value of $80,822)........................... 61,284 -- -------- -------- Total redeemable preferred stock....................... 242,875 181,591 -------- -------- Stockholders' equity (deficit): Common Stock, $0.01 par value, 50,000,000 shares authorized; 10,000,000 shares issued and outstanding (actual); shares issued and outstanding (pro forma)(d)............................................... 100 100 Additional paid-in capital............................... -- 120,712 Retained earnings (accumulated deficit)(a)............... (50,723) (95,723) -------- -------- Total stockholders' equity............................. (50,623) 25,089 -------- -------- Total capitalization................................... $206,005 $220,433 ======== ========
- --------------------- (a) Pro forma balance gives effect to (1) the offering and the application of the estimated net proceeds therefrom, (2) the payment of $45 million of cash dividends by the Company on its Common Stock to Apollo prior to the offering and (3) the receipt of a $30 million payment on February 10, 1999 from Cendant for certain services to be performed by the Company under the Acquisition Services Agreement in connection with future acquisitions by the Company pursuant to the Acquisition Cooperation Agreement. See "Certain Transactions--Acquisition Services Agreement." (b) Restricted cash, which represents proceeds from cash secured bank loans, is invested in cash equivalents and cannot be used for purposes other than to repay the cash secured bank loans. (c) The Company entered into a $50 million bank credit facility on January 7, 1999 and will seek to replace its existing facility with a new facility providing for approximately $150 million of borrowing capacity. See "Description of Certain Indebtedness." (d) Excludes 1.34 million shares of Common Stock reserved for issuance under the Company's 1997 Equity Participation Plan. See "Management--Equity Participation Plan." 27 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated financial information of the Company presents the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1997 and the nine-month periods ended September 30, 1997 and 1998 and the unaudited pro forma condensed consolidated balance sheet as of September 30, 1998. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1997 and the nine-month periods ended September 30, 1997 and 1998 give effect to the following transactions as if such transactions occurred on January 1, 1997: (1) the offering at an assumed offering price per share of $ , the mid-point of the expected range of initial public offering price per share, and the application of the estimated net proceeds therefrom; and (2) the following acquisitions (the "Acquisitions"): (a) Del Monte Realty Company on February 10, 1997, (b) Contempo Realty, Inc. on March 1, 1997, (c) Marie Powell & Associates, Inc. on July 24, 1997, (d) Cornish & Carey Residential, Inc. on September 10, 1997, (e) Jon Douglas Real Estate Services Group, Inc. on September 11, 1997, (f) Barbara Sue Seal Properties, Inc. on October 10, 1997, (g) the Residential Division of West Shell, Inc. on October 16, 1997, (h) John M. Grubb Real Estate Corporation on October 16, 1997, (i) Seville Properties, Inc. on October 17, 1997, (j) Metro Real Estate Services, Inc. on October 29, 1997, (k) Continental Development Corp. on November 8, 1997, (l) Waterside Property Sales, Inc. on January 6, 1998, (m) Polley, Polley & Madsen, Inc. on January 7, 1998, (n) TAM-BAY Realty, Inc. on January 14, 1998, (o) Gimelstob Realty, Inc. on January 15, 1998, (p) Joseph J. Murphy Realty, Inc. on January 21, 1998, (q) Buckhead Brokers of Georgia, Inc. on January 26, 1998, (r) the Burnet Financial Group on February 13, 1998, (s) O'Conor, Piper & Flynn, Inc. on February 23, 1998, (t) Coker, Ewing, Cook & Cook on August 3, 1998, (u) Coldwell Banker 1st American Realtors, L.L.C. on August 20, 1998, (v) Higgins & Heath, Inc. on September 4, 1998, (w) Moore and Company on September 30, 1998, (x) Premier Van Schaak, Inc. on September 30, 1998, (y) Hunneman Real Estate Corporation on October 14, 1998 and (z) Pardoe & Graham Real Estate, Inc., Pardoe Real Estate, Inc. and Graham Realty, Inc. on December 8, 1998. The pro forma statement of operations data do not give effect to the interest income that would have been earned on non-utilized proceeds of the offering or the initial capitalization of the Company had such transactions occurred on January 1, 1997. The unaudited pro forma condensed consolidated balance sheet as of September 30, 1998 gives effect to the following transactions as if such transactions had occurred on September 30, 1998: (1) the offering and the application of the estimated net proceeds therefrom; (2) the receipt by the Company on February 10, 1999 of a $30 million payment from Cendant for certain services that the Company is obligated to perform under the Acquisition Services Agreement in connection with future acquisitions by the Company pursuant to the Acquisition Cooperation Agreement; and (3) the payment by the Company of $45 million of cash dividends prior to the closing of the offering. The Acquisitions have been accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed have been recorded at their estimated fair values, which are subject to further refinement, including appraisals and other analyses. Management does not expect that the final allocations of the purchase prices for the above acquisitions will differ materially from the preliminary allocations. The Company has also completed certain smaller transactions that did not have a material effect on the Company's financial condition or results of operations and are not reflected in the unaudited pro forma condensed consolidated statements of operations. 28 The pro forma adjustments reflect the Company's determination of all adjustments necessary to present fairly the Company's pro forma financial position and results of operations and are based upon available information and certain assumptions considered reasonable under the circumstances. The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the financial position or the results of operations of the Company had the transactions referred to above occurred on the dates specified, nor is it necessarily indicative of the financial condition or results of operations which may be expected to exist in the future. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements of the Company, its predecessors and certain of the acquired companies, and the notes thereto, included elsewhere in this prospectus. The accompanying unaudited pro forma condensed consolidated statements of operations also do not reflect cost savings that have resulted or are expected to result from the implementation of plans to restructure and consolidate operations of the aforementioned acquired companies. The synergies and related cost savings are more fully described in Note (i) to the unaudited pro forma condensed consolidated statements of operations. 29 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 1997 (in thousands, except per share information)
NRT Predecessor Incorporated ------------ ------------ Pro Forma Eight Months Four Months Before Pro Forma Ended Ended Pro Forma Offering Offering Pro Forma August 31, December 31, Acquisition Related Related As 1997 1997 Combined Acquisitions(a) Adjustments Adjustments Adjustment Adjusted ------------ ------------ ---------- --------------- ----------- ----------- ---------- ---------- REVENUES: Real estate commissions..... $570,150 $446,134 $1,016,284 $ 991,993 $ (1,859)(d) $2,006,418 $2,006,418 Other revenues... 14,636 17,380 32,016 83,296 115,312 115,312 -------- -------- ---------- --------- -------- ---------- -------- ---------- Total revenues.. 584,786 463,514 1,048,300 1,075,289 (1,859) 2,121,730 2,121,730 -------- -------- ---------- --------- -------- ---------- -------- ---------- EXPENSES: Commissions and royalties....... 393,235 330,169 723,404 693,125 (1,311)(d) 1,476,071 $ 23,125 (e) 1,499,196 60,853 (e) Selling, general and administrative(i).. 168,863 124,785 293,648 352,028 645,676 645,676 Amortization of goodwill........ 1,162 637 1,799 3,889 (f) 5,688 5,688 Acquisition related costs... 10,735 78,462 89,197 46,107 (f) 151,822 151,822 16,518 (g) -------- -------- ---------- --------- -------- ---------- -------- ---------- Operating income (loss)......... 10,791 (70,539) (59,748) 30,136 (127,915) (157,527) (23,125) (180,652) Interest expense, net............. 117 (2,843) (2,726) 3,075 349 349 Provision (benefit) for income taxes.... 4,432 (25,453) (21,021) 10,960 (h) (51,805)(h) (61,866) (9,366) (71,232) -------- -------- ---------- --------- -------- ---------- -------- ---------- Net income (loss)(i)...... $ 6,242 $(42,243) $ (36,001) $ 16,101 $(76,110) $ (96,010) $(13,759) $ (109,769) ======== ======== ========== ========= ======== ========== ======== ========== Per share information: Income (loss) per share: Basic........... Diluted......... Weighted average shares outstanding: Basic........... Diluted.........
See notes to unaudited pro forma condensed consolidated statements of operations. 30 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Nine-Month Period Ended September 30, 1997 (in thousands, except per share information)
NRT Predecessor Incorporated ------------ ------------- Pro Forma Eight Months One Month Before Pro Forma Ended Ended Pro Forma Offering Offering August 31, September 30, Acquisition Related Related 1997 1997 Combined Acquisitions(b) Adjustments Adjustments Adjustment ------------ ------------- --------- --------------- ----------- ----------- ---------- REVENUES: Real estate commissions.. $570,150 $100,592 $670,742 $834,950 $ (547)(d) $1,505,145 Other revenues.. 14,636 2,428 17,064 66,140 83,204 -------- -------- --------- -------- --------- ---------- -------- Total revenues...... 584,786 103,020 687,806 901,090 (547) 1,588,349 EXPENSES: Commissions and royalties...... 393,235 73,346 466,581 579,380 (379)(d) 1,097,011 $ 17,344 (e) 51,430 (e) Selling, general and administrative(i).. 168,863 26,750 195,613 283,075 478,688 Amortization of goodwill....... 1,162 160 1,322 3,086 (f) 4,408 Acquisition related costs.. 10,735 32,264 42,999 89,783 (f) 151,823 19,040 (g) -------- -------- --------- -------- --------- ---------- -------- Operating income (loss)........ 10,791 (29,500) (18,709) 38,635 (163,507) (143,581) (17,344) Interest expense, net... 117 (757) (640) 4,992 4,352 Provision (benefit) for income taxes... 4,432 (11,656) (7,224) 13,625 (h) (66,220) (59,819) (7,024)(h) -------- -------- --------- -------- --------- ---------- -------- Net income (loss)(i).. $ 6,242 $(17,087) $ (10,845) $ 20,018 $ (97,287) $ (88,114) $(10,320) ======== ======== ========= ======== ========= ========== ======== Per share information: Income (loss) per share: Basic.......... Diluted........ Weighted average shares outstanding: Basic.......... Diluted........ Pro Forma As Adjusted ----------- REVENUES: Real estate commissions.. $1,505,145 Other revenues.. 83,204 ----------- Total revenues...... 1,588,349 EXPENSES: Commissions and royalties...... 1,114,356 Selling, general and administrative(i).. 478,688 Amortization of goodwill....... 4,408 Acquisition related costs.. 151,822 ----------- Operating income (loss)........ (160,925) Interest expense, net... 4,352 Provision (benefit) for income taxes... (66,843) ----------- Net income (loss)(i).. $ (98,434) =========== Per share information: Income (loss) per share: Basic.......... Diluted........ Weighted average shares outstanding: Basic.......... Diluted........
See notes to unaudited pro forma condensed consolidated statements of operations. 31 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Nine-Month Period Ended September 30, 1998 (in thousands, except per share information)
Pro Forma Before Pro Forma Pro Forma Offering Offering Pro Forma Acquisition Related Related As Historical Acquisitions(c) Adjustments Adjustments Adjustments Adjusted ---------- --------------- ----------- ----------- ----------- ---------- REVENUES: Real estate commissions............ $1,488,932 $262,968 $11,369 (d) $1,763,269 $1,763,269 Other revenues.......... 77,017 34,830 111,847 111,847 ---------- -------- -------- ---------- -------- ---------- Total revenues......... 1,565,949 297,798 11,369 1,875,116 1,875,116 EXPENSES: Commissions and royalties............. 1,091,039 207,469 8,709 (d) 1,322,995 $ 17,344 (e) 1,340,339 15,778 (e) Selling, general and administrative(i)...... 406,161 68,392 474,553 474,553 Amortization of goodwill............... 3,220 346 (f) 3,566 3,566 Acquisition related costs.................. 48,225 (30,915)(f) 1,255 1,255 (16,055)(g) ---------- -------- -------- ---------- -------- ---------- Operating income (loss)................ 17,304 21,937 33,506 72,747 (17,344) 55,403 Interest expense, net... (2,068) 644 (1,424) (1,424) Provision (benefit) for income taxes........... 8,444 8,624 (h) 13,570 (h) 30,638 (7,025) 23,613 ---------- -------- -------- ---------- -------- ---------- Net income (loss)(i)... $ 10,928 $ 12,669 $ 19,936 $ 43,533 $(10,319)(h) $ 33,214 ========== ======== ======== ========== ======== ========== Per share information: Income (loss) per share: Basic.................. Diluted................ Weighted average shares outstanding: Basic.................. Diluted................
See notes to unaudited pro forma condensed consolidated statements of operations. 32 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (a) Reflects the historical operations of companies acquired during 1997 from January 1, 1997 through the respective dates of acquisition, combined with the 1997 historical operations of companies acquired during 1998, exclusive of income taxes that were reflected in the financial statements of the acquired entities. (b) Reflects the historical operations of companies acquired during 1997 and 1998 from January 1, 1997 through the earlier of (1) the respective dates of acquisition or (2) September 30, 1997, exclusive of income taxes that were reflected in the financial statements of the acquired entities. (c) Reflects the historical operations of companies acquired during 1998 from January 1, 1998 through the earlier of (1) the respective dates of acquisition, or (2) September 30, 1998, exclusive of income taxes that were reflected in the financial statements of the acquired entities. (d) Reflects adjustments to recognize revenue and the related commission and royalty expense upon the closing of a real estate transaction for those acquired companies that recognized revenue on a different basis prior to being acquired. (e) Pursuant to the Franchise Agreements, the Company is required to pay royalties to the Franchisors. The pro forma adjustments give effect to such payments as if the Franchise Agreements were entered into on January 1, 1997 and are summarized as follows (in thousands):
Nine Months Ended Year Ended ------------------------------------- December 31, 1997 September 30, 1997 September 30, 1998 ----------------- ------------------ ------------------ Acquisition adjustments: Royalties(1).......... $59,520 $50,097 $15,778 Royalties(2).......... 1,333 1,333 -- ------- ------- ------- $60,853 $51,430 $15,778 ======= ======= ======= Offering related adjust- ment: Royalties(3).......... $23,125 $17,344 $17,344 ======= ======= =======
---------------- (1) Under the Franchise Agreements, the Company is required to pay royalties to the Franchisors based upon a percentage of the Company's gross commission income (6% for all of the Company's offices, other than CENTURY 21(R) offices in Northern California for which the Company currently pays 4.89%). See "Certain Transactions--Franchise Agreements." Concurrent with each of the Company's acquisitions, the acquired brokerages are franchised under one of the Franchisors' franchised brand names and are required to pay the applicable royalties. The pro forma adjustment applies the applicable percentage to the acquired companies' historical gross commission income from January 1, 1997 through the respective dates of acquisition. (2) Since the Company's acquisition of Jon Douglas Real Estate Services Group, Inc. in September 1997, the Company has been required to pay to the Franchisors an additional royalty of $166,667 per month. The pro forma adjustment applies this additional monthly royalty to all months prior to such date during the periods presented. (3) Following the closing of the offering, the Company will be required to pay the Franchisors additional monthly royalties of (x) approximately % of the Company's gross commission income, up to an estimated annual maximum of $21.3 million and (y) $156,250. The pro forma adjustment applies the additional royalties to all months during the periods presented. In addition to the royalties described above, the Company has also been required to pay to the Franchisors since January 1999, an additional monthly royalty that has averaged $ per month for the first three months of 1999 (which royalty will be replaced by the royalty set forth in clause (3) above upon closing of the offering). The Company will also be required to pay the Franchisors 33 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (Continued) 0.15% of the Company's total revenue per quarter for each quarter (up to a total of 20 quarters) in which the Company's EBITDA over the preceding twelve- month period exceeds $225 million. The pro forma condensed consolidated statements of operations do not give effect to such additional royalties. See "Certain Transactions--Franchise Agreements--Royalties." (f) The Company's intangibles are comprised principally of pending real estate sales contracts, real estate listing contracts and the excess of cost over fair value of net assets acquired. Pending real estate sales contracts and real estate listing contracts are recorded at the time of acquisition and are amortized on a straight-line basis over a three-month and six-month benefit period, respectively. The cumulative estimated fair value of the acquired companies' pending real estate sales contracts and real estate listing contracts at the time of acquisition was approximately $90.8 million and $25.2 million, respectively. The fair value ascribed to pending real estate sales contracts is determined based on historical rates at which such real estate sales contracts close. The fair value ascribed to real estate listing contracts is determined based on historical rates at which such real estate listing contracts result in closed real estate transactions. The excess of cost over fair value of net assets acquired is estimated at approximately $181.0 million and is determined to have a benefit period of forty years, which is based on the acquired companies' historical growth and regional strength and the market share of their operations. The pro forma adjustment for amortization of pending real estate sales contracts, real estate listing contracts and the excess of cost over fair value of net assets acquired is comprised as follows (in thousands):
Nine Months Ended Year Ended ------------------------------------- December 31, 1997 September 30, 1997 September 30, 1998 ----------------- ------------------ ------------------ Amortization of pending real estate contracts.. $30,694 $67,666 $(19,292) Amortization of real estate listing contracts.............. 15,413 22,117 (11,623) ------- ------- -------- Amortization of intangibles, excluding goodwill............... $46,107 $89,783 $(30,915) ======= ======= ======== Amortization of excess of cost over fair value of net assets acquired............... $ 3,889 $ 3,086 $ 346 ======= ======= ========
(g) In connection with the Company's acquisitions, conversion costs, related primarily to signage changes, name change advertising and other transitional costs, are incurred and expensed evenly over a short period of time after the date of acquisition. The pro forma adjustments reflect the incurrence of such costs as if all acquisitions had occurred on January 1, 1997 and that related conversion costs would have been incurred shortly thereafter. (h) The tax rate applied to the pro forma adjustments consists of the federal statutory rate, adjusted for state taxes net of federal benefit. The adjustment applies a provision for taxes for acquired company operations, the majority of which operated as S corporations. 34 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (Continued) (i) In connection with the Acquisitions, the Company developed business plans to restructure and consolidate certain of the respective acquired companies' operations, which actions are resulting in the elimination of redundant selling, general and administrative costs subsequent to the Acquisitions. Restructuring and consolidation plans included the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. Accordingly, certain selling, general and administrative expenses will not be incurred in the future. The estimated costs that the Company believes are being eliminated are presented below. These savings were not reflected in the pro forma condensed consolidated statements of operations.
Nine Months Ended Year Ended ------------------------------------- December 31, 1997 September 30, 1997 September 30, 1998 ----------------- ------------------ ------------------ (in thousands) Elimination of redundant costs: Payroll and related..... $ 24,397 $ 18,298 $ 2,960 Occupancy............... 17,130 12,848 2,236 Professional............ 5,044 3,783 689 Other................... 15,236 11,427 1,181 --------- --------- ------- Total................. $ 61,807 $ 46,356 $ 7,066 ========= ========= ======= The impact on pro forma net income and net income per share of eliminating these redundant selling, general and administrative costs is as follows: Nine Months Ended Year Ended ------------------------------------- December 31, 1997 September 30, 1997 September 30, 1998 ----------------- ------------------ ------------------ (in thousands, except per share information) Income (loss) before taxes, pro forma as adjusted before elimi- nation of redundant costs.................. $(181,001) $(165,277) $56,827 Elimination of redundant selling, general and administrative costs... 61,807 46,356 7,066 --------- --------- ------- Income (loss) before taxes, as adjusted..... (119,194) (118,921) 63,893 Provision (benefit) for income taxes........... (46,200) (48,068) 26,774 --------- --------- ------- Net income (loss) as ad- justed................. $ (72,994) $ (70,853) $37,119 ========= ========= ======= Per share information: Income (loss) per share: Basic................. Diluted...............
35 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1998 (in thousands)
Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- ASSETS: Cash and cash equivalents.................. $ 64,045 $ 140,250 (a) $108,473 (80,822)(b) 30,000 (c) (45,000)(d) Restricted cash............................ 68,157 68,157 Commissions and accounts receivable, net... 50,875 50,875 Other current assets....................... 34,105 34,105 -------- --------- -------- Total current assets................... 217,182 44,428 261,610 Property and equipment, net................ 81,858 81,858 Goodwill and other intangibles, net........ 159,514 159,514 Other assets............................... 11,864 11,864 -------- --------- -------- Total assets........................... $470,418 $ 44,428 $514,846 ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Accounts payable and accrued expenses...... $165,413 $165,413 Cash secured bank loans.................... 68,157 68,157 Notes payable and other current liabilities............................... 11,238 11,238 -------- -------- Total current liabilities.............. 244,808 244,808 Deferred revenues.......................... -- 30,000 (c) 30,000 Notes payable ............................. 13,753 13,753 Other liabilities ......................... 19,605 19,605 Redeemable preferred stock, net 9.00% Series A Cumulative Senior Redeem- able Preferred Stock.................... 157,591 157,591 5.00% Series B Cumulative Convertible Re- deemable Preferred Stock................ 24,000 24,000 18.00% Series C Cumulative Junior Redeem- able Preferred Stock.................... 61,284 (61,284)(b) -- -------- --------- -------- Total redeemable preferred stock, net.. 242,875 (61,284) 181,591 -------- --------- -------- Stockholders' equity Common stock............................. 100 100 Additional paid-in capital............... -- 140,250 (a) 120,712 (19,538)(b) Accumulated deficit...................... (50,723) (45,000)(d) (95,723) -------- --------- -------- Total stockholders' equity ............ (50,623) 75,712 25,089 -------- --------- -------- Total liabilities and stockholders' equity .......................................... $470,418 $ 44,428 $514,846 ======== ========= ========
See notes to unaudited pro forma condensed consolidated balance sheet. 36 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (a) Reflects the receipt of estimated net proceeds to the Company from the offering at an assumed initial public offering price of $ , less estimated fees and expenses of the offering to be paid by the Company of $9.8 million. (b) Reflects the redemption of all outstanding shares of the Junior Preferred Stock, including the redemption premium, in connection with the offering. (c) Reflects the receipt by the Company on February 10, 1999 of a $30 million payment from Cendant for certain services that the Company is obligated to perform under the Acquisition Services Agreement in connection with future acquisitions by the Company pursuant to the Acquisition Cooperation Agreement. Such payment is expected to be recognized as revenue over a ten-year period as the Company performs the required services and is refundable to Cendant to the extent the required services are not performed. (d) Reflects the payment by the Company of cash dividends of $45 million on its Common Stock to Apollo prior to the closing of the offering. 37 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of December 31, 1993 and 1994 and for the years ended December 31, 1993 and 1994 are derived from unaudited financial statements of Coldwell Banker Residential Brokerage Corporation. The selected consolidated financial data presented below as of December 31, 1995, 1996 and 1997 and for the year ended December 31, 1995, the five-month period ended May 31, 1996, the seven-month period ended December 31, 1996, the eight- month period ended August 31, 1997, and the four-month period ended December 31, 1997 are derived from the audited consolidated financial statements of the Company and its predecessors, Coldwell Banker Residential Brokerage Corporation and National Realty Trust. The selected consolidated financial data as of September 30, 1998 and for the nine-month period ended September 30, 1998 and the one-month period ended September 30, 1997 are derived from unaudited financial statements of the Company, which, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of the financial position and results of operations for the periods presented. Results for the nine-month period ended September 30, 1998 are not necessarily indicative of results for a full year. All of the financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and its predecessors and related notes thereto included elsewhere in this prospectus.
Predecessors(a) ----------------------------------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust ----------------------------------------------- ----------------------- Five Seven Eight Months Months Months Year Ended Year Ended Year Ended Ended Ended Ended December 31, December 31, December 31, May 31, December 31, August 31, 1993 1994 1995 1996 1996 1997 ------------ ------------ ------------ -------- ------------ ---------- (in thousands) Statement of Operations Data: NRT NRT Incorporated Incorporated ------------ --------------------------- Four One Nine Months Month Months Ended Ended Ended December 31, September 30, September 30, 1997 1997 1998 ------------ ------------- ------------- Statement of Operations Data: Real estate commissions.... $554,524 $526,229 $540,302 $228,005 $400,076 $570,150 Other revenues.. 21,237 17,620 16,042 7,810 12,101 14,636 -------- -------- -------- -------- -------- -------- Total reve- nues.......... 575,761 543,849 556,344 235,815 412,177 584,786 Commissions and royalties...... 339,154 322,694 333,869 141,404 276,364 393,235 Selling, general and administrative.. 227,908 198,907 212,013 93,532 119,862 168,863 Amortization of goodwill....... -- -- 532 482 104 1,162 Acquisition related costs.. -- -- 4,240 26 22,188 10,735 -------- -------- -------- -------- -------- -------- Operating income (loss)........ 8,699 22,248 5,690 371 (6,341) 10,791 Interest expense, net... (687) (686) (137) 11 44 117 Provision (benefit) for income taxes... 4,231 4,796 2,459 156 -- 4,432 -------- -------- -------- -------- -------- -------- Net income (loss)........ $ 5,155 $ 18,138 $ 3,368 $ 204 $ (6,385) $ 6,242 - -------------------------------------------------- ======== ======== ======== ======== ======== ======== Real estate commissions.... $446,134 $100,592 $1,488,932 Other revenues.. 17,380 2,428 77,017 ------------ ------------- ------------- Total reve- nues.......... 463,514 103,020 1,565,949 Commissions and royalties...... 330,169 73,346 1,091,039 Selling, general and administrative.. 124,785 26,750 406,161 Amortization of goodwill....... 637 160 3,220 Acquisition related costs.. 78,462 32,264 48,225 ------------ ------------- ------------- Operating income (loss)........ (70,539) (29,500) 17,304 Interest expense, net... (2,843) (757) (2,068) Provision (benefit) for income taxes... (25,453) (11,656) 8,444 ------------ ------------- ------------- Net income (loss)........ $(42,243) $(17,087) $ 10,928 - -------------------------------------------------- ============ ============= =============
NRT Predecessors Incorporated --------------------------------- -------------------------- As of December 31, As of As of --------------------------------- December 31, September 30, 1993 1994 1995 1996 1997 1998 -------- -------- ------- ------- ------------ ------------- (in thousands) Balance Sheet Data: Cash and cash equivalents............ $ 1,676 $ 1,202 $ 89 $11,087 $165,360 $64,045 Total assets............ 125,034 119,999 65,519 71,296 416,671 470,418 Long-term debt.......... 880 843 785 1,152 4,844 13,753 Redeemable preferred stock.................. -- -- -- -- 237,858 242,875 Stockholders' equity (deficit).............. 63,636 21,278 24,646 (1,385) (34,232) (50,623)
- ------------------ (a) In May 1996, Cendant acquired Coldwell Banker Corporation and contributed the real estate brokerage operations owned by Coldwell Banker Residential Brokerage Corporation to National Realty Trust. Cendant retained ownership of all trademarks utilized in connection with the transferred real estate brokerage operations and franchised the right to conduct business under the COLDWELL BANKER(R) brand name to National Realty Trust. Cendant subsequently franchised the right to conduct business under the ERA(R) and CENTURY 21(R) brand names to National Realty Trust. In August 1997, NRT Incorporated was formed and acquired all of the real estate brokerage operations owned by National Realty Trust, including real estate brokerage offices acquired after May 1996. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and its predecessors and the notes thereto included elsewhere in this prospectus. Although the Company has been in existence since August 1997 and its consolidated financial statements present the results of operations of the Company and its predecessors separately for the periods presented as required by generally accepted accounting principles, for comparative purposes, the following discussion and analysis presents (1) the results of operations of the Company for the nine months ended September 30, 1998 compared with the combined results of operations of the Company for the one month ended September 30, 1997 and the Company's predecessor, National Realty Trust, for the eight months ended August 31, 1997, (2) the combined results of operations of National Realty Trust for the eight months ended August 31, 1997 and the Company for the four months ended December 31, 1997 compared with the combined results of operations of National Realty Trust's predecessor, Coldwell Banker Residential Brokerage Corporation, for the five months ended May 31, 1996 and National Realty Trust for the seven months ended December 31, 1996, and (3) the combined results of operations of Coldwell Banker Residential Brokerage Corporation and National Realty Trust for 1996 compared with the results of operations of Coldwell Banker Residential Brokerage Corporation for the year ended December 31, 1995. The operating results of the Company and its predecessors include the results of operations of various companies which were acquired in 1996, 1997 and 1998 and accounted for by the purchase method of accounting. Accordingly, the results of operations of such acquired companies have been included in the consolidated operating results of the Company only from their respective dates of acquisition. The consolidated financial statements of Coldwell Banker Residential Brokerage Corporation have been prepared from separate records maintained by Coldwell Banker Residential Brokerage Corporation, as well as from the records of Coldwell Banker Corporation, and may not be indicative of the conditions that would have existed if Coldwell Banker Residential Brokerage Corporation had operated as an independent entity. General In May 1996, a subsidiary of Cendant Corporation acquired Coldwell Banker Corporation and contributed the real estate brokerage operations of Coldwell Banker Residential Brokerage Corporation to National Realty Trust. Cendant retained ownership of all trademarks utilized in connection with the transferred real estate brokerage operations and franchised the right to conduct business under the COLDWELL BANKER(R) brand name to National Realty Trust. Cendant subsequently franchised the right to conduct business under the ERA(R) and CENTURY 21(R) brand names owned by it to National Realty Trust. In August 1997, the Company was formed and acquired all of the real estate operations owned by National Realty Trust. The Company has made since its formation, and intends to continue to make, selected acquisitions of residential real estate brokerage companies in existing and new geographic markets. The Company believes that there will be opportunities to improve the operating profitability of acquired companies through the consolidation of offices, elimination of duplicative costs, reduction in personnel and centralization of back office functions. The Company owns and operates a network of full service residential real estate brokerage offices, which conduct residential real estate brokerage activities utilizing the COLDWELL 39 BANKER(R), ERA(R) and CENTURY 21(R) brand names. As a full service brokerage, the Company offers, either directly or through third party arrangements, a wide variety of homeowner services, including mortgage, title, escrow and relocation services, home warranties, home security systems and other services. The Company's real estate commissions consist of commissions earned for providing assistance to customers in the purchase and sale of new and existing homes. Real estate commissions, which are calculated as a percentage of the sales price, typically range from approximately 5% to 7%. In transactions in which the Company is acting as a broker on one side of a transaction (either the buying side or the selling side) and a third-party broker is representing the other side of the transaction, the Company typically must share with such other broker 50% of the sales commission. In transactions in which the Company is acting as the sole broker, the Company generally receives 100% of the sales commission. In addition to real estate brokerage services, the Company offers, either directly or through third party arrangements: . mortgage origination services through a marketing arrangement with Cendant Mortgage, pursuant to which the Company derives revenues; . title services for which the Company receives a fee from title insurance underwriters; . escrow and other closing services for which the Company typically receives a fee from home buyers; . relocation services through (1) an arrangement with Cendant Mobility Services Corporation ("Cendant Mobility"), a wholly owned subsidiary of Cendant, for which the Company receives fees from Cendant Mobility, and (2) the Company's own relocation company, for which the Company receives fees from customers in addition to the commissions generated on the sale and/or purchase of the transferee's property; and . a wide variety of other brokerage-related services through marketing and purchasing programs established by Cendant with leading service providers, including, among others, home warranties, home security systems, temporary housing, temporary storage, moving truck rentals and telephone services, for which the Company generally receives fees. Real estate commissions are recorded as revenues and the related sales associate commissions and franchise royalty fees are recorded as expenses upon the closing of the home sale transaction. Other revenues, which are derived from the Company's brokerage-related services, are recorded as revenue at the time that such services are performed. Commissions and royalties payable by the Company include commissions paid to the Company's sales associates and royalties paid to the Franchisors. Commissions paid to sales associates have averaged 60% to 67% of real estate commissions in recent years. Because the commissions paid to sales associates vary from region to region and from office to office, the average commission rate paid to the Company's sales associates is affected by the Company's acquisitions. The Company's royalty expenses are 6% of gross commission income (currently 4.89% for the Company's CENTURY 21(R) offices in Northern California), plus $166,667 per month. In February 40 1999, the Company entered into new Franchise Agreements with the Franchisors, which require the Company to pay additional royalties of (1) $156,250 per month following the closing of the offering and (2) 0.15% of the Company's total revenue per quarter for each quarter (up to a total of 20 quarters) in which the Company's EBITDA for the preceding twelve-month period exceeds $225 million. Since January 1999, the Company has been required to pay an additional monthly royalty which has averaged $ per month for the first three months of 1999 . Upon the closing of the offering, such additional royalty will be replaced with an additional monthly royalty under the Franchise Agreements of % of the Company's gross commission income, up to an estimated maximum additional royalty of $21.3 million per year. See "Certain Transactions-- Franchise Agreements--Royalties." Selling, general and administrative expenses consist primarily of employee compensation, advertising and marketing, occupancy costs, general office expenses, depreciation of property, plant and equipment. Acquisition related costs consist of office conversion costs and amortization of pending real estate sales contracts and real estate listing contracts of acquired real estate brokerage companies. Office conversion costs incurred or accrued include primarily signage change, name change advertising and other transitional costs. The Company amortizes the acquired companies' pending real estate sales contracts over a three-month period and real estate listing contracts over a six-month period, reflecting the respective periods over which the Company estimates that such contracts will result in closed real estate transactions. The Company believes that pending real estate sales contracts are a leading indicator of revenues to be recognized in the near future. Pending real estate sales contracts represent those transactions in which substantially all of the services associated with the home sale have been performed, but the home sale has not yet closed. This is generally evidenced by the execution of a binding contract of sale. The Company considers real estate contracts to be binding only after any rescission period expires, a good faith deposit is placed in escrow and only normal contingencies, principally financing and property inspection, remain. As a result of these contingencies, a portion of the Company's pending real estate sales contracts will fail to close and, accordingly, will not result in the recognition of commission income. Historically, an average of approximately 13% of the Company's pending real estate sales contracts have failed to close. The Company's real estate brokerage business is subject to seasonal fluctuations. Historically, revenues have been strongest in the second and third quarters of the calendar year. While commissions are paid to sales associates only upon the sale of a home, many of the Company's other expenses, such as rent and personnel, are fixed. As a result, the relationship between the Company's expenses and revenues is subject to significant fluctuation on a quarter-to-quarter basis. 41 Results of Operations The following table sets forth certain statement of operations and other data for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998:
Years Ended December 31, Nine Months Ended September 30, ----------------------------------------------------------- ---------------------------------------- 1995(a) 1996(b) 1997(c) 1997(d) 1998 ------------------ ------------------ -------------------- ------------------ -------------------- % of % of % of % of % of Dollars Revenues Dollars Revenues Dollars Revenues Dollars Revenues Dollars Revenues -------- -------- -------- -------- ---------- -------- -------- -------- ---------- -------- (dollars in thousands) REVENUES Real estate commissions......... $540,302 97.1% $628,081 96.9% $1,016,284 96.9% $670,742 97.5% $1,488,932 95.1% Other revenues....... 16,042 2.9 19,911 3.1 32,016 3.1 17,064 2.5 77,017 4.9 -------- ----- -------- ----- ---------- ----- -------- ----- ---------- ----- Total revenues...... 556,344 100.0 647,992 100.0 1,048,300 100.0 687,806 100.0 1,565,949 100.0 EXPENSES Commissions and royalties.. 333,869 60.0 417,768 64.5 723,404 69.0 466,581 67.8 1,091,039 69.7 Selling, general and administrative...... 212,013 38.1 213,394 32.9 293,648 28.0 195,613 28.4 406,161 25.9 Amortization of good- will................ 532 0.1 586 0.1 1,799 0.2 1,322 0.2 3,220 0.2 Acquisition related costs............... 4,240 0.8 22,214 3.4 89,197 8.5 42,999 6.3 48,225 3.1 -------- ----- -------- ----- ---------- ----- -------- ----- ---------- ----- Total expenses....... 550,654 99.0 653,962 100.9 1,108,048 105.7 706,515 102.7 1,548,645 98.9 -------- ----- -------- ----- ---------- ----- -------- ----- ---------- ----- Operating income (loss)............. 5,690 1.0 (5,970) (0.9) (59,748) (5.7) (18,709) (2.7) 17,304 1.1 Interest expense, net................. (137) 55 (2,726) (0.3) (640) (0.1) (2,068) (0.1) Income tax provi- sion................ 2,459 156 (21,021) (7,224) 8,444 -------- ----- -------- ----- ---------- ----- -------- ----- ---------- ----- Net income.......... $ 3,368 0.6% $ (6,181) (1.0)% $ (36,001) (3.4)% $(10,845) (1.6)% $ 10,928 0.7% ======== ===== ======== ===== ========== ===== ======== ===== ========== ===== Operating income be- fore amortization of goodwill and acqui- sition related costs............... $ 10,462 1.9% $ 16,830 2.6% $ 31,248 3.0% $ 25,612 3.7% $ 68,749 4.4% EBITDA(e)............ 18,181 3.3 21,032 3.2% 27,285 2.6% 21,731 3.2% 65,658 4.2%
- --------------------- (a) Financial information for the year ended December 31, 1995 represents the results of operations of Coldwell Banker Residential Brokerage Corporation. (b) Financial information for the year ended December 31, 1996 represents the combined historical results of operations of Coldwell Banker Residential Brokerage Corporation from January 1, 1996 through May 31, 1996 and National Realty Trust from June 1, 1996 through December 31, 1996. (c) Financial information for the year ended December 31, 1997 represents the combined historical results of operations of National Realty Trust from January 1, 1997 through August 31, 1997 and the Company from September 1, 1997 through December 31, 1997. (d) Financial information for the nine months ended September 30, 1997 represents the results of operations of National Realty Trust for the eight months ended August 31, 1997 and the results of operations of the Company for the one month ended September 30, 1997. 42 (e) EBITDA is defined herein as operating income plus depreciation and amortization, and amortization of goodwill and other intangibles and has been calculated as follows:
Nine Months Ended Years Ended December 31, September 30, -------------------------- ------------------- 1995 1996 1997 1997 1998 ------- ------- -------- --------- -------- (in thousands) Operating income (loss).. $ 5,690 $(5,970) $(59,748) $ (18,709) $ 17,304 Amortization of good- will.................... 532 586 1,799 1,322 3,220 Acquisition related costs................... 4,240 22,214 89,197 42,999 48,225 ------- ------- -------- --------- -------- Operating income before amortization of goodwill and acquisition related costs................... 10,462 16,830 31,248 25,612 68,749 Depreciation and amorti- zation.................. 9,111 4,941 6,024 3,583 12,964 ------- ------- -------- --------- -------- EBITDA before office con- version costs........... $19,573 $21,771 $ 37,272 $ 29,195 $ 81,713 Office conversion costs.. (1,392) (739) (9,987) (7,464) (16,055) ------- ------- -------- --------- -------- EBITDA................... $18,181 $21,032 $ 27,285 $ 21,731 $ 65,658 ======= ======= ======== ========= ========
Amortization of goodwill and other intangibles reflects primarily the amortization of acquired companies' pending real estate sales contracts and real estate listing contracts. NRT amortizes acquired companies' pending real estate sales contracts over a three-month period and real estate listing contracts over a six-month period, reflecting the respective periods over which the Company estimates that such contracts will result in closed real estate transactions. Cash flows provided by (used in) operating, investing and financing activities were as follows:
Nine Months Ended Years Ended December 31, September 30, ---------------------------- ------------------ 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- (in thousands) Net cash provided by operating activities.. $ 12,756 $ 34,665 $ 30,152 $ 19,402 $ 19,576 Net cash (used in) in- vesting activities.... (12,933) (33,190) (152,270) (140,180) (117,692) Net cash (used in) pro- vided by financing ac- tivities.............. (936) 10,624 294,067 295,254 (3,199)
The Company believes that EBITDA is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the periods presented, nor has it been presented as an alternative to operating income or as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The Company understands that while EBITDA is frequently used by securities analysts in the evaluation of companies, EBITDA, as used in this prospectus, is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation. 43 Nine Months Ended September 30, 1998 Compared to Combined Nine Months Ended September 30, 1997 Revenues. Total revenues increased 127.7% to $1,565.9 million for the nine months ended September 30, 1998 from $687.8 million for the nine months ended September 30, 1997. Real estate commissions increased 122.0% to $1,488.9 million for the nine months ended September 30, 1998 from $670.7 million for the nine months ended September 30, 1997, due primarily to increased real estate commissions generated by operations acquired during 1998 and the second half of 1997 and the effects of a strong residential real estate market throughout the United States. Other revenues increased to $77.0 million for the nine months ended September 30, 1998 from $17.1 million for the nine months ended September 30, 1997, due primarily to the acquisition of title and escrow operations and increased revenues derived from the Company's existing title and escrow operations, increased fees from the Marketing Agreement and other revenues. Commissions and Royalties. Commissions and royalties as a percentage of total revenues increased to 69.7% for the nine months ended September 30, 1998 from 67.8% for the nine months ended September 30, 1997. This increase was due primarily to the acquisition of operations that pay a higher commission split to sales associates. Selling, General and Administrative. Selling, general and administrative expenses increased $210.6 million to $406.2 million for the nine months ended September 30, 1998 from $195.6 million for the nine months ended September 30, 1997. The increase in such expenses reflects primarily the selling, general and administrative expenses associated with operations acquired during 1997 and 1998. As a percentage of total revenues, selling, general and administrative expenses decreased to 25.9% for the nine months ended September 30, 1998 from 28.4% for the nine months ended September 30, 1997. The decrease in selling, general and administrative expenses as a percentage of total revenues reflects the relatively low costs associated with the revenue growth of the Company's existing business and synergies obtained by the Company through the consolidation of certain acquired office locations. Amortization of Goodwill. Amortization of goodwill increased $1.9 million to $3.2 million for the nine months ended September 30, 1998 from $1.3 million for the nine months ended September 30, 1997, reflecting primarily the amortization of goodwill of the acquired companies. Acquisition Related Costs. Acquisition related costs were $48.2 million for the nine months ended September 30, 1998 compared to $43.0 million for the nine months ended September 30, 1997. Such amounts reflect the volume and timing of acquisitions during the respective periods. Operating Income (Loss). The Company had operating income of $17.3 million for the nine months ended September 30, 1998 compared to an operating loss of $18.7 million for the nine months ended September 30, 1997, as a result of the factors discussed above. Excluding the amortization of goodwill and acquisition related costs, operating income would have increased to $68.7 million for the nine months ended September 30, 1998 from $25.6 million for the nine months ended September 30, 1997. As a percentage of total revenues, operating income before the amortization of goodwill and acquisition related costs would have increased to 4.4% for the nine months ended September 30, 1998 from 3.7% for the nine months ended September 30, 1997. Such increases reflect the factors discussed above. 44 EBITDA. EBITDA increased to $65.7 million for the nine months ended September 30, 1998 from $21.7 million for the nine months ended September 30, 1997 and, as a percentage of total revenues, increased to 4.2% for the nine months ended September 30, 1998 from 3.2% for the nine months ended September 30, 1997, as a result of the factors discussed above. Pending Real Estate Sales Contracts. At September 30, 1998, the Company had pending real estate sales contracts representing approximately 48,390 sides, reflecting an increase of 61.4% from the 29,974 sides represented by the Company's pending real estate contracts at September 30, 1997. The Company's pending real estate sales contracts at September 30, 1998 represented approximately $326.7 million of real estate commissions, reflecting an increase of 71.3% from the $190.7 million of real estate commissions represented by the Company's pending real estate sales contracts at September 30, 1997. Such increases reflect the effects of the Company's acquisitions, the continued strength in the residential real estate market throughout the United States and an increase in the Company's average home sales price. Combined Year Ended December 31, 1997 Compared to Combined Year Ended December 31, 1996 Revenues. Total revenues increased 61.8% to $1,048.3 million for 1997 from $648.0 million for 1996. Real estate commissions increased 61.8% to $1,016.3 million for 1997 from $628.1 million for 1996, primarily as a result of operations acquired during 1997 and the effects of a strong residential real estate market in the United States. Excluding the impact of acquired businesses, real estate commissions increased 42.1% to $892.5 million in 1997 from $628.1 million in 1996. Such increase reflects a 40.1% increase in the number of sides closed combined with an increase in the average home sales price to $239,000 in 1997 from $205,000 in 1996, partially offset by a slight decrease in the commission rate earned. Other revenues increased 60.8% to $32.0 million for 1997 from $19.9 million for 1996, primarily as a result of the acquisition of title and escrow operations in connection with the acquisition of Jon Douglas Real Estate Services Group, Inc. on September 11, 1997 and an increase in sales volume by the Company's existing title operations. The Company also experienced an increase in its revenues associated with other brokerage-related services. Commissions and Royalties. Commissions and royalties as a percentage of total revenues increased to 69.0% in 1997 from 64.5% in 1996. The Company did not begin making royalty payments until May 31, 1996, when National Realty Trust was formed and Cendant acquired the rights to franchise the COLDWELL BANKER(R) brand name. However, if the Company had been required to make such royalty payments throughout 1996, total commissions and royalties as a percentage of total revenues would have increased 2.4 percentage points to 69.0% in 1997 from 66.6% in 1996. Such increase is due primarily to the acquisition of operations that pay a higher commission split to sales associates. Selling, General and Administrative. Selling, general and administrative expenses increased $80.2 million to $293.6 million in 1997 from $213.4 million in 1996. The increase in such expenses reflects the additional costs associated with operations acquired during 1996 and 1997. As a percentage of total revenues, selling, general and administrative expenses decreased to 28.0% in 1997 from 32.9% in 1996. The decrease in selling, general and administrative expenses as a percentage of total revenues reflects the relatively low costs associated with revenue growth relating to the 45 Company's existing business and synergies obtained by the Company through the consolidation of certain acquired office locations. Amortization of Goodwill. Amortization of goodwill increased to $1.8 million in 1997 from $586,000 in 1996, reflecting primarily the amortization of goodwill of the acquired companies. Acquisition Related Costs. Acquisition related costs were $89.2 million for 1997 compared to $22.2 million for 1996 reflecting the significantly increased volume of acquisitions during 1997 compared to 1996. Operating Income (Loss). Operating loss increased to $59.7 million in 1997 from $6.0 million in 1996, as a result of the factors discussed above. Excluding the amortization of goodwill and acquisition related costs, operating income would have increased 85.7% to $31.2 million in 1997 from $16.8 in 1996. As a percentage of total revenues, operating income before the amortization of goodwill and acquisition related costs would have increased to 3.0% in 1997 from 2.6% in 1996. Such increases reflect primarily the factors discussed above. EBITDA. EBITDA increased 29.7% to $27.3 million in 1997 from $21.0 million in 1996 and, as a percentage of total revenues, decreased to 2.6% for 1997 from 3.2% for 1996, as a result of the factors discussed above. Combined Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues. Total revenues increased 16.5% to $648.0 million for 1996 from $556.3 million for 1995. Real estate commissions increased 16.2% to $628.1 million in 1996 from $540.3 million in 1995 primarily as a result of (1) a 9.6% increase in the number of sides closed, (2) an increase in the average home sales price to $205,400 for 1996 from $192,800 for 1995 and (3) a slight increase in the commission rate earned. Other revenues increased 24.1% to $19.9 million in 1996 from $16.0 million in 1995, primarily as a result of the increased revenues derived from the Company's title operations. Commissions and Royalties. Commissions and royalties as a percentage of total revenues increased to 64.5% in 1996 from 60.0% in 1995. Such increase reflects primarily the royalty fees paid by the Company to Cendant subsequent to formation of the Trust on May 31, 1996 combined with a slight increase in the commission split paid to the Company's sales associates due primarily to certain acquired operations paying a higher commission split to sales associates. Selling, General and Administrative. Selling, general and administrative expenses increased $1.4 million to $213.4 million in 1996 from $212.0 million in 1995. The increase in such expenses reflects the additional costs of operations acquired by the Company in 1996. As a percentage of total revenues, selling, general and administrative expenses decreased to 32.9% in 1996 from 38.1% in 1995. The decrease in selling, general and administrative expense as a percentage of total revenues reflects the relatively low costs relating to revenue growth associated with the Company's existing business and synergies obtained by the Company through the consolidation of certain acquired office locations. Amortization of Goodwill. Amortization of goodwill increased $54,000 to $586,000 in 1996 from $532,000 in 1995. 46 Acquisition Related Costs. Acquisition related costs were $22.2 million for 1996 compared to $4.2 million for 1995 reflecting primarily the amortization of pending real estate sales contracts and listing contracts recorded in connection with the formation of National Realty Trust. Operating Income (Loss). The Company had an operating loss of $6.0 million in 1996 compared to operating income of $5.7 million in 1995. This change was a result of the factors discussed above. Excluding the amortization of goodwill and acquisition related costs, operating income would have increased 60.9% to $16.8 million in 1996 from $10.5 million in 1995. As a percentage of total revenues, operating income before the amortization of goodwill and acquisition related costs would have increased to 2.6% in 1996 from 1.9% in 1995. Such increases reflect primarily the factors discussed above. EBITDA. EBITDA increased 15.7% to $21.0 million in 1996 from $18.2 million in 1995, as a result of the factors discussed above. As a percentage of total revenues, EBITDA declined slightly to 3.2% in 1996 from 3.3% in 1995. Liquidity and Capital Resources The Company's operating cash requirements consist principally of working capital requirements, capital expenditures, acquisitions and dividends payable on its preferred stock. The Company currently believes that cash flows from operating activities will be adequate to meet the Company's working capital, capital expenditure and dividend requirements. Acquisitions have primarily been funded through the Company's agreement with Cendant, capital contributions made by the Company's stockholders and cash flow from operations. Net cash provided by operating activities for the nine months ended September 30, 1997 and 1998 was $19.4 million and $19.6 million, respectively. The change was due primarily to increased acquisition related costs resulting from an increase in acquisitions, partially offset by increased cash flows generated from operations of acquired companies and internal growth. Net cash provided by operating activities was $12.8 million in 1995, $34.7 million in 1996 and $30.2 million in 1997. The decrease in net cash provided by operating activities in 1997 compared to 1996 was due primarily to the payment of a full year of royalties by the Company to the Franchisors in 1997, compared to only seven months of royalty payments during 1996. To a lesser extent, the Company's net cash provided by operating activities was increased by net cash inflows from operations of acquired companies in 1997, partially offset by cash used to fund liabilities incurred in connection with the Company's acquisitions. The increase in cash flows provided by operating activities for the year ended December 31, 1996 compared to the year ended December 31, 1995 was due primarily to the repayment of amounts due from Coldwell Banker Corporation, partially offset by the payment of seven months of royalties by the Company to the Franchisors in 1996, while no similar royalties were paid in 1995. Net cash used in investing activities was $140.2 million for the nine months ended September 30, 1997 and $117.7 million for the nine months ended September 30, 1998. The increase was due primarily to the payment of $68.4 million in connection with the Company's 44 acquisitions during the nine months ended September 30, 1998 compared to $110.6 million paid in connection 47 with the Company's eight acquisitions, including the acquisition of National Realty Trust's assets, during the nine months ended September 30, 1997. Additionally, the Company invested approximately $23.2 million and $27.8 million in restricted cash during the nine months ended September 30, 1997 and 1998, respectively. Such restricted cash can only be used to repay the loans entered into to fund the restricted cash. Net cash used in investing activities was $12.9 million for 1995, $33.2 million for 1996 and $152.3 million for 1997. Cash paid by the Company in connection with these acquisitions and the acquisition of National Realty Trust's assets was $8.8 million in 1995, $13.8 million in 1996 and $111.5 million in 1997. The 1997 acquisitions were financed primarily with $255.6 million in capital contributions from the Company's stockholders in 1997. Additional capital expenditures in 1997 were utilized for the implementation of a new financial accounting and reporting system. Net cash (used in) provided by financing activities was $295.3 million for the nine months ended September 30, 1997 and $(3.2) million for the nine months ended September 30, 1998. During 1997, the Company was funded with $255.6 million in capital contributions, which were utilized to fund the Company's acquisitions in 1997. Also, during the nine months ended September 30, 1997, the Company received a $20.0 million development advance from Cendant, which, following an amendment of its term from 10 years to 40 years effective September 1, 1997, is being forgiven over a 40-year period. Additionally, the Company received approximately $27.8 million in loans from financial institutions during the nine months ended September 30, 1998, up from $23.2 million during the nine months ended September 30, 1997. Such loans are secured by and payable from investments entered into with the proceeds from such loans. During the nine months ended September 30, 1998, the Company paid $22.1 million of dividends on its preferred stock. Net cash outflows from financing activities were $0.9 million for 1995. Net cash inflows from financing activities were $10.6 million for 1996 and $294.1 million for 1997. During 1997, the Company was funded with $255.6 million in capital contributions, which were utilized to fund the Company's acquisitions in 1997. Additionally, as noted above, during 1997, Cendant made an advance of $20.0 million to National Realty Trust and Coldwell Banker Residential Brokerage Corporation, which is being forgiven over a 40-year period. During 1996, the Company received approximately $11.2 million in proceeds from investments of amounts loaned to the Company by financial institutions, which loans are secured by and payable from such investments. No similar borrowings were made during 1995. The Company plans to continue its business strategy of actively pursuing strategic acquisitions of residential real estate brokerage firms and brokerage-related businesses. NRT and Cendant have an agreement that reduces the Company's effective purchase price for brokerage acquisitions by NRT in which Cendant agrees to participate. When Cendant and NRT cooperate to jointly fund an acquisition, Cendant acquires the trademarks and mortgage operations (if any) of the acquired brokerage while the Company acquires the brokerage operations. As with its existing offices, NRT is required to operate all acquired offices under the Franchisors' brand names and pay royalties for such offices pursuant to the Franchise Agreements. Under its agreement with NRT, Cendant has provided an average of 66% of the total purchase price for all of NRT's acquisitions since NRT's formation (excluding the National Realty Trust acquisition). While Cendant can decline to participate in any brokerage acquisition, it has participated in all of NRT's brokerage acquisitions to date (excluding the National Realty Trust acquisition). 48 Upon NRT's formation in August 1997, Cendant committed approximately $445 million for the Company's brokerage acquisitions. Through December 31, 1998, Cendant had provided approximately $420 million of its original commitment and NRT had used approximately $230 million of its own capital for its acquisitions. Cendant has committed an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate pursuant to the Acquisition Cooperation Agreement. The $1 billion commitment is available in two $500 million tranches. The first $500 million (of which Cendant has provided approximately $23 million) is currently available, and the second $500 million will be available after the first $500 million has been completely used by NRT but in no case earlier than February 9, 2004, unless otherwise agreed to by Cendant. As a result of an amendment to the calculation of the purchase price payable by Cendant in connection with the Company's brokerage acquisitions pursuant to the Acquisition Cooperation Agreement, the percentage of the total purchase price payable by Cendant in future NRT brokerage acquisitions is likely to be lower than the percentage that has historically been paid by Cendant, which may adversely affect the Company's ability to find acquisition candidates on terms acceptable to the Company and to finance and complete such transactions. See "Certain Transactions--Acquisition Cooperation Agreement." Possible sources of the Company's financing of brokerage acquisitions include internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of any of the foregoing. See "Risk Factors-- Risks in Pursuing Acquisitions." On January 7, 1999, NRT entered into a $50 million bank credit facility. Borrowings drawn thereunder may be used for the Company's general working capital needs in the ordinary course of business and permitted acquisitions. The Company will seek to replace its bank credit facility with a new facility providing for approximately $150 million of borrowing capacity, which may have terms that are different from or more restrictive than those of the current facility. See "Description of Certain Indebtedness." Upon its formation, the Company issued the Senior Preferred Stock, the Convertible Preferred Stock and the Junior Preferred Stock. Each class of preferred stock accrues dividends based on a liquidation preference amount equal to $1,000 per share plus any previously declared and unpaid dividends. In addition, each class of preferred stock is mandatorily redeemable in accordance with the terms of its certificate of designation. See "Description of Capital Stock--Preferred Stock." As described under "Use of Proceeds," the Company intends to use a portion of the net proceeds of the offering to redeem all outstanding shares of the Junior Preferred Stock. The Company had restricted cash totaling $40.3 million at December 31, 1997 and $68.2 million at September 30, 1998, which can be used only to repay loans entered into to fund certain investments by the Company. Such loans are included with the current portion of notes payable. On February 10, 1999, the Company received a $30 million advance from Cendant for certain services to be provided by the Company to Cendant under the terms of the Acquisition Services Agreement. See "Certain Transactions--Acquisition Services Agreement." The Company has declared a total of $45 million of cash dividends on its Common Stock to Apollo, which will be paid prior to the closing of the offering. The Company does not anticipate paying cash dividends to its common stockholders in the foreseeable future and is restricted in doing so by the terms of the Franchise Agreements, its new bank credit facility and its preferred stock. See 49 "Dividend Policy," "Description of Certain Indebtedness," "Certain Transactions--Franchise Agreements" and "Description of Capital Stock-- Preferred Stock." Year 2000 Compliance Many existing computer programs will be unable to properly recognize dates in the year 2000 and beyond. In the course of executing its strategy, both internally and through acquisitions, the Company determined that its existing systems did not contain the features and capacity necessary to implement its business plan. Accordingly, the Company is in the process of completing the installation of a new financial accounting and reporting system. Installation is anticipated to be completed by the first quarter of 1999 and is not expected to have a material adverse effect on the Company's financial condition or results of operations. The new system is year 2000 compliant and therefore will enable data from and after January 1, 2000 to be recognized and processed correctly. In connection with each of the Company's acquisitions, NRT evaluates the systems of the acquired company to determine whether such systems are year 2000 compliant. If an acquired company's systems are not year 2000 compliant, the Company will prepare a plan to bring the systems into compliance. While the Company cannot guarantee that all acquired companies will be year 2000 compliant on a timely basis, the cost of bringing such companies into compliance is not expected to have a material adverse effect on the Company's financial condition or results of operations. The Company is in the process of contacting third party vendors and service providers on whom it relies to assure that their systems will be converted in a timely fashion to ensure year 2000 compliance. However, the Company can not guarantee that the systems of such companies will be converted in a timely fashion, or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Furthermore, the Company cannot guarantee that the installation of the Company's system will be completed on a timely basis, that it will be fully effective or that year 2000 issues will not have a material adverse effect on the Company. Impact of New Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, on January 1, 1998. SFAS No. 130 requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any comprehensive income components requiring separate disclosure. For the fiscal year beginning January 1, 1999, the Company will adopt SFAS No. 131, Disclosure About Segments and Enterprise and Related Information. The Company is reviewing the impact of the adoption of this pronouncement on its consolidated financial statements. Impact of Inflation Generally, inflation causes the value of residential real estate to increase. While increases in the value of residential real estate typically lead to corresponding increases in the Company's commissions, inflation could also cause interest rates to increase. Higher interest rates tend to reduce sales of existing single family homes, which may offset the Company's increased commission revenues. 50 BUSINESS Company Overview NRT is the largest residential real estate brokerage company in the United States, with approximately 690 offices and over 30,000 sales associates throughout the country. The Company is approximately five times larger than its next largest competitor in terms of the dollar volume of home sales and believes that it is the only national residential real estate brokerage company. The Company operates in 18 of the 30 largest domestic markets measured by population and believes, based on reported revenues and number of offices, that it is either the largest or second largest residential real estate brokerage in each market in which it operates. NRT operates full service brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. As a full service brokerage, the Company offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems and other services. When compared to other real estate brokerages, NRT believes it benefits from several competitive advantages, including operating economies of scale, national brand identity, extensive training programs for its sales associates, more sophisticated technology and information systems, a wide variety of brokerage-related services and greater access to capital. With these competitive advantages, the Company recruits, retains and develops highly productive sales associates. In 1997, the Company acted as broker in transactions representing over $36.8 billion in home sales volume, $1.0 billion in gross commission income and 154,066 "sides" (each real estate transaction has two sides, the selling side and the buying side). For the twelve-month period ended September 30, 1998, after giving effect certain acquisitions completed by the Company, the Company had pro forma revenues of $2.4 billion and operating income before depreciation and amortization (after eliminating redundant selling, general and administrative costs related to such acquisitions) of $84.6 million. The Company operates all of its brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names pursuant to the Franchise Agreements. The Company operates approximately 85% of its offices under the COLDWELL BANKER(R) brand name, 12% of its offices under the ERA(R) brand name and 3% of its offices under the CENTURY 21(R) brand name. The Company operates its COLDWELL BANKER(R) offices throughout the country, its ERA(R) offices in New Jersey and the Mid-Atlantic region and its CENTURY 21(R) offices in Northern California. Based on gross commission income, the Company is the largest individual real estate brokerage franchisee for each of these three brands. The Company believes that the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names provide the Company with consumer recognition and credibility on a national and international basis. Based on publicly available information, COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) are three of the five largest national real estate franchise systems in the United States, measured by the number of franchised real estate brokerage offices. NRT believes that the fragmented nature of the real estate brokerage industry offers substantial consolidation opportunities, and NRT's objective is to continue to expand its presence as the leading 51 national real estate brokerage company. When it was formed in August 1997, the Company acquired the assets of National Realty Trust, which included the former real estate brokerage operations of Coldwell Banker Corporation. At that time, National Realty Trust was the largest residential real estate brokerage in the United States, with approximately 370 offices, $648 million of revenues and $21 million of operating income before depreciation and amortization for the year ended December 31, 1996. The operations acquired from National Realty Trust provided NRT with a strong core business and a proven operating history from which to expand by acquiring additional real estate brokerage firms. The Company has grown rapidly, in large part through its 28 acquisitions of multi-office brokerages and 36 acquisitions of single-office brokerages from September 1, 1997 through December 31, 1998, representing a total of over 500 brokerage offices and $1.14 billion in gross commission income on an annualized basis. The Company's significant acquisitions to date include Jon Douglas Real Estates Services Group, Inc., the third largest residential real estate brokerage company in the United States, Burnet Financial Group, the fourth largest, Hunneman Real Estate Corporation, the ninth largest, Cornish & Carey Residential, Inc., the tenth largest, and O'Conor, Piper & Flynn, Inc., the fifteenth largest (rankings based on the dollar volume of home sales in the last completed calendar year prior to being acquired by NRT). NRT and Cendant have an agreement that reduces the Company's effective purchase price for brokerage acquisitions by NRT in which Cendant agrees to participate. When NRT and Cendant cooperate to jointly fund an acquisition, the Company acquires the brokerage operations of the acquired brokerage, while Cendant acquires the trademarks and mortgage operations (if any). As with its existing offices, NRT is required to operate all acquired offices under one of the Franchisors' brand names and pay royalties for such offices under the Franchise Agreements. From NRT's formation through December 31, 1998, Cendant has provided an average of 66% of the total acquisition cost of all of NRT's acquisitions (excluding the National Realty Trust acquisition). While Cendant can decline to participate in any brokerage acquisition, it has participated in all of NRT's brokerage acquisitions to date (excluding the National Realty Trust acquisition). Upon NRT's formation in August 1997, Cendant committed approximately $445 million for the Company's brokerage acquisitions. Through December 31, 1998, Cendant had provided approximately $420 million of its original commitment and NRT had used approximately $230 million of its own capital for acquisitions. Cendant has committed an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate pursuant to the Acquisition Cooperation Agreement, which amends NRT's prior agreement with Cendant by reducing the percentage of the purchase price payable by Cendant in future NRT brokerage acquisitions. The $1 billion commitment is available in two $500 million tranches. The first $500 million (of which Cendant has provided approximately $23 million) is currently available, and the second $500 million will be available after the first $500 million has been completely used by NRT but in no case earlier than February 9, 2004, unless otherwise agreed to by Cendant. See "Business--Acquisitions" and "Certain Transactions--Acquisition Cooperation Agreement." In addition to the Franchise Agreements with the Franchisors and the Acquisition Cooperation Agreement, the Company has entered into various other agreements with Cendant or its subsidiaries. These agreements include a Program Outsourcing Agreement under which Cendant acts as the 52 Company's exclusive agent in negotiating arrangements with third party service and product providers, a Stockholders Agreement relating to the voting, transfer and registration of shares of the Company's capital stock owned by Apollo and Cendant, a Marketing Agreement relating to the marketing of Cendant's mortgage information services and other agreements. NRT intends to enter into a joint venture with Cendant to provide mortgage services, at which time the Marketing Agreement will be terminated. See "Certain Transactions." NRT continually explores and discusses with third parties potential acquisitions and other strategic corporate transactions. NRT is currently engaged in discussions with third parties regarding possible acquisitions in the real estate brokerage industry. Completion of any such transactions would be subject to the negotiation and signing of final agreements, the receipt of any necessary regulatory approvals and third party consents and the satisfaction of other conditions. The Company cannot guarantee the timing, likelihood or financial or business effect of any possible transaction. The Industry According to industry data, the 1998 domestic residential real estate industry generated approximately $940 billion in home sales and over 11 million sides. Assuming an average commission rate of 5 1/2%, the industry generated over $50 billion of gross commission income in 1998. Existing home sales in the United States have exceeded 3.5 million homes sold every year since 1992 and over 4.0 million homes sold in each of 1996, 1997 and 1998. Since 1991, the number of new and existing homes sold per year in the United States has grown at an average annual rate of 5.4%. Recent years have been among the strongest ever for existing home sales. According to the National Association of Realtors, the 1993-1998 period represents six of the eight strongest years on record for annual existing home sales. Real estate brokerage companies typically realize revenues as a commission that is based on a percentage of the price of each home sold. As a result, the real estate brokerage industry generally benefits from rising home prices. In 1998, the national median price for existing, single-family homes, as reported by the National Association of Realtors, was $130,600, up 5.2% from 1997. Since 1981, median home prices have increased an average of 4.0% annually. Rising home ownership rates have also had a positive impact on the real estate brokerage industry. According to the United States Census Bureau, the 1998 national home ownership rate was 66.4%, the highest rate on record (statistics have been kept since 1900). The home ownership rate is rising in most areas of the country. The highly fragmented real estate brokerage industry consists primarily of a large number of relatively small brokerage companies and a small number of multi-office regional brokerage companies. The 482 real estate brokerage firms included in the Real Facts listing of the largest real estate brokerage companies in the United States represented less than 19% of the total number of sides closed in 1997. In addition, according to the National Association of Realtors, approximately 87% of all real estate brokerage firms existing on December 31, 1997 consisted of a single office. 53 The following table contains certain data for the five largest residential real estate brokerage firms in the United States as of and for the year ended December 31, 1997:
Home Sales Company Volume(a) Sides(a) Offices(a) Region ------- ---------- -------- ---------- ---------------------- (in billions) NRT Incorporated(b)..... $63.0 277,566 652 National Weichert, Realtors...... 13.0 63,500 200 Northeast/Mid-Atlantic Long & Foster Real Estate, Inc. .......... 7.8 44,612 116 Mid-Atlantic Prudential Florida Realty(c).............. 4.9 28,982 75 Florida Fred Sands Realtors..... 4.4 12,018 20 California
- --------------------- (a)Source: 1998 Edition of Real Facts. (b) Includes Burnet Financial Group, Hunneman Real Estate Corporation and O'Conor, Piper & Flynn, Inc., which were acquired by NRT during 1998, but excludes all other acquisitions by the Company in 1998. If Burnet Financial Group were separately listed, it would be the fourth largest residential real estate brokerage company. (c) On July 31, 1998, Prudential Florida Realty was acquired by The St. Joe Company. The Company believes that the future of the real estate brokerage industry will be dominated by (1) large companies offering multiple services and (2) smaller, niche-oriented firms. NRT believes that larger firms, such as NRT, will benefit from their ability to offer consumers a "full service brokerage" approach to the complex process of purchasing or selling a home by offering home buyers and sellers a wide variety of homeowner services. Growth Strategy The Company's growth strategy is to expand its operations and improve profitability through the following strategic initiatives: Internal Growth Strategy Leverage Well Known, National Brand Names. The Company believes that its ability to operate under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names provides it with substantial benefits, including: (1) the enhanced name recognition and reputation of the brands among consumers for quality and consistency; (2) access to the Franchisors' well developed sales associate training and educational programs; and (3) the approximately $65 million of annual marketing expenditures by national advertising funds promoting the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. The Company believes that brand recognition is important in the real estate business because (1) home buyers and sellers are generally infrequent users of brokerage services and typically rely on reputation as well as word-of-mouth recommendations and (2) real estate sales associates believe that a brokerage firm's image with customers is its most important attribute. Continue to Broaden Range of Services Offered. As a full service brokerage company, NRT offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems, temporary housing, temporary storage, moving truck rentals and telephone services. The Company intends to capitalize on the purchasing power of home buyers and sellers and take advantage of the relationship between homeowners and the Company's sales 54 associates to market a wide range of homeowner services. The Company believes that by offering a wide range of brokerage and related services it can improve the home purchase or sale experience, enhance its relationship with its customers and increase its service revenues. The Company intends to continue to broaden the range of services that it offers. See "Certain Transactions--Program Outsourcing Agreement," "--Marketing Agreement" and "-- Relocation Management." Recruit, Retain and Develop High-Quality Sales Associates. The success of the Company's business is largely driven by its ability to recruit, retain and develop high-quality real estate sales associates. The Company believes that its strong reputation and ability to offer consumers a wide range of real estate brokerage-related services, coupled with its ability to provide its sales associates with extensive training and educational programs, marketing support, sophisticated information technology and other resources, help the Company recruit, retain and develop highly productive sales associates. The Company believes its sales associates generally have a reputation for quality of service and professionalism. While individual results vary widely, the productivity of the Company's sales associates increased by 13.4% to an average of 9.3 closed sides per sales associate in 1997 from 8.2 closed sides per sales associate in 1996. Continue to Enhance Productivity with Information Technology. The Company's technology-based systems combine software applications with features such as prospective customer management, location mapping, financial analysis, property information, photographs and forms. The Company believes that these systems, which provide the Company's sales associates with quick access to current market information, are powerful productivity enhancing and marketing tools. The Company intends to continue to upgrade its information technology and use technology to enhance the productivity of its sales associates. Acquisition Strategy NRT intends to grow by making selected acquisitions of residential real estate brokerages, title insurance agencies and escrow operations in existing and new geographic markets. The Company believes that smaller brokerage firms, which comprise a large segment of the real estate brokerage industry, generally are not as well positioned as the Company to compete in their markets, do not have the same access to capital as does the Company and are less able to respond to changes in the real estate industry. Enter New Markets. NRT intends to enter new markets by selectively acquiring high-quality, leading real estate brokerage firms that it believes will enable it to establish a strong presence in target markets. In evaluating potential acquisitions, the Company considers a number of factors, including financial performance, quality of management and sales associates, demographics and economic conditions of the new market and competitive position of the acquisition target. Expand Within Existing Markets. NRT seeks to expand its presence within its existing markets through acquisitions of additional local and regional brokerages, as well as smaller "roll-in" acquisitions. "Roll-in" acquisitions are acquisitions of smaller firms, often consisting of a single office, whose businesses can be integrated into the Company's operations, while eliminating many duplicative costs, such as advertising, rent and administrative support. By utilizing its existing infrastructure to support a broader network of sales associates and revenue base, the Company 55 believes it can enhance the profitability of its consolidated operations. Since its formation, NRT has completed over 35 "roll-in" acquisitions. Improve Operations of Acquired Companies. The Company seeks to improve the operating profitability of its acquired companies through the consolidation of offices, elimination of duplicative costs, reduction in personnel and centralization of back office functions. The limited availability of capital has constrained expansion and modernization at many small and mid-sized real estate brokerage firms. The Company believes that it can increase internal growth at many of the acquired companies through its (1) affiliation with nationally recognized brand names, (2) offering of a wide range of brokerage- related services, (3) improved use of information technology, (4) sales associate training and educational programs, (5) marketing and business promotion and (6) skilled senior management. From September 1, 1997 through December 31, 1998, the Company completed 25 acquisitions of brokerages which each had over $5 million of annual gross commission income. Through September 30, 1998, the Company had taken actions to reduce the annual operating costs of the acquired companies by an aggregate of approximately $55.4 million, which represents approximately 15.7% of the acquired companies' selling, general and administrative expenses. Other Growth Opportunities The Company intends to seek other growth opportunities and has identified the following areas for possible expansion. International. The Company believes that the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names are highly regarded in a number of industrialized countries, including Canada, the United Kingdom and France, which have real estate brokerage industries that operate in a manner similar to the real estate brokerage industry in the United States. The Company may seek to enter such markets by (1) acquiring master franchise rights in such markets, (2) entering into partnerships with brokers operating in such markets or (3) making acquisitions of brokers operating in such markets. Commercial. Approximately 400 of the Company's sales associates concentrate principally on commercial real estate sales. The Company may pursue opportunities to expand its network of commercial real estate sales associates by making strategic acquisitions of regional and local commercial brokerage companies. Acquisitions Identification and Evaluation The Company has a dedicated group of professionals whose function is to identify, evaluate and complete acquisitions. In the ordinary course of business, the Company continuously evaluates, and from time to time conducts discussions with, possible acquisition candidates. The Company considers various financial, non-financial and market factors when evaluating potential acquisition targets. Financial analyses performed by the Company in evaluating acquisition prospects include (1) reviews of historical performance, (2) comparisons to peers and the Company and (3) analyses of potential cost reductions and synergy enhancements. The Company also performs consolidation 56 analyses, which include a review of factors such as occupancy costs, employee count, advertising expenditures and conversion costs that an office is expected to incur in the consolidation process. Based on this detailed analysis, the Company is able to estimate with a high degree of confidence the incremental profitability which is expected to result from combining two or more offices into one. Non-financial considerations in evaluating acquisition prospects include the quality of the target's management and sales associates and the target's competitive positioning. Market factors considered by the Company include demographics and economic conditions of the geographic market and the relative position of the acquisition target compared to its competitors in such market. The Company's target markets fall into three categories: (1) large metropolitan markets; (2) feeder markets; and (3) smaller metropolitan markets. The Company defines large metropolitan markets as markets with annual gross commission income of greater than $250 million. In such markets, the Company seeks to acquire firms with strong management and significant consolidation and synergy opportunities. The Company estimates that there are currently 28 markets in the United States meeting these criteria, of which it operates in 16. The Company defines feeder markets as those markets that are directly linked to NRT's large metropolitan markets. The Company seeks to make acquisitions in such markets if they exhibit fluid population movement and demographic strength and the acquisition targets exhibit consolidation and synergy opportunities. The Company currently operates in two such markets. The Company defines smaller metropolitan markets as markets with annual gross commission income of less than $250 million but greater than $100 million. In such markets, the Company seeks to acquire firms which exhibit significant consolidation and synergy opportunities. The Company estimates that there are currently 14 markets in the United States meeting these criteria, of which it operates in two. Once the Company has established itself in a given market, it will then seek to make acquisitions of regional and local firms and "roll-in" acquisitions of smaller companies to take advantage of economies of scale and improve its market penetration. The Company believes that by segmenting and applying different criteria to the markets that it analyzes, it can better identify and manage its acquisition opportunities, while generating an extensive list of acquisition targets. See "--Growth Strategy--Acquisition Strategy." Acquisition Funding The terms of the Acquisition Cooperation Agreement reduce the Company's effective purchase price for brokerage acquisitions in which Cendant agrees to participate. When NRT and Cendant cooperate to jointly fund an acquisition, NRT acquires the brokerage operations of the acquired brokerage, while Cendant acquires the trademarks and mortgage operations (if any). As with its existing offices, NRT is required to operate each acquired office under one of the Franchisors' brand names and pay royalties for such offices under the Franchise Agreements. The Company believes that Cendant's participation in the Company's brokerage acquisitions, and the Company's reduced share of the total purchase price payable in such acquisitions as a result of Cendant's participation, enables the Company, in most cases, to achieve a higher rate of return on such brokerage acquisitions than would otherwise be possible. From NRT's formation through December 31, 1998, Cendant has provided an average of 66% of the total purchase price for all of NRT's acquisitions (excluding the National Realty Trust acquisition). While Cendant can decline to participate in any brokerage acquisition, it has participated in all of NRT's brokerage acquisitions to date (excluding the National Realty Trust acquisition). 57 Upon NRT's formation in August 1997, Cendant committed approximately $445 million for the Company's brokerage acquisitions. Through December 31, 1998, Cendant had provided approximately $420 million of its original commitment and NRT had used approximately $230 million of its own capital for acquisitions. Cendant has committed an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate pursuant to the Acquisition Cooperation Agreement, which amends NRT's prior agreement with Cendant by reducing the percentage of the purchase price payable by Cendant in such brokerage acquisitions. The $1 billion commitment is available in two $500 million tranches. The first $500 million (of which Cendant has provided approximately $23 million) is currently available, and the second $500 million will be available after the first $500 million has been completely used by NRT but in no case earlier than February 9, 2004, unless otherwise agreed to by Cendant. See "Certain Transactions--Acquisition Cooperation Agreement." Integration Following completion of an acquisition, the Company further refines its consolidation analysis and consolidates the newly acquired operations with its existing operations. By consolidating operations, the Company significantly reduces or eliminates duplicative costs, such as advertising, rent and administrative support. By utilizing its existing infrastructure to support a broader network of sales associates and revenue base, the Company can enhance the profitability of its consolidated operations. The Company also seeks to enhance the profitability of newly acquired operations by increasing the productivity of the acquired brokerages' sales associates. The Company provides its sales associates with specialized tools, training and resources that are often unavailable at smaller firms, such as access to more sophisticated information technology and ongoing technical support, increased advertising and marketing support, corporate relocation referrals and a wide offering of brokerage-related services. 58 Brokerage Services The Company provides real estate brokerage services in 18 of the 30 largest metropolitan markets throughout the United States based on population (based on statistics compiled by A.C. Nielsen). The following table contains certain data for the 10 largest markets in which the Company operates as of and for the twelve months ended September 30, 1998:
Pro Forma(a) ---------------- Gross Commission Offices Sales Associates Income ------- ---------------- ---------------- Metropolitan Regions (in thousands) San Francisco/Northern California (b)................................ 86 4,139 $ 471,022 Los Angeles/Southern California (c)................................ 65 3,488 414,468 New York Metropolitan Area.......... 120 5,032 275,379 Chicago............................. 68 3,176 173,338 Minneapolis......................... 37 2,296 148,622 Washington DC/Baltimore............. 50 1,886 102,802 Tampa/West Central Florida (d)...... 42 1,764 96,633 Miami/Southeast Florida............. 42 1,987 91,951 Denver.............................. 27 925 82,300 Atlanta............................. 21 1,375 77,257
- --------------------- (a) Assumes all 1997 and 1998 acquisitions of brokerages with annualized gross commission income in excess of $5 million were completed on January 1, 1997. (b) Includes Sacramento, California. (c) Includes San Diego, California. (d) Includes Orlando, Florida. In its residential real estate brokerage business, the Company provides services to consumers in the purchase and sale of new and existing homes. In assisting the seller in a real estate transaction, the Company's sales associates provide the seller with a full service marketing program, which includes: (1) developing a direct marketing plan for the property; (2) assisting the seller in pricing the property and preparing it for sale; (3) advertising the property, including listing it on one or more multiple listing services and/or on one or more web sites on the internet; (4) showing the property to prospective buyers; (5) assisting the seller in sale negotiations; and (6) assisting the seller in closing the transaction. When the Company assists the buyer in a real estate transaction, the Company's sales associates provide the buyer with services, including: (1) assisting the buyer in locating specific properties that meet the buyer's personal and financial specifications; (2) showing properties to the buyer; (3) where permissible, assisting the buyer in negotiating the terms of the contract to purchase; (4) assisting the buyer in closing the transaction, including assisting with mortgage qualification and (5) offering a wide range of brokerage related services. Commissions In a typical brokerage transaction, the Company will receive its commission upon the closing of the transaction. Sales commissions, which are calculated as a percentage of sales price, typically range from approximately 5% to 7%. In transactions in which the Company is acting as a broker one side of a transaction (either the buying side or the selling side) and a third-party broker is acting as 59 broker on the other side of the transaction, the Company typically must share with the other broker 50% of the sales commission. In transactions in which the Company is acting as the sole broker, the Company generally receives 100% of the sales commission. The following table sets forth the gross commission income and related data of the Company and its predecessors during the periods indicated:
Years Ended Nine Months Ended December 31, September 30, ------------------------------ -------------------- 1995 1996 1997 1997 1998 -------- -------- ---------- -------- ---------- (dollars in thousands) Sides................... 100,339 109,994 154,066 105,936 220,297 Average sales price per home................... $192.8 $205.4 $239.0 $232.2 $247.3 Average commission rate per side............... 2.77% 2.78% 2.76% 2.74% 2.73% Real estate sales com- missions............... $540,302 $628,081 $1,016,284 $670,742 $1,488,932
The commission earned by the Company's sales associates is based upon a percentage of the sales commissions earned by the Company. Typically, the percentage of the real estate sales commissions which is shared with the Company's sales associates will vary based on a variety of factors, including 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 has shared with sales associates has averaged between 60% and 67% in recent years. Sales Associates The success of the Company's residential real estate brokerage business is largely dependent upon its ability to recruit, retain and develop highly motivated and well trained sales associates. The Company believes that the reputation of particular sales associates, in addition to the reputation of the Company, is an important factor for many consumers when choosing a brokerage. The Company currently has over 30,000 sales associates, substantially all of whom are independent contractors. Either the Company or the sales associate can terminate the independent contractor relationship at any time. In 1997, the Company experienced a turnover of sales associates who collectively generated approximately 10% of the Company's gross commission income. The Company believes this level of turnover is consistent with the industry average. The Company generally replaces departing sales associates through the recruitment of sales associates. The Company is dedicated to the recruitment and retention of both new and experienced sales associates and to providing extensive programs aimed at both improving their marketing skills and increasing their knowledge and awareness of the issues and laws affecting the real estate industry. While individual results vary widely, the productivity of the Company's sales associates has increased by 13.4% to an average of 9.3 closed sides per sales associate in 1997 from 8.2 closed sides per sales associate in 1996. The Company provides extensive training programs for its sales associates in a variety of areas, including current marketing and selling techniques and customer service. 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 60 and professional skills. Sales associates are responsible for funding certain of the marketing tools used by them in their business. See "--Marketing and Information Technology." There has been a significant change in the real estate industry over the last 20 years characterized by increasing productivity and professionalism of real estate sales associates and increasing demands placed by consumers on such sales associates for a greater range of services to be offered in connection with a home sale or purchase. In order to meet the increasing demands of customers and the needs of the Company's sales associates, the Company has diversified its offering of services by offering, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems and other services. The Company believes that the offering of these services, in addition to the marketing and technological assistance and training programs provided by the Company to its sales associates, will enable the Company to continue to attract and retain highly productive, full-time real estate sales professionals. Referral Network Within its 18 markets, the Company has established an informal network of referral associates who refer home buyers and sellers to other sales associates of the Company. Referral associates generally are non-practicing, licensed real estate agents who pay the Company an annual membership fee to participate in the Company's referral network. By referring a home buyer or seller to the referral network, the referral associate earns a portion of the commission earned by the Company. Marketing and Information Technology The Company markets its full service real estate services and specific real estate listings through a variety of media, including major area and local newspapers, the internet, real estate publications, magazines, luxury homes divisions of the brands, television, radio, and outdoor advertising. The Company's newspaper advertising includes both traditional classified advertising to market each of the Company's listings and full-page advertisements with descriptions of selected homes in the market, typically accompanying photographs of the properties. In addition to newspaper advertising, the Company publishes and distributes Buyers Guides, which display selected Company listings by region. The Company also markets its properties through a direct mail program implemented at the local level. The Company's sales associates may supplement the Company's direct mail programs with specialized programs that they fund on their own. The Company provides its sales associates with promotional materials which can be customized for those sales associates who choose to utilize this opportunity. The Company also participates in luxury marketing programs established by the Franchisors, such as Coldwell Banker Previews, Century 21 Fine Homes & Estates and ERA International Collection. These programs provide special services for buyers and sellers of luxury homes. Properties covered in these programs are listed separately in newspaper advertisements and in quarterly mailings to a qualified list of prospective purchasers throughout the metropolitan areas in which the Company operates, as well as to relocation companies for use by potential transferees to the area. The Company has sales associates who specialize in these homes and form an important component of the marketing approach of the programs. 61 In addition to the Company's direct expenditures on marketing, the Company contributes a portion of its gross commission income to segregated national advertising funds maintained by the Franchisors. The national advertising funds collect marketing contributions from all of their respective franchisees and allocate such funds, together with funds contributed by the Franchisors, for national media purchases and brand awareness and positioning campaigns. In 1997, the national advertising funds' expenditures on advertising promoting the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names totaled approximately $65 million. The Company believes that the use of information technology as a marketing tool will continue to increase and, accordingly, has sought to become a leader among residential real estate brokerage firms in the use and application of information technology. Key features of the Company's information technology include: (1) access to information from any location; (2) integration of the Company's information systems with multiple listing services to provide information covering a large number of properties, including current prices, color photographs, on-line updates and a property tax database; (3) competitive market analyses; (4) mapping and preparation of property tours; (5) desktop publishing for personalized feature sheets and marketing materials; and (6) customized forms and contracts. The Company's internet presence features the Company's entire listing inventory in its regional and national markets, plus community profiles, home buying and selling advice, relocation tips and mortgage financing information. Consumers are able to check the Company's listings by providing certain search parameters. A list of all properties conforming to the user's search criteria is then generated with specific information including a photograph of each property available for those properties of particular interest. In addition, the customer has the ability to contact the Company interactively with respect to such customer's particular interest. The Company believes that its internet presence provides it with a competitive advantage by enabling consumers to familiarize themselves with the Company's sales associates, local markets and information with respect to available homes from anywhere in the world prior to their arrival in a local market for a home search. Office Management The Company operates its brokerage offices in a decentralized manner, which permits significant marketing flexibility and management control at the local level. The Company believes that local management is better situated to understand local markets and is best able to tailor services to such markets. Following an acquisition, the Company seeks to centralize certain of the acquired company's functions, such as finance, accounting, payroll, human resources and legal support, thereby eliminating duplicative operations and realizing economies of scale. By centralizing these functions, the Company is able to utilize its existing infrastructure to support an increased level of revenues without a corresponding increase in expenses. Mortgage Services The Company markets mortgage origination services to its customers pursuant to the Marketing Agreement with Cendant Mortgage, the ninth largest mortgage originator in the United States. Cendant Mortgage provides mortgage services through a centralized inbound telemarketing mortgage 62 origination service in most of the Company's offices and through loan officers located in certain of the Company's offices. This service includes providing the prospective home buyer with an immediate mortgage preapproval with respect to an anticipated home purchase, which makes the prospective home buyer more attractive to the seller. The Company earns marketing fees for the services it provides under the Marketing Agreement. The Company believes that its agreement with Cendant Mortgage provides it with a nationwide mortgage underwriter well suited to provide mortgage services to clients of a large, geographically dispersed network of real estate offices. The Company intends to enter into a joint venture with Cendant to provide mortgage services, at which time the Marketing Agreement will be terminated. See "Certain Transactions--Marketing Agreement." Title, Escrow and Other Closing Services The Company operates full service title insurance agencies which provide real estate closing and title insurance services in certain of the Company's markets. The Company conducts title searches, updates abstracts, records closing documents, conducts closings and performs other services on behalf of the underwriters of the title insurance policy and issues title insurance for third party title insurance companies. As a title agent in such transactions, while the Company does not underwrite the insurance, the Company retains a significant portion of the title insurance premium in consideration of the services it provides. The Company owns an escrow services company which is licensed as a full service escrow company in Southern California and provides a range of real estate closing services to home buyers and sellers. These services include escrowing funds and processing closing documentation. Revenues are generated by transaction fees, which tend to fluctuate with the Company's brokerage revenues. Additional Services In addition to the foregoing services, the Company offers the following additional services to its customers. Brokerage-Related Services The Company offers, either directly or through marketing and purchasing arrangements with or established by Cendant, brokerage-related services, including home warranties, home security systems, temporary housing, temporary storage, moving truck rentals and telephone services. The Company generally earns fees for the marketing of such services. See "Certain Transactions-- Program Outsourcing Agreement" and "Risk Factors--Restrictions Imposed by Program Outsourcing and Marketing Agreements." The Company believes that its offering of brokerage-related services at competitive prices provides it with a significant point of differentiation from most other brokerages, which typically do not offer such services. Relocation Management The Company also offers relocation services to its customers either directly or through an arrangement with Cendant Mobility, the country's largest relocation company. Relocation services generally include home sale and marketing assistance programs, property rental management, closing 63 services, home finding assistance, moving services, rental assistance, mortgage services, expense management, policy counseling, consulting services and group move management. The Company provides relocation services that focus on smaller and mid-size companies that can benefit from the services provided by a full service relocation company, yet may not be large enough to contract with Cendant Mobility or other large relocation company. When the Company provides its own relocation services, it receives fees from the client for its relocation services in addition to the commissions generated on the sale and/or purchase of the transferee's property. In addition, the Company has an arrangement with Cendant Mobility, the country's largest relocation company, pursuant to which the Company provides its brokerage services to relocating employees of the clients of Cendant Mobility, which are typically large corporations and governmental agencies. When receiving a referral from Cendant Mobility, the Company seeks to assist the buyer in completing a home sale. Upon completion of home sale, the Company receives a commission on the purchase or sale of the property but is obligated to pay Cendant Mobility a portion of such commission as a referral fee. The Company believes that such fees are comparable to the fees charged by other relocation companies. See "Certain Transactions--Relocation Management." Competition The residential real estate brokerage industry is highly competitive, particularly in the densely populated metropolitan markets in which the Company competes. In addition, the industry has relatively low barriers to entry for new participants, including participants pursuing non-traditional methods of marketing real estate, such as internet-based listing services. The Company competes primarily with (1) franchisees of local and regional real estate franchisors, (2) franchisees of the Franchisors and other national real estate franchisors, such as RE/MAX, Prudential Real Estate and Better Homes and Gardens, (3) regional independent real estate organizations, such as Weichert, Realtors and Fred Sands Realtors, and (4) smaller niche companies competing in local areas. Companies compete for sales and marketing business primarily on the basis of services offered, reputation, personal contacts, and, to a lesser extent, brokerage commissions. Government Regulation The Company's businesses are subject to governmental regulation. The residential real estate brokerage business is subject to regulatory and licensing requirements of government agencies in each state in which the Company operates. As a result, the Company must be licensed as a broker and its sales associates must be licensed as sales associates in each state in which they operate. State statutes contain general standards for and prohibitions on the conduct of real estate brokers and sales associates and set standards in the areas of disclosure when acting in an agency and dual agency (representing a seller and a buyer in a transaction) capacity, commission collection, continuing broker and sales associate education, administration of trust funds, advertising and disclosure of various information in real estate forms. Under state law, a real estate broker such as the Company has a duty to supervise and is responsible for the conduct of its sales associates. 64 The Company is subject to the Real Estate Settlement Procedures Act (commonly referred to as "RESPA"), a federal law that, among other things, requires timely disclosure of the relationships or financial interests between providers of real estate settlement services and fees and prohibits certain referral fees between providers of settlement services. The Company is also subject to similar state laws as well as other state laws and industry standards which impose additional restrictions or requirements on the manner in which the Company may conduct its business. The Company's title and escrow services businesses are regulated by state regulatory authorities that possess broad powers relating to the granting and revocation of licenses. Such state authorities also regulate insurance rates and the form of the policies. The Company's business depends on the validity of, and the Company's continued good standing under, the licenses and approvals pursuant to which it operates, as well as compliance with pertinent regulations. The Company therefore devotes significant effort toward maintaining its licenses and to ensuring compliance with applicable regulations. Although the Company believes that it currently complies in all material respects with all applicable regulatory and licensing requirements, there can be no assurance of full compliance with current laws, regulations or interpretations or that more restrictive laws, regulations or interpretations will not be adopted in the future that could make compliance more difficult or expensive. In addition, regulatory authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals, and to implement regulations. Accordingly, the possibility exists that the Company might be precluded or temporarily suspended from carrying on some or all of its activities or otherwise penalized in a given jurisdiction in the future if its practices were to be found not to comply with the then current regulatory or licensing requirements, or any interpretation thereof by the regulatory authority. Employees and Sales Associates As of December 31, 1998, the Company had over 4,000 full-time employees and over 30,000 sales associates (substantially all of whom are independent contractors). None of the Company's employees or sales associates is covered by a collective bargaining agreement. Management believes that the Company's relations with its employees and sales associates are good. Properties The Company's principal executive offices are located in Parsippany, New Jersey, where the Company leases approximately 7,500 square feet from Cendant. The Company also leases approximately 35,000 square feet of office space from Cendant in Mission Viejo, California. See "Certain Transactions--Lease Agreements." With respect to the Company's approximately 690 brokerage offices, the Company owns 18 brokerage offices representing a total of approximately 56,000 square feet of office space and leases all remaining properties representing a total of approximately 3.4 million square feet. The Company believes that its present facilities are adequate for its current level of operations. 65 Legal Proceedings In the ordinary course of business, the Company is involved in various legal proceedings incident to its operations. The Company maintains general liability and errors and omissions insurance in respect of such legal proceedings. In the opinion of management, the Company is not currently involved in any legal proceeding which it believes would have a material adverse effect on the operations or financial condition of the Company, taken as a whole. 66 MANAGEMENT Directors and Executive Officers The following table sets forth certain information concerning the executive officers and directors of the Company as of December 31, 1998. There are no family relationships among any of the Company's executive officers and directors.
Name Age Position Robert M. Becker........ 57 President, Chief Executive Officer and Director Chandler B. Barton...... 64 Chairman of the Board and Director Michael R. Good......... 49 Executive Vice President Gregory W. Hunt......... 42 Senior Vice President, Chief Financial Officer and Treasurer Steven L. Barnett....... 34 Senior Vice President, General Counsel and Secretary Ralph W. Burnet......... 53 Senior Vice President--Midwest Region Larry Knapp............. 52 Senior Vice President--Western Region Bruce G. Zipf........... 42 Senior Vice President--Northeast Region R. Scott Webber......... 44 Senior Vice President--Southeast Region Terence W. Edwards...... 43 Director Joshua J. Harris........ 34 Director David M. Johnson........ 38 Director Samuel L. Katz.......... 33 Director Marc J. Rowan........... 36 Director Richard A. Smith........ 45 Director Michael L. Tarnopol..... 62 Director Michael D. Weiner....... 46 Director
The following biographical information of the Company's executive officers and directors is based on information provided by them. Robert M. Becker has been President and Chief Executive Officer of the Company since August 1997. Mr. Becker served as President and Chief Executive Officer of National Realty Trust from May 1997 to August 1997 and President and Chief Executive Officer of Coldwell Banker from May 1996 to May 1997. From 1994 to May 1996, Mr. Becker served as President and Chief Operating Officer of Coldwell Banker Schlott Realtors ("CBSR"), a subsidiary of Coldwell Banker Corporation and one of the largest real estate brokerages in the United States with over 100 offices in New Jersey, Connecticut and Westchester County, New York and over 3,500 sales associates. Mr. Becker served as General Sales Manager of CBSR from February 1990 (when it was acquired by Coldwell Banker Corporation ) to 1994 and served in a similar capacity at CBSR from 1980 to February 1990. Chandler B. Barton has been Chairman of the Board and a director of the Company since August 1997. Mr. Barton served as Chairman of National Realty Trust from May 1996 to August 67 1997 and President and Chief Executive Officer of Coldwell Banker Corporation from January 1989 to May 1996. Prior to October 1993, Mr. Barton also served as Chairman of the Board of Coldwell Banker Corporation. Mr. Barton was Executive Vice President of Coldwell Banker Corporation from 1988 to January 1989, Chief Executive Officer and a director of the mortgage, relocation, title and escrow companies owned by Coldwell Banker Corporation from 1986 to 1988 and Senior Vice President of Coldwell Banker Corporation's southeast region residential operations from 1982 to 1986. Mr. Barton joined Coldwell Banker Corporation in 1979 as part of its acquisition of Barton and Ludwig, at that time one of the largest real estate brokerage companies in the southern United States. Michael R. Good has been Executive Vice President of the Company since August 1998. Mr. Good was Senior Vice President--Southeastern Region of the Company from August 1997 to August 1998. Mr. Good served as Senior Vice President-- Southeastern Region of National Realty Trust from June 1997 to August 1997. Prior thereto, Mr. Good served as President of Coldwell Banker Corporation's operations in West Central Florida from 1987 to 1997, with the exception of 1991 and 1992, during which he served as Vice President of Coldwell Banker Corporation. Mr. Good has been associated with Coldwell Banker Corporation since 1981 when his real estate brokerage was acquired by Coldwell Banker Corporation. Gregory W. Hunt has been Senior Vice President and Chief Financial Officer of the Company since January 1998 and Treasurer since September 1998. Prior to joining NRT, Mr. Hunt served as Managing Director for the CEENIS Property Fund, a venture capital and property investment fund, from September 1996 to December 1997. From August 1995 to August 1996, Mr. Hunt was Vice President, Finance and Chief Financial Officer of Culligan Water Technologies, Inc. He served as Vice President, Treasurer and Chief Financial Officer of Astrum International Corp., the holding company for Culligan Water Technologies, Inc., McGregor Corporation and Samsonite Corporation, from January 1991 to August 1995. Steven L. Barnett has been Senior Vice President, General Counsel and Secretary of the Company since April 1998. From May 1997 to April 1998, Mr. Barnett served as Associate General Counsel for Venator Group, Inc. (formerly Woolworth Corporation). From October 1989 to May 1997, Mr. Barnett was a mergers and acquisitions associate with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP in New York. Ralph W. Burnet has been Senior Vice President--Midwest Region of the Company since February 1998. Mr. Burnet was the founder and owner of Burnet Realty, the largest residential real estate brokerage in Minnesota and one of the largest residential real estate brokerages in the country, which was acquired by the Company in February 1998. Prior thereto, Mr. Burnet served as Chairman and Chief Executive Officer of Burnet Realty from 1990 to February 1998 and as Eastern Region President for Merrill Lynch Realty Associates following its purchase of Burnet Realty from 1982 to 1990. 68 Larry Knapp has been Senior Vice President--Western Region of the Company since August 1997. Mr. Knapp served as Senior Vice President--Western Region of National Realty Trust from June 1997 to August 1997 and as the President of Coldwell Banker Corporation's Northern California operations from 1985 to June 1997. From 1981 to 1985, Mr. Knapp served as Senior Vice President and Regional Manager for Coldwell Banker Corporation's Sacramento operations. Bruce G. Zipf has been Senior Vice President--Northeast Region of the Company since August 1997 and President and Chief Operating Officer of the Metro New York Region of the Company from August 1997 through November 1998. Mr. Zipf served as Senior Vice President--Northeast Region and President of the Metro New York Region of the Trust from June 1996 to August 1997 and as Senior Vice President--Northeast Region and President and Chief Operating Officer of the Metro New York Region of National Realty Trust from May 1996 to August 1997. From 1994 to May 1996, Mr. Zipf was Senior Vice President of Finance and Administration for Schlott Realtors and served in a variety of senior management positions with Schlott Realtors after joining Schlott Realtors as Controller in 1986. R. Scott Webber has been Senior Vice President--Southeast Region of the Company since October 1998. Mr. Webber was the owner of Coldwell Banker Van Schaack and Company prior to its acquisition by NRT. Previously, Mr. Webber served as Senior Vice President of the Rocky Mountain Region for Coldwell Banker Residential Real Estate. Terence W. Edwards has been a director of the Company since September 1997. Mr. Edwards has been President and Chief Executive Officer of Cendant Mortgage (and its predecessor PHH Mortgage Services Corporation ("PHH Mortgage")) since February 1996. Mr. Edwards was Vice President, Investor Relations and Treasurer of PHH Mortgage from June 1995 to February 1996 and Senior Vice President, Secondary Marketing of PHH Mortgage from 1990 to February 1996, Vice President of PHH Mortgage from 1987 to 1990 and Director of Mortgage Finance of PHH Mortgage from 1984 to 1987. Mr. Edwards served as Treasury Operations Analyst of PHH Corporation from 1980 to 1984. Joshua J. Harris has been a director of the Company since August 1997. Mr. Harris is a principal of Apollo Management, L.P. and has served as an officer of certain affiliates of Apollo Management, L.P. since 1990. Mr. Harris also is a director of Alliance Imaging, Inc., Converse Inc., Florsheim Group Inc., MTL, Inc. and SMT Health Services Inc. David M. Johnson has been a director of the Company since December 1998. Mr. Johnson has served as Senior Executive Vice President and Chief Financial Officer of Cendant since November 1998. He was Executive Vice President-Finance of Cendant from April 1998 to November 1998. Prior to joining Cendant, Mr. Johnson worked in the Investment Banking group of Merrill Lynch, Pierce, Fenner & Smith Incorporated, most recently as a Managing Director. Samuel L. Katz has been a director of the Company since August 1997. Mr. Katz has served as Executive Vice President, Strategic Development of Cendant since April 1998 and was Senior Vice President--Acquisitions of Cendant (and its predecessor HFS Incorporated) from January 1996 to April 1998. From June 1993 to December 1995, Mr. Katz was Vice President of Dickstein Partners Inc., a private investment firm. Mr. Katz is a director of Specialty Catalog Corp. 69 Marc J. Rowan has been a director of the Company since September 1997. Mr. Rowan is one of the founding principals of Apollo Management, L.P. and has been a principal of Apollo Management, L.P. and an officer of certain affiliates of Apollo Management, L.P. since 1990. Mr. Rowan is a director of Samsonite Corporation, MTL, Inc. and Vail Resorts, Inc. Richard A. Smith has been a director of the Company since September 1997. Mr. Smith has been Chairman and Chief Executive Officer of the Real Estate Division of Cendant (and its predecessor HFS Incorporated) since October 1996 and served as Executive Vice President of Operations of HFS Incorporated from February 1992 to October 1996. Prior thereto, Mr. Smith held various management positions at Days Inns of America ("Days Inns") over a period of 13 years, including corporate director of risk management, vice president of personnel, senior vice president of human resources and senior vice president of administration and also served as a member of the operating committee of Days Inns. Michael L. Tarnopol has been a director of the Company since September 1997 and was a trustee of National Realty Trust from May 1996 to July 2, 1997. Mr. Tarnopol has been Vice Chairman of Bear, Stearns & Co., Inc. since 1997, a Senior Managing Director of Bear, Stearns & Co. Inc. since 1985 and Chairman of the Investment Banking Division of Bear, Stearns & Co. Inc. since 1987. Mr. Tarnopol is also a director of Avis Rent A Car, Inc. and Planet Hollywood International Inc. Michael D. Weiner has been a director of the Company since September 1997. Mr. Weiner has been an officer of certain affiliates of Apollo Management, L.P. since 1992. Prior to 1992, Mr. Weiner was a partner in the law firm of Morgan, Lewis & Bockius LLP. Mr. Weiner is also a director of Alliance Imaging, Inc., Continental Graphics Holdings, Inc., Converse Inc., Florsheim Group Inc., MTL, Inc., SMT Health Services Inc. and WMC Finance Co. Pursuant to the terms of the Stockholders Agreement, Apollo and Cendant have agreed to vote their shares of the Company's voting stock in favor of a twelve- member Board of Directors consisting of five directors designated by Apollo, five directors designated by Cendant and two directors jointly designated by Apollo and Cendant. The Company's Board of Directors currently consists of ten directors, including four directors (Joshua J. Harris, Marc J. Rowan, Michael L. Tarnopol and Michael D. Weiner) designated by Apollo, four directors (Terence W. Edwards, David M. Johnson, Samuel L. Katz and Richard A. Smith) designated by Cendant, and two directors (Chandler B. Barton and Robert M. Becker) jointly designated by Apollo and Cendant. Prior to the closing of the offering, each of Apollo and Cendant will designate one additional director who is an "independent director" (within the meaning of the rules of the New York Stock Exchange). See "Certain Transactions--Stockholders Agreement." Prior to the closing of the offering, the Board of Directors will be divided into three classes of directors, each of which will be elected for a staggered term of three years. The initial terms of the Class I, II and III directors will expire at the annual meeting of stockholders of the Company in 2000, 2001 and 2002, respectively. Messrs. , and will be Class I directors, Messrs. , and will be Class II directors and Messrs. , , and will be Class III directors. Officers of the Company are elected at the first meeting of the Board of Directors held each year following the annual meeting of stockholders and serve at the discretion of the Board. 70 Committees of the Board of Directors The Company's Board of Directors currently has three standing committees, including a Compensation and Human Resource Committee, an Audit Committee and an Executive Committee. The Company's Compensation and Human Resource Committee administers the Equity Participation Plan and reviews and makes recommendations to the Board of Directors with respect to the Company's compensation and hiring programs and policies. The current members of the Compensation Committee are Messrs. Harris, Johnson, Katz and Rowan. The Company's Audit Committee recommends the annual appointment of the Company's auditors, with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, accounting principles used by the Company in financial reporting, internal auditing procedures, and the adequacy of the Company's internal control procedures. The current members of the Audit Committee are Messrs. Harris and Katz. It is expected that the Audit Committee will be reconstituted prior to the closing of the offering to consist solely of independent directors of the Board. The Company's Executive Committee has certain selected powers and rights to exercise the authority of the Board of Directors between meetings of the Board of Directors. The current members of the Executive Committee are Messrs. Becker, Harris and Katz. The Company may, from time to time, establish other committees to facilitate the management of the Company. Compensation of Directors Directors of the Company who are also employees receive no additional compensation for their service as a director. Non-employee directors receive an annual retainer of $30,000, plus $4,000 for serving as chairman (if a chairman has been selected) of a committee and $2,000 for serving as a member of a committee other than as chairman. Non-employee directors are also paid $1,000 for each Board meeting attended and $500 ($1,000 for committee chairmen) for each Board committee meeting if held on the same day as a Board meeting and $1,000 ($2,000 for committee chairmen) for each Board committee meeting attended on a day on which there is no Board meeting. Non-employee directors are reimbursed for expenses incurred in attending meetings of the Board of Directors and committees. Under the Company's 1997 Equity Participation Plan, each non-employee director of the Company was granted options on December 13, 1998 to purchase 30,000 shares of Common Stock at an exercise price equal to $20.00 per share (with the exception of Mr. Katz, whose options, which were granted on September 6, 1997, have an exercise price of $2.00 per share, subject to adjustment). With the exception of options to purchase 30,000 shares of Common Stock granted to Michael P. Monaco, who served as a director of the Company from September 1997 to December 1998, all of which are fully vested, all options granted to non-employee directors vest one-third on the date of grant, one-third on September 6, 1999 and the balance on September 6, 2000. See "Equity Participation Plan." 71 Executive Compensation Summary Compensation Table The following table sets forth the compensation earned by the Chief Executive Officer of the Company and the four other most highly paid executive officers of the Company who served as executive officers of the Company as of December 31, 1998, for the fiscal year ended December 31, 1998 and for the Company's first fiscal year, which commenced on September 1, 1997 and ended on December 31, 1997.
Long-Term Compensation Annual Compensation Securities ---------------------- Underlying All Other Name and Position Year Salary Bonus Options(1) Compensation(2) - ----------------- ---- -------- -------- ------------ --------------- Robert M. Becker .......... 1998 President and Chief 1997 $337,994 $260,000 50,000 Executive Officer $108,336 $ 83,333 200,000 $ Chandler B. Barton......... 1998 $249,988 $312,500 -- Chairman of the Board 1997 $ 83,328 $104,167 75,000 $ Gregory W. Hunt............ 1998 $243,435 $156,250 150,000 Senior Vice President, 1997 -- -- -- -- Chief Financial Officer and Treasurer Michael R. Good............ 1998 $217,917 $125,000 25,000 Executive Vice President 1997 $ 63,333 $ 35,417 50,000 $ Bruce G. Zipf.............. 1998 Senior Vice President-- 1997 $190,000 $125,000 -- Northeast Region $ 62,864 $ 36,458 50,000 $
- --------------------- (1) Includes options to acquire shares of Common Stock of the Company. In addition, options to acquire 480,260 shares of common stock of Cendant were granted to Mr. Becker on April 30, 1997 for his services as an employee of Cendant. (2) Includes matching contributions by the Company on behalf of the named executive officers under the Company's 401(k) savings plan (Mr. Becker ($ ), Mr. Barton ($ ), Mr. Hunt ($ ), Mr. Good ($ ) and Mr. Zipf ($ )). Options Granted in Last Fiscal Year The following table sets forth information concerning stock options which were granted during the fiscal year ended December 31, 1998 to the executive officers named in the Summary Compensation Table.
Potential Realizable Value at Percent of Assumed Total Annual Rates Number of Options of Stock Price Securities Granted to Appreciation for Underlying Employees Exercise or Option Term(3) Options in Fiscal Base Price Per Expiration ----------------- Name Granted(1) Year Share(2) Date 5% 10% - ---- ---------- ---------- -------------- ---------- -------- -------- Robert M. Becker........ 50,000 6.8% $20.00 9/01/08 $ $ Chandler B. Barton...... -- -- -- -- Gregory W. Hunt......... 90,000 12.2% $ 9.80 1/12/08 30,000 4.1% $20.00 1/12/08 30,000 4.1% $20.00 12/13/08 Michael R. Good......... 25,000 3.4% $20.00 10/01/08 Bruce G. Zipf........... -- -- --
- --------------------- (1) Includes options granted under the Equity Participation Plan, the terms of which are described under "--Equity Participation Plan." (2) On September 28, 1998, the Board of Directors of NRT approved an adjustment to the exercise price of each option under the Equity Participation Plan outstanding as of such date to give effect to the payment of a portion of the dividends to Apollo. The exercise price of such options will be further adjusted downward to give effect to the payment to the Franchisors of an additional royalty pursuant to the Franchise Agreements of 0.15% of the Company's total revenue per quarter for each quarter (up to a total of 20 quarters) in which the Company's EBITDA over the preceding twelve-month period exceeds $225 million. In no event, however, shall the exercise price for such options be adjusted to less than $0.01 per share. Of the options reflected in the above table, the options granted to Mr. Becker and 120,000 of the options granted to Mr. Hunt are subject to adjustment. (3) The amounts shown in these two columns represent the potential realizable values using the options granted and the exercise price. The assumed rates of stock price appreciation are set by the Securities and Exchange Commission's executive compensation disclosure rules and are not intended to forecast the future appreciation of the Common Stock. 72 Options Exercised in Last Fiscal Year; Fiscal Year End Option Values at Year End No options were exercised in the fiscal year ended December 31, 1998. The following table summarizes certain information regarding the value of options held by the executive officers named in the Summary Compensation Table as of December 31, 1998.
Fiscal Year End Option Values(1) --------------------------------------------------- Number of Securities Value of Unexercised Underlying Options at In-the-Money Options Fiscal Year End (#) at Fiscal Year End ($) Name Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------------------- ------------------------- Robert M. Becker............ 20,000/230,000 Chandler B. Barton.......... 7,500/67,500 Gregory W. Hunt............. 0/150,000 Michael R. Good............. 5,000/70,000 Bruce G. Zipf............... 5,000/45,000
- --------------------- (1) Includes options to acquire shares of Common Stock granted under the Equity Participation Plan. In calculating fiscal year end option values, the Common Stock is assumed to have a value as of December 31, 1998 of $20.00 per share, representing an estimate of the value of the Common Stock as of that date. In addition, at December 31, 1998, options to acquire shares of Cendant common stock were held in respect of their former employment by Cendant as follows: Mr. Becker (374,940 shares); Mr. Good (24,031 shares); and Mr. Zipf (9,612 shares). Employment Agreements The Company does not have any employment or severance agreements with any of the executive officers named in the Summary Compensation Table. Equity Participation Plan General The 1997 Equity Participation Plan of NRT Incorporated (as amended, the "Equity Participation Plan"), which was adopted by the Board of Directors of the Company in September 1997 and amended, authorizes an aggregate of 2,500,000 shares of Common Stock for awards under the plan, of which shares of Common Stock will be subject to options upon the closing of the offering. The primary purpose of the Equity Participation Plan is to provide an additional incentive to key employees, consultants and non-employee directors of the Company and its subsidiaries to further the growth, development and financial success of the Company and to enable the Company to obtain and retain the services of such employees, consultants and directors. The Equity Participation Plan is intended to qualify for the performance-based exclusion from the deduction limitation of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Administration The Equity Participation Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee selects the recipients of awards under the Equity Participation Plan and has the authority to make determinations with respect to the participation of employees, consultants and non-employee directors in the Equity Participation Plan and the terms and conditions of all awards granted, including vesting schedules, performance criteria and post- 73 termination exercise provisions. The Compensation Committee also has the authority to interpret and construe the provisions of the Equity Participation Plan. Awards The Equity Participation Plan provides for a variety of awards, including stock options, stock appreciation rights, restricted stock, dividend equivalents and other equity-based awards. Stock options granted under the Equity Participation Plan may be incentive stock options ("ISOs") or non- qualified stock options ("NSOs") within the meaning of Section 422 of the Code. The exercise price of each stock option granted under the Equity Participation Plan is fixed by the Compensation Committee (or the Board of Directors, in the case of options granted to non-employee directors), provided that in the case of ISOs and options intended to be performance based compensation under Section 162(m)(4)(C) of the Code, such price may not be less than 100% of the fair market value of the Common Stock on the date the option is granted or in the case of ISOs granted to an individual then owning over 10% of the total combined voting power of the Company's capital stock, such price shall not be less than 110% of the fair market value of the Common Stock on the date of grant. The Compensation Committee may, in its discretion, permit the exercise of stock options granted under the Equity Participation Plan on a "cashless" basis. The term of each stock option granted under the Equity Participation Plan is set by the Compensation Committee (or the Board in the case of options granted to non-employee directors), but in no event may the term be more than ten years from the date of grant, or five years from the date of grant in the case of an ISO granted to an individual owning more than 10% of the total combined voting power of all classes of the Company's stock. No participant in the Equity Participation Plan may receive awards in any year with respect to more than 300,000 shares of Common Stock. As of the date of this prospectus, outstanding awards under the Equity Participation Plan consist solely of stock options with respect to shares of Common Stock, with a weighted average exercise price of $ . In general, one-half of the options granted to employees are time vesting options, which vest in equal installments over a five-year period and are fully exercisable at the end of such five-year period, and one-half are performance-based options, which vest in equal installments over a five-year period but are not earned prior to the earlier of (1) the eighth anniversary of the date of grant or (2) the date of a qualifying Triggering Event (as defined in the Equity Participation Plan). The closing of the offering and the application of the net proceeds therefrom will constitute a qualified Triggering Event for purposes of the Equity Participation Plan. Options held by employees of the Company will become fully vested following a change in control if such employees are terminated within 12 months after the change in control without cause or in connection with the change in control. Each non-employee director of the Company was granted options on December 13, 1998 to purchase 30,000 shares of Common Stock at an exercise price equal to $20.00 per share (other than Mr. Katz, whose options have an exercise price of $2.00 per share, subject to the adjustments described above). With the exception of an option to purchase 30,000 shares of Common Stock granted to Michael P. Monaco, who served as a director of the Company from September 1997 to December 1998, all of which are fully vested, all options granted to non- employee directors vest one-third on the date of grant, one-third on September 6, 1999 and the balance on September 6, 2000. 74 All options held by non-employee directors will become fully vested upon a change in control of the Company occurring after the offering. Amendment/Termination The Board of Directors of the Company may amend or terminate the Equity Participation Plan, provided that (1) no such amendment or termination may adversely affect the rights of any participant without the consent of such participant and (2) to the extent required by any law, regulation or stock exchange rule, no amendment shall be effective without the approval of the Company's stockholders. Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Board of Directors currently consists of Messrs. Harris, Johnson, Katz and Rowan. Mr. Katz was President of the Company and Mr. Harris was Vice President and Treasurer of the Company at the time of the Company's formation in August 1997. 75 PRINCIPAL AND SELLING STOCKHOLDERS The table below sets forth certain information regarding the beneficial ownership of the Common Stock by (1) each person known by the Company to be the beneficial owner of five percent or more of its outstanding Common Stock and Convertible Preferred Stock, (2) each of the executive officers of the company listed in the Summary Compensation Table above, (3) each of the directors of the Company, and (4) all directors and executive officers of the Company as a group. Unless otherwise indicated, the Company believes that the beneficial owner has sole voting and investment power over such shares. The figures shown with respect to the Common Stock (1) assume the conversion of all outstanding shares of Convertible Preferred Stock held by Cendant and (2) do not give effect to a to 1 split of the Common Stock to be effected prior to the offering.
Beneficial Ownership Beneficial Ownership Beneficial Ownership of of Common Stock of Common Stock Convertible Preferred Before the Offering After the Offering Stock(5) ---------------------- Shares of -------------------- --------------------------- Number Common Number of Number Percentage of Shares Percentage Stock Being Shares of Percentage of of Name of Class(1) of Class Offered Class of Class Shares Class ---- ----------- ---------- ----------- --------- ---------- ------------- ------------- Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. c/o Apollo Management, L.P.(2) 1301 Avenue of the Americas 38th Floor New York, New York 10019................... 10,000,000 -- -- Bear, Stearns & Co. Inc.(3) 245 Park Avenue New York, New York 10167................... 4,900,000 -- -- Cendant Operations, Inc. c/o Cendant Corporation(4) 6 Sylvan Way Parsippany, New Jersey 07054................... 24,000 100% Robert M. Becker........ 40,000 * -- 40,000 * -- -- Chandler B. Barton...... 15,000 * -- 15,000 * -- -- Gregory W. Hunt......... 24,000 * -- 24,000 * -- -- Michael R. Good......... 10,000 * -- 10,000 * -- -- Bruce G. Zipf........... 10,000 * -- 10,000 * -- -- Terence W. Edwards(6)... 10,000 * -- 10,000 * -- -- Joshua J. Harris(7)..... 10,000 * -- 10,000 * -- -- David M. Johnson(6)..... 10,000 * -- 10,000 * -- -- Samuel L. Katz(6)....... 10,000 * -- 10,000 * -- -- Marc J. Rowan(7)........ 10,000 * -- 10,000 * -- -- Richard A. Smith(6)..... 10,000 * -- 10,000 * -- -- Michael L. Tarnopol(8).. 10,000 * -- 10,000 * -- -- Michael D. Weiner(7).... 10,000 * -- 10,000 * -- -- All executive officers and directors as a group (17 persons)..... 226,500 -- 226,500 -- --
(footnotes on following page) 76 - --------------------- * Less than one percent. (1) Includes options to acquire shares of Common Stock which are exercisable within 60 days following consummation of the offering as follows: Mr. Becker (40,000), Mr. Barton (15,000), Mr. Hunt (24,000), Mr. Barnett (10,000), Mr. Burnet (15,000), Mr. Good (10,000), Mr. Knapp (12,500), Mr. Zipf (10,000), Mr. Webber (0), Mr. Edwards (10,000), Mr. Harris (10,000), Mr. Johnson (10,000), Mr. Katz (10,000), Mr. Rowan (10,000), Mr. Smith (10,000), Mr. Tarnopol (10,000) and Mr. Weiner (10,000). (2) Includes 9,116,213 shares held by Apollo Investment Fund III, L.P., 545,832 shares held by Apollo Overseas Partners III, L.P. and 337,905 shares held by Apollo (UK) Partners III, L.P., each of which is a private investment fund managed by Apollo Management, L.P. See Note (3) below. (3) Pursuant to a Participation Agreement, dated as of August 11, 1997, Bear, Stearns & Co. Inc. owns a 49% non-voting equity participation in Apollo's investment in the Company and, accordingly, is entitled to receive its pro rata share of any amounts received by Apollo in respect of such investment, including the proceeds to Apollo from the sale of shares of Common Stock in the offering. (4) Cendant Operations, Inc. is a wholly owned subsidiary of Cendant Corporation. In connection with the offering, Cendant, Apollo and NRT have agreed that in the event the underwriters' over-allotment option is exercised, Cendant will sell to the underwriters, in connection with such exercise, a number of shares of Common Stock equal to 10% of the total secondary offering by Apollo and Cendant (including shares sold pursuant to the exercise of the underwriters' over-allotment option). The amounts shown in the table assume that the underwriters' over-allotment option is not exercised. (5) Includes 24,000 shares of Convertible Preferred Stock held by Cendant. The Convertible Preferred Stock has the right to vote on all matters as to which the holders of Common Stock are entitled to vote, voting together with the holders of Common Stock as a class. Each holder is entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Convertible Preferred Stock could be converted on the record date for the vote which is being taken. The outstanding shares of Convertible Preferred Stock (all of which are held by Cendant) represent % of the total voting power of the Company's outstanding shares. (6) Messrs. Edwards, Johnson, Katz and Smith are officers of Cendant and expressly disclaim beneficial ownership of any shares of the Company's capital stock owned by Cendant. (7) Messrs. Harris, Rowan and Weiner are affiliated with Apollo Management, L.P. and expressly disclaim beneficial ownership of any shares of Common Stock owned by Apollo. (8) Mr. Tarnopol is Vice Chairman and a Senior Managing Director of Bear, Stearns & Co. Inc. and expressly disclaims beneficial ownership of any shares of Common Stock beneficially owned by Bear, Stearns & Co. Inc. 77 CERTAIN TRANSACTIONS Prior to the offering, Apollo beneficially owns % and Cendant beneficially owns % of the issued and outstanding shares of Common Stock assuming the conversion of all outstanding shares of Convertible Preferred Stock into Common Stock. Immediately following the offering, Apollo will beneficially own approximately % ( % if the underwriters' over-allotment option is exercised in full) and Cendant will beneficially own approximately % ( % if the underwriters' over-allotment option is exercised in full) of the outstanding shares of Common Stock (assuming the conversion of all outstanding shares of Convertible Preferred Stock into Common Stock). Cendant was formed through the merger of HFS Incorporated and CUC International Inc. in December 1997. Within its three principal operating segments--real estate services, travel and alliance marketing--Cendant provides a wide range of complementary consumer and business services. The real estate segment assists in employee relocation, provides home buyers with mortgages and franchises real estate brokerage businesses; the travel segment facilitates vacation timeshare exchanges, manages corporate and government vehicle fleets and franchises car rental and hotel businesses; and the alliance marketing segment provides an array of value driven products and services through more than 20 membership clubs and client relationships. Cendant also offers tax preparation services, customer software in various multimedia forms, information technology services, credit information services and financial products. Headquartered in Parsippany, New Jersey, Cendant has more than 40,000 employees and operates in over 100 countries. Apollo comprises a number of private securities investment funds managed by Apollo Management, L.P., which, together with its affiliates, manages a portfolio of investments currently valued in excess of $5 billion. Apollo, Cendant, the Franchisors and the Company have entered or will enter into various agreements and arrangements setting forth their on-going rights and responsibilities regarding various matters outlined below. The agreements summarized below are included as exhibits to the Registration Statement of which this prospectus is a part. The following summaries are qualified in their entirety by reference to such exhibits. Franchise Agreements The Company's status as a franchisee is governed by the Franchise Agreements with the Franchisors. Pursuant to the Franchise Agreements, the Company has the non-exclusive right to operate under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) real estate franchise systems at the locations specified therein and, pursuant to a related License Agreement, has the right to operate under the trade names and trademarked operating names acquired by Cendant in acquisitions in which Cendant participates. On February 9, 1999, the Company entered into new Franchise Agreements with each of the Franchisors, which superseded the Franchise Agreements then in effect. The following summary is of the new Franchise Agreements. General The Franchise Agreements impose certain restrictions on the business and operations of the Company and require the Company to operate its brokerage offices in accordance with the standards set forth in the Franchisors' operating manuals. Failure to comply with such restrictions and 78 standards could result in a termination of the applicable Franchise Agreement. The Franchise Agreements also provide that the Company is entitled to participate in the programs established by the Franchisors for the benefit of their franchisees, including marketing programs, relocation services, referral systems, orientation and training, and is required to participate in certain other programs under the Program Outsourcing Agreement. Each of the Franchise Agreements has a 50-year term expiring on February 9, 2049 which may be extended for an additional 50-year term on the same terms of the relevant Franchise Agreement, provided that the Company is not then in breach of such Franchise Agreement. Royalties Pursuant to the Franchise Agreements, the Company has agreed to pay the Franchisors a monthly base royalty of 6% of the Company's gross commission income (with the exception of the Company's CENTURY 21(R) offices in Northern California, for which the Company is currently required to pay a royalty fee of 4.89% (subject to adjustment for acquisitions) of the gross commission income from such offices). In the event that the Company acquires or opens additional offices, such offices will be subject to the foregoing royalty rate, except that with respect to offices acquired in transactions in which Cendant does not participate pursuant to the Acquisition Cooperation Agreement, after the Company has requested Cendant to participate, the franchise royalty rate will be (1) 4% if the acquired brokerage's gross commission income for the 12-month period ending on the most recently completed calendar month prior to such acquisition is $5 million or less, (2) 3% if the acquired brokerage's gross commission income for the preceding 12-month period is over $5 million but equal to or less than $10 million and (3) 2% if the acquired brokerage's gross commission income for the preceding 12-month period is over $10 million. If, however, the acquired brokerage operates in one of the territories in which NRT then has operations, then the franchise royalty rate will be (1) 3% if the acquired brokerage's gross commission income for the preceding 12-month period is $5 million or less and (2) 2% if the acquired brokerage's gross commission income for the preceding 12-month period is over $5 million. Once Cendant's $1 billion commitment for brokerage acquisitions has been exhausted in connection with the Company's brokerage acquisitions, which is currently expected to be no earlier than five years from the date of the Acquisition Cooperation Agreement, and so long as Cendant is not then committed to provide additional amounts in connection with the Company's brokerage acquisitions, the franchise royalty rate for brokerages acquired in transactions in which Cendant does not participate pursuant to the Acquisition Cooperation Agreement will be (1) 4% if the acquired brokerage's gross commission income for the preceding 12-month period is $5 million or less (3% if the acquired brokerage operates in a territory in which NRT then has operations) and (2) 3% if the acquired brokerage's gross commission income for the preceding 12-month period is over $5 million. If the Company moves its sales associates from or to one or more of its offices that was acquired in a brokerage acquisition without Cendant's participation, the franchise royalty rate for such sales associates will continue to be the rate charged for such sales associates prior to such move. If the Company consolidates one or more of its existing offices with one or more of the offices that are acquired without Cendant's participation, the franchise royalty rate for the consolidated offices will be equal to a weighted average franchise royalty rate based on the gross commission income of the consolidating offices for the 12-month period prior to such consolidation (using the above franchise royalty rate for the newly acquired office(s) and the existing franchise royalty rate for the existing office(s)). 79 Pursuant to the Franchise Agreements, the Company is also required to pay an additional royalty of approximately $166,667 per month and, since January 1999, an additional monthly royalty based on a percentage of the Company's gross commission income, up to a maximum royalty of $5 million per year (which royalty will be replaced by the Additional Royalty (as defined below) described in the next paragraph upon the closing of the offering). In addition, upon the closing of the offering, the Company will be required to pay $156,250 per month. Upon the occurrence of a brokerage acquisition in which Cendant acquires the stock of the acquired brokerage and then sells the assets of such brokerage to the Company in accordance with the Acquisition Cooperation Agreement, the Company will also be required to pay Cendant, in consideration of the stepped-up tax basis received by the Company for such assets, an additional monthly royalty, beginning on the first month after the consummation of such transaction, in an amount equal to (1) one-tenth of the federal income tax payable by Cendant in respect of the gain on the sale of the assets to the Company in such transaction, divided by (2) 12. To date, the Company has not been required to pay Cendant additional royalties as a result of taxes being incurred by Cendant in connection with the Company's brokerage acquisitions. The Company paid franchise royalties to the Franchisors totaling approximately $24.0 million during 1996 (from May 31, 1996), $57.4 million during 1997 and $90.3 million during 1998 (through September 30, 1998). Upon the closing of the offering, the Company will be required to pay an additional monthly royalty (the "Additional Royalty") equal to % (the "Additional Royalty Rate") of the Company's gross commission income for such month provided that the Additional Royalty in any month shall not exceed the Additional Royalty Rate multiplied by the Company's gross commission income for the corresponding month during the 12-month period immediately prior to the closing of the offering. Also, no later than the fifth business day in January of any year, (1) if the Company's gross commission income for the then prior year were equal to or greater than 90% of the gross commission income during the 12-month period prior to the closing of the offering, the Company will be required to pay the Franchisors an additional royalty which, when added to the Additional Royalties paid in respect of the prior year, equals the Additional Royalty Rate multiplied by the Company's gross commission income during the 12- month period prior to the closing of the offering and (2) if the Company's gross commission income for the prior year were less than 90% of the Company's gross commission income during the 12-month period prior to the closing of the offering, the Company will be required to pay the Franchisors an additional royalty which, when added to the Additional Royalties paid in respect of the prior year, equals the Additional Royalty Rate multiplied by the Company's gross commission income for the prior year. On an unaudited pro forma basis, if such additional royalty had been charged to the Company beginning on January 1, 1997, the Company would have paid a total of approximately $80.8 million for the combined year ended December 31, 1997 and $107.3 million for the nine months ended September 30, 1998. Net income would have been reduced by approximately $13.7 million for the combined year ended December 31, 1997 and $10.3 million for the nine months ended September 30, 1998. In addition, an additional royalty of 0.15% of the Company's total revenue per quarter is payable for each quarter (up to a total of 20 quarters) in which the Company's operating income before depreciation and amortization for the 12-month period immediately prior to such quarter exceeds $225 million. 80 Additional Offices Under the Franchise Agreements, the Company is required to give Cendant prior notice before opening or acquiring new brokerage offices. Cendant may object to the opening or acquisition of such new brokerage offices if (1) such opening or acquisition would have an adverse impact on other existing Cendant franchisees under the relevant brand, (2) such opening or acquisition would result in the Franchisor being in breach of any agreement with its other franchisees or (3) the office proposed to be acquired was previously affiliated with a Cendant owned real estate brand. To compensate the Franchisors for any actual administrative costs incurred in connection with the acquisition process and for the benefits to be received by the Company resulting from newly acquired or opened offices, the Company is required to pay the Franchisors an initial fee of $4,000 for each newly acquired or opened office not previously affiliated with Cendant franchisees. In addition, with respect to each brokerage acquisition in which Cendant's franchise sales force is involved, NRT is required to pay Cendant an additional fee of $3,500 per office acquired, whether such offices are operated by NRT or are immediately closed. Any such fees are subject to a maximum of $100,000 per acquisition. Each acquired office is required to be operated under one of the Franchisor's brands, unless such office is closed within one year of its acquisition in accordance with the business plan presented to the Company's Board of Directors and Cendant at the time of acquisition. No initial office fee is payable with respect to newly acquired offices that are closed within one year of their acquisition so long as such offices do not operate under any of the Franchisors' brands during such period. The Company has incurred approximately $1.6 million in such fees payable to Cendant for new offices opened since August 1997, of which Cendant has provided $1.3 million pursuant to the Acquisition Cooperation Agreement. Office Closings In the event that the Company wishes to sell, close down or otherwise terminate one or more of its real estate brokerage offices, it will be required to obtain the relevant Franchisor's consent prior to each intended closure, except that the Company has the right to close the following offices without the Franchisor's consent: . offices which were acquired by the Company from National Realty Trust, provided that such offices closed may not, in the aggregate, represent in excess of $150 million of the Company's gross commission income (in each case measured over the 12-month period prior to such closure), . offices closed within one year of being acquired by the Company, provided that the offices to be closed were identified to Cendant at the time of acquisition and the closed offices were not operating under any of the Franchisors' brands at any time during such period, and . other offices to the extent that the aggregate gross commission income for the 12-month period prior to such closure for all such offices closed during a year (excluding offices otherwise permitted to be closed) does not exceed the sum of (1) 3% of the Company's aggregate gross commission income for the preceding calendar year (pro forma for new offices opened and office closings) (the "3% Cap") and (2) the unused portion of the 3% Cap for up to two prior years (commencing in August 1997); 81 provided that all fees payable to the Franchisors have been paid, no assignment of the franchise for the closed offices is involved and the closure does not reduce any of the brands' market share for the applicable market by more than 10%. For purposes of the Franchise Agreements, gross commission income of an office excludes revenues transferred to another office of the Company. Advertising The Company is required to make monthly contributions to national advertising funds maintained by the Franchisors for the creation and development of advertising, public relations and promotional programs promoting the Franchisors' brands. Under the CENTURY 21(R) and ERA(R) Franchise Agreements, the Company is required to pay a monthly fee of 2% of the Company's gross commission income and, under the COLDWELL BANKER(R) Franchise Agreement, the Company is required to pay a monthly fee of 2 1/2% of the Company's gross commission income, subject in each case to certain minimum and maximum advertising fees per brokerage office. As a result of the maximum advertising fee limitation, the Company paid an average of 0.33% of its gross commission income to the national advertising funds in 1997. The Company contributed to the Franchisors' advertising funds a total of $1.4 million during 1996 (from May 31, 1996), $3.4 million during 1997 and $3.9 million during 1998 (through September 30, 1998). See "Business--Marketing and Information Technology." Cendant has informed the Company that substantially all amounts contributed to the national advertising funds maintained by the Franchisors generally have been spent on the Franchisors' marketing and advertising programs. See "Business--Marketing and Information Technology." Indemnification The Company has agreed to indemnify each of the Franchisors and its respective subsidiaries, affiliates, parents, directors, officers and employees and all of its other franchisees against liabilities arising out of the operation of the Company's business, provided that no indemnification is required for liabilities arising out of the affirmative acts of the Franchisors or their employees or for matters that do not arise out of the operation of the Company's business, including those that arise out of disputes under any agreement between Cendant and the Company (other than disputes involving successful claims for indemnification under the Franchise Agreements). Change in Control of Company Each Franchise Agreement provides that the relevant Franchisor's consent will be required for any issuance or transfer of the Company's voting stock that results in any person or group acquiring beneficial ownership of more than 30% of the outstanding Common Stock and/or securities convertible into or exercisable for shares of Common Stock. Any such transfer which is made without first obtaining the Franchisor's consent will result in an event of default under the relevant Franchise Agreement (unless caused by Cendant) which, after being given notice of and an opportunity to cure such default, could result in the Company being required to pay liquidated damages. See "--Liquidated Damages." 82 Limitations on Indebtedness and Dividends Under the Franchise Agreements, the Company is not permitted to incur indebtedness (including acquired indebtedness) if such incurrence would cause the pro forma ratio (the "Leverage Ratio") of the Company's total indebtedness (with certain exclusions) to its operating income before depreciation and amortization for the preceding 12-month period to exceed 2.0 to 1. The Company is permitted, however, to incur, regardless of its then Leverage Ratio: . loans from financial institutions that are secured by and payable from the proceeds of the amounts so loaned in the ordinary course of business; . working capital revolving loans not to exceed 2% of gross commission income for the preceding 12-month period; . letters of credit and hedging obligations in the ordinary course of business; . indebtedness to refinance existing indebtedness, provided that such indebtedness is not greater than the indebtedness so refinanced; and . other indebtedness not to exceed 1% of gross commission income over the preceding 12-month period outstanding at any time. The maximum permitted Leverage Ratio will be increased to 3.0 to 1 from 2.0 to 1 once Cendant's additional $1 billion commitment for future brokerage acquisitions has been exhausted pursuant to the Acquisition Cooperation Agreement, provided that Cendant has not then committed to provide additional funds in connection with the Company's brokerage acquisitions on substantially similar economic terms. Immediately prior to any incurrence of indebtedness by the Company (including acquired indebtedness), the Company will be required to furnish Cendant with a certificate to the effect that such incurrence would not be in violation of the Leverage Ratio test and that, based on the Company's business plan and a good faith forecast prepared at the time of incurrence, the Leverage Ratio would not reasonably be expected to exceed 2.0 to 1 or 3.0 to 1, as the case may be, for the 12 months following such incurrence. For purposes of the Leverage Ratio test, indebtedness is deemed to include any outstanding amount of preferred stock which is mandatorily redeemable in whole or in part. Indebtedness does not, however, include (1) pay-in-kind preferred stock that does not, under any circumstances, require the Company to make any cash payments (other than upon liquidation) or include sanctions for the non-payment of cash, (2) perpetual cash pay preferred stock that does not contain any sanctions for the non-payment of required amounts other than the right to elect (together with all other preferred stock other than currently existing series) no more than two directors of the Company upon any default, provided that the rate on such preferred stock does not exceed 13% per annum and, at the time of issuance, the Company would have been permitted under the Leverage Ratio test to incur indebtedness with fixed charges equal to the fixed charges of such preferred stock, and (3) preferred stock that was outstanding on the date of the Franchise Agreements (including any shares paid thereon). In addition, the Franchise Agreements prohibit the Company from incurring indebtedness to finance the payment of any dividends on its common or preferred stock. The Company is also prohibited from declaring or paying any dividend that exceeds 20% of the Company's net income for 83 the year in which declared or paid (less any dividends paid during such period) and is not a regularly scheduled quarterly dividend consistent with past practice, unless the Company's Leverage Ratio (calculating indebtedness net of cash and cash equivalents) is 1.0 to 1 or less. Termination The Franchise Agreements may be terminated, either in their entirety or with respect to specific offices, upon mutual consent of the parties or by the Franchisors upon the occurrence of certain termination events (subject to notice and an opportunity to cure in certain cases), including, among others: . a material breach by the Company of the Franchise Agreements (including those breaches set forth under "--Liquidated Damages" below); . the suspension or revocation of the Company's real estate brokerage license; . the Company's failure to conduct its business in accordance with applicable ethical standards; . the Company's failure to maintain a volume of closed brokerage transactions for its offices, in every six-month period, sufficient to produce gross commission income per office during such period equal to at least 50% of the average gross commission income per office generated by all franchisees during such period in the same local area or in such other geographic area as the Franchisor may reasonably establish from time to time; . certain insolvency or bankruptcy events involving the Company; and . a change in control of the Company. Liquidated Damages The Franchise Agreements provide that the Company will be required to pay the Franchisors liquidated damages upon the occurrence of an early termination of the Franchise Agreements by the Franchisors due to, among other events: . a change in control of the Company (other than a change in control caused by Cendant); . the affiliation by the Company with another real estate brokerage franchisor that is not an affiliate of the Franchisors; . the failure of the Company to operate one or more of its offices under one of the Franchisors' brands or the closing of any offices in willful violation of the Franchise Agreements (or if 20 or more offices are involved, regardless of whether such violation was willful); . any payment default under the Franchise Agreements; and . any other breach of any of the Franchise Agreements by the Company that has a material adverse effect on, or which is reasonably expected to have a material adverse effect on, the relevant Franchisor's brand, in each case after notice and an opportunity to cure (which in the case of a change in control is limited to a cure within 10 business days after notice to the acquiring person as soon as practicable after learning of such breach). The Franchise Agreements provide that liquidated damages will be equal to the Franchisor's lost future royalties, based on the average monthly royalty payments paid by the Company from the commencement of the Franchise Agreements, provided that such damages shall not exceed 25 years of lost future royalties. In addition, any liquidated damages with respect to any failure to operate one or more offices under any of the Franchisors' brands or closure in violation of the Franchise 84 Agreements will be limited to the lost future royalties relating to the offices involved. In case of any other breaches of the Franchise Agreements by the Company, the Franchisors are entitled to seek other forms of legal and equitable relief. Acquisition Cooperation Agreement The Company and Cendant entered into an Acquisition Cooperation Agreement on February 9, 1999, which superseded certain provisions of a Stockholders Agreement then in effect. Pursuant to the Acquisition Cooperation Agreement, Cendant has agreed, subject to its approval of each brokerage acquisition in which it participates, to purchase the trade names, trademarked operating names and, so long as the Marketing Agreement is in effect, mortgage operations (if any) of the brokerage being acquired by the Company, thereby paying a substantial portion of the purchase price that would otherwise be payable by the Company. The Company purchases all other assets of the acquired brokerage. The Company has agreed to operate each office that is acquired by the Company (with or without Cendant's participation) under the Franchisors' real estate brokerage franchise systems at the royalty rates set forth in the Franchise Agreements. At any time when Cendant does not participate in a brokerage acquisition in which the Company has requested Cendant to participate, the Company will have the right, subject to Cendant's right to prohibit the transaction based on a determination that the acquisition of such office will adversely affect other franchisees of the Franchisors, to complete the brokerage acquisition without Cendant's participation. The franchise royalty rate with respect to any such acquired brokerage will be lower than the 6% royalty rate that generally applies to the Company's offices. See "Franchise Agreements--Royalties." Upon NRT's formation in August 1997, Cendant committed approximately $445 million for the Company's brokerage acquisitions. Through December 31, 1998, Cendant had provided approximately $420 million of its original commitment and NRT had used approximately $230 million of its own capital for brokerage acquisitions. Cendant has committed an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate pursuant to the Acquisition Cooperation Agreement. The $1 billion commitment is available in two $500 million tranches. The first $500 million (of which Cendant has provided approximately $23 million) is currently available, and the second $500 million will be available after the first $500 million has been completely used by NRT but in no case earlier than February 9, 2004, unless otherwise agreed to by Cendant. See "Business--Acquisitions." Brokerage acquisitions in which Cendant agrees to participate under the Acquisition Cooperation Agreement are completed in one of two ways. If the Company elects to acquire the acquired brokerage directly through the purchase of assets, Cendant purchases the trade names, trademarked operating names and mortgage operations, if any, of the acquired brokerage in exchange for a cash payment either to the seller of the brokerage or to the Company, as the case may be, equal to Cendant's portion of the total acquisition cost of the brokerage acquisition. In all other brokerage acquisitions, Cendant (rather than the Company) purchases the acquired brokerage from the seller and immediately sells to the Company the acquired brokerage's assets other than trade names, trademarked operating names and mortgage operations, if any, at a price equal to the total acquisition cost of the brokerage acquisition minus Cendant's portion of the total acquisition cost and minus any 85 payment made by Cendant to the seller in respect of a non-competition agreement or arrangement. Purchases and sales of assets between NRT and Cendant are typically completed pursuant to one or more agreements between NRT and Cendant. Cendant's portion of the total acquisition cost (the "Cendant Acquisition Cost") is calculated by multiplying the "Acquisition Multiple" (as defined below) by 100% (or 125% with respect to Cendant's original commitment of approximately $445 million, of which approximately $420 million had been provided as of December 31, 1998) of the pro forma royalty fees that would have been payable by the acquired brokerage to the Franchisors during the preceding 12-month period had the brokerage acquisition occurred at the beginning of such period minus any net royalty fees payable to the Franchisors for the preceding 12-month period. The "Acquisition Multiple" is defined as (1) the total acquisition cost of a brokerage acquisition divided by (2) the acquired brokerage's pro forma operating income before depreciation and amortization (including appropriate cost allocations to reflect the acquired brokerage's operations on a stand-alone basis if the acquired business were part of a group of companies with shared expenses) before anticipated synergies, plus such acquired brokerage's royalties, franchise fees and marketing fees payable to entities other than the Franchisors ("Pro Forma EBITDAR")). The Cendant Acquisition Cost is subject to an adjustment based on the amount of EBITDA (after deducting interest expense) generated by the acquired brokerage's mortgage operations for the twelve months prior to the acquisition ("Mortgage EBITDA"). If Mortgage EBITDA is greater than $1 million, then the Cendant Acquisition Cost will be increased (or decreased if the following amount is negative) by an amount equal to the Acquisition Multiple multiplied by the amount obtained by subtracting Mortgage EBITDA minus $58.37 multiplied by the number of the acquired brokerage's closed transaction sides for the twelve months prior to the acquisition. In no event will the Cendant Acquisition Cost exceed 90% of the total acquisition cost of the brokerage acquisition. From September 1, 1997 through December 31, 1998, Cendant participated in each of the Company's 28 acquisitions of multi-office brokerages and 36 acquisitions of single-office brokerages. Through December 31, 1998, Cendant has paid the Company or the seller a total of approximately $420 million, and the Company has paid a total of $230 million, in transactions in which Cendant has participated. If the change in calculation of the purchase price payable by Cendant had been in effect since August 1997, Cendant would have paid a total of approximately $359 million and the Company would have paid a total of approximately $333 million in such brokerage acquisitions. From September 1, 1997 through December 31, 1998, the average multiple of the purchase price paid by the Company in making brokerage acquisitions to the acquired brokerages' pro forma operating income before interest, taxes, depreciation and amortization over the 12-month period prior to their respective acquisition dates was 2.9. Pursuant to the Acquisition Cooperation Agreement, following the closing of the offering, Cendant will have the right to pay up to 50% of the Cendant Acquisition Cost associated with any brokerage acquisition by cancelling liquidation preference of its Senior Preferred Stock, provided that the Company has at least $50 million in available borrowing capacity under the Leverage Ratio test under the Franchise Agreements. However, if the Company does not have available funds to consummate the brokerage acquisition without Cendant's participation, the Company will have the right to postpone the cancellation of liquidation preference for up to 90 days following the brokerage 86 acquisition and Cendant will then be required to pay the Cendant Acquisition Cost in accordance with the Acquisition Cooperation Agreement. Within 90 days of consummation of a brokerage acquisition in which the Company has elected to postpone the cancellation of liquidation preference of the preferred stock held by Cendant, the Company will cancel the liquidation preference (to the extent permitted by law) of such preferred stock in the amount requested by Cendant to be cancelled and will repay to Cendant an amount equal to the liquidation preference cancelled plus all accrued and unpaid dividends thereon. Cendant has the right under the Acquisition Cooperation Agreement, at any time up to 60 days after each brokerage acquisition, to cause the Company or its subsidiaries to sell to Cendant or its designee one or more of the brokerage offices designated by Cendant that were owned by the acquired brokerage, unless such offices' Pro Forma EBITDAR (before allocation of the Company's corporate overhead) or gross revenues over the preceding 12-month period are greater than 5% (10% with Apollo's consent) of the acquired brokerage's Pro Forma EBITDAR (before allocation of the Company's corporate overhead) or gross revenues over the preceding 12-month period, respectively. The purchase price for any such offices will be equal to the product of (1) the Acquisition Multiple and (2) the greater of (a) the difference between the Pro Forma EBITDAR for the acquired brokerage before giving effect to the sale of such offices and the Pro Forma EBITDAR for the acquired brokerage after giving effect to the sale of such offices (in each case before allocation of the Company's corporate overhead) and (b) the gross revenues of the offices to be sold multiplied by Pro Forma EBITDAR divided by the gross revenues of the acquired brokerage over the preceding 12-month period. To date, Cendant has not exercised this right. Stockholders Agreement Upon formation of the Company, the Company, Apollo and Cendant entered into a Stockholders Agreement to govern the relationship among Apollo and Cendant and their respective affiliates as stockholders of the Company. Immediately prior to the closing of the offering, such agreement will be amended in certain respects and restated. The following summary is of the Stockholders Agreement as it is proposed to be amended and restated prior to the closing of the offering. Voting Agreement The Stockholders Agreement provides that Apollo and Cendant will vote all of their voting stock of the Company in favor of a Board of Directors consisting of (1) five directors to be designated by Cendant, (2) five directors to be designated by Apollo and (3) two directors to be jointly designated by Apollo and Cendant who may not be an employees of, consultants to, or officers or directors of Cendant, Apollo or any of their affiliates (other than the Company). One of the directors designated by Cendant and one of the directors designated by Apollo must be an "independent director" within the meaning of the rules of the New York Stock Exchange and will be subject to the prior approval of the other party. Upon notice by either Stockholder that it desires to remove a director designated by it (or, in the case of the directors jointly designated by Apollo and Cendant, upon the request of both Apollo and Cendant), Apollo and Cendant will vote all of their shares of voting stock of the Company in favor of the removal of such director. 87 Registration Rights The Company has granted to Apollo and Cendant certain demand and "piggyback" registration rights with respect to the shares of Common Stock owned by them or to be acquired by them upon conversion or exercise of securities convertible into or exercisable for shares of Common Stock. Pursuant to the Stockholders Agreement, upon a demand registration request, the Company is required to use its best efforts to register the shares requested to be registered. Under the Stockholders Agreement, during the three-year period following the closing of the offering, in any demand registration initiated by either of Apollo or Cendant, Apollo will have the right to register in such offering up to the greater of (1) 80% of the shares to be sold in such secondary offering and (2) a number of shares such that Apollo will have sold 70% of all shares sold by Apollo and Cendant in all secondary offerings following the offering. Thereafter, each of Apollo and Cendant will be entitled to sell 50% of the total number of shares to be sold in any secondary offering of shares by Cendant or Apollo. If Apollo beneficially owns less than 5% of the outstanding Common Stock, Cendant will have the right to sell up to 100% of any secondary offering, subject to Apollo's reasonable piggyback rights. In addition, during the three-year period following the closing of the offering, Cendant may not sell shares of Common Stock, except that it will have the right to demand that the Company register up to $25 million of its Common Stock per quarter, but not in excess of $50 million of its Common Stock in any twelve-month period. Subject to those limitations, Apollo and Cendant are each entitled to four demand registration requests, and, in addition, may request the Company to use its reasonable efforts to register shares of Common Stock held by them in certain other registrations initiated by the Company on its own behalf or on behalf of any other stockholder of the Company. All reasonable out-of-pocket costs and expenses (other than underwriting discounts and commissions) of any registration under the Stockholders Agreement will be paid by the Company. The Stockholders Agreement also contains customary provisions with respect to, among other things, registration procedures, underwritten offerings and indemnification and contribution rights in connection with the registration of Common Stock on behalf of the Stockholders. Restriction on Transfer of Shares Held by Apollo Apollo has agreed under the Stockholders Agreement that it will not, without Cendant's consent, transfer its shares of Common Stock, other than transfers to or among its affiliates, if the proposed transferee would, as a result of such transfer, acquire beneficial ownership of 20% or more of the Common Stock or securities convertible into or exchangeable for Common Stock. In addition, Apollo has agreed not to transfer beneficial ownership of 10% or more of the outstanding Common Stock or securities convertible into or exchangeable for Common Stock to any person or group without the consent of Cendant. For purposes of these transfer restrictions, Cendant's consent to a proposed transfer may not be unreasonably withheld unless the proposed transferee would acquire 30% or more of the Common Stock or securities convertible into or exercisable for Common Stock (in which case Cendant may withhold its consent in its absolute discretion). Reasonable grounds for withholding consent include if Cendant believes, in its sole discretion, that the proposed transferee may be acquiring such securities with the purpose of acquiring, changing or influencing control of the Company (or facilitating any such acquisition, change or influence of control). Cendant's belief may be based, without limitation, on the proposed transferee's failure to disclaim any present control intention or any previous history or a reputation of seeking to acquire, change or influence control of 88 a company. Apollo will otherwise be free to transfer Common Stock to any person or group if such person or group would not, as a result of such transfer, become the beneficial owner of 30% or more of the Common Stock or securities convertible into or exercisable for Common Stock. Termination Unless earlier terminated by mutual agreement of the parties, the Stockholders Agreement will terminate when either Cendant or Apollo ceases to beneficially own any shares of Common Stock or Convertible Preferred Stock, except that (1) the voting provisions of the Stockholders Agreement will terminate at such time as either Cendant or Apollo owns less than 5% of the outstanding voting stock of the Company and (2) the registration rights, access and confidentiality provisions of the Stockholders Agreement will terminate when neither Cendant nor Apollo owns any of the outstanding voting stock of the Company. In addition, NRT has agreed that so long as the Franchise Agreements are in place, Cendant will continue to have the right to nominate at least one director to the Board of Directors. Acquisition Services Agreement On February 9, 1999, the Company and Cendant entered into the Acquisition Services Agreement, pursuant to which the Company has agreed to provide advisory services to Cendant relating to the identification of potential acquisition candidates, the negotiation of agreements and other services in connection with future brokerage acquisitions by the Company. In exchange for such advisory services, on February 10, 1999 Cendant paid the Company $30 million as an advance against the fees that are payable to the Company pursuant to a fee schedule attached to the Acquisition Services Agreement which takes into account, among other things, the size of the Company's future brokerage acquisitions. In no event will Cendant be required to pay any additional amounts to the Company in respect of the advisory services. The fees advanced but not earned under the Acquisition Services Agreement are refundable to Cendant in the event that services under the Acquisition Services Agreement are not provided to Cendant. The Acquisition Services Agreement has a ten-year term, unless earlier terminated upon mutual consent of the parties. Lease Agreements The Company leases from Cendant a total of approximately 42,500 square feet of office space for its offices in Parsippany, New Jersey and Mission Viejo, California pursuant to two leases dated August 11, 1997. Each lease has an initial term of five years commencing on September 1, 1997, with an option exercisable by the Company to extend the term thereof for an additional five years upon 30 days' written notice to Cendant. Under the leases, Cendant is responsible for property taxes, maintenance and insurance as well as various ancillary services. Rent is payable under each lease at a rate equal to Cendant's total annual actual costs of operating the leased premises. In addition, the Company is permitted to amend the lease to increase or reduce the square footage of the premises as needed and as space becomes available, provided that the Company gives 60 days' advance notice to Cendant of its intent to do so and the rental amount is adjusted accordingly. Each lease may be terminated by either party, with or without cause, upon 180 days' written notice to the other party. The Company paid Cendant a total of $529,000 during 1997 and $640,000 during 1998 (through September 30, 1998) under the leases. 89 Marketing Agreement Pursuant to the Marketing Agreement, NRT markets Cendant Mortgage's mortgage programs and products through the Company's real estate brokerage offices. The Company receives a fee for marketing Cendant Mortgage's services. The term of the Marketing Agreement is 40 years unless earlier terminated by Cendant Mortgage with or without cause or, at the Company's option if Cendant Mortgage materially breaches the Marketing Agreement or if a nationwide third party provider of mortgage services meeting certain conditions offers the Company a comparable marketing agreement on economic terms more favorable to the Company than those set forth in the Marketing Agreement and Cendant Mortgage declines to match the economic terms. During the term of the Marketing Agreement, the Company may not enter into any similar arrangement with another party. During 1997, over the four-month period in which the Marketing Agreement was in effect, Cendant Mortgage paid the Company a total of $699,000 under the Marketing Agreement. During 1998, Cendant Mortgage paid the Company a total of $11.2 million under the Marketing Agreement. For each of the first four quarters of its term, the Marketing Agreement provided for the payment of less than the otherwise applicable marketing fee for the quarter to account for the phase-in of the services to be provided. NRT intends to enter into a joint venture to provide mortgage services, at which time the Marketing Agreement will be terminated. Program Outsourcing Agreement In order to generate additional brokerage-related service revenues and obtain more advantageous pricing in the purchase and sale of products and services through purchasing and marketing programs established by Cendant with various third party vendors, the Company and Cendant have entered into a Program Outsourcing Agreement, dated as of February 9, 1999, which supersedes a Preferred Alliance Agreement, dated as of August 11, 1997 (the "1997 Preferred Alliance Agreement"), between the Company and Cendant. Pursuant to the Program Outsourcing Agreement, NRT has appointed Cendant as NRT's exclusive outsourcing agent to negotiate the terms of the Company's participation in (1) purchasing relationships and programs (including corporate purchasing relationships) with vendors and (2) programs through which the Company markets vendors' products or services to its customers. The Company is generally not permitted to enter into or pursue any purchasing relationships or marketing programs (other than the programs established by Cendant) and is required to refer to Cendant all program opportunities and parties with which the Company would enter into such a relationship. NRT has agreed to participate, and to encourage its sales associates to participate, in existing and new programs established by Cendant with vendors. NRT has also agreed to make such programs available to its employees and sales associates and to provide program training to its sales associates. NRT is not required to participate in a program if: (1) such program does not afford the Company terms at least as advantageous (taken as a whole) as those afforded to any other franchisees of Cendant's real estate brokerage systems; and (2) the Company is already participating in a program covering a similar good or service as the new program and the term of such program has not expired; provided that upon implementation of a new program in which NRT is required to participate, NRT will terminate any program which conflicts with such new program as soon as it is permissible to terminate such program without cost to NRT, or earlier if NRT is directed by Cendant to do so and is reimbursed for such cost. In addition, the Company will not be required to participate 90 in the new program if Cendant reasonably determines that the program does not offer competitive pricing and service relative to the Company's size and compared to any similar program in which the Company participates, or, with respect to marketing programs in which NRT receives buyer leads, listing leads or barter consideration and no other consideration, that such program is reasonably expected to provide the same value to NRT. No title insurance agency or escrow service business serving the Company will be required to participate in any marketing program established by Cendant, and the provisions of the Program Outsourcing Agreement will not apply to any marketing program established by the Company relating to such services. If the Company decides to sell its title insurance agency or escrow services businesses, it will notify Cendant and, at Cendant's election, will negotiate exclusively with Cendant in good faith to explore the sale of such businesses to Cendant or the combination of such businesses with Cendant's related operations. If Cendant establishes a program with a title insurance underwriter or owns a title insurance underwriter, the Company will make exclusive use of such underwriter as long as such underwriter provides service and economic terms comparable to the terms of the Company's then current arrangements. Notwithstanding the limitations on NRT entering into purchasing and marketing programs directly or with third parties ("NRT Programs"), NRT is permitted to enter into: . a purchasing program if no Cendant purchasing program covers such good or service and the Company's aggregate purchases of such good or service do not exceed $250,000 per calendar year; . a purchasing program covering a good or service sought by the Company if a purchasing program exists which covers such good or service, but pursuant to the Program Outsourcing Agreement the Company is not required to participate in such purchasing program; . a marketing program in which the Company receives buyer leads, listing leads or barter consideration and no other consideration, if such marketing program does not conflict with any Cendant program then in effect; . a program with respect to a good or service sought to be purchased or marketed by the Company, if a program covering such good or service has expired or has been terminated and Cendant has either not replaced, renewed or extended such program; . a program with respect to a good or service sought to be purchased or marketed by the Company, if the Company has notified Cendant of its desire to have Cendant implement a new program covering such good or service and Cendant (1) has not, within 30 days of the notice from the Company, notified the Company of its decision to pursue such new program or (2) has not implemented such new program within 180 days of Cendant notifying the Company of its decision to pursue such new program; and . a program with respect to an area which is not covered by a particular program if such program does not cover all geographic areas in which the Company operates. If Cendant subsequently implements a new program covering the same or a similar product or service covered by such NRT Program, then the Company will terminate such NRT Program and commence participation in such new program. Any NRT Program implemented under the Program Outsourcing Agreement must be limited to a one-year term, without automatic renewal. 91 The Company has agreed under the Program Outsourcing Agreement not to provide any of its real estate listings and other customer data to any third party without Cendant's consent. In accordance with the Franchise Agreements, Cendant has the right to provide to any third party the customer information provided to Cendant's subsidiaries under each Franchise Agreement. The term of the Program Outsourcing Agreement is until the termination or expiration of the last of the Franchise Agreements to terminate or expire, unless earlier terminated. The Program Outsourcing Agreement may be terminated in the event of a material breach provided that the breaching party is given notice of such breach and the opportunity to cure the breach within 60 days of notice. Relocation Management The Company has an arrangement with Cendant Mobility, the country's largest relocation company, pursuant to which the Company provides its brokerage services to relocating employees of the clients of Cendant Mobility, which are typically large corporations and governmental agencies. Pursuant to such arrangement, when receiving a referral from Cendant Mobility, the Company receives a commission on the purchase or sale of the property but is obligated to pay Cendant Mobility a portion of such commission as a referral fee. The Company believes that such fees are comparable to the fees charged by other relocation companies. The Company paid a total of $6.4 million during 1997 and $8.7 million during 1998 (through September 30, 1998) in referral fees to Cendant Mobility. The arrangement with Cendant Mobility is not embodied in a written agreement and, accordingly, may be subject to termination or modification at any time. Support Agreement The Company and Cendant are parties to a Support Agreement, dated as of August 11, 1997, pursuant to which Cendant has agreed to furnish the Company with certain computer and data related information services. In consideration of the provision of such services, the Company has agreed to reimburse Cendant directly for certain actual costs incurred by Cendant on behalf of the Company. In addition, the Company was required to pay Cendant a monthly fee of $77,500 during 1997 and is required to pay a monthly fee of $41,667 during 1998 and $12,500 during 1999. The Company paid Cendant a total of $1.4 million during 1997 and $1.5 million during 1998 (through September 30, 1998) under the Support Agreement. The Support Agreement terminates on December 31, 1999, unless earlier terminated by either party. Advisory Services Agreement The Company and Apollo Management, L.P. ("Apollo Management") have entered into an Advisory Services Agreement, dated as of August 11, 1997, pursuant to which Apollo Management has provided management, advisory and other services to the Company in connection with the operation of its business. In consideration for such services, the Company is required to pay Apollo Management a monthly fee in an amount equal to $166,667. The Advisory Services Agreement will terminate upon redemption of all outstanding shares of Junior Preferred Stock with the proceeds of the offering. The Company paid Apollo Management a total of $667,000 during 1997 and $1.5 million during 1998 (through September 30, 1998) under the Advisory Services Agreement. 92 Development Advance On January 14, 1997, Coldwell Banker Residential Affiliates, Inc., the predecessor to Coldwell Banker Real Estate Corporation, made a development advance of $20 million to National Realty Trust and Coldwell Banker Residential Brokerage Corporation to assist National Realty Trust and Coldwell Banker Residential Brokerage Corporation in paying operating expenses. The obligations of National Realty Trust and Coldwell Banker Residential Brokerage Corporation to repay the development advance were assumed by the Company in August 1997. The advance was replaced on September 1, 1997 with an advance of $18,750,000 which is being amortized over a 40-year period. Under the terms of the advance, 1/480th of the original balance is being forgiven each month so long as the Company is not in material breach of the terms of the Franchise Agreements. In the event that the Company is determined to be in default under a material term of the Franchise Agreements, the entire remaining advance will become immediately due and payable and bear interest at the prime interest rate. Acquisition of Burnet Financial Group On February 17, 1998, NRT acquired Burnet Financial Group, a residential real estate brokerage firm founded by Ralph W. Burnet, who became Senior Vice President--Midwest Region of NRT following the acquisition. In connection with such acquisition, NRT issued to Mr. Burnet notes in an aggregate principal amount of $5,800,000, all of which is currently outstanding. Acquisition of Coldwall Banker Van Schaak In September 1998, NRT acquired Coldwell Banker Van Schaak and Company, a residential real estate brokerage firm then owned by R. Scott Webber. During 1999, Mr. Webber will be entitled, subject to sales associates meeting certain performance targets, to receive additional payments from NRT in connection with such acquisition. Special Dividend The Company has declared a total of $45 million of cash dividends on its Common Stock to Apollo, which will be paid prior to the closing of the offering. See "Dividend Policy." 93 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company currently consists of 50,000,000 shares of Common Stock and 405,000 shares of preferred stock. As of , 1999, 10,000,000 shares of Common Stock were issued and outstanding, all of which were held by Apollo, and shares were reserved for issuance under the Equity Participation Plan. Prior to the closing of the offering, the Company's authorized capital stock will be increased to shares of Common Stock and shares of preferred stock. Upon the closing of the offering, shares of Common Stock will be issued and outstanding, of which shares will be held by Apollo ( if the underwriters' over-allotment option is exercised in full), shares will be held by the Company's public stockholders ( if the underwriters' over-allotment option is exercised in full), shares will be reserved for issuance upon conversion of the Convertible Preferred Stock and shares will be reserved for issuance under the Equity Participation Plan. The following summary description of the capital stock of the Company is qualified by reference to the Restated Certificate of Incorporation (the "Restated Certificate") and Amended and Restated By-laws (the "Restated By- laws") of the Company, which will become effective prior to the closing of the offering. Forms of the Restated Certificate and Restated By-laws are filed as exhibits to the Registration Statement of which this Prospectus forms a part. Common Stock Voting Rights The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Holders of shares of Common Stock are not entitled to cumulate their votes in the election of directors or otherwise. Generally, all matters to be voted on by shareholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of Common Stock present in person or represented by proxy, voting together as a single class together with the Convertible Preferred Stock. Dividends Holders of Common Stock are entitled to receive their pro rata share of any dividends if, as and when declared by the Board of Directors out of funds legally available therefor, subject to any preferential rights of any outstanding preferred stock, including the Senior Preferred Stock, Convertible Preferred Stock and Junior Preferred Stock. Other Rights On liquidation, dissolution or winding up of the Company, after payment in full of the amounts required to be paid to holders of preferred stock, if any, all holders of Common Stock are entitled to receive their pro rata share of any assets available for distribution to holders of shares of Common Stock after the payment of all debts and other liabilities of the Company. No shares of Common Stock are subject to redemption or have preemptive rights to purchase additional shares of Common Stock. All the outstanding shares of Common Stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to and may be adversely affected 94 by the rights of holders of shares of any series of Preferred Stock, whether currently outstanding or designated and issued in the future. Preferred Stock Pursuant to the Restated Certificate, the Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of shares of preferred stock in one or more series and to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. Because the Board of Directors has the power to establish the preferences and rights of each series, it may afford the holders of the preferred stock preferences, powers and rights (including voting rights) senior to the rights of the holders of Common Stock. An aggregate of 250,101 shares of preferred stock are outstanding in three series: 157,591 shares of Senior Preferred Stock, 24,000 shares of Convertible Preferred Stock and 68,510 shares of Junior Preferred Stock. The Company has agreed to redeem all of the outstanding shares of Junior Preferred Stock with a portion of the proceeds of the offering. See "Use of Proceeds." Accordingly, following the offering, there will be no shares of Junior Preferred Stock outstanding. Although the Company has no present plans to issue any additional shares of preferred stock following the consummation of the offering, the issuance of additional shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect of delaying, deferring or preventing a change in control of the Company or an unsolicited acquisition proposal. Senior Preferred Stock Dividends. Holders of the Senior Preferred Stock are entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends at the rate of 9% per annum on the then current liquidation preference of such preferred stock, payable quarterly in arrears on each February 15, May 15, August 15 and November 15 (or if such date is not a business day, on the next succeeding business day) to holders of record as of the preceding February 1, May 1, August 1 and November 1, respectively. Dividends are payable (1) in cash, to the extent the Company has sufficient available cash in excess of certain prescribed amounts, and (2) by increasing the liquidation preference of the Senior Preferred Stock, to the extent the Company has insufficient available cash. So long as shares of Senior Preferred Stock are outstanding, no dividends (other than a dividend payable solely in junior securities) or other distribution on any Common Stock or capital stock ranking junior to the Senior Preferred Stock shall be declared or paid or set apart, and no Common Stock or any other capital stock of the Company ranking junior to or on parity with the Senior Preferred Stock (other than the Junior Preferred Stock on a Mandatory Redemption Date as defined below) shall be redeemed, purchased or otherwise acquired by the Company or a subsidiary thereof, unless full cumulative dividends on the Senior Preferred Stock have been paid in full. Redemption. The Senior Preferred Stock is redeemable at the option of the Company at any time at a redemption price (the "Senior Preferred Redemption Price") equal to the sum of (1) 100% of the then current liquidation preference of the Senior Preferred Stock and (2) all accrued and unpaid dividends through the redemption date. In addition, on August 29, 2004 and each August 29th thereafter until and including August 29, 2008 (each a "Mandatory Partial Redemption Date"), the Company is required to redeem 10% of the total number of shares of Senior Preferred Stock 95 ever issued at a price equal to the Senior Preferred Redemption Price. On August 29, 2009 (the "Mandatory Final Redemption Date"), the Company is required to redeem all remaining outstanding shares of Senior Preferred Stock at a price in cash equal to the Senior Preferred Redemption Price. Dissolution, Liquidation, Winding Up. Upon the dissolution, liquidation or winding up of the Company, holders of the Senior Preferred Stock are entitled to be paid out of the assets available for distribution an amount up to the liquidation preference of such preferred stock plus all accrued but unpaid dividends before any payment or distribution shall be made on the Common Stock or capital stock ranking junior to the Senior Preferred Stock. Voting Rights. Although the holders of the Senior Preferred Stock generally do not have the right to vote on any matters presented to the Company's stockholders, the affirmative vote or consent of holders of a majority of the shares of the Senior Preferred Stock is required in order for the Company to (1) authorize, create or issue any securities ranking on a parity with or senior to the Senior Preferred Stock (or any security convertible into such a security), other than the Convertible Preferred Stock, (2) amend or otherwise alter the certificate of incorporation of the Company in a manner that adversely affects the rights of holders of the Senior Preferred Stock, (3) amend, alter, and waive the Senior Preferred Stock's certificate of designations in any manner (other than to cure an ambiguity, defect or inconsistency or to make any change that would provide additional rights or benefits to the holders of the Senior Preferred Stock or that does not adversely affect the rights of such holders), or (4) waive any compliance with the Senior Preferred Stock's certificate of designations. In addition, the consent of each holder of the Senior Preferred Stock is required for certain amendments or waivers of the Company's certificate of incorporation or the Senior Preferred Stock's certificate of designations affecting the rights of holders of the Senior Preferred Stock. Convertible Preferred Stock Dividends. Holders of the Convertible Preferred Stock are entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends at the rate of 5% per annum on the then current liquidation preference of such preferred stock, payable quarterly in arrears on each February 15, May 15, August 15 and November 15 (or if such date is not a business day, on the next succeeding business day) to holders of record as of the preceding February 1, May 1, August 1 and November 1, respectively. Dividends are payable (1) in cash, to the extent the Company has sufficient available cash in excess of certain prescribed amounts, and (2) by increasing the liquidation preference of the Convertible Preferred Stock, to the extent the Company has insufficient available cash. So long as shares of Convertible Preferred Stock are outstanding, no dividends (other than a dividend payable solely in junior securities) or other distribution on any Common Stock or capital stock ranking junior to the Convertible Preferred Stock shall be declared or paid or set apart, and no Common Stock or any other capital stock of the Company ranking junior to or on parity with the Convertible Preferred Stock (other than the Junior Preferred Stock after a Mandatory Redemption Date as defined below) shall be redeemed, purchased or otherwise acquired by the Company or a subsidiary thereof, unless full cumulative dividends on the Convertible Preferred Stock have been paid in full. Redemption. The Convertible Preferred Stock is redeemable at the option of the Company from and after the third anniversary of the closing of the offering (the "Anniversary Date") at a redemption price equal to the sum of all accrued and unpaid dividends through the redemption date, 96 plus (1) 103% of the then current liquidation preference of the Convertible Preferred Stock if the Convertible Preferred Stock is redeemed on or prior to the first anniversary of the Anniversary Date, (2) 102% of the then current liquidation preference of the Convertible Preferred Stock if the Convertible Preferred Stock is redeemed on or prior to the second anniversary of the Anniversary Date, (3) 101% of the then current liquidation preference of the Convertible Preferred Stock if the Convertible Preferred Stock is redeemed on or prior to the third anniversary of the Anniversary Date, or (4) 100% of the then current liquidation preference of the Convertible Preferred Stock if the Convertible Preferred Stock is redeemed after the third anniversary of the Anniversary Date. In addition, on August 29, 2012, the Company is required to redeem all remaining outstanding shares of the Convertible Preferred Stock at a price in cash equal to 100% of the then current liquidation preference of the Convertible Preferred Stock then outstanding. Dissolution, Liquidation, Winding Up. Upon the dissolution, liquidation or winding up of the Company, holders of the Convertible Preferred Stock are entitled to be paid out of the assets available for distribution an amount up to the liquidation preference of such preferred stock plus all accrued but unpaid dividends before any payment or distribution shall be made on the Common Stock or capital stock ranking junior to the Convertible Preferred Stock. Conversion Rights. Holders of the Convertible Preferred Stock have the right to convert all shares of Convertible Preferred Stock held by them into shares of Common Stock, at any time commencing immediately prior to the closing of the offering. Under the Convertible Preferred Stock's certificate of designations, holders may convert that fraction of the Convertible Preferred Stock then outstanding equal to the aggregate liquidation preference of the Convertible Preferred Stock at the time of issuance divided by the aggregate liquidation preference of the Convertible Preferred Stock at the time of conversion into a total of shares of Common Stock. Accordingly, all 24,000 shares of Convertible Preferred Stock held by Cendant will initially be convertible into a total of shares of Common Stock (the "Conversion Rate"), assuming no change in the liquidation preference of the Convertible Preferred Stock prior to the time of conversion and assuming an initial public offering price of $ per share, the mid-point of the expected range of initial public offering price per share. Voting Rights. Upon the closing of the offering, each share of Convertible Preferred Stock will vote together with the Common Stock on all matters submitted to a vote of the holders of the Common Stock and generally will be entitled to a number of votes equal to the number of shares of Common Stock into which such share is convertible, based on the Conversion Rate. In addition, the affirmative vote or consent of holders of a majority of the shares of the Convertible Preferred Stock is required in order for the Company to (1) authorize, create or issue any securities ranking on a parity with or senior to the Convertible Preferred Stock (or any security convertible into such a security), other than the Senior Preferred Stock, (2) amend or otherwise alter the certificate of incorporation of the Company in a manner that adversely affects the rights of holders of the Convertible Preferred Stock, (3) amend or otherwise alter the Convertible Preferred Stock's certificate of designations in any manner (other than to cure an ambiguity, defect or inconsistency or to make any change that would provide additional rights or benefits to the holders of the Convertible Preferred Stock or that does not adversely affect the rights of such holders), or (4) waive compliance 97 with any provision of the Convertible Preferred Stock's certificate of designations. The consent of each holder of the Convertible Preferred Stock is also required for certain amendments or waivers of the Company's certificate of incorporation or the Convertible Preferred Stock's certificate of designations affecting the rights of holders of the Convertible Preferred Stock. Junior Preferred Stock The Company has agreed to redeem all of the outstanding shares of Junior Preferred Stock with a portion of the proceeds of the offering. The aggregate consideration for such redemption will be calculated in accordance with the certificate of designation for the Junior Preferred Stock. See "--Redemption." Dividends. Holders of the Junior Preferred Stock are entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends at the rate of 18% per annum on the then current liquidation preference of such preferred stock, payable quarterly in arrears on each February 15, May 15, August 15 and November 15 (or if such date is not a business day, on the next succeeding business day) to holders of record as of the preceding February 1, May 1, August 1 and November 1, respectively. In addition, on each dividend payment date, holders of the Junior Preferred Stock are entitled to an additional dividend in an amount (the "Additional Dividend Amount") equal to 0.1% of the gross commission income of the Company under the COLDWELL BANKER(R) Franchise Agreement for the fiscal quarter ending immediately prior to the applicable dividend payment date divided by the number of shares of Junior Preferred Stock outstanding. Dividends are payable (1) in cash, to the extent the Company has sufficient available cash in excess of certain prescribed amounts, and (2) by increasing the liquidation preference of the Convertible Preferred Stock, to the extent the Company has insufficient available cash. So long as shares of Senior Preferred Stock are outstanding, no dividends (other than a dividend payable solely in junior securities) or other distribution on any Common Stock or capital stock ranking junior to the Senior Preferred Stock shall be declared or paid or set apart, and no Common Stock or any other capital stock of the Company ranking junior to or on parity with the Senior Preferred Stock (other than the Junior Preferred Stock after a mandatory redemption date as described below) shall be redeemed, purchased or otherwise acquired by the Company or a subsidiary thereof, unless cumulative dividends on the Senior Preferred Stock have been paid in full. Redemption. The Junior Preferred Stock is redeemable, at the option of the Company, at any time prior to August 29, 2001 (the "Mandatory Redemption Date") at a redemption price equal to the sum of (1) the then current liquidation preference for such subseries, (2) any accrued and unpaid dividends (including the Additional Dividend Amount) through the redemption date, and (3) 18% of the product of (a) the initial liquidation preference for such subseries of Junior Preferred Stock and (b) the number of days from the date of issuance of such subseries to the Mandatory Redemption Date divided by 1460. The Company estimates that the redemption price for all outstanding shares of Junior Preferred Stock will be $84.5 million. Anti-Takeover Provisions The Restated Certificate, the Restated By-laws, the Franchise Agreements and the General Corporation Law of the State of Delaware (the "DGCL") contain certain provisions that could make 98 more difficult the acquisition of control of the Company. The following description is intended as a summary only and is qualified in its entirety by reference to the Restated Certificate, the Restated By-Laws, the Stockholders Agreement and the DGCL. Classified Board of Directors; Removal of Directors The Restated Certificate provides for the Board of Directors to be divided into three classes of directors, as nearly equal in number as is reasonably possible, serving staggered terms so that directors' initial terms will expire either at the 1999, 2000 or 2001 annual meeting of stockholders. Commencing with the 1999 annual meeting of stockholders, one class of directors will be elected each year for a three-year term. The Company believes that a classified board of directors will help to assure the continuity and stability of the Board of Directors and the Company's business strategies and policies as determined by the Board of Directors, since a majority of the directors at any given time will have had prior experience as directors of the Company. The Company believes that this will permit the Board of Directors to represent more effectively the interests of stockholders. With a classified board of directors, at least two annual meetings of stockholders, instead of one, generally will be required to effect a change in a majority of the Board of Directors. In addition, the Company's directors may be removed by the Company's stockholders only for cause. Action by Written Consent; Special Meetings of Stockholders The Restated Certificate provides that no action required or permitted to be taken by stockholders of the Company may be taken except at a meeting of stockholders. The Restated By-laws provide that special meetings may be called only by (1) the Chairman of the Board, (2) the President or (3) any three directors of the Board of Directors. Stockholders are not permitted to call a special meeting or to require that the Board call a special meeting of stockholders. In addition, the business permitted to be conducted at any special meeting of stockholders is limited to the purpose or purposes specified in the written notice of such meeting. The provisions of the Restated Certificate prohibiting action by written consent without a meeting and the provisions of the Restated By-laws governing the call of and matters to be considered at special meetings may have the effect of delaying consideration of a stockholder proposal until the next annual meeting of stockholders. Advance Notice Provisions for Stockholder Nominations and Proposals The Restated By-laws will establish advance notice provisions with regard to the nomination of candidates for election as directors, other than by or at the direction of the Board, and the bringing any stockholder proposal before any annual meeting of stockholders. The advance notice provisions provide that business other than that proposed by the Board may be transacted and candidates for director other than those selected by the Board may be nominated at the annual meeting of stockholders only if the Secretary of the Company has received a written notice identifying such business or candidates and providing specified additional information not less than 90 nor more than 120 days before the anniversary of the prior year's annual meeting of stockholders (or if the Board has set a different date for the annual meeting, not less than 90 nor more than 120 days before such other date, provided that if such meeting has been called for a date that is not within 30 days of such anniversary date, then no later than 10 days after the day on which notice of the date of such meeting was mailed or otherwise publicly disclosed). In addition, not more than 10 days after receipt by the sponsoring stockholder of the Secretary's written request, the sponsoring stockholder must provide the Secretary with such additional information as the Secretary may reasonably require. 99 Restrictions Imposed by Agreements The provisions of the Franchise Agreements contain as an event of default the acquisition by any person or group of beneficial ownership of over 30% of the Common Stock and/or securities convertible into or exercisable for shares of Common Stock. The Company could be required to pay the Franchisors liquidated damages based on the remaining term of the Franchise Agreements (up to 25 years) if the Franchise Agreements are terminated due to a change in control. In addition, the Stockholders Agreement generally prohibits Apollo from transferring beneficial ownership of over 10% of the Common Stock to any person or group or any shares of Common Stock to a person or group if such person or group would acquire thereby beneficial ownership of over 20% of the Common Stock, in each case without Cendant's consent. Under the Stockholders Agreement, Cendant's consent to a proposed transfer may not be unreasonably withheld unless the proposed transferee would acquire 30% or more the Common Stock or securities convertible into or exercisable for Common Stock (in which case Cendant may withhold its consent in its absolute discretion). Reasonable grounds for withholding consent include if Cendant withhold its consent if it believes in good faith, in its sole discretion, that the proposed transferee may be acquiring such securities with the purpose of acquiring, changing or influencing control of the Company (or facilitating any such acquisition, change or influence of control). In addition, the terms of the Company's bank credit facility provide that a change in control of the Company will constitute an event of default under its terms. Such provisions may render an unsolicited takeover of the Company more difficult or less likely to occur or might prevent such a takeover. See "Certain Transactions--Franchise Agreements," "-- Stockholders Agreement" and "Description of Certain Indebtedness." Delaware Business Combination Statute Section 203 of the DGCL imposes a three-year moratorium on business combinations between a Delaware corporation and an "interested stockholder" (in general, a stockholder owning 15% or more of a corporation's outstanding voting stock) or an affiliate or associate thereof unless (1) prior to an interested stockholder becoming an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction resulting in the interested stockholder becoming an interested stockholder; (2) upon consummation of the transaction resulting in an interested stockholder becoming an interested stockholder, the interested stockholder owns 85% of the voting stock outstanding at the time the transaction commenced (excluding, from the calculation of outstanding shares, shares beneficially owned by directors who are also officers and certain employee stock plans); or (3) on or after an interested stockholder becomes an interested stockholder, the business combination is approved by (a) the board of directors or (b) holders of at least 66 2/3% of the outstanding shares (other than those shares beneficially owned by the interested stockholder) at a meeting of stockholders. Section 203 of the DGCL applies to any corporation incorporated in the State of Delaware unless the corporation expressly elects not be governed by such legislation. The Company has not made such an election and is therefore subject to Section 203 of the DGCL. 100 Limitations on Directors' Liability The Restated Certificate provides that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Company or its stockholders, (2) for acts or omissions not in good faith or which involve intention misconduct or a knowing violation of law, (3) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (4) for any transaction from which the director derived an improper personal benefit. The effect of those provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors under federal securities laws. Listing The Company intends to apply to list the Common Stock on the New York Stock Exchange under the symbol "NRS." Transfer Agent And Registrar The transfer agent and registrar for the Common Stock is . 101 DESCRIPTION OF CERTAIN INDEBTEDNESS On January 7, 1999, the Company entered into a $50,000,000 credit facility (the "Credit Facility"), guaranteed by certain of the Company's subsidiaries. The following is a summary of the material terms and conditions of the Credit Facility. The Credit Facility consists of a revolving credit facility of up to $50,000,000, which will be available to the Company until May 29, 2001. Advances may be used for the general working capital needs of the Company in the ordinary course of business and for certain permitted acquisitions. At the option of the Company, each individual borrowing under the Credit Facility may be designated and maintained as either a base rate loan or a Eurodollar loan. Interest accrues on base rate loans at a rate equal to 0.75% plus the higher of (i) 1/2 of 1% in excess of the federal funds rate, and (ii) the prime lending rate. Interest accrues on Eurodollar loans at a rate equal to 0.75% plus the British Bankers' Association interest settlement rate (or if not available, by reference to the London interbank market rate). The Company's obligations arising under the Credit Facility are secured by a pledge of the capital stock of certain of the Company's subsidiaries and are guaranteed by certain of the Company's subsidiaries, which guarantees are secured by a pledge of the capital stock of certain of the guarantor's subsidiaries. Under the terms of the Credit Facility, the Company must make certain mandatory prepayments following the receipt of funds from specified events. These events include certain asset dispositions, certain permitted incurrences of additional debt or issuances of additional preferred stock, or instances where the Company receives funds due to the destruction, damage, theft, condemnation or taking of its property or assets. The Credit Facility contains a number of covenants, including covenants with respect to the Company and its subsidiaries, including among others, limitations on changes in lines of business, acquisitions, consolidations, mergers, asset dispositions, liquidations, dissolutions, liens, indebtedness, investments, loans and advances, payment of dividends, voluntary payments and modifications of other debt instruments and issuances of additional capital stock. The Company is also required to maintain compliance with certain financial performance covenants, including covenants containing a maximum total leverage ratio and a minimum interest coverage ratio. Events of default under the Credit Facility include nonpayment of principal when due, nonpayment of interest or fees following a grace period, material inaccuracy of representations and warranties, failure to comply with covenants, default under certain other agreements, bankruptcy events, certain ERISA events, certain judgments against the Company or its subsidiaries, the termination of or payment of certain liquidated damages under the Franchise Agreements and a change in control of the Company (defined to include the acquisition by any person, other than Cendant and Apollo and certain affiliates thereof (as a group), of 25% or more of the voting and/or economic interest in the Company's capital stock on a fully-diluted basis). 102 In addition to the Credit Facility, in connection with the Company's acquisition of Hunneman Real Estate Corporation, the Company assumed a line of credit, of which $22.8 million was outstanding at December 31, 1998. Such line is restricted to provide funding for the Company's mortgage loan originations, pursuant to which the Company finances mortgage loans. The Company draws from the line of credit up to 98% of the mortgage loan amount, then sells such mortgage loans to third parties. Upon the sale, the Company pays off the amount drawn, typically within 90 days of the draw. 103 SHARES ELIGIBLE FOR FUTURE SALE Immediately after the closing of the offering, the Company will have shares of Common Stock issued and outstanding, and shares of Common Stock issuable upon the conversion of the Convertible Preferred Stock and the exercise of outstanding options. All of the shares of Common Stock to be sold in the offering will be freely tradeable without restrictions or further registration under the Securities Act, except that shares purchased by an "affiliate" of the Company (as that term is defined in Rule 144) will be subject to the resale limitations of Rule 144. In general, under Rule 144, as currently in effect, (1) a person (or persons whose shares are required to be aggregated) who owns shares of Common Stock which have been held for at least one year since such shares were sold by the Company or by an affiliate of the Company in a transaction or chain of transactions not involving a public offering ("restricted securities") or (2) an affiliate of the Company who holds shares of Common Stock that are not restricted securities, may sell, within any three-month period, no more than 1% of the Company's Common Stock then outstanding or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which the required notice of such sale was filed, whichever is greater. Sales under Rule 144 are also subject to certain provisions relating to the manner and notice of sale and availability of current public information about the Company. Affiliates of the Company must comply with the requirements of Rule 144, including the one-year holding period requirement, to sell shares of Common Stock that are restricted securities. Furthermore, if a period of at least two years has elapsed from the date restricted securities were acquired from the Company or an affiliate of the Company, a holder of such restricted securities who is not an affiliate of the Company at the time of the sale and has not been an affiliate of the Company at any time during the three months prior to such sale would be entitled to sell such shares without regard to the volume limitation and other conditions described above. Each of the Company, its executive officers and directors, Apollo and Cendant has agreed, subject to certain exceptions, not to offer, sell or otherwise dispose of any shares of Common Stock, other than in the offering, or any security convertible into or exchangeable or exercisable for shares of Common Stock, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the underwriters for a period of 180 days after the date of this prospectus. See "Underwriting." In addition, transfers of shares of Common Stock by Apollo and Cendant are also restricted by the provisions of the Stockholders Agreement. See "Certain Transactions-- Stockholders Agreement." Prior to the offering, there has been no public market for Common Stock. Although the Company can make no prediction as to the effect, if any, that sales of shares of Common Stock by Apollo or Cendant would have on the market price prevailing from time to time, sales of substantial amounts of Common Stock or the availability of such shares for sale could adversely affect prevailing market prices. See "Risk Factors--Shares Eligible for Future Sale by Apollo and/or Cendant." 104 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS RELATING TO NON-U.S. HOLDERS The following is a general discussion of certain United States federal income and estate tax considerations with respect to the ownership and disposition of Common Stock applicable to Non-U.S. Holders (as defined below) who hold the Common Stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code. In general, a "Non-U.S. Holder" is any holder other than (1) a citizen or resident of the United States, (2) a corporation created or organized in the United States or under the laws of the United States or of any state, (3) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (4) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and (b) one or more United States persons have the authority to control all substantial decisions of the trust. This discussion is based on current law, which is subject to change (possibly with retroactive effect), and is for general information only. This discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of income and estate taxation or any aspects of state, local or non-United States taxes, nor does it consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. In addition, persons that hold the Common Stock through "hybrid entities" may be subject to special rules and may not be entitled to the benefits of a U.S. income tax treaty. Accordingly, prospective investors are urged to consult their tax advisors regarding the United States federal, state, local and non-United States income and other tax considerations of holding and disposing of shares of Common Stock. For purposes of the discussion below, dividends and gain on the sale, exchange or other disposition of Common Stock will be considered to be "U.S. trade or business income" if such income or gain is (1) effectively connected with the conduct of a U.S. trade or business or (2) in the case of a treaty country resident, attributable to a permanent establishment (or, in the case of an individual, a fixed base) in the United States. Dividends In general, dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate (or a lower rate prescribed by an applicable income tax treaty) of the gross amount unless the dividends are effectively connected to a U.S. trade or business income. Dividends that are U.S. trade or business income generally will not be subject to United States withholding tax if the Non-U.S. Holder files certain forms, including Internal Revenue Service Form 4224, with the payor of the dividend, but rather will be subject to United States federal income tax on a net income basis, in the same manner as if the Non-U.S. Holder were a resident of the United States. A Non- U.S. Holder that is a corporation may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty). To determine the applicability of a tax treaty providing for a lower rate of withholding under the currently effective United States Treasury Department regulations (the "Current Regulations"), dividends paid to an address in a foreign country are presumed to be paid to a resident of that country absent knowledge to the contrary. 105 Under United States Treasury Department regulations issued on October 6, 1997 (the "Final Regulations") generally effective for payments made after December 31, 1998, a Non-U.S. Holder (including in certain cases of Non-U.S. Holders that are fiscally transparent entities, the owner or owners of such entity) will be required to provide to the payor certain documentation that such Non- U.S. Holder (or the owner or owners of such fiscally transparent entities) is a foreign person in order to claim a reduced rate of withholding pursuant to an applicable income tax treaty. In addition, if the Common Stock ceases to be actively traded, then a Non-U.S. Holder claiming the benefits of a treaty may also be required to provide a U.S. taxpayer identification number, a certificate of residence in the foreign country (or other acceptable proof of such residence). Under the Final Regulations, persons claiming that dividends are U.S. trade or business income will generally be required to provide a Form W-8, including a taxpayer identification number, certifying that the income is U.S. trade or business income. Gain on Sale or Other Disposition of Common Stock In general, a Non-U.S. Holder will not be subject to United States federal income tax on any gain realized upon the sale or other disposition of such holder's shares of Common Stock unless (1) the gain is U.S. trade or business income; (2) the Non-U.S. Holder is an individual who holds shares of Common Stock as a capital asset and is present in the United States for 183 days or more in the taxable year of disposition, and certain other tests are met; (3) the Non-U.S. Holder is subject to tax pursuant to the provisions of the U.S. tax law applicable to former citizens and residents of the United States; or (4) the Company is or has been a United States real property holding corporation (a "USRPHC") for United States federal income tax purposes (which the Company does not believe that it is or is likely to become) at any time within the shorter of the five year period preceding such disposition or such Non-U.S. Holder's holding period. If the Company were or were to become a USRPHC at any time during this period, gains realized upon a disposition of Common Stock by a Non-U.S. Holder which did not directly or indirectly own more than 5% of the Common Stock during this period generally would not be subject to United States federal income tax, provided that the Common Stock was regularly traded on an established securities market. Estate Tax Common Stock owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for United States federal estate tax purposes unless an applicable estate tax treaty provides otherwise, and therefore may be subject to United States federal estate tax. Backup Withholding, Information Reporting and Other Reporting Requirements The Company must report annually to the Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of this information also may be made available under the provisions of a specific treaty or agreement with the tax authorities in the country in which the Non-U.S. Holder resides or is established. 106 Under the Current Regulations, United States backup withholding tax (which generally is imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) and information reporting requirements (other than those discussed above under "--Dividends") generally will not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States. Backup withholding and information reporting generally will apply, however, to dividends paid on shares of Common Stock to a Non-U.S. Holder at an address in the United States, if such holder fails to establish an exemption or to provide certain other information to the payor. Under the Current Regulations, the payment of proceeds from the disposition of Common Stock to or through a United States office of a broker will be subject to information reporting and backup withholding unless the beneficial owner, under penalties of perjury certifies, among other things, its status as a Non-U.S. Holder or otherwise establishes an exemption. The payment of proceeds from the disposition of Common Stock to or through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding and information reporting except as noted below. In the case of proceeds from a disposition of Common Stock paid to or through a non-U.S. office of a broker that is (1) a United States person, (2) a "controlled foreign corporation" for United States federal income tax purposes, or (3) a foreign person 50% or more of whose gross income from certain periods is effectively connected with a United States trade or business, information reporting (but not backup withholding) will apply unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder (and the broker has no actual knowledge to the contrary). Under the Final Regulations, the payment of dividends or the payment of proceeds from the disposition of Common Stock to a Non-U.S. Holder may be subject to information reporting and backup withholding unless such recipient provides to the payor certain documentation as to its status as a Non-U.S. Holder or otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded or credited against the Non-U.S. Holder's United States federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service in a timely manner. 107 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement, dated as of , 1999 (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated (the "Representatives"), have severally agreed to purchase from the Company and Apollo the respective number of shares of Common Stock set forth opposite their names below.
Number of Shares --------- Donaldson, Lufkin & Jenrette Securities Corporation................ Bear, Stearns & Co. Inc............................................ Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................................. Morgan Stanley & Co. Incorporated.................................. ---- Total............................................................ ====
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The offering price and underwriting discounts and commissions per share for shares of Common Stock offered by the Company, Apollo and Cendant (with respect to the Underwriters' over-allotment option discussed below) are identical. The Underwriters initially propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this prospectus and in part to certain dealers (including the Underwriters) at such price, less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $ per share. After the initial offering of Common Stock, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Apollo and Cendant have granted to the Underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to a total of additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. Such option may be exercised at any time until 30 days after the date of this prospectus. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage of the initial underwriting commitment as indicated in the preceding table. Upon any such exercise, the shares of Common Stock subject to the Underwriters' over- allotment option will be sold by Apollo and Cendant in the following manner: (1) shares in an aggregate amount equal to 10% of the shares sold by Apollo in 108 the offering not including the over-allotment option will be sold by Cendant; and (2) after giving effect to such sales by Cendant, 10% of any over-allotment shares sold in excess of clause (1) pursuant to the option will be sold by Cendant and the other 90% by Apollo. The Company, Apollo and Cendant have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Each of the Company, its executive officers and directors, Apollo and Cendant has agreed not to (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (1) or (2) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this prospectus without the prior written consent of DLJ, except for (1) the grant of stock options, restricted stock or other awards pursuant to the Company's 1997 Equity Participation Plan, (2) the issuance of shares of Common Stock upon the exercise of an option or warrant or the conversion of convertible securities, (3) the issuance of shares of Common Stock by the Company in connection with acquisitions, (4) transfers by Apollo and Cendant to and among their affiliates, and (5) the transfer of securities by directors and officers of the Company to members of their immediate families, to trusts and estates or as gifts; provided in the case of (4) and (5) above that the acquiring entity or transferee agree in writing to be bound by such transfer restrictions. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its executive officers and directors and the Selling Stockholders have agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without DLJ's prior written consent. Prior to the offering, there has been no established trading market for the Common Stock. The initial public offering price for the shares of Common Stock offered hereby will be determined by negotiation among the Company, Apollo and Cendant and the Representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company and the general condition of securities markets at the time of the offering. The Company intends to apply to have the Common Stock listed on the New York Stock Exchange under the symbol "NRS." In order to meet the requirements for listing the Common Stock on the New York Stock Exchange, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. Other than the United States, no action has been taken in any jurisdiction by the Company, Apollo, Cendant or the Underwriters that would permit a public offering of the Common Stock 109 offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published, in any jurisdiction, except under circumstances that will result in compliance with applicable rules and regulations of such jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or solicitation is unlawful. In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a syndicate short position. In addition, the Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. The underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise or if DLJ receives a report that indicates the clients of such syndicate members have "flipped" the Common Stock. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. Of the shares offered hereby, shares have been reserved for sale to certain employees of the Company and certain of its subsidiaries, certain clients and certain other persons designated by the Company ("Eligible Participants"), in each case to the extent permitted by applicable law. The price per share of the shares to be sold to Eligible Participants will be the same as the price to the public in the offering. The maximum investment of any Eligible Participant may be limited by the Company in its sole discretion. This program is being administered by DLJ and, where required by applicable law, a locally licensed or authorized broker-dealer. It is currently anticipated that the number of shares to be sold under this program will not exceed % of the number of shares of Common Stock offered in connection with the offering. The Representatives from time to time perform investment banking and other financial services for the Company and its affiliates for which they may receive advisory or transaction fees, as applicable, plus out-of-pocket expenses of the nature and in amounts customary in the industry for such services. Michael L. Tarnopol, a member of the Company's Board of Directors, is Vice Chairman, a Senior Managing Director and Chairman of the Investment Banking Division of Bear, Stearns & Co. Inc. ("Bear Stearns"), which is acting as an Underwriter in the offering. Bear Stearns, a member of the National Association of Securities Dealers, Inc. (the "NASD"), owns a 49% non-voting equity participation interest in Apollo's investment in the Company. Due to the fact that over 10% of the net proceeds of the offering will be paid to Bear Stearns, under Rule 2710(c)(8) of the Rules of Conduct of the NASD, the price at which the shares of Common Stock are to be distributed to the public must be no higher than the price recommended by a qualified independent underwriter ("QIU"). In accordance with this requirement, DLJ has assumed the 110 responsibilities of acting as QIU and will recommend a price in compliance with the requirements of Rule 2720. In connection with the offering, DLJ has performed due diligence investigations and reviewed and participated in the preparation of this prospectus and the Registration Statement of which this prospectus forms a part. As compensation for the services of DLJ as QIU, the Company has agreed to pay DLJ $5,000. 111 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the Common Stock in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws, which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock. Representations of Purchaser Confirmations of the acceptance of offers to purchase shares of Common Stock will be sent to Canadian residents to whom this prospectus has been sent and who have not withdrawn their offers to purchase prior to the issuance of such confirmation. Each purchaser of Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company and the dealer from whom such purchase confirmation is received that (1) such purchaser is entitled under applicable Canadian provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (2) where required by law, such purchaser is purchasing as principal and not as agent, (3) such purchaser has reviewed the text above under "--Resale Restrictions", (4) if such purchaser is located in Manitoba, such purchaser is not an individual and is purchasing for investment only and not with a view to resale or distribution, (5) if such purchaser is located in Ontario, a dealer registered as an international dealer in Ontario may sell shares of Common Stock to such purchaser, and (6) if such purchaser is located in Quebec, such purchaser is a "sophisticated purchaser" within the meaning of Section 43 of the Securities Act (Quebec). Taxation Canadian residents should consult their own legal and tax advisers with respect to the tax consequences of an investment in the Common Stock in their particular circumstances and with respect to the eligibility of the Common Stock for investment by the purchaser under relevant Canadian legislation. Enforcement of Legal Rights The Company has been organized under the laws of the State of Delaware. All of the directors and officers of the Company reside outside Canada and substantially all of the assets of the Company are located outside Canada. As a result, it may not be possible for Canadian investors to effect service of process within Canada upon the Company or to enforce against the Company in Canada judgments obtained in Canadian courts that are predicated upon the contractual rights of action, if any, granted to certain purchasers by the Company. It may also not be possible for investors to enforce against the Company in the United States judgments obtained in Canadian courts. Furthermore, although the requirement for an issuer to provide to certain purchasers the contractual right of action for damages and/or rescission described below is consistent with 112 contractual considerations associated with a private placement which constitutes a primary distribution of the issuer's securities by the issuer, an investor may not be able to enforce a contractual right of action for rescission against the issuer where the offer or sale of the issuer's securities is a secondary distribution being made by a third party. Notice to Ontario Residents The Common Stock offered hereby is being issued by a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. All the Company's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the Company or such persons. All or a substantial portion of the assets of the Company and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the Company or such persons in Canada or to enforce a judgment obtained in Canadian courts against the Company or persons outside of Canada. Notice to Nova Scotia Residents The Securities Act (Nova Scotia) provides that where a Canadian offering document, together with any amendments thereto, contains an untrue statement of material fact or omits to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made (such untrue statement or omission herein called a "misrepresentation"), a purchaser who was delivered such offering document and who purchases such securities shall be deemed to have relied on such misrepresentation if it was a misrepresentation at the time of purchase and has a right of action for damages against the seller of the securities or he may elect to exercise the right of rescission against the seller, in which case he shall have no right of action for damages against the seller, provided that: (1) The seller will not be liable if the seller proves that the purchaser purchased the securities with knowledge of the misrepresentation; (2) In an action for damages, the seller will not be liable for all or any portion of such damages that the seller proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon; (3) In no case shall the amount recoverable pursuant to the right of action exceed the price of which the securities were offered; and (4) The action for rescission or damage conferred by the Securities Act (Nova Scotia) is in addition to and without derogation from any other rights the purchaser may have at law; but no action to enforce these rights may be commenced more than 120 days after the date on which payment is made for the securities or after the date on which the initial payment for the securities is 113 made where a payment subsequent to the initial payment is made pursuant to a contractual commitment assumed prior to, or concurrently with, the initial payment. Notice to Saskatchewan Residents The Securities Act (Saskatchewan) provides that in the event an offering memorandum, together with any amendment thereto, or any advertising or sales literature (as such terms are defined in the Securities Act (Saskatchewan)) used in connection with an offering contains a misrepresentation (as defined in the Securities Act (Saskatchewan)) that was a misrepresentation at the time of purchase, purchasers of securities will be deemed to have relied upon such misrepresentation and will have a statutory right of action pursuant to the Securities Act (Saskatchewan) for damages against the issuer and the seller of the securities, or alternatively may elect to exercise a right of rescission against the issuer or the seller, provided that: (1) no person or company is liable where the person or company proves that the purchaser purchased the securities with knowledge of the misrepresentation; (2) no person or company, other than the issuer or selling security holder, is liable unless that person or company: (i) failed to conduct a reasonable investigation sufficient to provide reasonable grounds for a belief that there had been no misrepresentation; or (ii) believed there had been a misrepresentation; and (3) in an action for damages, the defendant is not liable for all or any portion of such damages that it proves does not represent the depreciation in value of the securities as a result of the misrepresentation relied upon, but no action to enforce these rights may be commenced: (1) in the case of rescission, more than 180 days after the date of the transaction that gave rise to the cause of action; and (2) in the case of any other action, other than an action for rescission, more than the earlier of (a) 180 days after the purchaser first had knowledge of the facts giving rise to the cause of action, or (b) three years after the date of the transaction that gave rise to the cause of action. Language of Documents All Canadian purchasers of shares of Common Stock acknowledge that all documents evidencing or relating in any way to the sale of such shares will be drawn in the English language only. 114 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal matters in connection with the sale of shares of Common Stock in the offering will be passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, New York, New York. Certain legal matters in connection with the sale of shares by Apollo in the offering will be passed upon by Latham & Watkins. Skadden, Arps, Slate, Meagher & Flom LLP has from time to time represented, currently represents and may continue to represent Cendant, Apollo, the Underwriters and certain of their respective affiliates in connection with certain legal matters. Milbank, Tweed, Hadley & McCloy has from time to time represented and may continue to represent Apollo in connection with certain legal matters. EXPERTS The consolidated financial statements of (1) Coldwell Banker Residential Brokerage Corporation for the year ended December 31, 1995 and the period from January 1, 1996 to May 31, 1996, (2) National Realty Trust and subsidiaries as of December 31, 1996 and for the period from June 1, 1996 to December 31, 1996, and the period from January 1, 1997 to August 31, 1997, and (3) NRT Incorporated and subsidiaries as of December 31, 1997 and for the four months then ended, each included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein (which reports express an unqualified opinion and include an explanatory paragraph referring to the preparation of the financial statements of Coldwell Banker Residential Brokerage Corporation), and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Jon Douglas Real Estate Services Group, Inc. for the nine months ended September 30, 1997, included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The combined financial statements of Jon Douglas Company, San Vicente Escrow Company, Equity Title Company, Douglas Referral Associates, and Jon Douglas Financial for the period January 1, 1995 through November 14, 1995, included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Jon Douglas Real Estate Services Group, Inc. for the period from November 15, 1995 through December 31, 1995 and the year ended December 31, 1996, included in this prospectus, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and is included herein in reliance upon the report of said firm and upon the authority of said firm as experts in accounting and auditing. The financial statements of Cornish & Carey Residential, Inc. for the years ended December 31, 1995 and 1996, included in this prospectus, have been audited by Deloitte & Touche LLP, 115 independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The combined financial statements of Contempo Realty, Inc., Contempo Relocation, Inc. and the Blossom Valley, Morgan Hill and Bascom general partnerships for each of the three years in the period ended December 31, 1996, included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of Barbara Sue Seal Properties for the year ended December 31, 1996, included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 116 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (as amended from time to time and together with all exhibits and schedules thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock to be sold in the offering. This prospectus constitutes a part of the Registration Statement and does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this prospectus as to the content of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement. The Registration Statement, and the reports and other information to be filed by the Company with the Commission following the offering in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), can be inspected and copied at the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Commission's website, http://www.sec.gov, and from the Public Reference Room of the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission. Investors may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Upon completion of the offering, the Company will be subject to the informational requirements of the Exchange Act and, in accordance therewith, will file reports, proxy and information statements and other information with the Commission. Such reports, proxy and information statements and other information can be inspected and copied at the addresses set forth above. The Company intends to furnish to its stockholders with annual reports containing audited consolidated financial statements, including an opinion thereon expressed by the Company's independent public accountants. 117 INDEX TO FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements of NRT Incorporated and Subsidiaries Independent Auditors' Report............................................ F-3 Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)......................................... F-4 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998 (unaudited)................................................... F-5 Consolidated Statements of Trust and Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1998 (unaudited)............................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998 (unaudited)................................................... F-7 Notes to Consolidated Financial Statements.............................. F-8 Consolidated Financial Statements of Jon Douglas Real Estate Services Group, Inc. and Subsidiaries Independent Auditors' Reports........................................... F-25 Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............. F-28 Consolidated Statements of Shareholders' Deficit for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997................................................................... F-29 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............. F-30 Notes to Consolidated Financial Statements.............................. F-31 Financial Statements of Cornish & Carey Residential, Inc. Independent Auditors' Report............................................ F-37 Statements of Operations for the years ended December 31, 1995 and 1996 and the period January 1, 1997 to June 30, 1997 (unaudited)........................... F-38 Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 and the period January 1, 1997 to June 30, 1997 (unaudited)... F-39 Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the period January 1, 1997 to June 30, 1997 (unaudited)............ F-40 Notes to Financial Statements........................................... F-41 Combined Financial Statements of Contempo Realty, Inc. and Affiliates Independent Auditors' Report............................................ F-45 Combined Statements of Operations for the years ended December 31, 1994, 1995 and 1996.......................................................... F-46 Combined Statements of Owners' Equity for the years ended December 31, 1994, 1995 and 1996.................................................... F-47 Combined Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996......................................................... F-48 Notes to Combined Financial Operations.................................. F-49
F-1 Financial Statements of Barbara Sue Seal Properties Independent Auditors' Report............................................ F-51 Statement of Operations and Retained Earnings for the year ended December 31, 1996 and the nine months ended September 30, 1996 and 1997 (unaudited)............................................................ F-52 Statement of Cash Flows for the year ended December 31, 1996 and the nine months ended September 30, 1996 and 1997 (unaudited).............. F-53 Notes to Financial Statements........................................... F-54
F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors of NRT Incorporated: We have audited the accompanying consolidated balance sheet of NRT Incorporated and subsidiaries (the "Company") as of December 31, 1997 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the four months then ended, the consolidated balance sheet of National Realty Trust and subsidiaries (the "Predecessor Trust") as of December 31, 1996 and the related consolidated statements of operations, trust equity and cash flows for the period from June 1, 1996 to December 31, 1996, and the period from January 1, 1997 to August 31, 1997, and the consolidated statements of operations, stockholders' equity (deficit) and cash flows of Coldwell Banker Residential Brokerage Corporation and subsidiaries ("Predecessor CB Residential") for the year ended December 31, 1995 and the period from January 1, 1996 to May 31, 1996. These financial statements are the responsibility of management of the Company, the Predecessor Trust and Predecessor CB Residential. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and the results of its operations and its cash flows for the four months then ended in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor Trust consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Predecessor Trust and subsidiaries at December 31, 1996, and the results of operations and cash flows of Predecessor Trust and its subsidiaries for the periods from June 1, 1996 to December 31, 1996 and from January 1, 1997 to August 31, 1997 in conformity with generally accepted accounting principles. Finally, the Predecessor CB Residential consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Predecessor CB Residential and its subsidiaries for the year ended December 31, 1995 and the period from January 1, 1996 to May 31, 1996, in conformity with generally accepted accounting principles. As more fully described in Note 1, Coldwell Banker Residential Brokerage Corporation was part of the Coldwell Banker companies and had no separate legal status or existence for the year ended December 31, 1995 or the period from January 1, 1996 to May 31, 1996. Predecessor CB Residential had various transactions with other Coldwell Banker entities that were material in amount. The financial statements of Predecessor CB Residential have been prepared from the separate records maintained by Coldwell Banker, and may not necessarily be indicative of the conditions that would have existed if Predecessor CB Residential had operated as an independent entity. Deloitte & Touche LLP Costa Mesa, California July 9, 1998 F-3 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
Predecessor ------------ Pro Forma National September 30, Realty Trust September 30, 1998 December 31, December 31, 1998 (unaudited) 1996 1997 (unaudited) (Note 17) ------------ ------------ ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................. $11,087 $165,360 $ 64,045 $ 19,045 Restricted cash....................................................... 11,291 40,316 68,157 68,157 Commissions and accounts receivable, net.............................. 12,499 15,521 50,875 50,875 Deferred income taxes................................................. -- 26,587 24,634 24,634 Prepaid expenses and other current assets............................. 4,467 8,451 9,471 9,471 ------- -------- -------- -------- Total current assets................................................. 39,344 256,235 217,182 172,182 PROPERTY AND EQUIPMENT, net............................................ 22,854 51,545 81,858 81,858 GOODWILL AND OTHER INTANGIBLES, net.................................... 8,017 97,643 159,514 159,514 DEFERRED INCOME TAXES.................................................. -- 8,869 8,392 8,392 OTHER ASSETS........................................................... 1,081 2,379 3,472 3,472 ------- -------- -------- -------- $71,296 $416,671 $470,418 $425,418 ======= ======== ======== ======== LIABILITIES AND TRUST AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable and accrued expenses................................. $39,335 $111,804 $127,164 $127,164 Franchise fees payable................................................ 3,618 7,821 11,238 11,238 Accrued salaries and benefits......................................... 11,904 13,470 22,017 22,017 Restricted cash bank loans............................................ 11,291 40,316 68,157 68,157 Notes payable, current portion........................................ 2,341 10,296 11,238 11,238 Dividends payable..................................................... -- 4,829 4,994 4,994 ------- -------- -------- -------- Total current liabilities............................................ 68,489 188,536 244,808 244,808 NOTES PAYABLE, long-term portion....................................... 1,152 4,844 13,753 13,753 OTHER LIABILITIES...................................................... 3,040 19,665 19,605 19,605 REDEEMABLE PREFERRED STOCK: 9.00% Series A Cumulative Senior, at redemption value of $1 per share................................................................ -- 157,591 157,591 157,591 5.00% Series B Cumulative Convertible, at redemption value of $1 per share................................................................ -- 24,000 24,000 24,000 18.00% Series C Cumulative Junior, net, redemption value of $80,822... -- 56,267 61,284 61,284 ------- -------- -------- -------- Total redeemable preferred stock..................................... -- 237,858 242,875 242,875 ------- -------- -------- -------- COMMITMENTS AND CONTINGENCIES TRUST AND STOCKHOLDERS' DEFICIT: Common stock, $.01 par value; 50,000,000 shares authorized; 10,000,000 shares issued and outstanding at December 31, 1997 and September 30, 1998 (unaudited) -- 100 100 100 Additional paid-in capital............................................ -- 7,911 -- -- Accumulated deficit................................................... -- (42,243) (50,723) (95,723) Trust deficit......................................................... (1,385) -- -- -- ------- -------- -------- -------- Total trust and stockholders' deficit................................ (1,385) (34,232) (50,623) (95,623) ------- -------- -------- -------- $71,296 $416,671 $470,418 $425,418 - -------------------------------------------------- ======= ======== ======== ========
See independent auditors' report and notes to consolidated financial statements. F-4 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Predecessors ----------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust ----------------------- ----------------------- January 1, June 1, January 1, September 1, One month Nine months Year 1996 1996 1997 1997 ended ended ended to to to to September 30, September 30, December 31, May 31, December 31, August 31, December 31, 1997 1998 1995 1996 1996 1997 1997 (unaudited) (unaudited) ------------ ---------- ------------ ---------- ------------ ------------- ------------- REVENUES: Real estate commissions........... $540,302 $228,005 $400,076 $570,150 $446,134 $100,592 $1,488,932 Other revenues......... 16,042 7,810 12,101 14,636 17,380 2,428 77,017 -------- -------- -------- -------- -------- -------- ---------- Total revenues........ 556,344 235,815 412,177 584,786 463,514 103,020 1,565,949 -------- -------- -------- -------- -------- -------- ---------- EXPENSES: Commissions and royalties............. 333,869 141,404 276,364 393,235 330,169 73,346 1,091,039 Salaries and benefits.. 69,963 30,467 44,953 65,802 47,231 9,929 175,114 Business promotion and advertising........... 36,645 16,983 23,358 32,521 22,072 6,396 63,341 Building and equipment expenses.............. 48,380 20,708 24,546 34,736 24,471 5,036 86,590 Amortization of goodwill ............. 532 482 104 1,162 637 160 3,220 Other operating expenses.............. 57,025 25,374 27,005 35,804 31,011 5,389 81,116 Acquisition related costs................. 4,240 26 22,188 10,735 78,462 32,264 48,225 -------- -------- -------- -------- -------- -------- ---------- Total expenses........ 550,654 235,444 418,518 573,995 534,053 132,520 1,548,645 -------- -------- -------- -------- -------- -------- ---------- OPERATING INCOME (LOSS)................. 5,690 371 (6,341) 10,791 (70,539) (29,500) 17,304 Interest expense, net.. (137) 11 44 117 (2,843) (757) (2,068) -------- -------- -------- -------- -------- -------- ---------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)............. 5,827 360 (6,385) 10,674 (67,696) (28,743) 19,372 PROVISION (BENEFIT) FOR INCOME TAXES........... 2,459 156 -- 4,432 (25,453) (11,656) 8,444 -------- -------- -------- -------- -------- -------- ---------- NET INCOME (LOSS)....... $ 3,368 $ 204 $ (6,385) $ 6,242 $(42,243) $(17,087) $ 10,928 ======== ======== ======== ======== ======== ======== ==========
See independent auditors' report and notes to consolidated financial statements. F-5 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF TRUST AND STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)
Total trust and Additional Accumulated stockholders' Common paid-in equity Trust equity stock capital (deficit) equity (deficit) ------ ---------- ----------- ------ ------------- Predecessor: Coldwell Banker Residential Real Estate BALANCE, December 31, 1994...................... $487 $20,973 $ (182) $ -- $ 21,278 Net income................ -- -- 3,368 -- 3,368 ---- ------- -------- ------ -------- BALANCE, December 31, 1995...................... 487 20,973 3,186 -- 24,646 Net loss.................. -- -- 204 -- 204 ---- ------- -------- ------ -------- BALANCE, May 31, 1996...... $487 $20,973 $ 3,390 $ -- $ 24,850 ==== ======= ======== ====== ======== Predecessor: National Realty Trust BALANCE, June 1, 1996...... $-- $ -- $ -- $ -- $ -- Trust formation........... -- -- -- 5,000 5,000 Net loss.................. -- -- -- (6,385) (6,385) ---- ------- -------- ------ -------- BALANCE, December 31, 1996...................... -- -- -- (1,385) (1,385) Net income................ -- -- -- 6,242 6,242 ---- ------- -------- ------ -------- BALANCE, August 31, 1997... $-- $ -- $ -- $4,857 $ 4,857 ==== ======= ======== ====== ======== NRT Incorporated BALANCE, September 1, 1997...................... $-- $ -- $ -- $ -- $ -- Capital contribution...... 100 19,900 -- -- 20,000 Net loss.................. -- -- (42,243) -- (42,243) Accretion of Series C preferred stock discount and redemption........... -- (2,257) -- -- (2,257) Dividends on preferred stock.................... -- (9,732) -- -- (9,732) ---- ------- -------- ------ -------- BALANCE, December 31, 1997...................... 100 7,911 (42,243) -- (34,232) Net income (unaudited).... -- -- 10,928 -- 10,928 Accretion of Series C preferred stock discount and redemption (unaudited).............. -- (1,654) (3,363) -- (5,017) Dividends on preferred stock (unaudited)........ -- (6,257) (16,045) -- (22,302) ---- ------- -------- ------ -------- BALANCE, September 30, 1998 (unaudited)............... $100 $ -- $(50,723) $ -- $(50,623) ==== ======= ======== ====== ========
See independent auditors' report and notes to consolidated financial statements. F-6 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Predecessors ----------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust ----------------------- ----------------------- January 1, June 1, January 1, September 1, One month Nine months Year 1996 1996 1997 1997 ended ended ended to to to to September 30, September 30, December 31, May 31, December 31, August 31, December 31, 1997 1998 1995 1996 1996 1997 1997 (unaudited) (unaudited) ------------ ---------- ------------ ---------- ------------ ------------- ------------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income (loss)....... $ 3,368 $ 204 $ (6,385) $ 6,242 $(42,243) $(17,087) $ 10,928 ------- -------- -------- -------- -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......... 9,111 3,812 1,129 3,026 2,998 557 12,964 Amortization of goodwill and other intangibles........... 3,380 508 21,553 10,477 70,533 26,381 35,391 Deferred income taxes.. -- -- -- 4,432 (25,853) (11,656) 7,744 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts and commissions receivable............ 2,612 2,848 5,541 8,231 (11,472) (2,141) (31,465) Prepaid expenses and other assets.......... 3,022 6,831 (115) (794) 5,492 (1,524) 1,081 Accounts payable and accrued expenses...... (14,026) 3,986 5,170 (8,826) 7,900 3,844 (24,103) Accrued salaries and benefits.............. (887) (1,226) 1,459 (2,808) 1,953 390 6,981 Other liabilities...... 6,221 (12,256) 1,478 909 226 (3) 55 Other.................. (45) 148 (20) (264) (7) 16 -- ------- -------- -------- -------- -------- -------- -------- Total adjustments..... 9,388 4,651 36,195 14,383 51,770 15,864 8,648 ------- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities........... 12,756 4,855 29,810 20,625 9,527 (1,223) 19,576 ------- -------- -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Change in restricted cash.................. -- (14,935) 3,772 (14,444) (14,581) (8,728) (27,841) Expenditures for property and equipment............. (4,551) (3,394) (5,049) (5,168) (6,668) (1,104) (21,690) Payments for acquisitions.......... (8,770) (230) (13,535) (25,198) (86,326) (85,386) (68,444) Other.................. 388 139 42 15 100 (167) 283 ------- -------- -------- -------- -------- -------- -------- Net cash used in investing activities........... (12,933) (18,420) (14,770) (44,795) (107,475) (95,385) (117,692) ------- -------- -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in cash secured bank loans............ -- 14,935 (3,772) 14,444 14,581 8,728 27,841 Capital contribution... -- -- -- -- 255,600 255,600 -- Dividends on preferred stock................. -- -- -- -- (4,903) -- (22,120) Issuance (payment) of notes payable......... (936) (358) (181) (3,685) (1,970) 167 (8,920) Development advance.... -- -- -- 20,000 -- -- -- ------- -------- -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities........... (936) 14,577 (3,953) 30,759 263,308 264,495 (3,199) ------- -------- -------- -------- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (1,113) 1,012 11,087 6,589 165,360 167,887 (101,315) CASH AND CASH EQUIVALENTS, beginning of period.............. 1,202 89 -- 11,087 -- -- 165,360 ------- -------- -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, end of period................. $ 89 $ 1,101 $ 11,087 $ 17,676 $165,360 $167,887 $ 64,045 ======= ======== ======== ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-- Cash paid during period for: Interest............... $ 72 $ 180 $ 143 $ 124 $ 672 $ 38 $ 958 ======= ======== ======== ======== ======== ======== ======== Income taxes........... $ -- $ -- $ -- $ 28 $ 145 $ -- $ 491 ======= ======== ======== ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Fair value of assets purchased............. $21,047 $ 837 $ 27,188 $ 35,949 $276,807 $244,708 $124,014 Cash payments for acquisition........... (8,770) (230) (13,535) (25,198) (86,326) (85,386) (68,444) ------- -------- -------- -------- -------- -------- -------- Liabilities assumed.... $12,277 $ 607 $ 13,653 $ 10,751 $190,481 $159,322 $ 55,570 ======= ======== ======== ======== ======== ======== ========
See independent auditors' report and notes to consolidated financial statements. F-7 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. ORGANIZATION AND BASIS OF PRESENTATION In May 1996, a subsidiary of Cendant Corporation ("Cendant") acquired Coldwell Banker Corporation ("Coldwell Banker") and contributed its residential real estate brokerage operations ("CB Residential") to National Realty Trust (the "Trust"). Cendant retained ownership of all trademarks, and franchised the right to the Trust to conduct business under the COLDWELL BANKER(R) brand name. Subsequently, Cendant franchised the rights to the Trust to conduct business under the ERA(R) and CENTURY 21(R) brand names. In August 1997, NRT Incorporated (the "Company") was formed and acquired all of the operating assets owned by the Trust. The Acquisition was accounted for as a purchase in accordance with Accounting Principles Board ("APB") Opinion No. 16, Business Combinations. Accordingly, the total purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. The Company recognized intangibles of approximately $55,800 and goodwill of approximately $14,400 in connection with the acquisition and recorded an office closure reserve of approximately $12,000 for facility and severance costs. The accompanying consolidated financial statements present the operations of the Company and its predecessors (CB Residential and the Trust) during the three-year period ended December 31, 1997 and the nine months ended September 30, 1997 and 1998. CB Residential's financial statements have been disaggregated (i.e., carved out) from other Coldwell Banker entities not contributed to the Trust, and are presented for 1995 and through the date of acquisition by Cendant. Such financial statements have been prepared from separate records maintained by CB Residential as well as from the combined records of Coldwell Banker and include revenues and expenses that are directly related to the operations of the Company. In cases involving amounts not specifically identifiable to any particular division of Coldwell Banker, certain allocations were made based on a variety of factors which management believes provide a reasonable basis for the accompanying financial statements. The CB Residential financial statements may not necessarily be indicative of the conditions that would have existed if the CB Residential had operated as an independent entity. Coldwell Banker's historical cost bases of the assets and liabilities for CB Residential were carried over to the Trust. The Trust's financial statements have been presented from its date of formation through its sale to the Company. The accompanying consolidated financial statements for the four months ended December 31, 1997 reflect the operations of the Company. Because of acquisition adjustments recorded by the Company and its predecessors as described above, the accompanying consolidated financial statements of the Company are not directly comparable to those of its predecessors. The accompanying consolidated financial statements and footnote disclosures for the nine months ended September 30, 1997 and 1998 are unaudited but, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normally recurring adjustments, necessary for fair presentation of the financial position and results of operations for the periods presented. F-8 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company--The Company owns and operates a network of full service residential real estate brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. As a full service brokerage, the Company offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems and relocation and other services. Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its subsidiaries (including comparable operations of its predecessors). All significant intercompany accounts and transactions have been eliminated in consolidation. Management 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 Equivalents--The Company considers short-term investments which have maturities of three months or less at the date of acquisition to be cash equivalents. Property and Equipment--Property and equipment, including significant improvements thereto, are carried at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the respective assets. Buildings are depreciated over 35 years, building improvements over 10 to 35 years and furniture and equipment over three to seven years. Leasehold improvements are amortized on the straight-line method over the estimated useful life of the asset or the term of the lease, whichever is shorter. Gains or losses from retirements and disposals of property and equipment are included in other operating expenses. Maintenance and repairs are charged to expense as incurred. Leases--The Company operates primarily in leased facilities. Lease terms are generally five years with options to renew at varying terms. Certain facility leases include scheduled base rent increases over the term of the lease. The total amount of the base rent payments is being charged to expense using the straight-line method over the term of the leases. The Company has recorded a liability to reflect the excess of rent expense over cash payments since the inception of the leases. In addition to the base rent payment, the Company may also be required to pay certain of the building's operating expenses. Goodwill and Other Intangibles--Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill is amortized on a straight-line basis over 40 years. Other intangibles are stated at cost and include the capitalized values of pending real estate sales contracts and real estate listing contracts of acquired residential real estate brokerage companies F-9 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) which are being amortized on a straight-line basis over their estimated lives of three and six months, respectively. Such amortization is included in Acquisition Related Costs in the consolidated statements of operations. The Company assesses whether there has been an impairment in the value of intangible assets by considering factors such as expected future operating income, trends and prospects, and the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred. Fair Value of Financial Instruments--The carrying values of cash and cash equivalents, accounts and commissions receivable, accounts payable and accrued expenses approximate fair value due to the short maturities of such instruments. Revenue Recognition--Real estate commissions and the related sales associate commissions and franchise royalty fees are recorded as revenue and expense, respectively, upon the closing of a real estate transaction. Other revenues are recorded as revenue at the time that such services are provided. Income Taxes--The Company and its subsidiaries file a consolidated federal income tax return. The Company uses the liability method of accounting for income taxes. Deferred income taxes are recorded based on the difference between financial statement and income tax bases of assets and liabilities and available tax credit carryforwards using enacted rates in effect for the year in which the differences are expected to reverse. Income tax expense is the tax payable for the period and the change during the period in deferred income tax assets and liabilities. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Income taxes have been provided for the predecessor entities based upon the effective tax rate of those entities. Closed Offices--In the ordinary course of business, the Company opens and closes real estate brokerage offices and facilities based on industry and local market conditions. Leases related to facilities which have been closed are evaluated taking into consideration current and prospective real estate market conditions, sublease and lease termination opportunities and other factors, and a charge to operations is recorded to reflect the expected future lease costs and other expenses associated with such closed facilities. The estimated cost of closing offices obtained through acquisition are considered part of the acquisition purchase price. Comprehensive Income--The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, on January 1, 1998. SFAS No. 130 requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any comprehensive income components requiring separate disclosure. Segment Reporting--For the fiscal year beginning January 1, 1998, the Company adopted SFAS No. 131, Disclosure About Segments and Enterprise and Related Information. The Company is reviewing the impact of the adoption of this pronouncement on its consolidated financial statements. F-10 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. ACQUISITIONS The Company's business strategy includes actively pursuing strategic acquisitions of real estate brokerage firms and brokerage-related businesses. The Company has an agreement with Cendant that provides a significant source of funding for the Company's brokerage acquisitions. Pursuant to an Acquisition Cooperation Agreement, in acquisitions in which Cendant has agreed to participate, Cendant purchases the trade names, trademarked operating names and mortgage operations (if any) of brokerages being acquired by the Company, thereby paying a substantial portion of the total purchase price that otherwise would be payable by the Company in making such brokerage acquisitions. Upon NRT's formation, Cendant committed approximately $445 million for the Company's brokerage acquisitions. Through September 30, 1998, Cendant had provided $394 million of its original commitment and NRT had used $187 million of its own capital for acquisitions. Cendant has committed an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate pursuant to the Acquisition Cooperation Agreement, which amends NRT's prior agreement with Cendant by reducing the portion of the purchase price payable by Cendant in future NRT brokerage acquisitions. The $1 billion commitment is available in two $500 million tranches. The first $500 million is currently available, and the second $500 million will be available after the first $500 million had been completely used by NRT but in no case earlier than February 9, 2004. The cumulative amount expended by Cendant was approximately $216 million at December 31, 1997 and $394 million at September 30, 1998. F-11 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 1996 and 1997 and the nine months ended September 30, 1998, the Company acquired certain assets and assumed certain liabilities of various residential real estate brokerage companies. The acquisitions were accounted for as purchases in accordance with APB Opinion No. 16, Business Combinations. Accordingly, the total purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed based on the Company's estimates of their respective fair values at the dates of acquisition. The following table sets forth certain information with respect to certain of such acquisitions.
Date Company of Acquisition - ------- ------------------ 1996 The Kahn Realty Companies, Inc............................... November 1, 1996 Douglas & Jean Burgdorff, Inc. .............................. December 1, 1996 1997 Del Monte Realty Company..................................... February 10, 1997 Contempo Realty, Inc......................................... March 1, 1997 Don Saunders, Inc............................................ July 17, 1997 Marie Powell & Associates, Inc............................... July 24, 1997 George J. Cyrus & Company, Inc............................... August 16, 1997 Cornish & Carey Residential, Inc. ........................... September 10, 1997 Jon Douglas Real Estate Services Group, Inc. ................ September 11, 1997 Barbara Sue Seal Properties, Inc............................. October 10, 1997 West Shell, Inc. ............................................ October 16, 1997 Seville Properties, Inc...................................... October 17, 1997 Metro Real Estate Services, Inc.............................. October 29, 1997 Continental Development Corp................................. November 8, 1997 Nine Months Ended September 30, 1998 (Unaudited) Waterside Property Sales, Inc. .............................. January 6, 1998 Polley, Polley & Madsen, Inc................................. January 7, 1998 TAM-BAY Realty, Inc.......................................... January 14, 1998 Gimelstob Realty, Inc........................................ January 15, 1998 Joseph J. Murphy Realty, Inc................................. January 21, 1998 Buckhead Brokers of Georgia, Inc. ........................... February 1, 1998 Burnet Financial Group....................................... February 13, 1998 O'Conor, Piper & Flynn, Inc.................................. February 23, 1998 Whitfield-Burnhardt, Inc..................................... March 30, 1998 Coker Ewing Cook............................................. August 3, 1998 Coldwell Banker 1st American Realtors, LLC................... August 20, 1998 Higgins & Heath, Inc......................................... September 4, 1998 Moore and Company............................................ September 30, 1998 Premier Van Schaak, Inc...................................... September 30, 1998
In connection with the above acquisitions, the Company paid a total purchase price of $18,289 in 1996, $160,651 in 1997 and $113,895 in the nine months ended September 30, 1998. In addition to the above acquisitions, the Company acquired 20 other residential real estate brokerage companies in 1996 for a total purchase price of $1,701, 18 in 1997 for a total purchase price of $1,386 and 33 in the nine months ended September 30, 1998 for a total purchase price of $9,936. F-12 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Goodwill of $82,313 arose from the 1997 acquisitions made subsequent to August 1997 and $61,560 arose from the 1998 acquisitions. Goodwill associated with those companies acquired before the formation of the Company was considered in the accounting for the purchase of the assets of National Realty Trust (Note 1). Other intangibles of $7,646 in 1996, $26,097 in 1997 and $31,158 in 1998 arose from acquisitions. The results of operations of the acquired companies are included in the Company's consolidated statements of operations for the periods in which they were owned by the Company. Under the terms of certain acquisition agreements, the Company is obligated to fund additional purchase price payments contingent upon the achievement of certain operating targets. The Company records such amounts to goodwill when the contingencies are resolved. The following unaudited pro forma consolidated results of operations give effect to the above acquisitions for 1996 as though the 1996 and 1997 acquisitions had occurred on January 1, 1996, and for 1997 as though the 1997 acquisitions had occurred on January 1, 1997. For the nine month period ended September 30, 1997, the unaudited pro forma consolidated results of operations give effect to the 1997 and 1998 acquisitions as though they had occurred on January 1, 1997, and for the nine month period ended September 30, 1998 as though the 1998 acquisitions had occurred on January 1, 1998. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred and is not necessarily indicative of future results of operations of the combined companies.
Unaudited ---------------------------------------------- Year ended Nine Months ended December 31, September 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- Total revenues................. $1,226,340 $1,429,258 $1,488,525 $1,729,452 Operating income before acquisition related costs..... $ 2,734 $ 25,513 $ 7,736 $ 67,483 Acquisition related costs...... 62,395 95,648 139,901 52,624 ---------- ---------- ---------- ---------- Operating income (loss)........ $ (59,661) $ (70,135) $ (132,165) $ 14,859 ========== ========== ========== ========== Net income (loss).............. $ (39,569) $ (42,181) $ (81,323) $ 9,790
In connection with the 1997 and 1998 acquisitions, the Company recorded an office closure reserves of $22,190 and $17,533, respectively, for facility and severance costs. Costs include primarily office lease costs for offices scheduled for closure and related severance for terminated employees. During the four months ended December 31, 1997, approximately $8,786 of facility and severance costs were paid. F-13 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Acquisition related costs consist of office conversion costs and amortization of pending real estate sales contracts and real estate listing contracts of acquired residential real estate brokerage companies. Office conversion costs include primarily signage change, name change advertising and costs of agent retention. Acquisition related costs are summarized as follows:
Predecessors -------------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust ------------------------ ------------------------- One month Nine months Year Five months Six months Eight months Four months ended ended ended ended ended ended ended September 30, September 30, December 31, May 31, December 31, August 31, December 31, 1997 1998 1995 1996 1996 1997 1997 (unaudited) (unaudited) ------------ ----------- ------------ ------------ ------------ -------------- ------------- Office conversion costs.................. $1,392 $-- $ 739 $ 1,421 $ 8,566 $ 6,043 $16,055 Amortization............ 2,848 26 21,449 9,314 69,896 26,221 32,170 ------ ---- ------- ------- ------- ------- ------- $4,240 $ 26 $22,188 $10,735 $78,462 $32,264 $48,225 ====== ==== ======= ======= ======= ======= =======
4. CASH AND CASH EQUIVALENTS The Company had restricted cash totaling $11,291 at December 31, 1996, $40,316 at December 31, 1997 and $68,157 at September 30, 1998, which can be used only to repay the loans entered into to fund the restricted cash. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, September 30, 1996 December 31, 1998 (Predecessor) 1997 (unaudited) ------------- ------------ ------------- Land............................ $ 2,486 $ 2,477 $ 2,090 Buildings and improvements...... 4,717 4,983 4,664 Leasehold improvements.......... 5,278 14,429 28,370 Furniture and equipment......... 11,514 32,746 63,036 ------- ------- ------- 23,995 54,635 98,160 Less accumulated depreciation and amortization............... (1,141) (3,090) (16,302) ------- ------- ------- Property and equipment, net..... $22,854 $51,545 $81,858 ======= ======= =======
Depreciation and amortization expense was $9,111 for the year ended December 31, 1995, $3,812 for the five months ended May 31, 1996, $1,129 for the seven months ended December 31, 1996, $3,026 for the eight months ended August 31, 1997 and $2,998 for the four months ended December 31, 1997. F-14 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The components of accounts payable and accrued expenses are summarized as follows:
December 31, September 30, 1996 December 31, 1998 (Predecessor) 1997 (unaudited) ------------- ------------ ------------- Accounts payable................. $ 8,511 $ 14,688 $ 17,632 Commissions payable.............. 14,401 28,791 27,682 Reserve for office closures...... 350 24,274 30,239 Accrued legal reserves........... 3,749 15,467 12,342 Other accrued expenses........... 12,324 28,584 39,269 ------- -------- -------- $39,335 $111,804 $127,164 ======= ======== ========
7. RESTRICTED CASH BANK LOANS Proceeds from restricted cash bank loans are invested in cash equivalents and cannot be used other than to repay the related loans. The loans bear interest at rates ranging from .55% to 2.0% at December 31, 1996, December 31, 1997 and September 30, 1998 and are due monthly. 8. NOTES PAYABLE Notes payable consist of the following:
December 31, September 30, 1996 December 31, 1998 (Predecessor) 1997 (unaudited) ------------- ------------ ------------- Acquisition-related notes....... $ -- $ 10,737 $13,632 Obligations under capital leases (Note 16)...................... 1,867 3,584 11,180 Other........................... 1,626 819 179 ------- -------- ------- 3,493 15,140 24,991 Less current portion............ (2,341) (10,296) (11,238) ------- -------- ------- $ 1,152 $ 4,844 $13,753 ======= ======== =======
Obligations under capital leases bear interest at rates ranging up to 11%, have terms ranging from 36 months to 68 months and are generally collateralized by the related leased assets. Acquisition related notes consist primarily of amounts payable to former owners of businesses acquired by the Company, are unsecured with maturities generally under one year and bear interest at 5.0% to 11.0% at December 31, 1997 and September 30, 1998. The carrying value of notes payable approximates market value due to the short maturities of such instruments. 9. DEVELOPMENT ADVANCE During 1997, National Realty Trust received a $20,000 non-interest-bearing development advance from Coldwell Banker Real Estate Corporation, a wholly owned subsidiary of Cendant, which was assumed by the Company in August 1997. The development advance is recorded in other liabilities in the consolidated balance sheet. The advance was being amortized over a 10-year period F-15 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) prior to September 1, 1997. The advance was replaced on September 1, 1997 with an advance of $18,750 which is being amortized over a 40-year period. Under the terms of the advance, 1/480th of the original balance is forgiven each month so long as the Company is not in material breach of the terms of its franchise agreements with Cendant. The amount forgiven is reflected as a reduction to royalties in the consolidated statement of income. In the event the Company is determined to be in default on a material term of the franchise agreements, the entire remaining advance will become immediately due and payable and bear interest at the prime interest rate. It is management's intention to maintain compliance with the terms of the advance. 10. INCOME TAXES The Company's benefit for income taxes was comprised as follows from September 1, 1997 to December 31, 1997: Federal: Current........................................................ $ -- Deferred....................................................... 21,216 State: Current........................................................ (400) Deferred....................................................... 4,637 ------- $25,453 =======
A reconciliation of income taxes at the statutory federal income tax rate to the Company's effective income tax rate is as follows from September 1, 1997 to December 31, 1997: Federal tax at statutory rate..................................... (35.0)% State income taxes net of federal benefit......................... (4.1) Other............................................................. 1.5 ----- (37.6)% =====
The components of the Company's deferred income taxes are summarized as follows at December 31, 1997:
Current Noncurrent ------- ---------- Deferred income tax assets: Net operating loss carryforward........................ $10,781 $10,781 Reserves............................................... 18,420 -- Goodwill............................................... -- 3,258 Other.................................................. 1,692 85 ------- ------- Total deferred income tax assets..................... 30,893 14,124 ------- ------- Deferred income tax liabilities: Fixed assets........................................... -- (5,255) Purchase accounting.................................... (4,306) -- ------- ------- Total deferred income tax liabilities................ (4,306) (5,255) ------- ------- Net deferred tax asset................................... $26,587 $ 8,869 ======= =======
F-16 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1997, the Company had a federal net operating loss carryforward of approximately $53,000 which will expire in the year ending December 31, 2012. The provision (benefit) for income taxes for the predecessor entities are based upon the historical effective tax rate of those entities. 11. REDEEMABLE PREFERRED STOCK The Company's 9.00% Series A Cumulative Senior Redeemable Preferred Stock (the "Series A Preferred Stock") accrues dividends based on a liquidation preference amount equal to $1 per share plus any previously declared and unpaid dividends. At December 31, 1997 and at September 30, 1998, there were 260,000 shares of Series A Preferred Stock authorized and 157,591 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred Stock has a mandatory redemption requirement of 10% per annum beginning August 29, 2004 through August 29, 2008 with any remaining shares required to be redeemed on August 29, 2009, in each case at a price equal to 100% of the liquidation preference plus accrued and unpaid dividends. The Company may redeem the shares at the liquidation preference at any time prior to the required redemption dates. The Company's 5.00% Series B Cumulative Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") accrues dividends based on a liquidation preference amount equal to $1 per share plus any previously declared and unpaid dividends. At December 31, 1997 and at September 30, 1998, there were 25,000 shares of Series B Preferred Stock authorized and 24,000 shares of Series B Preferred Stock issued and outstanding. The Company, at its option, may redeem the shares following the third anniversary (the "Anniversary Date") of (1) the public offering of 20% or more of the Company's outstanding common stock, (2) the sale by the Company of assets representing 80% or more of the Company's assets on a fair market value basis or (3) the distribution to stockholders of other assets representing 80% or more of the Company consolidated net assets on a fair market value basis (each, a "Triggering Event") at a price of (1) 103% of the principal amount on or prior to the first anniversary of the Anniversary Date, (2) 102% of the principal amount on or prior to the second anniversary of the Anniversary Date, (3) 101% of the principal amount on or prior to the third anniversary of the Anniversary Date and (4) 100% of the principal amount after the third anniversary of the Anniversary Date. Shares of Series B Preferred Stock are convertible into shares of common stock beginning immediately prior to a Triggering Event at a conversion rate calculated in accordance with the Series B Preferred Stock's Certificate of Designation. The Company is required to redeem any remaining Series B Preferred Stock on August 29, 2012. The Company's 18.00% Series C Cumulative Junior Redeemable Preferred Stock (the "Series C Preferred Stock") accrues dividends based on a liquidation preference amount equal to $1 per share plus any declared and unpaid dividends. In addition to the 18% dividend accrual rate, the Company is required to pay an additional dividend equal to .1% of the Company's gross commission revenue, as defined in the Company's franchise agreement with Coldwell Banker Real Estate Corporation. At December 31, 1997 and at September 30, 1998, there were 120,000 shares of Series C Preferred Stock authorized and 68,510 shares of Series C Preferred Stock issued and outstanding. The Series C F-17 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Preferred Stock was issued at a discount to its liquidation preference and is recorded at its issue price. The difference in the carrying amount of the stock and the redemption price, as defined, is being accreted through charges to additional paid in capital of the Company over the period from issuance to the mandatory redemption date. At December 31, 1997 and at September 30, 1998, the redemption price of the Series C Preferred Stock totaled approximately $80,800. The Company is required to redeem any remaining Series C Preferred Stock on August 29, 2001. The Company, at its option, may redeem the shares at the redemption price at any time prior to the mandatory redemption date. 12. STOCKHOLDERS' EQUITY Stock Option Plan--In September 1997, the Company adopted the 1997 Equity Participation Plan of NRT Incorporated (as amended, the "Plan"), which provides for the grant of stock options and other awards to certain officers, consultants, directors and key employees of the Company. The maximum number of shares of common stock that may be issued pursuant to the Plan is 2,500,000. The Company granted options to purchase shares of the Company's common stock as set forth in the following table at prices which the Company's Board of Directors deemed to be equal to, or in excess of, fair market value of the common stock at the dates of grants, to employees of the Company. The following table summarizes the activity under the Plan for the periods indicated:
Weighted Price of average Options option exercise outstanding grants price ----------- ----------- -------- OUTSTANDING, September 1, 1997.............. -- $ -- $ -- Grants...................................... 877,500 2.00 2.00 --------- OUTSTANDING, December 31, 1997.............. 877,500 2.00 Grants...................................... 465,000 9.80-20.00 10.54 Cancelled................................... (2,500) 2.00 2.00 --------- ------ OUTSTANDING, September 30, 1998............. 1,340,000 5.33 ========= ======
At December 31, 1997, there were no exercisable options to purchase shares, and at September 30, 1998, there were 87,750 exercisable options to purchase shares. At December 31, 1997, the weighted average remaining contractual life of options outstanding was 9.75 years. SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does not require companies to record compensation cost for employee stock option grants. The Company has chosen to continue to account for employee option grants using APB Opinion No. 25. No compensation expense has been recognized for employee stock option grants. Had compensation expense for the employee stock option grants been determined based on the fair value at the grant dates consistent F-18 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) with SFAS No. 123, the Company's net loss for the period from September 1, 1997 to December 31, 1997 would have been increased to the pro forma amounts indicated below: Net loss applicable to common stock: As reported.................................................... $42,243 Pro forma...................................................... $42,755
The weighted average fair value of options granted was $0.95 per share. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: zero dividend yield, expected volatility of 0% (as the Company is not a public entity), risk-free interest rate of 6.7% and expected lives of 10 years. 13. COMMITMENTS AND CONTINGENCIES Litigation--The Company and its subsidiaries are defendants in certain lawsuits involving routine litigation incidental to the businesses in which they are engaged. Based on the opinions of in-house and external counsel, the Company believes that any liability which may result from disposition of these lawsuits will not have a material effect on the Company's consolidated financial position or results of operations. 14. RELATED-PARTY TRANSACTIONS Concurrent with the Company's formation, certain affiliates of Apollo Management, L.P. ("Apollo") acquired all of the Company's outstanding common stock and Series C Preferred Stock and a subsidiary of Cendant acquired all of the Company's outstanding Series A Preferred Stock and Series B Preferred Stock. Franchise Agreements--In conjunction with the acquisition of the assets of National Realty Trust, the Company entered into franchise agreements with Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc., and Century 21 Real Estate Corporation (the "Franchisors"). On February 9, 1999, the Company entered into new franchise agreements with each of the Franchisors, which superseded the existing franchise agreements with the Franchisors (the "Franchise Agreements"). Each Franchise Agreement has a 50-year term and provides for a royalty payment generally equal to 6% of the Company's gross closed commission income earned (with the exception of CENTURY 21(R) offices in Northern California, for which the Company currently pays royalties of 4.89% of gross closed commission income earned, and offices acquired by the Company without Cendant's participation, for which the Company pays a lower royalty rate). Pursuant to the Franchise Agreements, the Company is also required to pay an additional royalty of approximately $167 per month. In addition, upon the closing of the offering, the Company will be required to pay $156 per month. Upon the occurrence of a brokerage acquisition in which Cendant acquires the stock of the acquired brokerage and then sells the assets of such brokerage to the Company in accordance with the Acquisition Cooperation Agreement, the Company F-19 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) will also be required to pay Cendant, in consideration of the stepped-up tax basis received by the Company for such assets, an additional monthly royalty, beginning with the first month after the consummation of such transaction, in an amount equal to (1) one-tenth of the federal income tax payable by Cendant in respect of the gain on the sale of the assets to the Company in such transaction, divided by (2) 12. To date, the Company has not been required to pay Cendant additional royalties as a result of taxes being incurred by Cendant in connection with the Company's brokerage acquisitions. The Company incurred franchise royalties totaling $24,000 for the seven months ended December 31, 1996, $33,400 for the eight months ended August 31, 1997 and $26,800 for the four months ended December 31, 1997, respectively. Since January 1999, the Company has been required to pay an additional monthly royalty up to a maximum additional royalty of $5,000 annually. Upon the closing of the initial public offering of the Company's securities, such royalty will be replaced with an additional monthly royalty equal to % of the Company's gross commission income, up to a maximum additional royalty of $ per year. In addition, an additional royalty of 0.15% of the Company's total revenue per quarter (up to a total of 20 quarters) is payable for each quarter in which the Company's earnings before interest, income taxes, depreciation and amortization for the preceding twelve month period exceeds $225,000. Under the Franchise Agreements, the Company is required to give Cendant prior notice before opening or acquiring new brokerage offices. If Cendant objects to the opening or acquisition of such new brokerage offices based on a determination that such opening or acquisition would have an adverse impact on other existing Cendant franchisees under the relevant brand, the Company cannot open or acquire the new brokerage offices set forth in its notice. To compensate the Franchisors for any actual administrative costs incurred in connection with the acquisition process and for the benefits to be received by the Company resulting from newly acquired or opened offices identified by Cendant's franchise sales force, the Company is required to pay the Franchisors an initial fee of $7.5 for each office that is acquired in a transaction in which Cendant's franchise sales force is involved ($4.0 if Cendant's franchise sales force is not involved), subject to a maximum of $100 per acquisition. Each acquired office is required to be operated under one of the Franchisor's brands, unless such office is closed within one year of its acquisition in accordance with the business plan presented to the Company's Board of Directors and Cendant at the time of acquisition. No initial office fee is payable with respect to newly acquired offices that are closed within one year of their acquisition so long as such offices do not operate under any of the Franchisors' brands during such period. The Company has incurred approximately $1,600 in such fees payable to Cendant for new offices opened since August 1997, of which Cendant will provide $1,300 pursuant to the Acquisition Cooperation Agreement. The Franchise Agreements also require the Company to make monthly contributions to national advertising funds maintained by the Franchisors for the creation and development of advertising, public relations and promotional programs promoting the Franchisors' brands. Under the CENTURY 21(R) and ERA(R) Franchise Agreements, the Company is required to pay a monthly fee of 2% of the Company's gross commission income and, under the COLDWELL BANKER(R) Franchise Agreement, F-20 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the Company is required to pay a fee in the amount of 2 1/2% of the Company's gross commission income, subject in each case to certain minimum and maximum advertising fees per brokerage office. As a result of the maximum advertising fee limitation, the Company paid an average of 0.33% of its gross commission income to the national advertising funds in 1997. The Company contributed to the Franchisors' national advertising funds a total of $1,400 during 1996 (from May 31, 1996), $3,400 during 1997 and $2,400 during 1998 (through September 30, 1998). The Franchise Agreements also restrict the Company's ability to incur indebtedness (including acquired indebtedness) if such incurrence would cause the Company's pro forma ratio of total indebtedness to operating income before interest, income taxes, depreciation and amortization over the preceding twelve-month period, with certain exclusions, to exceed 2.0 to 1. Once Cendant's additional $1 billion commitment to provide funds in connection with future brokerage acquisitions has been exhausted pursuant to the Acquisition Cooperation Agreement and provided that Cendant has not then committed to provide additional funds in connection with the Company's brokerage acquisitions on substantially similar economic terms, the maximum permitted Leverage Ratio will be increased to 3.0 to 1 from 2.0 to 1. In addition, the Franchise Agreements prohibit the Company from incurring indebtedness to finance the payment of any dividends on its common or preferred stock. The Company is also prohibited from declaring or paying any dividend that is not a regularly scheduled quarterly dividend consistent with past practice which exceeds 20% of the Company's net income for the year in which declared or paid (less any dividends paid during such period) unless the Company's Leverage Ratio (calculating indebtedness net of cash and cash equivalents) is 1.0 to 1 or less. Lease Agreements--The Company leases its corporate offices from Cendant. The leases expire in September 2002 and have options to extend the term for an additional five years. The landlord is responsible for property tax, maintenance and insurance as well as various ancillary services, including janitorial, security, mail room, and general lobby reception. The Company paid total rentals of $342 for the seven months ended December 31, 1996, $353 for the eight months ended August 31, 1997 and $176 for the four months ended December 31, 1997. Prior to June 1, 1996, such costs were allocated to the Company from Coldwell Banker based on usage. Support Agreement--The Company also has an agreement with Cendant for certain data processing and telecommunication services. The agreement expires in 1999 and can be canceled or terminated by the Company with 90 days' notice. Total costs under this arrangement were $479 for the four months ended December 31, 1997. Marketing Agreement--The Company has a Marketing Agreement with Cendant Mortgage Corporation ("Cendant Mortgage") which provides for the joint marketing of Cendant's mortgage products through the Company's real estate brokerage offices. The agreement expires in 2037 and is subject to certain termination provisions. Total fees earned by the Company for the four months ended December 31, 1997, totaled $699. F-21 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Program Outsourcing Agreement--The Company and Cendant have entered into a Program Outsourcing Agreement pursuant to which the Company has appointed Cendant as its exclusive outsourcing agent to negotiate the terms of the Company's participation in (1) purchasing relationships and programs (including corporate purchasing relationships) with vendors and (2) programs through which the Company markets vendors' products or services to its customers. The Company is generally not permitted to enter into or pursue any purchasing relationships or marketing programs (other than the programs established by Cendant) and is required to refer to Cendant all program opportunities and parties with which the Company would enter into such a relationship. The Company has agreed to participate, and to encourage its sales associates to participate, in existing and new programs established by Cendant with vendors, to make such programs available to its employees and sales associates and to provide program training to its sales associates. The Company is not required to participate in: (1) a program if such program does not afford the Company terms at least as advantageous (taken as a whole) as those afforded to any other franchisees of Cendant's real estate brokerage systems; or (2) any new program if the Company is already participating in a program covering a similar good or service to the new program, the term of which has not expired; provided that upon implementation of a new program in which the Company is required to participate, the Company will terminate any program which conflicts with such new program as soon as it is permissible to terminate such program without cost to the Company, or earlier if the Company is directed by Cendant to do so and is reimbursed for such cost. In addition, the Company will not be required to participate in the new program if Cendant reasonably determines that the program does not offer competitive pricing and service relative to the Company's size and compared to any similar program in which the Company participates, or, with respect to marketing programs in which the Company receives buyer leads, listing leads or barter consideration and no other consideration, that such program is reasonably expected to provide the same value to the Company. However, the Company will participate in such program if after the program is implemented, Cendant determines that the program is then offering competitive pricing and service relative to the Company's size and compared to any Company program covering a similar good or service. Advisory Services Agreement--The Company also has entered into an Advisory Services Agreement with Apollo which requires the Company to pay Apollo $167 monthly for advisory services provided by Apollo. The Agreement expires upon the redemption of all of the outstanding 18.00% Series C Cumulative Junior Redeemable Preferred Stock or as mutually agreed upon by the Company and Apollo. 15. FIDUCIARY FUNDS The consolidated financial statements do not include the assets and liabilities or activities of various fiduciary funds held by the Company. At December 31, 1997, such funds amounted to approximately $66,900. These funds are comprised primarily of deposits by homebuyers pending close of escrow or transfer of title. The Company is subject to various disclosure and fiduciary duties under certain state laws with which the Company believes it currently complies. F-22 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. LEASES Operating Leases--The Company leases certain of its offices and equipment under non-cancelable operating leases. Minimum annual rental commitments under non-cancelable operating leases and related sublease rentals are as follows at December 31, 1997:
Mimimum Sublease payments rentals -------- ------ Year ending December 31: 1998........................................................ $ 50,996 $2,130 1999........................................................ 41,774 1,554 2000........................................................ 32,645 1,067 2001........................................................ 24,454 558 2002........................................................ 14,248 227 Thereafter.................................................. 20,827 2,921 -------- ------ Total..................................................... $184,944 $8,457 ======== ======
Rent expense is summarized as follows:
Net Rent Sublease rent expense income expense ------- ------ ------- Year ended December 31, 1995....................... $29,191 $2,744 $26,447 Five months ended May 31, 1996..................... 13,433 2,276 11,157 Seven months ended December 31, 1996............... 17,093 1,526 15,567 Eight months ended August 31, 1997................. 23,116 1,926 21,190 Four months ended December 31, 1997................ 15,663 839 14,824
In connection with the formation of the Trust, Cendant assumed the liabilities for certain closed office leases. Lease payments net of sublease income for these closed offices amounted to $1,648 for the seven months ended December 31, 1996, $1,893 for the eight months ended August 31, 1997 and $983 for the four months ended December 31, 1997. The Company leases certain pieces of equipment under capital lease agreements which expire over the next five fiscal years. Property under capital leases at December 31, 1997 consists of the following: Office equipment.................................................. $3,880 Less accumulated depreciation..................................... (377) ------ $3,503 ======
F-23 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum lease payments under capital leases together with the present value of net minimum lease payments are as follows: 1998.............................................................. $1,800 1999.............................................................. 1,245 2000.............................................................. 545 2001.............................................................. 321 2002.............................................................. 221 ------ 4,132 Less amount representing interest............................... (548) ------ Present value of net minimum lease payments..................... $3,584 ======
17. SUBSEQUENT EVENTS The Company has declared and will pay $45,000 in cash dividends on its common stock to Apollo prior to the closing of the offering. The unaudited pro forma balance sheet at September 30, 1998 gives effect to such dividends. On February 9, 1999, the Company and Cendant entered into the Acquisition Services Agreement, pursuant to which the Company has agreed to provide advisory services to Cendant relating to the identification of potential acquisition candidates, the negotiation of agreements and other services in connection with future brokerage acquisitions by the Company. In exchange for such advisory services, Cendant paid the Company $30,000 as an advance against the fees that are payable to the Company pursuant to a fee schedule attached to the Acquisition Services Agreement, which, among other things, takes into account the size of the Company's future brokerage acquisitions. In no event will Cendant be required to advance additional amounts to the Company in respect of the advisory services. The portion of the advance that is paid but not earned under the Acquisition Services Agreement will be refundable to Cendant in the event that services under the Acquisition Services Agreement are not provided to Cendant. The Acquisition Services Agreement has a ten-year term, unless earlier terminated upon mutual consent of the parties. On January 7, 1999, NRT entered into a $50 million bank credit facility. Advances made thereunder may be used for the Company's general working capital needs in the ordinary course of business and permitted acquisitions. F-24 INDEPENDENT AUDITORS' REPORT To the Shareholders of the Jon Douglas Companies: We have audited the accompanying combined statements of operations, shareholders' deficit and cash flows of Jon Douglas Company (a California corporation), San Vicente Escrow Company (a California corporation), Equity Title Company (a California corporation), Douglas Referral Associates (a California corporation) and Jon Douglas Financial (a California corporation) (collectively, the "Jon Douglas Companies" or "Predecessor"), all of which are under common ownership and common management, for the period January 1, 1995 through November 14, 1995. These combined financial statements are the responsibility of the Jon Douglas Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined statements of operations, shareholders' deficit and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined statements of operations, shareholders' deficit and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined statements of operations, shareholders' deficit and cash flows. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined statements of operations, shareholders' deficit and cash flows referred to above present fairly, in all material respects, the combined results of operations and combined cash flows of the Jon Douglas Companies for the period January 1, 1995 through November 14, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Costa Mesa, California July 10, 1998 F-25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Jon Douglas Real Estate Services Group, Inc.: We have audited the accompanying consolidated statements of operations, shareholders' deficit and cash flows of Jon Douglas Real Estate Services Group, Inc., a Delaware corporation (the "Company"), for the year ended December 31, 1996 and the period from November 15, 1995 to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated statements of operations, shareholders' deficit and cash flows referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Jon Douglas Real Estate Services Group, Inc. for the year ended December 31, 1996 and the period from November 15, 1995 to December 31, 1995 in conformity with generally accepted accounting principles. Arthur Andersen LLP Los Angeles, California March 19, 1997 F-26 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Jon Douglas Real Estate Services Group, Inc.: We have audited the accompanying consolidated statements of operations, shareholders' deficit and cash flows of Jon Douglas Real Estate Services Group, Inc., a Delaware corporation (the "Company"), for the nine months ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated statements of operations, shareholders' deficit and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated statements of operations, shareholders' deficit and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated statements of operations, shareholders' deficit and cash flows. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated statements of operations, shareholders' deficit and cash flows referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Jon Douglas Real Estate Services Group, Inc. for the nine months ended September 30, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Costa Mesa, California July 10, 1998 F-27 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Predecessor ------------ Jon Douglas Companies ------------ November 15, January 1, 1995 (date of Nine months 1995 to merger) to Year ended ended November 14, December 31, December 31, September 30, 1995 1995 1996 1997 ------------ ------------- ------------ ------------- REVENUES............................................................... $80,579 $29,700 $269,875 $234,914 COSTS AND EXPENSES: Commissions and fees................................................. 48,848 19,623 178,121 156,346 Compensation and benefits............................................ 15,212 3,647 31,736 26,007 Rent (Notes 4 and 6)................................................. 5,644 2,230 14,207 11,064 Advertising and marketing............................................ 2,608 871 6,808 5,015 Legal (Note 6)....................................................... 2,375 1,098 2,037 4,454 General and administrative........................................... 6,772 2,172 16,951 14,361 Franchise fees and other expenses (Note 4)........................... 230 3,656 3,090 Merger costs and severence payments (Note 7)......................... 12,089 ------- ------- -------- -------- Total costs and expenses............................................. 81,459 29,871 253,516 232,426 ------- ------- -------- -------- (LOSS) INCOME BEFORE INTEREST EXPENSE, DEPRECIATION AND AMORTIZATION AND PROVISION FOR INCOME TAXES........................................ (880) (171) 16,359 2,488 INTEREST EXPENSE....................................................... (640) (483) (3,629) (2,297) DEPRECIATION AND AMORTIZATION.......................................... (1,235) (523) (3,455) (2,421) ------- ------- -------- -------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES........................ (2,755) (1,177) 9,275 (2,230) PROVISION FOR INCOME TAXES (Note 3).................................... 4 5 2,092 751 ------- ------- -------- -------- NET (LOSS) INCOME...................................................... $(2,759) $(1,182) $ 7,183 $ (2,981) - -------------------------------------------------- ======= ======= ======== ========
See notes to consolidated financial statements. F-28 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (in thousands)
Common shares Additional ------------- paid-in Accumulated Shares Amount capital deficit Total ------ ------ ---------- ----------- -------- Predecessor: Jon Douglas Companies BALANCE, January 1, 1995........ 55 $754 $453 $ (5,101) $ (3,894) Dividends paid................. (930) (930) Net loss for the period January 1, 1995 to November 14, 1995.. (2,759) (2,759) ----- ---- ---- -------- -------- BALANCE, November 14, 1995...... 55 754 453 (8,790) (7,583) Jon Douglas Real Estate Services Group, Inc.: Capital formation and merger adjustments.................... 945 (744) (11) (18,337) (19,092) ----- ---- ---- -------- -------- BALANCE, November 15, 1995...... 1,000 10 442 (27,127) (26,675) Net loss for the period November 15, 1995 (date of merger) to December 31, 1995.. (1,182) (1,182) ----- ---- ---- -------- -------- BALANCE, December 31, 1995...... 1,000 10 442 (28,309) (27,857) Net income..................... 7,183 7,183 ----- ---- ---- -------- -------- BALANCE, December 31, 1996...... 1,000 10 442 (21,126) (20,674) Net loss....................... (2,981) (2,981) ----- ---- ---- -------- -------- BALANCE, September 30, 1997..... 1,000 $ 10 $442 $(24,107) $(23,655) ===== ==== ==== ======== ========
See notes to consolidated financial statements. F-29 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Predecessor ------------ Jon Douglas Companies ------------ November 15, January 1, 1995 (date of Nine months 1995 to merger) to Year ended ended November 14, December 31, December 31, September 30, 1995 1995 1996 1997 ------------ ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income...................................................... $(2,759) $(1,182) $ 7,183 $(2,981) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization........................................ 1,235 523 3,455 2,421 Write-off of deferred costs.......................................... 1,187 Write-off of other assets............................................ 326 Change in certain assets and liabilities: Restricted cash.................................................... 106 (73) (45) Commissions receivable............................................. (217) 115 (13) 135 Notes and other receivables, net................................... (375) 585 (1,267) (221) Prepaid expenses and other......................................... (121) (667) 275 223 Other assets....................................................... (411) 166 (117) 153 Deferred tax asset................................................. (867) Accounts payable and accrued expenses.............................. 669 501 1,459 5,497 Accrued office closure costs....................................... 1,367 (220) (1,695) 250 Deferred indemnity fees............................................ 132 (226) (872) 1,154 Claims liability................................................... 422 (1,908) 2,436 Other liabilities.................................................. (24) (752) 360 56 Deferred tax liability............................................. 41 ------- ------- ------- ------- Net cash (used in) provided by operating activities.............. (398) (735) 5,961 10,591 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements...................... (462) (121) (2,500) (1,429) Additions to deferred costs............................................ (88) ------- ------- ------- ------- Net cash used in investing activities............................ (462) (121) (2,588) (1,429) CASH FLOWS FROM FINANCING ACTIVITIES: Release of restricted cash............................................. 56 Borrowings from notes payable.......................................... 2,614 Repayments of notes payable............................................ (900) (43) (1,511) (5,936) Dividends paid......................................................... (930) ------- ------- ------- ------- Net cash provided by (used in) financing activities.............. 784 13 (1,511) (5,936) ------- ------- ------- ------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................... (76) (843) 1,862 3,226 CASH AND CASH EQUIVALENTS, beginning of period......................... 4,591 4,283 3,440 5,302 ------- ------- ------- ------- CASH AND CASH EQUIVALENTS, end of period............................... $ 4,515 $ 3,440 $ 5,302 $ 8,528 ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURE-- Cash paid during the year for: Interest........................................................... $ 637 $ -- $ 3,562 $ 2,732 ======= ======= ======= ======= Income tax......................................................... $ 76 $ -- $ 3,666 $ 2,279 - -------------------------------------------------- ======= ======= ======= =======
See notes to consolidated financial statements. F-30 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. ORGANIZATION AND BASIS OF PRESENTATION On November 15, 1995, Jon Douglas Real Estate Services Group, Inc. (the "Company") was formed for the purpose of merging the Jon Douglas Company and certain of its affiliates (collectively, the "Jon Douglas Companies" or "Predecessor") with Prudential California Realty and certain of its affiliates (collectively, the "Prudential Companies"). The Company accounted for the transaction using the historical cost amounts of the Jon Douglas Companies and the Prudential Companies (carryover basis). The acquisition of minority interests was accounted for as a purchase, with the excess acquisition cost being assigned to goodwill. In February 1996, Jon Douglas Financial (a wholly owned subsidiary of the Company) was merged into Hamera Corp. ("Hamera"), with Hamera as the surviving corporation. In connection with this merger, the Company became the owner of 100% of the issued and outstanding stock of the post-merger Hamera (Note 4). The accompanying consolidated financial statements present the operations of the Company for the period November 15, 1995 (date of merger) to December 31, 1995, the year ended December 31, 1996 and the nine months ended September 30, 1997 and its Predecessor for the period January 1, 1995 to November 14, 1995. The Jon Douglas Companies' financial statements are presented for the period January 1, 1995 to November 14, 1995, the date prior to the merger with the Prudential Companies (the "Merger"). The Company's financial statements are presented from the date of the Merger through its sale of operations to NRT Incorporated (Note 7). Because of merger adjustments recorded by the Company and its Predecessor, the accompanying consolidated financial statements of the Company are not directly comparable to those of its Predecessor. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES The Company--The Company is primarily engaged in the business of providing residential real estate brokerage, title, mortgage, escrow, information and other real estate related services throughout California. Principles of Consolidation--The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its wholly owned subsidiaries, including: Jon Douglas Company, a California corporation; West Coast Escrow Company, a California corporation (formerly San Vicente Escrow Company); Equity Title Company, a California corporation; Douglas Referral Associates, a California corporation; and Jon Douglas Financial, a California corporation (including comparable operations of its predecessor). See "Organization and Basis of Presentation" above. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition--Real estate commission revenues and the related commission expenses earned by agents are recognized upon the close of escrow or transfer of title. F-31 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Escrow and loan fees are recognized as income at the close of escrow. Title premium fees are recognized as income in the period the title policy is issued. A liability for estimated claim costs relating to title insurance policies issued is recorded when premium revenue is recognized and is based on prior experience. Depreciation and Amortization--Depreciation on furniture and equipment is computed using the straight-line method over the estimated useful lives ranging from two to seven years. Amortization on leasehold improvements is computed using the straight-line method over the shorter of the term of the leases, excluding options to renew, or their estimated useful lives. Deferred Costs--Deferred costs represent costs incurred in financing and are amortized over the term of the related debt. Amortization of Intangibles--Franchise costs are amortized over eight years (the initial term of the franchise agreement) (Note 6) and goodwill is amortized over 20 years. In addition, loan fees are amortized using the effective interest method over the lives of the respective loans. The Company periodically assesses whether there has been an impairment in the value of goodwill and other intangible assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Income Taxes--The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Jon Douglas Companies operated as S corporations during the period January 1, 1995 to November 14, 1995. Accordingly, no provision for federal income tax was made during the period. 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. Reclassifications--Certain reclassifications have been made to the 1995 and 1996 amounts to conform to the 1997 presentation. F-32 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. INCOME TAXES The provision (benefit) for income taxes includes the following:
Predecessor ------------ Jon Douglas Companies ------------ November 15, January 1, 1995 (date of Nine months 1995 to merger) to Year ended ended November 14, December 31, December 31, September 30, 1995 1995 1996 1997 ------------ ------------- ------------ ------------- Federal: Current........................................................... $ $ $2,151 $ -- Deferred.......................................................... 737 (702) Change in valuation allowance..................................... (1,563) 1,453 --- --- ------ ----- 1,325 751 State: Current........................................................... 4 5 767 -- Deferred.......................................................... 6 Change in valuation allowance..................................... (6) --- --- ------ ----- $ 4 $ 5 $2,092 $ 751 -------------------------------------------------- === === ====== =====
The reconciliation of (loss) income before provision for income taxes at the statutory federal income tax rate to the Company's effective income tax rate is as follows:
Predecessor ------------ Jon Douglas Companies ------------ November 15, January 1, 1995 (date of Nine months 1995 to merger) to Year ended ended November 14, December 31, December 31, September 30, 1995 1995 1996 1997 ------------ ------------- ------------ ------------- Net pre-tax (loss) income at statutory federal rate................. -- (34.0)% 34.0% (34.0)% State income taxes, net of federal benefit.......................... 0.2% (42.1) 5.4 Change in valuation allowance....................................... -- 76.5 (16.8)% 65.2 Other............................................................... -- 2.5 --- ----- ----- ----- -------------------------------------------------- 0.2% 0.4% 22.6% 33.7% === ===== ===== =====
The increase in the valuation allowance during the nine months ended September 30, 1997 is due to the inability of the Company to realize any of the tax benefit arising from the net operating loss sustained during the period. The Jon Douglas Companies operated as Subchapter S corporations during the period January 1, 1995 to November 14, 1995. As such, the Jon Douglas Companies were not liable for federal income taxes, and accordingly, no provision for federal income taxes was made during the period. F-33 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. RELATED PARTY TRANSACTIONS An affiliate of one of the Company's shareholders monitored its investment in the Company, pursuant to an Investment Monitoring Agreement, for an annual fee of $300. The investment monitoring fee amounted to $38, $300 and $225 for the period November 15, 1995 (date of merger) to December 31, 1995, the year ended December 31, 1996 and the nine months ended September 30, 1997, respectively. In connection with the merger of the Company with PRGI, the Investment Monitoring Agreement was terminated. The Company leases certain office facilities from entities in which shareholders of the Company have a financial interest. The rental payments to these affiliated entities amounted to $236, $392, $510 and $440 during the period January 1, 1995 to November 14, 1995, the period November 15, 1995 (date of merger) to December 31, 1995, the year ended December 31, 1996 and the nine months ended September 30, 1997, respectively. In connection with the merger of Hamera, the Company issued irrevocable stock options to certain former shareholders of Hamera which entitle them to purchase up to 25% of the outstanding shares (subject to adjustment) of Hamera for a nominal amount. In addition, Hamera agreed to make payments to certain former shareholders based upon operating cash flow, as defined. During 1996 and 1997, Hamera paid approximately $365 and $475 to these former shareholders, which is included in other expenses in the accompanying consolidated statements of operations. 5. EMPLOYEE BENEFIT PLAN The Company adopted the Prudential employee benefit plan (the "Plan"), a defined contribution profit sharing plan under Section 401(k) of the Internal Revenue Code. During 1995, 1996 and the nine months ended September 30, 1997, the Company did not authorize any contributions to the Plan. In connection with the merger of the Company with PRGI, the Plan was terminated. 6. COMMITMENTS AND CONTINGENCIES The Company had a claims management plan whereby, for an annual fee, independent real estate agents who worked out of the Company's offices were offered indemnification for claims filed against the Company and the real estate sales agents within the covered period. The fees collected from the agents for this indemnification were deferred and offset against legal expenses ratably over the term of the covered period (one year). During the period January 1, 1995 to November 14, 1995, the period November 15, 1995 (date of merger) to December 31, 1995, the year ended December 31, 1996 and the nine- month period ended September 30, 1997, fees of $1,197, $219, $2,622 and $2,080, respectively, were recognized and recorded as a reduction of legal expense. In accordance with a franchise agreement (the "Franchise Agreement"), prior to the PRGI transaction the Company paid to Prudential Real Estate Affiliates, Inc. ("PREA") a franchise fee F-34 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) based on 1.14% of gross sales, as defined, and an advertising fee. In addition, during 1996, certain PREA affiliates paid to the Company a management fee in connection with this franchise agreement. The Franchise Agreement ceased effective with the merger of the Company with PRGI (Note 7). Equity Title Company had an agreement which expired in 1998 with an insurance company whereby Equity Title was authorized to issue title insurance policies on behalf of the insurance company. Equity Title pays a percentage of gross title premiums to the insurance company and was responsible for up to $5,000 of any losses incurred in connection with each policy issued. In addition, Equity Title has a title plant agreement, expiring in 2000, with an insurance company whereby Equity Title rents the title plant for a percentage of gross title premiums. Because both the underwriting and plant costs are directly related to Equity Title's revenues, the future fixed commitments under these agreements cannot be determined. Certain key executives entered into annual employment contracts with the Company which guarantee a minimum annual base salary with incentive bonus compensation based on achieving certain financial performance targets. In connection with the merger of the Company with PRGI, such employment contracts were terminated (Note 7). As part of the consideration for a partial forgiveness of the Prudential Companies' debt prior to the Merger, the Company agreed to a contingent payment obligation ("CPO") equal to 10% of the Company's equity value, as defined, less $20,000 upon the occurrence of certain events, including the sale of all or substantially all of the Company's assets. In connection with the merger of the Company with PRGI, the Company paid $1,000 to satisfy the CPO (Note 7). The Company leases various properties under operating leases with terms ranging from one to eight years. Aggregate future minimum payments of such leases at September 30, 1997 are as follows: Year ending September 30: 1998.................................................................. $ 9,189 1999.................................................................. 8,460 2000.................................................................. 6,173 2001.................................................................. 4,450 2002.................................................................. 2,908 Thereafter............................................................ 2,834 ------- Total............................................................. $34,014 =======
The Company incurred rental expenses of $5,644, $2,230, $14,207 and $11,064 during the period January 1, 1995 to November 14, 1995, the period November 15, 1995 (date of merger) to December 31, 1995, the year ended December 31, 1996 and the nine-month period ended September 30, 1997, respectively. F-35 JON DOUGLAS REAL ESTATE SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. SUBSEQUENT EVENT In September 1997, the Company merged with and into Property Resources Group, Inc. ("PRGI"), a wholly owned subsidiary of Cendant Corporation, with the Company being the surviving entity. Subsequent to the merger with PRGI, certain of the Company's assets were acquired and certain liabilities assumed by NRT Incorporated. Effective October 1, 1997, the Company's results of operations were included in NRT Incorporated's consolidated financial statements. In connection with the merger of the Company with PRGI, the Company recorded certain merger-related expenses primarily related to employee severance payments and termination fees associated with the early termination of contractual obligations. F-36 INDEPENDENT AUDITORS' REPORT To the Board of Directors Cornish & Carey Residential, Inc. San Mateo, California We have audited the accompanying statements of operations, shareholders' equity and cash flows of Cornish & Carey Residential, Inc. (the "Company") for the years ended December 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations, shareholders' equity and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations, shareholders' equity and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statements of operations, shareholders' equity and cash flows. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the statements of operations, shareholders' equity and cash flows referred to above, present fairly, in all material respects, the results of operations and cash flows of Cornish & Carey Residential, Inc. for the years ended December 31, 1995 and 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Francisco, California June 19, 1998 F-37 CORNISH & CAREY RESIDENTIAL, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997 (UNAUDITED)
Six Months Ended ------------------------ June 30, June 30, 1996 1997 1995 1996 (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- REVENUES: Real estate commissions.. $61,562,247 $81,820,650 $39,517,342 $44,401,437 Agent fees............... 1,391,069 1,367,899 580,837 590,172 Other revenues........... 932 226,187 126,216 275,909 ----------- ----------- ----------- ----------- Total revenues......... 62,954,248 83,414,736 40,224,597 45,267,518 ----------- ----------- ----------- ----------- EXPENSES: Commissions and referrals............... 42,017,224 57,045,512 27,048,177 31,396,761 Salaries and related expenses................ 8,137,527 11,093,363 5,280,452 4,603,704 Facilities and related expenses (Note 2)....... 4,487,478 4,979,577 2,463,805 2,343,613 Advertising and promotion............... 3,051,250 3,238,123 1,678,574 1,674,129 Professional fees and settlement costs........ 1,349,873 1,621,444 701,414 332,048 Depreciation and amortization............ 978,237 1,177,323 541,910 653,563 General and administrative.......... 1,931,709 1,889,358 428,860 1,040,709 ----------- ----------- ----------- ----------- Total expenses......... 61,953,298 81,044,700 38,703,192 42,044,527 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS..... 1,000,950 2,370,036 1,521,405 3,222,991 OTHER INCOME (EXPENSE): Interest income.......... 32,171 135,717 32,780 73,413 Interest expense......... (102,092) (117,200) (58,035) (37,412) Other income............. 178,049 153,285 -- 94,092 Other expense (Note 6)... (489,205) (199,834) (108,144) (4,403) ----------- ----------- ----------- ----------- Total other income (expense)............. (381,077) (28,032) (133,399) 125,690 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAX PROVISION................. 619,873 2,342,004 1,388,006 3,348,681 INCOME TAX PROVISION (Note 3)........................ 284,842 958,422 567,077 1,372,357 ----------- ----------- ----------- ----------- NET INCOME................. $ 335,031 $ 1,383,582 $ 820,929 $ 1,976,324 =========== =========== =========== ===========
See notes to financial statements. F-38 CORNISH & CAREY RESIDENTIAL, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
Common Stock Total ----------------- Retained Shareholders' Shares Amount Earnings Equity ------ --------- ----------- ------------- BALANCE, January 1, 1995........ 3,648 $ 693,199 $ 2,288,564 $ 2,981,763 Repurchase and retirement of common stock (Note 5).......... (730) (138,716) (861,284) (1,000,000) Net income...................... 335,031 335,031 ----- --------- ----------- ----------- BALANCE, December 31, 1995...... 2,918 554,483 1,762,311 2,316,794 Dividends paid.................. (300,000) (300,000) Net income...................... 1,383,582 1,383,582 ----- --------- ----------- ----------- BALANCE, December 31, 1996...... 2,918 554,483 2,845,893 3,400,376 Dividends paid (unaudited)...... (1,052,210) (1,052,210) Net income (unaudited).......... 1,976,324 1,976,324 ----- --------- ----------- ----------- BALANCE, June 30, 1997 (unaudited).................... 2,918 $ 554,483 $ 3,770,007 $ 4,324,490 ===== ========= =========== ===========
See notes to financial statements. F-39 CORNISH & CAREY RESIDENTIAL, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997 (UNAUDITED)
Six Months Ended ------------------------ June 30, June 30, 1996 1997 1995 1996 (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................ $ 335,031 $ 1,383,582 $ 820,929 $ 1,976,324 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 978,237 1,177,323 541,910 653,563 Provision for deferred income taxes........... 221,000 (87,000) (52,000) 26,000 Loss on sale of fixed assets................. 3,310 69,155 4,137 4,403 Loss on disposition of fixed assets included in loss on office closures............... 41,719 41,719 Loss on sale of land and real property held for resale................. 31,819 Gain on investment in partnerships........... (25,364) Change in operating assets and liabilities: Receivables........... (184,303) (150,693) (920,494) (263,489) Refundable income taxes................ (88,000) 110,000 Prepaid expenses...... 422,840 (104,654) ( 79,650) (29,325) Refundable deposits... (3,553) (254) (141,401) (181,965) Accounts payable...... (21,908) 1,151,673 1,671,251 (308,705) Accrued expenses...... 150,953 359,585 915,558 533,297 ----------- ----------- ---------- ----------- Net cash provided by operating activities......... 1,820,062 3,950,436 2,801,959 2,410,103 ----------- ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in partnership.............. (33,844) 5,052 Proceeds from investment in partnership........... 126,230 Proceeds from sale of land and real property held for sale................. 253,181 Principal payments received on notes receivable............... 36,125 177,538 106,246 Issuance of notes receivable............... (264,937) (112,245) (97,455) (9,810) Proceeds from disposition of fixed assets.......... 7,709 8,141 8,141 55,604 Purchase of fixed assets.. (1,876,031) (1,744,333) (617,609) (309,093) ----------- ----------- ---------- ----------- Net cash used in investing activities......... (1,717,723) (1,704,743) (602,677) (258,247) ----------- ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt........... (571,399) (877,995) (295,043) (269,486) Proceeds from long-term debt..................... 666,412 500,296 500,296 Dividend paid............. (300,000) -- (1,052,210) Repurchase of common stock.................... (400,000) ----------- ----------- ---------- ----------- Net cash (used in) provided by financing activities......... (304,987) (677,699) 205,253 (1,321,696) ----------- ----------- ---------- ----------- (DECREASE) INCREASE IN CASH AND EQUIVALENTS............ (202,648) 1,567,994 2,404,535 830,160 CASH AND CASH EQUIVALENTS, Beginning of year.......... 1,426,339 1,223,691 1,223,691 2,791,685 ----------- ----------- ---------- ----------- CASH AND CASH EQUIVALENTS, End of year................ $ 1,223,691 $ 2,791,685 $3,628,226 $ 3,621,845 =========== =========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid............. $ 102,000 $ 117,000 $ 58,000 $ 37,000 =========== =========== ========== =========== Income taxes paid......... $ 185,000 $ 93,000 $ 45,000 $ 872,000 =========== =========== ========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Notes payable issued in repurchase of common stock.................... $ 600,000 $ -- $ -- $ -- =========== =========== ========== =========== Notes payable issued in acquisition of fixed assets................... $ 82,407 $ -- $ -- $ -- =========== =========== ========== ===========
See notes to financial statements. F-40 CORNISH & CAREY RESIDENTIAL, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997 (UNAUDITED) 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Business--Cornish & Carey Residential, Inc. (the "Company") provides real estate marketing and brokerage services related to residential properties. The Company provides these services from 23 separate offices located in Northern California. In 1996, the Company also began licensing its name to other high-end residential real estate brokerages in the Bay Area. During September 1997, certain of the Company's assets were acquired and certain liabilities were assumed by NRT Incorporated. Revenue Recognition--Commissions are recognized upon the close of escrow. Fees paid by agents are recognized as supporting services are rendered to agents. Depreciation and Amortization--Depreciation is computed using the straight- line method over estimated useful lives of three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the assets. Commission and Referral Expenses--Commission expenses are recorded upon the close of escrow. Referral expenses are recorded as services are performed. Cash and Cash Equivalents--For purposes of the statement of cash flows, the Company considers all highly-liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company routinely maintains cash deposits with a major financial institution. Such deposits exceed the $100,000 limit insured by the Federal Deposit Insurance Corporation. Advertising Costs--Costs associated with the production of advertising, such as writing copy, printing, and other costs, are charged to expense when incurred. Costs associated with communicating advertising that has been produced, such as newspaper and billboard space, are charged to expense as services are received. Income Taxes--The Company uses the liability method to account for income taxes. Deferred income tax assets and liabilities result when the Company's carrying value for assets and liabilities for income tax purposes is different from the amount on its financial statements. Deferred income taxes result principally from depreciation, franchise tax expense, and reserves recorded for financial statement purposes which are not deductible for income tax purposes until realized. F-41 CORNISH & CAREY RESIDENTIAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 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, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited Information--The financial information with respect to the six- months ended June 30, 1996 and June 30, 1997 is unaudited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of such periods. The results of operations for the six-months ended June 30, 1996 and June 30, 1997 are not necessarily indicative of the results to be expected for the full year. 2. COMMITMENTS AND CONTINGENCIES Lease Commitments--The Company leases its office facilities under operating lease agreements. Rent expense in 1995 and 1996 was approximately $3,394,000 and $3,652,000, respectively. Rent expense during the six-months ended June 30, 1996 and June 30, 1997 (unaudited) was $1,861,000 and $1,720,000, respectively. At June 30, 1997 (unaudited), future minimum operating lease payments are approximately: Year ending June 30 (unaudited): 1998.......................................................... $ 2,713,152 1999.......................................................... 1,984,199 2000.......................................................... 1,305,648 2001.......................................................... 880,888 2002.......................................................... 621,528 Thereafter.................................................... 3,323,004 ----------- Total........................................................... $10,828,419 ===========
The Company leased certain of its office facilities from a related party in 1995. Rent paid for these facilities in 1995 was approximately $434,000. As of November 1995, the lessor is no longer considered a related party. Contingencies--The Company is involved in certain legal actions and claims arising in the ordinary course of its business. While the Company believes many of these claims are without merit, from time to time it will settle matters to avoid the cost of litigation. During 1995 and 1996, the Company settled several matters for aggregate payments of approximately $482,000 and $415,000, respectively. Settlement payments during the six months ended June 30, 1996 and June 30, 1997 (unaudited) were approximately $269,000 and $100,000, respectively. In addition, the Company provides reserves against matters that are still pending, when it believes it is appropriate to do so. With respect to all known unsealed actions and claims, the Company believes they will be resolved without material effect on the Company's financial position or results of operations and cash flows. F-42 CORNISH & CAREY RESIDENTIAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 3. INCOME TAXES The provision for income taxes consists of the following:
Six Months Ended ----------------------- June 30, June 30, December 31, December 31, 1996 1997 1995 1996 (Unaudited) (Unaudited) ------------ ------------ ----------- ----------- Current: Federal................. $ 57,889 $ 814,703 $482,840 $1,138,739 State................... 5,953 230,719 136,237 207,618 -------- ---------- -------- ---------- Total................. 63,842 1,045,422 619,077 1,346,357 -------- ---------- -------- ---------- Deferred: Federal................. 166,000 (86,000) (51,000) 22,000 State................... 55,000 (1,000) (1,000) 4,000 -------- ---------- -------- ---------- Total................. 221,000 (87,000) (52,000) 26,000 -------- ---------- -------- ---------- Total..................... $284,842 $ 958,422 $567,077 $1,372,357 ======== ========== ======== ==========
The reconciliation between the Company's effective tax rate and the statutory federal income tax rate is as follows:
Six Months Ended ----------------------- June 30, June 30, December 31, December 31, 1996 1997 1995 1996 (Unaudited) (Unaudited) ------------ ------------ ----------- ----------- Statutory federal income tax rate................ 34.0% 34.0% 34.0% 34.0% State income taxes, net of federal tax benefit.. 6.2 6.2 6.2 6.2 Nondeductible entertainment and officers' life insurance............... 3.5 0.7 0.7 0.4 Tax-exempt dividend income.................. (1.1) (0.5) (0.4) Other.................... 3.4 0.5 0.4 0.4 ---- ---- ---- ---- Total.................... 46.0% 40.9% 40.9% 41.0% ==== ==== ==== ====
4. PENSION PLAN The Company had a defined contribution pension plan (401(k) plan). All employees over the age of 21 who completed at least one year of service were eligible to participate. Participants could elect to have amounts deducted from their compensation and contributed to the 401(k) plan up to the limit allowed by applicable laws. All such contributions were fully vested to the employee. While the Company was not required to make contributions to the 401(k) plan, it had accrued a $35,000 and $30,000 contribution for 1995 and 1996, respectively. For the six months ended June 30, 1996 and 1997, the Company had accrued $15,000 and $15,000, respectively. Subsequent to the acquisition (Note 1), the plan was terminated. 5. RELATED-PARTY TRANSACTIONS During 1995, the Company repurchased and retired capital stock from a shareholder. The Company purchased the shares for $1,000,000 ($400,000 in cash and $600,000 in a note). F-43 CORNISH & CAREY RESIDENTIAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 6. INVESTMENT IN MARKETING VENTURE During 1995, the Company purchased the operating rights to certain specialized computer software to enhance its residential home marketing efforts. Because of the developer's inability to continue supporting and maintaining the software, the Company abandoned these assets in October 1995. The total costs written off related to these assets amount to approximately $406,000 and are included in other expense in the accompanying statements of operations. F-44 INDEPENDENT AUDITORS' REPORT To the Shareholders of Contempo Realty, Inc. Contempo Relocation, Inc. and To the Partners of Blossom Valley Partnership Morgan Hill Partnership Bascom Partnership We have audited the accompanying combined statements of operations, owners' equity and cash flows of Contempo Realty, Inc., Contempo Relocation, Inc. and the Blossom Valley, Morgan Hill and Bascom general partnerships, which are under common ownership and common management, for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the management of the companies and partnerships. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined statements of operations, owners' equity and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined statements of operations, owners' equity and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined statements of operations, owners' equity and cash flows. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined statements of operations, owners' equity and cash flows present fairly, in all material respects, the combined results of operations of the companies and partnerships referred to above and their combined cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Francisco, California June 26, 1998 F-45 CONTEMPO REALTY COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 ----------- ----------- ----------- REVENUE: Commission income........................ $34,615,265 $36,807,848 $54,333,863 Other revenues........................... 2,325,102 3,102,626 2,033,736 ----------- ----------- ----------- Total.................................. 36,940,367 39,910,474 56,367,599 EXPENSES: Commission and referral fees............. 26,805,532 29,193,097 42,592,573 Salaries and related expenses............ 2,338,300 2,514,483 4,004,671 Facilities and related expenses.......... 2,206,076 2,215,809 2,558,936 Advertising and promotion................ 1,214,832 1,216,675 1,117,804 Depreciation and amortization............ 372,946 498,478 499,059 General and administrative............... 3,438,423 3,203,931 3,452,880 ----------- ----------- ----------- Total.................................. 36,376,109 38,842,473 54,225,923 ----------- ----------- ----------- INCOME FROM OPERATIONS..................... 564,258 1,068,001 2,141,676 OTHER INCOME............................... 74,725 107,264 51,361 ----------- ----------- ----------- INCOME BEFORE INCOME TAX PROVISION......... 638,983 1,175,265 2,193,037 PROVISION FOR INCOME TAX (Note 2).......... 12,902 219,599 433,660 ----------- ----------- ----------- NET INCOME................................. $ 626,081 $ 955,666 $ 1,759,377 =========== =========== ===========
See accompanying notes to combined financial statements. F-46 CONTEMPO REALTY COMBINED STATEMENTS OF OWNERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Shareholders' Equity ------------------------ Common Stock Total Partners' --------------- Retained Owners' Equity Shares Amount Earnings Equity ---------- ------ -------- -------- ---------- BALANCE, JANUARY 1, 1994..... $ 170,189 32,061 $325,911 $151,815 $ 647,915 CASH DISTRIBUTIONS........... (758,849) (758,849) NET INCOME (LOSS)............ 643,863 (17,782) 626,081 ---------- ------ -------- -------- ---------- BALANCE, DECEMBER 31, 1994... 55,203 32,061 325,911 134,033 515,147 CASH DISTRIBUTIONS........... (515,859) (515,859) NET INCOME................... 766,708 188,958 955,666 ---------- ------ -------- -------- ---------- BALANCE, DECEMBER 31, 1995... 306,052 32,061 325,911 322,991 954,954 CASH DISTRIBUTIONS........... (920,632) (920,632) NET INCOME................... 1,276,439 482,938 1,759,377 ---------- ------ -------- -------- ---------- BALANCE, DECEMBER 31, 1996... $ 661,859 32,061 $325,911 $805,929 $1,793,699 ========== ====== ======== ======== ==========
See accompanying notes to combined financial statements. F-47 CONTEMPO REALTY COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 --------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................... $ 626,081 $ 955,666 $ 1,759,377 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................... 372,946 498,478 499,059 Loss on disposal of fixed assets....... 8,403 2,274 36,392 Changes in assets and liabilities: Receivables.......................... (21,509) (139,572) (102,054) Prepaid expenses..................... (49,974) Other assets......................... (36,845) (39,978) (60,924) Trade payables....................... (34,560) 176,944 17,177 Accrued expenses..................... 14,951 99,256 81,868 Other liabilities.................... (60,498) 19,800 249,164 --------- ---------- ----------- Net cash provided by operating activities........................ 868,969 1,572,868 2,430,085 --------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets....... 2,564 Purchase of property and equipment....... (877,000) (792,732) (431,796) Investment in affiliated entities........ (68,306) (150,920) Distributions from affiliated entities... 85,729 2,834 --------- ---------- ----------- Net cash used in investing activities........................ (791,271) (861,038) (577,318) --------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions paid....................... (758,849) (515,859) (920,632) Increase (decrease) in credit line payable................................. 65,801 4,298 (25,444) Increase (decrease) in notes payable..... 527,808 129,420 (268,876) Repayments of loans from shareholders.... (48,134) (44,997) (262,464) --------- ---------- ----------- Net cash used in financing activities........................ (213,374) (427,138) (1,477,416) --------- ---------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................... (135,676) 284,692 375,351 CASH AND CASH EQUIVALENTS, beginning of year...................................... 741,741 606,065 890,757 --------- ---------- ----------- CASH AND CASH EQUIVALENTS, end of year..... $ 606,065 $ 890,757 $ 1,266,108 ========= ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION-- Interest paid............................ $ 69,000 $ 168,000 $ 111,000 ========= ========== =========== Income taxes paid........................ $ -- $ 190,000 $ 430,000 ========= ========== ===========
See accompanying notes to combined financial statements. F-48 CONTEMPO REALTY NOTES TO COMBINED STATEMENTS OF OPERATIONS, OWNERS' EQUITY AND CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Presentation--The statements of operations, owners' equity and cash flows for Contempo Realty, Inc., Contempo Relocation, Inc., and the Morgan Hill, Almaden and Bascom general partnerships (collectively, the "Company" or "Contempo Realty") have been combined, due to common ownership and common management, and are presented herein. Contempo Realty, Inc. has a 10% direct interest in each of the partnerships. Nature of Business--The Company provides real estate marketing and brokerage services related to resident properties. The Company operates business locations in Santa Clara, San Benito and Alameda Counties. During March 1997, the Company was acquired by Coldwell Banker Residential Brokerage Corporation, an affiliate of National Realty Trust. Cash and Cash Equivalents--The Company considers cash investments with a maturity of three months or less at the time of purchase to be cash equivalents. Depreciation and Amortization--Depreciation is computed using the straight- line method over estimated useful lives of three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the assets. 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. Revenue Recognition--Real estate commissions are recorded as revenue upon close of escrow or upon transfer of title. Other fees including management and referral fees are recorded as revenue at the time the related services have been performed by the Company unless significant future contingencies exist. Income Taxes--The Company uses the same method of depreciation for financial reporting purposes as used for federal income tax reporting purposes. There is no deferred tax liability, as there are no timing differences relating to income or expenses. Income tax has been provided only on the income of Contempo Realty, Inc. and Contempo Relocation, Inc. (the "Corporations"). This includes the Corporations' share of the partnerships' income. No tax has been provided for the partnerships as this tax is the responsibility of the individual partners. F-49 CONTEMPO REALTY NOTES TO COMBINED STATEMENTS OF OPERATIONS, OWNERS' EQUITY AND CASH FLOWS--(Continued) 2. INCOME TAX PROVISION As tax is only provided on the Corporations' (loss) income, the following table shows the corporate taxable income for each year:
1994 1995 1996 -------- ---------- ---------- Corporate (loss) income..................... $ (4,880) $ 408,557 $ 916,598 Partnership income.......................... 643,863 766,708 1,276,439 -------- ---------- ---------- Income before income tax provision.......... $638,983 $1,175,265 $2,193,037 ======== ========== ==========
The income tax provision consists of the following at December 31:
1994 1995 1996 ------- -------- -------- Federal............................................ $ 9,128 $183,856 $363,076 State.............................................. 3,774 35,743 70,584 ------- -------- -------- Total.............................................. $12,902 $219,599 $433,660 ======= ======== ========
The Company has no federal or state carryovers or deferred tax attributes remaining as of December 31, 1996. The reconciliation between the Corporations' effective tax rate on income before taxes and the statutory federal income tax rate is as follows at December 31:
1994 1995 1996 ------ ---- ---- Statutory federal income tax rate................... 34.0 % 34.0 % 34.0 % State income taxes, net of federal benefit.......... 6.2 6.2 6.2 Nondeductible entertainment and officers' life in- surance............................................ 12.3 1.8 1.0 Taxable interentity partnership income.............. (293.2) 14.7 9.1 Others.............................................. (23.7) (3.0) (3.0) ------ ---- ---- Total............................................... (264.4)% 53.7 % 47.3 % ====== ==== ====
3. MINIMUM LEASE COMMITMENTS The Company leases its office facilities under operating lease agreements. Rent expense in 1994, 1995 and 1996 was $1,634,000, $1,840,000 and $2,071,000, respectively. Also, the Company is obligated under lease agreements for various office equipment. F-50 CONTEMPO REALTY NOTES TO COMBINED STATEMENTS OF OPERATIONS, OWNERS' EQUITY AND CASH FLOWS--(Continued) At December 31, 1996, future minimum operating lease payments for office facilities and equipment are approximately:
Office Facilities Equipment ---------- --------- Year ending December 31: 1997..................................................... $1,295,339 $239,758 1998..................................................... 1,161,219 180,371 1999..................................................... 825,444 64,469 2000..................................................... 482,909 22,660 2001..................................................... 388,404 3,779 Thereafter............................................... 47,486 ---------- -------- Total...................................................... $4,200,801 $511,037 ========== ========
F-51 INDEPENDENT AUDITORS' REPORT To the Board of Directors Barbara Sue Seal Properties, Inc. Portland, Oregon We have audited the accompanying statements of operations and retained earnings and of cash flows of Barbara Sue Seal Properties, Inc. (the "Company") for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations and retained earnings and of cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations and retained earnings and of cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statements of operations and retained earnings and of cash flows. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the statements of operations and retained earnings and of cash flows referred to above, present fairly, in all material respects, the results of operations and cash flows of Barbara Sue Seal Properties, Inc. for the year ended December 31, 1996 in conformity with generally accepted accounting principles. Portland, Oregon July 1, 1998 F-52 BARBARA SUE SEAL PROPERTIES, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1997 (UNAUDITED)
Nine Months Nine Months Ended Ended Year Ended Spetember September 30, December 31, 30, 1996 1997 1996 (unaudited) (unaudited) ------------ ----------- ------------- REVENUES: Real estate commissions............ $20,292,752 $15,455,489 $17,000,134 Other.............................. 392,013 96,546 47,391 ----------- ----------- ----------- Total revenues................... 20,684,765 15,552,035 17,047,525 ----------- ----------- ----------- EXPENSES: Commissions........................ 13,455,268 9,829,784 11,474,149 Salaries and wages................. 1,806,585 1,408,419 1,407,303 Advertising and marketing.......... 1,784,286 1,210,478 1,297,049 Rent............................... 1,121,253 842,238 819,721 General and administrative......... 1,141,787 954,218 904,493 Depreciation and amortization...... 220,828 132,300 286,919 ----------- ----------- ----------- Total expenses................... 19,530,007 14,377,457 16,189,634 ----------- ----------- ----------- INCOME FROM OPERATIONS............... 1,154,758 1,174,578 857,891 ----------- ----------- ----------- INTEREST INCOME (EXPENSE): Interest income.................... 53,706 27,264 39,678 Interest expense................... (1,095) (1,095) (230) ----------- ----------- ----------- Interest income--net............. 52,611 26,169 39,448 ----------- ----------- ----------- NET INCOME........................... 1,207,369 1,200,747 897,339 RETAINED EARNINGS, BEGINNING OF PERIOD.............................. 1,728,273 1,728,273 1,677,642 DISTRIBUTIONS........................ (1,258,000) (730,000) (943,000) ----------- ----------- ----------- RETAINED EARNINGS, END OF PERIOD..... $ 1,677,642 $ 2,199,020 $ 1,631,981 =========== =========== ===========
See notes to financial statements. F-53 BARBARA SUE SEAL PROPERTIES, INC. STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1997 (UNAUDITED)
Nine Months Nine Months Ended Ended September 30, September 30, 1996 1997 1996 (unaudited) (unaudited) ---------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................... $1,207,369 $1,200,747 $ 897,339 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...... 220,828 132,300 286,919 Bad debt (recovery) expense........ 4,801 2,152 (8,108) Gain on sale of investment in securities........................ (34,854) (26,141) -- Change in: Commissions receivable........... (44,134) 69,921 20,028 Other receivables................ (5,716) (7,011) (5,750) Prepaid expenses................. 9,688 11,101 (5,898) Accounts payable................. 112,876 1,479 (49,433) Accrued bonuses and commissions to agents....................... 199,518 (22,156) (257,239) Deferred compensation............ 75,233 54,492 174,447 Accrued and related tax benefits........................ 9,148 15,029 (12,130) Other accrued liabilities........ 3,865 (59) (1,473) ---------- ---------- ---------- Net cash provided by operating activities.................... 1,758,622 1,409,653 1,038,702 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements........................ (511,638) (389,228) (45,061) Investment in securities, net........ (12,971) 262,104 143,881 Decrease (Increase) in notes receivable.......................... 79,364 61,139 (50,109) ---------- ---------- ---------- Net cash (used in) provided by investing activities.......... (445,245) (65,985) 48,711 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES-- Distributions......................... (1,258,000) (730,000) (943,000) ---------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 55,377 613,668 144,413 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................ 276,637 276,637 332,014 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 332,014 $ 890,305 $ 476,427 ========== ========== ==========
See notes to financial statements. F-54 BARBARA SUE SEAL PROPERTIES, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1997 (UNAUDITED) 1. ORGANIZATION Barbara Sue Seal Properties, Inc. (the "Company"), founded in 1983, operates as a real estate broker/dealer specializing in sales of prestigious residential real estate in Oregon and Washington. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents include all cash balances and highly-liquid investments, all of which have maturities of three months or less. Depreciation--Equipment and leasehold improvements are depreciated using the straight-line method over its estimated useful life ranging from 5 to 31 years. Revenue Recognition--Commissions are recognized at the time sales are closed. Advertising Costs--Advertising costs are expensed when incurred. Income Taxes--The Company has elected under the Internal Revenue Code to be an S Corporation. In lieu of corporation income taxes, the stockholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements. 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 disclosures 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. 3. LEASING COMMITMENTS The Company leases office space under the long-term operating lease agreements. Most leases have original terms of five years with several three- to five-year renewal options with terms and conditions similar to the original lease. The Uptown branch is leased from the 100% stockholder of the Company, and the Wilsonville branch is leased from the Seal Family, LLC, a related party. The Sunset Corridor Branch is leased from Seal-Wieden, LLC, a related party. Total rent paid to the stockholder and related party amounted to $285,008 for the year ended December 31, 1996 and, $208,006 and $229,606 for the nine months ended September 30, 1996 and 1997, respectively (unaudited). F-55 BARBARA SUE SEAL PROPERTIES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following is a schedule, by years, of future minimum lease payments under leases that have initial or remaining noncancelable lease terms in excess of one year as of the nine months ended September 30, 1997 (unaudited):
Nine Months Ended September 30, 1997 ------------- (Unaudited) 1998....................................................... $ 214,419 1999....................................................... 778,955 2000....................................................... 546,542 2001....................................................... 486,229 2002....................................................... 332,338 Thereafter................................................. 260,000 ---------- $2,618,483 ==========
Beginning in 1995, the Company subleased a portion of its office space under month-to-month leases. Sublease rental income was $99,600 in 1996. Rental expense under operating leases was $1,121,253 for the year ended December 31, 1996 and, $842,258 and $819,721 for the nine months ended September 30, 1996 and 1997, respectively (unaudited). 4. RETIREMENT PLAN The Company has a defined contribution profit sharing pension plan covering substantially all of its employees with contributions set at the discretion of management. The total contributions to the plan were $20,000 for the year ended December 31, 1996 and, $8,100 and $20,000 for the nine months ended September 30, 1996 and 1997, respectively (unaudited). 5. DEFERRED COMPENSATION PLANS The Company established a deferred compensation system in 1990 called the President's Council. Employees are admitted into the Plan based on sales and years of service and vest five years after entering the plan. The Company makes contributions based on level of sales and years of service. The plan was amended in March 1996, retroactive to January 1, 1995 to read that participants in the plan who are 100% vested will not be allowed to withdraw from the plan except for termination, retirement or economic hardship reasons. The Company established an additional deferred compensation system in 1992 called the Roundtable. Employees are admitted into this plan based on sales and years of service. The Company makes contributions based on level of sales and years of service. Contributions to the President's Council and Roundtable deferred compensation plans were $81,775 for the year ended December 31, 1996 and, $101,522 and $90,512 for the nine months ended September 30, 1996 and 1997, respectively (unaudited). F-56 BARBARA SUE SEAL PROPERTIES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 6. SUBSEQUENT EVENT On October 10, 1997, the Company was acquired by NRT, Inc. After the acquisition, the Company became Coldwell Banker Barbara Sue Seal Properties. As a result of the acquisition, the Company terminated the employee profit sharing plan and both the President's Council and Roundtable deferred compensation plans. In November 1997, participants' account balances were dispersed resulting in total distributions of $652,197, $742,455, and $18,915, for each of the respective plans. * * * * * * F-57 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- , 1999 NRT Incorporated Shares of Common Stock --------------------- PROSPECTUS --------------------- Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. Merrill Lynch & Co. Morgan Stanley Dean Witter - -------------------------------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters that are not stated in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted or legal. Neither the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create any implication that the information contained herein or the affairs of the company have not changed since the date hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these securities may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as an underwriter in this offering and when selling previously unsold allotments or subscriptions. - -------------------------------------------------------------------------------- PART II Item 13. Other Expenses of Issuance and Distribution. The following table indicates the estimated expenses to be incurred in connection with the offering, all of which will be paid by the Company. SEC registration fee................................................ $62,550 NASD fee............................................................ 23,000 NYSE listing fee.................................................... * Accounting fees and expenses........................................ * Legal fees and expenses............................................. * Printing and engraving.............................................. * Transfer agent's fees............................................... * Blue sky fees and expenses (including counsel fees)................. * Miscellaneous expenses.............................................. * ------- Total............................................................. $ * =======
- --------------------- * To be completed by amendment. Item 14. Indemnification of Directors and Officers As permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware (the "DGCL"), the Restated Certificate of Incorporation of the Company (filed herewith as Exhibit 3.1) (the "Restated Certificate") provides that no director shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director other than for (i) breaches of the directors' duty of loyalty to the Company and its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) the unlawful payment of dividends or unlawful stock purchases or redemptions under Section 174 of the DGCL and (iv) any transaction from which the director derived an improper personal benefit. Section 145 of the DGCL provides that a corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful, except that if such action shall be in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been adjudged to have been liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which the action was brought shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other court shall deem proper. II-1 The Restated Certificate and the Amended and Restated By-laws of the Company (filed herewith as Exhibit 3.2) (the "Restated By-laws") provide for indemnification of officers and directors of the Company, both past and present, to the fullest extent permitted by the DGCL, and allow the Company to advance or reimburse litigation expenses upon submission by the director or officer of an undertaking to repay such advances or reimbursements if it is ultimately determined that indemnification is not available to such director or officer pursuant to the Restated By-laws. The Restated By-laws also authorize the Company to purchase and maintain insurance on behalf of an officer or director, past or present, against any liability asserted against him in any such capacity whether or not the Company would have the power to indemnify him against such liability under the provisions of its certificate of incorporation or Section 145 of the DGCL. The Company intends to provide liability insurance for each of its directors and officers against certain losses arising from claims made against them while acting in their capacities as directors or officers of the Company, whether or not the Company would have the power to indemnify such person against such losses, as permitted by law. The form of Underwriting Agreement filed herewith as Exhibit 1.1 provide, among other things, for the indemnification by the Underwriters of directors and certain officers of the Company against certain liabilities. Item 15. Recent Sales of Unregistered Securities. In connection with the formation of the Company, on August 29, 1997, certain affiliates of Apollo Management, L.P. purchased 100 shares of Common Stock of the Company (subsequently split at the rate of 100,000 shares for each share outstanding) for $20,000,000 in cash and 55,000 shares of 18.00% Series C Cumulative Junior Redeemable Preferred Stock ("Junior Preferred Stock") of the Company for $40,500,000 in cash. On the same date, Cendant Corporation purchased 132,500 shares of 9.00% Series A Cumulative Senior Redeemable Preferred Stock ("Senior Preferred Stock") of the Company for $132,500,000 in cash and 24,000 shares of 5.00% Series B Cumulative Convertible Redeemable Preferred Stock of the Company for $24,000,000 in cash. On September 11, 1997, Cendant purchased an additional 25,091 shares of Senior Preferred Stock for $25,091,000 in cash, and certain affiliates of Apollo purchased 13,510 shares of Junior Preferred Stock for $13,510,000 in cash. All such transactions were exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") in reliance on Section 4(2) of the Securities Act on the basis that such transactions did not involve a public offering. II-2 Items 16. Exhibits (a) Exhibits:
Exhibit Number Description of Exhibit ------- ---------------------- 1.1* Form of Underwriting Agreement. 3.1 Form of Restated Certificate of Incorporation of the Company. 3.2 Form of Amended and Restated By-laws of the Company. 4.1* Specimen of Common Stock Certificate. 5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, regarding legality of securities being registered. 10.1 Master Membership Agreement, dated as of February 9, 1999, between ERA Franchise Systems, Inc. and the Company. 10.2 Master Century 21 Real Estate Franchise Agreement, dated as of February 9, 1999, between Century 21 Real Estate Corporation and the Company. 10.3 Master Real Estate Franchise Agreement, dated as of February 9, 1999, between Coldwell Banker Real Estate Corporation and the Company. 10.4 Form of Amended and Restated Stockholders Agreement, among the Company, Apollo Management, L.P., Cendant Corporation and the stockholders named therein. 10.5 Acquisition Cooperation Agreement, dated as of February 9, 1999, between Cendant Corporation and the Company. 10.6 Marketing Agreement, dated as of August 11, 1997, between the Company and Cendant Mortgage Corporation. 10.7 Program Outsourcing Agreement, dated as of February 9, 1999, between the Company and Cendant Corporation. 10.8 Support Agreement, dated as of August 11, 1997, between Cendant Corporation and the Company. 10.9 Advisory Services Agreement, dated as of August 11, 1997, among the Company and Apollo Management, L.P. 10.10 Lease, dated as of August 11 , 1997, between the Company and Cendant (relating to Parsippany, New Jersey property). 10.11 Lease, dated as of August 11, 1997, between the Company and Cendant (relating to Mission Viejo, California property). 10.12 Acquisition Services Agreement, dated as of February 9, 1999, between the Company and Cendant Corporation. 10.13 Development Advance Promissory Note, dated as of September 1, 1997, between the Company and Coldwell Banker Real Estate Corporation. 10.14 Credit Agreement, dated as of January 7, 1999, among the Company, The Chase Manhattan Bank, Bankers Trust Company and the lending institutions party thereto. 10.15 NRT Incorporated 1997 Equity Participation Plan, as amended. 10.16 License Agreement, dated as of February 9, 1999, between Cendant and the Company
II-3
Exhibit Number Description of Exhibit ------- ---------------------- 21.1 Subsidiaries of the Company. 23.1* Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1). 23.2 Consent of Deloitte & Touche LLP. 23.3 Consent of Deloitte & Touche LLP. 23.4 Consent of Deloitte & Touche LLP. 23.5 Consent of Deloitte & Touche LLP. 23.6 Consent of Deloitte & Touche LLP. 23.7 Consent of Deloitte & Touche LLP. 23.8 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (included on signature page). 27.1 Financial Data Schedule.
- ------------------- * To be filed by amendment. (b) Financial Statement Schedules: Financial statement schedules are omitted as not required or not applicable or because the information is included in the financial statements of the Company or notes thereto. Item 17. Undertakings. (a) The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company by the Company pursuant to the Underwriting Agreement, the Restated Certificate, the Restated By-laws, the DGCL or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the adjudication of such issue. (c) The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registration has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Parsippany, State of New Jersey, on February 10, 1999. NRT Incorporated /s/ Robert M. Becker By: _________________________________ Name: Robert M. Becker Title: President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Robert M. Becker, Gregory W. Hunt and Steven L. Barnett, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any additional Registration Statements related to the offering contemplated by this Registration Statement that are filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully 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 substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Robert M. Becker President, Chief February 10, - ------------------------------------- Executive Officer 1999 Robert M. Becker and Director (Principal Executive Officer) /s/ Chandler B. Barton Chairman of the February 10, - ------------------------------------- Board and Director 1999 Chandler B. Barton /s/ Gregory W. Hunt Senior Vice February 10, - ------------------------------------- President, Chief 1999 Gregory W. Hunt Financial Officer and Treasurer (Principal Financial and Accounting Officer) II-5 Signature Title Date /s/ Terence W. Edwards Director February 10, - ------------------------------------- 1999 Terence W. Edwards /s/ Joshua J. Harris Director February 10, - ------------------------------------- 1999 Joshua J. Harris /s/ David M. Johnson Director January 21, - ------------------------------------- 1999 David M. Johnson /s/ Samuel L. Katz Director February 10, - ------------------------------------- 1999 Samuel L. Katz /s/ Marc J. Rowan Director February 10, - ------------------------------------- 1999 Marc J. Rowan /s/ Richard A. Smith Director February 10, - ------------------------------------- 1999 Richard A. Smith /s/ Michael L. Tarnopol Director January 20, - ------------------------------------- 1999 Michael L. Tarnopol /s/ Michael D. Weiner Director February 10, - ------------------------------------- 1999 Michael D. Weiner II-6 EX-3.1 2 FORM OF RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 FORM OF RESTATED CERTIFICATE OF INCORPORATION OF NRT INCORPORATED ----------------------------------------- Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware ----------------------------------------- NRT Incorporated (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "GCL"), does hereby certify as follows: FIRST: The name of the Corporation is NRT Incorporated. The name under which the Corporation was originally incorporated was NRT Incorporated and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on August 11, 1997. SECOND: This Restated Certificate of Incorporation was duly adopted by the Board of Directors and by the stockholders of the Corporation in accordance with the provisions of Sections 228, 242 and 245 of the GCL. THIRD: This Restated Certificate of Incorporation amends and restates the Certificate of Incorporation of the Corporation, as heretofore amended. FOURTH: Each share of Common Stock outstanding immediately prior to the time that this Restated Certificate of Incorporation is filed with the Secretary of State of the State of Delaware (the "Effective Time") shall be subdivided on the basis of [ ] shares for each outstanding share and, accordingly, each share of Common Stock, par value $0.01 per share, outstanding immediately prior to the Effective Time shall, without further action by the Corporation or any stockholder, immediately following the Effective Time become and be deemed to represent [ ] shares of Common Stock, par value $0.01 per share. FIFTH: The text of the Restated Certificate of Incorporation is amended and restated in its entirety as follows: ARTICLE I: The name of the Corporation is NRT Incorporated (here --------- inafter, the "Corporation"). ARTICLE II: The address of the registered office of the ---------- Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. ARTICLE III: The purpose of the Corporation is to engage in any ----------- lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the "GCL"). ARTICLE IV: (a) The total number of shares of stock which the ---------- Corporation shall have authority to issue is [ ] shares of Common Stock, each having a par value of $0.01, and [ ] shares of Preferred Stock, each having a par value of $0.01. (b) The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the Preferred Stock in one or more classes or series, and to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such class or series and as may be permitted by the GCL, including, with out limitation, the authority to provide that any such class or series may be (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; or (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock, of the Corporation at such price or prices or at such rates of exchange and with such adjustments; all as may be stated in such resolution or resolutions. ARTICLE V: (a) The business and affairs of the Corporation shall --------- be managed by or under the direction of the Board of Directors. (b) The number of directors of the Corporation shall be no fewer than three, nor more than fifteen, with the specific number of directors as from time to time fixed by, or in the manner provided in, the By-Laws of the Corporation. Election of directors need not be by written ballot unless the By- Laws so provide. (c) The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of 2 the total number of directors constituting the entire Board of Directors. The initial division of the Board of Directors into classes shall be made by the decision of the affirmative vote of a majority of the entire Board of Directors. The term of the initial Class I directors shall terminate on the date of the 1999 annual meeting of stockholders; the term of the initial Class II directors shall terminate on the date of the 2000 annual meeting of stockholders; and the term of the initial Class III directors shall terminate on the date of the 2001 annual meeting of stockholders. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. (d) Subject to the terms of any one or more classes or series of Preferred Stock, any vacancy on the Board of Directors caused by death, resignation, retirement, disqualification or removal or any other cause (including an increase in the number of directors) may be filled by resolution adopted by a majority of the Board of Directors then in office whether or not such majority constitutes less than quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. No decrease in the size of the Board of Directors shall have the effect of shortening the term of any incumbent director. (e) Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the Corporation's then outstanding capital stock entitled to vote generally in the election of directors. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V unless expressly provided by such terms. 3 ARTICLE VI: In addition to the powers and authority hereinbefore or ---------- by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Restated Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the -------- ------- stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted. The directors shall have concurrent power with the stockholders to make, alter, amend, change, add to or repeal the By-Laws of the Corporation except as otherwise provided therein. ARTICLE VII: No director shall be personally liable to the ----------- Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the GCL as the same exists or may hereafter be amended. If the GCL is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the GCL, as so amended. Any repeal or modification of this Article VII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. ARTICLE VIII: Meetings of stockholders may be held within or ------------ without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation. 4 ARTICLE IX: Any action required or permitted to be taken by the ---------- stock holders of the Corporation may be effected only upon the vote of the stockholders at an annual or special meeting of stockholders of the Corporation, duly noticed and called in accordance with the By-Laws of the Corporation and may not be taken by a written consent of stockholders in lieu of a meeting. ARTICLE X: In furtherance and not in limitation of the powers --------- conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt, amend, alter or repeal the Corporation's By-Laws. The affirmative vote of at least a majority of the directors then in office shall be required to adopt, amend, alter or repeal the Corporation's By-Laws. The Corporation's By-Laws also may be adopted, amended, altered or repealed by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the shares entitled to vote at an election of directors. ARTICLE XI: The Corporation reserves the right to amend, alter, ---------- change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that notwithstanding any other provision of this Restated Certificate of Incorporation (and in addition to any other vote required by law), the affirmative vote of at least eighty percent (80%) of the voting power of the shares entitled to vote at an election of directors shall be required to amend, alter, change or repeal, or to adopt any provision as part of this Restated Certificate of Incorporation inconsistent with the purpose and intent of Articles V, VI, VII, VIII, IX, or X of this Restated Certificate of Incorporation or this Article XI. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be executed on its behalf this ___ day of __________, 1998. NRT INCORPORATED By: --------------------------- Name: Title: 5 EX-3.2 3 FORM OF AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 FORM OF AMENDED AND RESTATED BY-LAWS OF NRT INCORPORATED (hereinafter called the "Corporation") ARTICLE I OFFICES ------- Section 1. Registered Office. The registered office of the --------- ----------------- Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at --------- ------------- such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Place of Meetings. Meetings of the stockholders for the --------- ----------------- election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. Annual meetings of stockholders shall be --------- --------------- held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect a Board of Directors, and transact such other business as may properly be brought before the meeting. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 3. Special Meetings. Unless otherwise prescribed by law or --------- ---------------- by the certificate of incorporation of the Corporation (including any certificate of designation for any series of preferred stock, the "Certificate of Incorporation"), special meetings of stock holders, for any purpose or purposes, may be called by either (i) the Chairman, if there be one, (ii) the President, (iii) any three directors, and shall be called by any such officer at the request in writing of a majority of the Board of Directors. At a special meeting of stock holders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement thereto). Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten nor more than sixty days before the date of the meeting to each stock holder entitled to vote at such meeting. Section 4. Quorum. Except as otherwise provided by law or by the --------- ------ Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. A 2 quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. Section 5. Ajournment. If a quorum shall not be present or --------- ---------- represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. The chairman of any meeting of stockholders shall also have the power to adjourn such meeting if (i) a quorum is not present or represented or (ii) the Board of Directors determines that adjournment is necessary or appropriate to enable stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or to otherwise enable stockholders to exercise effectively their voting rights. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. Section 6. Voting. Unless otherwise required by law or provided by --------- ------ the Certificate of Incorporation or these By-Laws, any question brought before any meeting of stockholders, other than the election of directors, shall be decided by the vote of the holders of a majority of the total number of votes of the capital stock represented and entitled to vote thereat. Each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. 3 Such votes may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in such officer's discretion, may require that any votes cast at such meeting shall be cast by written ballot. Section 7. Nature of Business at Annual Meetings of Stockholders. No --------- ----------------------------------------------------- business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Company (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 7 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 7. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Company. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Company not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is -------- ------- 4 called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by such stock holder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 7, provided, however, that, once business -------- ------- has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 7 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman shall declare to the 5 meeting that the business was not properly brought before the meeting and such business shall not be transacted. Section 8. List of Stockholders Entitled to Vote. The officer of the --------- ------------------------------------- Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 9. Stock Ledger. The stock ledger of the Corporation shall --------- ------------ be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 8 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 10. Conduct of Meetings. The Board of Directors of the ---------- ------------------- Corporation may adopt by resolution such rules and regulations for the conduct of the meeting of the stockholders as it shall deem appropriate. At each meeting of the stockholders of the Corporation, the Chairman of the Board of Directors or the President of the Corporation, or, 6 in their absence, a director chosen by a majority of the directors present, shall act as chairman. The Secretary of the Corporation shall act as secretary at each meeting of stockholders of the Corporation. In case the Secretary shall be absent from any meeting of Stockholders, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all the Assistant Secretaries, the Chairman of the meeting may appoint any person to act as secretary of the meeting. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establish ment of an agenda or order of business for the meeting; (ii) the determination of when the polls shall open and close for any given matter to be voted on at the meeting; (iii) rules and procedures for maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (v) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (vi) limitations on the time allotted to questions or comments by participants. 7 ARTICLE III DIRECTORS --------- Section 1. Number and Election of Directors. The Board of Directors --------- -------------------------------- shall consist of not less than one nor more than fifteen members, the exact number of which shall be fixed from time to time by the Board of Directors. Except as provided in Section 2 of this Article III, directors shall be elected by a plurality of the votes cast at the Annual Meeting of Stockholders, and each director so elected shall hold office until such director's successor is duly elected and qualified, or until such director's earlier death, resignation or removal. Any director may resign at any time upon notice to the Corporation. Directors need not be stockholders. Section 2. Nomination of Directors. Only persons who are nominated --------- ----------------------- in accordance with the following procedures shall be eligible for election as directors of the Company, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Company (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2 and on the record date for the determi- 8 nation of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 2. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Company. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Company (a) in the case of an annual meeting, not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual -------- ------- meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of 9 shares of capital stock of the Company which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Ex change Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth in this Section 2. If the Chairman of the meeting determines that a nomination was not made in accordance with 10 the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 3. Vacancies. Except as otherwise provided in the --------- --------- Stockholders Agreement, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal. Section 4. Duties and Powers. The business and affairs of the --------- ----------------- Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 5. Meetings. The Board of Directors may hold meetings, both --------- -------- regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may only be called by any director. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. 11 Section 6. Inclusion of Business. Any director may require that --------- --------------------- any one or more proposals of such director shall be discussed at any meeting of the Board of Directors by delivering notice as provided in Article VI hereof to each director and the Corporation either within one day after such director receives notice of such meeting or in the notice by such director calling a special meeting of the Board of Directors. Section 7. Quorum. Except as may be otherwise specifically --------- ------ provided by law, the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 8. Actions of Board. Unless otherwise provided by the --------- ---------------- Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 9. Meetings by Means of Conference Telephone. Unless --------- ----------------------------------------- otherwise provided by the Certificate of Incorporation or these By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may 12 participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. Section 10. Committees. The Board of Directors may, by resolution ---------- ---------- passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 11. Compensation. The directors shall be paid their ---------- ------------ reasonable out-of-pocket expenses, if any, of attendance at each meeting of the Board of Directors and each 13 meeting of any committee thereof and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director, payable in cash or securities. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 12. Interested Directors. No contract or transaction ---------- -------------------- between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because the director or aa vote is counted for such purpose if (i) the material facts as to the director or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to the director or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or trans action is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested 14 directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS -------- Section 1. General. The officers of the Corporation shall be chosen --------- ------- by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors (who must be a director), a Chief Executive Officer and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. Section 2. Election. The Board of Directors at its first meeting --------- -------- held after each Annual Meeting of Stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier death, resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any 15 vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 3. Voting Securities Owned by the Corporation. Powers of --------- ------------------------------------------ attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 4. Chairman of the Board of Directors. The Chairman of the --------- ---------------------------------- Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation, unless the Board of Directors designates the President as the Chief Executive Officer, and except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman 16 of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 5. President. The President shall, subject to the control --------- --------- of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and exe cute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. If there be no Chairman of the Board of Directors, or if the Board of Directors shall otherwise designate the President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 6. Vice Presidents. At the request of the President or in --------- --------------- the President's absence or in the event of the President's inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties 17 of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 7. Secretary. The Secretary shall attend all meetings of the --------- --------- Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general 18 authority to any other officer to affix the seal of the Corporation and to attest the affixing by such officer's signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 8. Treasurer. The Treasurer shall have the custody of the --------- --------- corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of the Treasurer and for the restoration to the Corporation, in case of the Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurer's possession or under the Treasurer's control belonging to the Corporation. Section 9. Assistant Secretaries. Assistant Secretaries, if there be --------- --------------------- any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, 19 and in the absence of the Secretary or in the event of the Secretary's disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 10. Assistant Treasurers. Assistant Treasurers, if there be ---------- -------------------- any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurer's disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Assistant Treasurer's possession or under the Assistant Treasurer's control belonging to the Corporation. Section 11. Other Officers. Such other officers as the Board of ---------- -------------- Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. 20 ARTICLE V STOCK ----- Section 1. Form of Certificates. Every holder of stock in the --------- -------------------- Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Section 2. Signatures. Any or all of the signatures on a certificate --------- ---------- may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a --------- ----------------- new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or the owner's legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with 21 respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new Certificate. Section 4. Transfers. Stock of the Corporation shall be transferable --------- --------- in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by such person's attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. Section 5. Record Date. ----------- (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; providing, however, that the Board of Directors may fix a new record date for the adjourned meeting. 22 (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolutions taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may 23 fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. Record Owners. The Corporation shall be entitled to --------- ------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, 24 whether or not it shall have express or other notice thereof, except as otherwise required by law. ARTICLE VI NOTICES ------- Section 1. Notices. Whenever written notice is required by law, the --------- ------- Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person's address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex or cable. Section 2. Waivers of Notice. Whenever any notice is required by --------- ----------------- law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. 25 ARTICLE VII GENERAL PROVISIONS ------------------ Section 1. Dividends. Dividends upon the capital stock of the --------- --------- Corporation, subject to the requirements of the DGCL and provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section 6 of Article III hereof), and may be paid in cash, in property, or in shares of the Corporation's capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 2. Disbursements. All checks or demands for money and notes --------- ------------- of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the Corporation shall be --------- ----------- fixed by resolution of the Board of Directors. Section 4. Corporate Seal. The corporate seal shall have inscribed --------- -------------- thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, 26 Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII INDEMNIFICATION --------------- Section 1. Power to Indemnify in Actions, Suits or Proceedings other --------- --------------------------------------------------------- Than Those by or in the Right of the Corporation. Subject to Section 3 of this - ------------------------------------------------ Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, ---- ---------- shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed 27 to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. Section 2. Power to Indemnify in Actions, Suits or Proceedings by or --------- --------------------------------------------------------- in the Right of the Corporation. Subject to Section 3 of this Article VIII, the - ------------------------------- Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. 28 Section 3. Authorization of Indemnification. Any indemnification --------- -------------------------------- under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case. Section 4. Good Faith Defined. For purposes of any determination --------- ------------------ under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person's conduct was unlawful, if such person's action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or 29 on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be. Section 5. Indemnification by a Court. Notwithstanding any contrary --------- -------------------------- determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent other wise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, 30 in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. Section 6. Expenses Payable in Advance. Expenses incurred by a --------- --------------------------- director or officer in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VIII. Section 7. Nonexclusivity of Indemnification and Advancement of --------- ---------------------------------------------------- Expenses. The indemnification and advancement of expenses provided by or - -------- granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any By-Law, agreement, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnifica tion of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. 31 Section 8. Insurance. The Corporation may purchase and maintain --------- --------- insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VIII. Section 9. Certain Definitions. For purposes of this Article VIII, --------- ------------------- references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corpora tion" shall include any service as a director, officer, employee or agent of the Corporation 32 which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VIII. Section 10. Survival of Indemnification and Advancement of Expenses. ---------- ------------------------------------------------------- The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 11. Limitation on Indemnification. Notwithstanding anything ---------- ----------------------------- contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 hereof), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation. Section 12. Indemnification of Employees and Agents. The Corporation ---------- --------------------------------------- may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation. 33 ARTICLE IX AMENDMENTS ---------- Section 1. Amendments. These By-Laws may be altered, amended or --------- ---------- repealed, in whole or in part, or new By-Laws may be adopted by a majority of the entire Board of Directors or by the stockholders as provided in the Certificate of Incorporation. Section 2. Entire Board of Directors. As used in this Article IX and --------- ------------------------- in these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. 34 EX-10.1 4 MASTER MEMBERSHIP AGREEMENT EXHIBIT 10.1 ERA FRANCHISE SYSTEMS, INC. MASTER MEMBERSHIP AGREEMENT This Membership Agreement (this "Agreement") is made by and between ERA --------- FRANCHISE SYSTEMS, INC., a Delaware corporation ("ERA"), and NRT INCORPORATED, a --- Delaware corporation ("you" or "Member"), as of February 9, 1999. You propose to operate an ERA franchised real estate brokerage business only at the offices and locations set forth on the list provided to Franchisor on the date hereof (the "Office List") (individually an "Office" and collectively the "Offices") ----------- ------ ------- and only under the ERA tradenames set forth on the Office List. RECITALS. ERA has the right to license to others various trademarks, service marks, designs, colors, trade dress and non-functional and distinctive color patterns described in the ERA System For Results Manuals (collectively, the "ERA ------------------------------ --- Identification") for use in promotion of the services, products, programs, - -------------- marketing and business methods (the "ERA Integrated Marketing System") offered ------------------------------- under the ERA Identification. Substantial time, money and effort has been spent in developing the ERA Identification and ERA Integrated Marketing System and establishing its reputation and goodwill with consumers and the real estate industry. You desire to become a Member licensed to use the ERA Identification and the ERA Integrated Marketing System in your commercial and residential real estate brokerage business (the "Business"), to be conducted at the Offices. -------- ERA is willing to grant you a license to use the ERA Identification and ERA Integrated Marketing System to conduct your Business at the Offices, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants of each party to the other, and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties, it is mutually agreed between the parties as follows: 1. MEMBERSHIP A. The parties hereby agree that this Agreement amends, restates and supersedes all prior franchise agreements (the "Old Agreements") between the -------------- parties under which any real estate brokerage offices owned by Member were operating. ERA hereby agrees to waive all claims against Member that may exist under the Old Agreements, except claims for monies due, indemnification claims by ERA and ERA's exercise of audit rights thereunder. In addition, the parties agree that (i) effective on the first day of the month following the month in which a Triggering Event (as defined below) occurs, the Incremental Royalty Agreement (the "Incremental Royalty Agreement"), dated as of August 11, 1997, ----------------------------- among ERA, Member, Century 21 Real Estate Corporation, Coldwell Banker Real Estate Corporation and HFS Incorporated, (ii) effective on the date hereof, the Additional Royalty Agreement dated as of August 11, 1997, among ERA, Member, Century 21 Real Estate Corporation, Coldwell Banker Real Estate Corporation and HFS Incorporated, and (iii) upon the redemption in full of Member's Series C Cumulative Junior Redeemable Preferred Stock, the Franchise Override Agreement, dated as of August 11, 1997, among ERA, Member, Century 21 Real Estate Corporation, Coldwell Banker Real Estate Corporation and HFS Incorporated, are hereby terminated and of no further force or effect (in the case of (i) and (ii), as a result of the royalties previously payable thereunder becoming payable under the Master Real Estate Franchise Agreement, dated as of the date hereof, between Member and Coldwell Banker Real Estate Corporation). "Triggering ---------- Event" shall mean the earliest of (i) such time as at least 20% of Member's - ----- issued and outstanding common shares have been distributed through a primary public offering registered under the Securities Act of 1933, as amended, (ii) the sale by Member, in one or a series of related transactions of assets representing 80% or more in value of Member's consolidated assets on a fair market value basis 1 and (iii) the dividend or distribution to stockholders of cash or assets representing 80% or more in value of Member's consolidated assets, net of liabilities on a fair market value basis. B. License; ERA Integrated Marketing System. As of the Effective Date (defined below), ERA grants you a non-exclusive license (i) to use the ERA Identification for the Business at and from the Offices set forth on the Office List and only under the applicable ERA tradenames set forth on the Office List and to hold the Business out to be a participant in the ERA Integrated Marketing System, and (ii) to use the ERA Integrated Marketing System for the operation of the Business at and from the Offices. You accept the nonexclusive license granted by ERA, subject to the terms and conditions of this Agreement and the "ERA System for Results" Manuals (the "Manuals") as amended from time to time. The ------- ERA Integrated Marketing System consists of the full range of products, services, programs and marketing provided by or through ERA and made available to ERA franchisees ("Members"). The ERA Integrated Marketing System currently ------- includes: 1) A system of referring properties (the "ERA National Relocation ----------------------- System"); 2) A national Home Protection Plan program; 3) A non-exclusive license - ------ to use ERA Affiliate Internet Manager as defined in Section 8; 4) the Sellers Security(R) Plan program; and 5) local, regional and national identification programs. C. Program Expansion and Modification. ERA intends, as conditions permit, to modify existing programs and to introduce new programs. ERA intends to make new programs available generally to those Members who operate under Membership Agreements which are the same or substantially similar to the form of Membership Agreement being marketed to ERA Members at the time ERA implements such programs nationally. ERA reserves the right to modify, add to, qualify, or eliminate such programs as it deems are in the best interests of the system. D. Participation in Programs. ERA may condition participation in ERA programs upon your compliance with certain requirements, including payment of all your financial obligations to ERA when due under the Membership Agreement or otherwise, maintenance of specified program standards, successful completion of any educational programs required by ERA and payment of a separate fee to participate in all or some of such programs. Only Members who meet all program requirements are authorized to utilize trademarks or service marks or other identifications that are unique to such program. E. ERA Identification. ERA reserves the right to approve any and all public uses of the ERA Identification, other than those used on ERA-prepared materials. All use of the ERA Identification will inure to the benefit of ERA. You acknowledge that ERA or an affiliate is the sole owner of the ERA Identification, and will not challenge the validity of the ownership of the ERA Identification or ERA's right to license the same to you. At its sole option, ERA or an affiliate will obtain and maintain its registrations for the ERA Identification and exercise its rights against infringement or unauthorized use of ERA Identification. You will use or display the ERA Identification solely in connection with the operation of the Business provided for under this Agreement and in connection with no other business, activity or enterprise. F. Confidentiality. You will maintain, and make every effort to ensure that your employees and sales associates maintain, the confidentiality of all manuals, programs, training materials and other items used by ERA or you as part of the ERA Integrated Marketing System. You will use such manuals, programs and materials solely in connection with the operation of the Business and your ERA Membership and will not direct or permit their copying or reproduction without the express prior written consent of ERA. G. Effective Date. This Agreement is effective on the date hereof (the "Effective Date"). On the Effective Date, you will commence operation of the - --------------- Business at the Offices listed on the Office List 2 using the ERA Integrated Marketing System pursuant to this Agreement. All closings that occur on and after the Effective Date will be subject to Fee payments as provided in Sections 6 and 7, below. 2. INITIAL FEES A. Initial Membership Fee. There shall be no initial membership fee payable by Member in connection with the Offices in operation on the date hereof. For each Additional Office (other than Transition Offices, Offices which were already affiliated with Franchisor and Offices relocated pursuant to Section 5E(ii)), whether through acquisition, merger, or otherwise, Member shall pay ERA an initial franchise fee in connection with any Additional Offices, equal to $4,000 per office. In addition, with respect to each Brokerage Acquisition (as defined in the Acquisition Cooperation Agreement) in which Franchisor's franchise sales staff is involved, Member shall pay to Franchisor an additional fee equal to $3,500 per office acquired, whether such offices are operated by Member or are immediately closed. The maximum additional fee payable by Member pursuant to this Section 2A with respect to a single transaction shall be $100,000. Throughout this Agreement, the terms "dollars" and "$" shall mean ------- - United States dollars. B. No Refund. The Additional Office membership fee is payable and fully earned by ERA upon your written request for the inclusion of such Additional Office(s) on the Office List and is not refundable. 3. INITIAL ERA OBLIGATIONS Initial ERA Obligations. Within a reasonable time after the Effective Date, ERA will: (1) Orientation. For each Additional Office, at ERA's election, hold a new member orientation seminar in Parsippany, New Jersey or such other place as designated by ERA. At least one designated representative of Member will, at Member's expense, attend the first orientation seminar offered after each Additional Offices is added to the Office List at which space is available and pay all expenses to attend. (2) Manuals. Loan to you one (1) copy of the Manuals for each office identified on the Office List. You will abide by the policies and procedures described in such Manuals, as amended updated and replaced from time to time. Upon renewal, you will not receive additional copies of the Manuals, but will continue to receive amendments, updates and replacements. 4. CONTINUING ERA OBLIGATIONS A. Relocation and Referrals. ERA will promptly transmit your relocation and referral listings to other appropriate Members or other brokers designated by ERA. B. Referral Commissions. ERA will promptly pay all referral commissions due you after their receipt by ERA. C. Promotional Materials. ERA will produce and maintain an inventory of advertising and marketing materials, sales promotion items and training aids for purchase or for license to use. D. Staff. ERA will maintain a staff to consult with you on advertising, marketing and technical matters by telephone, in writing or in person as ERA deems appropriate and necessary. 3 E. Real Estate License. ERA will maintain on its staff, or appoint as its representative, an individual with a valid real estate brokers license. F. Reserved. 5. OFFICE LOCATIONS A. Member shall operate the Business exclusively from the locations set forth on the Office List (herein referred to individually as an "Office" and ------ collectively as the "Offices"). Member may not operate the Business from any ------ other location or any additional locations without the prior written approval of ERA or Cendant Corporation ("Cendant") (it being understood that approval of ------- funding, pursuant to the Acquisition Cooperation Agreement or otherwise, of an acquisition pursuant to which Member will acquire additional brokerage offices shall not by itself be deemed as approval for the offices acquired in such transaction to become Offices hereunder); provided that ERA agrees to grant its consent to any additional offices (each, an "Additional Office") unless any such ----------------- Additional Office (i) would have a negative impact on any other Member, as determined by ERA consistently with impact review practices and policies generally applicable to Members, (ii) would result in ERA being in breach of any agreement with another Member or (iii) is an office proposed to be acquired by Member which was affiliated with a Cendant real estate brand prior to the proposed acquisition of such office by Member. "Acquisition Cooperation ----------------------- Agreement" shall mean the Acquisition Cooperation Agreement, dated as of - --------- February 9, 1999 between Member and Cendant. B. Member shall operate a real estate brokerage business and neither Member nor any of its subsidiaries shall operate, manage, own, have a greater than 10% interest in, or otherwise engage in, any other business (except for the marketing of products and services permitted pursuant to the Program Outsourcing Agreement) or, except for real estate brokerage businesses pursuant to a franchise or membership agreement with Cendant or a subsidiary thereof, operate, manage, own, have a greater than 10% interest in, or otherwise engage in, any other real estate brokerage business, either under Member's ERA trade name or under any other name, without the prior written consent of ERA, which consent may be withheld in ERA's sole discretion. Notwithstanding the foregoing, if permitted pursuant to the terms of the Program Outsourcing Agreement, dated as of February 9, 1999, between Member and Cendant (the "Outsourcing Agreement"), --------------------- Member shall be permitted to conduct title insurance and escrow service and closing service operations without the prior consent of ERA, provided that such operations do not use the ERA Identification and Member apprises the public, in each case, that such real estate related business is not associated with or endorsed by ERA. For purposes of this Agreement, a franchise or membership agreement with Cendant or a subsidiary thereof shall mean any franchise or membership agreement which, at the time of execution, was with Cendant or a subsidiary thereof. C. Upon Member's establishment of any Additional Office or Member's expansion (through assignment or otherwise) of its Offices and approval of such Office or Offices by ERA as provided herein, the location for each such Additional Office location shall be added to the Office List by mutual agreement of ERA and Member and such Additional Office shall be deemed for all purposes to be an "Office" hereunder. Member shall provide ERA on the date hereof with a current list of all of its Offices and the Broker of Record for each such office. Member shall provide ERA with written notice upon any change in any of its Offices or Broker of Record for any such Office. D. Non-Exclusive. This Agreement does not grant you any express or implied territorial rights, benefits or protections with regard to any marketing or geographic area. ERA does not guarantee any minimum distance between your Offices and any other Member's office. Subject to the other provisions of this Agreement, ERA reserves the unrestricted right in its sole discretion to approve or 4 disapprove the location and relocation of your Office and any other Member offices anywhere. Subject to the other provisions of this Agreement, ERA reserves the unrestricted right, in its sole discretion, to offer products, services and programs under the ERA name directly and indirectly through its employees, representatives, agents and others at any location whatsoever, except at your approved Office location(s). There is no restriction on the right of any ERA affiliate to offer any product, service, franchise, membership, program or benefit under any other name or mark at any location whatsoever. E. If Member wishes to sell, close down or otherwise terminate one or more of its ERA Offices, Member shall be required to obtain the prior written consent of ERA, which consent may be withheld in ERA's sole discretion; provided however, -------- ------- that Member shall be permitted to close, without the consent of ERA, (i) a number of Offices acquired by Member not exceeding the number of Offices which were identified in writing to Cendant prior to such acquisition (provided that in an acquisition in which Cendant is providing financing pursuant to the Acquisition Cooperation Agreement, such number of Offices must be identified in writing to Cendant prior to the date on which Cendant agrees to provide such funding) as the number of Offices to be closed, so long as such Offices are closed within one year of such acquisition and are not identified as being, or being affiliated with, ERA Offices (unless such offices at the time of acquisition by Member are ERA offices) ("Transition Offices"), (ii) Offices ------------------ which are moved within a proximate geographical area (it being understood that such a move requires the consent of ERA pursuant to Section 5A of this Agreement), so long as in connection with such move, a material portion of the personnel at such office is not reassigned to other Offices, (iii) any of the offices acquired by Member from National Realty Trust, provided that the sum of the Gross Revenues of all of such offices closed (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant), in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such office occurred, is less than $150,000,000 and (iv) other Offices, so long as the Gross Revenues for each such Office, together with the Gross Revenues for each other Office (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) closed pursuant to this clause (iv) in the same calendar year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such Office occurred, is less than the sum of (A) 3% of Member's Gross Revenues (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the immediately prior calendar year and (B) for office closures occurring in calendar years beginning in 1999, an amount equal to (i) 3% of Member's Gross Revenues (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the calendar year immediately preceding the immediately prior calendar year minus (ii) the Gross Revenues of all Offices closed pursuant to this clause (iv) in the immediately preceding prior year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such office occurred and (C) for office closures occurring in calendar years beginning in 2000, an amount equal to (i) 3% of Member's Gross Revenues (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the calendar year two years immediately prior to the immediately prior calendar year minus (ii) the Gross Revenues of all Offices closed pursuant to this clause (iv) in the year immediately prior to the immediately preceding prior year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such Office occurred, provided that all fees payable to ERA and the NAF are made through the closure date, Member complies with the procedures set forth in Section 17 with respect to such closed offices, no assignment of the franchise for such office(s) is involved without ERA's consent and such Office closures or sales do 5 not reduce the ERA System marketshare for the applicable market by greater than 10%. Any references to Gross Revenues in this Section 5E shall exclude all Gross Revenues attributable to sales agents transferred to another office of Member that is subject to a franchise or membership agreement with what is (notwithstanding the last sentence of Section 5B) at the time of such transfer a subsidiary of Cendant. Any determination of Member's Gross Revenues for calendar year 1997 shall only include the period from August 29, 1997 through December 31, 1997. 6. FRANCHISE ROYALTIES A. Gross Revenues: The phrase "Gross Revenues" means all monies or things of -------------- value, calculated at their fair market value in United States currency, received or receivable (i.e., earned but not yet received) by Member (including, without limitation, all revenues and commissions received by or on behalf of Member's independent sales associates, regardless of whether or not such independent sales associates are entitled to retain all or part of such revenues or commissions), directly or indirectly, in connection with the Business at all Offices including, but not limited to, the closing of transactions and provision of services for which a real estate or auctioneer's license (including appraisal, but excluding title or escrow services not using any ERA Identification) is required, the sale or provision of products or services that we or any of our affiliates develop or make available to you directly or through a third party and/or any transaction, sale and/or service in which the ERA Identification or ERA Integrated Marketing System is used in any manner, without deducting any of Member's multiple listing fees, advertising costs, commissions, overrides, bonuses, salaries, gifts, or any other costs or expenses, except referral fee expenses paid and payments to outside brokers. However, (1) Monies or things of value received or receivable by Member solely from property management, title, escrow, mortgage or mortgage marketing services (including fees under the Marketing Agreement (defined below)), referral network dues, desk rental fees, broker price opinions and home warranty fees shall not be included in Gross Revenues. Property management services shall not include any property management commissions paid to Member's brokers, for which royalties will be charged. (2) Monies or things of value received or receivable by Member from transactions involving the renting or leasing of property for a non - renewable term of one (1) year or less and which do not include an option to purchase the property shall not be included in Gross Revenues. (3) Monies or things of value received as interest or investment income, including interest or investment income in connection with title and escrow deposits and/or arbitrage loans shall not be included in Gross Revenues. B. Royalties: Member shall pay to ERA a continuing royalty fee ("Royalty Fee") in an amount equal to six percent (6%) (the "Regular Royalty") - ------------- --------------- of all Gross Revenues. Royalty Fees are due and payable in United States currency on or before the tenth day of the month following the settlement or close of escrow of each transaction which occurs, or sales contract which is made, on or after the Effective Date and which generates Gross Revenues. Upon expiration or termination of this Agreement, Royalty Fees shall remain payable as to all transactions entered into, or sales contracts made, prior to the date of such expiration or termination. Pursuant to the terms and conditions of the Incremental Royalty Agreement, in addition to the Royalty Fees payable hereunder, ERA shall be entitled to receive from Member from time to time additional royalties based upon the consolidated performance of all of Member's real estate brokerage businesses, until the termination 6 of the Incremental Royalty Agreement. Notwithstanding the Regular Royalty set forth in the first sentence of this section, upon the opening of a new office by Member as a result of an acquisition of an existing real estate brokerage company which was not affiliated with any Cendant franchise brand immediately prior to such acquisition, which acquisition did not involve Cendant's or one of its subsidiaries' acquisition of trademarks and was not consummated using funds from Cendant or one of its subsidiaries (I) while the commitment to provide funds under the Acquisition Cooperation Agreement (the "Commitment") has not ---------- been exhausted, and Member has requested in writing for Cendant to use its funds (which request is made in good faith and on equivalent economic terms to those in the Acquisition Cooperation Agreement) and Cendant has declined to do so, and provided that Member is in compliance with the Acquisition Cooperation Agreement, the royalty fee applicable to gross revenues attributable to those sales agents affiliated with such office immediately prior to such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Member's offices, whether such office is operating under this Agreement or any other agreement between Member and a subsidiary of Cendant) shall be equal to: (i) 4% if the offices acquired in such acquisition had LTM Gross Revenues of up to $5,000,000, (ii) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenues between $5,000,000 and $10,000,000, and (iii) 2% if the offices acquired in such acquisition had aggregate LTM Gross Revenues in excess of $10,000,000; provided that if ERA's -------- impact review policy would have, in ERA's sole determination, prevented Member from opening such office due to the proximity of such office to Member's existing ERA office (the "Impacted Office") if not for the fact that Member also --------------- owns the Impacted Office, the royalty fee applicable to gross revenues attributable to sales agents working in such office at the time of such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Member's offices, whether such office is operating under this Agreement or any other agreement between Member and a subsidiary of Cendant) shall be equal to: (i) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenues of up to $5,000,000 and (ii) 2% if the offices acquired in such acquisition had aggregate LTM Gross Revenues in excess of $5,000,000 and (II) after the Commitment has been exhausted, and Member has requested in writing for Cendant to use its funds (which request is made in good faith and on equivalent terms, economic and other, to those in Acquisition Cooperation Agreement) and Cendant has declined to do so, the royalty fee applicable to gross revenues attributable to those sales agents affiliated with such office immediately prior to such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Member's offices, whether such office is operating under this Agreement or any other agreement between Member and a subsidiary of Cendant) shall be equal to: (i) 4% if the offices acquired in such acquisition had aggregate LTM Gross Revenues of up to $5,000,000 and (ii) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenues in excess of $5,000,000; provided that if ERA's impact review policy would have, in -------- ERA's sole determination, prevented Member from opening such office due to the proximity of such office to an Impacted Office if not for the fact that Member also owns the Impacted Office, the royalty fee applicable to gross revenues attributable to sales agents working in such office at the time of such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Member's offices, whether such office is operating under this Agreement or any other agreement between Member and a subsidiary of Cendant) shall be equal to 3%. Notwithstanding the foregoing, if Member transfers the operations of one Office ("Office A") to -------- another Office ("Office B"), or combines the operations of any two Offices -------- ("Office A" and "Office B") the royalty fee applicable to Gross Revenues - ------------ -------- generated at the combined Office or the Office to which the operation were transferred, shall be equal to (X) the LTM Gross Revenues for Office A divided by LTM Gross Revenues for Office A and Office B, multiplied by the royalty fee applicable to Office A, plus (Y) the LTM Gross Revenues for Office B divided by LTM Gross Revenues for Office A and Office B multiplied by the royalty fee applicable to Office 7 B. For purposes of this Agreement, the determination of whether the Commitment has been exhausted shall be made assuming that the fifth anniversary of the date of the Acquisition Cooperation Agreement has passed. Notwithstanding anything in this Agreement to the contrary, royalties are payable under this Section 6 with respect to Transition Offices. C. Late Payment: Royalty Fee payments that are more than ten (10) days late shall bear interest from the due date until paid at a rate of eighteen percent (18%) per annum or the highest rate for commercial contracts allowed by law, whichever is less. D. Deductions made for special fees, employee home purchases and salesperson home purchases shall not be included as Gross Revenue. E. The term Gross Revenues shall not include Gross Revenues for which a royalty fee is paid pursuant to Franchise Agreements between Member and any other Cendant subsidiary, currently CENTURY 21 Real Estate Corporation and Coldwell Banker Real Estate Corporation. 7. NATIONAL MARKETING FUND CONTRIBUTION A. NMF Contribution. You will support the concept of national advertising and marketing and will contribute two percent (2%) of your Gross Revenues to a National Marketing Fund (the "Fund" or "NMF"), subject to the limitations in the ---- --- next sentence. There shall be a minimum monthly NMF Contribution per Office of $192 and a maximum monthly NMF Contribution per Office of $647. The minimum and maximum monthly NMF Contribution levels may be increased under Section 10 of this Agreement. Your NMF Contributions begin to accrue on the Effective Date and are due and payable to ERA at its principal office not later than the tenth (10th) day following the end of each calendar month. Payments not received by that date shall bear interest at the same rate as late Royalty Fee payments as set forth in Section 6.C of this Agreement. B. Use and Management of NMF. The NMF is not held in trust and we do not manage it in a fiduciary capacity. ERA may deposit NMF Contributions with its other monies, but will separately and distinctly identify and account for NMF Contributions on its books and records. ERA, as it determines in its sole discretion, will manage and use the NMF Contributions for the development, implementation, production, placement, payment and costs of NMF advertising and marketing and other related services and programs. The NMF may also be used for other purposes such as training, customer service support, capital improvement incentives for ERA offices, and software development and distribution. As used in this Agreement, "NMF advertising and marketing" means national and regional ----------------------------- advertising, marketing, promotions, public relations and/or other programs, including direct mail, market research, customer surveys and test marketing to promote and further the recognition of the ERA Identification and the ERA Integrated Marketing System and the ERA Members generally. "Regional" includes -------- any Designated Market Area ("DMA") or group of DMA's. For purposes of this --- Agreement, DMA shall have the same definition as that used by Nielsen Media Research of the Dun & Bradstreet Corp, or any other definition that replaces DMA in the advertising trade as ERA reasonably determines. We shall be entitled to reimburse ourselves and our affiliates, and other related parties from the Fund for expenses incurred or advanced to administer and manage the Fund for the conduct of the Fund's activities and for products or services provided to the Fund, including, but not limited to, the reasonable costs of accounting, collection and legal services, as well as other products or services which historically have been provided by unaffiliated third parties, and the costs for employees administering, managing and providing services to the Fund. 8 You understand that the NMF Contributions are used for NMF advertising and marketing as well as other services and programs as set forth in the preceding paragraph, and that ERA is under no obligation to use or allocate NMF Contributions on a proportional basis with the NMF Contributions collected from any Member specific geographic area or to benefit any particular Member or group of Members. ERA is not obligated to use all the NMF Contributions in the year it receives such NMF Contributions. If ERA spends less NMF Contributions in any year than the amount of NMF Contributions paid into the fund in that year, such excess of NMF Contributions will be accumulated for use in future years. Upon your written request, ERA will provide you with a financial report of the Fund showing the total NMF Contributions collected and disbursed for the previous year, certified to be true and correct by an officer of ERA or an independent certified public accountant. ERA is not obligated to cause the Fund to be audited or reviewed by an independent certified public accounting firm. 8. TECHNOLOGY A. Affiliate Internet Manager. We have developed the Affiliate Internet Manager ("AIM") system, consisting of our proprietary software and non- proprietary operating programs, that enables you to transmit required listing information and transaction information and other data. We will license the software to you without charge during the term of this Agreement. However, you must obtain appropriate connectivity and browser software for this application as well as any platform upgrades that may be necessary within one year after we license the software to you. You are responsible for purchasing compatible hardware from a vendor you select. The technology systems are not available for Apple(R), Power PCs(R) or MacIntosh(R) hardware and are not compatible with OS2(R) or Unix(R) operating systems. B. Required Computer Equipment. ERA is in the process of revising standards for computer hardware and software. When ERA has completed and revised those standards, you will use your best efforts to maintain computer hardware and software for each Office which meets or exceeds the minimum specifications below or in the Manuals as amended from time to time. The current standards are listed below. You acknowledge that changes in technology may necessitate upgrading, replacing or adding to such equipment or purchasing or leasing additional equipment during the term of this Agreement. Any failure of your computer equipment, software, communications capabilities, and reporting formats to be compatible with ERA's systems shall not result in your failure to timely satisfy your obligations under this Agreement. Minimum Requirements: Intel Pentium CPU in an IBM-compatible personal -------------------- computer; 166 MHz speed; 2 gigabyte hard disk drive; 32 MB Random Access Memory; 10-speed CD ROM; Hayes-compatible 33.6 BPS modem; 15 inch SVGA monitor (800 x 600 pixels, 256 color); Lexmark 7000 Inkjet printer or equal; 16 MB tape or second disk drive (mirrored) for back-up; MS DOS 6.22, Windows 95; Internet access using Internet Explorer 4.0. C. You are required to transmit and access certain information, including Transaction Track reports, through AIM or through such other means as ERA may require. D. Systems Support. Applications developed by ERA are licensed and distributed on an "as is' basis. ERA will use its best efforts to provide support, limited solely to ERA-issued applications. ERA reserves the right to change the level and type of support provided at any time without notice. 9 E. ERA Member's Responsibilities. You are responsible for the selection, purchase, installation and support of all hardware and systems software required to run the ERA technology products. ERA recommends you make arrangements with a local personal computer consultant or dealer for installation and ongoing support of your computer hardware and software. 9. OTHER COSTS AND OBLIGATIONS A. Sellers Security(R) Plan. In connection with your required participation in the ERA Sellers Security Plan ("SSP") program, you must sign a Sellers Security --- Plan Participation Agreement with ERA and pay an annual participation fee which, as of the Effective Date, is One Hundred Twenty-Five Dollars ($125) for each Office. You must pay the SSP participation fee for each Office before each April 1. If ERA does not receive your annual participation fee by April 1 of any year, you may be required to pay an increased fee which, as of the Effective Date, is Three Hundred Dollars ($300) per Office. ERA may adjust this participation fee. ERA will not process any SSP application received from you if you are more than thirty (30) days delinquent in any financial obligations under this Agreement. If ERA incurs losses on properties you list in the SSP, you will share in a portion of such loss, as provided in the Manuals. B. Commercial/Industrial Broker Network. If you choose to participate in the ERA Commercial/Industrial Broker Network (CIBN), you must sign a separate participation agreement, pay a one-time application fee, and pay annual participation fees. Although these fees may change, as of the Effective Date, the application fee is $50 per Office and the annual participation fee is $300 per Office. C. Notwithstanding any contrary terms and conditions contained in this Agreement (other than the first sentence of Section 5B hereof), Member agrees to be bound by and comply with the terms and conditions of the Outsourcing Agreement. D. ERA International Business Conference. A representative of each of your Offices identified on the Office List, as amended, will attend and encourage your sales associates and employees to attend the ERA International Business Conference each year. In any event, each year you will be required to pay for at least one (1) registration fee per Office for the ERA International Business Conference, for each Office whether or not you or your representative attend. You will be required to pay at least one (1) registration fee per Office each year. ERA may bill you at any time before the ERA International Business Conference for one (1) registration fee at the non-discounted on-site rate, if ERA has received no registration from your Office at the time of billing. E. Brokers of Record. A designated representative responsible for the management and operation of your Business at each Office (the "Brokers of ---------- Record") must maintain a valid and current real estate broker license to operate the Business in the states where the Offices are located during the term of this Agreement at your expense. You represent and warrant to ERA that your Broker of Record possesses all required licenses as required by law and this Agreement. In addition to any other obligations contained herein, Member shall defend and indemnify ERA and their respective shareholders, directors, officers, employees, agents, attorneys, successors and assigns and hold them harmless from and against and reimburse them for all claims, liabilities, damages, attorneys' fees, costs, settlement amounts, etc. arising out of or related to Member's failure to have qualified Brokers of Record. F. Facsimile Capability. In order to enhance participation in the ERA National Relocation System, on or before the Effective Date you will obtain, install and maintain at your own expense Group 10 Three compatible facsimile equipment or similar computer facsimile capability accessible by a dedicated telephone line. G. Offsets. ERA may offset any amounts ERA owes you in full or partial satisfaction of any amounts you owe under this Agreement or otherwise whenever you are more than thirty (30) days past due. H. Costs of Collection. Where permitted by law, you will pay all costs and expenses, including reasonable attorneys' fees, that ERA incurs in the collection of any fees or amounts due from you under this Agreement or otherwise, whether due to ERA or the applicable local or regional ERA Broker Council, if any, or otherwise to enforce the provisions of this Agreement. I. Interest. All delinquent payments under this Agreement will bear interest at the rate of 18% per annum simple interest (1.5% per month) or the highest rate for commercial contracts permitted under applicable law, whichever is less. J. Returned Checks. ERA will charge you a returned check charge on any checks submitted to pay any fee or other amount owed to ERA returned unpaid for any reason. You must replace any such check with a certified or cashiers check, money order or electronic transfer of funds within three (3) days after notification. ERA may charge the highest commercial rate permissible under the law. K. Ethical Conduct. You will uphold and take reasonable efforts to insure that your sales associates and employees uphold high standards of honesty, integrity, fair dealing and ethical conduct in dealing with the general public, the customers of the Business, other Members and with ERA. All persons engaged in the Business will comply with the Code of Ethics of the National Association of REALTORS(R). L. Manuals. You will keep your Manuals up-to-date, keep them at your respective Offices , not copy, reproduce or disseminate the Manuals or any portions of the Manuals unless expressly authorized by ERA and return all Manuals to ERA when this Agreement expires or terminates, or ERA requests their return before or after replacement with substituted sources of information. M. Indebtedness. Member shall not, and shall not permit its subsidiaries to, incur Indebtedness if the Leverage Ratio (after giving effect to the incurrence of such Indebtedness) shall exceed 2.0 (3.0 if the Commitment has been exhausted and not replaced with an additional commitment of funds by Cendant or one of its subsidiaries on substantially equivalent terms). Leverage Ratio shall mean the ratio of total consolidated Indebtedness of Member and its subsidiaries (excluding Cash Secured Loans (as defined below) and the outstanding principal amount of the existing development advance) to pro forma LTM EBITDA (pro forma meaning pro forma for the LTM EBITDA of brokerage offices acquired during such LTM including appropriate cost allocations to reflect operation on a standalone basis if the acquired business was part of a group of companies with shared expenses, but excluding anticipated synergies). "EBITDA" shall mean Member's ------ consolidated earnings from continuing operations (excluding extraordinary gains or losses, Conversion Costs (as defined in the Acquisition Cooperation Agreement) and, as agreed between ERA, Member, and, until such time as Apollo owns less than 10% of Member's outstanding common stock, Apollo, one-time or non-recurring items of income or expense) plus interest expense, provision for income taxes and depreciation and amortization expense. Immediately prior to any incurrence of Indebtedness by Member (including Indebtedness incurred by Member upon the acquisition of another entity or upon the assumption of liabilities of another entity), Member shall furnish ERA with a certificate executed by its chief financial officer to the effect that such incurrence is not in violation of this section and that, based on Member's business plan 11 and a good faith forecast prepared at the time of incurrence, the Leverage Ratio is not reasonably expected to exceed 2.0, or 3.0, as the case may be, for the twelve full calendar months following such incurrence. Notwithstanding the foregoing, Member shall not be prohibited from incurring (i) Cash Secured Loans in the ordinary course of business, (ii) working capital revolving loans not in excess of 2% of Member's LTM Gross Revenues (under this Agreement and any other franchise or membership agreement with a subsidiary of Cendant) at any one time outstanding, (iii) letters of credit and hedging obligations in the ordinary course of business, (iv) Indebtedness to refinance existing Indebtedness provided that such Indebtedness is not greater than the Indebtedness so refinanced and (v) other Indebtedness not to exceed 1% of Member's LTM Gross Revenues (under this Agreement and any other franchise or membership agreement with what is then (notwithstanding the last sentence of Section 5B) a subsidiary of Cendant) at any one time outstanding (the foregoing, collectively, "Permitted --------- Indebtedness"); provided that the Permitted Indebtedness incurred pursuant to - ------------ clauses (ii), (iv) or (v) above shall be included in the calculation of the Leverage Ratio, for purposes of determining whether Indebtedness beyond the Permitted Indebtedness is permitted hereunder. "LTM" shall mean, at any time, --- the twelve consecutive full calendar months of such Person ending on the most recently completed full month for which financial statements prepared in accordance with generally accepted accounting principles consistently applied are available. "Cash Secured Loans" shall mean any loan incurred in connection ------------------ with title insurance and escrow operations to the extent that the principal and interest thereon is secured by an amount of cash or U.S. governmental securities to ensure the full payment of principal and interest thereon after giving effect to the interest income earned thereon. "Indebtedness," at any date shall ------------- include, without duplication, (a) all indebtedness of Member or its subsidiaries for borrowed money or for the deferred purchase price of property or services (other than current payables incurred in the ordinary course of business and payable in accordance with customary practices) and including earn-out or similar contingent purchase amounts, (b) any other indebtedness of Member or its subsidiaries which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of Member or its subsidiaries under capitalized leases, (d) all obligations of Member or its subsidiaries in respect of acceptances issued or created for the account of Member or its subsidiaries, (e) all liabilities secured by any lien on any property owned by Member or its subsidiaries even though neither Member nor its subsidiaries has assumed or otherwise become liable for the payment thereof, and (f) all guarantees by Member or its subsidiaries of obligations of others (including the value of obligations of others secured by liens on the assets of Member or its subsidiaries). For purposes of this section, Indebtedness shall include any outstanding amount of mandatorily redeemable preferred stock or preferred stock with scheduled mandatory redemptions, and shall not include (i) pay-in-kind preferred stock that does not require Member to make any cash payments (other than upon liquidation) and does not include sanctions for the non-payment of cash, other than increasing the dividend rate to a rate not exceeding 13% per annum, (ii) perpetual cash-pay preferred stock that does not contain any sanctions for the non-payment of amounts provided for therein other than the right to elect (together with all other preferred stock other than preferred stock existing on the date hereof) no more than 2 directors to Member's board of directors upon any default; provided that the rate thereon does not exceed 13% per annum and, at the time of issuance thereof, Member would have been permitted under the Leverage Ratio test to incur Indebtedness with fixed charges equal to the fixed charges of such preferred stock and (iii) preferred stock outstanding on the date hereof and any shares paid thereon in accordance with the term thereof. N. Dividends. Notwithstanding anything else herein to the contrary, Member shall not be permitted to (i) incur Indebtedness to finance the payment of dividends or (ii) declare or pay any Extraordinary Dividend unless the Leverage Ratio (provided that the Leverage Ratio is calculated such that the consolidated indebtedness is net of cash and cash equivalents) at the time such 12 dividend is declared and paid is no greater than 1.0. "Extraordinary Dividend" ---------------------- shall mean any dividend or distribution which is not a regularly scheduled quarterly dividend consistent with past practice and which exceeds the lesser of (x) 20% of Member's net income for the fiscal year in which such dividend or distribution is declared minus dividends or distributions already paid during such fiscal year and (y) 20% of Member's net income for the fiscal year in which such dividend or distribution is paid minus dividends or distributions already paid during such fiscal year. For the avoidance of doubt, the payment by the Member of all or any part of the $45,000,000 dividend to Apollo Management, L.P. and/or its affiliates ("Apollo") pursuant to the Letter Agreement, dated as of ------ the date hereof, among Franchisee, Cendant, Apollo and others, shall not be restricted in any manner by this Agreement, including this Section 9N. 10. INCREASES A. Annual Increases in NMF Contributions. Effective April 1 each year during the term of this Agreement, ERA at its sole option, increase the Minimum and Maximum Monthly NMF Contribution under Section 7A of this Agreement. No percentage increase in any particular fee will exceed the greater of 1) the annual percentage increase of the Consumer Price Index for all Urban Consumers, U.S. City Average (1982-84=100) ("CPI") during the period between December of --- the applicable base year of such particular fee and the December immediately preceding the April 1 on which such fee increase is to take effect or 2) the yield to maturity on United States Treasury Bonds (as listed in The Wall Street --------------- Journal or such other source as ERA deems reliable) maturing approximately 30 - ------- years after December 31 in the year preceding the effective date of such change. ERA may round to the nearest dollar the amount of increase resulting from application of the CPI percentage or the Treasury Bond yield. The applicable base year for each particular fee is defined for CPI purposes as the calendar year immediately preceding the later of the date ERA first set the particular fee or the April 1 on which ERA last raised that particular fee pursuant to this option. As of the Effective Date of this Agreement, the base year for the Minimum and Maximum Monthly NMF Contributions is 1997. Notwithstanding the foregoing, the maximum and minimum NMF Contribution will be adjusted consistently with all other franchisees of ERA. B. Other Fee Increases. ERA will also have the right, at its sole option, to impose, eliminate or modify initial membership fees, renewal membership fees, training fees, fees to participate in voluntary programs at any time, including, but not limited to, the Sellers Security Plan, referral fees, late charges and returned check charges, which revisions will not be subject to the limitations described in Section 10A. 11. RECORDKEEPING; AUDIT A. Recordkeeping, Financial Statements and Audit. You will maintain accurate records for each Office in the form prescribed by ERA during the term of this Agreement and for two (2) years after the expiration or termination of this Agreement. You will provide ERA, at ERA's request, with quarterly financial statements for each Office within thirty (30) days after the end of each calendar quarter and an annual balance sheet and profit and loss statement within sixty (60) days after the end of your fiscal year. Financial statements must be prepared in accordance with generally accepted accounting principles. You must transmit information to ERA in the manner and format required by ERA and allow ERA or its designee(s) to audit your operations, including your financial record retention systems, or to obtain information from other sources including the local Multiple Listing Service, regarding your Gross Revenues, to verify the Royalty Fees, NMF Contributions and any other fees then due under this Agreement during the applicable audit period. You must immediately pay ERA any of such fees or contributions shown by the audit as having been due during the audit period but not paid. If the audit discloses a deficiency of at least five percent (5%) in amounts due 13 under this Agreement for any three (3) month period, you must also pay all costs incurred by ERA with regard to the audit and such deficiency will constitute a material breach of this Agreement. You must also pay the costs of the audit if ERA must spend more than the average amount of time or energy to get your records relating to any Office in order to do the audit, as compared to an office with a reasonably similar number of listings and transactions. ERA may charge you an administration fee of up to Five Hundred Dollars ($500) if you cancel or reschedule an audit within seventy two (72) hours of the scheduled time of the audit. B. Access to Records. ERA or such person as ERA may designate in writing will have the right during the term of this Agreement and any renewals, and for period of three years following any termination of this Agreement, to visit any of your Office locations or administrative office location (or such other place as your records may be located) during normal business hours and without hindrance or delay, proceed: (1) to inspect, audit, check and make copies of and extracts from your books, records (including state and federal tax returns), journals, orders, receipts, any correspondence and other data relating to your Business or to any transactions; (2) to make such verification concerning any portion of such records or of your Business as ERA may consider reasonable under the circumstances; and (3) to discuss your records and Business with any officers, directors, employees responsible for maintaining the records, or with your broker of record, or with your sales associates with respect to their transactions. C. Condition of Assignment or Mutual Termination. ERA may require an audit of your operations at any time, including as a condition of ERA approval of any assignment or mutual termination of this Agreement. D. Sales Associate Information. You will provide ERA information about your sales associates and allow and assist ERA in any survey of your sales associates. E. Other Information. You will provide ERA and/or cooperate with ERA in collecting such other information as ERA may reasonably request, including information for research and development of services, products and programs, identification of demographic information, industry reports and preparation of the ERA Uniform Franchise Offering Circular. 12. RELOCATION AND REFERRAL OBLIGATIONS A. Operation of Relocation Program. You and ERA each will abide by the Manuals, as amended from time to time at the sole discretion of ERA, with respect to relocation eligibility, format, and procedures and the manner and amount of commission payments from ERA to you or from you to ERA for relocation transactions transmitted through the ERA National Relocation System. B. Obligation to Refer. You will transmit all residential and commercial real estate relocations exclusively through the ERA National Relocation System. C. Listing Inventory. You agree to supply to ERA, no later than fifteen (15) days after the Effective Date (in the case of Additional Offices, within 15 days of the amendment of the Office List to include any such Additional Offices), and at all times to maintain with ERA, a complete and current inventory of all listings of your Business, in the format required by ERA, transmitted in the 14 manner required by ERA, for ERA to transmit to other ERA Members or brokers designated by ERA when appropriate. D. Prospect Contacts. You will contact by telephone each buyer or listing prospect referred or supplied to you by ERA within twenty-four (24) hours of receipt, unless otherwise specified on the relocation form. E. Follow-Up Reports. You will complete all prospect follow-up report forms in a manner specified by ERA and return them to ERA within seventy-two (72) hours after receipt. F. Payment of Referral Fee. You will direct the escrow company, attorney or other party handling the closing of any transaction in which a referral fee is due to pay the referral fee at closing directly to the ERA Relocation Center and to identify the referral fee paid with the referral transaction number. If the escrow company, attorney or other party handling the closing of a transaction fails or refuses to do so, you will pay the referral fee to the ERA Relocation Center within three (3) days after the closing of any transaction on which that fee is due. You shall pay the fee in cash, check or certified funds and identify the referral fee with the referral transaction number. G. Failure to Follow Procedures. ERA reserves the right at its option to cease furnishing referrals to you if you violate any provision of this Section 12 or any provision of the Manuals relating to referral procedures, are otherwise in breach of this Agreement or are delinquent in the payment of any financial obligation to ERA then due and payable. H. Consent to Use. You consent to ERA's use of your listing and Transaction information. 13. SHARED IDENTITY OBLIGATIONS; ADVERTISING A. Advertising. Whenever you advertise or otherwise identify your real estate brokerage Business, you agree to use the mark "ERA" and any other ERA Identification according to ERA standards specified in the Manuals, and to allow no other trade name, logotype or trademark to appear in the advertisement or identification without the express written consent of ERA. ERA consents to Member's use of Cendant Mortgage Corporation's advertisements. B. Outdoor Sign. As of the Effective Date, you must have installed an ERA approved outdoor illuminated sign, in accordance with specifications in the Manuals, at each Office, and to provide ERA either a color photograph of such sign or a copy of the order for such sign. ERA and you will use commercially reasonable efforts to implement an acceptable alternative to the outdoor illuminated sign if its use is prevented by any code, contract or covenant binding on you. C. Yard Signs; Business Cards; Flipcharts. As of the Effective Date, you must obtain and put into continuous use for the term of this Agreement: (1) Standard ERA yard signs on all listings; (2) Standard ERA business cards and office stationery; and (3) Listing Presentation Flipcharts or portable computers equipped to show a Listing Presentation Flipchart for each sales associate. D. Independently Owned. You must use the phrase "Each Office Independently Owned and Operated" (or a similar slogan which has been approved by ERA) in conspicuous lettering on all business cards and stationery, real estate listing and Transaction documents, advertising, ERA yard signs, purchase and sale documents, listing agreements, all other printed or recorded material you 15 and your sales associates and employees use and in all other places required by state or local law or regulation. E. Verification of Use. With regard to yard signs, you will provide ERA, within sixty (60) days after the Effective Date (In the case of an Additional Office, within sixty (60) days of the amendment of the Office List to include such Additional Office), either a color photograph of such signs or a copy of the order for such signs. F. ERA Standards. For each Office, you must purchase Items in subsections B and C above, and any other supplies and Materials bearing ERA Identification from a supplier approved by ERA. G. Fictitious or Assumed Name. For each Office, you must adopt a trade name which includes the mark "ERA" in accordance with the Manuals, and use no other name to conduct the Business for the duration of this Agreement. If required by law, you must file for and maintain a Certificate of Fictitious Name or comparable instrument and furnish ERA evidence of such filing. You agree not to use "ERA" or "Electronic Realty Associates" as any part of the legal name of an entity without the advance written consent of ERA. Once established, you may not change your legal entity or trade names without the advance written consent of ERA. H. Maintain Image Standards. ERA may undertake from time to time to determine if you are meeting ERA's standards for ERA Identification usage. You will promptly correct whatever deficiencies ERA finds to exist. I. Goodwill. You covenant with us that you will not make or publish any statement or advertisement which would, or could be construed to, demean the image, value, identity, or goodwill of ERA or of any other Member. This covenant is independent of and will survive any termination, expiration or assignment of this Agreement. J. Ethical Standards. You will adhere and take efforts to ensure that your sales associates and employees adhere to the standard of ethics that may be specified by the National Association of REALTORS or in the Manuals from time to time. K. Advertising Standards. All of your advertising will be completely factual, not intentionally misleading and in good taste in the judgment of ERA. 14. ERA HOME PROTECTION PROGRAMS A. Required to Present. As part of the ERA Integrated Marketing System, and unless otherwise prohibited by law, you will use your best efforts to cause the marketing and issuance of the Seller Protection Plan ("SPP") and Buyer --- Protection Plan ("BPP") coverage in connection with every listing agreement --- written or secured on eligible properties by your Business. The BPP and SPP coverages are referred to collectively as the "Home Protection Plans." The Home --------------------- Protection Plans are administered by Aon Home Warranty Services, Inc. as of the Effective Date. You must submit a signed form to ERA or such other entity designated by ERA (its "Designee") within three (3) days after taking each -------- listing, evidencing acceptance or rejection of the SPP or BPP. You will comply with all the terms and provisions of the Manuals governing SPP and BPP. B. Listing or Selling Broker. You will restrict your efforts for issuance of any ERA Home Protection Plan contracts only to those sellers and buyers of homes in which you are the listing or selling real estate broker at the time of sale or offering for sale. 16 C. Collection of Contract Price. For each BPP you cause to be issued, you must collect all BPP fees and pay ERA or its Designee, within three (3) days after close of escrow on the sale, the contract price specified in the Manuals or announced by ERA from time to time. ERA has the right, at its sole option, to amend, or authorize the amendment of, the contract price for BPP contracts, and you will, upon thirty (30) days' advance written notice (or such advance notice as ERA can reasonably give) abide by such amendment. D. Improper Withholding of BPP Fees. You will not withhold from ERA or its Designee any BPP fees collected and due ERA or its Designee. If you do withhold any BPP fees collected and due ERA or its Designee, such action will constitute a material breach of this Agreement and you will immediately pay ERA or its Designee such amount and late fees. Such conduct is considered consumer fraud in many states and may subject you to criminal charges. ERA may suspend your right to market the ERA Home Protection Plans if you withhold BPP fees. E. Price. You will market BPP contracts on behalf of ERA or its Designee at the current price listed on the state specific schedule of fees, or at such current price as is announced by ERA from time to time. F. Inform of Availability. You will inform each seller and buyer of any home being sold in which the Business is involved of the availability of SPP and BPP and will satisfy ERA or its Designee that you have done so in accordance with procedures specified in the Manuals. You will deliver to each buyer or buyer's agent (if buyer is represented by someone other than the Business), the Buyer Protection Plan closing instructions before closing, as required by the Manuals. G. Home Protection Plan Claims. If the amount or number of claims paid on Home Protection Plan contracts you submit for any Office exceed the acceptable loss ratio of claims paid to fees paid established by ERA or its Designee, then ERA may terminate your continued participation of such Office or impose additional requirements or conditions on the continued offering of Home Protection Plans. The nature and extent of this action will be at the sole discretion of ERA. An unacceptable loss ratio will not relieve you of your obligation to present the ERA Home Protection Plans. Acceptable loss ratios and other conditions are determined solely by ERA or its Designee and are described in the Manuals. H. This Section 14 shall only apply if, pursuant to the Outsourcing Agreement, Member is required to participate in Aon Home Warranty Programs. In the event of any conflict between this Section 14 and the terms of any program in which NRT is participating pursuant to the Outsourcing Agreement, the terms of such program shall control. 15. LOCAL BROKER COUNCILS A. Obligation to Participate. You support the concept of cooperative marketing activities with other Members in your area in order to derive more fully the benefits of local and regional identity. Therefore, each Office will use its reasonable best efforts to join and participate in local and regional ERA Broker Councils when formed to serve the DMA or area in which such Office is located. Each Office will also use its reasonable best efforts to adopt and abide by the ERA Broker Council By-Laws and decisions of the respective Broker Councils. ERA may amend the ERA Broker Council By-Laws from time to time. 16. MODIFICATION OF THE SYSTEM; IMPROVEMENTS; CONFIDENTIALITY 17 A. Agreement to Accept Modifications. ERA may change, augment or modify the ERA Identification or ERA Integrated Marketing System, including the adoption and use of new or modified trade names, trademarks, trade dress, service marks, copyrighted materials, new products or services, new equipment, new business methods or new techniques in its sole discretion from time to time, without the consent of the Members. You will accept, use and display any such changes in the ERA Integrated Marketing System as if they were a part of this Agreement at the Effective Date. You will make such expenditures as may be required to conform to such changes, augmentations or modifications. B. Elimination of Programs. Notwithstanding any other provision of this Agreement, ERA reserves the right to modify, suspend or eliminate any new or existing portion of the ERA Integrated Marketing System or ERA Identification. C. Improvements by You. If, during the initial or any renewal term of this Agreement, you conceive of or develop any improvements or additions to the ERA Integrated Marketing System, new trade names, trademarks, service marks or other commercial symbols related to the Business or any advertising or promotion ideas related to the Business ("Improvements"), you will fully disclose the ------------ Improvements to ERA without disclosing the Improvements to others. You must obtain ERA's written approval before using any of the Improvements. Any Improvements approved by ERA shall be deemed licensed to ERA on a royalty-free, paid-up, perpetual worldwide license, and may be used by ERA and all other ERA Members without any obligation to you for royalties or similar fees. You assign to ERA without charge, any and all of your right, title and interest in and to any and all Improvements, including the right to grant sublicenses to use any Improvements. ERA at its discretion may make application for and own copyrights, trade names, trademarks and service marks relating to any Improvements. ERA may also consider the Improvements as the property and trade secret of ERA. ERA will authorize you to utilize any Improvements authorized generally for use by other ERA Members. D. Confidentiality. You acknowledge that all of the information you now have or obtain in the future regarding the ERA Integrated Marketing System and the concepts and methods of promotion are part of ERA's franchise system and you will treat as confidential all information disclosed to you in confidence. You will never directly or indirectly engage in or aid in the misappropriation, disclosure, divulgence or distribution of any part of the ERA Integrated Marketing System or the concepts and methods of promoting ERA franchises. You also will require all your management personnel employed in the Business to enter into an agreement that ERA can enforce, under which they agree to treat that information as confidential. 17. TERM AND TERMINATION A. Initial Term and Renewals. (1) Initial Term. The initial term of this Agreement is for a period ------------ commencing on the date hereof and ending on the date 50 years from the date hereof (the "Expiration Date"). --------------- (2) Renewals. Upon the expiration of each term hereof (other than -------- upon a termination by ERA), Member shall have the option to extend the term hereof for an additional 50 years, provided that, Member complies with all -------- ---- of the following: (i) At the time of the extension of the term hereof, Member shall not be in material default under Member's existing Franchise Agreement or any other agreement or obligation Member may have with ERA (such as other ERA membership agreements), including, but not limited to, 18 Member's obligations to (x) pay Royalty Fees, National Marketing Fund contributions, Broker Council assessments (to the extent Member is required herein to participate in such Broker Councils), interest and late charges, audit fees and other properly chargeable amounts; and (y) comply with the Manuals, including trade name and logo guidelines. (ii) Member shall deliver to ERA written notice of Member's intent to renew not more than one hundred eighty (180) days and not less than ninety (90) days prior to the Expiration Date of the term under which Member is then operating; if no such notice has been received by ERA at least ninety (90) days but not more than one hundred eighty (180) days prior to said Expiration Date, then Member's option to extend the term hereof shall be extinguished and ERA shall have the right, during the ninety (90) day period prior to said Expiration Date, subject to local law, and notwithstanding any other provision of this Agreement, to market, grant, place and/or operate franchises in the general vicinity of any of Member's Offices. Upon receipt of such notice, the term hereof shall automatically and without further action be extended to a date 50 years from the date the term of this Agreement was otherwise to terminate. (iii) Member, as a condition for extending the term hereof, shall make such reasonable expenditures as ERA may require, pursuant to this Agreement, as are necessary to conform with ERA's standards for interior and exterior office size, decor, overall attractiveness and cleanliness then in effect. (iv) Member shall pay no initial franchise fee or renewal fee in connection with extending the term hereof. OTHER THAN AS SET FORTH IN THIS SECTION, NEITHER PARTY HAS RENEWAL RIGHTS. B. Termination. This Agreement may be terminated in its entirety or as to any particular Office(s) only under the following terms and conditions: (1) Mutual Consent. By mutual consent of the parties; -------------- (2) Termination by Member. By you for a material breach by ERA of Sections 3 --------------------- or 4 of this Agreement upon ninety (90) days' advance written notice to ERA and opportunity to cure during the entire notice period. If ERA cures that breach during the ninety (90) day notice period, or if the breach cannot be cured in ninety (90) days, if ERA diligently commences to cure that breach within the ninety (90) period and cures the breach within a reasonable time, your right to terminate this Agreement for such notice and material breach will cease. For you to terminate, you must be in compliance under this Agreement at the time you give notice and at the time of termination. (3) Termination by ERA for Good Cause. By ERA for good cause which will --------------------------------- mean any material breach by you of your obligations under this Agreement as determined by ERA in its sole discretion exercised in good faith. Good cause includes both curable and non-curable defaults, such as, but not limited to, the following: (a) Curable Defaults; Notice. After giving you thirty (30) days' advance written notice of the proposed termination and the opportunity to cure the breach during the entire notice period, or such longer or shorter notice as is required or permitted by the law of the state where the Office is located, if the breach is: 19 1. The failure to pay when due any financial obligation to ERA, to the applicable Broker Council, or to the National Marketing Fund; 2. Refusal or failure of any Office to join and/or participate in your local Broker Council or to comply with or abide by the authorized and lawful actions and decisions of that Broker Council; 3. An audit by ERA of your records which discloses a deficiency of at least five percent (5%) in amounts due under this Agreement within any three (3) month period, or your refusal to permit ERA to audit your operations and records; 4. Any attempt by you to subfranchise (Subfranchising is defined to include, without limitation, any license or grant to any other person or entity of the right to use the ERA Identification or the ERA Integrated Marketing System in connection with the operation of an office owned or leased, in whole or in part, by such other person or entity, or in which such other person or entity is responsible for losses, if any, incurred in the operation of such office.); 5. Any other material breach of this Agreement not listed below as a noncurable default. Upon receipt of notice to terminate with right to cure, you must immediately commence diligently to cure that breach. If you cure that breach during such period, the right of ERA to terminate this Agreement for such breach will cease, subject to termination for repeating the same default as described below. (b) Noncurable Defaults; No Notice Required. ERA reserves the right to terminate this Agreement immediately without prior notice and without your right to cure for any of the following causes: 1. Suspension or revocation of your real estate license; 2. Any conduct by you which impairs the image, identity, value or goodwill associated with ERA Identification or the ERA Integrated Marketing System, including, without limitation, any breach of Section 13; 3. You are the subject of any bankruptcy, receivership, composition, assignment, marshaling, insolvency or similar proceeding for the benefit of creditors, provided that termination upon bankruptcy may not be enforceable under Title 11, United States Code; 4. Abandonment of your Office(s), demonstrated by removal of the ERA Identification or by your not operating the Business for five consecutive business days or any shorter period when, under the facts and circumstances, it would not be unreasonable for ERA to conclude that you do not intend to continue to operate the Business, unless the cause is a force majeure beyond your control, e.g., flood, earthquake or similar acts of God; 20 5. Any default for which ERA has issued you a notice of default during the last twelve (12) months advising you of ERA's intent to terminate for the same cause, even if the default(s) were cured; 6. Any material misrepresentation or omission by you, or at your direction to ERA with respect to acquiring the ERA Membership; or 7. Upon any merger, consolidated or reorganization, or sale or transfer or any series of sales or transfers (whether related or unrelated) that result in thirty percent (30%) or more of the voting power or the outstanding shares of Member's common stock being owned beneficially or of record by a single person or group (each as defined in Section 13)d)(3) of the Securities Exchange Act of 1934, as amended) (other then Cendant or any successor thereto or Apollo) (the "Acquiring Person") whether by operation ---------------- of law or otherwise, unless the prior written consent of ERA shall have been obtained; provided that the Acquiring Person still owns such 30% or more ten business days after notice to the Acquiring Person (which notice Member hereby agrees to deliver to the Acquiring Person and ERA). For purposes of determining the outstanding shares of Member's common stock, securities convertible into (but not exercisable for) common stock shall be deemed to have been converted into common stock. Notwithstanding anything to the contrary herein, transfers of interest in the Member by Sponsors (as defined in the Stockholders Agreement) in accordance with the terms of the Stockholders Agreement shall not be a termination event under this Agreement. C. Pretermination Options of ERA. Before termination, if you fail to pay any amount owed under this Agreement, or fail to comply with any term of this Agreement, then in addition to any right ERA may have to terminate this Agreement or to bring a claim for damages, ERA will also have the following options with respect to any or all Offices: (1) To suspend all services provided to you under this Agreement or otherwise, including training, marketing assistance and other award(s) eligibility for you and your agents, and the sale of products and supplies; (2) To suspend taking or placing referrals or relocation requests, Home Protection Plans and/or Sellers Security Plan applications for or from you and to direct any inquiries regarding these or other programs or services to other ERA Members; and/or (3) To eliminate listing you in any advertising, marketing or promotional materials, including Yellow Pages directory or other ------------ directory listings, approved or published by ERA. ERA may continue taking such actions until you have brought your account current, cured any default, and complied with ERA requirements, and ERA has acknowledged such compliance in writing. ERA's exercising one or more of the options permitted in this Section 17C will not suspend or release you from any obligation you would otherwise owe to ERA, the applicable ERA Broker Council or to the National Marketing Fund. Your right to cure does not restrict the right of ERA to initiate or institute any legal action it deems appropriate before, during or after the cure period. 21 D. Effect of Nonrenewal or Termination. In the event of nonrenewal or termination, you must, for each terminated Office, immediately, at your expense, return to ERA all property belonging to ERA including originals and all copies of the Manuals, all copies of ERA-issued technology products (including copies held or under the control of your sales associates), and all films, cassettes and instruction manuals which are part of the ERA programs. Each such Office must also immediately discontinue all use of the ERA Identification licensed to you by this Agreement in any and all of your materials. Such Office must immediately discontinue all use of signs or cross arm signposts displaying the unique style, logo, colors, color patterns and designs of ERA and/or ERA Identification. If you desire to use such signs or cross arm signposts after the nonrenewal or termination, you must immediately change the colors and color patterns by complete repainting of the signs or signposts and you must permanently remove or cover any ERA Identification on the signs and must provide ERA with color photographs of such changed signs and signposts. Effective immediately upon the date of termination or nonrenewal, all representatives of such terminated Office(s) will refrain from any representation whatsoever that you are an ERA Member or are or have been otherwise affiliated with ERA. You must immediately advise all of your then-current real estate listings associated with such Office that you are no longer associated with ERA and must assign the telephone number to ERA or its designee(s) and immediately cause the local phone company (white pages) and the Yellow Pages publisher to remove the Offices from ------------ its listings of ERA Members in any directory or listings. E. Effect of Continued Use of ERA Identification. Upon nonrenewal or termination for any reason whatsoever, any continued use of the ERA Identification by you, the Business or any sales associates of a terminated or nonrenewed Office: (1) will constitute willful and knowing mark infringement, dilution of ERA's trademark rights and unfair competition; and (2) may constitute trafficking in a counterfeit mark for which both civil remedies and criminal penalties may be imposed. F. Infringement Damages. If ERA brings an action against you or anyone associated with you in the Business, before or after nonrenewal or termination, seeking to halt infringement of ERA Identification, you acknowledge that any court having jurisdiction of the matter may enter temporary restraining orders, preliminary and permanent injunctions without posting a bond or other security; and may order the immediate seizure and destruction of any infringing materials. If any court rules that a bond is required and cannot be waived, you stipulate that a $1,000 bond will be sufficient. Furthermore, in addition to your continuing obligations under Section 17G, H and I below, you will pay ERA Royalty Fees, and NMF Contributions on all Gross Revenues during the period of any infringement; attorneys' fees incurred by ERA in the enforcement of the rights of ERA with respect to the ERA Identification; and the costs and disbursements of bringing the enforcement action. G. Surviving Obligations. (1) Except as specifically set forth in this Agreement, upon expiration of the Membership Agreement or its termination by ERA as to any or all Offices, you will have no further interest or rights pursuant to this Agreement with respect to such Offices. All financial obligations of ERA and you to each other, incurred before termination or expiration, will not be affected by such expiration or termination; and must be satisfied as would have been required under this Agreement. In addition, you will remain obligated to pay Royalty Fees, NMF Contributions, referral fees, Home Protection fees and Sellers Security Plan fees on transactions pending at the time of expiration, termination or assignment. The provisions of this Section 17 also survive termination or expiration of this Agreement. 22 (2) In the event that prior to the expiration of any term hereof, there is (i) a failure to pay royalties on a timely basis, (ii) a termination of this Agreement by Member, (iii) any breach of Section 5E hereof due to the willful closure or willful deidentification of Offices in excess of those permitted to be closed or deidentified pursuant to Section 5E, (iv) any breach of Section 5E hereof due to the closure or deidentification of in excess of 20 of the Offices permitted to be closed or deidentified pursuant to Section 5E, (v) termination of this Agreement pursuant to Section 17(B)(3)(b)(7), (vi) the affiliation by Member with another real estate brokerage system (other than a system owned by Cendant), or (vii) any breach of this Agreement by Member (other than a breach of Section 9C hereof) that has, or is reasonably expected to have, a material adverse effect on the ERA System, in each case other than clause (v) above after notice to Member and a reasonable opportunity to cure (each, a "Liquidated ---------- Damages Event"), Member shall immediately become obligated to pay ERA ERA's - ------------- "lost future profits" (as hereinafter defined). For purposes of this Agreement "lost future profits" for an office shall consist of all royalty fees which Member would have paid to ERA with respect to such office from the date of the Liquidated Damages Event through the earlier of the end of the then-current term of this Agreement, had there been no Liquidated Damages Event, and 25 years from the date of the Liquidated Damages Event. The parties acknowledge and agree that it would be impracticable and extremely difficult to calculate the actual amount of lost future profits payable by Member, and that the following method of calculation represents a fair and reasonable estimate of foreseeable lost future profits: Lost future profits shall be calculated on an Office by Office basis by determining the average monthly royalty fee payment payable by the Member to ERA for each such Office from the commencement date of this Agreement through the date of the Liquidated Damages Event, and multiplying these average amounts by the lesser of (i) the actual number of months (and any fraction thereof) remaining between the date of the Liquidated Damages Event and the end of the then-current term of this Agreement and (ii) 300. Lost future profits shall be payable with respect to all of Member's Offices, provided that in the case of clauses (iii) and (iv) of the definition of Liquidated Damages Event, lost future profits shall only be payable with respect to the Offices closed or deidentified in violation of Section 5E (including the 20 permitted to be closed or deidentified before clause (iv) becomes effective). Member acknowledges that the lost future profits set forth in this section are fair and reasonable, in light of the fact that ERA's affiliate has participated in Member's prior acquisitions and will participate in Member's future acquisitions by purchasing the tradenames and trademarked operating names of the acquired entities with the intention of licensing such names, together with the names licensed hereunder, to Member and the expectation of royalties in consideration of the use of such names, for the full term of this Agreement. H. Other Damages. If you take any action after this Agreement is terminated or expires that causes damage to ERA, and ERA is successful in obtaining judicial relief against you as a result of such action, you will be liable to ERA for an additional amount equal to the aggregate of ERA's costs of commencing and prosecuting the action, including, reasonable attorneys' fees, costs of investigation and proof of facts, court costs and other litigation expenses. Member acknowledges that in addition to the provisions of Section 17G hereof, upon a termination of this Agreement prior to its Expiration Date, or breach of this Agreement, ERA shall be entitled to any other remedy at law or in equity. I. In addition, the parties agree that in event of a termination, for any and all offices, of this Agreement by ERA by reason of a breach of this Agreement by Member, other than an Early Termination, the parties agree that ERA shall not be entitled to any damages for lost future profits and ERA shall be required to pursue its other remedies in connection with such breach under this Agreement and under applicable law. J. Post Termination Audit. You will cooperate with ERA and permit ERA to conduct an audit of your records in accordance with Section 11B above after this Agreement expires or is terminated. 23 18. ASSIGNMENT A. Assignment Generally. You may not assign the rights, or delegate your duties under this Agreement without advance written approval of ERA, which approval may be withheld in ERA's sole discretion. B. Reserved. C. Notwithstanding anything to the contrary herein, each party acknowledges that transfers of interests in Member by Sponsors (as defined in the Stockholders Agreement) in accordance with the terms of the Stockholders Agreement shall not violate this Section 18. "Stockholders Agreement" shall mean the Stockholders ---------------------- Agreement, dated as of August 11, 1997 between and among Member and the Stockholders thereof identified on Schedule A thereto, as amended or restated from time to time. D. Reserved. E. Reserved. F. Assignment by ERA. ERA may assign, delegate or subcontract all or any part of its rights and duties under this Agreement, including by operation of law, without notice and without your consent. You are not the third party beneficiary of any contract with a third party to provide services to you under this Agreement. ERA will have no obligations to you after you are notified that a transferee has assumed ERA's obligations under this Agreement except those that arose before ERA assigns this Agreement. 19. INDEMNIFICATION AND INSURANCE A. (1) Your Indemnification of ERA. You will indemnify ERA, Cendant and their respective officers, directors, employees, successors and assigns (the "Indemnified Parties") in any legal action, claim or other adversary proceeding - -------------------- (including alternative dispute resolution proceedings) related to the Business or to you in which the liability of the Indemnified Party is alleged or in which the Indemnified Party is named as a defendant or codefendant as a result of activities by you which are not in accordance with this Agreement, with ERA policy as published in the Manuals or with any law, rule, regulation or custom governing real estate brokerage operations, or in which the alleged liability of the Indemnified Party is based on principles of agency, respondent superior, or the existence of a joint or common enterprise between an Indemnified Party and you, or in which the Indemnified Party is alleged to have been negligent in your selection, training or supervision. You will reimburse the Indemnified Party for all costs and expenses of defending the matter incurred by the Indemnified Party, including attorneys' fees, if your insurer or you do not assume defense of the Indemnified Party promptly when requested or a conflict of interest requires retention of separate counsel. ERA must approve any resolution or course of action in a matter that could directly or indirectly have any adverse effect on us or the ERA franchise system, or could serve as a precedent for other matters. Your obligations to indemnify and hold harmless each Indemnified Party will survive the termination, expiration or assignment of this Agreement, but any release by ERA of your obligations under this Agreement will not release your obligations under this Section 19 with respect to any claim that arose before expiration, assignment or termination of this Agreement. Notwithstanding the foregoing, the indemnification provided for in this subparagraph shall not extend to any liability, cost or expense or to any suits, proceedings or claims (i) to the extent arising from the affirmative acts of ERA or its employees or any indemnified party or from the actions of 24 Member or its employees engaged in at the direction of ERA or any indemnified party, or (ii) which do not arise out of or relate to member's operation of the Business, including those that arise out of disputes under any agreement (A) between ERA and Member, other than this Agreement or (B) between Member and its stockholders. The obligations of Member pursuant to this Paragraph shall survive the expiration or termination of this Agreement. (2) Reserved. B. Insurance. (1) Required Policies and Coverage. You will obtain and maintain for the term of the Membership Agreement for each Office identified on the Office List, at Member's expense, commercial general liability insurance for all of its operations (including operations under other franchise or membership agreements) in an amount not less than a $50,000,000 coverage limit per year (with a $1,000,000 coverage limit per occurrence). Member shall, for the entire term of this Agreement, maintain at Member's expense errors and omissions insurance for all of its operations (including operations under other franchise or membership agreements) in a coverage limit per year not less than the Yearly Insurance Limit (with a coverage limit per occurrence not less than 10% of the Yearly Insurance Limit). ERA reserves the right to establish minimum standards with which underwriters providing the aforementioned insurance coverage must comply. Said policies of insurance shall insure Member against any liability which may arise in connection with the operation of Member's real estate brokerage business and such collateral businesses as may be approved in writing by ERA and shall be in such form as ERA approves. If required by law, Workers' Compensation Insurance shall be carried on all employees and sales associates. All insurance policies maintained by Member, other than Worker's Compensation Insurance, shall contain a separate endorsement naming ERA, Cendant and Cendant Finance Holding Corporation as additional insureds; shall not be subject to cancellation, except on ten (10) days written notice to ERA; and shall contain an express waiver of any and all rights of subrogation whatsoever against ERA. Member shall cause certificates of insurance of all such policies and endorsements, showing compliance with the above requirements, to be deposited with ERA within thirty (30) days of the execution of this Agreement and annually thereafter. "Yearly Insurance ---------------- Limit" shall mean", for each calendar year of this Agreement, (i) ----- $10,000,000 if Member's total revenue (as reported on Member's financial statements) ("Total Revenue") for the calendar year immediately prior to ------------- the calendar year for which the Yearly Insurance Limit is being calculated is not more than $2,500,000,000, (ii) $15,000,000 if Member's Total Revenue for the calendar year immediately prior to the calendar year for which the Yearly Insurance Limit is being calculated is between $2,500,000,000 and $3,000,000,000 and (iii) $20,000,000 if Member's Total Revenue for the calendar year immediately prior to the calendar year for which the Yearly Insurance Limit is being calculated exceeds $3,000,000,000. Such policies must be in form and content satisfactory to ERA and must be issued by an insurer(s) rated A or better in Class X by Alfred M. Best and Company Inc., or comparably rated by Moody's and/or Standard and Poor's or similarly reliable rating services acceptable to ERA. ERA reserves the right to change the minimum acceptable rating requirement. C. Tail Coverage. As one of the conditions to ERA's granting approval of an assignment or request for mutual termination of this Agreement, you must purchase and provide evidence to ERA that you have purchased tail (extended option) coverage on all applicable policies for a minimum of twelve (12) months after the effective date of any assignment or mutual termination. 25 20. AMENDMENT A. Written and Signed. Any modification, change or amendment to this Agreement must be in writing and signed by the President or any Vice President authorized by the President of ERA and by you. B. Authority to Amend. NO FIELD REPRESENTATIVE, INCLUDING ANY DIVISIONAL OR REGIONAL PRESIDENT, REGIONAL VICE PRESIDENT OR REGIONAL OR DISTRICT BUSINESS MANAGER OF ERA, HAS THE RIGHT OR AUTHORITY TO MAKE ORAL OR WRITTEN MODIFICATIONS, CHANGES OR AMENDMENTS TO THE TERMS OF THIS AGREEMENT. NO SUCH UNAUTHORIZED MODIFICATION, CHANGE OR AMENDMENT WILL BE BINDING UPON EITHER PARTY. 21. WAIVER A. Waiver. If any provision(s) of this Agreement is or becomes in violation of any local, state or federal law, then such provision(s) will be considered immediately amended to conform to that law. If the violative provision cannot be amended to conform to that law, each party expressly releases the other from any liability under the violative provision of this Agreement if either party cannot fulfill any obligation under this Agreement due to any provisions of local, state, or federal laws governing the violative provision. No waiver of any breach of any term or condition contained in this Agreement will constitute a waiver of any subsequent breach of the same term or condition. B. Limitations Period. Failure, refusal or neglect by either you or ERA to exercise any right or remedy arising under this Agreement or otherwise, or with any specification, standard or operating procedure of ERA as to any Office, will waive any default arising under this Agreement or the right of a party to any remedy resulting from such action or inaction of the other, and will prevent exercise or enforcement of any right or remedy as to such Office, unless the non-defaulting party provides written notice of such default to the other party within twelve (12) months after such right or default occurs. If ERA conducts an audit and discovers defaults not previously known, then ERA will have an additional twelve (12) months after an audit by ERA before any waiver of any of your defaults will become effective. Such waiver will not apply to your financial obligations of which ERA had no knowledge, e.g., without limitation, Royalty Fees and NMF Contributions on unreported Gross Revenues . Any obligation billed by ERA will be deemed to be notice of a right to collect. C. Disputes with Others. You and ERA agree that a decision of an arbitrator, mediator or court of competent jurisdiction in arbitration, mediation or litigation to which one of them is not a party will not in any manner prevent the person that was a party to such action from making similar arguments or taking similar positions in any action between you and ERA. You and ERA each waive the right to assert that principles of collateral estoppel prevent either you or ERA from raising any claim or defense in an action between you and ERA as a result of such party having lost a similar claim or defense in another action. 22. NON-COMPETITION COVENANTS A. Reserved B. Reserved. C. Competing Services or Products. During the initial or any renewal term of this Agreement, neither you nor any of your subsidiaries, nor your respective officers, directors, employees, sales 26 associates or agents will organize, manage, operate, hold any ownership interest in or receive compensation from any firm, company or other business entity which provides or seeks to provide equipment, supplies, services or other operating materials to other ERA Members, without the advance written consent of ERA. 23. INDEPENDENT CONTRACTOR A. Independently Owned and Operated. You will, at all times, hold yourself and the Business out to be an independently owned and operated business and otherwise operate your Business in compliance with any applicable laws, rules and regulations. You must conspicuously disclose in your real estate sale documents, listing agreements and on all business cards, stationery, and in all advertisements and in all other printed or recorded material you and your sales associates and employees use, that you are independently owned and operated and are not an agent of or owned by ERA. That disclosure must be conspicuous. You expressly understand that you will be an independent contractor and must hold yourself out to the general public as such. This Agreement does not make you an agent, legal representative, joint venture, partner, employee or servant of ERA for any purpose. You are not authorized to make or promise any contract, agreement, warranty or representation on behalf of ERA or an affiliate, except as expressly provided in this Agreement, or to create any obligation, express or implied on behalf of ERA. You are not authorized to accept service of process or legal notices directed to ERA. You acknowledge that this Agreement does not constitute or create, and the relationship between ERA and you is not and is not intended to be, a fiduciary relationship. B. Responsibility for Operations. ERA will have no obligation to pay your commissions, taxes, wages or other expenses, and will have no right to regulate or participate in the recruitment, selection, engagement, retention, discipline or termination of your sales associates or employees, or to determine or limit the parties from whom you may accept listings or to or for whom you may sell property, the commission rates you charge, the commission splits between you and your sales associates, your working conditions, the manner or details of work performed by you or your sales associates or employees, except as may be necessary to protect the ERA Identification and goodwill. You agree that you are solely responsible for the conduct of the Business operated under this Agreement according to your own judgment, and in accordance with the provisions of this Agreement and the Manuals as they may be amended from time to time. C. Ownership/Participants. Notwithstanding the foregoing, ERA and its affiliates may be equity owners of and may participate in the operating profits of Member or any affiliates of Member and this Section 23 shall not limit, in any way, the rights, responsibilities or relationships relating to such equity interest or profit participation. 24. MISCELLANEOUS A. Credit Report. You authorize ERA to investigate your credit and will supply ERA with references and signed consent forms for this purpose. You consent to exchange of information about you, the Business and your business and credit history on a privileged basis between ERA and your references or persons named in your credit report. B. Automatic Withdrawal. You will sign any documentation necessary to permit payment from your bank accounts through electronic funds transfer or similar methods of any fees or payments due under this Agreement to ERA or your ERA Broker Council. 27 C. Taxes. If any sales, income, services, use or privilege tax is imposed or levied by any government or governmental agency on account of your payment to ERA of Royalty Fees, NMF Contributions or other payments to ERA under this Agreement, then you must pay to ERA an amount equal to the amount of that tax. This provision will not apply to federal or state income taxes (or optional alternatives to an income tax) imposed on ERA. D. Successors and Assigns. Subject to the provisions of Section 18, this Agreement will be binding upon and inure to the benefit of the parties and their respective legal representatives, successors and assigns. E. Notices. All notices required under this Agreement must be in writing and will be deemed given: (1) if personally delivered to the respective party at the address specified below (or at such other address as a party may subsequently designate for itself by notice to the other party), or (2) if deposited in the United States mail, by certified mail, return receipt requested, postage prepaid, and addressed to the respective party at the address specified below (or at such other address as a party may subsequently designate for itself by notice to the other party), or (3) if faxed, provided that a confirmation copy of any fax transmission is mailed to the respective party via first class United States mail: (1) If to you: NRT Incorporated, 6 Sylvan Way. Parsippany, NJ 07054; ----------------------------------------------------- Attention: President -------------------- (2) If to ERA: ERA Franchise Systems, Inc., 6 Sylvan Way, Parsippany, NJ 07054; Attention: Vice President-Franchise Compliance; FAX: (973) 496-5641. Any notice will be considered given as of the date personally delivered or faxed or three (3) business days after the date of deposit in the United States mail, as the case may be. Either party has the right to change their address for notice by giving written notice as provided in this paragraph. F. Headings. The headings in this Agreement are for convenience only, do not constitute a part of this Agreement, and will not be deemed to limit or affect any of the provisions of this Agreement. G. Time of the Essence. Time is of the essence of this Agreement. H. Applicable Law. This Agreement will be governed by the laws of the state of New Jersey, except that the New Jersey Franchise Practices Act shall not apply to Members with Offices located outside New Jersey. I. Venue and Jurisdiction. You submit to the non-exclusive personal jurisdiction of the State and Federal courts of New Jersey with respect to any litigation pertaining to this Agreement or to any aspect of the business relationship between the parties. Such litigation will have venue in State courts in Morris County, New Jersey, or in the United States District Court for the District of New Jersey. J. WAIVER OF JURY TRIAL. The parties waive the right to a jury trial in any action related to this Agreement or any aspect of the relationship between the Member, ERA and their respective successors and assigns. K. Waiver of Punitive Damages. ERA and you fully waive any right to or claim for any punitive or exemplary damages against the other and agree that if any dispute arises between them, each will be 28 limited to recovery of actual damages sustained which, in the case of ERA, includes lost future profits as set forth herein. L. Attorney Fees. In any claim or counterclaim or other legal proceeding brought by either you or ERA against the other in connection with this Agreement, if such party instituting the claim, counterclaim or legal proceeding is unsuccessful, then it will pay the prevailing party's reasonable attorneys' fees and costs. M. Reserved N. Variations Among Agreements. ERA specifically reserves the right and privilege, at its sole discretion and as it may deem in the interests of those concerned in any specific instance, to vary standards for any other Member based upon the peculiarities of a particular area, circumstance, business practice or other condition which ERA deems of importance to the successful operation of such other Member's business. You will not complain on account of any variation from standard specifications and practices granted to any other Member and will not be entitled to require ERA to grant you a like or similar variation under this Agreement. You are not the third party beneficiary of any other Membership Agreement. In the event of any conflict between this Agreement and the Manuals or any other document, this Agreement shall control. O. Opportunity to Investigate. You acknowledge that you have had full opportunity to investigate independently the operations of ERA and to be thoroughly advised of the terms and conditions of this Agreement by counsel of your choice. P. Integration. You acknowledge that ERA's operations have been fully explained to you; that you understand its uses, benefits and limitations; and that no representations as to the particular type or amount of benefit to be gained by you have been made by or on behalf of ERA. You have not relied on any written or oral representations except those specifically included in or made a part of this Agreement in writing. Except as expressly provided in this Section 24(P), this Agreement, the Marketing Agreement, the Outsourcing Agreement, the Acquisition Cooperation Agreement, the Incremental Royalty Agreement and the Stockholders Agreement contain all agreements, understandings, conditions, warranties and representations of any kind, oral or written, between the parties hereto, and constitute the entire and final agreement between them with respect to the subject matter addressed herein. Accordingly, all prior and contemporaneous agreements, understandings, conditions, warranties and representations of any kind, oral or written, are hereby superseded and canceled by this Agreement, except as to any monies due and unpaid between the parties to this Agreement at the time of the execution hereof. There are no implied agreements, understandings, conditions, warranties or representations of any kind. No officer, employee or agent of ERA has any authority to make any representation or promise not contained in this Agreement. "Marketing --------- Agreement" shall have the meaning ascribed to it in the Acquisition Cooperation Agreement. Q. Reserved R. Reserved S. Member acknowledges that it has provided input for the preparation of this Agreement, that is has consulted with counsel of its choice, that the Agreement reflects a negotiation between Franchisor and Member, and that this Agreement shall not be construed more strongly against either party on account of that party drafting this Agreement. 29 DO NOT SIGN THIS AGREEMENT IF YOU BELIEVE ERA OR ANY OF ITS REPRESENTATIVES HAS PROMISED YOU SOMETHING THAT IS NOT PART OF THIS AGREEMENT, ANY ATTACHED ADDENDUM OR THE OFFERING CIRCULAR. 25. ADDITIONAL REPRESENTATIONS Member makes the following additional warranties and representations on which ERA is relying to enter into this Agreement: A. Member is a corporation duly organized and existing under the laws of Delaware. Member is qualified to do business and in good standing under the laws of the State where each Office is located. B. Reserved. C. Reserved. D. Reserved. E. Reserved. F. Reserved. 30 IN WITNESS WHEREOF, the parties have signed this Agreement effective as of the Effective Date. ERA FRANCHISE SYSTEMS, INC. By: /s/ John J. Kornfeind Dated: February 9, 1999 ------------------------------------------------ ------------------ John J. Kornfeind Vice President-Franchise Sales and Administration
MEMBER NRT INCORPORATED By: /s/ Steven L. Barnett Dated: February 9, 1999 ------------------------------------------------ ------------------ Name: Steven L. Barnett Title: Senior Vice President, General Counsel and Secretary
#58040.12 31 EX-10.2 5 MASTER CENTURY 21 REAL ESTATE FRANCHISE AGREEMENT EXHIBIT 10.2 MASTER CENTURY 21(R) REAL ESTATE FRANCHISE AGREEMENT This Agreement (this "Agreement") is made as of February 9, 1999 by and --------- between Century 21 Real Estate Corporation, a Delaware corporation and a licensed real estate broker, with principal offices in the State of New Jersey (hereinafter called "Franchisor"), and NRT Incorporated, a Delaware corporation, ---------- with principal offices located at 6 Sylvan Way, Parsippany, New Jersey (hereinafter called "Franchisee"). ---------- RECITALS A. Franchisor has the exclusive right to use and sublicense certain tradenames, trademarks and service marks, including the name "CENTURY 21," which have been registered on the Principal Register in the United States Patent and Trademark Office, with other appropriate state agencies in the United States, and with governmental agencies of foreign countries (which marks, together with certain other trademarks and service marks which are not registered or which are pending registration, are hereinafter collectively called "CENTURY 21 Marks"); ---------------- B. Franchisor has developed a system for the promotion and assistance of independently owned and operated real estate brokerage offices, including policies, procedures and techniques designed to enable such offices to compete more effectively in the real estate sales market (which system is hereinafter called the "CENTURY 21 System"). The CENTURY 21 System includes, but is not ----------------- limited to, common use and promotion of certain CENTURY 21 Marks, copyrights, trade secrets, centralized advertising programs, recruiting programs, referral programs and sales and management training programs. Franchisor has from time to time revised and updated the CENTURY 21 System and plans to continue to do so as required in its best judgment; C. Franchisee and Franchisor currently are parties to an Amended and Restated Master CENTURY 21 Real Estate Franchise Agreement, and the parties wish to further amend and restate such agreement. TERMS OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the delivery, receipt and sufficiency of which are hereby acknowledged; and further, in accordance with and pursuant to all terms, conditions, covenants, agreements, representations and warranties contained herein, the parties hereby mutually agree as follows: 1. GRANT OF FRANCHISE The parties hereby agree that this Agreement amends, restates and supersedes all prior franchise agreements (the "Old Agreements") between the parties under -------------- which any real estate brokerage offices owned by Franchisee were operating. Franchisor hereby agrees to waive all claims against Franchisee that may exist under the Old Agreements, except claims for monies due, indemnification claims and Franchisor's exercise of audit rights thereunder. In addition, the parties agree that (i) effective on the first day of the month following the month in which a Triggering Event (as defined in Schedule 3 hereof) occurs, the Incremental Royalty Agreement (the "Incremental Royalty Agreement"), dated as of ----------------------------- August 11, 1997, among Franchisor, Franchisee, ERA Franchise Systems, Inc., Coldwell Banker Real Estate Corporation and HFS Incorporated, (ii) effective on the date hereof, the -1- Additional Royalty Agreement dated as of August 11, 1997, among Franchisor, Franchisee, ERA Franchise Systems, Inc., Coldwell Banker Real Estate Corporation and HFS Incorporated, and (iii) upon the redemption in full of Franchisee's Series C Cumulative Junior Redeemable Preferred Stock, the Franchise Override Agreement, dated as of August 11, 1997, among Franchisor, Franchisee, ERA Franchise Systems, Inc., Coldwell Banker Real Estate Corporation and HFS Incorporated, are hereby terminated and of no further force or effect (in the case of (i) and (ii), as a result of the royalties previously payable thereunder becoming payable under the Master Real Estate Franchise Agreement, dated as of the date hereof, between Franchisee and Coldwell Banker Real Estate Corporation). Franchisor hereby grants to Franchisee, and Franchisee hereby accepts, the non-exclusive right to use the CENTURY 21 System and certain CENTURY 21 Marks, as they are set forth in the CENTURY 21 Policy and Procedure Manual (hereinafter called the "P&P Manual"), as it may be revised and/or ---------- supplemented from time to time by Franchisor, for the operation of multiple licensed real estate brokerages upon the terms and conditions set forth in this Agreement (hereinafter collectively called the "Franchise"). Except as --------- specifically set forth in this Agreement, the grant of this Franchise shall not be construed as granting Franchisee any right to purchase any additional franchises from Franchisor, or any right or priority as to the location of any additional franchise which may be granted by Franchisor. If Franchisor subsequently grants Franchisee any franchise, said grant shall be on such terms as Franchisor shall establish. "Triggering Event" shall mean the earliest of (i) ---------------- such time as at least 20% of Franchisee's issued and outstanding common shares have been distributed through a primary public offering registered under the Securities Act of 1933, as amended, (ii) the sale by Franchisee, in one or a series of related transactions of assets representing 80% or more in value of Franchisee's consolidated assets on a fair market value basis and (iii) the dividend or distribution to stockholders of cash or assets representing 80% or more in value of Franchisee's consolidated assets, net of liabilities on a fair market value basis. 2. TERM OF FRANCHISE The term of this Franchise shall be for a period of fifty (50) years, commencing on the date hereof. 3. LIMITED RENEWABILITY OF FRANCHISE A. Upon the expiration of each term hereof (other than upon a termination by Franchisor), Franchisee shall have the option to extend the term hereof for an additional term of 50 years, provided that, Franchisee complies with all of the -------- ---- following: (i) At the time of the extension of the term hereof, Franchisee shall not be in material default under Franchisee's existing Franchise Agreement or any other agreement or obligation Franchisee may have with Franchisor (such as other CENTURY 21 franchise agreements), including, but not limited to, Franchisee's obligations to (x) pay royalty fees, National Advertising Fund contributions, Broker Council assessments (to the extent Franchisee is required herein to participate in such Broker Councils), interest and late charges, audit fees and other properly chargeable amounts; and (y) comply with the P&P Manual, including trade name and logo guidelines; (ii) Franchisee shall deliver to Franchisor written notice of Franchisee's intent to extend the term hereof not more than one hundred eighty (180) days and not less than ninety (90) days prior to the Expiration Date of the term under which Franchisee is then operating; if no such notice has been received by Franchisor at least ninety (90) days but not more than one hundred eighty (180) days prior to said Expiration Date, then Franchisee's option to extend the term hereof shall be extinguished and Franchisor shall have the right, during the ninety (90) day period prior to said Expiration Date, subject to local law, and -2- notwithstanding any other provision of this Agreement, to market, grant, place and/or operate franchises in the general vicinity of any of Franchisee's Approved Locations. Upon receipt of such notice, the term hereof shall automatically and without further action be extended to a date 50 years from the date the term of this Agreement was otherwise to terminate; (iii) Franchisee, as a condition for extending the term hereof, shall make such reasonable expenditures as Franchisor may require, pursuant to Paragraph 11C(ix), as are necessary to conform with Franchisor's standards for interior and exterior office size, decor, overall attractiveness and cleanliness then in effect; and (v) Franchisee shall pay no initial franchise fee or renewal fee in connection with extending the term hereof under the terms of this Paragraph 3. OTHER THAN AS SET FORTH IN THIS PARAGRAPH 3, NEITHER PARTY HAS RENEWAL RIGHTS. 4. NAME OF FRANCHISE A. Unless otherwise consented to in writing by Franchisor, Franchisee's offices (other than Transition Offices) shall operate under the trade names set forth in Schedule 1 attached hereto, which for each office will include the ---------- words "CENTURY 21" followed by the applicable office identifier, (hereinafter -------------------------------------------- individually called a "Franchisee CENTURY 21 trade name") and shall use no other name(s) in connection with any operations conducted at or from the applicable location specified in Paragraph 5 hereof or on computer communication services such as the Internet. Franchisee may operate its business through wholly-owned subsidiaries. Unless otherwise consented to in writing by Franchisor, in every visual display in which the CENTURY 21 modern building logo is used the portion of every Franchisee CENTURY 21 trade name immediately following the words "CENTURY 21," or other approved words, shall be in a five-to-one size relationship with the CENTURY 21 name and logo, as required in the P&P Manual, and the total appearance of every Franchisee CENTURY 21 trade name and other identifying words must be approved in advance in writing by Franchisor. Franchisor reserves the right to review and require corrections and modifications to any display by Franchisee of the CENTURY 21 name or marks. Franchisor's failure to promptly require corrections of or modifications to Franchisee's improper use of the name or marks shall not be deemed a waiver of Franchisor's right to do so. B. Franchisee shall display the aforementioned trade name for all purposes, including but not limited to, office signs, yard signs, stationery, business cards and advertising materials for the particular office(s) in strict compliance with the requirements set forth in the P&P Manual. C. Franchisee shall file and keep current, in the county and/or state in which Franchisee's Approved Location is situated and at such other places as may be required by law, a "Fictitious Name Certificate," or comparable instrument, with respect to every Franchisee CENTURY 21 trade name under which Franchisee has been approved to operate by Franchisor. If Franchisee is a corporation, Franchisee shall not, without the prior written consent of Franchisor, include the words "CENTURY 21" as part of Franchisee's corporate name. Prior to opening an office under said trade name, Franchisee shall supply evidence satisfactory to Franchisor that Franchisee has complied with all relevant laws regarding the use of fictitious or assumed names. -3- D. Franchisee shall use Franchisee's CENTURY 21 trade name and such other CENTURY 21 Marks as Franchisee may be authorized to use from time to time, exclusively for the purpose of promoting and operating licensed real estate brokerage offices, and for such other lawful business activities as may have been authorized previously in writing by Franchisor; provided, however, that Franchisor has no obligation to authorize any such additional business activities. E. Franchisee shall comply, at all times throughout the term of this Agreement, with all guidelines instituted by Franchisor concerning authorized use and/or presentation by Franchisee of the CENTURY 21 Marks (including derivative marks such as "CENTURY," "C-21," "C21") and the CENTURY 21 System on the Internet or other communication systems. 5. LOCATION OF FRANCHISED OFFICES A. Franchisee shall operate the Franchise exclusively from the locations set forth on the list provided to Franchisor on the date hereof (the "Office List") ----------- (herein referred to individually as an "Approved Location" and collectively as ----------------- the "Approved Locations"). Franchisee may not operate the franchised business ------------------ from any other location or any additional locations without the prior written approval of Franchisor or Cendant Corporation ("Cendant") (it being understood ------- that approval of funding, pursuant to the Acquisition Cooperation Agreement or otherwise, of an acquisition pursuant to which Franchisee will acquire additional brokerage offices shall not by itself be deemed as approval for the offices acquired in such transaction to become Approved Locations hereunder); provided that Franchisor agrees to grant its consent to any additional offices unless any such additional office (i) would have a negative impact on any other franchisee, as determined by Franchisor consistently with impact review practices and policies generally applicable to franchisees, (ii) would result in Franchisor being in breach of any agreement with another franchisee or (iii) is an office proposed to be acquired by Franchisee which was affiliated with a Cendant real estate brand prior to the proposed acquisition of such office by Franchisee. Each Approved Location set forth on the Office List is subject to the terms and conditions, if any, set forth in Paragraph 11.C(ix) of this Agreement. "Acquisition Cooperation Agreement" shall mean the Acquisition --------------------------------- Cooperation Agreement, dated as of February 9, 1999 between Franchisee and Cendant. B. Franchisee shall operate a real estate brokerage business and neither Franchisee nor any of its subsidiaries shall operate, manage, own, have a greater than 10% interest in, or otherwise engage in, any other business (except for the marketing of products and services permitted pursuant to the Program Outsourcing Agreement) or, except for real estate brokerage businesses pursuant to a franchise or membership agreement with Cendant or a subsidiary thereof, operate, manage, own, have a greater than 10% interest in, or otherwise engage in, any other real estate brokerage business, either under Franchisee's CENTURY 21 trade name or under any other name, without the prior written consent of Franchisor, which consent may be withheld in Franchisor's sole discretion. Notwithstanding the foregoing, if permitted pursuant to the terms of the Program Outsourcing Agreement, dated as of February 9, 1999, between Franchisee and Cendant (the "Outsourcing Agreement"), Franchisee shall be permitted to conduct --------------------- title insurance and escrow service and closing service operations without the prior consent of Franchisor, provided that such operations do not use the CENTURY 21 Marks and Franchisee apprises the public, in each case, that such real estate related business is not associated with or endorsed by Franchisor. For purposes of this Agreement, a franchise or membership agreement with Cendant or a subsidiary thereof shall mean any franchise or membership agreement which, at the time of execution, was with Cendant or a subsidiary thereof. -4- C. Upon Franchisee's establishment of any new CENTURY 21 office or Franchisee's expansion (through assignment or otherwise) of its CENTURY 21 branch offices and approval of such office or offices by Franchisor as provided in Paragraph 7 hereof, the Approved Location for each such new office location shall be added to the Office List by mutual agreement of Franchisor and Franchisee. Franchisee shall provide Franchisor on the date hereof with a current list of all of its operating CENTURY 21 offices and the address of the Approved Locations and Responsible Broker for each such office. Franchisee shall provide Franchisor with written notice upon any change in any of its operating CENTURY 21 offices, the address of the Approved Locations or Responsible Broker for any such office. 6. SERVICES AND OBLIGATIONS TO FRANCHISEE A. Franchisor will impart to Franchisee its real estate brokerage, selling, promotional and merchandising methods and techniques associated with the CENTURY 21 System, and shall maintain a staff to give assistance and service to Franchisee. B. Franchisor will publish and distribute from time to time a supply manual suggesting sources of supply for forms, signs, cards, stationery and other items necessary to operate a modern real estate brokerage business. The suggested source of supply for items may be Franchisor, or an Affiliate of Franchisor, or an independent supplier. Franchisee may purchase supplies either from a source of supply suggested by Franchisor or from any other supplier which can first demonstrate to the satisfaction of Franchisor that its products or services meet the specifications established from time to time by Franchisor. The foregoing is subject in all respects to the Outsourcing Agreement. "Affiliate" shall mean --------- with respect to any entity or person, another entity or person which controls, is controlled by, or is under common control with, such entity or person. C. Franchisor will make available sample referral forms for use in referring business between CENTURY 21 franchisees. Franchisor also will establish procedures for referrals between Franchisee and other CENTURY 21 franchisees; provided, however, that all referral commissions shall be subject to negotiation directly between the franchisees participating in the referral transaction. D. Franchisor will operate a sales training program on a periodic basis for CENTURY 21 franchisees and their sales personnel at a location or locations selected by Franchisor. This program will include seminars and conferences of special interest to be held as Franchisor deems necessary or advisable, relating to such topics as market conditions, sales motivation, sales aids, advertising and financing. Franchisor may charge a registration fee or other fee for such programs, seminars and conferences. E. Reserved --------- F. Franchisor agrees to contribute timely to the National Advertising Fund an amount of its own funds equal to ten percent (10%) of the royalty fees it receives from Franchisee pursuant to Section 8(A)(i). Notwithstanding the foregoing, Franchisor will make no such contributions to the National Advertising Fund if annual royalty fees payable by Franchisee to Franchisor under Section 8(A)(i) of this Agreement are less than 5% of Franchisee's gross revenue (as determined in accordance with Section 8) ("Gross Revenue") for such ------------- period. -5- G. Notwithstanding any contrary terms and conditions contained in this Agreement (other than the first sentence of Section 5B hereof), Franchisee agrees to be bound by and comply with the terms and conditions of the Outsourcing Agreement. 7. ADDITIONAL OFFICES/FRANCHISE FEES A. There shall be no initial franchise fee payable by Franchisee in connection with the Franchise offices set forth on the Office List on the date hereof (individually an "Office" and collectively the "Offices"). Should ------ ------- Franchisee add any additional offices (and Approved Locations) (whether through acquisition, merger, or otherwise), other than Transition Offices, Offices which were already affiliated with Franchisor and Offices relocated pursuant to Section 7C(ii), Franchisee shall pay Franchisor an initial franchise fee in connection with any additional offices, equal to $4,000 per office. In addition, with respect to each Brokerage Acquisition (as defined in the Acquisition Cooperation Agreement) in which Franchisor's franchise sales staff is involved, Franchisee shall pay to Franchisor an additional fee equal to $3,500 per office acquired, whether such offices are operated by Franchisee or are immediately closed. The maximum additional fee payable by Franchisee pursuant to this Section 7A with respect to a a single transaction shall be $100,000. Throughout this Agreement, the terms "dollars" and "$" shall mean ------- - United States dollars. B. In connection with the establishment of any CENTURY 21 office by Franchisee at a location or locations other than an Approved Location, whether by acquisition, assignment or relocation, Franchisee shall be required to notify Franchisor in writing of the proposed acquisition, assignment or relocation, the address of the proposed office site and such other business information as Franchisor shall request in connection with reviewing such application, including information concerning the seller, transferor or assignor of such office. Franchisor will review and, consistent with the second sentence of Section 5A, approve or reject each such application within a reasonable period of time after receipt by Franchisor of all Franchisee's information relating to such application requested by Franchisor. C. If Franchisee wishes to sell, close down or otherwise terminate one or more of its CENTURY 21 Offices, Franchisee shall be required to obtain the prior written consent of Franchisor, which consent may be withheld in Franchisor's sole discretion; provided however, that Franchisee shall be permitted to close, -------- ------- without the consent of Franchisor, (i) a number of Offices acquired by Franchisee not exceeding the number of Offices which were identified in writing to Cendant prior to such acquisition (provided that in an acquisition in which Cendant is providing financing pursuant to the Acquisition Cooperation Agreement, such number of Offices must be identified in writing to Cendant prior to the date on which Cendant agrees to provide such funding) as the number of Offices to be closed, so long as such Offices are closed within one year of such acquisition and are not identified as being, or being affiliated with, CENTURY 21 Offices (unless such offices at the time of acquisition by Franchisee are CENTURY 21 offices) ("Transition Offices"), (ii) Offices which are moved within ------------------ a proximate geographical area (it being understood that such a move requires the consent of Franchisor pursuant to Section 5A hereof), so long as in connection with such move, a material portion of the personnel at such office is not reassigned to other Offices, (iii) any of the offices acquired by Franchisee from National Realty Trust, provided that the sum of the Gross Revenue of all of such offices closed (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant), in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such office occurred, is less than $150,000,000 and (iv) other Offices, so long as the Gross Revenue for each such Office, together with the Gross Revenue for each other Office (whether operating under this Agreement or -6- any other franchise or membership agreement with a subsidiary of Cendant) closed pursuant to this clause (iv) in the same calendar year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such Office occurred, is less than the sum of (A) 3% of Franchisee's Gross Revenue (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the immediately prior calendar year and (B) for office closures occurring in calendar years beginning in 1999, an amount equal to (i) 3% of Franchisee's Gross Revenue (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the calendar year immediately preceding the immediately prior calendar year minus (ii) the Gross Revenue of all Offices closed pursuant to this clause (iv) in the immediately preceding prior year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such office occurred and (C) for office closures occurring in calendar years beginning in 2000, an amount equal to (i) 3% of Franchisee's Gross Revenue (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the calendar year two years immediately prior to the immediately prior calendar year minus (ii) the Gross Revenue of all Offices closed pursuant to this clause (iv) in the year immediately prior to the immediately preceding prior year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such Office occurred, provided that all fees payable to Franchisor and the NAF are made through the closure date, Franchisee complies with the procedures set forth in Section 18 with respect to such closed offices, no assignment of the franchise for such office(s) is involved without Franchisor's consent and such Office closures or sales do not reduce the CENTURY 21 System marketshare for the applicable market by greater than 10%. Any references to Gross Revenue in this Section 7C shall exclude all Gross Revenue attributable to sales agents transferred to another office of Franchisee that is subject to a franchise or membership agreement with what is (notwithstanding the last sentence of Section 5B) at the time of such transfer a subsidiary of Cendant. Any determination of Franchisee's Gross Revenue for calendar year 1997 shall only include the period from August 29, 1997 through December 31, 1997. 8. FRANCHISE ROYALTY FEES A. (i) Franchisee agrees to pay in cash to Franchisor at its principal offices, or at such other place as Franchisor may designate, in addition to the initial franchise fee set forth above in Paragraph 7A, a "royalty fee" equal to six percent (6%) (the "Regular Royalty") of the gross revenue earned, derived --------------- and/or received by Franchisee and its subsidiaries, salespeople, agents, representatives, contractors, employees, partners, directors or officers from: (1) all transactions involving the purchase, sale, lease, rental, hypothecation, license, exchange or other transfer or disposition of any interest in real estate, condominiums, mobile homes, panelized housing, time share units or manufactured homes; (2) all other transactions for which a real estate license or auctioneer's license is required (which, for purposes of this Agreement, is deemed to include all fees and remuneration collected or earned by Franchisee in organizing, promoting, selling, managing or otherwise servicing any kind of real estate syndicate, partnership (whether general or limited) or corporation, real estate investment trust or other real estate investment organization, or finding any investors for any of the above, said royalty fees being payable with respect not only to any cash payments, but also to the value of all other forms of compensation and remuneration received, including, but not limited to, promissory notes, securities, partnership interests, interests in real estate and other forms of property) and (3) all transactions in which CENTURY 21 Marks or the CENTURY 21 System are used, including that portion of a transaction in which personal property is -7- bought or sold. Notwithstanding the foregoing, with respect to Franchisee's offices operating under this Agreement on the date hereof (the "Contempo Offices"), the royalty fee set forth above shall be equal to 4.89% (the ---------------- "Contempo Royalty"); provided that the Contempo Royalty shall be adjusted as ---------------- follows: if Franchisee acquires any new real estate brokerage offices whose operations are transferred to or combined with the operations of the Contempo Offices (a "Contempo Roll-In"), the Contempo Royalty will be adjusted to ---------------- equal (a) LTM Gross Revenue for the Contempo Offices in operation immediately prior to such Contempo Roll-In divided by the LTM Gross Revenue for both the Contempo Offices in operation immediately prior to such Contempo Roll-In and the offices acquired in such Contempo Roll-In, multiplied by the Contempo Royalty as last determined plus (b) the LTM Gross Revenue for the offices acquired in such Contempo Roll-In (the "New Offices") divided by the LTM Gross Revenue for ----------- both the Contempo Offices in operation immediately prior to such Contempo Roll-In and the New Offices, multiplied by the Regular Royalty rate that would have been in effect but for this sentence or the lower rate set forth below. Upon each Contempo Roll-In, the Contempo Royalty as adjusted shall apply to the Contempo Offices and the offices whose operations are transferred to, or combined with, the Contempo Offices, and "Contempo Offices" shall thereafter refer to all of such offices. Notwithstanding the Regular Royalty set forth in the first sentence of this section, but subject to the calculation of the Contempo Realty described above, upon the opening of a new office by Franchisee as a result of an acquisition of an existing real estate brokerage company which was not affiliated with any Cendant franchise brand immediately prior to such acquisition, which acquisition did not include Cendant's or one of its subsidiaries' acquisition of trademarks and was not consummated using funds from Cendant or one of its subsidiaries (I) while the commitment to provide funds under the Acquisition Cooperation Agreement (the "Commitment") has not been ---------- exhausted, and Franchisee has requested in writing for Cendant to use its funds (which request is made in good faith and pursuant to the Acquisition Cooperation Agreement) and Cendant has declined to do so, and provided that Franchisee is in compliance with the Acquisition Cooperation Agreement, the royalty fee applicable to gross revenues attributable to those sales agents affiliated with such office immediately prior to such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to: (i) 4% if the offices acquired in such acquisition had LTM Gross Revenue of up to $5,000,000, (ii) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenue between $5,000,000 and $10,000,000, and (iii) 2% if the offices acquired in such acquisition had aggregate LTM Gross Revenue in excess of $10,000,000; provided that if Franchisor's impact review policy would -------- have, in Franchisor's sole determination, prevented Franchisee from opening such office due to the proximity of such office to Franchisee's existing CENTURY 21 office (the "Impacted Office") if not for the fact that Franchisee also owns the --------------- Impacted Office, the royalty fee applicable to gross revenues attributable to sales agents working in such office at the time of such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to: (i) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenue of up to $5,000,000 and (ii) 2% if the offices acquired in such acquisition had aggregate LTM Gross Revenue in excess of $5,000,000 and (II) after the Commitment has been exhausted, and Franchisee has requested in writing for Cendant to use its funds (which request is made in good faith and on equivalent terms, economic and other, to those in the Acquisition Cooperation Agreement) and Cendant has declined to do so, the royalty fee applicable to gross revenues attributable to those sales agents affiliated with such office immediately prior to such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of -8- Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to: (i) 4% if the offices acquired in such acquisition had aggregate LTM Gross Revenue of up to $5,000,000 and (ii) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenue in excess of $5,000,000; provided that if Franchisor's impact review policy would have, in Franchisor's sole determination, prevented Franchisee from opening such office due to the proximity of such office to an Impacted Office if not for the fact that Franchisee also owns the Impacted Office, the royalty fee applicable to gross revenues attributable to sales agents working in such office at the time of such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to 3%. Notwithstanding the foregoing, if Franchisee transfers the operations of one Office ("Office A") -------- to another Office ("Office B"), or combines the operations of any two Offices -------- ("Office A" and "Office B") the royalty fee applicable to Gross Revenue -------- -------- generated at the combined Office or the Office to which the operation were transferred, shall be equal to (X) the LTM Gross Revenue for Office A divided by LTM Gross Revenue for Office A and Office B, multiplied by the royalty fee applicable to Office A, plus (Y) the LTM Gross Revenue for Office B divided by LTM Gross Revenue for Office A and Office B multiplied by the royalty fee applicable to Office B. For purposes of this Agreement, the determination of whether the Commitment has been exhauasted shall be made assuming that the fifth anniversary of the date of the Acquisition Cooperation Agreement has passed. Notwithstanding anything in this Agreement to the contrary, royalties are payable under this Section 8(A)(i) with respect to Transition Offices. (ii) In addition to the foregoing, and unless waived in writing by Franchisor as to any specific transaction, the royalty fees shall be paid on all transactions in which Franchisee or any subsidiary of Franchisee is involved on Franchisee's own behalf or account (that is on transactions for properties owned by Franchisee), and for which the services or facilities of Franchisee or Franchisee's office are used, or in which the CENTURY 21 name or mark is used in any manner. The Franchisee's regularly charged brokerage commission or fee shall be imputed with respect to transactions involving any subsidiary of Franchisee acting as a principal for purposes of computing the royalty fee payable to Franchisor in connection with such transactions. (iii) Notwithstanding anything else herein to the contrary, no royalty fees or NAF contributions will be charged or payable hereunder with respect to (i) escrow, title, mortgage or mortgage marketing services (including fees under the Marketing Agreement (defined below)), referral network dues, desk rental fees, broker price opinions and home warranty fees received or earned by Franchisee, (ii) interest or investment income, including interest or investment income in connection with title and escrow deposits and/or arbitrage loans and (iii) property management services performed by Franchisee; provided that property management services shall not include property management commissions paid to Franchisee's brokers, for which royalty fees and NAF contributions will be charged. "Marketing Agreement" shall have the meaning ascribed to it in the ------------------- Acquisition Cooperation Agreement. B. The royalty fee is fully earned by and payable to Franchisor immediately upon Franchisee's receipt of revenue, whether in cash or other property. In all transactions, Franchisee will be required to pay the royalty fee on a monthly basis no later than the tenth business day of the month with respect to all transactions closed in the prior month. Royalty fees more than ten (10) days late shall bear interest from the due date until paid at the lower rate of either the highest rate allowed by law or a rate that is five (5) -9- percentage points per annum higher than the "prime rate" then currently established by Mellon Bank, N.A. Pittsburgh, PA. C. In addition to royalty fees payable hereunder, pursuant to the terms and conditions of the Incremental Royalty Agreement, Franchisee shall be required to pay Franchisor from time to time, additional royalties based upon the consolidated performance of all of Franchisee's real estate brokerage businesses, until the termination of the Incremental Royalty Agreement. 9. NATIONAL ADVERTISING FUND A. Franchisee agrees to pay in cash to Franchisor at its principal offices, or at such other place as Franchisor may designate, in addition to the "royalty fees," a National Advertising Fund (hereinafter called the "NAF") contribution --- equal to two percent (2%) of Franchisee's Gross Revenue (including Gross Revenue attributable to Transition Offices); provided, however, that Franchisee's NAF contribution shall be limited and subject to the following payment formula: Franchisee shall pay in cash to the NAF a monthly per office contribution. Such contribution shall be paid on the same dates as royalty fees are paid hereunder. Such contribution shall be subject to minimum and maximum amount limitations. Franchisee's initial minimum and maximum monthly contribution amount limitations as of this Agreement are currently $272 and $817 per office (including Transition Offices). These limitations may be adjusted annually based upon the greater of (i) the percentage increase in the Consumer Price Index: All Items/US City Average-All Urban Consumers ("Index"-1967 Base Year=100) as published by the United States Department of Labor's Bureau of Labor Statistics from January of the year in which the minimums and maximums were last adjusted (or, for the first adjustment, January of the year in which the minimums and maximums set forth above were established) to the January of the year in which the minimums and maximums are then being adjusted and (ii) a percentage equal to the yield to maturity on United States Treasury Bonds with maturity of 30 years as listed in The Wall Street Journal as of the last business day of October in the year preceding the effective date of such adjustment. Franchisor shall publish to all franchisees the adjustment, if any, which shall become effective on June 1 of each year. Should the Index cease to be published or be published less frequently or in a different manner, then Franchisor reserves the right to adopt a substitute index or procedure that reasonably reflects and monitors changes in consumer price levels. Notwithstanding the foregoing, Franchisor reserves the right in its sole discretion in any year to waive in whole or in part or postpone temporarily or indefinitely, or any combination of a waiver or postponement, any scheduled adjustment in the Franchisee's monthly contribution to the NAF. Notwithstanding the foregoing, the NAF minimums and maximums will be adjusted consistently with all other franchisees of Franchisor. B. If Franchisee's required NAF contributions are not received on the payment date set forth in A. above (it being understood that the 10-day grace period applicable to payment of royalty fees shall similarly apply to payments of NAF contributions), Franchisor may assess a late fee equal to ten percent (10%) of the delinquent amount payable to Franchisor and/or accrue interest in favor of the NAF on the amount past due from the date due to the date paid at the lower rate of either the highest rate allowed by law or a rate that is five (5) percentage points per annum higher than the "prime rate" then currently established by Mellon Bank, N.A., Pittsburgh, PA. -10- C. In addition to the Franchisor contributions required by Paragraph 6.F and 9.E, Franchisee's NAF contributions shall be placed in a National Advertising Fund, managed by Franchisor. Such funds will be held by Franchisor in a National Advertising Fund account. Franchisor will administer such funds in accordance with this Paragraph 8. Franchisor has agreed that contributions to the NAF shall be used exclusively for advertising and public relations purposes for the exclusive, collective benefit of all members of the CENTURY 21(R) organization, including all CENTURY 21 franchisees, Franchisor, and CENTURY 21 Regional Subfranchisors. With respect to franchises in the company-owned regions, Franchisor will spend at least eighty-five percent (85%) of contributions to the NAF on either, (1) national advertising, media, promotion or marketing or national public relations programs or (2) local or regional advertising, media, promotion or marketing or local or regional public relations programs or (3) other activities connected to the promotion and marketing of the CENTURY 21 Marks or the CENTURY 21 organization. Franchisor will spend not more than fifteen percent (15%) of contributions to the NAF to engage in test marketing, to conduct research, surveys of advertising effectiveness, produce new commercials and other promotional and advertising materials and programs, or other purposes deemed beneficial by Franchisor for the general recognition of the "CENTURY 21" name, other CENTURY 21 Marks and for the overall success of the various members of the CENTURY 21 organization in the United States and other countries. Said fifteen percent (15%) portion may be spent on a disproportionate basis at the discretion of Franchisor. Franchisee shall receive on at least an annual basis a report describing the activity of the NAF and summary financial information regarding the NAF. Franchisor shall be entitled to reimburse itself and its Affiliates for reasonable accounting, collection, bookkeeping, reporting and legal expenses incurred with respect to the NAF. Franchisor shall not be liable for any act or omission with respect to the NAF which is consistent with this Agreement or done in good faith. D. Option to Require Flat Fee Monthly Advertising Contributions: Franchisor shall have the right to modify from time to time the method by which the required NAF contribution shall be computed. Franchisor may require a fixed monthly contribution amount, said fixed monthly contribution shall first be established as that amount which is equal to the average monthly NAF contribution billed to all CENTURY 21 franchisees nationally in the calendar year immediately preceding the year in which the right to invoke the NAF contribution modification is exercised, plus the permissible annual adjustment in the NAF monthly contribution amount described in Paragraph 9.A. Said fixed monthly contribution shall be adjusted annually according to increases or decreases in the Consumer Price Index pursuant to those procedures described in the payment formula contained in Paragraph 9.A; provided however, that in no case shall the NAF fixed monthly per office contribution required be less than Two Hundred Dollars ($200.00). and shall not exceed the amount under Paragraph 9.A. Franchisee shall pay timely such fixed monthly contribution amounts, such that a contribution for a particular month is received by Franchisor at its principal offices, or at such other location designated by Franchisor, not later than the last day of the following month, whether or not Franchisee actually receives a billing for such fixed contribution amount. Franchisee acknowledges that those provisions governing delinquent contributions and NAF contribution and expenditure guidelines, as currently are contained in Paragraphs 9.B and 9.C, shall remain in effect in the event Franchisor elects to require a fixed monthly contribution amount pursuant to this Paragraph 9.D. In the event Franchisor shall exercise the right granted it under this Paragraph 9.D, it continues to retain those rights specifically reserved and described in the payment formula contained in Paragraph 9.A. Franchisee acknowledges the right of Franchisor to modify the method of contribution pursuant to this Paragraph 9.D and recognizes Franchisee's continuing duty to fulfill all NAF obligations if and when such right is exercised. -11- E. Reserved. F. Franchisor reserves the right to account for, charge and collect the minimum and maximum NAF contributions referred to in Paragraph 9.A on an annual rather than a monthly basis. 10. TEMPORARY TRACT OFFICES With the prior written consent of Franchisor, and upon payment of a One Thousand Dollar ($1,000.00) fee to Franchisor, Franchisee may open a temporary tract sales office within or immediately adjacent to a new subdivision or development for the sole purpose of selling property in the subdivision or development. Franchisor may impose such conditions as it deems necessary to assure that such temporary tract sales offices are, in fact, temporary and are used only in conjunction with the initial sales program for a particular subdivision or development. The term of said temporary tract sales office shall be for a period of one year. Franchisor may, in its sole and absolute discretion, agree at the end of the one year term to extend the term for an additional year, and may, on each anniversary thereafter, in its sole and absolute discretion agree to further one year extensions. 11. ADDITIONAL OBLIGATIONS OF FRANCHISEE A. Start-Up Obligations: Prior to opening any additional office under Franchisee's CENTURY 21 trade name, as set forth in Paragraphs 4, 5 and 7 hereof, Franchisee shall complete all of the following at Franchisee's expense, which obligations shall be continuing obligations throughout the term of this Agreement (it being understood that upon a change in the CENTURY 21 Marks requiring modifications pursuant to (ii), (iv) and (v) below, Franchisee will make such modifications within a reasonable period of time (as determined by Franchisor) after the change in the CENTURY 21 Marks occurs): (i) Office Appearance. Franchisee may be required pursuant to Paragraph 11.C(ix) to make reasonable alterations, modifications or upgrades to the office space in which the Franchise is to be operated; (ii) Office Sign. Franchisee shall install one or more internally lighted exterior signs displaying Franchisee's CENTURY 21 trade name, as set forth in Paragraph 4 hereof, at the Approved Location, which sign(s) must conform to the standards and specifications set forth in the P&P Manual, and which SIGN MUST BE APPROVED IN WRITING IN ADVANCE AS TO ARTWORK, LETTERING, COLOR SCHEME, SIZE, CONSTRUCTION AND OVERALL APPEARANCE BY FRANCHISOR. Any exception to office sign requirements because of local sign ordinances or other reasons must first be approved in writing by Franchisor. (iii) Disclaimer. Franchisee shall place a conspicuous placard or decal on or near the door to the front entrance of Franchisee's office, which complies with the standards and specifications set forth in the P&P Manual, which has been approved in writing by Franchisor, and which clearly states: "AN INDEPENDENTLY OWNED AND OPERATED MEMBER OF THE CENTURY 21 SYSTEM" or which provides a similar statement which has been approved by Franchisor; (iv) Yard Signs. Franchisee shall purchase or lease an adequate quantity of colonial yard signs displaying Franchisee's CENTURY 21 trade name and such other information as may be required by law and is in compliance with the standards and specifications in the P&P Manual; -12- (v) Stationery Goods. Franchisee shall purchase adequate supplies of business cards, stationery, promotional materials and related items, which display Franchisee's CENTURY 21 trade name and other information, and all of which comply with the standards and specifications of the P&P Manual; (vi) International Management Academy. Any new Responsible Broker for any new or existing Office shall, at the expense of Franchisee, attend the first available new franchisee orientation and management training program, offered by Franchisor, at the location and time designated by Franchisor (which program may occur subsequent to Franchisee's opening of the franchised office). If an office manager will operate the office for Franchisee, the office manager shall also, at the expense of Franchisee, attend orientation. The Franchisee participant is responsible for all costs incurred in connection with attendance at the program, including transportation, lodging, program costs and incidental expenses; and (vii) Insurance. Franchisee shall, for the entire term of this Agreement, maintain at Franchisee's expense commercial general liability insurance for all of its operations (including operations under other franchise or membership agreements) in an amount not less than a $50,000,000 coverage limit per year (with a $1,000,000 coverage limit per occurrence). Franchisee shall, for the entire term of this Agreement, maintain at Franchisee's expense errors and omissions insurance for all of its operations (including operations under other franchise or membership agreements) in a coverage limit per year not less than the Yearly Insurance Limit (with a coverage limit per occurrence not less than 10% of the Yearly Insurance Limit) . Franchisor reserves the right to establish minimum standards with which underwriters providing the aforementioned insurance coverage must comply. Said policies of insurance shall insure Franchisee against any liability which may arise in connection with the operation of Franchisee's real estate brokerage business and such collateral businesses as may be approved in writing by Franchisor and shall be in such form as Franchisor approves. If required by law, Workers' Compensation Insurance shall be carried on all employees and sales associates. All insurance policies maintained by Franchisee, other than Worker's Compensation Insurance, shall contain a separate endorsement naming Franchisor, Cendant and Cendant Finance Holding Corporation as additional insureds; shall not be subject to cancellation, except on ten (10) days written notice to Franchisor; and shall contain an express waiver of any and all rights of subrogation whatsoever against Franchisor. Franchisee shall cause certificates of insurance of all such policies and endorsements, showing compliance with the above requirements, to be deposited with Franchisor within thirty (30) days of the execution of this Agreement and annually thereafter. "Yearly Insurance Limit" shall mean", for each calendar year of this Agreement, - ----------------------- (i) $10,000,000 if Franchisee's total revenue (as reported on Franchisee's financial statements) ("Total Revenue") for the calendar year immediately prior ------------- to the calendar year for which the Yearly Insurance Limit is being calculated is not more than $2,500,000,000, (ii) $15,000,000 if Franchisee's Total Revenue for the calendar year immediately prior to the calendar year for which the Yearly Insurance Limit is being calculated is between $2,500,000,000 and $3,000,000,000 and (iii) $20,000,000 if Franchisee's Total Revenue for the calendar year immediately prior to the calendar year for which the Yearly Insurance Limit is being calculated exceeds $3,000,000,000. B. Ongoing Obligations: In addition to the above-referenced Start-Up Obligations and concurrent with the opening of the franchise office and continuing throughout the term of this Agreement, Franchisee agrees to undertake and carry out diligently all of the following obligations: (i) Management. Franchisee shall at all times assign a qualified Responsible Broker for each of its Approved Locations (it being understood that to the extent permitted by law, the same individual -13- may serve as Responsible Broker for more than one Approved Location). Franchisee represents and warrants to Franchisor, and shall provide to Franchisor a yearly certificate of an executive officer of Franchisee, that each of Franchisee's offices has been assigned a qualified Responsible Broker and that Franchisee's Responsible Brokers possess all required licenses as required by law and this Agreement. In addition to any other obligations contained herein, Franchisee shall defend and indemnify Franchisor and their respective shareholders, directors, officers, employees, agents, attorneys, successors and assigns and hold them harmless from and against and reimburse them for all claims, liabilities, damages, attorneys' fees, costs, settlement amounts, etc., arising out of or related to Franchisee's failure to have qualified Responsible Brokers. (ii) Payment For Goods Or Services. Franchisee shall pay promptly to Franchisor all fees and contributions due hereunder, as well as any additional fees or charges incurred for any products, supplies, or services furnished or to be furnished by Franchisor at Franchisee's request, which fees or charges shall be payable by Franchisee immediately or, in the case of goods furnished by a third party, when payment is due to the third party. Any payments which are past due shall bear interest at the lower rate of either the highest rate allowed by law or a rate that is five (5) percentage points per annum higher than the "prime rate" then currently established by Mellon Bank, N.A., Pittsburgh, PA. (iii) Records. Franchisee agrees to maintain and keep such records and reports as are prescribed by Franchisor and shall mail copies of such reports and records to the address designated by Franchisor in accordance with schedules required by Franchisor. A report of each brokerage transaction in which a royalty fee will be payable shall be filed with the Franchisor as soon as practicable after, but in no event later than 15 days after, the execution of initial documents by the parties thereto. (iv) Financial Statements. Franchisee shall supply to Franchisor, at its request, a complete financial statement prepared in accordance with generally accepted accounting principles, on an annual basis within 120 days of Franchisee's fiscal year end. Franchisee, Franchisee's principal shareholder, if Franchisee is a corporation or Franchisee's independent accountant shall sign said financial statement certifying the truth and accuracy of the matters contained therein. Cendant shall supply to Franchisee, at its request, a complete financial statement prepared in accordance with generally accepted accounting principles, on an annual basis within 120 days of Cendant's fiscal year end. (v) Taxes. Franchisee shall pay promptly when due all taxes, accounts, liabilities and indebtedness of any kind incurred by Franchisee in the conduct of its business. In the event any fees (including, without limitation, royalty fees and the initial franchise fee) payable by Franchisee to Franchisor are subject to Value Added Taxes, Gross Receipts Taxes, or similar taxes imposed by taxing authorities within the jurisdiction in which Franchisee operates, then Franchisee shall, in addition to the fees due Franchisor, pay to Franchisor an additional sum which is equal to and shall represent the amount of such tax imposed on fees due Franchisor. This provision will not apply to federal or state income taxes imposed on Franchisor. (vi) Indemnification. Franchisee shall indemnify and hold harmless Franchisor, and its subsidiaries, Affiliates, and its parent, and the directors, officers and employees of each, and all other CENTURY 21 franchisees from all expenses, fines, suits, proceedings, claims, losses, damages, liabilities or actions of any kind or nature (including, but not limited to, costs and attorneys' fees) arising out of or in any way connected with Franchisee's operation of the Franchise. Franchisee further agrees that if -14- Franchisor is made a party to a lawsuit or other legal action in connection with the activities of Franchisee or any Affiliates of Franchisee, then it may tender the defense and/or prosecution of the case to Franchisee who shall be responsible for diligently pursuing the case or action at Franchisee's expense, or may hire counsel directly to protect its interests and bill Franchisee for all costs and reasonable attorneys' fees incurred in connection therewith, in which case Franchisee shall promptly reimburse for Franchisor all costs and reasonable expenses which Franchisor incurred. This indemnity shall apply to claims that Franchisor was negligent or failed to train, supervise or discipline Franchisee, and to claims that Franchisee or its agents is the agent of Franchisor or part of a common enterprise with Franchisor. Notwithstanding the foregoing, the indemnification provided for in this subparagraph 11.B(vi) shall not extend to any liability, cost or expense or to any suits, proceedings or claims (i) to the extent that such arises from the affirmative acts of Franchisor or its employees or from the actions of Franchisee or its employees engaged in at the direction of Franchisor, or (ii) that do not arise out of Franchisee's operation of the Franchise, including those that arise out of disputes under any agreement (A) between Franchisor and Franchisee, other than this Agreement or (B) between Franchisee and its stockholders. The obligations of Franchisee pursuant to this Paragraph shall survive the expiration or termination of this Agreement. (vii) Local Councils. Franchisor may establish a local council of CENTURY 21 franchisees with boundaries as determined, from time to time, by Franchisor. Franchisee agrees to use its reasonable best efforts to join and participate in the council established in the area designated by Franchisor as Franchisee's local council area. The local council may make recommendations and suggestions concerning the expenditure of council funds available for promotional purposes in the local area. Such local council may adopt its own by-laws, rules and procedures, but such by-laws, rules and/or procedures shall not restrict Franchisee's rights or obligations under this Agreement. Except as otherwise provided herein, and subject to the approval of Franchisor, any lawful action of such council at a meeting attended by two-thirds (2/3) of the members, including reasonable assessments for local promotional and advertising purposes, shall be binding upon Franchisee if approved by two-thirds (2/3) of the member franchisees present, with each member office having one (1) vote, provided that no franchisee (or controlled group of franchisees) shall have more than twenty- five percent (25%) of the vote in a local council regardless of the number of offices owned; and, (viii) Other Councils. Franchisor may establish a regional council of CENTURY 21 franchisees in each regional area as determined by Franchisor. Franchisor may establish a national and international council of CENTURY 21 franchisees with boundaries established by Franchisor. Each regional council, national council and international council shall establish its own reasonable bylaws and procedures. Actions of the regional, national and international councils shall be binding upon Franchisee; provided, however, that no council action shall modify the terms and conditions of this Agreement. Regional, national and international councils shall be composed of CENTURY 21 franchisees who are elected or appointed on a representative basis by members of local or regional councils or Franchisor. Representatives to regional, national and international councils shall have voting power in proportion to the number of CENTURY 21 franchisees in the area or region they represent. Franchisor shall not have a vote in any franchisee council. (ix) Indebtedness. Franchisee shall not, and shall not permit its subsidiaries to, incur Indebtedness if the Leverage Ratio (after giving effect to the incurrence of such Indebtedness) shall exceed 2.0 (3.0 if the Commitment has been exhausted and not replaced with an additional commitment of funds by Cendant or one of its subsidiaries on substantially equivalent terms). Leverage Ratio shall -15- mean the ratio of total consolidated Indebtedness of Franchisee and its subsidiaries (excluding Cash Secured Loans (as defined below) and the outstanding principal amount of the existing development advance) to pro forma LTM EBITDA (pro forma meaning pro forma for the LTM EBITDA of brokerage offices acquired during such LTM including appropriate cost allocations to reflect operation on a standalone basis if the acquired business was part of a group of companies with shared expenses, but excluding anticipated synergies). "EBITDA" ------ shall mean Franchisee's consolidated earnings from continuing operations (excluding extraordinary gains or losses, Conversion Costs ( as defined in the Acquisition Cooperation Agreement) and, as agreed between Franchisor, Franchisee, and, until such time as Apollo owns less than 10% of Franchisee's outstanding common stock, Apollo, one-time or non-recurring items of income or expense) plus interest expense, provision for income taxes and depreciation and amortization expense. Immediately prior to any incurrence of Indebtedness by Franchisee (including Indebtedness incurred by Franchisee upon the acquisition of another entity or upon the assumption of liabilities of another entity), Franchisee shall furnish Franchisor with a certificate executed by its chief financial officer to the effect that such incurrence is not in violation of this section and that, based on Franchisee's business plan and a good faith forecast prepared at the time of incurrence, the Leverage Ratio is not reasonably expected to exceed 2.0, or 3.0, as the case may be, for the twelve full calendar months following such incurrence. Notwithstanding the foregoing, Franchisee shall not be prohibited from incurring (i) Cash Secured Loans in the ordinary course of business, (ii) working capital revolving loans not in excess of 2% of Franchisee's LTM Gross Revenue (under this Agreement and any other franchise or membership agreement with a subsidiary of Cendant) at any one time outstanding, (iii) letters of credit and hedging obligations in the ordinary course of business, (iv) Indebtedness to refinance existing Indebtedness provided that such Indebtedness is not greater than the Indebtedness so refinanced and (v) other Indebtedness not to exceed 1% of Franchisee's LTM Gross Revenue (under this Agreement and any other franchise or membership agreement with what is then (notwithstanding the last sentence of Section 5B) a subsidiary of Cendant) at any one time outstanding (the foregoing, collectively, "Permitted --------- Indebtedness"); provided that the Permitted Indebtedness incurred pursuant to clauses (ii), (iv) or (v) above shall be included in the calculation of the Leverage Ratio, for purposes of determining whether Indebtedness beyond the Permitted Indebtedness is permitted hereunder. "LTM" shall mean, at any time, --- the twelve consecutive full calendar months of such Person ending on the most recently completed full month for which financial statements prepared in accordance with generally accepted accounting principles consistently applied are available. "Cash Secured Loans" shall mean any loan incurred in connection ------------------ with title insurance and escrow operations to the extent that the principal and interest thereon is secured by an amount of cash or U.S. governmental securities to ensure the full payment of principal and interest thereon after giving effect to the interest income earned thereon. "Indebtedness," at any date shall ------------- include, without duplication, (a) all indebtedness of Franchisee or its subsidiaries for borrowed money or for the deferred purchase price of property or services (other than current payables incurred in the ordinary course of business and payable in accordance with customary practices) and including earn- out or similar contingent purchase amounts, (b) any other indebtedness of Franchisee or its subsidiaries which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of Franchisee or its subsidiaries under capitalized leases, (d) all obligations of Franchisee or its subsidiaries in respect of acceptances issued or created for the account of Franchisee or its subsidiaries, (e) all liabilities secured by any lien on any property owned by Franchisee or its subsidiaries even though neither Franchisee nor its subsidiaries has assumed or otherwise become liable for the payment thereof, and (f) all guarantees by Franchisee or its subsidiaries of obligations of others (including the value of obligations of others secured by liens on the assets of Franchisee or its subsidiaries). For purposes of this section 11(B)(ix), Indebtedness shall include any outstanding amount of mandatorily redeemable preferred stock or -16- preferred stock with scheduled mandatory redemptions, and shall not include (i) pay-in-kind preferred stock that does not require Franchisee to make any cash payments (other than upon liquidation)and does not include sanctions for the non-payment of cash, other than increasing the dividend rate to a rate not exceeding 13% per annum, (ii) perpetual cash-pay preferred stock that does not contain any sanctions for the non-payment of amounts provided for therein other than the right to elect (together with all other preferred stock other than preferred stock existing on the date hereof) no more than 2 directors to Franchisee's board of directors upon any default; provided that the rate thereon does not exceed 13% per annum and, at the time of issuance thereof, Franchisee would have been permitted under the Leverage Ratio test to incur Indebtedness with fixed charges equal tot he fixed charges of such preferred stock and (iii) preferred stock outstanding on the date hereof and any shared paid thereon in accordance with the term thereof. (x) Dividends. Notwithstanding anything else herein to the contrary, Franchisee shall not be permitted to (i) incur Indebtedness to finance the payment of dividends or (ii) declare or pay any Extraordinary Dividend unless the Leverage Ratio (provided that the Leverage Ratio is calculated such that the consolidated indebtedness is net of cash and cash equivalents) at the time such dividend is declared and paid is no greater than 1.0. "Extraordinary Dividend" ---------------------- shall mean any dividend or distribution which is not a regularly scheduled quarterly dividend consistent with past practice and which exceeds the lesser of (x) 20% of Franchisee's net income for the fiscal year in which such dividend or distribution is declared minus dividends or distributions already paid during such fiscal year and (y) 20% of Franchisee's net income for the fiscal year in which such dividend or distribution is paid minus dividends or distributions already paid during such fiscal year. For the avoidance of doubt, the payment by the Franchisee of all or any part of the $45,000,000 dividend to Apollo Management, L.P. and/or its affiliates ("Apollo") pursuant to the Letter ------ Agreement, dated as of the date hereof, among Franchisee, Cendant, Apollo and others, shall not be restricted in any manner by this Agreement, including this Section 11.B.(x). C. Obligations Related to Quality of Service and Goodwill: In addition to the above-referenced "Start-Up Obligations" and "On Going Obligations" Franchisee acknowledges that it is of utmost importance that the services provided by Franchisee to the consuming public adhere to the minimum standards associated with the CENTURY 21 system and serve to enhance the reputation and goodwill associated with the service mark "CENTURY 21". Franchisee acknowledges that the requirements set forth in this Paragraph are necessary to assure continuing public acceptance and patronage of the CENTURY 21(R) franchise system and to avoid deterioration or obsolescence in the operation of Franchisee's CENTURY 21 office. Franchisee, therefore, agrees to undertake and carry out diligently all the following obligations: (i) Use of Service Mark. Franchisee agrees that throughout the term of this Agreement, except as provided for in this Agreement or another franchise agreement with Cendant or a Cendant subsidiary it will operate exclusively under Franchisee's CENTURY 21 trade name with respect to all advertising, promotion and communications, including, but not limited to, telephone answering, office sign(s), yard signs, business cards, bank accounts, stationery, promotional and advertising materials, real estate documents, and all other materials used in any medium by Franchisee. Franchisee agrees to supervise all persons working with or under Franchisee in the franchised operation to assure compliance by such persons with all the terms of this Agreement and the P&P Manual; -17- (ii) Regular Business Hours. During the term of this Agreement, Franchisee shall diligently, faithfully and continuously conduct a CENTURY 21 Franchise at each Approved Location, which shall be open during regular business hours at least six (6) days per week. Franchisee also agrees to give prompt, courteous and efficient service to the public, and generally to operate the Franchise in compliance with the P&P Manual and professional standards so as to preserve, maintain and enhance the value of the CENTURY 21 Marks and the CENTURY 21 System and the reputation and goodwill built up by Franchisor and by CENTURY 21 franchisees. Also, Franchisee agrees to maintain throughout the term of this Agreement all office facilities, equipment, office sign(s), yard signs and all other materials in first-class condition, and to keep them in strict compliance with the P&P Manual; (iii) Disclaimer. Franchisee specifically agrees to include conspicuously the slogan "AN INDEPENDENTLY OWNED AND OPERATED MEMBER OF THE CENTURY 21 SYSTEM" " or a similar slogan which has been approved by Franchisor on all sales agent and brokerage office business cards, stationery, promotional and advertising materials, real estate documents, and all other materials used by Franchisee, unless specifically provided otherwise in the P&P Manual or waived in writing by Franchisor; (iv) Audit Rights. Franchisee shall allow Franchisor to make inspections of Franchisee's business and premises at any reasonable time upon reasonable notice, and will make Franchisee's books, tax returns and records available for inspection and audit by Franchisor during normal working hours. Franchisor's right to audit shall include the right to examine books, tax returns and records of other real estate related businesses owned, in whole or in part, or operated by Franchisee or Franchisee's Affiliates, to determine whether all revenue received by Franchisee has been properly reported by Franchisee, that appropriate fees and contributions have been paid, and that the obligations of Franchisee under this Agreement have been complied with. Whenever Franchisor exercises its right to audit, Franchisee shall, upon reasonable notice from Franchisor, provide a comfortable working space for Franchisor's representative(s) and ensure that all relevant books, tax returns and records are available at Franchisee's Approved Location. Franchisor reserves the right to establish a uniform list of accounts and/or a uniform bookkeeping system for all of its franchisees, and in such event, Franchisee agrees to maintain its books and records in the manner required by Franchisor. In the event an audit of Franchisee's books disclose that royalty fees or NAF contributions have been underpaid by more than five percent (5%) in any consecutive three (3) month period, Franchisor may, in addition to any other remedy available under this Agreement or by law, require Franchisee to pay the audit fees and any expenses, including reasonable attorneys' fees, incurred by Franchisor in collecting the past due royalty fees and/or NAF contributions. Furthermore, the audit costs and related charges shall be in addition to the interest and/or late charges that would be owing for delinquent royalty fees, NAF contributions and related charges, which are accrued from the date they should have been paid had the Franchisee properly and timely reported the relevant transactions and otherwise complied with this Agreement to the date said amounts are paid, at the rates specified in this Agreement. (v) Ethics. Franchisee agrees to conduct its business (and likewise to supervise all Affiliates of Franchisee) in a manner that complies with the terms and intent of this Agreement; with national, state and local laws, regulations and ordinances; with the Code of Ethics of the National Association of REALTORS; and with the CENTURY 21 Code of Ethics (if and when adopted and published by Franchisor). Franchisee hereby authorizes any federal, local or state body regulating or supervising real estate broker practices and Franchisee's Board of REALTORS(R) (if any) to release to -18- Franchisor information related to complaints and to any disciplinary actions taken based upon Franchisee's practices or the practices of Franchisee's Affiliates. Franchisee agrees to notify Franchisor within five (5) business days of any such complaints or disciplinary actions. Franchisee also agrees to maintain all permits, certificates and licenses (necessary for its Franchise operation) in good standing and in accordance with applicable laws and regulations; (vi) Policy and Procedure Manual. Franchisee agrees to abide by the terms of the P&P Manual and to supervise Affiliates of Franchisee to assure their compliance with the P&P Manual. Franchisee acknowledges that Franchisor has reserved the right, pursuant to Paragraph 15 of this Agreement, to make reasonable changes in the P&P Manual that Franchisor determines are important for the continued success and development of the CENTURY 21 franchise organization and its members. Accordingly, Franchisee agrees that from time to time Franchisor may reasonably change or modify the CENTURY 21 Marks and the CENTURY 21 System as well as the standards and specifications set forth in the P&P Manual, including, but not limited to, the modification or adoption of new or modified trade names, trademarks, service marks, sign and logo requirements, or copyrighted materials. Franchisee also agrees, at Franchisee's own expense, to adopt on a timely basis (but in no case later than ninety (90) days after notice) any such modifications as if they were a part of the CENTURY 21 System at the time of the execution of this Agreement. Franchisor shall notify Franchisee in writing delivered via facsimile or regular mail as to changes in the P&P Manual or other changes in the operational structure of the Franchise; (vii) CENTURY 21 Marks. Franchisee acknowledges that Franchisor has the exclusive right to use and sublicense the CENTURY 21(R) Marks, and that the CENTURY 21 System and other products and items delivered to Franchisee pursuant to this Agreement are the sole and exclusive property of Franchisor and that Franchisee's right to use the same solely in connection with the operation of its franchised real estate business is contingent upon Franchisee's continued full and timely performance under this Agreement. Franchisee shall be responsible for, and supervise all of its Affiliates in order to assure, the proper use of the CENTURY 21 Marks and the CENTURY 21 System in compliance with this Agreement. Franchisee acquires no rights in any of said property, except for the Franchisee's right to use the same under this Agreement. Franchisee agrees that at no time during this Agreement or at any time after the expiration or termination of this Agreement shall Franchisee contest in the United States or any other country the sole and exclusive rights of Franchisor in said CENTURY 21(R) Marks and -19- CENTURY 21 System and other products and items delivered under this Agreement, nor shall Franchisee claim any interest therein that is contrary to this Paragraph or at any time dispute, disparage or impugn the validity of the CENTURY 21 Marks and/or the CENTURY 21 System. In addition, Franchisee acknowledges and agrees that it shall be required to comply throughout the term of this Agreement with all guidelines instituted by Franchisor concerning authorized use and/or presentation by Franchisee of the CENTURY 21 Marks and the CENTURY 21 System on the Internet or other communication systems. Franchisee acknowledges that such guidelines will prohibit use by Franchisee of the "CENTURY 21," "CENTURY," "C-21," "C21" or any other derivative word or mark on the Internet or other computer communications service in connection with identification of Franchisee and the operation of its business other than in compliance with its CENTURY 21 Tradename and in compliance with the P&P Manual. Franchisee agrees that neither during the term of this Agreement nor at any time after its expiration or termination shall Franchisee adopt or employ, or seek to register, any names, marks, insignias, colors, trade dress, or symbols in the franchise operations or any other business that are confusingly similar to the CENTURY 21 Marks licensed under this Agreement. Furthermore, Franchisee agrees to cooperate with and assist Franchisor in connection with any legal action brought by or against either regarding the protection and preservation of said CENTURY 21 Marks and CENTURY 21 System and other products and items delivered under this Agreement. Also, Franchisee acknowledges that all information delivered to Franchisee pursuant to this Agreement, unless the information is otherwise publicly available, constitutes trade secrets and proprietary information of Franchisor. Franchisee agrees to keep said information confidential and further agrees to use diligent efforts to protect it from disclosure without prior written approval of Franchisor, and to protect it from misappropriation by Affiliates of Franchisee or by any other persons under the control of Franchisee; (viii) Review of Advertising. Franchisee acknowledges that Franchisor has the exclusive right to use and sublicense the CENTURY 21 Marks in the United States and throughout the world and that the CENTURY 21 System is the sole and exclusive property of Franchisor in the United States and throughout the world, and that any advertising or promotional materials produced by Franchisee will reflect and have an impact upon the CENTURY 21 System. Accordingly, Franchisee agrees to submit, upon the written request of Franchisor, all advertising or promotional material produced by Franchisee to Franchisor at least five (5) days prior to the planned publication or airing thereof. Franchisor shall thereupon approve or disapprove the use of the CENTURY 21 Marks in said advertising, which approval shall not be unreasonably withheld. (ix) Office Size and Appearance. Franchisee acknowledges and recognizes that all of it CENTURY 21 franchised real estate brokerage Offices must meet certain minimum standards of professionalism as determined by Franchisor from time to time as regards office location, office size, exterior attractiveness, and interior attractiveness and decor, and general appearance and cleanliness. (a) Continuing Obligation Of Franchisee. Franchisee shall have a continuing obligation, throughout the term of this Agreement, to maintain both the exterior and interior of Franchisee's Offices so that they remain the same or better in appearance and condition as when said Office was originally approved by Franchisor. In the event Franchisee does not comply with the provisions of this Paragraph 11.C(ix)(a), Franchisor may, at its option, terminate this Agreement. (b) Modifications Of Office Size And Design Requirements. Franchisee acknowledges and agrees that because of changing market conditions Franchisor reserves and shall have the right to change, increase, or eliminate Office size and exterior and interior appearance and decor requirements from time to time, and that as a condition to an assignment of Franchisee's franchise, Franchisee or Franchisee's assignee, may be required to make modifications to its office spaces according to Franchisor's then current Office size and exterior and interior appearance and decor policies. (x) Consumer Relations and Protection of Goodwill. The parties recognize that from time to time disputes may arise between Franchisee, or Affiliates or agents of Franchisee, and a client, customer or other individual or entity involved in a real estate related transaction, and that it is in the best interest of all parties, when possible, to quickly resolve such disputes. Accordingly, Franchisee agrees to promptly respond to all complaints received from its customers or clients or other individuals, in an attempt to resolve said dispute in a reasonable business manner. When Franchisor is contacted by any party with a complaint regarding the handling of a particular transaction by Franchisee, Franchisor may investigate the matter and attempt to obtain from Franchisee, from the complaining party and from available witnesses, their respective versions of the relevant facts. Franchisee agrees to cooperate fully with Franchisor in any investigation. Franchisor will attempt to complete any investigation within thirty (30) days of its receipt of a complaint. Upon completion of said investigation (and in the absence of Franchisee's independent -20- resolution of the matter), if Franchisor has obtained facts sufficient to make a determination that, in Franchisor's reasonable business judgment, Franchisee has provided substandard service or acted in a materially improper fashion in said transaction, Franchisor will so advise Franchisee of such determination, in writing, and provide Franchisee with guidelines prepared pursuant to Franchisor's reasonable business judgment, setting forth the method by which Franchisee may correct the situation (e.g. cancellation of a listing agreement; refund of deposit or other funds, etc.). (xi) Quality Survey. Upon the closing (settlement) of each transaction which Franchisee has handled for either a buyer or seller (hereinafter collectively referred to as "client"), and subsequent receipt by Franchisor of a Commission Disbursement Authorization (CDA) or Sales Report (SR) regarding that transaction, Franchisor may, and Franchisee so authorizes Franchisor to, send to Franchisee's client (or a sampling of Franchisee's clients) in said transaction a questionnaire which will request the client to rate the service and performance of Franchisee and Franchisee's sales associates in said transaction. The procedures and standards of quality and performance of this rating system, or any other rating system that Franchisor chooses to implement in addition to or in substitution of such questionnaire rating system, shall be set forth in the P&P Manual, as it may be revised and/or supplemented from time to time by Franchisor. In establishing any such standards, Franchisor shall exercise reasonable business judgment in a good faith attempt to maintain and improve the quality of service provided under the service mark, CENTURY 21. 12. REPRESENTATIONS BY FRANCHISOR Franchisor represents that the following statements are true and accurate and represents that the following statements shall be true and accurate at all times during the term of this Agreement: A. Franchisor acknowledges that it has the exclusive right to use and sublicense those CENTURY 21 Marks and the CENTURY 21 System licensed to Franchisee pursuant to this Agreement, subject to certain rights and claims as may be stated otherwise herein and/or explained in the Franchise Disclosure Documents Franchisee received prior to the execution of this Agreement, and except as to those rights and claims not known to Franchisor and as to those pending claims Franchisor considers as not representing a material challenge to its rights; B. Franchisor is authorized to offer this Franchise on the terms stated herein at the Approved Location specified in Paragraph 5 hereof; C. Franchisor is a corporation duly incorporated in the state of Delaware, and currently qualified to do business in the state in which Franchisee's Approved Location is situated; D. The execution of this Agreement by Franchisor will not violate or constitute a breach of any other agreement or commitment to which Franchisor is a party; and E. The Corporate Officer of Franchisor executing this Agreement is authorized to enter into this Agreement on behalf of Franchisor. This Agreement upon its execution shall represent a valid and binding obligation of Franchisor to the extent performance by it is specifically required hereunder. 13. REPRESENTATIONS BY FRANCHISEE -21- Franchisee represents that the following statements are true and accurate and represents that the following statements shall be true and accurate at all times during the term of this Agreement: A. Franchisee or its subsidiaries are licensed real estate brokers under the laws of each of the states in which Franchisee's Approved Locations are situated. The Responsible Broker for each of Franchisee's offices is a licensed real estate broker under the laws of the states in which such office is situated. B. Franchisee is not obtaining this Franchise for speculative purposes and, except for the initial public offering of common stock of Franchisee, has no present intention to sell or transfer or attempt to sell or transfer the Franchise in whole or in part. C. Franchisee understands and acknowledges the importance of the high and uniform standards of quality, appearance and service imposed by Franchisor in order to maintain the value of the CENTURY 21 name and the necessity of operating the Franchised offices in compliance with CENTURY 21 standards. Franchisee represents that Franchisee has the present capability and intention to meet those standards. D. Franchisee is duly incorporated, and it is, or its subsidiaries conducting business are, licensed and currently qualified to do business in the state in which Franchisee's Approved Locations are situated and in any other states in which Franchisee proposes to do business. E. Franchisee or its subsidiaries has procured such certificates, licenses and permits, in addition to appropriate real estate licenses, necessary for Franchisee to carry on the business contemplated by this Agreement. F. The execution of this Agreement by Franchisee will not violate or constitute a breach of the terms of any other agreement or commitment to which Franchisee is a party. G. The individual executing this Agreement on behalf of Franchisee is duly authorized to do so; upon its execution, the Agreement shall constitute a valid and binding obligation of Franchisee, and all of its partners, if Franchisee is a partnership. H. Franchisee acknowledges that no representations, promises, guarantees or warranties of any kind are made or have been made by Franchisor or by any person representing himself or herself as an authorized agent or representative of Franchisor to induce Franchisee to execute this Agreement, except as specifically set forth in the Franchise Disclosure Documents delivered to Franchisee. Franchisee acknowledges that neither Franchisor, nor any other person has guaranteed or warranted that Franchisee will succeed in the operation of the Franchise, or has provided any sales or income projections of any kind to Franchisee. 14. RELATIONSHIP OF PARTIES A. Franchisee is and shall be an independent contractor and nothing herein contained shall be construed so as to create an agency relationship, a partnership or joint venture, between Franchisor and Franchisee. Neither Franchisor, nor Franchisee shall act as agent or representative of the other. Neither Franchisor nor Franchisee shall guarantee the obligations of the other or in any way become obligated for -22- the debts or expenses of the other unless specifically agreed upon in writing. Notwithstanding the foregoing, affiliates of Franchisor, including the shareholders and their respective affiliates, may be equity owners of Franchisee or any affiliates of Franchisee and may participate in the operating profits of Franchisee or any affiliates of Franchisee and this Paragraph 14 shall not limit in any way the rights, responsibilities or relationships relating to any such equity interest or profit participation. All employees or sales associates, as the case may be, hired or engaged by or working for Franchisee shall be the employees or sales associates of Franchisee and shall not by virtue of this Agreement be deemed employees, sales associates, agents or representatives of Franchisor. B. Franchisor shall not regulate the hiring or firing of Franchisee's salespeople, the parties from whom Franchisee may accept listings or for whom Franchisee may sell property, the commission rates charged by Franchisee, the commission splits between Franchisee and Franchisee's salespeople, the details of the work performed by Franchisee or its sales associates, the manner in which Franchisee obtains listings or sells property, the working conditions of Franchisee's salespeople, or Franchisee's contracts with clients or customers, except to the extent necessary to protect the CENTURY 21 Marks, trade names and goodwill associated therewith. The conduct of Franchisee's business shall be determined by its own judgment and discretion, subject only to the provisions of this Franchise Agreement and the P&P Manual as it shall be adopted or revised from time to time. 15. RIGHTS RESERVED BY FRANCHISOR A. Franchisee expressly understands and agrees that Franchisor, as regards its relationship with Franchisee, retains all right, title and interest in and to the CENTURY 21 Marks and the CENTURY 21 System, goodwill, trade secrets and proprietary information licensed to Franchisee pursuant to this Agreement. B. Franchisee further understands and agrees that Franchisor retains the right to modify the CENTURY 21 Marks, logos, color scheme and/or other trade dress of the system, as well as the CENTURY 21 System and other products and items delivered pursuant to this Agreement and to modify the standards, specifications and other requirements set forth in the P&P Manual. Franchisee is required to comply with any such changes at Franchisee's expense, as provided in this Agreement. C. Franchisor has reserved all rights in the CENTURY 21(R) Marks not expressly granted to Franchisee, and has further reserved the right to use and to license the CENTURY 21 Marks to others for uses that may not be related to the operation of a licensed real estate brokerage office. 16. ASSIGNMENT OF FRANCHISE RIGHTS A. This Agreement is being entered into in reliance upon and in consideration of the skill, qualifications and representations of, and trust and confidence reposed in, Franchisee, its Responsible Brokers, and Franchisee's officers and directors. Therefore, neither this Agreement nor any of its rights or privileges shall be assigned, transferred, shared or divided, by operation of law or otherwise, in any manner, without the prior written consent of Franchisor; which consent may be withheld in Franchisor's sole determination; any such purported transfer, assignment, sharing or division without the prior written approval of Franchisor shall be void. B. Reserved. -23- C. Reserved. D. Reserved. E. Notwithstanding anything to the contrary herein, each party acknowledges that transfers of interests in Franchisee by Sponsors (as defined in the Stockholders Agreement) in accordance with the terms of the Stockholders Agreement shall not violate this Section 16. "Stockholders Agreement" shall mean ---------------------- the Stockholders Agreement, dated as of August 11, 1997 between and among Franchisee and the Stockholders thereof identified on Schedule A thereto, as amended or restated from time to time. 17. TERMINATION This Agreement may not be terminated except as provided in this Agreement. Termination of this Agreement shall not relieve Franchisee of any unfulfilled obligations created hereunder unless agreed to in writing by Franchisor. In addition to and without limiting any other provisions herein relating to termination, this Agreement may be terminated either in its entirety or with respect to individual offices, as indicated, as follows: A. Upon mutual written consent of the parties hereto. B. At the option of Franchisor, if Franchisee materially breaches any of Franchisee's representations or warranties or materially fails to perform any of Franchisee's obligations under this Agreement or under any other agreement or indebtedness Franchisee may have with Franchisor (such as, by way of example but not by way of limitation, other CENTURY 21 franchise agreements), including, but not limited to, obligations to pay royalty fees, National Advertising Fund contributions, Broker Council assessments, responsibilities to comply with the P&P Manual, including trade name and logo guidelines. C. On a per office basis at the option of Franchisor, if the real estate brokerage license of Franchisee or the Responsible Broker for such office(s) is suspended or revoked or otherwise is not maintained continuously and actively in full force and effect, and in good standing. D. At the option of Franchisor, upon any merger, consolidated or reorganization, or sale or transfer or any series of sales or transfers (whether related or unrelated) that result in thirty percent (30%) or more of the voting power or the outstanding shares of Franchisee's common stock being owned beneficially or of record by a single person or group (each as defined in Section 13)d)(3) of the Securities Exchange Act of 1934, as amended) (other then Cendant or any successor thereto or Apollo) (the "Acquiring Person") whether by operation of law or otherwise, unless the prior written consent of Franchisor shall have been obtained; provided that the Acquiring Person still owns such 30% or more ten business days after notice to the Acquiring Person (which notice Franchisee hereby agrees to deliver to the Acquiring Person and Franchisor). For purposes of determining the outstanding shares of Franchisee's common stock, securities convertible into (but not exercisable for) common stock shall be deemed to have been converted into common stock. Notwithstanding anything to the contrary herein, transfers of interest in the Franchisee by Sponsors (as defined in the Stockholders Agreement) in accordance with the terms of the Stockholders Agreement shall not be a termination event under this Agreement. -24- E. At the option of Franchisor, if Franchisee fails to conduct and govern the franchised business according to the Code of Ethics of the National Association of REALTORS, the CENTURY 21 Code of Ethics, or the laws, ordinances and regulations of the federal, state, provincial, district, county or city government. F. On a per office basis in the event performance of such office falls below the minimum operating standards set forth in this Subparagraph F, Franchisee will be notified in writing setting forth such deficiency and at the option of Franchisor, Franchisee may be placed on probation for such subject office or offices for a period of not less than three (3) months nor more than six (6) months. If such deficiency is not corrected within said probationary period, Franchisor may, at its option, terminate this Agreement with respect to such Office(s). The minimum operating standard requires that Franchisee shall for such office, in every six (6) month period, beginning with a starting point established by Franchisor, maintain a volume of closed business for such subject office or offices on which royalty fees have been paid sufficient to produce revenue (for purposes of determining royalty fees) over such period equal to not less than fifty percent (50%) of the average revenue (for purposes of determining royalty fees) generated by all franchisees over such six (6) month period in the same local council or in such other geographic area as Franchisor may reasonably establish from time to time. G. At the option of Franchisor: (i) if Franchisee becomes insolvent; or (ii) if a receiver is appointed to take possession of Franchisee's business or property or any part thereof; or (iii) if Franchisee shall make a general assignment for the benefit of creditors; or (iv) if a judgment of $10,000,000 or more is obtained against Franchisee which remains unsatisfied for a period of more than thirty (30) days after all rights of appeal have been exhausted. H. On an office-by-office basis at the option of Franchisor, if a Franchisee office shall have been moved without the prior written consent of Franchisor or shall have become vacant, abandoned or deserted, or shall fail to remain open for business as required hereby or by the P&P Manual. I. Reserved. J. Reserved. K. Reserved. L. At the option of Franchisor, if the Franchisee shall become bankrupt, or shall become subject to any chapter of the United States Bankruptcy Code, unless Franchisee shall: (i) timely undertake to reaffirm the obligations under this Franchise Agreement; (ii) timely comply with all conditions as legally may be imposed by Franchisor upon such an undertaking to reaffirm this Franchise Agreement; and (iii) timely comply with such other conditions and provide such assurances as may be required in relevant provisions of the United States Bankruptcy Code; provided, however, that the parties acknowledge that this Franchise Agreement constitutes a personal service contract and that Franchisor has relied to a degree and in a manner material to this Agreement upon the personal promises of Franchisee, and/or its directors, officers, shareholders or partners, as the case may be, to participate on a full-time basis in the management and/or operations of the Franchise, and, consequently, the parties agree that any attempt by any other party, -25- including the trustee in bankruptcy or any third party, to assume or to accept an assignment of this Franchise Agreement shall, to the extent permitted by law, be void. M. In the event Franchisor shall elect to terminate this Agreement pursuant to any provision of this Agreement, Franchisor shall give Franchisee twenty (20) days notice, or such notice as may be required by the laws of the state or province in which Franchisee's office is located, setting forth the reason or reasons for termination. Franchisee may cure the default within the twenty (20) day notice period and thereby avoid termination. Notwithstanding the aforesaid, Franchisor shall have the right to terminate this Agreement upon ten (10) days notice to the Franchisee, if the right to terminate arises from any of the following reasons, in which case the Franchisee shall not have the opportunity to cure the default and this Agreement shall automatically be terminated: (i) the default arises under C or G of this Paragraph 17; or (ii) the default complained of is a result of intentional action or gross misconduct by the Franchisee. N. In no event shall this Agreement be assumed by, or transferred to, any individual who or entity which does not comply with all requirements for transfer or assignment specified in this Agreement. 18. PROCEDURES AFTER TERMINATION Upon termination (including expiration, assignment, or transfer) of this Agreement for any reason as provided in Paragraph 17, with respect to all Offices to which such termination relates, Franchisee shall cease to be an authorized CENTURY 21 franchisee and shall do all of the following acts and things for each terminated office, each of which shall survive the termination of this Agreement and shall remain an ongoing obligation of Franchisee: A. Promptly pay Franchisor all sums then owing from Franchisee to Franchisor, the NAF and to Franchisee's Broker Council, if any. B. Pay to Franchisor the applicable royalty fee, plus the NAF contribution, based upon the gross revenue ultimately received from any transaction in process as of the date of termination and the applicable royalty fee, plus the NAF contribution, based upon the gross revenue ultimately received from any referral sent to or received from any other CENTURY 21 office prior to the date of termination, said sum to be paid promptly upon receipt of such revenue by Franchisee. Additionally, Franchisee shall pay Franchisor the applicable royalty fee, plus the NAF contribution based upon the gross revenues ultimately received from the closing of any transaction occurring after termination hereof, but the listing for which was initially procured by Franchisee during the time Franchisee was operating the Franchise under this Agreement. In the event that Franchisor shall exercise its right under Paragraph 9.D of --- this Agreement to require a fixed monthly NAF contribution payment, Franchisee shall pay to Franchisor a pro-rata portion of its NAF contribution obligation for the month in which Franchisee is terminated, in addition to any royalty fees to be paid pursuant to this Paragraph 18. C. Immediately and permanently discontinue the use of all CENTURY 21 Marks, including, but not limited to, the proprietary mark "CENTURY 21", all similar names and marks, and any name or mark containing the designation "CENTURY 21", "CENTURY", "21" or any other name, designation or mark, or similar colors or lettering indicating or tending to indicate that Franchisee is or ever was an authorized CENTURY 21 franchisee. If Franchisee is a corporation or partnership and "CENTURY 21" is -26- a part of Franchisee's corporate or partnership name, or if Franchisee adopted an assumed or fictitious name (or its equivalent) containing "CENTURY 21" Franchisee agrees to immediately cause its governing documents, and/or its assumed or fictitious name documents, and/or registration, to be amended to delete both the word "CENTURY" and the numerals "21" and to provide Franchisor with documentation that such changes have been made. Furthermore, Franchisee shall not promote or advertise the fact that the firm was formerly a franchisee or affiliate of the CENTURY 21 organization. D. Promptly destroy, or surrender to Franchisor, all stationery, letterheads, forms, manuals, printed matter, films, books, cassettes, videotapes, licensed software and advertising containing CENTURY 21 Marks, including, but not limited to, the proprietary mark "CENTURY 21", or any similar names or marks or designation or mark indicating or tending to indicate that Franchisee is or was an authorized CENTURY 21 franchisee and promptly return to Franchisor any equipment leased or lent to Franchisee. E. Immediately and permanently discontinue all advertising as a CENTURY 21 franchisee, including, but not limited to, the immediate removal of all signs from Franchisee's office which contain the CENTURY 21 Marks or other identifying marks, and the immediate removal from any property then listed for sale or lease of all signs or sign posts using CENTURY 21(R) Marks or other identifying marks or colors, including, but not limited to, the yard sign post and cross arm, and any yard sign or other sign using colors and/or a configuration similar to any CENTURY 21 yard sign, all of which Franchisee acknowledges constitute proprietary trade dress items of Franchisor and which Franchisee has not used at any time in the past in business prior to Franchisee's affiliation with the CENTURY 21 organization. If Franchisee fails to remove the office signs within ten (10) days after the effective date of the termination of this Agreement, Franchisee hereby grants Franchisor the right to enter upon Franchisee's premises and remove all "CENTURY 21" signs and all other indicia of any affiliation by Franchisee with the CENTURY 21 organization. Franchisee shall be obligated to reimburse Franchisor for the cost of removal, storage and disposition of said signs and other materials. If Franchisee fails to claim said signs and related materials removed by Franchisor within five (5) days after their removal, Franchisor shall have the right to sell or otherwise dispose of said signs and related materials, in its sole discretion, and Franchisor may retain the proceeds, if any, from any sale or other disposal, to the extent necessary to offset the costs of removal, storage and disposition of said signs and related materials and to offset any other amounts or obligations that Franchisee may then owe Franchisor, or any of its subsidiaries or affiliates. F. Immediately and forever cease and desist from using the CENTURY 21 System, including, but not limited to, operating manuals, training manuals, sales manuals and aids, listing films and books, advertising and promotional materials, and all trade secret and confidential and proprietary material delivered to Franchisee pursuant to this Agreement. G. At the option of Franchisor, return the P&P Manual and operating manuals and sell all or part of the training manuals, listing books, listing films, sales training cassettes, forms or brochures on hand which contain CENTURY 21 Marks or which are part of the CENTURY 21 System to Franchisor at cost. H. Refrain from doing anything which would indicate that Franchisee is an authorized CENTURY 21 franchisee. -27- I. Maintain all books, records and reports required by Franchisor pursuant to Paragraph 11 hereof for a period of not less than three (3) years after the termination of this Agreement and allow Franchisor to make final inspection and audit of Franchisee's books and records during normal business hours within said three (3) year period for the purpose of verifying that all royalty fees, NAF contributions and other appropriate amounts have been paid as required herein. J. Promptly cancel and discontinue use of the telephone number(s) which served Franchisee's Approved Location at the time of termination and delete Franchisee's CENTURY 21 listing in the Yellow Pages and any other directory. Franchisee shall be deemed to have granted to Franchisor, pursuant to the terms of this Agreement, a power of attorney with full authority for Franchisor to cancel, terminate, assign, discontinue or take any and all lawful action with respect to the telephone number(s) which serves Franchisee's Approved Location, including, without limitation, the power to take such steps as in the opinion of Franchisor may be necessary to delete Franchisee's CENTURY 21 listing or advertising in the Yellow Pages and any other directories and to terminate any other listing which indicates that Franchisee is or was affiliated with the CENTURY 21 organization. Franchisee shall indemnify and hold harmless each such telephone company, directory publisher and other person or entity against all costs, damages, attorneys' fees, expenses and liabilities which may be incurred or sustained in connection with or as a result of any action taken in reliance on the foregoing power of attorney. Notwithstanding the foregoing, Franchisee shall be free to continue use of the telephone number(s) which served Franchisee's Approved Location at the time of termination, provided that, such -------- ---- termination occurs by reason of the expiration of this Agreement on the Expiration Date or upon early termination of this Agreement, other than by reason of a breach of this Agreement by Franchisee. In such events, within fourteen (14) days of the termination date, Franchisee shall be required to clearly indicate in all respects, including all telephone directories, databases and directory assistance, as well as stationery and signage, that if, he or she is no longer a CENTURY 21 Franchisee or part of the CENTURY 21 System upon termination of this Agreement. K. Immediately and permanently cause all officers, employees, and other Affiliates (as defined in Paragraph 6B) to discontinue the wearing of career apparel in the distinctive CENTURY 21 gold color or any apparel indicating or tending to indicate that the Franchisee is or was an authorized CENTURY 21 Franchisee, and promptly to destroy or surrender to Franchisor all such career apparel. L. Franchisee acknowledges that during the term of this Agreement and after its termination, (which shall include expiration, where there has been no subsequent assignment or transfer), Franchisor shall, as is hereinafter specified, have the right to access and use for any business purpose (i) all information provided by Franchisee to Franchisor pursuant to that section of the CENTURY 21 P &P Manual, Code of Conduct, entitled "Reporting", which specifically includes all items therein included under the categories entitled "Reporting", "Real Estate Transaction Information", and "Listing Information," as well as any other Reporting item or category which may hereinafter be adopted in the P & P Manual, including customer identification, address and other information; (ii) all information provided by Franchisee to Franchisor contained in those forms or reports known as Commission Disbursement Authorizations ("CDA's") or Sales Reports ("SR's"), and in such other operational reports as Franchisor may from time to time request from Franchisee; and (iii) all information provided by Franchisee to Franchisor regarding enrollment of Franchisee's customers or clients in the CENTURY 21 Preferred Client Club (which, for purposes of this Subparagraph 18.L, shall include such other client/customer contact program(s) as may hereafter be adopted by Franchisor and). The information referred to in (i), (ii) and (iii), above, shall hereinafter be referred to, collectively, as "the Client Information". The Client Information may be used by Franchisor during the -28- term of this Agreement for business purposes which shall include, but shall not be limited to, public relations, advertising and statistical compilations, investigations and resolutions of customer or client complaints, and quality survey. In addition, Franchisor shall have the right, upon termination, to continue to use the Client Information as hereinabove specified, and to make the Client Information available to other CENTURY 21 franchisees for such purposes as Franchisor, in its sole and absolute discretion, deems appropriate. In addition, and not in limitation of the above, upon termination, Franchisee shall be deemed to have assigned all of its CENTURY 21 Preferred Client Club enrollments to Franchisor, which is hereby authorized to deal with said enrollments in such manner as it deems appropriate. Upon termination, the names of Franchisee and Franchisee's sales associates will be deleted from Preferred Client Club mailings. 19. ADDITIONAL REMEDIES FOR BREACH A. In the event that prior to the expiration of any term hereof, there is (i) a failure to pay royalties on a timely basis, (ii) a termination of this Agreement by Franchisee, (iii) any breach of Section 7C hereof due to the willful closure or willful deidentification of Offices in excess of those permitted to be closed or deidentified pursuant to Section 7C, (iv) any breach of Section 7C hereof due to the closure or deidentification of in excess of 20 of the Offices permitted to be closed or deidentified pursuant to Section 7C, (v) termination of this Agreement pursuant to Section 17D, (vi) the affiliation by Franchisee with another real estate brokerage system (other than a system owned by Cendant), or (vii) any breach of this Agreement by Franchisee (other than a breach of Section 6G hereof) that has, or is reasonably expected to have, a material adverse effect on the CENTURY 21 System, in each case other than clause (v) above after notice to Franchisee and a reasonable opportunity to cure (each, a "Liquidated Damages Event"), Franchisee shall immediately become ------------------------ obligated to pay Franchisor Franchisor's "lost future profits" (as hereinafter defined). For purposes of this Agreement "lost future profits" for an office shall consist of all royalty fees which Franchisee would have paid to Franchisor with respect to such office from the date of the Liquidated Damages Event through the earlier of the end of the then-current term of this Agreement, had there been no Liquidated Damages Event, and 25 years from the date of the Liquidated Damages Event. The parties acknowledge and agree that it would be impracticable and extremely difficult to calculate the actual amount of lost future profits payable by Franchisee, and that the following method of calculation represents a fair and reasonable estimate of foreseeable lost future profits: Lost future profits shall be calculated on an Office by Office basis by determining the average monthly royalty fee payment payable by the Franchisee to Franchisor for each such Office from the commencement date of this Agreement through the date of the Liquidated Damages Event, and multiplying these average amounts by the lesser of (i) the actual number of months (and any fraction thereof) remaining between the date of the Liquidated Damages Event and the end of the then-current term of this Agreement and (ii) 300. Lost future profits shall be payable with respect to all of Franchisee's Offices, provided that in the case of clauses (iii) and (iv) of the definition of Liquidated Damages Event, lost future profits shall only be payable with respect to the Offices closed or deidentified in violation of Section 7C (including the 20 permitted to be closed or deidentified before clause (iv) becomes effective). Franchisee shall be entitled to a credit toward the total amount of lost future profits payable to Franchisor only for those amounts which are paid by Franchisee to Franchisor for each such Office pursuant to the provisions of Paragraph 18.B of this Agreement. Franchisee acknowledges that the lost future profits set forth in this section are fair and reasonable, in light of the fact that Franchisor's affiliate has participated in Franchisee's prior acquisitions and will participate in Franchisee's future acquisitions by purchasing the tradenames and trademarked operating names of the acquired entities with the intention of licensing such names, together with the names licensed hereunder, to Franchisee and the expectation of royalties in consideration of the use of such names, for the full term of this Agreement. -29- B. Franchisee acknowledges that in addition to the provisions of Paragraphs 18A and B, and 19A hereof, upon a termination of this Agreement prior to its Expiration Date, or breach of this Agreement, Franchisor shall be entitled to any other remedy at law or in equity. C. Franchisee acknowledges that if Franchisee breaches this Agreement and/or continues to utilize the CENTURY 21 System or CENTURY 21 Marks at such times when Franchisee is not legally entitled to use them, Franchisor shall have no adequate remedy at law. Therefore, Franchisee expressly consents and agrees that Franchisor may, in addition to any other available remedies, obtain an injunction and/or temporary restraining order to terminate or prevent the continuation of any existing default or violation, and to prevent the occurrence of any threatened default or violation, by Franchisee of this Agreement. 20. ATTORNEYS' FEES Should either party incur attorneys' fees in order to enforce the terms and conditions of this Agreement, including post-term covenants, whether or not a legal action is instituted, the party not in default shall be entitled to reimbursement of such attorneys' fees and costs, in addition to any other remedies either party may have at law or in equity. Should any legal action be instituted in connection with this Agreement, the prevailing party shall be entitled to recover all litigation costs and expenses, including attorneys' fees. 21. INTEGRATION A. Except as expressly provided in Paragraph 21B hereof, this Agreement, the Marketing Agreement, the Outsourcing Agreement, the Acquisition Cooperation Agreement, the Incremental Royalty Agreement and the Stockholders Agreement contain all agreements, understandings, conditions, warranties and representations of any kind, oral or written, between the parties hereto, and constitute the entire and final agreement between them with respect to the subject matter addressed herein. Accordingly, all prior and contemporaneous agreements, understandings, conditions, warranties and representations of any kind, oral or written, are hereby superseded and canceled by this Agreement, except as to any monies due and unpaid between the parties to this Agreement at the time of the execution hereof. There are no implied agreements, understandings, conditions, warranties or representations of any kind. No officer, employee or agent of Franchisor has any authority to make any representation or promise not contained in this Agreement. B. Notwithstanding the provisions of Paragraph 21.A hereof, this Agreement shall not supersede or cancel the information and representations in the Franchise Disclosure Documents which Franchisee has received in connection with the Franchise which is the subject of this Agreement. 22. AMENDMENT Any modification or change in this Agreement must be in writing, executed by an authorized corporate officer of Franchisor and by Franchisee. NO FIELD REPRESENTATIVE OF FRANCHISOR HAS THE RIGHT OR AUTHORITY TO MAKE ORAL OR WRITTEN MODIFICATIONS OF THIS AGREEMENT, AND ANY SUCH ATTEMPTED MODIFICATIONS SHALL NOT BE BINDING UPON EITHER PARTY HERETO. -30- 23. WAIVER No waiver of any breach of any condition, covenant or agreement herein shall constitute a continuing waiver or a waiver of any subsequent breach of the same or any other condition, covenant or agreement. Any waiver of any provision of this Agreement to be enforceable must be in writing and signed by the waiving party. 24. APPROVALS Except as otherwise provided, Franchisor may withhold any consent or approval provided for herein at its discretion. Furthermore, except as specifically noted otherwise, any consent or approval Franchisee is required to obtain from Franchisor shall be deemed withheld unless given in writing. 25. CONSTRUCTION, VENUE AND MISCELLANEOUS A. This Agreement shall be construed according to the laws of the State of New Jersey; provided that the New Jersey Franchise Practices Act shall not apply to any CENTURY 21 franchised brokerage office whose Approved Location is outside the State of New Jersey. Captions or paragraph headings included herein are for reference purposes only and shall not in any way modify or limit the statements contained in any paragraph or provision of this Agreement. All words in this Agreement shall be deemed to include any number or gender as the context or sense of this Agreement requires. In the event of any conflict between this Agreement and the P&P Manual or any other document, this Agreement shall control. Franchisee consents to the non-exclusive personal jurisdiction of the New Jersey state courts situated in Morris County and the United States District Court for the District of New Jersey; Franchisee waives objection to venue in any such courts. B. This Agreement is exclusively for the benefit of the parties hereto and may not give rise to liability to any third party unless this Agreement specifically provides for such liability. The exercise by Franchisor of any right or discretion provided to Franchisor under the provisions of this Agreement shall not constitute the absence of good faith. 26. SEVERABILITY In case any one or more of the provisions of this Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and any other application thereof shall not in any way be affected or impaired thereby. If there is a conflict between any of the provisions of this Agreement and the laws or statutes of the state or province of Franchisee's Approved Location, and/or any other law or statute, the provisions of said law(s) or statute(s) shall prevail. 27. NOTICES Any notices to be given hereunder shall be in writing and may be delivered personally, or by certified or registered mail, with postage fully prepaid. Any notice to be delivered to Franchisor shall be addressed to Century 21 Real Estate Corporation, 6 Sylvan Way, Parsippany, New Jersey 07054, Attention: Legal Department. Any notice to Franchisee shall be delivered to NRT Incorporated, 6 Sylvan Way, Parsippany, New Jersey 07054, Attention: Legal Department. -31- The addresses specified herein for service of notices may be changed at any time by the party making the change giving written notice to the other party. Any notice delivered by mail in the manner herein specified shall be deemed delivered five (5) days after mailing if sent Certified, Return Receipt Requested or, if received earlier, upon actual receipt. 28. BINDING ON SUCCESSORS This Agreement is binding upon and shall inure to the benefit of the parties hereto, their heirs, successors and permitted assigns, except as may be otherwise restricted pursuant to other Paragraphs contained herein. Franchisor reserves the right to assign, pledge, hypothecate or transfer this Agreement, provided that such assignment, pledge, hypothecation or transfer shall not affect materially the rights and privileges granted to Franchisee herein. 29. EXCLUSIVE PROPERTY The form and content of this Agreement and the P&P Manual are the exclusive property of Franchisor and may not be reproduced in whole or in part by Franchisee or others, without the prior written consent of Franchisor. 30. ADDITIONAL REPRESENTATIONS Franchisee makes the following additional warranties and representations: A. Franchisee is a corporation. B. The address where Franchisee's records are to be maintained is: 6 Sylvan Way, Parsippany, New Jersey, 07054. C. Reserved. 31. MISCELLANEOUS Franchisee acknowledges that it has provided input for the preparation of this Agreement, that is has consulted with counsel of its choice, that the Agreement reflects a negotiation between Franchisor and Franchisee, and that this Agreement shall not be construed more strongly against either party on account of that party drafting this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. NRT INCORPORATED By: /s/ Steven L. Barnett -------------------------------- Name: Steven L. Barnett ------------------------------ Title: Senior Vice President, General Counsel and Secretary ----------------------------- -32- CENTURY 21 REAL ESTATE CORPORATION By: /s/ John Kornfiend -------------------------------- Name: John Kornfiend ------------------------------ Title: V.P. Administration ----------------------------- -33- Schedule 1 ---------- FRANCHISEE'S CENTURY 21 TRADE NAMES CENTURY 21 Contempo Realty CENTURY 21 Seville CENTURY 21 Contempo/Seville CENTURY 21 Fine Homes & Estates Seville Contempo CENTURY 21 Fine Homes & Estates Seville Properties #53933.14 -34- EX-10.3 6 MASTER REAL ESTATE FRANCHISE AGREEMENT Exhibit 10.3 [LOGO] COLDWELL BANKER MASTER REAL ESTATE FRANCHISE AGREEMENT THE PARTIES AGREE THAT THIS AGREEMENT SHALL GOVERN THEIR RELATIONSHIP IN CONNECTION WITH FRANCHISEE'S OPERATION OF ITS INDEPENDENT REAL ESTATE BUSINESS. 1.0 PARTIES AND TERM: 1.1 Franchisor: The word "Franchisor" means: ---------- COLDWELL BANKER REAL ESTATE CORPORATION, a California Corporation. By: -------------------------- Jack Kornfeind, Vice President Sales and Administration 1.2 Franchisee: The word "Franchisee" means: ---------- NRT INCORPORATED, a Delaware corporation By: ________________________________ Date: __________ Robert Becker, President 1.3 The parties hereby agree that this Agreement amends, restates and supersedes all prior franchise agreements (the "Old Agreements") between the -------------- parties under which any real estate brokerage offices owned by Franchisee were operating. Franchisor hereby agrees to waive all claims against Franchisee that may exist under the Old Agreements, except claims for monies due, indemnification claims and Franchisor's exercise of audit rights thereunder. In addition, the parties agree that (i) effective on the first day of the month following the month in which a Triggering Event (as defined below) occurs, the Incremental Royalty Agreement (the "Incremental Royalty Agreement"), dated as of ----------------------------- August 11, 1997, among Franchisee, Franchisor, Century 21 Real Estate Corporation, ERA Franchise Systems, Inc. and HFS Incorporated, (ii) effective on the date hereof, the Additional Royalty Agreement dated as of August 11, 1997, among Franchisee, Franchisor, Century 21 Real Estate Corporation, ERA Franchise Systems, Inc. and HFS Incorporated, and (iii) upon the redemption in full of Member's Series C Cumulative Junior Redeemable Preferred Stock, the Franchise Override Agreement, dated as of August 11, 1997, among Franchisee, Franchisor, Century 21 Real Estate Corporation, ERA Franchise Systems, Inc. and HFS Incorporated, are hereby terminated and of no further force or effect (in the case of (i) and (ii), as a result of the royalties previously payable thereunder becoming payable hereunder). THE SUBMISSION OF THIS AGREEMENT TO FRANCHISEE DOES NOT CONSTITUTE AN OFFER. THIS AGREEMENT SHALL NOT BE BINDING ON FRANCHISOR UNLESS AND UNTIL IT IS ACCEPTED BY FRANCHISOR, THAT IS, SIGNED BY FRANCHISOR'S AUTHORIZED OFFICERS AND RETURNED TO FRANCHISEE. 1 [LOGO] COLDWELL BANKER 1.4 RESERVED. a. Reserved. b. Reserved. 1.5 RESERVED. 1.6 TERM OF AGREEMENT: This Agreement is effective on the date hereof (the "Effective Date"). This Agreement shall expire on the date 50 years from the - --------------- Effective Date (the "Expiration Date"). The period starting on the Effective --------------- Date and ending on the Expiration Date is the "Term" of this Agreement. ---- 1.7 EFFECTIVE DATE: Franchisee is obligated to pay continuing royalties to Franchisor, as set forth in Article 7.0. This obligation commences on the Effective Date. 1.8 RESERVED. 2.0 FRANCHISEE INFORMATION: 2.1 BUSINESS NAME: Franchisee shall operate real estate businesses at the Office locations set forth on the list provided to Franchisor on the date hereof (the "Office List") and only under the applicable "Coldwell Banker" tradenames ----------- set forth on the Office List and Franchisee shall file and keep current fictitious name certificates or similar document with respect to each such office in each jurisdiction which requires such filing. Franchisee may only operate its business directly or through wholly-owned subsidiaries, unless (and then only to the extent) required by law. 2.2 LEGAL ENTITY: Franchisee represents and warrants that it was formed under the laws of the State of Delaware and it is validly existing and in good standing under such laws. 2.3 RESIDENTIAL MANAGER: The "Residential Manager" for each Office is the ------------------- individual responsible for managing the overall day-to-day operations of the Franchised Business, as defined below at such Office. Franchisee represents and warrants to Franchisor that Franchisee's Residential Managers possess all required licenses as required by law and this Agreement. In addition to any other obligations contained herein, Franchisee shall defend and indemnify Franchisor and its present and future Related Parties, and their respective shareholders, directors, officers, employees, agents, attorneys, successors and assigns and hold them harmless from and against and reimburse them for all claims, liabilities, damages, attorneys' fees, costs, settlement amounts, etc. arising from Franchisee's failure to have qualified Residential Managers. 2.4 RESPONSIBLE BROKER: Each "Responsible Broker" is Franchisee's licensed real ------------------ estate broker under applicable law for its Franchised Business at the designated Office(s). Franchisee represents and warrants to Franchisor that Franchisee's Responsible Brokers possess all required licenses as required by law and this Agreement. In addition to any other obligations contained herein, Franchisee shall defend and indemnify Franchisor and its present and future Related Parties, and their 2 [LOGO] COLDWELL BANKER respective shareholders, directors, officers, employees, agents, attorneys, successors and assigns and hold them harmless from and against and reimburse them for all claims, liabilities, damages, attorneys' fees, costs, settlement amounts, etc. arising from Franchisee's failure to have qualified Responsible Brokers. It is hereby understood that to the extent permitted by law, the same individual may serve as Responsible Broker for more than one Office. Franchisee shall provide to Franchisor a yearly certificate of an executive officer of Franchisee, that each of Franchisee's offices has been assigned a qualified Responsible Broker and that Franchisee's Responsible Brokers possess all required licenses as required by law and this Agreement. 2.5 OFFICES: The real estate business governed by this Agreement shall be operated exclusively by Franchisee and only from the Offices, as defined in this Section. No change in any Office shall be made by Franchisee without Franchisor's prior written consent in accordance with this Agreement. The word "Office" and "Offices" in this Agreement refer only to the locations set forth - ------- ------- on the Office List. 2.6 OPENING AND CLOSING OF FRANCHISED OFFICES: Throughout the term of this Agreement, and as otherwise provided herein, Franchisor acknowledges that Franchisee will be requesting approval for the opening, relocating and the closing of various real estate brokerage offices. Franchisee agrees that prior to acquiring any new real estate brokerage companies, opening any additional offices, or closing any office, Franchisee will submit a written request to Franchisor, requesting Franchisor's consent of the proposed action (it being understood that approval of funding, pursuant to the Acquisition Cooperation Agreement or otherwise, of an acquisition pursuant to which Franchisee will acquire additional brokerage offices shall not by itself be deemed as approval of Franchisor for the offices acquired in such transaction to become Offices hereunder). Franchisor agrees to grant its consent to any additional offices unless any such proposed additional office (i) would have a negative impact on any other franchisee, as determined by Franchisor consistently with impact review practices and policies generally applicable to franchisees, (ii) would result in Franchisor being in breach of any agreement with another franchisee or (iii) is an office proposed to be acquired by Franchisee which was affiliated with a Cendant real estate brand prior to the proposed acquisition of such office by Franchisee. All approved locations shall be added to the Office List by mutual agreement of Franchisor and Franchisee. Franchisee shall provide Franchisor on the date hereof with a current list of all of Franchisee's Coldwell Banker Offices and the address of the Offices and Responsible Broker for each such office. Franchisee shall provide Franchisor with written notice upon any change in any of its Coldwell Banker Offices, the address of the Offices or the Responsible Broker for any such office. "Acquisition Cooperation ----------------------- Agreement" shall mean the Acquisition Cooperation Agreement, dated as of - --------- February 9, 1999 between Franchisee and Cendant Corporation ("Cendant"). ------- 2.7 NOTICE ADDRESS: Notices and communications to Franchisee shall be sent to the addressee at the following street address or facsimile transmission telephone number: Street Address: 6 Sylvan Way City, State and Zip Code: Parsippany, New Jersey 07054 FAX Telephone Number: (973) 496-5712 3.0 INTERPRETATION: 3.1 CERTAIN DEFINITIONS: Where used in this Agreement, the following words and phrases will have the meanings set forth below: 3 [LOGO] COLDWELL BANKER a. Reserved. b. Reserved. c. "Coldwell Banker Marks" means the trademarks, service marks and trade dress --------------------- that Franchisor authorizes Franchisee to use from time to time in the "Policy Manual" (as defined below), including all additional or substitute trademarks, service marks and trade dress that Franchisor may hereafter authorize Franchisee to use. d. "Coldwell Banker System" means the system developed by Franchisor for ---------------------- franchising the operation of real estate offices, including the use and promotion of the Coldwell Banker Marks, copyrights, trade secrets, confidential ideas, and other marketing and management methods, materials and procedures. Franchisor has updated the Coldwell Banker System from time to time and plans to continue to do so as it deems advisable in its sole judgment. e. "Franchised Business" means the real estate business operated from the ------------------- Offices, including without limitation all transactions and services falling within the definition of "Franchised Services" set forth in Sections 6.1 through 6.4 of this Agreement. f. "Office Manager" means the individual responsible for the day-to-day -------------- operations of each of the Offices. The Residential Manager may be the Office Manager. g. "Person" means an individual, a partnership, a trust, a corporation, an ------ association and any other incorporated or unincorporated organization or entity. h. "Policy Manual" means the confidential manual of policies and procedures ------------- delivered to Franchisee by Franchisor. i. "Related Party" means a Person who, directly or indirectly, owns or ------------- controls a party to this Agreement, is owned or controlled by a party to this Agreement, or is under common control with a party to this Agreement. Control, in this context, means the possession of the power to direct or to cause the direction of the management and policies of a Person, whether through ownership, by contract or otherwise. j. "System Standards" means Franchisor's mandatory specifications, standards, ---------------- methods and procedures prescribed by Franchisor in the Policy Manual. 3.2 TITLES AND WORDS: Titles used in this Agreement are for convenience only and shall not affect the meaning of any provision of this Agreement. Capitalized words shall have the meanings defined where such terms occur in this Agreement in quotation marks. All words used in any number or gender shall extend to include any other number or gender as the context or sense of this Agreement may require. The language of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party. The parties agree that if any provision of this Agreement is capable of more than one construction, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the meaning which renders it valid. Throughout this Agreement, the terms "dollars" ------- and "$" shall mean United States dollars. - 4 [LOGO] COLDWELL BANKER 3.3 FRANCHISOR'S CONSENT: In all cases where Franchisor's prior consent or acceptance is required and no other method or timing for obtaining such consent or acceptance is prescribed, Franchisee shall request such consent or acceptance in writing, and Franchisor shall notify Franchisee of its decision within 30 days after receiving Franchisee's written request and all supporting documentation. Whenever the consent or acceptance of Franchisor is required hereunder, such consent or acceptance must be in writing. If Franchisor does not respond in writing to Franchisee's request within such 30-day period, the request shall be deemed denied. Franchisor's consent to or acceptance of any request by Franchisee shall be effective only to the extent specifically stated and shall not be deemed to waive or render unnecessary Franchisor's consent or acceptance of any subsequent similar request. Except where this Agreement expressly obligates Franchisor to reasonably accept or consent to (or not to unreasonably withhold its acceptance of or consent to) any action or request by Franchisee, Franchisor has the absolute right for any reason to withhold its acceptance of or consent to any action by Franchisee. 3.4 TIME: Time is of the essence of this Agreement with respect to each and every provision in which time is a factor. Wherever this Agreement refers to a period of days, such period shall be measured by calendar days; however, if the last day of the period is not a business day, the period shall be extended automatically to the next business day. 4.0 REPRESENTATIONS AND WARRANTIES: 4.1 STATUS: As an inducement to Franchisor entering into this Agreement, Franchisee represents and warrants that the following statements accurately describe the status of Franchisee: a. Franchisee possesses such business licenses, certificates and permits, in addition to real estate licenses, as are required for Franchisee to conduct its real estate business from the Offices listed in Section 2.5; b. Reserved. c. The signing and performance of this Agreement by Franchisee will not violate or constitute a breach of any provision of any other agreement made by Franchisee or any of its Related Parties; and d. The individual or individuals signing this Agreement on behalf of Franchisee are duly authorized to do so. 4.2 INVESTIGATION: As a further inducement to Franchisor entering into this Agreement, Franchisee represents and warrants that the following statements are accurate and true: a. Franchisor advised Franchisee to seek the counsel of its business advisors prior to signing this Agreement and to contact existing Coldwell Banker franchisees to gain a better understanding of the franchise. Franchisee has consulted with such advisors and Coldwell Banker franchisees as Franchisee has deemed advisable; and b. The success of Franchisee's business is largely dependent on Franchisee's abilities, efforts and financial resources, and on conditions in its market area. 5 [LOGO] COLDWELL BANKER 4.3 Reserved. 5.0 GRANT OF THE COLDWELL BANKER FRANCHISE: 5.1 GRANT OF RIGHTS: Franchisor grants to Franchisee the non-exclusive right to use the Coldwell Banker System in the operation of the Offices during the Term. Franchisee accepts the obligation to comply fully with this Agreement in its operation of the Offices and use of the Coldwell Banker System throughout the Term. 5.2 SYSTEM STANDARDS: Franchisee acknowledges that its compliance with the System Standards is essential to preserve the goodwill of the Coldwell Banker Marks and the integrity of the Coldwell Banker System. System Standards constitute provisions of this Agreement as if fully set forth herein. Each reference to this Agreement includes all System Standards, as modified, supplemented or deleted from time to time by Franchisor in the Policy Manual, provided that no System Standard shall alter Franchisee's fundamental status and rights under this Agreement. 5.3 POLICY MANUAL: Franchisor will loan to Franchisee during the Term one or more copies of the Policy Manual, which may consist of one or more publications. The Policy Manual contains Franchisor's System Standards and recommended methods, specifications and procedures relating to the use and protection of the Coldwell Banker System. Franchisor may modify the Policy Manual from time to time to reflect changes in the Coldwell Banker System. Franchisor shall provide Franchisee with all such modifications and Franchisee shall keep its copy or copies of the Policy Manual current. If a dispute develops relating to the contents of the Policy Manual, the master copy which Franchisor maintains at its principal office will be controlling. Franchisee may not copy any part of the Policy Manual. 5.4 ORIENTATION: The "Orientation" is Franchisor's training program to ----------- introduce the Coldwell Banker System to the Residential Manager and Office Managers. When the Orientation is given, it will consist of Franchisor's then- current training program. The Orientation will be held at such times and places as Franchisor designates. Franchisee shall be responsible for all registration fees, program costs, travel costs and living expenses incurred in connection with the attendance of Franchisee's personnel at the Orientation. a. Whenever Franchisee begins operating at a new Office, then within 60 days after such date, Franchisor will provide an Orientation. Franchisee will make its Residential Manager available for the Orientation at the earliest possible date following such date. 1. Reserved. 2. Franchisor shall not be responsible for any of the travel costs and living expenses associated with Franchisee's Residential Manager's attendance at Orientation. b. Reserved. c. Reserved. 6 [LOGO] COLDWELL BANKER d. If Franchisee desires to change its Residential Manager, then at the earliest possible date following Franchisor's acceptance of the new Residential Manager, Franchisee will make its new Residential Manager available for the Orientation. e. Reserved. 5.5 OPTIONAL TRAINING COURSES: In addition to the Orientation, Franchisor may make available to Franchisee optional training courses, seminars or conferences at such times and places and for such fees as Franchisor designates. Course fees, travel and living expenses incurred as a result of attending such training courses will be borne by Franchisee. 5.6 CONTINUING ASSISTANCE: Franchisor shall furnish guidance to Franchisee with respect to the Coldwell Banker System, including improvements and changes to the Coldwell Banker System. Such guidance shall, in Franchisor's discretion, be furnished in the form of the Policy Manual, bulletins and other written materials, consultations by telephone or in person at Franchisor's facilities or the Offices, or by other means of communication. Franchisor may, at Franchisee's request, provide special assistance for which Franchisee will be required to pay such fees and expenses as Franchisor then charges its other Franchisees. 5.7 OPTIONAL PROGRAMS: Franchisor, in its sole discretion, may develop, implement, modify and/or discontinue optional programs to enhance the Franchised Business, such as rebating a portion of Franchisee's Advertising Fees (as defined in Section 8.1) for local marketing and promotion, or permitting Franchisee to participate in one or more awards programs. Furthermore, Franchisor shall have the right, in its sole discretion, to condition Franchisee's participation in any one or more of such programs upon Franchisee and its Related Parties being in compliance with this Agreement and all other agreements with Franchisor or any of its Related Parties. In addition to the above, the parties agree that, in connection with any Brokerage Acquisition (as defined in the Acquisition Cooperation Agreement) of a brokerage company not affiliated with a Cendant brand, occurring after March 1, 1999, in which Franchisee commences operations at an office acquired in such Brokerage Acquisition, (A) if such Office had, in the LTM prior to the Brokerage Acquisition, Gross Revenues of greater than $1,500,000, then (i) in the first twelve months of operation by Franchisee of such office, such office shall not be required to pay Advertising Fees pursuant to Section 8.2 and (ii) in the second twelve months of operation by Franchisee of such office, such office shall be required to pay 25% of the Advertising Fees otherwise payable under Section 8.2 and (B) if such office had, in the LTM prior to the Brokerage Acquisition, Gross Revenues of greater than $750,000 but not greater than $1,500,000, then in the first twelve months of operation by Franchisee of such office, such office shall not be required to pay Advertising Fees pursuant to Section 8.2. For purposes of this Section 5.7, a "Participating Office" is an -------------------- office which is participating in the program described in this Section 5.7. The foregoing is conditioned on the amounts otherwise payable as Advertising Fees but for this Section 5.7 actually being spent by Franchisee on local marketing in support of the conversion of the Participating Office to the Coldwell Banker System. For purposes of this Section 5.7 only, the phrase "local marketing" shall be defined as the development, implementation, production, placement, payment and costs of marketing (print and media), promotions, public relations, direct mail, market surveys and other substantially similar programs designed to enhance the recognition of the Coldwell Banker identification with the Participating Office's tradename, as appropriate, in the markets where the Participating Office conducts business. Franchisee will be required to provide annual reports of such local marketing expenditures setting forth an itemized list of expenditures including a detailed description of the local marketing activities that were conducted. To the extent that Franchisee fails to submit the annual reports or to the extent that the unpaid Advertising Fees are not applied properly to local marketing activities as defined above, in each case with respect to a Participating Office the amounts otherwise payable as Advertising Fees but for this Section 5.7 will then be retroactively payable as Advertising Fees. The foregoing program shall terminate with respect to all Offices (including with respect to offices that are already participating in this program) automatically and without notice if at any time Franchisee's LTM Advertising Fees paid to Franchisor under this Agreement are less than $4,500,000. With respect to any Participating Office, this program will terminate at such time as such Participating Office is merged into a non- Participating Office or merged with a non-Participating Office into a new office. Each of the dollar amounts in this Section 5.7 shall be subject to adjustment pursuant to the same adjustment mechanism described in Section 8.2(b). Any revenues generated by a Participating Office which represents agents moved from a non-Participating Office or business generated through a non- Participating Office will be deemed to be revenues generated through a non- Participating Office. 5.8 PROGRAM OUTSOURCING AGREEMENT. Notwithstanding any contrary terms and conditions contained in this Agreement (other than the first sentence of Section 6.6 hereof), Franchisee agrees to be bound by and comply with the terms and conditions of the 7 [LOGO] COLDWELL BANKER Program Outsourcing Agreement, dated as of February 9, 1999, between Franchisee and Cendant (the "Outsourcing Agreement"). --------------------- 6.0 OPERATING THE FRANCHISED BUSINESS: 6.1 FRANCHISED SERVICES: The phrase "Franchised Services" means acting as a ------------------- broker or agent for another in connection with the listing, offering, selling, exchanging, purchasing, auctioning, managing, leasing or renting of any and all real property and any ancillary personal property (and all other services and/or property as further defined in the Policy Manual), for which a real estate broker license is required under applicable law, except for the following types of real property: a. reserved; b. reserved; c. reserved; and d. reserved. 6.2 COMMERCIAL FRANCHISED SERVICES: Franchisee is currently conducting Commercial Franchised Services out of some of its franchised offices as the term "Commercial Franchised Services" is defined in the Addendum to the Residential Franchise Agreement (copy attached). Franchisor is currently in the process of developing a new commercial-only franchise agreement for the Coldwell Banker Commercial system, which is designed to attract upper tier commercial companies in both major and minor markets to the Coldwell Banker Commercial System. Franchisor anticipates that the new commercial program will be rolled out by the spring of 1999. Franchisor and Franchisee acknowledge and agree that upon the introduction of the new Coldwell Banker Commercial Agreement, the parties will negotiate in good faith a Master Coldwell Banker Commercial Agreement for the operating of Franchisee's Commercial offices. 6.3 SUPPLEMENTAL DEFINITIONS: Franchisor reserves the right to further define and interpret the scope of Franchised Services from time to time in a manner that is consistent with the foregoing definition by establishing supplemental definitions in the Policy Manual. 6.4 SERVICES NOT INCLUDED: All transactions and types of service that are beyond the scope of the definition of Franchised Services constitute separate businesses distinct from the Franchised Business covered by this Agreement. a. Franchised Services shall not include any real estate or other investment syndication business of any kind, and Franchisee shall not engage in any such syndication business during the Term. b. Reserved. c. Reserved. 6.5 FRANCHISEE'S BEST EFFORTS: Franchisee agrees to conduct the Franchised 8 [LOGO] COLDWELL BANKER Business strictly in accordance with this Agreement and to exercise its continuous best efforts to maintain and develop the Franchised Business to its greatest potential. 6.6 FRANCHISEE'S RIGHT TO OPERATE OTHER BUSINESSES: Franchisee shall operate a real estate brokerage business and neither Franchisee nor any of its subsidiaries shall operate, manage, own, have a greater than 10% interest in, or otherwise engage in, any other business (except for the marketing of products and services permitted pursuant to the Program Outsourcing Agreement) or, except for real estate brokerage businesses pursuant to a franchise or membership agreement with Cendant or a subsidiary thereof, operate, manage, own, have a greater than 10% interest in, or otherwise engage in, any other real estate brokerage business, either under Franchisee's COLDWELL BANKER trade name or under any other name, without the prior written consent of Franchisor, which consent may be withheld in Franchisor's sole discretion. Notwithstanding the foregoing, if permitted pursuant to the terms of the Outsourcing Agreement, Franchisee shall be permitted to conduct title insurance and escrow service and closing service operations ("Ancillary Services") without the prior consent of ------------------ Franchisor, provided that such operations do not use the COLDWELL BANKER Marks and Franchisee apprises the public, in each case, that such real estate related business is not associated with or endorsed by Franchisor. For purposes of this Agreement, a franchise or membership agreement with Cendant or a subsidiary thereof shall mean any franchise or membership agreement which, at the time of execution, was with Cendant or a subsidiary thereof. 6.7 INDEPENDENT CONTRACTORS: Franchisor and Franchisee are and shall be independent contractors with each other. Nothing contained in this Agreement or arising from the conduct of Franchisor and Franchisee is intended to make either Franchisor or Franchisee a general or special agent, legal representative, joint venture, partner, trustee, fiduciary or employee of the other for any purpose whatsoever (including without limitation Franchisor's administration of the Advertising Fund (as defined in Section 8.1)) or to create any other relationship of trust or confidence. a. Franchisee shall make no express or implied agreements, warranties, guaranties or representations or incur any debt in the name or on behalf of Franchisor or represent that the relationship of the parties hereto is anything other than that of independent contractors. All employees hired by Franchisee shall not for any purpose be deemed employees of Franchisor nor subject to Franchisor's control. Franchisor shall not be obligated by, or have any liability under, any agreements made by Franchisee with any third party or for any representations made by Franchisee to any third party. Franchisor shall not be obligated for any damages to any Person or property directly or indirectly arising out of Franchisee's operation of the Franchised Business. b. Franchisee shall conspicuously identify itself in all dealings with customers, lessors, contractors, suppliers, public officials, personnel of Franchisee and others as the owner of the Franchised Business. Such notices of independent ownership as Franchisor may require in the Policy Manual shall be placed by Franchisee on forms, business cards, stationery, signs, advertising and other materials. The notice shall state that "INDEPENDENTLY OWNED AND OPERATED BY NRT INCORPORATED" or shall state a similar message which has been approved by Franchisor. c. Reserved. d. Franchisor shall have no liability for any sales, use, service, occupation, excise, 9 [LOGO] COLDWELL BANKER gross receipts, income, property or other taxes, whether levied upon Franchisee, Franchisee's property or upon Franchisor, in connection with the sales made or business conducted by Franchisee other than income taxes on Franchisor's income. Payment of all such taxes shall be Franchisee's responsibility. e. Franchisee shall operate the Franchised Business in compliance with all applicable laws, rules and regulations of all governmental authorities; shall prepare and file necessary tax returns; and shall at all times comply with the Code of Ethics of the National Association of Realtors. Franchisee shall obtain and maintain all permits, certificates and licenses necessary to conduct the Franchised Business in the jurisdiction where the Office is located. f. Notwithstanding the foregoing, Franchisor and its affiliates may be equity owners of Franchisee or any affiliate of Franchisee and may participate in the operating profits of Franchisee. Accordingly, this Section 6.7 shall not limit in any way, the rights, responsibilities or relationships relating to any such equity interest or profit participation, or tax obligations resulting from such ownership participation. 6.8 INDEMNIFICATION: Franchisee shall defend and indemnify Franchisor and its present and future Related Parties, and their respective shareholders, directors, officers, employees, agents, attorneys, accountants, successors and assigns, and hold them harmless from and against, and reimburse them for, all losses, claims, liabilities, obligations, damages, attorneys' fees, costs, settlement amounts, judgments, lost profits, charges, expenses and taxes based upon, arising out of, or in any way related to the operation of the Franchised Business, the breach by Franchisee of any provision of this Agreement or asserted against or imposed on any of the foregoing indemnified parties contrary to the provisions of Section 6.7. Franchisor and its Related Parties have the right to defend and/or settle any such matter in such manner as they deem appropriate, in their sole discretion, and without the consent of Franchisee. Franchisee also shall reimburse each of the foregoing indemnified parties for all costs reasonably incurred in investigating and defending any such matter, including without limitation, attorneys' fees and court costs. This Section 6.8 shall continue in full force and effect subsequent to, and notwithstanding, the expiration or termination of this Agreement. Notwithstanding the foregoing the indemnification provided for in this Section 6.8 shall not extend to any liability, cost or expense or to any suits, proceedings or claims (i) to the extent such arises from the affirmative acts of Franchisor or its employees or any indemnified party or (ii) to the extent such arises from the actions of Franchisee or its employees or any indemnified party engaged in at the direction of Franchisor or (iii) which does not arise out of or relate to Franchisee's operation of the Franchised Business, including those that arise out of any agreement (A) between Franchisor and Franchisee, other than this Agreement or (B) between Franchisee and its stockholders. The obligations of Franchisee pursuant to this Paragraph shall survive the expiration or termination of this Agreement. 6.9 MANAGEMENT OF THE FRANCHISED BUSINESS: During the Term, the Franchised Business conducted at each Office shall be under the direct, full-time supervision of a Residential Manager who has satisfactorily completed the Orientation and been accepted by Franchisor, which acceptance will not be unreasonably withheld. a. Franchisee shall employ at least one Office Manager for each Office; however, the Residential Manager may serve as the Office Manager. Each Office Manager shall 10 [LOGO] COLDWELL BANKER have satisfactorily completed the Orientation and shall have been sufficiently trained by Franchisee, in Franchisor's reasonable judgment, with respect to the Coldwell Banker System. b. The Residential Manager and each Office Manager shall continuously exert his or her full-time best efforts during normal business hours, as defined in the Policy Manual, to promote and manage the Franchised Business. They shall not engage in any other business or other activity, directly or indirectly, that requires their active participation during normal business hours or that may conflict with Franchisee's obligations under this Agreement. 6.10 OFFICE APPEARANCE STANDARDS: Franchisee agrees that throughout the Term of this Agreement, Franchisee shall meet the System Standards for Office and signage appearance and cleanliness set forth in the Policy Manual and that Franchisee may be required by Franchisor to make reasonable changes so as to meet such System Standards. 6.11 RESERVED. 6.12 ADDITIONAL OFFICE AND FRANCHISE FEES: a. There shall be no initial franchise fee payable by Franchisee in connection with the Offices operating on the date hereof. Should Franchisee add any additional offices (whether through acquisition, merger, or otherwise), other than Transition Offices, Offices which were already affiliated with Franchisor and Offices relocated pursuant to Section 6.12(c)(ii), Franchisee shall pay Franchisor an initial franchise fee in connection with any additional offices, equal to $4,000 per office. In addition, with respect to each Brokerage Acquisition (as defined in the Acquisition Cooperation Agreement) in which Franchisor's franchise sales staff is involved, Frachisee shall pay to Franchisor an additional fee equal to $3,500 per office acquired, whether such offices are operated by Franchisee or are immediately closed. The maximum additional fee payable by Franchisee pursuant to this Section 6.12(a) with respect to a single transaction shall be $100,000. b. In connection with the establishment of any Office by Franchisee at a location or locations other than an Office in operation on the date hereof, whether by acquisition, assignment or relocation, Franchisee shall be required to notify Franchisor in writing of the proposed acquisition, assignment or relocation, the address of the proposed office site and such other business information as Franchisor shall request in connection with reviewing such application, including information concerning the seller or assignor of such office. Franchisor will review and approve or reject each such transfer application within ten (10) business days by written notice delivered to Franchisee. c. If Franchisee wishes to sell, close down or otherwise terminate one or more of its COLDWELL BANKER Offices, Franchisee shall be required to obtain the prior written consent of Franchisor, which consent may be withheld in Franchisor's sole discretion, provided however, that Franchisee shall be -------- ------- permitted to close, without the consent of Franchisor, (i) a number of Offices acquired by Franchisee not exceeding the number of Offices which were identified in writing to Cendant prior to such acquisition (provided that in an acquisition in which Cendant is providing financing pursuant to the Acquisition Cooperation Agreement, such number of Offices must be identified in writing to Cendant prior to the date on which Cendant agrees to provide such funding) as the number of 11 [LOGO] COLDWELL BANKER Offices to be closed, so long as such Offices are closed within one year of such acquisition and are not identified as being, or being affiliated with, COLDWELL BANKER Offices (unless such offices at the time of acquisition by Franchisee are COLDWELL BANKER offices) ("Transition Offices"), (ii) Offices which are moved ------------------ within a proximate geographical area (it being understood that such a move requires the consent of Franchisor pursuant to Section 2.6 of this Agreement), so long as in connection with such move, a material portion of the personnel at such office is not reassigned to other Offices, (iii) any of the offices acquired by Franchisee from National Realty Trust, provided that the sum of the Gross Revenues of all of such offices closed (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant), in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such office occurred, is less than $150,000,000 and (iv) other Offices, so long as the Gross Revenues for each such Office, together with the Gross Revenues for each other Office (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) closed pursuant to this clause (iv) in the same calendar year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such Office occurred, is less than the sum of (A) 3% of Franchisee's Gross Revenues (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the immediately prior calendar year and (B) for office closures occurring in calendar years beginning in 1999, an amount equal to (i) 3% of Franchisee's Gross Revenues (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the calendar year immediately preceding the immediately prior calendar year minus (ii) the Gross Revenues of all Offices closed pursuant to this clause (iv) in the immediately preceding prior year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such office occurred and (C) for office closures occurring in calendar years beginning in 2000, an amount equal to (i) 3% of Franchisee's Gross Revenues (pro forma for Offices closed and new Offices opened) for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement with a subsidiary of Cendant) for the calendar year two years immediately prior to the immediately prior calendar year minus (ii) the Gross Revenues of all Offices closed pursuant to this clause (iv) in the year immediately prior to the immediately preceding prior year, in each case for the twelve calendar month period ending on the month immediately prior to the month in which the closure of each such Office occurred, provided that all fees payable to Franchisor and the Advertising Fund are made through the closure date, Franchisee complies with the procedures set forth in Section 14 with respect to such closed offices, no assignment of the franchise for such office(s) is involved without Franchisor's consent and such Office closures or sales do not reduce the COLDWELL BANKER System marketshare for the applicable market by greater than 10%. Any references to Gross Revenues in this Section 6.12(c) shall exclude all Gross Revenues attributable to sales agents transferred to another office of Franchisee that is subject to a franchise or membership agreement with what is (notwithstanding the last sentence of Section 6.6) at the time of such transfer a subsidiary of Cendant. Any determination of Franchisee's Gross Revenues for calendar year 1997 shall only include the period from August 29, 1997 through December 31, 1997. 6.13 SPECIAL OFFICES: Franchisor, in its sole discretion, may establish and modify from time to time special categories of business locations, for example: locations open only on a seasonal basis, locations open for a trial period of six months or less, and locations 12 [LOGO] COLDWELL BANKER authorized to offer limited categories of services. Conditions relating to the opening, operation and closing of such special locations, including without limitation, signage, permitted services, the payment of fees and the like, shall be set forth in the Policy Manual. 6.14 ADMINISTRATIVE FEES: Franchisor, in its sole discretion, may charge a reasonable administrative fee as set forth in the Policy Manual for processing each of Franchisee's requests to amend the information set forth in Sections 2.1 through 2.6. 6.15 UPDATES: Franchisee will provide to Franchisor, on a monthly basis, an updated Office List which will reflect in each case any changes to the information contained therein for the prior month, which changes must have been approved by Franchisor. 6.16 INSURANCE: Franchisee shall, for the entire term of this Agreement, maintain at Franchisee's expense commercial general liability insurance for all of its operations (including operations under other franchise or membership agreements) in an amount not less than a $50,000,000 coverage limit per year (with a $1,000,000 coverage limit per occurrence). Franchisee shall, for the entire term of this Agreement, maintain at Franchisee's expense errors and omissions insurance for all of its operations (including operations under other franchise or membership agreements) in a coverage limit per year not less than the Yearly Insurance Limit (with a coverage limit per occurrence not less than 10% of the Yearly Insurance Limit). Franchisor reserves the right to establish minimum standards with which underwriters providing the aforementioned insurance coverage must comply. Said policies of insurance shall insure Franchisee against any liability which may arise in connection with the operation of Franchisee's real estate brokerage business and such collateral businesses as may be approved in writing by Franchisor and shall be in such form as Franchisor approves. If required by law, Workers' Compensation Insurance shall be carried on all employees and sales associates. All insurance policies maintained by Franchisee, other than Worker's Compensation Insurance, shall contain a separate endorsement naming Franchisor, Cendant and Cendant Finance Holding Corporation as additional insureds; shall not be subject to cancellation, except on ten (10) days written notice to Franchisor; and shall contain an express waiver of any and all rights of subrogation whatsoever against Franchisor. Franchisee shall cause certificates of insurance of all such policies and endorsements, showing compliance with the above requirements, to be deposited with Franchisor within thirty (30) days of the execution of this Agreement and annually thereafter. "Yearly Insurance Limit" shall mean", for each calendar year of this Agreement, - ----------------------- (i) $10,000,000 if Franchisee's total revenue (as reported on Franchisee's financial statements) ("Total Revenue") for the calendar year immediately prior ------------- to the calendar year for which the Yearly Insurance Limit is being calculated is not more than $2,500,000,000, (ii) $15,000,000 if Franchisee's Total Revenue for the calendar year immediately prior to the calendar year for which the Yearly Insurance Limit is being calculated is between $2,500,000,000 and $3,000,000,000 and (iii) $20,000,000 if Franchisee's Total Revenue for the calendar year immediately prior to the calendar year for which the Yearly Insurance Limit is being calculated exceeds $3,000,000,000. 6.17 INDEBTEDNESS: Franchisee shall not, and shall not permit its subsidiaries to, incur Indebtedness if the Leverage Ratio (after giving effect to the incurrence of such Indebtedness) shall exceed 2.0 (3.0 if the Commitment has been exhausted and not replaced with an additional commitment of funds by Cendant or one of its subsidiaries on substantially equivalent terms). Leverage Ratio shall mean the ratio of total consolidated Indebtedness of Franchisee and its subsidiaries (excluding Cash Secured Loans (as 13 [LOGO] COLDWELL BANKER defined below) and the outstanding principal amount of the existing development advance) to pro forma LTM EBITDA (pro forma meaning pro forma for the LTM EBITDA of brokerage offices acquired during such LTM including appropriate cost allocations to reflect operation on a standalone basis if the acquired business was part of a group of companies with shared expenses, but excluding anticipated synergies). "EBITDA" shall mean Franchisee's consolidated earnings from ------ continuing operations (excluding extraordinary gains or losses, Conversion Costs (as defined in the Acquisition Cooperation Agreement) and, as agreed between Franchisor, Franchisee and, until such time as Apollo owns less than 10% of Franchisee's outstanding common stock, Apollo, one-time or non-recurring items of income or expense) plus interest expense, provision for income taxes and depreciation and amortization expense. Immediately prior to any incurrence of Indebtedness by Franchisee (including Indebtedness incurred by Franchisee upon the acquisition of another entity or upon the assumption of liabilities of another entity), Franchisee shall furnish Franchisor with a certificate executed by its chief financial officer to the effect that such incurrence is not in violation of this section and that, based on Franchisee's business plan and a good faith forecast prepared at the time of incurrence, the Leverage Ratio is not reasonably expected to exceed 2.0, or 3.0, as the case may be, for the twelve full calendar months following such incurrence. Notwithstanding the foregoing, Franchisee shall not be prohibited from incurring (i) Cash Secured Loans in the ordinary course of business, (ii) working capital revolving loans not in excess of 2% of Franchisee's LTM Gross Revenue (under this Agreement and any other franchise or membership agreement with a subsidiary of Cendant) at any one time outstanding, (iii) letters of credit and hedging obligations in the ordinary course of business, (iv) Indebtedness to refinance existing Indebtedness provided that such Indebtedness is not greater than the Indebtedness so refinanced and (v) other Indebtedness not to exceed 1% of Franchisee's LTM Gross Revenue (under this Agreement and any other franchise or membership agreement with what is then (notwithstanding the last sentence of Section 6.6) a subsidiary of Cendant) at any one time outstanding (the foregoing, collectively, "Permitted Indebtedness"); provided that the Permitted ---------------------- Indebtedness incurred pursuant to clauses (ii), (iv) or (v) above shall be included in the calculation of the Leverage Ratio, for purposes of determining whether Indebtedness beyond the Permitted Indebtedness is permitted hereunder. "LTM" shall mean, at any time, the twelve consecutive full calendar months of such Person ending on the most recently completed full month for which financial statements prepared in accordance with generally accepted accounting principles consistently applied are available. "Cash Secured Loans" shall mean any loan ------------------ incurred in connection with title insurance and escrow operations to the extent that the principal and interest thereon is secured by an amount of cash or U.S. governmental securities to ensure the full payment of principal and interest thereon after giving effect to the interest income earned there on. "Indebtedness," at any date shall include, without duplication, (a) all ------------ indebtedness of Franchisee or its subsidiaries for borrowed money or for the deferred purchase price of property or services (other than current payables incurred in the ordinary course of business and payable in accordance with customary practices) and including earn-out or similar contingent purchase amounts, (b) any other indebtedness of Franchisee or its subsidiaries which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of Franchisee or its subsidiaries under capitalized leases, (d) all obligations of Franchisee or its subsidiaries in respect of acceptances issued or created for the account of Franchisee or its subsidiaries, (e) all liabilities secured by any lien on any property owned by Franchisee or its subsidiaries even though neither Franchisee nor its subsidiaries has assumed or otherwise become liable for the payment thereof, and (f) all guarantees by Franchisee or its subsidiaries of obligations of others 14 [LOGO] COLDWELL BANKER (including the value of obligations of others secured by liens on the assets of Franchisee or its subsidiaries). For purposes of this section 6.17, Indebtedness shall include any outstanding amount of mandatorily redeemable preferred stock or preferred stock with scheduled mandatory redemptions, and shall not include (i) pay-in-kind preferred stock that does not require Franchisee to make any cash payments (other than upon liquidation and does not include sanctions for the non-payment of cash, other than increasing the dividend rate to a rate not exceeding 13% per annum, (ii) perpetual cash-pay preferred stock that does not contain any sanctions for the non-paymnet of amounts provided for therein other than the right to elect (together with all other preferred stock other than preferred stock existing on the date hereof) no more than 2 directors to Franchisee's board of directors upon any default; provided that the rate thereon does not exceed 13% per annum and, at the time of issuance thereof, Franchisee would have been permitted under the Leverage Ratio test to incur Indebtedness with fixed charges equal to the fixed charges of such preferred stock and (iii) preferred stock outstanding on the date hereof and any shares paid thereon in accordance with the term thereof. 6.18 DIVIDENDS: Notwithstanding anything else herein to the contrary, Franchisee shall not be permitted to (i) incur Indebtedness to finance the payment of dividends or (ii) declare or pay any Extraordinary Dividend unless the Leverage Ratio (provided that the Leverage Ratio is calculated such that the consolidated indebtedness is net of cash and cash equivalents) at the time such dividend is declared and paid is no greater than 1.0. "Extraordinary Dividend" ---------------------- shall mean any dividend or distribution which is not a regularly scheduled quarterly dividend consistent with past practice and which exceeds the lesser of (x) 20% of Franchisee's net income for the fiscal year in which such dividend or distribution is declared minus dividends or distributions already paid during such fiscal year and (y) 20% of Franchisee's net income for the fiscal year in which such dividend or distribution is paid minus dividends or distributions already paid during such fiscal year. For the avoidance of doubt, the payment by the Franchisee of all or any part of the $45,000,000 dividend (the "Apollo Dividend")to Apollo Management, L.P. and/or its affiliates ("Apollo") pursuant ------ to the Letter Agreement, dated as of the date hereof, among Franchisee, Cendant, Apollo and others, shall not be restricted in any manner by this Agreement, including this Section 6.18. 7.0 FRANCHISE ROYALTIES: 7.1 GROSS REVENUES: The phrase "Gross Revenues" means all moneys or things of -------------- value, calculated at their fair market value in United States currency, received or receivable (i.e., earned but not yet received) by Franchisee (including, without limitation, all revenues and commissions received by or on behalf of Franchisee's independent sales associates, regardless of whether or not such independent sales associates are entitled to retain all or part of such revenues or commissions), directly or indirectly, in connection with Franchised Services or the use of any of the Coldwell Banker Marks in any manner, without deducting any of Franchisee's multiple listing fees, advertising costs, commissions, overrides, bonuses, salaries, or any other costs or expenses, except referral fee expenses paid and payments to outside brokers. a. Reserved. b. Moneys or things of value received or receivable by Franchisee solely from property management, title, escrow, mortgage or mortgage marketing services (including fees under the Marketing Agreement (defined below)), referral network dues, 15 [LOGO] COLDWELL BANKER desk rental fees, broker price opinions and home warranty fees shall not be included in Gross Revenues. Property management services shall not include any property management commissions paid to Franchisee's brokers, for which royalties will be charged. c. Moneys or things of value received as interest or investment income, including interest or investment income in connection with title and escrow deposits and/or arbitrage loans shall not be included in Gross Revenues. d. Deductions made for special fees, employee home purchases and salesperson home purchases shall not be included as Gross Revenues. e. Reserved. f. The term Gross Revenues shall not include Gross Revenues for which a royalty fee is paid pursuant to franchise agreements between Franchisee and any other Cendant subsidiary, currently Century 21 Real Estate Corporation and ERA Franchise Systems, Inc. 7.2 ROYALTIES: a. Franchisee shall pay to Franchisor continuing royalties ("Royalties") in an amount equal to six percent (6%) (the "Regular Royalty") of --------- --------------- all Gross Revenues. Royalties are due and payable in United States currency on or before the tenth day of the month following the settlement or close of each transaction which generates Gross Revenues, on or after the Effective Date, including sales contracts and other transactions and contracts entered into or made before the Effective Date. Upon expiration or termination of this Agreement, Royalties shall remain payable as to all transactions entered into, or sales contracts made, prior to the date of such expiration or termination. In addition to Royalties payable hereunder, pursuant to the terms and conditions of the Incremental Royalty Agreement, Franchisee shall be required to pay Franchisor from time to time, additional royalties based upon the consolidated performance of all of Franchisee's real estate brokerage businesses, until the termination of the Incremental Royalty Agreement. Notwithstanding the Regular Royalty set forth in the first sentence of this section, upon the opening of a new office by Franchisee as a result of an acquisition of an existing real estate brokerage company which was not affiliated with any Cendant franchise brand immediately prior to such acquisition, which acquisition did not involve Cendant's or one of its subsidiaries' acquisition of trademarks and was not consummated using funds from Cendant or one of its subsidiaries (I) while the commitment to provide funds under the Acquisition Cooperation Agreement (the "Commitment") has not been exhausted, and Franchisee has requested in writing ---------- for Cendant to use its funds (which request is made in good faith and pursuant to the Acquisition Cooperation Agreement) and Cendant has declined to do so, and provided that Franchisee is in compliance with the Acquisition Cooperation Agreement, the royalty fee applicable to gross revenues attributable to those sales agents affiliated with such office immediately prior to such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to: (i) 4% if the offices acquired in such acquisition had LTM Gross Revenues of up to $5,000,000, (ii) 3% if the offices acquired in such acquisition had aggregate LTM Gross 16 [LOGO] COLDWELL BANKER Revenues between $5,000,000 and $10,000,000, and (iii) 2% if the offices acquired in such acquisition had aggregate LTM Gross Revenues in excess of $10,000,000; provided that if Franchisor's impact review policy would have, in -------- Franchisor's sole determination, prevented Franchisee from opening such office due to the proximity of such office to Franchisee's existing COLDWELL BANKER office (the "Impacted Office") if not for the fact that Franchisee also owns the --------------- Impacted Office, the royalty fee applicable to gross revenues attributable to sales agents working in such office at the time of such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to: (i) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenues of up to $5,000,000 and (ii) 2% if the offices acquired in such acquisition had aggregate LTM Gross Revenues in excess of $5,000,000 and (II) after the Commitment has been exhausted, and Franchisee has requested in writing for Cendant to use its funds (which request is made in good faith and on equivalent terms, economic and other, to those in the Acquisition Cooperation Agreement) and Cendant has declined to do so, the royalty fee applicable to gross revenues attributable to those sales agents affiliated with such office immediately prior to such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to: (i) 4% if the offices acquired in such acquisition had aggregate LTM Gross Revenues of up to $5,000,000 and (ii) 3% if the offices acquired in such acquisition had aggregate LTM Gross Revenues in excess of $5,000,000; provided that if Franchisor's impact review policy would have, in -------- Franchisor's sole determination, prevented Franchisee from opening such office due to the proximity of such office to an Impacted Office if not for the fact that Franchisee also owns the Impacted Office, the royalty fee applicable to gross revenues attributable to sales agents working in such office at the time of such acquisition and new agents recruited for, and working at, such office (other than those agents recruited from another one of Franchisee's offices, whether such office is operating under this Agreement or any other agreement between Franchisee and a subsidiary of Cendant) shall be equal to 3%. Notwithstanding the foregoing, if Franchisee transfers the operations of one Office ("Office A") to another Office ("Office B"), or combines the operations -------- -------- of any two Offices ("Office A" and "Office B") the royalty fee applicable to -------- -------- Gross Revenues generated at the combined Office or the Office to which the operation were transferred, shall be equal to (X) the LTM Gross Revenues for Office A divided by LTM Gross Revenues for Office A and Office B, multiplied by the royalty fee applicable to Office A, plus (Y) the LTM Gross Revenues for Office B divided by LTM Gross Revenues for Office A and Office B multiplied by the royalty fee applicable to Office B. For purposes of this Agreement, the determination of whether the Commitment has been exhausted shall be made assuming the fifth anniversary of the date of the Acquisition Cooperation Agreement has passed. Notwithstanding anything in this Agreement to the contrary, royalties are payable under this Section 7.2 with respect to Transition Offices. b. In addition to the Royalty Fees identified in (a) above, Franchisee shall pay to Franchisor (A) an additional monthly royalty hereunder, payable on the tenth day of each month (in the case of the first month in which this Agreement is in effect, payable on the Effective Date) beginning on the first month in which this Agreement is in effect, in an amount equal to: (i) $166,667 plus (ii) beginning in the month in which the Apollo Dividend is paid, $250,000 if the initial public offering of common stock of Franchisee (the "IPO") has not --- occurred by the first date of each such month 17 [LOGO] COLDWELL BANKER plus(iii) one-half of the federal income tax payable by Cendant or one of its subsidiaries in respect of the gain on the sale of assets to Franchisee or one of its subsidiaries pursuant to a transaction described in Section 5.8(c) of the Stockholders Agreement or Section 2.1(c) of the Acquisition Cooperation Agreement (whether such transaction occurred prior to or after the date hereof) divided by 12 and multiplied by 0.2 plus (iv) beginning on the month following the month in which a Triggering Event (as defined in Schedule A hereof) occurs, an additional amount calculated in accordance with Schedule A attached hereto and (B) an additional royalty equal to 0.15% of Franchisee's Total Revenue for each fiscal quarter, paid at the end of each fiscal quarter (beginning with the first full fiscal quarter after the date hereof) in which Franchisee's aggregate EBITDA for such fiscal quarter and the prior three fiscal quarters exceeds $225,000,000, until such time as a royalty has been paid under this clause (B) 20 times. Notwithstanding anything else herein to the contrary, this Section 7.2(b) will survive until termination of all franchise or membership agreements between Franchisee and any subsidiary of Cendant. "Stockholders Agreement" shall ---------------------- mean the Stockholders Agreement, dated as of August 11, 1997 between and among Franchisee and the Stockholders thereof identified on Schedule A thereto, as amended or restated from time to time. 7.3 RESERVED. 8.0 THE ADVERTISING FUND: 8.1 ADMINISTRATION: Recognizing the value of advertising to the goodwill and public image associated with the Coldwell Banker Marks, Franchisor, in its sole discretion, may establish, maintain and administer a special fund (the "Advertising Fund") for the creation and development of such advertising, public - ----------------- relations, promotional and related programs and materials as Franchisor may deem appropriate. Franchisor shall disburse moneys from the Advertising Fund for the purposes described above. The Advertising Fund shall be administered in the following manner: a. Real estate offices owned by Franchisor's Related Parties, except referral centers, shall contribute to the Advertising Fund on the same basis as Franchisee. The moneys contributed to the Advertising Fund ("Advertising Fees") ---------------- shall be accounted for separately from Franchisor's other funds, but may be deposited in any of Franchisor's general accounts and commingled with Franchisor's funds. b. The Advertising Fund may not be used to defray any general operating expenses of Franchisor and its Related Parties, except as follows: 1. Franchisor and its Related Parties shall be entitled to payment from the Advertising Fund for actual administrative expenses incurred with respect to the Advertising Fund; provided, however, that such expenses shall not, in the aggregate, exceed fifteen percent (15%) of the annual gross contributions to the Advertising Fund; and 2. Franchisor and its Related Parties also shall be entitled to payment from the Advertising Fund for the actual costs incurred in the production of advertising, public relations and promotional materials. c. Franchisor shall determine, in its sole discretion, the cost, form of media, content, 18 [LOGO] COLDWELL BANKER format, production, timing (including regional or local concentration and seasonal exposure), location and all other matters relating to the advertising, public relations and/or promotional campaigns sponsored by the Advertising Fund, including without limitation the sponsorship of joint campaigns with Franchisor's Related Parties. d. All disbursements from the Advertising Fund shall be made first from any interest income earned on deposits and then from contributions to the Advertising Fund. Franchisor may spend in any fiscal year an amount greater or less than the contributions to the Advertising Fund in that year. The Advertising Fund may borrow from Franchisor or other lenders to cover deficits of the Advertising Fund. Franchisor may cause the Advertising Fund to invest any surplus for future use by the Advertising Fund. In the event that Advertising Fund contributions made by any of Franchisor's Related Parties in any calendar year exceed the total amount required to be contributed during such calendar year, such Related Parties shall have the right to be reimbursed to the extent of such excess contributions from any amounts subsequently contributed to the Advertising Fund or to use such excess as a credit against future contributions that may become due. e. On or before April 30th of each year, Franchisor shall prepare annual financial statements of the Advertising Fund, certified to be correct by an officer of Franchisor, and furnish Franchisee with a copy thereof upon written request. The books and records of the Advertising Fund shall be available for inspection by Franchisee at Franchisor's principal place of business during Franchisor's normal business hours, upon 15 days' prior written notice from Franchisee. f. Franchisor, in its sole discretion, may determine that all or any portion of the Advertising Fund should be used for advertising on a local level by the contributors to the Advertising Fund. In such event, Franchisor shall have the right to return all or such portion of the Advertising Fund to the contributors, pro rata, for local advertising upon such terms and conditions as Franchisor shall specify. g. Except as expressly provided in this Article 8.0, Franchisor assumes no direct or indirect liability or obligation to Franchisee with respect to the maintenance, direction or administration of the Advertising Fund. 8.2 ADVERTISING FEES: Franchisee shall pay Advertising Fees to Franchisor for the purposes of the Advertising Fund in an amount equal to two and one-half percent (2.5%) of Franchisee's monthly Gross Revenues (including Gross Revenues attributable to Transition Offices) up to a maximum of $817 per Office per month, but not less than $222 per Office per month. a. If the Effective Date occurs before the 16th day of a calendar month, the first payment of Advertising Fees shall be due and payable on the tenth day of the following calendar month. If the Effective Date occurs after the 15th day of a calendar month, the first payment of Advertising Fees shall be due and payable on the tenth day of the second following calendar month. Advertising Fees are due and payable on the tenth day of each subsequent calendar month throughout the Term. Any Advertising Fees not received by the 15th day of the month when they are due shall be considered past due. b. The maximum and minimum Advertising Fees may be adjusted by Franchisor, in its sole discretion, as of January 1st of each year in an amount up to a maximum of any 19 [LOGO] COLDWELL BANKER annual percentage increase of the cost of living index for the immediately preceding year. The cost of living index shall be the index number in the table relating to "Consumer Price Index -United States City Average, All Items, for Urban Wage Earners and Clerical Workers" as presently published in the "Monthly Labor Review" of the Bureau of Labor Statistics for the United States Department of Labor for the month of September of each year. In the event that the Bureau ceases publishing this cost of living index or materially changes the method of its computation or other features thereof, Franchisor may select comparable statistics published by another governmental agency, a financial periodical or other recognized authority. Notwithstanding the foregoing, the maximum and minimum Advertising Fees will be adjusted consistently with all other franchisees of Franchisor. c. Franchisor may determine that the maximum and minimum Advertising Fees required to be made by each contributor to the Advertising Fund pursuant to this Article 8.0 are greater than required to effectively conduct the advertising, public relations and/or promotional campaigns of the Advertising Fund. Franchisor shall have the right to reduce the maximum and minimum Advertising Fees by such amount and for such period of time as Franchisor deems appropriate. All contributors to the Advertising Fund shall be treated equally with respect to any such reduction. In the event of any such reduction, Franchisor shall have the right, upon at least 30 days' written notice to Franchisee, to restore the maximum and minimum Advertising Fees to an amount which shall not exceed the allowable maximum and minimum Advertising Fees otherwise specified in this Section 8.2, including any authorized cost of living increases. d. Franchisor, in its sole discretion, may impose additional assessments upon Franchisee for special advertising, public relations and/or promotional activities in a particular area designated by Franchisor if eighty percent (80%) of the Coldwell Banker real estate franchisees located in such area agree to the additional assessments. Franchisee agrees to pay all such assessments in a timely manner. 9.0 THE COLDWELL BANKER MARKS: 9.1 OWNERSHIP AND GOODWILL: Franchisee acknowledges and agrees that Franchisee's right to use the Coldwell Banker Marks is derived solely from this Agreement and is limited to conducting the Franchised Business in compliance with this Agreement. Franchisee agrees to use the Coldwell Banker Marks only in accordance with the System Standards. Any unauthorized use of any of the Coldwell Banker Marks by Franchisee constitutes a breach of this Agreement and an infringement of the rights of Franchisor and Coldwell Banker Corporation to the Coldwell Banker Marks. a. Franchisee acknowledges and agrees that any use of any of the Coldwell Banker Marks for any transaction, business or service not included within the definition of Franchised Services (except when Franchisee has obtained Franchisor's prior written consent) shall be deemed an unauthorized use of the Coldwell Banker Marks. b. This Agreement does not confer on Franchisee any goodwill or other interests in any of the Coldwell Banker Marks. Franchisee's use of the Coldwell Banker Marks and any goodwill established thereby will inure to the exclusive benefit of Franchisor and Coldwell Banker Corporation. Franchisee shall not at any time during or after the Term contest or assist any other Person in contesting the validity or ownership of any of the Coldwell Banker Marks. 20 [LOGO] COLDWELL BANKER c. Upon the expiration of this Agreement without renewal or upon the earlier termination of this Agreement, Franchisee shall immediately cease using any and all of the Coldwell Banker Marks. If Franchisee does not cease such use in any manner, Franchisor shall have the right to execute in Franchisee's name and on its behalf any and all documents necessary, in Franchisor's sole judgment, to end all use by Franchisee of the Coldwell Banker Marks. Franchisee hereby irrevocably appoints Franchisor as Franchisee's attorney-in-fact to execute any and all such documents. 9.2 NOTIFICATION OF INFRINGEMENTS AND CLAIMS: Franchisee shall immediately notify Franchisor of any apparent infringement of, or challenge to, Franchisee's use of any of the Coldwell Banker Marks or any claim by another Person of any rights to any of the Coldwell Banker Marks. Franchisee shall not communicate with any Person, other than Franchisor and its counsel, in connection with any such infringement, challenge or claim. Franchisor shall have sole discretion to take such action as it deems appropriate and the right to control exclusively any litigation, any U.S. Patent and Trademark Office proceeding or any other administrative proceeding arising out of any such infringement, challenge or claim or otherwise relating to any of the Coldwell Banker Marks. Franchisee shall execute any and all instruments and documents, render such assistance and do such acts and things as may be necessary or advisable, in the opinion of Franchisor's counsel, to protect and maintain Franchisor's interests in the Coldwell Banker Marks. 9.3 FRANCHISEE'S USE OF THE COLDWELL BANKER MARKS: Franchisee shall use the Coldwell Banker Marks in combination with Franchisee's business name set forth in Section 2.1. Franchisee shall file and keep current, as required by law, a fictitious business name statement or similar document with respect to Franchisee's business name. Franchisee shall identify itself as the independent owner of the Franchised Business in the manner Franchisor prescribes from time to time in the Policy Manual. Other than Franchisee's corporate names that are in effect as of the date of this Agreement and which have been disclosed in writing to Franchisor, Franchisee shall not use any of the Coldwell Banker Marks as part of any corporate name or in any other manner not expressly authorized in writing by Franchisor. Franchisee acknowledges and agrees that in the event this Agreement is terminated for any reason, Franchisee shall promptly change all corporate names to a name which does not contain the words "Coldwell Banker". Franchisee agrees to supervise all of its employees and agents to ensure proper use of the Coldwell Banker Marks and compliance with this Agreement. 9.4 CHANGES IN THE USE OF THE COLDWELL BANKER MARKS: If it becomes advisable at any time in Franchisor's sole discretion for Franchisor and/or Franchisee to modify or discontinue the use of any of the Coldwell Banker Marks and/or to use one or more additional or substitute trademarks, service marks or trade dress, Franchisee agrees to comply with Franchisor's directions within a reasonable time after written notice. Franchisor shall have no liability or obligation whatsoever with respect to Franchisee's modification or discontinuance of any of the Coldwell Banker Marks or in connection with the use or promotion of any substitute trademark, service mark or trade dress. 10.0 FRANCHISE OWNERSHIP AND TRANSFER: 10.1 OWNERSHIP: This Agreement is personal to Franchisee. Franchisor has entered into this Agreement in reliance upon, and in consideration of, the skill, qualifications and representations of Franchisee and its employees, officers and employees. Franchisee 21 [LOGO] COLDWELL BANKER may not Transfer the Franchise or delegate its duties under this Agreement without advance written approval of Franchisor, which approval may be withheld in Franchisor's sole determination. 10.2 Transfer: The phrase "Transfer the Franchise" means the voluntary or ---------------------- involuntary, direct or indirect, sale, assignment, transfer, license, sublicense, subfranchise, sublease, collateral or conditional assignment, inter- vivos transfer, testamentary disposition, pledge, encumbrance, creation of a security interest in, or any other disposition of this Agreement, any interest in or right under this Agreement or the assets, revenues or income of Franchisee or the Franchised Business, including without limitation: a. reserved; b. reserved; Any transfer, out of the ordinary course of business, of any of the assets used in the Franchised Business, whether or not in conjunction with a transfer of Franchisee's rights under this Agreement; d. Any transfer in, or as a result of, insolvency, corporate or partnership dissolution proceeding or otherwise by operation of law; e. reserved; or f. Any foreclosure upon assets of the Franchised Business or the transfer, surrender or loss by Franchisee of possession, control or management of the Franchised Business. Notwithstanding anything to the contrary herein, each party acknowledges that transfers of interests in Franchisee by Sponsors (as defined in the Stockholders Agreement) in accordance with the terms of the Stockholders Agreement shall not violate this Section 10. 10.3 RESERVED. 10.4 RESERVED 10.5 RESERVED 10.6 RESERVED. 10.7 RESERVED. 11.0 RECORDS, REPORTING AND INSPECTIONS: 11.1 RECORDS: Franchisee shall keep and maintain such accurate and complete business records as Franchisor prescribes in the Policy Manual, including without limitation, bookkeeping and accounting records, sales and income tax records and returns, and other records of Franchisee for the Franchised Business, for any Ancillary Services business operated by Franchisee or any of its Related Parties, and for any other business operated by Franchisee. Business records for separate businesses shall 22 be separately identified. All such records shall be kept and maintained at the applicable Office unless otherwise approved in writing by Franchisor. 11.2 PERIODIC REPORTS: Franchisee shall furnish to Franchisor business information (including listing, sales and other customer information) at the times and on such forms as Franchisor may designate in the Policy Manual from time to time, including without limitation: a. Within 24 hours after the acceptance of an offer, a report of the transaction that has been commenced or the sales contract that has been made; b. Not later than the 10th day of each month, a report of Gross Revenues for the preceding month; and c. At Franchisor's request only, 90 days after the end of each calendar year, a year-end balance sheet, income statement and statement of cash flow of the Franchised Business for such year, reflecting all year-end adjustments. 11.3 VERIFICATION AND USE OF INFORMATION: Each business report and financial statement shall be signed and verified by Franchisee in the manner prescribed by Franchisor in the Policy Manual. None of such information shall be considered confidential by the parties. Franchisor shall have the rights to use information derived from such reports and statements for its own business purposes, to disclose such information as may be required by law and governmental authority, and to aggregate such information with other franchisee information and disclose such aggregated information as Franchisor deems appropriate. 11.4 ELECTRONIC COMMUNICATIONS: The parties contemplate the rapid development of computer systems and methods of reporting and communicating by tele-transmission during the Term. Franchisee agrees to use its best efforts to obtain and use computer equipment, software, communications capabilities and reporting formats which are fully compatible with any computer system that Franchisor, in its sole discretion, may employ from time to time. Any failure of Franchisee's computer equipment, software, communications capabilities, and reporting formats to be compatible with Franchisor's systems shall not result in Franchisees failure to timely satisfy Franchisee's obligations under this Agreement. a. Franchisor shall include specifications for such equipment and software in the Policy Manual. Franchisor expressly reserves the right to modify such specifications from time to time. b. The proper use of such equipment and software to report to Franchisor shall be deemed to fulfill the reporting requirements of Sections 11.2 and 11.3. In connection with any electronic communication between the parties' computer systems, Franchisor and Franchisee agree that: 1. The parties shall electronically transmit to, or receive from, each other such reports and communications as are listed from time to time in the Policy Manual (collectively "Electronic Reports"). All Electronic Reports shall be ------------------ transmitted in accordance with the procedures specified in the Policy Manual. 23 [LOGO] COLDWELL BANKER 2. Each party, at its own expense, shall provide and maintain the equipment, software, services and testing necessary to effectively and reliably transmit and receive Electronic Reports. 3. No information contained in any Electronic Report shall be considered confidential by the parties. Franchisor and Franchisee shall have the rights to use all information derived from any Electronic Report for their own business purposes and to disclose such information as may be required by law and governmental authority. Franchisor shall have the right to aggregate all of franchisee's information with other franchisee information and to disclose such aggregated information as Franchisor deems appropriate. Franchisor specifically indemnifies Franchisee against any claims (including reasonable attorney's fees) incurred by Franchisee out of Franchisor's use of the Electronic Reports in violation of applicable law. 4. Any Electronic Report properly transmitted pursuant to this Agreement shall be considered to be a "writing" or "in writing," and any such Electronic Report shall be deemed for all purposes to constitute an "original" when printed from electronic files or records established and maintained in the normal course of business. 5. Absent manifest error, no party shall contest the validity, enforceability or admissibility of any Electronic Reports properly transmitted pursuant to this Agreement, if introduced as evidence on paper in any judicial, arbitration, mediation or administrative proceeding. 11.5 RIGHTS TO INSPECT AND AUDIT: At any reasonable time and upon three business days' notice, Franchisor and its designated agents shall have the rights to inspect the Franchised Business; to interview and survey Franchisee's personnel and clients; and to review and audit the business records, bookkeeping and accounting records, sales and income tax records and returns and other records of Franchisee, including the records of the Franchised Business, any Ancillary Services business operated by Franchisee or any of its Related Parties, and any other business operated by Franchisee. Franchisee shall cooperate fully with Franchisor and its representatives in conducting any such inspection or audit. 11.6 UNDERSTATEMENT OF GROSS REVENUES: If any inspection or audit discloses an understatement of Gross Revenues, then Franchisee shall pay to Franchisor, within 7 days after receipt of the inspection or audit report, the Royalties and Advertising Fees due on the amount of such understatement, plus late charges and interest (as provided in Section 17.5) from the date originally due until the date of payment. Further, if such inspection or audit is made necessary by Franchisee's failure to furnish reports, records or information on a timely basis; if Franchisee's financial records require a substantial effort by Franchisor's auditors to be placed in a condition readily conducive to audit (whether or not such audit subsequently discloses any underpayment or overpayment); or if an understatement of Gross Revenues for the period of any audit is determined by Franchisor to be greater than two percent (2%), Franchisee shall reimburse Franchisor for the cost of such audit or inspection, including without limitation, the charges of any attorneys and independent accountants; all travel expenses, room and board; and compensation of Franchisor's employees and designated agents who participated in such audit or inspection. 12.0 RENEWAL OF THE FRANCHISE: Upon the expiration of each term hereof 24 [LOGO] COLDWELL BANKER (other than upon a termination by Franchisor), Franchisee shall have the option to extend the term hereof for an additional 50 years, provided that, Franchisee -------- ---- complies with all of the following: (i) At the time of the extension of the term hereof, Franchisee shall not be in material default under Franchisee's existing Franchise Agreement or any other agreement or obligation Franchisee may have with Franchisor (such as other COLDWELL BANKER franchise agreements), including, but not limited to, Franchisee's obligations to (x) pay Royalties, Advertising Fees, interest and late charges, audit fees and other properly chargeable amounts; and (y) comply with the Policy Manual, including trade name and logo guidelines. (ii) Franchisee shall deliver to Franchisor written notice of Franchisee's intent to renew not more than one hundred eighty (180) days and not less than ninety (90) days prior to the Expiration Date of the term under which Franchisee is then operating; if no such notice has been received by Franchisor at least ninety (90) days but not more than one hundred eighty (180) days prior to said Expiration Date, then Franchisee's option to extend the term hereof shall be extinguished and Franchisor shall have the right, during the ninety (90) day period prior to said Expiration Date, subject to local law, and notwithstanding any other provision of this Agreement, to market, grant, place and/or operate franchises in the general vicinity of any of Franchisee's Offices. Upon receipt of such notice, the term hereof shall automatically and without further action be extended to a date 50 years from the date the term of this Agreement was otherwise to terminate. (iii) Franchisee, as a condition for extending the term hereof, shall make such reasonable expenditures as Franchisor may require, pursuant to Section 6.10, as are necessary to conform with Franchisor's standards for interior and exterior office size, decor, overall attractiveness and cleanliness then in effect. (iv) Franchisee shall pay no initial franchise fee or renewal fee in connection with extending the term hereof. OTHER THAN AS SET FORTH IN THIS SECTION, NEITHER PARTY HAS RENEWAL RIGHTS. 13.0 DEFAULT AND TERMINATION: 13.1 RIGHT TO TERMINATE: Franchisor may terminate this Agreement for good cause. As used in this Article 13.0, the meaning of the phrase "good cause" shall include, without limitation, each cause expressly set forth in Sections 13.2 and 13.3, and Franchisee's failure to comply with any other lawful requirement of this Agreement. This Agreement may not be terminated except as expressly provided herein or as permitted under applicable law. 13.2 IMMEDIATE TERMINATION: Franchisee and Franchisor agree that certain acts, omissions or conditions fundamentally undermine their relationship. Franchisee agrees that this Agreement and the franchise relationship or the franchise for a particular Office or Offices, as indicated, may be terminated by Franchisor, in its sole discretion, immediately upon written notice of termination to Franchisee based upon the occurrence of any of the following acts, omissions or conditions all of which constitute a material breach of this Agreement. 25 [LOGO] COLDWELL BANKER a. Franchisee is insolvent by reason of its inability to pay its debts or other financial obligations as they mature; b. Franchisee's bank accounts, property or accounts receivable are attached; c. A final judgment against Franchisee in the amount of $10,000,000.00 or more remains unsatisfied of record for 30 days or longer; d. Execution is levied against the business or property of Franchisee; e. Suit is filed to foreclose any lien or mortgage against any of the assets of Franchisee and such suit is not dismissed or stayed within 60 days after the filing date; f. Franchisee voluntarily dissolves or liquidates, or has a petition filed for corporate or partnership dissolution and such petition is not dismissed within 30 days after the filing date; g. Reserved; h. Franchisee has made any material misrepresentation or omission in the application for the franchise conferred by this Agreement or in any other information provided pursuant to this Agreement; i. Franchisee or any of its employees, officers or directors is or has been convicted of, or pleads or has pleaded no contest to, any crime or offense that Franchisor determines might adversely affect the goodwill associated with the Coldwell Banker Marks; j. Franchisee has engaged in an action or a failure or refusal to act which endangers public health or safety; or k. Upon any merger, consolidated or reorganization, or sale or transfer or any series of sales or transfers (whether related or unrelated) that result in thirty percent (30%) or more of the voting power or the outstanding shares of Franchisee's common stock being owned beneficially or of record by a single person or group (each as defined in Section 13)d)(3) of the Securities Exchange Act of 1934, as amended) (other then Cendant or any successor thereto or Apollo) (the "Acquiring Person") whether by operation of law or otherwise, unless the ---------------- prior written consent of Franchisor shall have been obtained; provided that the Acquiring Person still owns such 30% or more ten business days after notice to the Acquiring Person (which notice Franchisee hereby agrees to deliver to the Acquiring Person and Franchisor). For purposes of determining the outstanding shares of Franchisee's common stock, securities convertible into (but not exercisable for) common stock shall be deemed to have been converted into common stock. Notwithstanding anything to the contrary herein, transfers of interest in the Franchisee by Sponsors (as defined in the Stockholders Agreement) in accordance with the terms of the Stockholders Agreement shall not be a termination event under this Agreement. 13.3 TERMINATION AFTER OPPORTUNITY TO CURE: Franchisor also shall have the right to terminate this Agreement in its entirety or with respect to individual Offices, as indicated, 26 [LOGO] COLDWELL BANKER effective immediately upon written notice of termination, if Franchisee, after reasonable notice and opportunity to cure (which need not be longer than 30 days): a. Reserved; b. Makes any unauthorized use of the Coldwell Banker Marks or any unauthorized use or disclosure of any Confidential Information, as defined in Section 15.1, or uses, duplicates or discloses any portion of the Policy Manual in violation of this Agreement; c. Violates any law, ordinance or regulation relating to the operation of the Franchised Business, including without limitation, laws and regulations governing the licensing and operation of real estate businesses; d. Fails to report Gross Revenues accurately or on a timely basis, or to make payments of any amounts due Franchisor for Royalties, Advertising Fees or any other amounts due Franchisor or any of its Related Parties under this Agreement or any other agreement with Franchisee or any of its Related Parties; e. Attempts to Transfer the Franchise or closes any transaction to Transfer the Franchise without the prior written consent of Franchisor; f. Surrenders or transfers control or supervision of the operation of any Office to a Residential Manager who has not satisfactorily completed the Orientation and been accepted in writing by Franchisor; or g. Fails to comply with or perform any other lawful requirement of this Agreement or any other agreement between Franchisor or any of its Related Parties and Franchisee or any of its Related Parties (including any Cendant brand real estate franchise agreements). 14.0 OBLIGATIONS UPON EXPIRATION OR TERMINATION: 14.1 CONTINUING OBLIGATIONS: All obligations of Franchisee under this Agreement which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement until they are satisfied in full or by their nature expire. 14.2 PAYMENTS OWED TO FRANCHISOR: Except for Royalties which may become due on transactions that have not yet closed, Franchisee shall pay to Franchisor and its Related Parties within 30 days after the date of termination of this Agreement or the Expiration Date if the franchise is not renewed, all Royalties, Advertising Fees, amounts owed for purchases from Franchisor or its Related Parties, late payment charges, interest due and all other amounts owed to Franchisor or its Related Parties which are then unpaid. 14.3 DISCONTINUANCE OF THE FRANCHISED BUSINESS: Franchisee agrees that upon termination of this Agreement or upon expiration if the franchise is not renewed, Franchisee will with respect to each terminated office: a. Not directly or indirectly at any time or in any manner identify itself or any business as a current or former franchisee of Franchisor or use any of the Coldwell 27 [LOGO] COLDWELL BANKER Banker Marks or any imitation thereof, or in any other way indicate that Franchisee is or has been a Coldwell Banker franchisee for any purpose, except as may be required by law or governmental authority; b. Take such action as may be required to cancel all fictitious or assumed name or equivalent registrations relating to Franchisee's use of any of the Coldwell Banker Marks; c. Give written notification to the telephone company and all telephone directory publishers of the termination or expiration of Franchisee's right to use any of the Coldwell Banker Marks in connection with any telephone number or any regular, classified or other telephone directory listings; d. Give Franchisor and its agents access to all books and records, and fully cooperate with Franchisor and its agents in order for them to conduct an audit pursuant to Section 11.5; e. Immediately discontinue using, for any purpose, all signs, advertising materials, forms, and other materials and supplies which display or include any of the Coldwell Banker Marks; f. Immediately cease using any Confidential Information, as defined in Section 15.1, in any business or otherwise, and return to Franchisor all copies of the Policy Manual and all other materials containing information about the Coldwell Banker System, regardless whether such materials have been purchased by Franchisee; and g. Furnish to Franchisor, within 30 days after the effective date of termination or the Expiration Date, evidence satisfactory to Franchisor of Franchisee's compliance with the foregoing obligations. 14.4 ADDITIONAL REMEDIES FOR BREACH. a. In the event that prior to the expiration of any term hereof, there is (i) a failure to pay royalties on a timely basis, (ii) a termination of this Agreement by Franchisee, (iii) any breach of Section 6.12(c) hereof due to the willful closure or willful deidentification of Offices in excess of those permitted to be closed or deidentified pursuant to Section 6.12(c), (iv) any breach of Section 6.12(c) hereof due to the closure or deidentification of in excess of 20 of the Offices permitted to be closed or deidentified pursuant to Section 6.12(c), (v) termination of this Agreement pursuant to Section 13.2(k), (vi) the affiliation by Franchisee with another real estate brokerage system (other than a system owned by Cendant), or (vii) any breach of this Agreement by Franchisee (other than a breach of Section 5.8 hereof) that has, or is reasonably expected to have, a material adverse effect on the COLDWELL BANKER System, in each case other than clause (v) above after notice to Franchisee and a reasonable opportunity to cure (each, a "Liquidated Damages Event"), ------------------------ Franchisee shall immediately become obligated to pay Franchisor Franchisor's "lost future profits" (as hereinafter defined). For purposes of this Agreement "lost future profits" for an office shall consist of all royalty fees which Franchisee would have paid to Franchisor with respect to such office from the date of the Liquidated Damages Event through the earlier of the end of the then- current term of this Agreement, had there been no Liquidated Damages Event, and 25 years from the date of the Liquidated Damages Event. The parties acknowledge and agree 28 [LOGO] COLDWELL BANKER that it would be impracticable and extremely difficult to calculate the actual amount of lost future profits payable by Franchisee, and that the following method of calculation represents a fair and reasonable estimate of foreseeable lost future profits: Lost future profits shall be calculated on an Office by Office basis by determining the average monthly royalty fee payment payable by the Franchisee to Franchisor for each such Office from the commencement date of this Agreement through the date of the Liquidated Damages Event, and multiplying these average amounts by the lesser of (i) the actual number of months (and any fraction thereof) remaining between the date of the Liquidated Damages Event and the end of the then-current term of this Agreement and (ii) 300. Lost future profits shall be payable with respect to all of Franchisee's Offices, provided that in the case of clauses (iii) and (iv) of the definition of Liquidated Damages Event, lost future profits shall only be payable with respect to the Offices closed or deidentified in violation of Section 6.12(c) (including the 20 permitted to be closed or deidentified before clause (iv) becomes effective). Franchisee acknowledges that the lost future profits set forth in this section are fair and reasonable, in light of the fact that Franchisor's affiliate has participated in Franchisee's prior acquisitions and will participate in Franchisee's future acquisitions by purchasing the tradenames and trademarked operating names of the acquired entities with the intention of licensing such names, together with the names licensed hereunder, to Franchisee and the expectation of royalties in consideration of the use of such names, for the full term of this Agreement. b. In addition, the parties agree that in event of a termination, for any and all offices, of this Agreement by Franchisor by reason of a breach of this Agreement by Franchisee, other than a termination which is a Liquidated Damages Event, the parties agree that Franchisor is not entitled to any damages for lost future profits and Franchisor shall be required to pursue its other remedies in connection with such breach under this Agreement and under applicable law. c. Franchisee acknowledges that in addition to the provisions contained in this Section 14, Franchisee will, upon a termination of this Agreement prior to its Expiration Date, also be responsible to Franchisor for such additional common law damages as may be payable by Franchisee to Franchisor as a result of said termination. d. Franchisee acknowledges that if Franchisee breaches this Agreement and/or continues to utilize the Coldwell Banker System or Coldwell Banker Marks at such times when Franchisee is not legally entitled to use them, Franchisor shall have no adequate remedy at law. Therefore, Franchisee expressly consents and agrees the Franchisor may, in addition to any other available remedies, obtain an injunction and/or temporary restraining order to terminate or prevent the continuation of any existing default or violation, and to prevent the occurrence of any threatened default or violation, by Franchisee of this Agreement. 15.0 RESTRICTIONS AND RESERVATIONS: 15.1 CONFIDENTIAL INFORMATION: Franchisor owns certain confidential information relating to the operation of the Coldwell Banker System and the Offices, including without limitation, the Policy Manual, electronic communications identification numbers, procedures related to Franchisor's proprietary communications and referral systems, and other methods and information related to Ancillary Services. Franchisor, as it deems necessary, will disclose its confidential information to Franchisee solely for Franchisee's use in operating the Franchised Business (the "Confidential Information"). The ------------------------ 29 [LOGO] COLDWELL BANKER Confidential Information is proprietary and includes Franchisor's trade secrets. During the Term and thereafter, Franchisee shall: a. Exert reasonable efforts to maintain the confidentiality of the Confidential Information, including adopting and implementing the procedures that Franchisor prescribes from time to time to prevent unauthorized use or disclosure of the Confidential Information. The Confidential Information may be disclosed to the extent required by order of a court or governmental agency; provided, however, that the disclosure of the Confidential Information must give Franchisor prior written notice of the proposed disclosure and must employ its best efforts to obtain a protective order or otherwise protect the confidentiality of the Confidential Information, all at the disclosure's cost and expense; b. Not use the Confidential Information in any other business or capacity; and c. Not make unauthorized copies of any portion of the Confidential Information in written, electronic or other tangible form. 15.2 COMPETITIVE BUSINESS: The phrase "Competitive Business" means any business -------------------- enterprise engaged in operating or franchising a real estate business or any other business that is the same as, or similar to, the Franchised Business, as such may evolve over time other than real estate business that are operated by Franchisee pursuant to an executed Franchise Agreement with any Cendant real estate subsidiary, currently Century 21 Real Estate Corporation and ERA Franchise Systems, Inc. Franchisor would be unable to protect its Confidential Information against unauthorized use or disclosure and would be unable to encourage a free exchange of ideas and information among Coldwell Banker franchisees if such franchisees and their owners were permitted an unrestricted right to hold interests in, or perform services for, any Competitive Business. During the Term, neither Franchisee nor any of Franchisee's employees, officers or directors, nor any member of his, her or their immediate families (whether natural or adopted), shall without Franchisor's prior review and written consent: a. Divert or attempt to divert any business or customer of the Franchised Business to any Competitive Business by inducement or otherwise, diminish the Gross Revenues of the Franchised Business, or do anything injurious to the goodwill associated with the Coldwell Banker Marks or the integrity of the Coldwell Banker System; or Directly or indirectly own any legal or beneficial interest in, or render services for or give advice to, any Competitive Business located anywhere. This restriction shall not prohibit Franchisee from participating in real estate industry groups and organizations; however, Franchisee shall not disclose the Confidential Information as part of any such participation. 15.3 RESERVED. 15.4 RESERVATION OF RIGHTS: This Agreement shall not be construed as granting Franchisee any right to purchase any additional franchise from Franchisor, or as granting any right or priority as to the location of any additional franchise which may be granted by Franchisor. If Franchisor enters into any other franchise agreement with Franchisee for any other location, such franchise agreement shall be on such terms as Franchisor then shall establish. Except as otherwise expressly provided in this 30 [LOGO] COLDWELL BANKER Agreement, Franchisor and its Related Parties retain all of their rights and discretion with respect to the Coldwell Banker Marks, the Coldwell Banker System and Coldwell Banker real estate offices, including without limitation, the rights to: a. Operate and grant to others the right to operate Coldwell Banker real estate offices identified by the Coldwell Banker Marks, at such locations within or outside of Franchisee's market area, and on such terms and conditions as Franchisor or any of its Related Parties deems appropriate; b. Sell any products or services under the Coldwell Banker Marks, or under any other trademarks, service marks or trade dress, through other channels of distribution; c. Operate and grant to others the right to operate real estate offices identified by trademarks, service marks or trade dress other than the Coldwell Banker Marks, at such locations within or outside of Franchisee's market area, and on such terms and conditions as Franchisor or any of its Related Parties deems appropriate; and d. Operate and grant others the right to operate real estate offices located anywhere (whether owned by Franchisor or any Related Party, franchisee or licensee of Franchisor) that are part of a franchise system, affiliation or group of real estate offices that are open and operating (or under contractual commitment for development) at the time when Franchisor or any Related Party, directly or indirectly, acquires such offices and/or acquires the rights of the Franchisor or licensor of such offices, regardless of whether such offices operate (or are converted to operate) using any or all of the Coldwell Banker Marks and/or any or all of the Coldwell Banker System or whether such offices operate under other trademarks, service marks or trade dress, and/or use other marketing and operating systems. 16.0 JUDICIAL PROCEEDINGS: 16.1 LIMITATIONS: Any judicial proceeding between two or more of the parties shall be governed by the following limitations: a. Such judicial proceeding will be considered unique as to its facts and may not be brought as a class action. Franchisee waives any right to proceed against Franchisor by way of class action. The court will not be precluded from making its own independent determination of the issues in question, notwithstanding the similarity of issues in any other judicial or arbitration proceeding involving any other franchisee. Each party waives the right to claim that a prior disposition of the same or similar issues preclude such independent determination. b. The parties agree that such judicial proceeding will be tried before the court sitting without a jury, notwithstanding any State or Federal constitutional or statutory rights. Each party waives any right to have any action tried by jury. c. Except with respect to obligations regarding use of the Coldwell Banker Marks (set forth in Sections 2.1, 6.6 and 15.2 and Article 9.0) and the Confidential Information (set forth in Sections 14.3, 15.1 and 15.2 of this Agreement), the parties waive, to the fullest extent permitted by law, any right to or claim for any punitive or exemplary damages against any other party and agree that the party making any claim directly or indirectly arising from or relating to this Agreement will be limited to recovery of actual 31 [LOGO] COLDWELL BANKER and consequential damages sustained. 16.2 COSTS AND ATTORNEYS' FEES: The party prevailing in any judicial or arbitration proceeding between the parties shall be awarded its costs and expenses, including reasonable attorneys' fees. The phrase "party prevailing" means the party which recovered the greater relief in the proceeding. 16.3 CUMULATIVE RIGHTS AND REMEDIES: Except as otherwise explicitly provided in this Article 16.0, the rights of the parties are cumulative and no exercise or enforcement by a party of any right shall preclude the exercise or enforcement by a party of any other right which the party is entitled to enforce by law, and all remedies under this Agreement at law, in equity or otherwise afforded shall be cumulative and not alternative, and may be exercised simultaneously or sequentially in any order. 16.4 GOVERNING LAW AND VENUE: This Agreement and the relationships among the parties shall be governed by, and construed in accordance with, the laws of the State of New Jersey; provided that the New Jersey Franchisee Practices Act shall not apply to any COLDWELL BANKER Franchised brokerage office whose office(s) is/are located outside the State of New Jersey and provided, however, the foregoing shall not be construed as a waiver of any right of Franchisee under any applicable franchise registration, disclosure and/or relationship law of another Territory, State or Commonwealth. In the event of any conflict of law, the laws of New Jersey shall prevail, without regard to the application of New Jersey conflict of law principles. However, if any provision of this Agreement is or becomes unenforceable under the laws of New Jersey, and if the Office is located outside of New Jersey and such provision would be enforceable under the laws of the Territory, State or Commonwealth in which the Office is located, then such provision shall be governed and construed by the laws of that Territory, State or Commonwealth. Nothing in this Section is intended to subject this Agreement or the relationship of the parties to any franchise or similar law of the State of New Jersey to which it would not otherwise be subject. Franchisee consents to the non-exclusive personal jurisdiction of the New Jersey state courts situated in Morris County and the United States District Court for the District of New Jersey. Franchisee waives objection to venue in any such courts. 16.5 CONSTRUCTION: The System Standards and the information inserted in Articles 1.0 and 2.0, all are integral parts of this Agreement. This Agreement, the Marketing Agreement, the Outsourcing Agreement, the Acquisition Cooperation Agreement, the Incremental Royalty Agreement and the Stockholders Agreement constitute the entire agreement of the parties with respect to the subject matter hereof. As of the Effective Date, this Agreement fully supersedes any and all prior negotiations, agreements or understandings between the parties pertaining to the subject matter of this Agreement; and there are no other oral or written agreements, understandings, representations or statements between the parties relating to the subject matter of this Agreement, other than Franchisor's franchise offering circular, that any party may rely upon or that will have any force or effect. "Marketing Agreement" shall have the meaning ------------------- ascribed to it in the Acquisition Cooperation Agreement. a. Nothing in this Agreement is intended or shall be deemed to confer any rights or remedies upon any Person not a party hereto. b. If applicable law shall imply a covenant of good faith and fair dealing in this 32 [LOGO] COLDWELL BANKER Agreement, the parties hereto agree that such covenant shall not imply any rights or obligations that are inconsistent with a fair construction of the terms of this Agreement. If applicable law shall imply such a covenant, the parties acknowledge and agree that: 1. This Agreement (and the relationship of the parties which is inherent from this Agreement) grants Franchisor the discretion to make decisions, take actions and/or refrain from taking actions not inconsistent with its explicit rights and obligations hereunder that may favorably or adversely affect the interests of Franchisee; Franchisor shall use its business judgment in exercising such discretion based on its assessment of its own interests and balancing those interests against the interests of the owners of other Coldwell Banker real estate offices generally (including Franchisor, its franchisees and its Related Parties) and specifically without considering the individual interests of Franchisee or any other particular franchisee of Franchisor; 3. Franchisor shall have no liability to Franchisee for the exercise of its discretion in this manner, so long as such discretion is not exercised in bad faith toward Franchisee; and 4. In the absence of such bad faith, no trier of fact in any judicial or arbitration proceeding shall substitute its judgment for the business judgment so exercised by Franchisor. c. If, at any time during the Term, two or more Persons are Franchisee (whether acting in partnership or otherwise and whether or not all have signed this Agreement), the rights, privileges and benefits granted to Franchisee in this Agreement may only be exercised and enjoyed jointly; and the obligations, liabilities and responsibilities of Franchisee under this Agreement shall be joint and several obligations of such Persons. Franchisee acknowledges that Franchisor may from time to time make exceptions to the standard parts of the Coldwell Banker System which Franchisor, in its sole discretion, determines to be necessary or desirable under particular circumstances. Franchisee agrees that it has no right to object to, or automatically obtain, such variances and that any exception is subject to Franchisor's prior written consent. Franchisee also acknowledges that other existing and/or future franchisees may operate under different forms of agreements and, consequently, the rights and obligations of such franchisees may differ materially from those of Franchisee. In the event of any conflict between this Agreement and the Policy Manual or any other document, this Agreement shall control. 16.6 CUSTOMER SATISFACTION: Franchisee agrees to respond in a diligent and professional manner to any notice of customer dissatisfaction. Franchisee agrees to cooperate with Franchisor and its representatives in any investigation undertaken by Franchisor of complaints regarding Franchisee's activities. 17.0 MISCELLANEOUS: 17.1 SUBSTITUTION OF VALID PROVISIONS: If any applicable law requires a greater prior notice for termination or non-renewal of this Agreement than is required hereunder, or the taking of some other action not required hereunder, the prior notice and/or other 33 [LOGO] COLDWELL BANKER action required by such law shall be substituted for, and/or included in, the applicable provisions hereof. If any covenant herein which restricts competitive activity is declared by an arbitrator or court of competent jurisdiction to be unenforceable by virtue of its scope in terms of geographical area, type of business activity prohibited and/or length of time, but could be enforceable by reducing any part or all of its scope, the parties agree that it will be enforced to the fullest extent permissible under applicable laws and public policies. If any other provision of this Agreement is declared by an arbitrator or court of competent jurisdiction to be invalid or unenforceable under applicable law, Franchisor shall have the right, in its sole discretion, to modify such invalid or unenforceable provision to the extent required to render such provision valid or enforceable, including without limitation the right to delete the provision in its entirety. It is hereby declared the intention of the parties that they would have executed the Agreement as so modified; provided, however, that if Franchisor, in its sole discretion, determines that such modification substantially impairs the value of this Agreement to Franchisor, Franchisor may terminate this Agreement by written notice to Franchisee. 17.2 WAIVER OF OBLIGATIONS: Franchisor or Franchisee may, by written instrument, unilaterally waive or reduce any obligation of the other under this Agreement. Franchisor or Franchisee shall not be deemed to have waived any right under this Agreement by virtue of any custom or practice of the parties at variance with the terms hereof, any failure of Franchisor or Franchisee to exercise any right under this Agreement or to insist upon exact compliance by the other of its obligations hereunder, any failure by Franchisor to exercise the same or any similar right with respect to other Coldwell Banker franchisees, or the acceptance by Franchisor of any payments due from Franchisee after any breach of this Agreement. Notwithstanding the foregoing provisions of this Section and except as prohibited or limited by applicable law, any failure or delay of a party to assert any breach or violation of any legal or equitable right arising from or in connection with this Agreement shall constitute a waiver of such right and shall preclude the exercise or enforcement of any legal or equitable remedy arising therefrom, unless written notice specifying such breach or violation is provided to the other party within 18 months after the later of the date of such breach or violation, or the date of discovery of the facts giving rise to such breach or violation (or the date the facts could have been discovered, assuming reasonable diligence). 17.3 EXCUSABLE DELAY: Neither Franchisor nor Franchisee shall be deemed to be in breach of this Agreement if its failure to perform its obligations results from acts of God, fires, strikes, embargoes, war, terrorism, riot, governmental laws or regulations, or any other similar event or cause. Any delay resulting from any of these causes will extend performance accordingly or excuse performance in whole or in part as may be reasonable, except that none of these causes shall excuse payments of amounts owed at the time of such occurrence or the payment of Royalties and Advertising Fees due on any Gross Revenues. 17.4 APPLICATION OF PAYMENTS: Notwithstanding any designation by Franchisee, Franchisor shall have sole discretion to apply any payments made by, or on behalf of, Franchisee (and to apply any amounts owed to Franchisee or any of its Related Parties by Franchisor or any of its Related Parties) to any of Franchisee's past due indebtedness for Royalties or Advertising Fees. No restrictive endorsement on any check or in any letter or other communications accompanying any payment shall bind Franchisor or any of its Related Parties. Franchisor's acceptance of any such payment shall not constitute an accord or satisfaction. Franchisor's and any of its Related Parties' 34 [LOGO] COLDWELL BANKER acceptance of any payments made by Franchisee shall not be construed to be a waiver of any breach or default of any provision of this Agreement. 17.5 LATE CHARGES AND INTEREST: All amounts which Franchisee owes to Franchisor or its Related Parties, including Advertising Fees, shall be subject to an administrative late charge and shall bear interest after their due date at the highest late charge rate and the highest applicable rate of interest permitted by law, not to exceed $10.00 for each late payment and one and one-half percent (1.5%) interest per month, respectively. 17.6 ASSIGNMENT AND TRANSFER BY FRANCHISOR: This Agreement is fully assignable and transferable by Franchisor, in whole or in part, whether by operation of law or otherwise, and shall inure to the benefit of any assignee, transferee or other legal successor to Franchisor. 17.7 BINDING EFFECT: This Agreement is binding upon the parties hereto and their permitted heirs, personal representatives, successors and assigns. Except as expressly permitted herein, this Agreement shall not be modified except by a subsequent written agreement signed by both Franchisee and Franchisor. 17.8 NOTICES AND PAYMENTS: All notices, payments, reports and other communications permitted or required by this Agreement to be sent to Franchisor shall be sent to the addresses identified in the Policy Manual. All notices, payments, reports and other communications permitted or required by this Agreement to be sent to Franchisee shall be sent to the notice address identified in Section 2.6. a. A party may change its address from time to time by notifying the other parties in writing. b. All notices, payments, reports and other communications permitted or required to be delivered by the provisions of this Agreement shall be deemed delivered at the time delivered by hand to the recipient party (or to an officer, director or partner of the recipient party); on the same date of the transmission by facsimile, telegraph or other reasonably reliable electronic communication system; on the same date as delivery occurs if placed in the hands of a commercial courier service or the United States Postal Service for guaranteed express delivery; or 5 days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the recipient party's most current address. 17.9 Franchisee acknowledges that it has provided input for the preparation of this Agreement, that it has consulted with counsel of its choice, that the Agreement reflects a negotiation between Franchisor and Franchisee, and that this Agreement shall not be construed more strongly against either party on account of that party drafting this Agreement. 17.10 RESERVED. 18.0 RESERVED. The remainder of this page is intentionally left blank. This is the last page of this agreement, other than Schedule A, attached hereto 35 [LOGO] COLDWELL BANKER SCHEDULE A ---------- Section 1. Definitions. Unless otherwise defined herein, the ----------- following terms used in this Schedule A shall have the meanings specified below: "Incremental Royalty Rate" shall mean a rate such that if multiplied ------------------------ by the LTM gross commission revenue at the time of the Triggering Event the result would equal 25% of the LTM EBITDA (before giving effect to royalties payable under the Incremental Royalty Agreement) at the time of such Triggering Event. "Maximum Incremental Royalties" shall mean, for any month, the ----------------------------- Incremental Royalty Rate times the Revenue Participation Cap for such month. "Revenue Participation Cap" shall mean, for any month, in any calendar ------------------------- year, the Franchisee's Gross Revenues, for all of its Offices (whether operating under this Agreement or any other franchise or membership agreement) for the corresponding month in the LTM prior to the Triggering Event. "Triggering Event" shall mean the earliest of (i) such time as at ---------------- least 20% of Franchisee's issued and outstanding common shares have been distributed through a primary public offering registered under the Securities Act of 1933, as amended, (ii) the sale by Franchisee, in one or a series of related transactions of assets representing 80% or more in value of Franchisee's consolidated assets on a fair market value basis and (iii) the dividend or distribution to stockholders of cash or assets representing 80% or more in value of Franchisee's consolidated assets, net of liabilities on a fair market value basis. Section 2. In addition to any amounts due under this Agreement and any other franchise or membership agreements between Franchisee and a Cendant subsidiary, Franchisee shall pay to Franchisor or its designee, a royalty, paid monthly on the tenth day following the end of each month, in an amount equal to (i) the Incremental Royalty Rate times (ii) Franchisee's Gross Revenues for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for such month, provided that the royalties paid pursuant to this Schedule for such month shall not exceed the Maximum Incremental Royalties for such month. In addition, no later than the fifth business day in January of any year, beginning on the first January following a Triggering Event, (A) if Franchisee's Gross Revenue for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for the prior year were equal to or greater than 90% of the Gross Revenues for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for LTM period prior to a Triggering Event, Franchisor shall have the right to receive an additional royalty which, when added to the royalties paid under this Section 2 in respect of the prior year, equals the Incremental Royalty Rate times the Franchisee's Gross Revenues for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for the LTM period prior to a Triggering Event and (B) if Franchisee's Gross Revenues for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for the prior year were less than 90% of the Franchisee's Gross Revenues for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for the LTM period prior to a Triggering Event, Franchisor shall have the right to receive an additional royalty which, when added to the royalties paid under this Section 2 in respect of the prior year, equals the Incremental Royalty Rate times Franchisee's Gross Revenues for all of its Offices (whether operating under this Agreement or any other Franchise or membership agreement) for the prior year; provided that for the first January after a Triggering Event, clauses (i) and (ii) will be calculated only for those full months after a Triggering Event and ended on or prior to the preceding December 31. Section 3. This Schedule A shall not apply until a Triggering Event. #58187.9 36 EX-10.4 7 AMENDED & RESTATED STOCKHOLDERS AGREEMENT EXHIBIT 10.4 AMENDED AND RESTATED STOCKHOLDERS AGREEMENT ------------------------------------------- AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this "Agreement"), dated --------- as of _______, 1999, by and among NRT Incorporated, a Delaware corporation (the "Company"), Apollo Management, L.P., Cendant Corporation, each of the ------- stockholders of the Company listed on Schedule A hereto and such other stockholders of the Company as may, from time to time, become parties to this Agreement in accordance with the provisions hereof (individually, a "Stockholder" and, collectively, the "Stockholders"). - ------------ ------------ WHEREAS, as of the date hereof, each Stockholder is the beneficial owner of the shares of Common Stock and/or Preferred Stock (each as defined herein) set forth on Schedule A hereto; and WHEREAS, the parties hereto desire to amend and restate the Stockholders Agreement, dated as of August 11, 1997 (the "1997 Agreement"), -------------- as more fully set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements and covenants contained herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows, hereby amending, restating and superceding the 1997 Agreement in its entirety: ARTICLE I DEFINITIONS Section 1.1 Definitions. Unless otherwise defined herein, the ----------- following terms used in this Agreement shall have the meanings specified below: "Affiliate" shall mean, with respect to any Person, any of (i) a --------- director or executive officer of such Person and (ii) any other Person that, directly or indirectly, controls, or is controlled by or is under common control with such Person. For the purpose of this definition, "control" (including the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities or by contract or agency or otherwise; it being understood that Cendant and Sponsors and their Affiliates shall be deemed to be Affiliates of the Company. "Apollo" shall mean Apollo Management, L.P. ------ "Board" shall mean the Board of Directors of the Company. ----- "By-Laws" shall mean the Amended and Restated By-Laws of the Company, ------- as amended from time to time. "Cendant" shall mean Cendant Corporation, a Delaware corporation, or ------- any subsidiary of Cendant Corporation that holds the Common Stock or the Convertible Preferred Stock. "Commission" shall mean the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. "Common Stock" shall mean the Common Stock, par value $0.01 per share, ------------ of the Company. "Convertible Preferred Stock" shall mean the 5.00% Series B Cumulative --------------------------- Convertible Redeemable Preferred Stock of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, or any ------------ similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934 shall include a reference to the comparable section, if any, of any such similar federal statute. "Junior Preferred Stock" shall mean the 18.00% Series C Cumulative ---------------------- Junior Redeemable Preferred Stock. "Master Franchise Agreements" shall mean the Amended and Restated --------------------------- Master Franchise Agreements between the Company and each of Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc. and Century 21 Real Estate Corporation, as the same shall be amended from time to time after the date hereof. "Person" shall mean a corporation, an association, a partnership, a ------ limited liability company, an organization, a business, a trust, an individual, a government or a subdivision thereof or a governmental agency or any other entity. "Preferred Stock" shall mean shares of any class of Preferred Stock of --------------- the Company, including the Senior Preferred Stock, the Convertible Preferred Stock and the Junior Preferred Stock. "Public Sale" shall mean any sale of Common Stock or Preferred Stock ----------- to the public pursuant to a public offering registered under the Securities Act or to the public 2 through a broker, dealer or market maker pursuant to the provisions of Rule 144 (or any similar provision then in force) adopted under the Securities Act. "Registration Expenses" shall mean all expenses incidental to the --------------------- Company's performance of, or compliance with, its obligations under Article IV including, without limitation, all registration and filing fees, all fees and expenses of compliance with securities and "blue sky" laws, all printing and copying expense, all messenger and delivery expenses, the fees and expenses of not more than one counsel for all selling securityholders, all fees and expenses of the Company's independent certified public accountants and counsel and other Persons retained by the Company in connection therewith. Notwithstanding the foregoing, Registration Expenses shall not include underwriting discounts or the fees and expenses of underwriters, accountants, agents or experts retained by a holder of Common Stock in connection with the sale of Common Stock but shall include the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties, the expense of any annual audit and the expense of any liability insurance) and the expenses and fees for listing the Common Stock on the New York Stock Exchange or other exchange or automated quotation system. "Restricted Securities" shall mean all shares of Common Stock and --------------------- Preferred Stock and any securities obtained upon exchange for or upon conversion or transfer of or as a distribution on such shares of Common Stock and Preferred Stock or any such securities, except that any particular Restricted Securities shall cease to be such when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (iii) such securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (iv) such securities shall have ceased to be outstanding. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the issuer thereof or its transfer agent, without expense (other than transfer taxes, if any), new securities of like tenor not bearing a legend of the character set forth in Section 3.1. "Securities Act" shall mean the Securities Act of 1933, or any similar -------------- federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar federal statute. 3 "Senior Preferred Stock" shall mean the 9.00% Series A Cumulative ---------------------- Senior Redeemable Preferred Stock of the Company. "Sponsors" shall mean Apollo Investment Fund III, L.P., Apollo -------- Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. As used in this Agreement, whenever any action requires the consent of, or the determination of, Sponsors, such consent or determination shall be made upon obtaining the consent or determination of a majority of the Sponsor Designees (as defined in Section 2.1). "Stockholder" shall mean the stockholders listed on Schedule A hereto ----------- and such other stockholders as may, from time to time, become parties to this Agreement in accordance with the provisions hereof. "Transfer" shall mean any conveyance, sale, disposition, lease, -------- transfer, pledge or transaction granting a mortgage, encumbrance, lien, security interest or charge, or any similar transaction. ARTICLE II BOARD OF DIRECTORS; VOTING AGREEMENTS Section 2.1 Board of Directors. (a) Each of the Stockholders shall ------------------ vote all of its Common Stock, and will take all other necessary or desirable actions within its control, and the Company will take all necessary or desirable action within its control, in order to cause (i) the number of directors on the Board to be twelve, except as provided in Section 2.1(b), (ii) five of the Board members to be nominated by Cendant (each, a "Cendant Designee"), (iii) five of ---------------- the Board members to be nominated by Sponsors (each a "Sponsor Designee") and ---------------- (iv) two of the Board members (the "Jointly Designated Directors") to be ---------------------------- jointly nominated by Cendant and Sponsors, provided that at each such person -------- designated as a Jointly Designated Director must not be employed by, a consultant to, or an officer or director of, Cendant, Sponsors or any of their Affiliates (other than the Company or its subsidiaries); provided, further, that -------- ------- at least one Cendant Designee and least one Sponsor Designee must be an "independent director" (within the meaning of the rules of the New York Stock Exchange or other exchange or market upon which the Common Stock is then or proposed to be listed) and shall be subject to the approval of Sponsors and Cendant, respectively, which approval will not be unreasonably withheld. It is hereby agreed that the Jointly Designated Directors shall initially be Chandler B. Barton and Robert M. Becker. (b) As soon as legally permissible, each Stockholder shall vote all of its shares of Common Stock and will take all other necessary or desirable actions to call, or cause the Company to call, a special or annual meeting of stockholders of the 4 Company and to vote all of the shares of Common Stock owned or held of record by such Stockholder for, or to take all actions by written consent in lieu of any such meeting necessary to cause, the removal, in accordance with the applicable provisions of the By-Laws, of any director designated and elected pursuant to Section 2.1(a) if: (i) such director is a Cendant Designee, upon the request of Cendant by written notice to the other Stockholders; (ii) such director is a Sponsor Designee, upon the request of Sponsors by written notice to the other Stockholders; or (iii) such director is a Jointly Designated Director, only upon the request of both Cendant and Sponsors. (c) In the event that any Cendant Designee or Sponsor Designee shall for any reason cease to serve as a member of the Board during his term of office, the resulting vacancy on the Board will be filled by a representative designated, respectively, by Cendant or Sponsors, as the case may be. In the event that any Jointly Designated Director shall for any reason cease to serve as a member of the Board during his term of office, the resulting vacancy on the Board will be filled by a Jointly Designated Director jointly chosen by Cendant and Sponsors. (d) Each Stockholder agrees to vote its shares of Common Stock at any special or annual meeting of stockholders, or take all actions by written consent in lieu of any meeting necessary to (i) cause the election of members of the Board so that the Board is constituted in accordance with this Section 2.1 and (ii) prevent the removal, other than for cause, of any Jointly Designated Director, except as provided in Section 2.1(b)(iii). ARTICLE III TRANSFER OF SHARES Section 3.1 Restrictions on Transfer; Legend on Certificates. (a) ------------------------------------------------ Except for Transfers of shares of capital stock of the Company (i) to a Stockholder on the date hereof or one of its wholly owned subsidiaries (in the case of Sponsors, whose officers are all bona fide officers of such Sponsor), (ii) from one Sponsor to another Sponsor, (iii) pursuant to a registration statement filed by the Company pursuant to Article IV hereof, (iv) from a Sponsor to an investment fund of which Apollo or an entity that is an Affiliate of Apollo holds sole voting and investment discretion with respect to such shares or (v) in connection with the Transfer by any Sponsor of all or substantially all of its assets to its investors, from such Sponsor to its investors (provided that such Transfer would not 5 otherwise be a Transfer of the type described in (A), (B) or (C) below)), in each case in compliance with federal and all applicable state securities laws, none of Sponsors or Apollo shall, directly or indirectly, Transfer, in a single transaction or a series of transactions, (A) shares of Common Stock and/or securities convertible into or exercisable for shares of Common Stock to any person or group (each as defined in Section 13(d)(3) of the Exchange Act), if such person or group would, as a result of such Transfer, acquire beneficial ownership of 20% or more of the then outstanding Common Stock, (B) shares of Common Stock and/or securities convertible into or exercisable for shares of Common Stock representing in the aggregate more than 10% of the then outstanding Common Stock to any person or group, and (C) shares of Common Stock and/or securities convertible into or exercisable for Common Stock to any person or group (other than Cendant or its designee) if such person or group would, as a result of such Transfer, become the beneficial owner of 30% or more of the Common Stock, unless, in the case of (A) or (B) above, Sponsors or Apollo shall have received the prior written consent of Cendant to such Transfer (which consent shall not be unreasonably withheld). For purposes of the foregoing sentence, reasonable grounds for withholding consent shall include, without limitation, if Cendant believes in good faith, in its sole discretion, that the proposed transferee may be acquiring such securities with the purpose of acquiring, changing or influencing control of the Company (or facilitating any such acquisition, change or influence of control), which belief may be based, without limitation, on the proposed transferee's failure to disclaim any present control intention, any previous history or a reputation of seeking to acquire, change or influence control of a company. In the case of a Transfer pursuant to clause (i) above, immediately prior to such time as the transferee of such shares is no longer a wholly owned subsidiary of the holder of such shares on the date hereof, the transferee shall immediately transfer such shares to a Person who is then a wholly owned subsidiary of the holder of such shares on the date hereof and who would then be a permitted transferee pursuant to clause (i). Notwithstanding the foregoing, nothing in this Agreement shall restrict the Transfer of any ownership interests in Apollo or any successor thereto, or any Transfer of indirect ownership interests in Apollo; and nothing in this Agreement shall restrict the Transfer of investment interests in any funds managed by Apollo or any affiliate thereof which do not hold, as their primary investment, securities of the Company. (b) Until the earlier of (i) the third anniversary of the date hereof or (ii) the date on which Sponsors own less than 5% of the Common Stock, Cendant shall not be entitled to Transfer any shares of Common Stock or Convertible Preferred Stock except that Cendant may Transfer such shares (i) to a Stockholder on the date hereof or one of its wholly owned subsidiaries, (ii) pursuant to a registration statement filed by the Company pursuant to Article IV hereof or (iii) in a sale not registered under the Securities Act up to an aggregate of $25 million of Common Stock and Convertible Preferred Stock in any quarter but not in excess of an aggregate of $50 million of Common Stock and Convertible Preferred Stock in any year, in each case less any amount sold by Cendant pursuant to Article IV during the respective quarter or year, as the case may 6 be. In the case of a Transfer pursuant to clause (i) above, immediately prior to such time as the transferee of such shares is no longer a wholly owned subsidiary of the holder of such shares on the date hereof, the transferee shall immediately transfer such shares to a Person who is then a wholly owned subsidiary of the Stockholder on the date hereof and who would then be a permitted transferee pursuant to clause (A). (c) In addition to any other restrictions contained in this Agreement, no Stockholder shall Transfer any Restricted Securities except (i) pursuant to an effective registration statement under the Securities Act, (ii) pursuant to Rule 144 or 144A (or any successor provisions) under the Securities Act or (iii) upon receipt by the Company of an opinion of counsel in form and substance reasonably satisfactory to the Company to the effect that such Transfer is exempt from the registration requirements of the Securities Act. (d) Unless otherwise expressly provided herein, each certificate for Restricted Securities and each certificate issued in exchange for or upon transfer of any thereof shall be stamped or otherwise imprinted with a legend in substantially the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and the transfer of such securities is subject to the conditions specified in that certain Amended and Restated Stockholders Agreement, dated as of ________ __, 1999, among NRT Incorporated and the stockholders listed therein, a counterpart of which has been placed on file by the issuer at its principal place of business and its registered office. The issuer reserves the right to refuse the transfer of such securities until such conditions have been fulfilled with respect to such transfer." (e) Any other provision of this Agreement to the contrary notwithstanding, no Transfer of any shares of Common Stock or Preferred Stock may be made to any Person (other than Transfers pursuant to a registration statement filed by the Company pursuant to Article IV hereof) unless such Person shall have agreed in writing that such Person, as a Stockholder, and the shares of Common Stock or Preferred Stock it acquires, shall be bound by all the provisions of this Agreement applicable to shares of the class of Common Stock or Preferred Stock acquired by such Person. Any purported Transfer of shares of Common Stock or Preferred Stock without compliance with the applicable provisions of this Agreement shall be void and of no effect, and the purported transferee shall have no rights hereunder. In the event of such non-complying Transfer, the Company shall not transfer any such shares of Common Stock or Preferred Stock on its books or recognize the purported transferee as a shareholder for any purpose, until all applicable provisions of this Agreement have been complied with. 7 ARTICLE IV REGISTRATION RIGHTS Section 4.1 Demand Registration. (a) At the request of Sponsors, the ------------------- Company shall use reasonable efforts to effect the registration under the Securities Act pursuant to the terms of this Section 4.1(a) of the shares of Common Stock held by Sponsors; provided that upon the Public Sale of all of -------- Sponsors' Common Stock, Sponsors will no longer be entitled to any registration rights pursuant to this Section 4.1. At the request of Cendant, the Company shall use reasonable efforts to effect a registration under the Securities Act pursuant to this Section 4.1(a) of the shares of Common Stock or Convertible Preferred Stock held by Cendant. Sponsors jointly and Cendant shall each be entitled to four underwritten registrations pursuant to this Section 4.1 and Sponsors jointly and Cendant shall each be entitled to one "shelf" registration pursuant to this Section 4.1. Until the earlier of (i) the third anniversary of the date hereof or (ii) the date on which Sponsors own less than 5% of the Common Stock, in any such registration requested by Sponsors or Cendant, and in any additional underwritten registrations of Common Stock held by Sponsors or Cendant which the Company elects to effect (other than as required pursuant to this Section 4.1(a)), Sponsors shall be entitled to register up to the greater of (i) 80% of the total number of shares to be registered in the secondary offering by Sponsors and Cendant (including any shares to be sold by Sponsors and Cendant pursuant to the underwriters' over-allotment option, if exercised) or (ii) such percentage of the total number of shares to be registered in the secondary offering by Sponsors and Cendant such that Sponsors will have sold at least 70% of all shares sold by Sponsors and Cendant following the Company's initial public offering. After the third anniversary of the date hereof, in any registration requested by Sponsors or Cendant, and in any additional under written registrations of Common Stock held by Sponsors or Cendant which the Company elects to effect (other than as required pursuant to this Section 4.1(a)), each of Sponsors and Cendant shall be entitled to register a number of shares equal to 50% of the total number of shares to be registered in the secondary offering by Sponsors and Cendant (including any shares to be sold by Sponsors and Cendant pursuant to the underwriters' over-allotment option, if exercised). Notwithstanding the foregoing, once Sponsors own less than 5% of the Common Stock, in any registration requested by Cendant or Sponsors, Cendant shall be entitled to register 100% of the total number of shares to be registered in a secondary offering (including any shares to be sold pursuant to the underwriters' overallotment option, if exercised), subject to Sponsors' right to include shares in such registration pursuant to Section 4.2 (subject to the limitations set forth in Section 4.2(b)). In any registration hereunder, Cendant shall be entitled, at its election, to (i) register the number of shares permitted to be registered by Cendant hereunder or (ii) cause the Company to register on its own behalf the number of shares set forth in clause (i) and use the proceeds from the sale of such shares to redeem, at Cendant's election, the Convertible Preferred Stock or Senior Preferred Stock, if permitted by applicable law. If the proceeds of any sale under this Section 4.1 are not permitted under applicable law to be used to 8 redeem the Convertible Preferred Stock or Senior Preferred Stock, then such proceeds shall be held by the Company to be paid in respect of such shares when and to the extent permitted by law. (b) Registrations under this Section 4.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and (ii) as shall permit the disposition of the Common Stock in accordance with the intended method or methods of disposition. (c) The Company will pay all Registration Expenses in connection with any registration pursuant to this Section 4.1. (d) If a registration pursuant to this Section 4.1 involves an underwritten offering, the underwriter or underwriters thereof shall be selected, after consultation with the Company, jointly by Sponsors and Cendant, and shall be reasonably acceptable to the Company. (e) A registration requested pursuant to this Section 4.1 shall not be deemed to have been effected (i) if a registration statement with respect thereto has not become effective, provided that a registration which does not become effective after the Company has filed a registration statement with respect thereto solely by reason of the refusal of Sponsors or Cendant to proceed shall be deemed to have been effected by the Company at the request of Sponsors or Cendant, as the case may be, (ii) if, after it has become effective, such registration becomes subject to, for longer than 90 days, any stop order, injunction or other order of the Commission or other governmental agency or court for any reason or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied, other than by reason of some act or omission by Sponsors. If a registration requested pursuant to this Section 4.1 is to be a "shelf" registration, the Company shall use reasonable efforts to keep such registration statement effective for one year after the effective date thereof, provided that the Company shall not be required to keep the registration statement effective if the continued effectiveness of the registration statement would require the Company to disclose a material financing, acquisition or other corporate development and the Company shall have determined that such disclosure is not in the best interests of the Company for such period not to exceed 180 days; and provided further that the requirement to use reasonable efforts to keep the registration statement effective shall be extended one day for each day that the Company allows the effectiveness of the registration statement to lapse in reliance on the preceding proviso. (f) If a registration pursuant to this Section 4.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Common Stock being registered) that, in its opinion, the number of shares of Common Stock requested to be included in such registration exceeds 9 the number which can be sold in such offering within a price range acceptable to the Stockholders requesting such registration, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, Common Stock to be included in such registration by Sponsors and Cendant (or, if Cendant makes the election described in Section 4.1(a), the Company) pro rata among such holders on the basis of the number of --- ---- shares of Common Stock requested to be included by such holders. Section 4.2 Incidental Registration. (a) If the Company at any time ----------------------- proposes to register any of its Common Stock under the Securities Act (other than by a registration on Form S-4 or S-8 or any successor or similar forms and other than pursuant to Section 4.1), whether or not for sale for its own account, it will each such time give prompt written notice to the Stockholders of its intention to do so and of such holders' rights under this Section 4.2. Upon the written request of any such holder made within 20 days after the receipt of any such notice (which request shall specify the Common Stock or Convertible Preferred Stock intended to be disposed of by such holder and the intended method of disposition thereof), the Company will, subject to the terms of this Agreement, use reasonable efforts to effect the registration under the Securities Act of all Common Stock and Convertible Preferred Stock which the Company has been so requested to register by the holders thereof, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Common Stock and Convertible Preferred Stock so to be registered, provided that if, at any time after giving written notice of -------- its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Stockholder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Common Stock and Convertible Preferred Stock in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Common Stock and Convertible Preferred Stock, for the same period as the delay in registering such other securities. The Company will pay all Registration Expenses in connection with each registration of Common Stock and Convertible Preferred Stock pursuant to this Section 4.2. (b) If (i) a registration pursuant to this Section 4.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction and (ii) the managing underwriter of such underwritten offering shall inform the Company and holders of Common Stock and Convertible Preferred Stock requesting such registration by letter of its belief that the distribution of all or a specified number of such Common Stock and Convertible Preferred Stock concurrently with the 10 securities being distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such writing to state the basis of such belief and the approximate number of shares of such Common Stock and Convertible Preferred Stock which may be distributed without such effect), then the Company may, upon written notice to all holders of Common Stock and Convertible Preferred Stock, reduce pro rata (if and to the extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such shares of Common Stock and Convertible Preferred Stock the registration of which shall have been requested by each holder of Common Stock and each holder of Convertible Preferred Stock pursuant to this Section 4.2 so that the resultant aggregate number of shares of Common Stock and Convertible Preferred Stock so included in such registration pursuant to this Section 4.2 shall be equal to the number of shares stated in such managing underwriter's letter. Section 4.3 Registration Procedures. If and whenever the Company is ----------------------- required to use reasonable efforts to effect the registration of any Common Stock or Convertible Preferred Stock under the Securities Act as provided in Sections 4.1 and 4.2, the Company shall, as expeditiously as possible: (i) prepare and within 60 days after the end of the period within which requests for registration may be given to the Company or as soon thereafter as possible (in the case of a registration pursuant to Section 4.1, such filing to be made within 60 days after the request of Sponsors or Cendant, as applicable, or in any event, as soon thereafter as possible) file with the Commission the requisite registration statement to effect such registration and thereafter use reasonable efforts to cause such registration statement to become effective, provided, however, that -------- ------- the Company may postpone filing any registration statement otherwise required to be filed by the Company pursuant to Section 4.1 or suspend the use of any effective registration statement for a reasonable period of time not to exceed 180 days, if the Chairman of the Board determines in his good faith, reasonable judgment that such registration or distribution would be materially detrimental to the Company or because the Company is in possession of material non-public information the disclosure of which would be materially detrimental to the Company; (ii) subject to Section 4.1(e), prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until the earlier of (A) such time as all of such securities have been disposed of in accordance with the intended methods of disposition set forth in the registration 11 statement and (B) (i) in the case of a registration pursuant to Section 4.1 other than a "shelf" registration statement, the expiration of 180 days after such registration statement becomes effective, (ii) in the case of a "shelf" registration pursuant to Section 4.1, the expiration of one year after such registration statement becomes effective, but subject to Section 4.1(e), and (iii) in the case of a registration pursuant to Section 4.2, the expiration of 90 days after such registration statement becomes effective; (ii) furnish to each seller of Common Stock and Convertible Preferred Stock covered by such registration statement such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the public sale or other disposition of the Common Stock and Convertible Preferred Stock owned by such seller; (iv) use reasonable efforts to register or qualify all Common Stock and Convertible Preferred Stock under such other securities laws or blue sky laws of such jurisdictions as any seller thereof shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified, to subject itself to income taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction; (v) use reasonable efforts to cause all Common Stock and Convertible Preferred Stock covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Common Stock or Convertible Preferred Stock; (vi) notify the holders of Common Stock and Convertible Preferred Stock and the managing underwriter or underwrit- 12 ers, if any, promptly and confirm such advice in writing promptly there after: (A) when the registration statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment thereto, when the same has become effective; (B) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information; (C) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings by any Person for that purpose; (D) if at any time the representations and warranties of the Company made as contemplated by Section 4.4 below cease to be true and correct; and (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Common Stock or Convertible Preferred Stock for sale under the securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (vii) notify each seller of Common Stock and Convertible Preferred Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon the Company's discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; 13 (viii) otherwise use reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to the holders of Common Stock and Convertible Preferred Stock, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and will furnish to each such seller at least five business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (ix) make available for inspection by a representative or representatives of the holders of Common Stock and Convertible Preferred Stock, each such representative representing the holders of not less than a majority of the Common Stock and Convertible Preferred Stock included in the registration, any underwriter participating in any disposition pursuant to the registration statement and any attorney or accountant retained by such selling holders or underwriter (each, an "Inspector"), all reasonably --------- requested financial and other records, pertinent corporate documents and properties of the Company (the "Records"), and cause the Company's ------- officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration in order to permit a reasonable investigation within the meaning of Section 11 of the Securities Act, provided that the Company shall not be required to -------- comply with this subdivision (ix) if there is a reasonable likelihood, in the judgment of the Company, that such delivery could result in the loss of any attorney-client privilege related thereto; and provided, further, that -------- ------- Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed to any Inspector unless such Inspector shall have executed a confidentiality agreement reasonably acceptable to the Company. (x) furnish to each underwriter, if an underwritten offering, customary "comfort" letters from its independent auditors, legal opinions from counsel to the Company on customary matters, and such other certificates, instruments or other matters reasonably requested by the underwriters; (xi) cause the Company's executive officers, including its chief executive officer and chief financial officer, to be available to meet with potential investors and to participate in any "roadshow" requested by the underwriters and which in the underwriters' judgment is reasonably necessary or 14 appropriate for the sale of the Common Stock and Convertible Preferred Stock; and (xii) take such other action that may be requested by a seller of Common Stock or Convertible Preferred Stock that are customary and reasonably required in connection with the sale of Common Stock or Convertible Preferred Stock. The Company may require each seller of Common Stock and Convertible Preferred Stock as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company, state "blue sky" commissions or the Commission may from time to time reasonably request in writing. Each Stockholder agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subdivision (vii) of this Section 4.3, such holder will forthwith discontinue such Stockholder's disposition of Common Stock and Convertible Preferred Stock pursuant to the registration statement relating to such Common Stock and Convertible Preferred Stock until such Stockholder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of this Section 4.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Stockholder's possession of the prospectus relating to such Common Stock and Convertible Preferred Stock current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in paragraph (ii) of this Section 4.3 shall be extended by the length of the period from and including the date when each seller of any Common Stock or Convertible Preferred Stock covered by such registration statement shall have received such notice to the date on which each such seller has received the copies of the supplemented or amended prospectus contemplated by paragraph (vii) of this Section 4.3. Section 4.4 Underwritten Offerings. (a) If requested by the ---------------------- underwriters for any underwritten offering pursuant to a registration under Section 4.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company and the underwriters, and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in Section 4.6. The Stockholders will cooperate with the Company in the negotiation of the underwriting agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof. 15 (b) If the Company at any time proposes to register any of its securities under the Securities Act and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Stockholder as provided in Section 4.2 and subject to the provisions of Section 4.2(b), use reasonable efforts to arrange for such underwriters to include all the Common Stock and Convertible Preferred Stock to be offered and sold by such holder among the securities to be distributed by such underwriters. (c) Each Stockholder agrees, if so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of any equity securities of the Company, in violation of Regulation M under the Securities Act or during the 120 days (or such time as reasonably requested by the managing underwriter) after any underwritten registration pursuant to Section 4.1 or 4.2 has become effective, except as part of such underwritten registration or pursuant to Section 3.1, whether or not such Stockholder participates in such registration. (d) No Person may participate in any underwritten offering hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the Company and the holders of a majority of Common Stock and Convertible Preferred Stock to be included in such underwritten offering, (ii) completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) required under the terms of such underwriting arrangements and (iii) makes the representations and warranties provided for in Section 4.4(a). Section 4.5 Preparation; Reasonable Investigation. In connection ------------------------------------- with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Common Stock and Convertible Preferred Stock registered under such registration statement, their underwriters, if any, and their respective counsel and accountants the reasonable opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto. Section 4.6 Indemnification. (a) In the event of any registration --------------- of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless (i) in the case of any registration statement filed pursuant to Section 4.1 or 4.2, each Stockholder covered by such registration statement, its directors and officers, each broker who participates in such offering or sale on behalf of a Stockholder, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Stockholder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Stockholder or any such director or officer or 16 underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such Stockholder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that -------- the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with information furnished to the Company by any Stockholder or any underwriter participating in the offering, and provided further that the Company shall not be liable to any Person who -------- participates as an underwriter in the offering or sale of Common Stock or Convertible Preferred Stock or to any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Securities Act to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Common Stock or Convertible Preferred Stock to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Stockholder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such Stockholder. (b) The Company may require, as a condition to including any Common Stock or Convertible Preferred Stock in any registration statement filed pursuant to Sections 4.1 or 4.2, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such Common Stock or Convertible Preferred Stock, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 4.6) the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls any such underwriter within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any 17 preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with information furnished to the Company by such seller. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. Such indemnity shall be limited to the net proceeds from such offering received by such indemnitor. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 4.6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that -------- the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 4.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless a conflict of interest between such indemnified and indemnifying parties would exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. (d) If the indemnification provided for in the preceding subdivisions of this Section 4.6 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability. In determining the amount of contribution to which an indemnified party is entitled, there shall be considered such indemnified party's relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, and other equitable considerations appro- 18 priate under the circumstances. It is hereby agreed that it would not necessarily be equitable if the amount of such contribution were determined by pro rata or per capita allocation. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not found guilty of such fraudulent misrepresentation. ARTICLE V CERTAIN COVENANTS Section 5.1 Reasonable Access. Subject to Section 5.4, the Company ----------------- agrees that each Stockholder (and its representatives) may, upon reasonable notice during normal business hours, visit and inspect the properties of the Company and its subsidiaries and examine and copy their books of record and account and discuss their affairs, finances and accounts with their officers and accountants. Subject to Section 5.4, the Company shall furnish to Sponsors and Cendant, monthly financial information consisting of at least: monthly and year- to-date operating statements, statements of cash flows and month-end balance sheets, in each case, on a pre-acquisition accounting and a post-acquisition accounting basis, and otherwise in accordance with generally accepted accounting principles as then in effect, any forecasted information prepared by the Company, a comparison to Company's forecast for such period and a corresponding period of the prior year and such other financial information as may be reasonably required by any stockholder in order to evaluate and monitor its investment in the Company. Section 5.2 Action by Stockholders. The Stockholders shall from time ---------------------- to time vote their shares of Common Stock and Convertible Preferred Stock as may be required to cause the Company to comply with the provisions of this Agreement. Section 5.3 Further Actions. In case at any time after the date --------------- hereof any further action is necessary or desirable to carry out the purposes of this Agreement, each party hereto shall take all such necessary action. Section 5.4 Confidentiality. Each Stockholder shall use, and shall --------------- cause its Affiliates, employees and agents to use, its or their best efforts to ensure that confidential information concerning the business and affairs of the Company and its subsidiaries are kept confidential unless the Company shall have consented to the disclosure of such information, provided that such information -------- may be disclosed to the extent required by law or legal process, provided, -------- further, that any party may disclose such information pursuant to the terms of a - ------- customary confidentiality agreement to a Person engaged in good faith negotiations to acquire all or substantially all of the equity interests or business of such party, provided, further, that the Stockholders may provide -------- ------- regular reports to their respective investors. The Company shall use, and shall cause its Affiliates, employees and 19 agents to use, its or their best efforts to ensure that the terms of this Agreement and information concerning the business and affairs of each Stockholder are kept confidential unless such Stockholder shall have consented to the disclosure of such information. The foregoing shall not prohibit disclosure of information which (i) is or becomes publicly available other than as a result of a violation of this Section 5.4, (ii) is or becomes available to a Stockholder or the Company, as the case may be, from a source (other than the Company or any Stockholder, as the case may be) which is not prohibited from disclosing such information by legal, contractual or fiduciary obligations or (iii) is required to be included in a registration statement filed pursuant to Article IV. Section 5.5 Additional Shares. Each Stockholder agrees that upon ----------------- acquisition of additional shares of Common Stock or Preferred Stock by such party or its subsidiaries or other controlled entities, whether by purchase, conversion, exercise of an option, or otherwise, the additional shares will become subject to this Agreement and such Stockholder shall become bound by the terms of this Agreement with respect to such additional shares. ARTICLE VI MISCELLANEOUS Section 6.1 Notices. Any notice, request or other document to be ------- given hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by telex, telecopy or certified or registered mail, postage prepaid and addressed to: If to the Company, addressed to: NRT Incorporated 6 Sylvan Way Parsippany, NJ 07054 Telecopy No.: (973) 496-0101 Attention: General Counsel If to Cendant or Cendant Operations, Inc., addressed to: Cendant Corporation 6 Sylvan Way Parsippany, NJ 07054 Telecopy No.: (973) 496-5331 Attention: General Counsel 20 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Telecopy No.: (212) 735-2000 Attention: Stephen F. Arcano If to Apollo or Sponsors, addressed to: Apollo Management L.P. 1301 Avenue of the Americas, 38th Floor New York, NY 10019 Telecopy No.: (212) 261-4071 Attention: Joshua J. Harris With a copy to: Latham & Watkins 885 Third Avenue Suite 1000 New York, NY 10022 Telecopy No.: (212) 751-4864 Attention: Raymond Y. Lin or to such other address as any party shall have specified by written notice given to the other parties in the manner specified above. Section 6.2 Binding Nature of Agreement; No Third Party ------------------------------------------- Beneficiaries. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto or their successors in interest, except as expressly otherwise provided herein. Nothing in this Agreement shall convey any rights upon any person or entity which is not a party or an assignee of a party to this Agreement. Section 6.3 Descriptive Headings. The descriptive headings of the -------------------- several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. Section 6.4 Specific Performance. Without limiting the rights of -------------------- each party hereto to pursue all other legal and equitable rights available to such party for the other parties' failure to perform their obligations under this Agreement, the parties hereto 21 acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. Section 6.5 Governing Law. This Agreement shall be construed and ------------- enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware, without regard to the principles of conflicts of law. Each party irrevocably consents to the service of any and all process in any action or proceeding arising out of or relating to this Agreement by the mailing of copies of such process to each party at its address specified herein. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York (or, if subject matter jurisdiction in that court is not available, in any state court located within the City of New York) over any dispute arising out of or relating to this Agreement or any agreement or instrument contemplated hereby or entered into in connection herewith or any of the transactions contemplated hereby or thereby. Each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum in connection therewith. Section 6.6 Counterparts. This Agreement may be executed ------------ simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Section 6.7 Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. Section 6.8 Entire Agreement. This Agreement is intended by the ---------------- parties hereto as a final and complete expression of their agreement and understanding in respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understandings, written or oral, between the parties with respect to such subject matter. Section 6.9 Amendment and Waiver. Any provision of this Agreement -------------------- may be amended if, but only if, such amendment is in writing and is signed by the Company and the Stockholders (or their Affiliates or transferees) owning at least a 22 majority of the then outstanding shares of each class of Preferred Stock and Common Stock, provided that (i) no such amendment may materially adversely -------- affect the rights of any Stockholder without the prior written consent of such Stockholder, (ii) Section 3.1 may be amended only if such amendment is in writing and is signed by the Company and all of the Stockholders, (iii) no such amendment may both (A) adversely affect the rights of Stockholders of any class and (B) treat the holders of such class differently from holders of another class in a manner not contemplated by this Agreement without the prior written consent of holders of a majority of shares (whether outstanding or issuable) of the class so adversely affected. Any provision may be waived if, but only if, such waiver is in writing and is signed by or on behalf of the party waiving such provision. Section 6.10 Termination. Upon such time as either of Cendant or ----------- Sponsors ceases to beneficially own any shares of the Common Stock or the Convertible Preferred Stock, this Agreement shall terminate and be of no further force and effect; provided, however, that (i) the obligations of the parties -------- ------- under Article II shall terminate when either of Cendant or Apollo beneficially owns less than 5% of the outstanding shares of the Company's voting stock, (ii) the obligations of the parties pursuant to Articles IV and V shall continue and shall not terminate and (iii) Cendant shall continue to have the right to designate one director for election to the Board pursuant to Article II, and the Company shall cause such designee to be nominated for election to the Board, so long as any of the Master Franchise Agreements remains in effect. Section 6.11 Expenses. All costs and expenses incurred by Sponsors, -------- Cendant and Bear, Stearns & Co., Inc. in connection with this Agreement and the transactions contemplated hereby shall be borne by the Company. Section 6.12 Effect on Prior Agreement; References. (a) This ------------------------------------- Agreement amends, restates and supercedes the 1997 Agreement in its entirety and, upon the effective date hereof, all provisions of the 1997 Agreement shall terminate and have no further force or effect. (b) All references to the 1997 Agreement in any other agreement to which any of the parties hereto are a party shall from and after the date hereof be deemed to be references to this Agreement. 23 IN WITNESS HEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. CENDANT CORPORATION By:____________________________________ Name: Title: CENDANT OPERATIONS, INC. By:____________________________________ Name: Title: For purposes of Article III only, APOLLO MANAGEMENT L.P. By:____________________________________ Name: Title: APOLLO INVESTMENT FUND III, L.P. By: APOLLO ADVISORS II, L.P. ------------------------ its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC. ---------------------------------- its General Partner By: _____________________ Name: Title: 24 APOLLO OVERSEAS PARTNERS III, L.P. By: APOLLO ADVISORS II, L.P. ------------------------ its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC. ---------------------------------- its General Partner By: _______________________ Name: Title: APOLLO (UK) PARTNERS III, L.P. By: APOLLO ADVISORS II, L.P. ------------------------ its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC. ---------------------------------- its General Partner By: _______________________ Name: Title: 25 Schedule A to Stockholders Agreement ----------------------
Class Number Stockholder of Stock of Shares - ----------- -------- --------- Apollo Investment Fund III, L.P. Common Stock 9,116,263 Apollo Overseas Partners III, L.P. Common Stock 545,832 Apollo (UK) Partners III, L.P. Common Stock 337,905 Cendant Operations, Inc. Senior Preferred Stock 157,591 Cendant Operations, Inc. Convertible Preferred Stock 24,000 Apollo Investment Fund III, L.P. Junior Preferred Stock 62,459 Apollo Overseas Partners III, L.P. Junior Preferred Stock 3,738 Apollo (UK) Partners III, L.P. Junior Preferred Stock 2,313
26 EX-10.5 8 ACQUISITION COOPERATION AGREEMENT EXHIBIT 10.5 ACQUISITION COOPERATION AGREEMENT --------------------------------- ACQUISITION COOPERATION AGREEMENT (this "Agreement"), dated as of --------- February 9, 1999, by and between NRT Incorporated, a Delaware corporation (the "Company"), Cendant Corporation, a Delaware corporation ("Cendant"), Apollo - -------- ------- Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. and, for purposes of Section 3.9 only, Apollo Management, L.P. ("Apollo"). ------ WHEREAS, pursuant to Section 5.8 of the Stockholders Agreement, dated as of August 11, 1997 (the "1997 Agreement"), by and among the Company, Apollo -------------- and each of the stockholders listed therein, Cendant has acquired the trade names, trademarked operating names and mortgage operations of real estate brokerages acquired by the Company (subject to Cendant's approval of each such brokerage acquisition) on the terms and subject to the conditions set forth therein; and WHEREAS, Cendant and the Company desire for Cendant to continue to acquire the trade names, trademarked operating names and mortgage operations (if any) of brokerages acquired by the Company following the date hereof on the terms and subject to the conditions set forth herein. WHEREAS, Cendant, for itself and its Affiliates (as defined herein), wishes to assure that the Company will not sell or transfer such trade names, trademarked operating names and mortgage operations to another person or entity, and the Company is willing to provide such assurance on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements and covenants contained herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows, hereby deleting and superceding the provisions of Sections 5.8 and 5.10 of the 1997 Agreement (and all related references thereto) in their entirety: ARTICLE I DEFINITIONS Section 1.1 Definitions. Unless otherwise defined herein, the ----------- following terms used in this Agreement shall have the meanings specified below: "1997 Agreement Amount" shall mean $470,398,000; provided that if ----------------------- after the date hereof, the parties have consummated a Brokerage Acquisition and in connection therewith determined to calculate Total Cendant Acquisition Cost pursuant to clause (II) of the definition of Total Cendant Acquisition Cost in lieu of clause (I), 1997 Agreement Amount shall be increased by the Total Cendant Acquisition Cost for such Brokerage Acquisition, so long as Total Cendant Acquisition Cost for such Brokerage Acquisition would otherwise have been calculated pursuant to clause (I) of the definition of Total Cendant Acquisition Cost. "Acquired Brokerage EBITDA" shall mean, for an Acquired Brokerage (as ------------------------- defined in Section 2.1) during any period, such Acquired Brokerage's consolidated earnings from continuing operations (excluding (i) the effects of purchase accounting, (ii) compensation, perquisites and benefits determined by management of the Company to be in excess of those that would have been paid under the Company's policies for similarly situated employees, if any, and in respect of principal corporate executive officers of the Acquired Brokerage who will not be continuing employees of the Company (other than on a transitional basis for not more than one year), (iii) other payments or expenses in respect of owners and employees not in the ordinary course of business, (iv) extraordinary gains and losses, (v) Conversion Costs and (vi) as mutually agreed to by Cendant, the Company and Sponsors (until such time as Sponsors own less than 10% of the outstanding common stock of the Company), other one-time or non-recurring items of income or expense, plus (A) interest expense, (B) provision for income taxes and (C) depreciation and amortization expenses. "Acquired Brokerage EBITDA Acquisition Multiple" means, with respect ---------------------------------------------- to any Brokerage Acquisition, Total Company Acquisition Cost for such Brokerage Acquisition divided by Acquired Brokerage Pro Forma LTM EBITDA. "Acquired Brokerage EBITDAR" means, for any Acquired Brokerage during -------------------------- any period, Acquired Brokerage EBITDA plus such Acquired Brokerage's consolidated royalties, franchise fees and marketing fund contributions payable to entities other than the Company's Franchisors that are deducted in calculating earnings for purposes of determining Acquired Brokerage EBITDA. "Acquired Brokerage Margin" means, with respect to any Brokerage ------------------------- Acquisition, Acquired Brokerage Pro Forma LTM EBITDAR divided by the LTM gross revenues of the Acquired Brokerage. "Acquired Brokerage Pro Forma LTM EBITDA" means, with respect to an --------------------------------------- Acquired Brokerage, Acquired Brokerage EBITDA for the LTM immediately prior to such Brokerage Acquisition (including appropriate cost allocations to reflect operation on a standalone basis if the acquired business was part of a group of companies with shared expenses and excluding anticipated synergies). "Acquired Brokerage Pro Forma LTM EBITDAR" means, with respect to an ---------------------------------------- Acquired Brokerage, Acquired Brokerage EBITDAR for the LTM immediately prior to such Brokerage Acquisition (including appropriate cost allocations to reflect operation on a standalone basis if the acquired business was part of a group of companies with shared expenses) but excluding anticipated synergies. "Acquired Brokerage Pro Forma LTM Cendant Royalty Fees" means, with ----------------------------------------------------- respect to an Acquired Brokerage, (A) the pro forma royalty fees that would have been payable to the Company's Franchisors for the LTM if the Brokerage Acquisition had occurred at the beginning of such period minus (B) any net royalty fees that were payable to the Company's Franchisors for the LTM prior to the Brokerage Acquisition (in the case 2 of (A) or (B) above, net of any amounts which would have been required to be contributed by Century 21 Real Estate Corporation to its national advertising fund for the LTM prior to the Brokerage Acquisition as a result of such Brokerage Acquisition). "Acquired Brokerage Pro Forma LTM Mortgage EBITDA" means, in the case ------------------------------------------------ of a Brokerage Acquisition in which Cendant acquires the Acquired Brokerage's mortgage operations pursuant to Section 2.1 hereof, that portion of Acquired Brokerage Pro Forma LTM EBITDA that is attributable to the mortgage operations of the Acquired Brokerage, minus interest expense of such mortgage operations related to indebtedness the proceeds of which are used to fund mortgages, to the extent not otherwise deducted in calculating Acquired Brokerage EBITDA. "Acquisition Multiple" means, with respect to any Brokerage -------------------- Acquisition, Total Acquisition Cost for such Brokerage Acquisition divided by Acquired Brokerage Pro Forma LTM EBITDAR. "Adjustment Amount" shall mean, with respect to any Brokerage Acquisi- ----------------- tion, the amount obtained by multiplying $58.37 by the number of real estate brokerage transaction sides closed by the Acquired Brokerage during the LTM immediately prior to the Brokerage Acquisition. "Affiliate" shall mean, with respect to any Person, any of (a) a --------- director or executive officer of such Person and (b) any other Person that, directly or indirectly, controls, or is controlled by or is under common control with such Person. For the purpose of this definition, "control" (including the ------- terms "controlling", "controlled by" and "under common control with"), as used ----------- ------------- ------------------------- with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities or by contract or agency or otherwise; it being understood that Cendant and Sponsors and their Affiliates shall be deemed to be Affiliates of the Company. "Board" shall mean the Board of Directors of the Company. ----- "Brokerage Acquisition" shall have the meaning set forth in Section --------------------- 2.1(a) hereof. "Cash Secured Loans" shall mean any loan incurred in connection with ------------------ title insurance and escrow operations to the extent that the principal and interest thereon is secured by an amount of cash or U.S. governmental securities to ensure the full payment of principal and interest thereon after giving effect to the interest income earned thereon. "Cendant" shall mean Cendant Corporation, a Delaware corporation. ------- 3 "Company's Franchisors" means, any franchisor of real estate --------------------- brokerages of which the Company or any of its subsidiaries is a franchisee. At the date of this Agreement, the Company's Franchisors are Coldwell Banker Real Estate Corporation, Century 21 Real Estate Corporation, and ERA Franchise Systems, Inc. "Conversion Costs" shall mean all reasonable costs incurred by the ---------------- Company which are reasonably necessary to convert an Acquired Brokerage to a franchisee of one of the Company's Franchisors, including, without limitation, (i) the reasonable costs of purchasing yard signs, billboards and other signs, (ii) the reasonable costs of promoting public awareness of the change in a brand name, (iii) the reasonable costs of replacing supplies, stationery, business cards and other similar items required to bring the Acquired Brokerage and its operations into compliance with the requirements of the applicable Master Franchise Agreement, (iv) the reasonable costs relating to the employment of temporary employees and contractors to assist in the conversion, (v) initial branch office fees payable under the Master Franchise Agreement with respect to the Acquired Brokerage and (vi) reasonable compensation and bonuses and reasonable amounts related to entertainment, travel and meals, in each case paid or provided to employees or sales agents of the Acquired Brokerage to induce them to remain with the Acquired Brokerage after the Brokerage Acquisition (provided that in the case of compensation and bonuses, Conversion Costs shall only include such amounts spent in respect of retaining such individuals for no more than one year, even if such persons are actually retained for greater than one year); provided that if the Company would have incurred any of such costs, or similar costs, in the absence of such Brokerage Acquisition, then Conversion Costs shall only include the portion of (i) through (vi) above which is attributable to the Brokerage Acquisition; provided, however, that (i) Conversion Costs shall exclude all costs and expenses incurred for the purpose of creating synergies or cost savings, including, without limitation, in connection with the termination or closing of offices, and (ii) costs must be spent or committed by the Company within 60 days of the Brokerage Acquisition to be includable in the definition of Conversion Costs. With respect to any Brokerage Acquisition, at or prior to the time that the Company requests Cendant's participation in a Brokerage Acquisition pursuant to Section 2.1 hereof, the Company shall provide to Cendant a good faith written estimate of the Conversion Costs associated with such Brokerage Acquisition (the "Estimated Conversion Costs"). To the extent the actual Conversion Costs incurred by the Company exceed the Estimated Conversion Costs, "Conversion Costs" shall exclude any amount in excess of 110% of the Estimated Conversion Costs. "Convertible Preferred Stock" shall mean the 5.00% Series B Cumulative --------------------------- Convertible Preferred Stock of the Company. "Independent Directors" shall mean those directors of the Board of --------------------- Directors of the Company who are not employed by, or an affiliate or associate of, 4 Cendant, Apollo or the Company (other than solely in their capacities as directors of the Company). "Junior Preferred Stock" shall mean the 18.00% Series C Cumulative ---------------------- Junior Redeemable Preferred Stock of the Company. "LTM" shall mean, for any Person, as of any determination date, the --- twelve consecutive fiscal months ending on the most recently completed full month for which financial statements prepared in accordance with generally accepted accounting principles consistently applied are available. "Master Franchise Agreements" shall mean the Master Real Estate --------------------------- Franchise Agreements between the Company and each of Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc. and Century 21 Real Estate Corporation, as the same shall be amended or supplemented after the date hereof. "Marketing Agreement" shall mean the Marketing Agreement, dated as of ------------------- August 11, 1997, between Cendant Mortgage Corporation (formerly known as PHH Mortgage Services Corporation) and the Company, as the same shall be amended. "Mortgage Joint Venture" shall mean any joint venture that is ---------------------- established by Cendant or one of its subsidiaries and the Company or one of its subsidiaries to originate and close mortgage loans. "Person" shall mean a corporation, an association, a partnership, a ------ limited liability company, an organization, a business, a trust, an individual, a government or a subdivision thereof or a governmental agency or any other entity. "Preferred Stock" shall mean shares of any class of Preferred Stock of --------------- the Company, including the Senior Preferred Stock, the Convertible Preferred Stock and the Junior Preferred Stock. "Selected Liabilities" shall mean, in connection with any Brokerage -------------------- Acquisition, likely future liabilities created by such Brokerage Acquisition or assumed by the Company or any of its subsidiaries, which liabilities are (i) of a nature that do not regularly recur in the ordinary course of business of the Acquired Brokerage's business or (ii) in an amount materially in excess of the expense incurred for similar liabilities of the Acquired Brokerage in the LTM period (which may include, without limitation, tax obligations, environmental liabilities and litigation), but excluding any amounts for liabilities arising from ongoing operations as intended by management of the Company to be conducted after such acquisition; provided that the items included under clauses (i), (ii), (iv), and (v) in the definition of Total Acquisition Cost below shall not be Selected Liabilities. 5 "Selected Liability Value" shall mean the present value (using a ------------------------ discount rate equal to the then current prime rate) of Selected Liabilities in connection with any Brokerage Acquisition. In connection with each Brokerage Acquisition in which Cendant participates pursuant to Section 2.1 hereof, the Selected Liability Value, if any, shall be determined by mutual agreement of Cendant and the Company; provided, that in the case of any such Brokerage Acquisition that is approved by the Board of Directors of the Company, at the request of a majority of the Independent Directors at or prior to the time of such approval, the Company shall, at its cost, retain a nationally recognized accounting firm chosen by mutual agreement of Cendant and the Independent Directors (the "Accounting Referee") to promptly review the determination of ------------------- Selected Liability Value (provided that if Cendant and the Independent Directors cannot agree on an Accounting Referee, they shall each designate a nationally recognized accounting firm, and shall cause the respective accounting firms to promptly select the Accounting Referee). Each of Cendant, the Company and the Independent Directors shall be permitted to provide supporting information to the Accounting Referee and all reasonable efforts shall be made to preserve the privileged nature of the privileged communication of the Company. The Accounting Referee shall deliver to the Company, as promptly as practicable, a report setting forth its determination, which report shall be final and binding upon the parties hereto for determining Selected Liability Value under this Agreement. If the Independent Directors make the request described above, the Company and Cendant may mutually agree to complete the Brokerage Acquisition pending final determination by the Accounting Referee, based on the Selected Liability Value as determined by Cendant and the Company. If the Accounting Referee determines that the Selected Liability Value of the Brokerage Acquisition exceeds 10% of the Total Acquisition Cost of such Acquired Brokerage, and the Company has completed the Brokerage Acquisition with the consent of Cendant and without the consent of a majority of the Independent Directors, then Cendant shall be required to reimburse the Company for costs and expenses (as such costs and expenses are incurred) actually paid by the Company in respect of such Selected Liabilities to the extent that such costs and expenses exceed 10% of the Total Acquisition Cost. "Senior Preferred Stock" shall mean the 9.00% Series A Cumulative ---------------------- Senior Redeemable Preferred Stock of the Company. "Sponsors" shall mean Apollo Investment Fund III, L.P., Apollo -------- Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. "Total Acquisition Cost" shall mean, with respect to any Brokerage ---------------------- Acquisition, without duplication, the aggregate direct and indirect cost of such Brokerage Acquisition to the Company and its subsidiaries (and, in the case of an Acquired Brokerage other than pursuant to Section 2.1(b), to Cendant and its Affiliates) including without limitation, (i) the consideration (including earnout payments), including the Non-Competition Payment (as defined in Section 2.1(c)), if any, paid directly or indirectly, to the seller or sellers in connection with the Brokerage Acquisition, (ii) indebtedness assumed (but not 6 payables and not Cash Secured Loans) net of cash, (iii) the Selected Liability Value (or if lesser, in the event that Cendant has agreed to pay the Company for any Selected Liability Value pursuant to this Agreement, 10% of the Total Acquisition Cost (prior to giving effect to this parenthetical)), (iv) out-of- pocket fees and expenses of such Brokerage Acquisition incurred or assumed by the Company or its subsidiaries, and (v) Conversion Costs; provided that any of the foregoing items that are not payable by the Company, Cendant or their respective subsidiaries at the time of closing of the Brokerage Acquisition shall not be included in Total Acquisition Cost except to the extent that such items, in the aggregate, do not exceed 10% of the Total Acquisition Cost at the time of closing (without giving effect to such items) of such Brokerage Acquisition; provided that Total Acquisition Cost will be appropriately adjusted when such excluded amounts are payable. "Total Cendant Acquisition Cost" shall mean, with respect to any ------------------------------ Brokerage Acquisition, (I) to the extent that the sum of all Total Cendant Acquisition Cost (after giving effect to the Total Cendant Acquisition Cost associated with such Brokerage Acquisition) relating to Brokerage Acquisitions under this Agreement and the 1997 Agreement is less than the 1997 Agreement Amount, the lesser of (a) (i) the Acquisition Multiple multiplied by 125% of Acquired Brokerage Pro Forma LTM Cendant Royalty Fees, plus (ii) in case of any Brokerage Acquisition in which the Acquired Brokerage Pro Forma LTM Mortgage EBITDA is more than $1,000,000 and Acquired Brokerage Pro Forma LTM Mortgage EBITDA is greater than the Adjustment Amount, the Acquisition Multiple multiplied by the amount equal to (A) Acquired Brokerage Pro Forma LTM Mortgage EBITDA minus (B) the Adjustment Amount, minus (iii) in case of any Brokerage Acquisition in which the Acquired Brokerage Pro Forma LTM Mortgage EBITDA is more than $1,000,000 and Acquired Brokerage Pro Forma LTM Mortgage EBITDA is less than the Adjustment Amount, the Acquisition Multiple multiplied by the amount equal to (A) the Adjustment Amount minus (B) Acquired Brokerage Pro Forma LTM Mortgage EBITDA, and (b) 90% of the Total Acquisition Cost, and (II) to the extent that the sum of all Total Cendant Acquisition Cost (after giving effect to the Total Cendant Acquisition Cost associated with such Brokerage Acquisition) relating to Brokerage Acquisitions under this Agreement and the 1997 Agreement equals or exceeds the 1997 Agreement Amount, the lesser of (a) (i) the Acquisition Multiple multiplied by 100% of Acquired Brokerage Pro Forma LTM Cendant Royalty Fees, plus (ii) in case of any Brokerage Acquisition in which the Acquired Brokerage Pro Forma LTM Mortgage EBITDA is more than $1,000,000 and Acquired Brokerage Pro Forma LTM Mortgage EBITDA is greater than the Adjustment Amount, the Acquisition Multiple multiplied by an amount equal to (A) the Adjustment Amount minus (B) Acquired Brokerage Pro Forma LTM Mortgage EBITDA, minus (iii) in case of any Brokerage Acquisition in which the Acquired Brokerage Pro Forma LTM Mortgage EBITDA is more than $1,000,000 and Acquired Brokerage Pro Forma LTM 7 Mortgage EBITDA is less than the Adjustment Amount, the Acquisition Multiple multiplied by the amount equal to (A) the Adjustment Amount minus (B) Acquired Brokerage Pro Forma LTM Mortgage EBITDA, and (b) 90% of the Total Acquisition Cost; provided, in each case, that if the Acquired Brokerage Pro Forma LTM EBITDA is less than or equal to zero, Total Cendant Acquisition Cost shall be equal to 90% of the Total Acquisi tion Cost; provided, further, that if the Total Cendant Acquisition Cost with respect to a Brokerage Acquisition in which Cendant participates pursuant to Section 2.1 hereof would be less than $1.00, the Total Cendant Acquisition Cost with respect to such Brokerage Acquisition shall be $1.00. "Total Company Acquisition Cost" shall mean, with respect to any ------------------------------ Brokerage Acquisition, Total Acquisition Cost minus Total Cendant Acquisition Cost. ARTICLE II BROKERAGE ACQUISITIONS Section 2.1 Brokerage Acquisitions. (a) The Company shall, if practi ---------------------- cable, make an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (or, if such election is not available, if practicable any similar election (an "Election")) with respect to the Company's acquisition (a -------- "Brokerage Acquisition") of any real estate brokerage (each, an "Acquired - ---------------------- -------- Brokerage") in order to treat such Brokerage Acquisition as an acquisition of - --------- the assets of such Acquired Brokerage for federal income tax purposes (and any corresponding elections under state and local law). Acquired Brokerages shall operate as a franchisee of a real estate brokerage franchise system owned by Cendant or a subsidiary of Cendant as of the date hereof or subsequently acquired by Cendant or one of its subsidiaries and shall be included under the terms of the applicable Master Franchise Agreement with Cendant or the subsidiary of Cendant owning the franchise system of which the Acquired Brokerage shall be a franchisee. (b) In connection with any Brokerage Acquisition in which the Company elects to acquire the Acquired Brokerage directly through a purchase of its assets or stock, and Cendant has consented in writing to such Brokerage Acquisition after the Company has requested Cendant's participation in such Brokerage Acquisition pursuant to the terms hereof, Cendant or one or more of its Affiliates shall purchase, and the Company shall sell, the trade names and trademarked operating names (including those relating to mortgage operations) and, so long as the Marketing Agreement is in effect, the mortgage operations (if any) of the Acquired Brokerage (the "Cendant Purchase"), and in ---------------- consideration therefor, Cendant shall make a cash payment (the "Cash Payment") ------------ to the Acquired Brokerage or NRT, as the case may be, equal to the Total Cendant Acquisition Cost. If the Cendant Purchase has occurred prior to the Brokerage Acquisition, then the amount of the Cash Payment shall be distributed to the seller of the Acquired Brokerage as 8 part of the Total Acquisition Cost for the Acquired Brokerage. In no event shall the Company sell, transfer or assign such mortgage operations, or the trade names and trademarked operating names related thereto, to any person or entity other than Cendant or one or more of its Affiliates in accordance with the terms and subject to the provisions of this Agreement. Notwithstanding the foregoing, in case of any Brokerage Acquisition in which the Total Acquisition Cost equals or exceeds $5 million or any Brokerage Acquisition that involves the acquisition of mortgage operations, Cendant's consent to such Brokerage Acquisition shall be subject to its confirming such consent in writing prior to the closing of such Brokerage Acquisition (after receipt of the final form of any acquisition agreement, unless such receipt is waived) and confirming satisfactory review of requested due diligence materials. (c) In connection with any Brokerage Acquisition (other than a Brokerage Acquisition pursuant to Section 2.1(b)) with respect to which Cendant has consented in writing after the Company has requested Cendant's participation in such Brokerage Acquisition pursuant to the terms hereof, Cendant (or one of its Affiliates, excluding the Company and its subsidiaries), rather than the Company, shall purchase the Acquired Brokerage from the seller thereof and immediately sell to the Company all of the assets of the Acquired Brokerage (provided, however, that if any of the companies comprising the Acquired Brokerage do not have real estate brokerage operations, then the stock of such companies, rather than the assets, will be sold to the Company) other than trade names and trademarked operating names (including those relating to mortgage operations) and, so long as the Marketing Agreement is in effect, mortgage operations (if any), at a price equal to (i) Total Acquisition Cost minus (ii) Total Cendant Acquisition Cost minus (iii) the Non-Competition Payment. In connection with each Brokerage Acquisition consummated pursuant to this Section 2.1(c), the Company shall be a party to a non-competition agreement and/or other arrangements to be entered into with such seller and shall make a direct payment to the seller of the Acquired Brokerage (the "Non-Competition Payment") in ----------------------- consideration of any such agreements or arrangements. The Company shall use its best efforts to ensure that the Non-Competition Payment in relation to the Total Acquisition Cost is structured so as to maximize the tax attributes of the Company to the extent permitted by law. Notwithstanding the foregoing, in case of any Brokerage Acquisition in which the Total Acquisition Cost equals or exceeds $5 million or any Brokerage Acquisition that involves the acquisition of mortgage operations, Cendant's consent to such Brokerage Acquisition shall be subject to its confirming such consent in writing (after receipt of the final form of any acquisition agreement, unless such receipt is waived) and confirming satisfactory review of requested due diligence materials. (d) Cendant's obligation to make Cash Payments and purchase Acquired Brokerages pursuant to Sections 2.1(b) and 2.1(c), which obligation shall only apply to Brokerage Acquisitions to which Cendant shall have consented in writing, shall cease after such time as the sum of all Total Cendant Acquisition Cost (including, for purposes of this Section 2.1(d), any amounts potentially includable in Total Acquisition Cost after the date of the Brokerage Acquisition) shall equal at least $499,544,000 and 9 shall extend to any Brokerage Acquisition which would cause such sum to exceed $499,544,000 only to the extent that the sum of all Total Cendant Acquisition Cost (after giving effect to such Brokerage Acquisition) would be no greater than $500,583,000; provided, however, that in the event that the Company consummates an initial public offering of its securities on or prior to June 30, 1999, subject to and effective upon the later to occur of (i) the fifth anniversary of the date hereof, unless earlier agreed to by Cendant, and (ii) the date on which the sum of all Total Cendant Acquisition Cost shall equal or exceed $999,544,000, Cendant's obligation to make Cash Payments and purchase Acquired Brokerages pursuant to Sections 2.1(b) and 2.1(c) hereof (subject to the terms of this Section 2.1(d)) shall cease after such time as the sum of all Total Cendant Acquisition Cost shall equal at least $999,544,000 and shall extend to any Brokerage Acquisition which would cause such sum to exceed $999,544,000 only to the extent that the sum of all Total Cendant Acquisition Cost (after giving effect to such Brokerage Acquisition) would be no greater than $999,544,000. (e) Following the redemption of all outstanding shares of the Company's 18.00% Series C Cumulative Junior Redeemable Preferred Stock, with respect to any Brokerage Acquisition in which Cendant participates pursuant to this Section 2.1, Cendant shall have the right, at its election, to cancel liquidation preference of its Senior Preferred Stock in lieu of paying up to 50% of the Total Cendant Acquisition Cost in such Brokerage Acquisition, provided -------- that immediately prior to the consummation of such Brokerage Acquisition, the Company would have been permitted to incur at least $50 million in indebtedness without violating the indebtedness covenant set forth in the Master Franchise Agreements, provided, further, that if, immediately prior to the consummation of -------- ------- such Brokerage Acquisition, the Company does not have available funds (after taking into account its cash needs for the three months following such Brokerage Acquisition) to consummate such Brokerage Acquisition without the payment by Cendant of 100% of the Total Cendant Acquisition Cost, the Company will have the right to postpone the cancellation of liquidation preference of the Preferred Stock held by Cendant for up to 90 days following the consummation of such Brokerage Acquisition and Cendant will pay the Total Cendant Acquisition Cost in accordance with the terms of Section 2.1(b) or 2.1(c) hereof, as the case may be. In the event of any postponement of the cancellation of liquidation preference of Preferred Stock held by Cendant pursuant to the immediately preceding proviso, as soon as the Company has available funds to pay for the cancellation of such liquidation preference and in any event within 90 days of the Brokerage Acquisition, the Company will cancel such liquidation preference in the amount requested by Cendant and repay to Cendant an amount equal to the liquidation preference cancelled plus all accrued and unpaid dividends thereon through the date of cancellation. Any election by Cendant to cancel liquidation preference in accordance with this Section 2.1(e) shall not affect the calculation of the sum of all Total Cendant Acquisition Cost in connection with Brokerage Acquisitions. 10 (f) Cendant shall have the right, at any time up to 60 days after each Brokerage Acquisition, to cause the Company or its subsidiaries to sell to one or more Persons (which Person shall be engaged in the real estate brokerage business) designated by Cendant one or more of the brokerage offices selected by Cendant that were owned, prior to such Brokerage Acquisition, by such Acquired Brokerage (the "Carved-Out Offices"), unless either the Acquired Brokerage Pro ------------------ Forma LTM EBITDAR (before allocation of the Company's corporate overhead) or LTM gross revenues of the Carved-Out Offices are greater than 5% (10% with Sponsors' consent) of such Acquired Brokerage's Acquired Brokerage Pro Forma LTM EBITDAR (before allocation of the Company's corporate overhead) or such Acquired Brokerage's LTM gross revenues, respectively. The purchase price for the Carved-Out Offices shall equal the product of the Acquired Brokerage EBITDA Acquisition Multiple multiplied by the greater of (i) the difference between the Acquired Brokerage Pro Forma LTM EBITDAR for the Acquired Brokerage before giving effect to the sale of the Carved-Out Offices and the Acquired Brokerage Pro Forma LTM EBITDAR for the Acquired Brokerage after giving effect to the sale of the Carved-Out Offices (in each case before allocation of the Company's corporate overhead) and (ii) the product of the Acquired Brokerage's LTM gross revenues of the Carved-Out Offices multiplied by the Acquired Brokerage EBITDAR Margin for the entire Acquired Brokerage before giving effect to the sale of the Carved-Out Offices. Cendant shall use its best efforts to reach a determination whether to exercise its rights hereunder, and if it so determines, to exercise such rights, as soon as practicable after the completion of a Brokerage Acquisition. (g) Subject to Section 2.1(d), Total Acquisition Cost shall be adjusted, as appropriate, to reflect the amounts actually payable for the relevant Brokerage Acquisition to the extent that such amounts are includable in Total Acquisition Cost pursuant to the definition thereof and any amounts owed in respect thereof shall be paid promptly. (h) (i) With respect to any Brokerage Acquisition in which the Total Acquisition Cost equals or exceeds $5 million or any Brokerage Acquisition that involves the acquisition of mortgage operations, in which Cendant's participation has been requested pursuant to this Section 2.1, the Company shall provide Cendant and its officers, employees, attorneys, accountants and agents (the "Cendant Representatives") access to any agreement or agreements being negotiated with the seller of the Acquired Brokerage and shall provide the Cendant Representatives with a reasonable opportunity to conduct a due diligence investigation of the Acquired Brokerage (including by providing the Cendant Representatives with access to any information received by the Company and its officers, employees, attorneys, accountants and agents with respect to the Acquired Brokerage); (ii) with respect to any Brokerage Acquisition, the Company agrees to negotiate with the seller of the Acquired Brokerage representations and warran- 11 ties and indemnities with respect to the trademarks, trade names and mortgage operations (if any) of the Acquired Brokerage that are at least as favorable to NRT and Cendant as the representations and warranties and indemnities relating to other aspects of the business of the Acquired Brokerage, and the Company shall assign to Cendant the benefit of such representations and warranties and indemnities upon the closing of the Brokerage Acquisition. The Company shall indemnify and hold harmless Cendant, its affiliates and their respective directors, officers, shareholders, partners, attorneys, accountants, agents and employees and their heirs, successors and assigns (the "Cendant Indemnified Parties") from and against any damages, claims, losses, charges, actions, suits, proceedings, deficiencies, interest, penalties and reasonable costs and expenses (including reasonable attorneys' and consultants' fees) imposed on, sustained, incurred or suffered by or asserted against any of the Cendant Indemnified Parties relating to or arising out of the Acquired Brokerage (except to the extent relating to or arising out of the Acquired Brokerage's trademarks, trade names or mortgage operations (if any)). In connection with any such Brokerage Acquisition in which Cendant acquires the trademarks, trade names and mortgage operations (if any) of an Acquired Brokerage, Cendant shall indemnify and hold harmless NRT, its affiliates and their respective directors, officers, shareholders, partners, attorneys, accountants, agents and employees and their heirs, successors and assigns (the "NRT Indemnified Parties") from and against any damages, claims, losses, charges, actions, suits, proceedings, deficiencies, interest, penalties and reasonable costs and expenses (including reasonable attorneys' and consultants' fees) imposed on, sustained, incurred or suffered by or asserted against any of the NRT Indemnified Parties relating to or arising out of the acquired trademarks, trade names or mortgage operations (if any)). Section 2.2 Certain Sales. If there shall be a sale or a business ------------- combination involving the Company or a substantial portion of its assets, any Acquired Brokerage or a substantial portion of the assets thereof, or a brokerage office, then in any such case the Company shall either (A) cause a term of such transaction to be that any successor entity or other entity acquiring such assets, an Acquired Brokerage or a brokerage office (as well as the Company or other remaining entity, if any) take such assets, Acquired Brokerage or brokerage office subject to the terms of the Master Franchise Agreements or (B) to make provision reasonably acceptable to Cendant for the payment of royalties and other amounts that would otherwise have been payable under the Master Franchise Agreement in respect of revenues and earnings of such disposed of Acquired Brokerage, assets or brokerage office in an amount mutually acceptable to the Company and Cendant. 12 ARTICLE III MISCELLANEOUS Section 3.1 Notices. Any notice, request or other document to be ------- given hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by telex, telecopy or certified or registered mail, postage prepaid and addressed to: If to the Company, addressed to: NRT Incorporated 6 Sylvan Way Parsippany, NJ 07054 Telecopy No.: (973) 496-0101 Attention: General Counsel If to Cendant, addressed to: Cendant Corporation 6 Sylvan Way Parsippany, NJ 07054 Telecopy No.: (973) 496-5331 Attention: General Counsel with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Telecopy No.: (212) 735-2000 Attention: Stephen F. Arcano or to such other address as any party shall have specified by written notice given to the other parties in the manner specified above. Section 3.2 Binding Nature of Agreement; No Third Party ------------------------------------------- Beneficiaries. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto or their successors in interest, except as expressly otherwise provided herein. Nothing in this Agreement shall convey any rights upon any person or entity which is not a party or an assignee of a party to this Agreement. 13 Section 3.3 Descriptive Headings. The descriptive headings of the -------------------- several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. Section 3.4 Specific Performance. Without limiting the rights of -------------------- each party hereto to pursue all other legal and equitable rights available to such party for the other parties' failure to perform their obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. Section 3.5 Governing Law. This Agreement shall be construed and ------------- enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware, without regard to the principles of conflicts of law. Each party irrevocably consents to the service of any and all process in any action or proceeding arising out of or relating to this Agreement by the mailing of copies of such process to each party at its address specified herein. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York (or, if subject matter jurisdiction in that court is not available, in any state court located within the City of New York) over any dispute arising out of or relating to this Agreement or any agreement or instrument contemplated hereby or entered into in connection herewith or any of the transactions contemplated hereby or thereby. Each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum in connection therewith. Section 3.6 Counterparts. This Agreement may be executed simulta- ------------ neously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Section 3.7 Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 14 Section 3.8 Entire Agreement. This Agreement is intended by the ---------------- parties hereto as a final and complete expression of their agreement and understanding in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings, written or oral, between the parties with respect to such subject matter. Section 3.9 Effect on Prior Agreement. This Agreement deletes and ------------------------- supercedes Section 5.8 and Section 5.10 of the 1997 Agreement and, upon the date hereof, the provisions of Section 5.8 and Section 5.10 are terminated and have no further force or effect. Section 3.10 Amendment and Waiver. Prior to the initial public -------------------- offering of the Company, any provision of this Agreement may be amended if, but only if, such amendment is in writing and is signed by each of Cendant, the Company and Apollo. Following the initial public offering of the Company, any provision of this Agreement may be amended if, but only if, such amendment is in writing and is signed by each of Cendant, the Company and, with respect to Section 3.9 only, Apollo. Section 3.11 Termination. This Agreement shall terminate and be of no ----------- further force and effect at such time as, pursuant to Section 2.1(c), Cendant is no longer obligated to make Cash Payments and purchase Acquired Brokerages pursuant to Sections 2.1(b) and 2.1(c) or at such earlier time as is mutually agreed by the parties; provided that the provisions of Section 2.2 shall survive -------- so long as any of the Master Franchise Agreements is in effect. Section 3.12 Expenses. All costs and expenses incurred by the Company -------- and Cendant in connection with this Agreement and the transactions contemplated hereby shall be borne by the Company. Section 3.13 Joint Venture. It is the current intent of the parties ------------- hereto to enter into a joint venture, if practicable, between the Company and Cendant Mortgage Corporation with respect to mortgage operations. If such joint venture is agreed upon, it is the further current intention of the parties that such joint venture will replace Cendant Mortgage Corporation as the exclusive marketing agent for mortgages for the Company and that the provisions contained herein with respect to the acquisition and sale of the mortgage operations of Acquired Brokerages will be appropriately adjusted by the parties, acting in good faith, to reflect the existence of the joint venture. 15 IN WITNESS HEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. NRT INCORPORATED /s/ Steven L. Barnett By: _______________________________ Name: Steven L. Barnett Title: Senior Vice President, General Counsel and Secretary CENDANT CORPORATION /s/ Samuel L. Katz By: _______________________________ Name: Samuel L. Katz Title: Executive Vice President APOLLO INVESTMENT FUND III, L.P. By: APOLLO ADVISORS II, L.P., its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC., its General Partner /s/ Joshua J. Harris By: _______________________________ Name: Joshua J. Harris Title: Vice President APOLLO OVERSEAS PARTNERS III, L.P. By: APOLLO ADVISORS II, L.P., its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC., its General Partner /s/ Joshua J. Harris By: _______________________________ Name: Joshua J. Harris Title: Vice President 16 APOLLO (UK) PARTNERS III, L.P. By: APOLLO ADVISORS II, L.P., its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC., its General Partner /s/ Joshua J. Harris By: _____________________________________ Name: Joshua J. Harris Title: Vice President FOR PURPOSES OF SECTION 3.9 ONLY: APOLLO MANAGEMENT, L.P. /s/ Joshua J. Harris By: _____________________________________ Name: Joshua J. Harris Title: Vice President 17 EX-10.6 9 MARKETING AGREEMENT EXHIBIT 10.6 MARKETING AGREEMENT BY AND BETWEEN NRT INCORPORATED AND PHH MORTGAGE SERVICES CORPORATION MARKETING AGREEMENT This Marketing Agreement ("Agreement") is entered into on this 11th day of August, 1997, and effective as of the first day of the month following the month in which, NRT Incorporated acquires the assets of National Realty Trust ("Effective Date"), between PHH Mortgage Services Corporation ("PHH"), a New Jersey corporation having an office at 6000 Atrium Way, Mt. Laurel, New Jersey 08054 and NRT Incorporated, a Delaware corporation, having an office at 6 Sylvan Way, Parsippany, New Jersey 07054 ("NRT") (the "Parties"). WHEREAS, PHH is engaged in providing mortgage services that include counseling, efficient processing, origination, and servicing of mortgage loans on homes located in the United States; and WHEREAS, NRT provides residential real estate brokerage services through real estate brokers and agents ("Agents") in approximately 400 real estate brokerage offices in the United States ("Existing NRT Offices")and intends to acquire additional real estate brokerage operations from time to time during the term of this Agreement ("Future NRT Offices") ("Existing NRT Offices" and "Future NRT Offices" are collectively referred to herein as "NRT Offices"); and WHEREAS, PHH and NRT wish to develop a marketing program ("Program"), the purpose of which will be to market PHH's mortgage services to the NRT Offices and Agents. NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties hereby agree as follows: 2 1. The Program. ----------- (a) NRT shall provide access to PHH and market PHH and its various mortgage programs and products to the NRT Offices and Agents. The Program shall include posting of PHH signs and banners throughout the NRT Offices, mail inserts, brochures and advertisements. In addition, the NRT Offices shall be encouraged to provide access to PHH in its company newsletters and to all of its Agents during the periodic sales meetings. NRT shall also provide access to the NRT Offices and Agents to a PHH loan originator. The marketing of PHH's programs and products shall direct all interested customers to contact PHH directly to obtain a mortgage loan. Before the Effective Date the parties shall make final, and semiannually or more frequently thereafter will confer and amend, as appropriate, their marketing plan to implement the Program and their respective obligations thereunder. Such marketing plan will include, but is not limited to, as applicable: (i) the newspapers or other media in which NRT Offices will place advertisements, (ii) the types, format, content, quantity and distribution channels for brochures and other materials to be produced and distributed by the NRT Offices; (iii) the size, format, content, quantity and location of signs, banners and related materials, to be displayed; (iv) the types, content, frequency and distribution of mailings; and (v) the opportunities to be provided to PHH loan originators to address Agents in the NRT Offices. (b) Although NRT through its NRT Offices shall market PHH to its Agents as required by the Program, neither the NRT Offices nor Agents shall be required to, and they shall not as part of the Program, provide advice, counseling or assistance to consumers in connection with any particular mortgage loan for which they have applied or may apply to PHH. (c) The NRT Offices shall encourage Agents and relocation directors to inform all customers of the mortgage loan products and services offered by PHH. As mutually agreed upon by PHH and NRT, from time to time, PHH will provide one or more dedicated toll free telephone numbers for the Program. (d) PHH covenants and agrees that the terms and conditions of the Program shall be no less favorable than the material terms and conditions of any other PHH program offered where the same services and relationship are being provided by a real estate corporation of the size and scope of NRT, and failure of PHH to comply with this covenant shall be deemed to be a material breach of the Agreement. NRT may terminate this Agreement without penalty in the event a nationwide third party provider of mortgage services, of similar reputation and quality as PHH, offers NRT a marketing arrangement comparable in all material respects to the Program, on economic terms more favorable to NRT than those set forth in this Agreement, provided that such offer is in writing and binding upon such third party if accepted by NRT, and is consistent with all applicable requirements of law. In such event, NRT shall promptly notify PHH of such offer in writing and PHH shall have ninety (90) days in which to agree or decline to match it. In the event PHH agrees to match it, the new terms shall apply to the Program beginning the first day of the calendar quarter immediately following such ninety (90) day period. If PHH declines, NRT may terminate the Agreement upon the expiration of ninety (90) days following receipt of written notice of termination thereof. 2. Compensation. ------------ (a) (i) Commencing with the Effective Date, PHH shall pay a quarterly fee to NRT for the access and marketing services provided under the Program ("Quarterly Marketing Fee"). The Quarterly Marketing Fee shall be paid within 15 days of the beginning of each calendar quarter of the term of this Agreement. The amount of 4 the Quarterly Marketing Fee shall be determined in accordance with Exhibit A (Fee Matrix) appended hereto and incorporated herein by this reference, as further adjusted as provided in this section 2. (ii) In the event the Effective Date is a date other than the first day of a calendar quarter (a "Partial Quarter"), no Quarterly Marketing Fee shall be payable until the next calendar quarter. For example, if the Effective Date is September 1, 1997 there shall be no compensation payable until the calendar quarter beginning October 1, 1997. (b) (i) By the close of each calendar quarter, each NRT Office shall report to NRT the number of home purchases and sales ("Units") it closed that quarter, and the average home sales price for such Units, relying therefor upon the management reports prepared by NRT Offices for NRT, in due course. NRT shall aggregate the number of Units for all NRT Offices; determine the average sales price for all such Units; determine from Exhibit A the Quarterly Marketing Fee to be paid for --------- the next calendar quarter, and promptly report its determination and the basis therefor (the "Data") to PHH. NRT shall reasonably cooperate with PHH in any further examination of the Data it reasonably may seek. (ii) The initial Quarterly Marketing Fee shall be established by determining the Units closed and the average sales price for such Units for the calendar quarter immediately preceding the first calendar quarter in which fees are payable pursuant to section 2(a). Subsequent Quarterly Marketing Fees shall be established in accordance with the procedure set forth in section 2(b)(i) above. (c) The Parties acknowledge and agree that the Quarterly Marketing Fee reflects the reasonable and fair market value of the goods and services to be provided by NRT and its NRT Offices under the Program, without regard to the value or volume of mortgage loans that may be attributable to the Program. The Parties have 5 concluded that the average sales price of home purchases and sales in which NRT Offices participate, and the aggregate number of such purchase and sale transactions, are reasonably related during each such calendar quarter to, among other factors; (i) the number of Agents employed by or working with NRT Offices; (ii) the number of real estate customers (including home buying customers) of NRT Offices; (iii) the marketing areas served by the NRT Offices; and (iv) the effectiveness, continuity, and coordinated nature of the Program. Not more frequently than semiannually during the term of the Agreement, either Party may notify the other, in writing, of its determination ("Determination"), and the basis therefor, that the Quarterly Marketing Fee amount may fail to reflect the reasonable and fair market value of the access, goods and services provided by NRT and the NRT Offices under the Program. The Parties shall promptly confer in good faith about the Determination. If they agree, the Parties shall adjust Exhibit A in accordance with the --------- Determination, or otherwise, effective at the beginning of the following calendar quarter. If they do not agree, Exhibit A shall not be revised. --------- (d) NRT intends to roll-out the Program to Existing NRT Offices during the first four (4) consecutive calendar quarters of the term of this Agreement (the "Initial Four Quarters") by focusing its efforts on providing the Program in an orderly and progressive manner to Existing NRT Offices, during each of the Initial Four Quarters, as set forth below (the "Roll-out"). In recognition of the Roll-Out, the Parties agree that the Quarterly Marketing Fee for each of the Initial Four Quarters similarly shall be adjusted, so that the Quarterly Marketing Fee paid for the first of the Initial Four Quarters shall be 25% of the amount that otherwise would be payable under this section 2; the amount for the second and third quarters, 50%; and the amount for the fourth quarter, 75%. After the Initial Four Quarters, the Quarterly Marketing Fee shall be equal to 100% of the amount payable under this section 2. 6 (e) Units attributable to Future NRT Offices ("Acquisition Units"), which shall be established by determining the Acquisition Units closed for the calendar quarter immediately preceding the acquisition date of such Future NRT Offices ("Acquisition Date"), shall be added to the number of Units for all NRT Offices for purposes of calculating the Quarterly Marketing Fee to be paid hereunder on the first day of the month immediately following such Acquisition Date. (f) The fees payable under this section 2 shall be subject to mutually agreed upon adjustments in the event the Jon Douglas Real Estate Services Group and Cornish & Carey Residential, Inc. transactions contemplated as of the date of this Agreement (which for purpose of this Agreement shall be included in the definition of Existing NRT Offices) are not consummated. 3. Exclusivity. During the term of this Agreement, neither NRT nor any NRT ----------- Office shall enter into any similar agreement with any other person or entity, including, but not limited to, any agreement to provide access and marketing services or to endorse or permit the rental of space within NRT Offices to any mortgage loan origination entity other than PHH (except that this prohibition shall not apply in those instances where the Future NRT Offices had such an arrangement in place prior to the applicable Acquisition Date, provided that NRT shall use reasonable efforts to promptly terminate such arrangements without undue expense or hardship), it being acknowledged that individual customers and Agents are not precluded thereby from choosing to do business with the mortgage loan origination entities of their choice. 4. Relationship. The relationship between PHH and NRT shall be that of ------------ independent contractors and neither party shall be or represent itself to be an agent, employee, partner or joint venturer of the other, nor shall either party have or represent itself to have any power or authority to act for, bind or commit the other. PHH shall have sole discretion 7 and authority with respect to product development, origination, processing, underwriting and servicing of all mortgage loans and mortgage loan applications. 5. Confidential Information. Each party recognizes that, during the term of ------------------------ this Agreement, its directors, officers or employees may obtain knowledge of trade secrets, membership lists and other confidential information of the other Party which are valuable, special or unique to the continued business of that Party. Accordingly, each Party hereby agrees to hold such information in confidence and to use its best efforts to ensure that such information is held in confidence by its officers, directors and employees. 6. Disclaimer. Neither PHH nor NRT make any representation or warranty to the ---------- other regarding the effect that this Agreement and the consummation of the transactions contemplated hereby may have upon the foreign, federal, state or local tax or other liability of the other. 7. Severability. If any material provision of this Agreement should be invalid, ------------ illegal or in conflict with any applicable state or federal law or regulation, such law or regulation shall control, to the extent of such conflict, without affecting the remaining provision of this Agreement. 8. Term and Termination. -------------------- (a) The term of this Agreement shall be forty (40) years commencing on its Effective Date unless earlier terminated in accordance with the provisions of this Section 8. (b) PHH may terminate this Agreement, at any time, with or without cause, by providing ninety (90) days' written notice to NRT. NRT may terminate this Agreement by providing ninety (90) days written notice to PHH upon any material default by PHH that is not corrected within such ninety (90) day period; provided, however, that PHH shall be required to provide mortgage services under the 8 Program for a transition period, not to exceed 365 days from notice of termination, as reasonably required by NRT to transition to a new mortgage lender. (c) NRT may terminate this Agreement in accordance with the provisions of section 1(d) of this Agreement. (d) Upon termination of this Agreement, as provided herein: (i) NRT shall refrain from any and all further use of or reference to materials utilizing PHH; (ii) PHH shall continue to process, in due course, any mortgage loan applications submitted by the NRT Offices' customers prior to termination of this Agreement; and (iii) PHH's obligation to pay any then due Quarterly Marketing Fee, and the provisions of sections 5 and 9 of this Agreement, shall survive, it being understood and agreed that any earned portion of such Quarterly Marketing Fee shall be paid pro rata, or any unearned portion of such Quarterly Marketing Fee shall be refunded pro rata, as applicable, based upon the amount that would have been payable for a full calendar quarter and the actual number of days elapsed for the quarter at the effective date of termination. 9. Hold Harmless. ------------- (a) PHH agrees to indemnify, defend and hold NRT harmless from and against any and all claims, suits, actions, liability, losses, expenses or damages which may hereafter arise, which NRT, its affiliates, directors, officers, agents or employees may sustain due to or arising out of any negligent act or omission by PHH, its affiliates, officers, agents, representatives or employees in violation of this Agreement or in violation of any applicable law or regulation. Provided, however, the above indemnification shall not provide coverage for (a) any claim, suit, action, liability, loss, expense or damage to the extent that it resulted from an act or omission of NRT or any indemnified party, (b) the amount by which any cost, fee, expense or loss associated with any of the foregoing were increased as a result of 9 an act or omission on the part of NRT or any indemnified party, or (c) any claim, suit, action, liability, loss, expense or damage arising out of, or connected to, any activity or relationship outside the scope of this Agreement. (b) NRT agrees to indemnify, defend and hold PHH harmless from and against any and all claims, suits, actions, liability, losses, expenses or damages which may hereafter arise, which PHH, its affiliates, directors, officers, agents or employees may sustain due to or arising out of any negligent act or omission by NRT, its affiliates, officers, agents, representatives or employees in violation of this Agreement or in violation of any applicable law or regulation, or out of the real estate brokerage business of NRT, its affiliates, officers, agents, representatives or employees. Provided, however, the above indemnification shall not provide coverage for (a) any claim, suit, action, liability, loss, expense or damage to the extent that it resulted from an act or omission of PHH or any indemnified party or (b) the amount by which any cost, fee, expense or loss associated with any of the foregoing were increased as a result of an act or omission on the part of PHH or any indemnified party or (c) any claim, suit, action, liability, loss expense or damage arising out of, or connected to, any activity or relationship outside the scope of this Agreement. 10. Notices. All notices required or permitted by this Agreement shall be ------- in writing and shall be given by certified mail, return receipt requested or by reputable overnight courier with package tracing capability and sent to the address at the head of this Agreement or such other address that a party specified in writing in accordance with this paragraph. 11. Amendment. The terms and conditions of this Agreement may not be --------- modified or amended other than by a writing signed by both Parties. 12. Assignment: Binding Nature. The terms of this Agreement shall be binding -------------------------- upon and shall inure to the benefit of the Parties hereto. This Agreement shall not be assigned by any Party without the express prior written consent of the other Party, which consent may be given or withheld in the sole discretion of the Party whose consent is required hereby. 13. Entire Agreement. This Agreement and any Exhibits attached hereto ---------------- constitute the entire Agreement between the parties and supersede all oral or written negotiations of the Parties with respect to the subject matter thereof. 14. Governing Law. This Agreement shall be subject to and construed under the ------------- laws of the State of New Jersey, without reference to conflicts of law provisions thereof. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed the date and year first above written. PHH MORTGAGE SERVICES NRT INCORPORATED CORPORATION /s/ Scott E. Forbes /s/ Joshua Harris Signature: ___________________ Signature: _________________ Scott E. Forbes Joshua Harris By: __________________________ By: ________________________ SVP Vice President Title: _______________________ Title: _____________________ Enclosures: Exhibit A (Fee Matrix) [CAPTION] PHH Mortgage Services Confidential Sheet1 Page 1 National Realty Trust Marketing Fee Template Quarterly at close units reported to franchisor Beginning Unit Volume 1 1001 2501 5001 7501 Ending unit volume 1000 2500 5000 7500 10000 Average Sales Price 75000-90000 $ 4,455 $ 11,138 $ 22,275 $ 33,413 $ 44,550 90001-115000 $ 6,075 $ 15,188 $ 30,375 $ 45,563 $ 60,750 115001-125000 $ 6,750 $ 16,675 $ 33,750 $ 50,625 $ 67,500 125001-175000 $ 8,100 $ 20,250 $ 40,500 $ 60,750 $ 81,000 175001-250000 $ 12,083 $ 30,206 $ 60,413 $ 90,619 $ 120,825 250001-325000 $ 15,526 $ 38,813 $ 77,625 $116,438 $ 155,250 325001-400000 $ 20,250 $ 50,625 $ 101,250 $151,875 $ 202,500 400000+ $ 23,625 $ 58,053 $ 118,125 $177,188 $ 236,250
PHH Mortgage Services Confidential PHH MORTGAGE SERVICES CONFIDENTIAL Sheet 1 Page 1
National Realty Trust Marketing Fee Template Quarterly at close units reported to franchisor Beginning Unit Volume 10001 15001 20001 25001 30001 Ending unit volume 15000 20000 25000 30000 35000 Average Sales Price 75000-90000 $ 59,400 $118,800 $178,200 $ 237,600 $ 371,250 90001-115000 $ 51,000 $162,000 $243,000 $ 324,000 $ 506,250 115001-125000 $ 90,000 $100,000 $270,000 $ 360,000 $ 562,500 125001-175000 $108,000 $218,000 $324,000 $ 432,000 $ 675,000 175001-250000 $161,100 $322,200 $483,300 $ 644,400 $1,008,875 250001-375000 $207,000 $414,000 $621,000 $ 828,000 $1,293,750 325001-400000 $270,000 $540,000 $810,000 $1,080,000 $1,687,500 400000+ $315,000 $630,000 $945,000 $1,260,000 $1,968,750
PHH MORTGAGE SERVICES CONFIDENTIAL Sheet 1 Page 1 PHH Mortgage Services Confidential Sheet1 Page 1 National Realty Trust Marketing Fee Template
Quarterly at close units reported to franchiser Beginning Unit Volume 35001 40001 45001 50001 55001 Ending unit volume 40000 45000 50000 55000 60000 Average Sales Price 75000-90000 $ 445,500 $ 561,330 $ 712,800 $ 801,900 $ 891,000 90001-115000 $ 607,500 $ 765,450 $ 972,000 $1,093,500 $1,215,000 115001-125000 $ 675,000 $ 850,500 $1,080,000 $1,215,000 $1,350,000 125001-175000 $ 810,000 $1,020,600 $1,295,000 $1,458,000 $1,620,000 175001-250000 $1,208,250 $1,522,395 $1,933,200 $2,174,850 $2,416,500 250001-325000 $1,552,500 $1,956,150 $2,484,000 $2,794,500 $3,105,000 325001-400000 $2,025,000 $2,551,500 $3,240,000 $3,645,000 $4,050,000 400000+ $2,362,500 $2,976,750 $3,760,000 $4,252,500 $4,725,000
PHH Mortgage Services Confidential Sheet1 Page 1 PHH Mortgage Services Confidential Sheet 1 Page 1 National Realty Trust Marketing Fee Template
Quarterly at close units reported to franchisor Beginning Unit Volume 60001 65001 70001 75001 80001 Ending Unit Volume 65000 70000 75000 80000 85000 Average Sales Price 75000-90000 $1,143,450 $1,247,400 $1,351,350 $1,663,200 $1,782,000 90001-115000 $1,559,250 $1,701,000 $1,842,750 $2,268,000 $2,430,000 115001-125000 $1,732,500 $1,890,000 $2,047,500 $2,520,000 $2,700,000 125001-175000 $2,079,000 $2,268,000 $2,457,000 $3,024,000 $3,240,000 175001-250000 $3,101,175 $3,383,100 $3,685,025 $4,510,800 $4,833,000 250001-325000 $3,984,750 $4,347,000 $4,709,250 $5,798,000 $6,210,000 320001-400000 $5,197,500 $5,670,000 $6,142,500 $7,560,000 $8,100,000 400000+ $6,063,750 $6,615,000 $7,168,250 $8,820,000 $9,450,000
PHH Mortgage Services Confidential EX-10.7 10 PROGRAMMING OUTSOURCING AGREEMENT EXHIBIT 10.7 PROGRAM OUTSOURCING AGREEMENT This PROGRAM OUTSOURCING AGREEMENT (this "Agreement"), dated as of the 9th day --------- of February 1999 by and between NRT INCORPORATED ("NRT"), a Delaware corporation --- having an office at 6 Sylvan Way, Parsippany, New Jersey 07054 and CENDANT CORPORATION ("Cendant"), a Delaware corporation having an office at 6 Sylvan ------- Way, Parsippany, New Jersey 07054. W I T N E S S E T H: WHEREAS, Cendant is the parent of the franchisors of several lodging, car rental and real estate brokerage franchise systems (collectively, the "Franchise --------- Systems"), including the CENTURY 21(R), ERA(R) and COLDWELL BANKER(R) real - ------- estate brokerage systems (the "Existing Real Estate Systems"), the Days Inn(R), ---------------------------- Howard Johnson(R), Knights Inn(R), Ramada(R), Super 8(R), Travelodge(R), Villager Lodge(R) and Wingate Inn(R) lodging systems and the Avis(R) car rental system and in the future may add additional franchise systems, including additional real estate brokerage franchise systems (the "New Real Estate --------------- Systems" and together with the Existing Real Estate Systems, the "Real Estate ----------- Systems"); and - ------- WHEREAS, Cendant has established, and may continue to establish, (i) purchasing relationships and programs (including corporate purchasing relationships) with vendors for the provision of goods and services designed to be utilized by franchisees of some or all of the Real Estate Systems, and their employees and/or sales agents ("Purchasing Programs") and (ii) programs through ------------------- which franchisees of some or all of the Real Estate Systems market vendors' products or services to the franchisees' customers ("Marketing Programs" and ------------------ collectively with the Purchasing Programs, the "Programs"); and -------- WHEREAS, NRT (references herein to NRT shall be deemed to refer to NRT and each of its subsidiaries) is the owner and operator of real estate brokerage offices which operate as franchised offices of the CENTURY 21(R), ERA(R) or COLDWELL BANKER(R) real estate brokerage systems pursuant to certain franchise and membership agreements (the "Franchise Agreements"); and -------------------- WHEREAS, NRT desires to have Cendant, and Cendant desires to, act as NRT's exclusive purchasing and marketing program outsourcing agent. NOW THEREFORE, NRT and Cendant have agreed as follows: 1. General. (a) NRT hereby appoints Cendant, and Cendant hereby agrees, to ------- act as NRT's exclusive outsourcing agent, throughout the term set forth in Section 2 below, to negotiate the specific terms of NRT's participation in the Programs. (b) Subject to Section 6, NRT shall not enter into, permit to exist or pursue, directly or through a third party, any purchasing relationships or programs (including corporate purchasing relationships) for the provision of products and services designed to be utilized by real estate brokers, their employees and/or sales agents ("NRT Purchasing -------------- Programs") or any programs through which NRT would market vendors' products or - -------- services to NRT's customers ("NRT Marketing Programs" and together with NRT ---------------------- Purchasing Programs, "NRT Programs") but shall refer to Cendant all such ------------ program opportunities and parties with which NRT would enter into a relationship. 2. Term. The term of this Agreement shall commence on the date hereof and, ---- unless earlier terminated as provided herein, shall terminate upon termination or expiration of the last of the Franchise Agreements to terminate or expire. Notwithstanding the foregoing, Sections 7 and 14 hereof shall survive termination of this Agreement. 3. Existing Programs. The parties acknowledge that Cendant has existing ----------------- Programs for the Real Estate Systems (the "Existing Programs"). Exhibit A, ----------------- attached hereto and made a part hereof, sets forth a list of the vendors with which there are Existing Programs as of the date hereof. With respect to Existing Programs, NRT will identify in writing specific Programs the terms of which NRT wishes Cendant to renegotiate on its behalf. Cendant agrees that it will, on only one occasion with respect to any such identified Existing Program, enter into good faith negotiations where appropriate with the applicable vendor(s) of such identified Existing Programs to improve NRT's terms of participation to reflect NRT's size and participation level. 4. New Programs. NRT acknowledges that Cendant may from time to time ------------ establish additional Programs for the Real Estate Systems (the "New Programs"). ------------ With respect to New Programs, (i) Cendant will exercise its best efforts to negotiate specific participation terms with vendors for NRT which are the most advantageous (including better pricing than smaller participating brokers) given NRT's participation and (ii) if available, Cendant will negotiate initial fees payable to NRT by the vendor of such New Program which reflect NRT's participation in such New Program. Cendant will provide notice to NRT promptly upon the establishment of a New Program, and Cendant will provide to NRT a written description of (i) the product or service covered by such New Program and (ii) the participation terms of such New Program, including commissions, fees or other consideration payable to NRT, if any. In the case of any Programs specific to NRT in which no other franchisees or Cendant operating units participate, Cendant will provide NRT with a copy of the agreement relating to each such Program, subject to confidentiality restrictions in each such agreement. 5. Participation. (a) On the terms of, and subject to the conditions -------------- contained in, this Agreement, NRT agrees to participate, and to encourage its sales agents and sales associates to participate, in each of the New Programs and Existing Programs in accordance with the terms of each such Program. NRT will make all such Programs pertaining to NRT available to its employees, sales agents and sales associates and provide training and other information to its sales agents and sales associates with respect to each Program in accordance with the terms of such Program. NRT shall use its reasonable best efforts to ensure that NRT, its office managers, agents and sales associates, to the fullest extent practicable, purchase the goods and services provided pursuant to the Purchasing Programs and market the goods and services which are the subject of the Marketing Programs. In order to so promote the Programs, NRT agrees that (i) evaluations of its employees shall include a measurement of participation in the Programs and (ii) 2 NRT will, from time to time and at its discretion, subject to applicable law, develop and implement specific performance incentives for its employees and sales associates based on levels of participation in the Programs. Cendant agrees to provide notice to NRT as soon as practicable after Cendant is reasonably certain that any Program is likely to be terminated and not replaced immediately upon such termination. With respect to Marketing Programs scheduled to be terminated and not replaced immediately upon such termination, Cendant will use its reasonable best efforts to have NRT's participation in such Program extended for six months beyond the time when such program was otherwise scheduled to be terminated. (b) NRT shall not be obligated to participate in a particular Program if such Program does not afford NRT at least as advantageous terms (taken as a whole) as any other franchisees of the Real Estate Systems are afforded pursuant to such Program. (c) NRT shall not be required to commence participation in any New Program if NRT is participating in an NRT Program covering a similar good or service as the New Program, but only for so long as NRT is contractually bound to participate in such NRT Program; provided, however, upon implementation of a New Program in ----------------- which NRT is required to participate (after making the determination provided for below), NRT will terminate any NRT Program which conflicts with the New Program as soon as is permissible under the terms of such NRT Program without NRT having to pay any cost to terminate such NRT Program, unless NRT is directed to do so by Cendant and NRT is reimbursed for having to pay such cost. NRT shall not be required to commence participation in any new Purchasing Program if it is reasonably determined by Cendant that such Program (taking into account NRT's expected participation) does not offer competitive pricing and service relative to NRT's size and compared to any NRT Program covering a similar good or service; provided that NRT shall commence participation in such Program if, on any anniversary of the implementation of such Program it is reasonably determined by Cendant that such Program (taking into account NRT's expected participation) is then offering competitive pricing and service relative to NRT's size and compared to any NRT Program covering a similar good or service. If an NRT Marketing Program exists which covers the same good or service as a new Marketing Program, NRT shall not be required to commence participation in such new Marketing Program if it is reasonably determined by Cendant that (A) such Program (taking into account NRT's expected participation) does not offer competitive pricing and service relative to NRT's size and compared to any NRT Program covering a similar good or service or (B) with respect to NRT Barter Programs (as defined below) to be replaced, such Program is not reasonably expected to provide the same economic value to NRT as such NRT Barter Program; provided that NRT shall commence participation in such Program if, on any anniversary of the implementation of such Program it is reasonably determined by Cendant that (A) such Program (taking into account NRT's expected participation) is then offering competitive pricing and service relative to NRT's size and compared to any NRT Program covering a similar good or service and (B) with respect to NRT Barter Programs (as defined below) to be replaced, such Program is reasonably expected to provide the same economic value to NRT as such NRT Barter Program. Once NRT commences participation in a Program, it shall not cease participation in such Program pursuant to the two immediately preceding sentences. NRT shall provide to Cendant in a timely fashion information regarding the terms and conditions of NRT's purchasing arrangements, in order to enable the parties to make the determinations described in this Section 5(c). Cendant agrees to use its reasonable best efforts to 3 have the terms of NRT's participation in any New Program reflect NRT's size and participation level. (d) Notwithstanding anything else in this Agreement to the contrary, if NRT owns a title agency business or escrow services business which services any NRT offices, such offices will not be required to participate in any Marketing Program relating to the title agency business and the provision of escrow services, and Section 1(b) hereof will not apply with respect to any NRT Marketing Program relating to such services. The parties acknowledge that NRT currently owns, and in the future may own additional, title agency and escrow services businesses, in each case which may service existing NRT offices and future NRT offices. NRT agrees that, if NRT elects to sell its title agency or escrow services businesses, it will so notify Cendant and, at Cendant's election, will negotiate with Cendant in good faith and on an exclusive basis to explore the sale of such business to Cendant or the combination of such businesses with Cendant's related operations. The exclusivity of such negotiations will last until 3 months from the date of NRT's notice to Cendant. To the extent Cendant has a Program with a title insurance underwriter or owns a title insurance underwriter (including Lawyers Title, Stewart Title and First American Title, which Programs exist on the date hereof), NRT will, with respect to NRT's title agency business, use such title insurance underwriter in NRT's title agency business on an exclusive basis, as long as such underwriters provide service and economic terms comparable to the terms of NRT's then current arrangements. (e) No company or business unit acquired by NRT after the date hereof will be required to participate in a Marketing Program if such company or business unit actively markets under a binding third party contractual agreement (but does not manufacture or produce) a comparable product or service, as reasonably determined by Cendant, to the product or service that is the subject of the Marketing Program in question, but only until the termination of such agreement (which will not be extended or renewed and will be terminated by NRT as soon as permissible under the terms of such agreement), unless (i) Cendant arranges for such Marketing Program to be provided to such company or business unit (but not NRT's other companies or business units, which will be subject to the terms of such Marketing Program already in effect) on competitive economic and service terms relative to NRT's size and compared to the program in effect at such acquired company or business unit, as reasonably determined by Cendant, (ii) the Marketing Program is reasonably expected to replace the cash flow generated from the marketing agreement to be replaced and (iii) NRT is compensated for any cost of terminating such marketing agreement in place at such company or business unit. If such acquired company or business unit is not so required to participate in any such Marketing Program, such company or business unit may continue such marketing agreement with respect to the customers of such company or business unit (but not customers of other NRT companies or business units) without being in violation of Section 1(b) hereof. (f) No company or business unit acquired by NRT after the date hereof will be required to participate in a Marketing Program if such company or business unit manufactures, produces or installs a product or service similar to the product or service that is the subject of the Program in question, unless (i) such Program is reasonably expected to replace the direct or indirect positive impact on net income, if any, created at such company or business unit due to the existence of such product or service, as mutually agreed by the parties and (ii) NRT is 4 compensated for any net costs associated with the closing or divesting of the business unit or company which manufactures or produces such product or service. If such acquired company or business unit is not so required to participate in any such Marketing Program, such company or business unit may continue to sell products or services (but not to customers of other NRT companies or business units) without being in violation of Section 1(b) hereof. (g) No company or business unit acquired by NRT after the date hereof will be required to participate in a Purchasing Program if such company or business unit is obtaining the product or service that is the subject of the Program in question under a third party agreement, until the termination of such agreement (which will not be extended or renewed and will be terminated by NRT as soon as permissible under the terms of such agreement), unless Cendant arranges for such product or service to be provided to such company or business unit under such Purchasing Program on more competitive pricing and service terms, as mutually agreed by the parties, and NRT is compensated for any cost of terminating any purchasing agreement in place at such company or business unit. (h) NRT will not be required to participate in any Program subsequent to April 29, 2001 until NRT's 18% Series C Cumulative Junior Redeemable Preferred Stock has been redeemed in accordance with its terms. 6. NRT Programs. Notwithstanding Section 1(b): ------------ (i) NRT shall be permitted to enter into an NRT Purchasing Program and will not be required to refer to Cendant such program opportunity if at such time no Purchasing Program covers such good or service and NRT's aggregate purchases of such product do not exceed $250,000 per calendar year. (ii) NRT shall be permitted to enter into an NRT Purchasing Program covering a good or service sought by NRT if at such time a Purchasing Program exists which covers such good or service but pursuant to Section 5 NRT is not required to participate in such Purchasing Program. (iii) NRT shall be permitted to enter into NRT Marketing Programs in which NRT receives buyer leads, listing leads or barter consideration and no other consideration (an "NRT Barter Program"), if such NRT ------------------ Marketing Program does not conflict with any Program then in effect. If Cendant subsequently implements a New Program covering the same or a similar product or service covered by such NRT Marketing Program, then NRT will, subject to the last sentence of this Section 6, terminate such NRT Marketing Program and commence participation in such New Program. (iv) NRT shall be permitted to enter into an NRT Program with respect to a good or service sought to be purchased or marketed by 5 NRT, if at such time a Program covering such good or service has expired or been terminated and Cendant has either not replaced, renewed or extended such Program. (v) NRT shall be permitted to enter into an NRT Program with respect to a good or service sought to be purchased or marketed by NRT, if there is then no Program covering such good or service, and NRT has notified Cendant of its desire to have Cendant implement a New Program covering such good or service and Cendant has (A) not, within 30 days of the notice from NRT, notified NRT of its decision to pursue such New Program or (B) not implemented such New Program within 180 days of Cendant notifying NRT of its decision to pursue such New Program. (vi) NRT shall be entitled to enter into an NRT Program with respect to an area which is not covered by a particular Program if such Program does not cover all geographic areas in which NRT operates. Notwithstanding anything else herein to the contrary, any NRT Program permitted to be implemented pursuant to this Agreement must be for a term of no more than one year, without automatic renewal. Upon implementation of a new NRT Program, NRT will provide to Cendant notice of the termination date of such NRT Program. 7. Information. With respect to its real estate listings and other ----------- customer data, NRT will not sell or otherwise provide any of such information to any third party without the prior written consent of Cendant, which consent may be withheld in Cendant's sole discretion. In accordance with the Franchise Agreements, Cendant will be entitled to freely use, sell and otherwise provide to any third party the customer information provided to Cendant's subsidiaries under each Franchise Agreement, including after termination of the Franchise Agreements. 8. Termination of Preferred Alliance Agreement. The Preferred Alliance ------------------------------------------- Agreement, dated as of August 11, 1997, between NRT and HFS Incorporated (predecessor to Cendant), is hereby terminated and shall be of no further force or effect. 9. Termination. This Agreement constitutes a binding obligation of both ----------- parties which may not be terminated by either party except either party may terminate in the event of a material breach of the terms of this Agreement by the other party, if the breaching party is given written notice of such breach and the opportunity to cure such breach within sixty days of the date of such notice. 10. Representations. Each party has full power and authority and has been --------------- duly authorized, to enter into and perform its obligations under this Agreement, all necessary approvals of any Board of Directors, shareholders, partners, co- tenants and lenders having been obtained. The execution, delivery and performance of this Agreement by each party will not violate, create a default under or breach of any charter, bylaws, agreement or other contract, license, permit, indebtedness, certificate, order, decree or security instrument to which such 6 party or any of its principals is a party or is subject. Neither party is the subject of any current or pending dissolution, receivership, bankruptcy, reorganization, insolvency, or similar proceeding on the date this Agreement is executed by such party and was not within the three years preceding such date. 11. No Violations of Law; Customer Complaints; Indemnification. (a) It is the ---------------------------------------------------------- intent of the parties that the transaction contemplated by this Agreement is to be effected in such a way that neither party should be subject to, or engage in any conduct which would constitute, a violation of any applicable laws, including but not limited to antitrust laws. Therefore, both parties agree to cooperate in structuring any contemplated transaction so as to comply with any legal requirements to avoid such characterization. Notwithstanding anything herein to the contrary, if NRT establishes to the satisfaction of Cendant that any Program does not comply with law, then NRT does not have to participate in such Program until the Program has been modified so as to comply with law. (b) Cendant shall indemnify and hold NRT and its affiliates, and their respective officers, directors, employees and agents (collectively, the "NRT --- Indemnified Parties") harmless from and against any liability, cost or expense - ------------------- incurred by any NRT Indemnified Party arising solely out of, or arising solely in connection with, claims brought against NRT resulting from the negligence of Cendant's employees in connection with the Programs. NRT shall indemnify and hold Cendant and its affiliates, and their respective officers, directors, employees and agents (collectively, the "Cendant Indemnified Parties") harmless --------------------------- from and against any liability, cost or expense incurred by any Cendant Indemnified Party arising from actions or omissions of NRT or its employees, agents or affiliates in connection with the Programs. 12. Relationship of Parties. (a) Each party is an independent contractor. ----------------------- Except as provided in this Agreement, neither party is the legal representative or agent of, or has the power to obligate (or has the right to direct or supervise the daily affairs of) the other or any other party for any purpose whatsoever. THE PARTIES EXPRESSLY ACKNOWLEDGE THAT THE RELATIONSHIP INTENDED BY THEM IS A BUSINESS RELATIONSHIP BASED ENTIRELY ON AND CIRCUMSCRIBED BY THE EXPRESS PROVISIONS OF THIS AGREEMENT AND THAT, EXCEPT AS PROVIDED IN THIS AGREEMENT, NO PARTNERSHIP, JOINT VENTURE, AGENCY, FIDUCIARY OR EMPLOYMENT RELATIONSHIP IS INTENDED OR CREATED BY REASON OF THIS AGREEMENT. NRT ACKNOWLEDGES THAT CENDANT IS A STOCKHOLDER OF NRT. (B) NRT ACKNOWLEDGES THAT CENDANT HAS AN INTEREST, FINANCIAL AND OTHERWISE, IN THE PROGRAMS AND MAY RECEIVE FEES AND/OR COMMISSIONS FOR NRT'S PARTICIPATION IN PROGRAMS, AND NRT ACKNOWLEDGES THAT IT IS NOT ENTITLED TO ANY ACCOUNTING OF SUCH FEES, COMMISSSIONS OR INTERESTS AND WAIVES ANY CLAIMS BASED ON OR RELATING TO THAT INTEREST AND THE COMMISSIONS AND FEES RECEIVED BY CENDANT. 13. Assignment. This Agreement may not be assigned by either party without ---------- the 7 prior written consent of the other party, which consent shall not be unreasonably withheld, except that an assignment in connection with a merger, consolidation or sale of substantially all of the assets of a party hereto shall not require the consent of the other party hereto. In addition, this Agreement shall be freely assignable by Cendant in connection with the sale of one or more of Cendant's real estate brands or Cendant's preferred alliance business unit to any party reasonably capable of performing the outsourcing services hereunder. Any assignee of this Agreement shall assume, by instrument reasonably acceptable to the other party to this Agreement, all of the assignor's obligations hereunder. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors in interest, legal representatives and assigns. 14. Confidentiality. Neither party shall disclose any information regarding --------------- this Agreement or the transactions contemplated hereby to any third party without the prior written consent of the other party, except for disclosure to any attorneys or accountants involved in assisting with the negotiation of the transaction or unless such disclosure is required by law. Any public announcement or press release relating or referring to this Agreement shall be approved in writing by both parties prior to its release. 15. Partial Invalidity. Should any part of this Agreement, for any reason, ------------------ be declared invalid, such decision shall not affect the validity of any remaining portion of this Agreement. 16. No Waiver. No failure or delay in requiring strict compliance with any --------- obligation of this Agreement (or in the exercise of any right or remedy provided herein) and no custom or practice at variance with the requirements hereof shall constitute a waiver or modification of any such obligation, requirement, right or remedy or preclude exercise of any such right or remedy or the right to require strict compliance with any obligation set forth herein. No waiver of any particular default or any right or remedy with respect to such default shall preclude, affect or impair enforcement of any right or remedy provided herein with respect to any subsequent default. No approval or consent of either party shall be effective unless in writing and signed by an authorized representative of such party. 17. Notices. Notices will be effective hereunder when and only when they are ------- reduced to writing and delivered, by next day delivery service, with proof of delivery, or mailed by certified or registered mail, return receipt requested, to the appropriate party at its address stated below or to such person and at such address as may be designated by notice hereunder. Notices shall be deemed given on the date delivered or date of attempted delivery, if service is refused. NRT: Cendant: NRT INCORPORATED CENDANT CORPORATION 6 Sylvan Way 6 Sylvan Way Parsippany, NJ 07054 Parsippany, NJ 07054 Attention: General Counsel Attention: General Counsel 8 18. Miscellaneous. The remedies provided in this Agreement are not ------------- exclusive. Without limiting the rights of each party hereto to pursue all other legal and equitable rights available to such party for the other party's failure to perform its obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. This Agreement will be construed in accordance with the laws of the State of New York, except for New York's conflict of laws principles. Each party consents to the personal jurisdiction of the courts of the State of New York and the United States District Court for the Southern District of New York and further waives objection to venue in any such court. This Agreement is exclusively for the benefit of the parties hereto and may not give rise to liability to a third party. The section headings in this Agreement are for convenience of reference only and will not affect its interpretation. This Agreement, together with all instruments, exhibits, attachments and schedules hereto, constitutes the entire agreement (superseding all prior agreements and understandings, oral or written) of the parties hereto with respect to the subject matter hereof and shall not be modified or amended in any respect except in writing executed by all such parties. 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. CENDANT CORPORATION BY: /s/ Samuel L. Katz ------------------------------- Name: Samuel L. Katz Title: Executive Vice President NRT INCORPORATED BY: /s/ Steven L. Barnett ------------------------------- Name: Steven L. Barnett Title: Senior Vice President, General Counsel and Secretary #54725.20 10 EXHIBIT A Existing Programs ----------------- @Backup MBNA ADT Merrill Training Airborne Express Merrill/May All Communications Moore Data American States Leasing North American Van Lines Amerigas Oakwood AOL Online Software Aon Consulting Pac Bell Aon E&O Paul W. Davis Aon Home Warranty Payroll Transfers AT&T (Business) Petro AT&T Consumer Pierce Leahy AT&T Wireless Services Pietrafesa Avis Plan Member Services Black & Decker Polaroid Boise Cascade Primestar Budget Property I.D. Cendant Mobility Public Storage Cendant Mortgage Realnet Direct Centimark RealSelect Danka Realtor.com Dearborn Remind America First American Title Skytel First Corp. Leasing Smartalk Franklin Covey Snapper Hachette Stewart Title Herman Miller (Stamford Office Furniture) Top Producer IPIX Travel Promotions Int'l Kodak U.S. Inspect Lawyers Title U.S. Lead Lexmark Visa Lucent WINR Lysias Zee Medical Zenith
11 EX-10.8 11 SUPPORT AGREEMENT EXHIBIT 10.8 SUPPORT AGREEMENT THIS SUPPORT AGREEMENT made and entered into this 11th day of August, 1997 ("Effective Date") between HFS Incorporated, a Delaware corporation with its principal place of business located at 6 Sylvan Way, Parsippany, NJ 07054, ("HFS"), and NRT Incorporated, a Delaware Corporation with its principal place of business located at 6 Sylvan Way, Parsippany, NJ 07054 ("NRT"). W I T N E S S E T H: WHEREAS, NRT deems it to be in the NRT's best interest to utilize certain information services, as set forth herein to be provided by HFS, in order to obtain the advantages of improved economy and efficiency, and to benefit from the experience of HFS; and WHEREAS, HFS is willing to provide such services on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 SUPPORT SERVICES ---------------- Section 1.1 Services. -------- (a) HFS shall furnish certain information services to NRT, which services shall include, without limitation, the specific service component list in Section 1.1(b) and such other services as the parties, from time to time, may deem necessary, appropriate and in the best interests of NRT. (b) The information services referred to in Section 1.1(a) shall consist of the following which, together with any additional services not specifically listed herein, shall be referred to individually and collectively as "Services" for the purpose of this Agreement: (i) Component 1 - Centralized Information Services. The Centralized Information Services consist of the Information Administration Services; Group Development Services; Database Operations Support Services, Customer Services and Data Communications Support Services. a. Information Administration Services. The Information Administration Services are provided by HFS Personnel and consist largely of the administrative functions performed by those personnel. b. Group Development Services. Group Development Services include all application maintenance and support services. c. Database Operations Support Services. These services include various computer operations, scheduling services, print services, technical system support services, etc. d. Customer Services. Customer Services consist of the Help Desk, Desktop Supervisors, etc.; e. Data Communication Support Services. These services comprise of e-mail, Local Area Network and related support services (ii) Component 2 - Mainframe Computer Services. HFS currently obtains all Online Processing and BATCH Processing from Advantis, Incorporated. HFS shall provide these same services to NRT through HFS' arrangement with Advantis. (iii) Component 3 - Data Communication Services. HFS currently obtains its Data Communication Services from Advantis, Incorporated. HFS shall provide these same services to NRT through HFS' arrangement with Advantis. With these services, NRT shall be able to access the Mainframe computer through a Systems Network Architecture Network. ARTICLE 2 FEES AND EXPENSES ----------------- Section 2.1 Information Services Fee. ------------------------ (a) In consideration for the Services to be performed or furnished for NRT, NRT agrees to pay HFS the following amounts: (i) NRT will reimburse HFS directly for all actual costs incurred for communications costs incurred by HFS on behalf of NRT, including mainframe, data and voice communications costs. HFS will provide NRT reasonable documentation substantiating HFS' costs charged to NRT under this provision; and (ii) NRT will pay to HFS additional monthly fees for the Services as follows: a. For the period of the Effective Date through December 31, 1997 the additional monthly fee shall be $77,500; b. For the period of January 1, 1998 through December 31, 1998 the additional monthly fee shall be $41,667; and 08/06/97 c. For the period of January 1, 1999 through December 31, 1999 the additional monthly fee shall be $12,500. (b) Monthly fees will be paid on or before the tenth day following the end of the month. Section 2.2 Verifications. -------------- (a) Each of the parties shall maintain its own books, accounts and records in such a way to disclose clearly and accurately the nature and detail of the transactions between them, including such accounting information as is necessary to support the reasonableness of charges made under this Agreement. (b) NRT and its representatives shall be entitled, from time to time during normal business hours, upon reasonable notice to HFS, to conduct an audit of the books, records and accounts of HFS, or their respective affiliates in connection with expenses for which the NRT is liable (whether directly of through reimbursement obligations) under this Article 2, and may request copies of such bills, invoices, statements for services, and the like as are reasonably available to HFS. (c) Each party shall remain the sole owner of its business and corporate records, regardless of the use and possession of any such records by HFS or any of their respective affiliates for the purpose of furnishing the Services. ARTICLE 3 EXCULPATION AND INDEMNIFICATION ------------------------------- Section 3.1 Exculpation and Indemnification. ------------------------------- (a) HFS shall not be liable to NRT for any misconduct, negligence, error or omission in connection with the Services, provided that HFS shall, in good faith, perform and furnish such Services in substantially the same manner and employing substantially the same supervision, guidelines, requirements and standards utilized in connection with the performance and furnishing of similar service for HFS except that HFS shall be liable for and indemnify NRT against any loss, cost or expense arising from the fraud, theft, willful misconduct or gross negligence of any employee of HFS or any of its respective affiliates. (b) Each of the individual's executing this Agreement on behalf of both parties represent and warrant that they have the actual authority to execute this Agreement and bind their respective companies to the terms and conditions of this Agreement. (c) The provisions of this Section 3.1 shall survive the expiration or termination of this Agreement. 08/06/97 ARTICLE 4 TERM AND TERMINATION -------------------- Section 4.1 Term. This Agreement shall become effective on the Effective ----- Date and terminate on December 31, 1999. Notwithstanding the above, after June 30, 1998, NRT may terminate this agreement with ninety (90) days written notice to HFS. Notwithstanding the above, either party, at any time, may, upon sixty (60) days written notice to the other party, terminate this Agreement earlier if the other party materially breaches the Agreement. Section 4.2 Preservations of Rights. Termination or expiration of this ------------------------ Agreement shall not affect: (i) the rights and liabilities hereunder of any party hereto existing, or arising from facts or circumstances existing, on the date of expiration or termination (including, without limitation, any rights to receive payments for Services rendered and reimbursement of expenses incurred); (ii) any other agreement between HFS on the one hand, and NRT, on the other hand; or (iii) any section or provision hereof stated elsewhere herein that survives expiration or termination hereof. ARTICLE 5 MISCELLANEOUS ------------- Section 5.1 Governing Law. THIS AGREEMENT AND THE RIGHTS OF THE PARTIES -------------- HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW JERSEY. Section 5.2 Amendments. No oral explanation or oral information by any ----------- party hereto shall alter the meaning or interpretation of this Agreement. No amendment or change hereof or addition hereto shall be effective or binding on any party hereto unless in writing and executed by each of the parties hereto. Section 5.3 Force Majeure. The failure or delay of any of the parties ------------- hereto to perform any obligation under this Agreement solely by reason of acts of God, acts or failures to act of or by any government, or government agencies, riots, wars, strikes, civil insurrection, natural disasters, lockouts, accidents or congestion in transportation or other causes beyond its control shall not be deemed to be a breach of this Agreement; provided, however, that the party so ------------------ prevented from complying herewith shall continue to take all actions within its power to comply as fully possible herewith. Except where the nature of the event shall prevent it from doing so, the party suffering such force majeure shall notify 08/06/97 the other party in writing within ten (10) days after the occurrence of such force majeure and shall use its best efforts to remove or remedy such cause. Section 5.4 Severability. In the event any term or provision in this ------------ Agreement shall for any reason be invalid, illegal or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired. Section 5.5 Assignability. Neither party hereto may transfer, assign or ------------- delegate any of its duties, obligations, rights or remedies under this Agreement without the prior written consent of the other. Notwithstanding the above, to the extent required, NRT does not object to the Assignment of this Agreement by HFS to the new entity that will be created should HFS, Incorporated complete its announced merger with CUC International, Incorporated. Section 5.6 Notices. To be effective, unless otherwise specified in this ------- Agreement, all notices, requests, demands, consents and other communications under this Agreement must be in writing and shall be deemed given: (a) Three (3) days after depositing the same in the United States mail, postage prepaid, certified or registered, return receipt requested; (b) Upon delivering the same in person and receiving a signed receipt therefor; (c) One day after sending the same by a recognized overnight delivery service; or (d) When sent by telecopy. All notices, requests, demands, consents and other communications under this Agreement shall be addressed as follows, or at such other address as any party hereto may hereafter specify in writing to the other parties hereto. If to HFS: HFS Incorporated 6 Sylvan Way Parsippany, NJ 07054 Attention: James E. Buckman, Esq. Telecopier: (973) 359-5331 If to NRT: NRT Incorporated 6 Sylvan Way Parsippany, NJ 07054 Attention: CFO Section 5.7 No Third Party Beneficiaries. Nothing in this Agreement, ---------------------------- whether express or implied, shall be construed to give any person other than HFS, and NRT and their respective permitted successors and assigns any legal or equitable right, remedy or claim under or in respect of this Agreement or any commitments, covenants or other 08/06/97 provisions contained herein, and the same shall be for the sole benefit of HFS, CBC and NRT and their respective permitted successors and assigns, as the case may be. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives, on the day and year first written above. HFS Incorporated By: /s/ Samuel L. Katz ------------------------------ Name: Samuel L. Katz Title: Sr. V.P. Acquisition NRT Incorporated By: /s/ Joshua Harris ------------------------------ Name: Joshua Harris Title: Vice President EX-10.9 12 ADVISORY SERVICES AGREEMENT Exhibit 10.9 ADVISORY SERVICES AGREEMENT --------------------------- THIS ADVISORY SERVICES AGREEMENT (this "Agreement"), dated as of --------- August 11, 1997, is by and among NRT Incorporated (the "Company"), and Apollo Management L.P. (the "Advisor"). ------- WHEREAS, the Company and the Advisor desire that the Advisor assume and perform the Advisory Services (as defined below). NOW THEREFORE, the Advisor and the Company hereby agree as follows: 1. Defined Terms. -------------- "Advisory Services" shall have the meaning given to it in ----------------- Section 4 of this Agreement. "Commencement Date" shall mean the first date after the ----------------- consummation of the Jon Douglas Acquisition. "Jon Douglas Acquisition" means the proposed acquisition of Jon ----------------------- Douglas Real Estate Services Group, Inc. "Junior Preferred Stock" shall mean the Company's 18.00% Series ---------------------- C Cumulative Junior Redeemable Preferred Stock due 2001. "Losses" shall have the meaning given to it in Section 6 of this ------ Agreement. "Material Adverse Effect" shall mean, with respect to any ----------------------- person, any loss or interference that could, individually or in the aggregate, have a material adverse effect on the condition (financial or other), business, properties, prospects or results of operations of such person and its subsidiaries, taken as a whole. "person" shall mean an individual, partnership, corporation, ------ business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Stockholders Agreement" shall mean that certain Stockholders ---------------------- Agreement, dated as of the date hereof, by and among the Company and each of the stockholders of the Company listed on Schedule A thereto and such other stockholders of the Company as may, from time to time, become parties to such agreement in accordance with the terms thereof. "Termination Date" shall mean the earlier of (i) the date on ---------------- which all of the shares of Junior Preferred Stock issued to the Advisor and its Affiliates has been redeemed and (ii) the date, if any, on which this Agreement is terminated by the Advisor pursuant to notice provided in accordance with Section 7 of this Agreement. 2. Retention. ---------- (a) The Company hereby retains the Advisor to provide the Advisory Services to the Company beginning on the Commencement Date. (b) The Advisor hereby agrees that it shall provide the Advisory Services to the Company until the Termination Date. 3. Representations and Warranties. Each of the Advisor and the ------------------------------ Company represents and warrants to the other that: (a) It (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all power and authority necessary to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, and (iii) is duly qualified as a foreign company and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except where the failure to so qualify would not have a Material Adverse Effect. (b) It has all power and authority necessary to make, deliver and perform its duties under this Agreement. (c) This Agreement has been duly executed and delivered by it. (d) This Agreement constitutes a legal, valid and binding obligation of it, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4. Duties and Rights of the Advisor. -------------------------------- (a) Beginning on the Commencement Date and until the Termination Date, the Advisor shall provide management, advisory and other services (the "Advisory Services"), as mutually agreed upon between the Company and the ----------------- Advisor, for the benefit of the Company. 2 (b) To the extent necessary or appropriate to perform any of the Advisory Services, the Advisor shall have the power to execute and deliver all necessary and appropriate documents and instruments on behalf of the Company with respect to the Advisory Services. (c) The Advisor may delegate all or any part of their duties under this Agreement to one or more submanagers. 5. Compensation and Reimbursement. Beginning on the Commencement ------------------------------ Date and until the Termination Date, the Company shall pay to the Advisor monthly, ten days following the end of each month, a fee in an amount equal to $166,667. 6. Non-Liability of Advisors. The Advisor shall perform on behalf ------------------------- of the Company only the duties that have been specifically delegated to the Advisor in this Agreement and the Advisor shall have no implied covenants or obligations to perform any other duties under this Agreement. The Advisor shall not be responsible for any losses, liabilities, damages, claims or expenses (collectively, the "Losses") incurred by the Company arising from any acts or ------ omissions by the Advisor in connection with the performance of its duties under this Agreement other than Losses resulting or arising from its gross negligence or willful misconduct; provided, however, that the Advisor shall not have any liability or responsibility for any Loss resulting or arising from an act or omission by a submanager. 7. Notice. Any notice or other communication required or permitted ------ to be given under this Agreement shall be given in the manner set forth in Section 6.1 of the Stockholders Agreement. 8. Section Headings. The section headings used in this Agreement ---------------- are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 9. Multiple Counterparts. This Agreement may be executed in one or --------------------- more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10. Invalidity. In the event that any one or more of the provisions ---------- contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. 11. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of the permitted successors, indorsees, transferees and assigns of the Company and the Advisor. 3 12. Entire Agreement; Amendment and Waiver. This Agreement -------------------------------------- constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 13. Choice of Law. This Agreement shall be construed, interpreted and ------------- the rights of the parties determined in accordance with the laws of the State of New York (without reference to its choice of law provisions). Each party irrevocably consents to the service of any and all process in any action or proceeding arising out of or relating to this Agreement by the mailing of copies of such process to each party at its address specified in Section 7. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York (or, if subject matter jurisdiction in that court is not available, in any state court located within the City of New York) over any dispute arising out of or relating to this Agreement or any agreement or instrument contemplated hereby or entered into in connection herewith or any of the transactions contemplated hereby or thereby. Each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and detemlined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum in connection therewith. [signature page follows] 4 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the date first above written. NRT INCORPORATED Samuel L. Katz By: ______________________ Name: Samuel L. Katz Title: President APOLLO MANAGEMENT L.P. Joshua Harris By: _______________________ Name: Joshua Harris Title: Vice President EX-10.10 13 LEASE, DATED AS OF AUGUST 11, 1997 EXHIBIT 10.10 LEASE BETWEEN HFS INCORPORATED LANDLORD AND NRT INCORPORATED TENANT AT 6 SYLVAN WAY PARSIPPANY, NJ 07054 ---------------
TABLE OF CONTENTS ----------------- 1. Parties.......................................... 1 2. Premises......................................... 1 3. Term............................................. 1 4. Possession....................................... 1 5. Rent............................................. 1 6. Security Deposit................................. 2 7. Use.............................................. 2 8. Condition Of Premises............................ 2 9. Observance Of Law................................ 3 10. Hazardous Materials.............................. 3 11. Rights Reserved By Landlord...................... 3 12. Trade Fixtures................................... 4 13. Improvements And Alterations..................... 4 14. Tenant To Keep Premises Free Of Liens............ 5 15. Maintenance And Repairs.......................... 5 16. Insurance........................................ 5 17. Waiver Of Subrogation............................ 6 18. Exemption Of Landlord From Liability............. 7 19. Destruction...................................... 7 20. Condemnation..................................... 7 21. Abatement Of Rent; Tenant's Remedies............. 8 22. Subordination.................................... 8 23. Estoppel Certificate............................. 8 24. Utilities........................................ 9 25. Real Property Taxes And Personal Property Taxes.. 9 26. Assignment And Subletting........................ 9 27. Signage.......................................... 9 28. Tenant Defaults And Remedies..................... 9 29. Default By Landlord.............................. 12 30. Termination...................................... 12 31. Notices.......................................... 12 32. Holding Over..................................... 13 33. Attorney's Fees.................................. 13 34. Consents......................................... 13 35. Force Majeure.................................... 13 36. Waiver........................................... 14 37. Exculpation...................................... 14 38. Severability..................................... 14 39. Surrender Of The Premises........................ 14 40. Brokers And Commissions.......................... 14 41. Miscellaneous.................................... 15 42. Examination...................................... 15 43. Addendum To Lease................................ 15
LEASE 1. PARTIES. This Lease, dated, August __, 1997 is made by and between HFS -------- INCORPORATED, a Delaware corporation, ("Landlord") and NRT INCORPORATED, a Delaware Corporation, ("Tenant"). 2. PREMISES. Landlord hereby leases to Tenant and Tenant leases from landlord --------- for the term, at the rental, and upon all of the conditions set forth herein, certain portions of that certain real property commonly known as 6 Sylvan Way, Parsippany, NJ 07054. 3. TERM. The term of this Lease ("Term") shall be for five (5) years ----- commencing on September __, 1997 the ("Commencement Date") and ending on August 31, 2002. In addition, Tenant is hereby granted one option to extend the term of this Lease, for five (5) years upon 30 days written notice to Landlord ("Option Exercise Notice") prior to the end of the current term. The Parties acknowledge and agree that the amount of space needed by Tenant has not yet been finally determined. Consequently, the Parties agree to negotiate in good faith in determining the premises actually leased as needed by Tenant. 4. POSSESSION. Tenant may assume possession of the Premises on the ----------- Commencement Date. Landlord agrees to perform all buildout functions for Tenant at Landlord's actual costs. Tenant agrees to pay Landlord all buildout costs upon completion of said buildout. 5. RENT. Landlord and Tenant agree that the Rent is on a Full Service Gross ----- basis meaning Tenant shall pay only the monthly rent and Landlord shall be responsible for all other charges associated with the property, including, but not limited to, those listed in Exhibit A attached hereto and made a part hereof. As rental for the Premises during the initial term and option period, Tenant covenants and agrees to pay to Landlord the greater of the following amounts: a. $1.67 per square foot of rental space per month; or b. Landlord's total annual actual costs of operating the Premises. Tenant will pay Landlord the monthly rent of $1.67 per square foot on or before the tenth day of each month based on the actual square feet rented by the Tenant on the first of the month. At the end of each calendar year, Landlord will calculate (True Up) the total, annual, actual costs for operation of the Premises. In the event that Landlord's actual costs exceed the total annual rent or were less than the total annual rent, Tenant will pay Landlord or Landlord will pay Tenant, as the case may be, on or before February 1 of the following calendar year, the difference between Landlord's actual costs for the leased Premises and the total amount of Rent paid during the calendar year. GROSS LEASE (NEW JERSEY) If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to Pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any monthly installment of Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within five (5) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. Any payment of any kind returned for insufficient funds will be subject to an additional handling charge of $25.00. 6. SECURITY DEPOSIT. None. -------- -------- 7. Use. Tenant, along with its successors or assigns, shall be limited in the ---- use of the Premises to that of general business purposes. Tenant shall not conduct any activity or perform any act prohibited by the laws of the United States of America or the state of New Jersey or the ordinances of the city or county in which the Premises is situated and shall not commit waste nor suffer waste to be committed, nor permit any nuisance on or in the Premises. The statement regarding the nature of the business to be conducted by Tenant in the demised Premises shall not be deemed or construed to constitute a representation or guarantee by Landlord that such business may be conducted in the demised Premises. Tenant shall obtain any and all permits, licenses or special hearings needed, necessary and required in conjunction with the operation of said business. Tenant shall not utilize any unethical method of business operation, nor shall any space in the Premises be used for living quarters, whether temporary or permanent. Tenant shall not do anything, or permit anything to be done, in or about the Premises, or bring or keep anything therein, that will in any way increase the possibility of fire or other casualty or do anything in conflict with the valid, pertinent laws, rules or regulations of any governmental authority. Tenant shall not use or keep in the Premises any hazardous, inflammable or explosive fluid or substance or any illuminating material, unless it is battery powered, UL approved. Landlord shall at all times maintain an adequate number of suitable fire extinguishers on the Premises for use in case of local fires, including electrical or chemical fires. 8. CONDITION OF PREMISES. Tenant's taking possession of the Premises shall ---------------------- be conclusive evidence that the Premises was in good order and satisfactory condition when Tenant took possession. No promises of Landlord to alter, remodel, repair or improve the Premises or the Building of which the Premises may be a part have been made GROSS LEASE (NEW JERSEY) -2- by Landlord to Tenant, other than as may be contained herein or in a separate Work Letter Agreement signed by Landlord and Tenant. 9. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to ------------------ be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental or environmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental or environmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirement of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises. The judgment of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 10. HAZARDOUS MATERIALS. Tenant, including its agents, employees, contractors --------- ---------- and invitees, shall not cause nor permit the presence, release, storage, use or handling of any toxic substances or hazardous materials in, about or under the Premises, nor the Building nor the real property of which the Premises may be a part. If Tenant breaches the obligations stated in the preceding sentence, or if the presence of any such toxic substances or hazardous materials on or about the Premises caused or permitted by Tenant results in contamination of the Premises, the real property of which the Premises may be a part, or any adjacent property, then Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises and/or adjacent property, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises and/or adjacent property, damages arising from any adverse impact on marketing of the Premises and/or adjacent property, costs incurred in connection with any cleanup, remedial, removal or restoration work, and sums paid in settlement of claims, attorney's fees, consultant fees and expert fees) which arise during or after the Term hereof, as a result of such contamination. Nothing contained herein shall be deemed or construed to limit the liability of Tenant to Landlord hereunder for the breach of any covenant of Tenant under this Section. The provisions of this Section shall survive the expiration or earlier termination of this Lease and Tenant's surrender of the Premises to Landlord. 11. RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights: ------ -------- -- --------- a) After thirty (30) days notice to Tenant, to change the name, number or designation of the Building of which the Premises may be a part during the term of this Lease or any extensions hereof without liability to Tenant; -3- GROSS LEASE (NEW JERSEY) b) To constantly have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes. Said keys shall only be for use in the event of emergency; c) To exhibit the Premises to prospective tenants during the last one hundred and eighty (180) days of the term, and to exhibit the Premises at any time during the term to any prospective purchaser, mortgagee, or assignee of any mortgagee on the property on which the Premises may be situated and to others having a legitimate interest; d) Tenant shall permit Landlord at any time to enter the Premises to examine and inspect the same or make such repairs, additions or alterations as the Landlord may deem necessary or proper for the safety, improvement, or preservation thereof. Landlord shall at all times have the right at its reasonable election to make such alterations or changes in other portions of the Building of which the Premises may be a part as it may from time to time deem necessary or desirable. Landlord shall not be liable to Tenant for any damage or inconvenience thereby suffered by Tenant. 12. TRADE FIXTURES. Tenant may install telephone systems, computers and trade --------------- fixtures at its own expense during the term of this Lease. At the termination of this Lease, Tenant may either leave the trade fixtures or remove some or all of them, at the option of Landlord. If Tenant removes trade fixtures any damage caused by such removal shall be repaired by Tenant at Tenant's sole expense. In the event Tenant fails to remove such office equipment and trade fixtures at the termination of this Lease after being requested by Landlord so to do, the same shall be deemed abandoned by Tenant, and shall immediately become the property of Landlord. Landlord shall have the right, without notice to Tenant, to sell or otherwise dispose of same, at the expense of Tenant, and Landlord shall not be accountable to Tenant for any part of the proceeds of such sale. 13. IMPROVEMENTS AND ALTERATIONS. Tenant shall not make or allow any ----------------------------- alterations, additions or improvements to the Premises without first obtaining the written consent of Landlord. Any alterations, additions, or improvements made to the Premises at the expense of Tenant, including but not limited to, wall covering, carpeting or other floor covering, paneling and built-in cabinets shall be deemed a part of the real estate and the property of Landlord and shall be surrendered with the Premises unless Landlord, by notice given to Tenant no later than thirty (30) days prior to the end of the Term, shall elect to have Tenant remove such alterations, additions, or improvements. Tenant shall thereupon accomplish such removal at its sole cost and repair any damage to the Premises or the Building of which the Premises may be a part caused by such removal. In the event that Landlord consents in writing to any alterations, additions, or improvements to the Premises by Tenant, they shall be made at the sole cost of Tenant by licensed contractors or workmen approved by Landlord. Tenant shall secure all appropriate governmental approvals and permits and shall complete such alterations with due diligence. Any consent or approval given by Landlord hereunder shall not give rise to rights to third parties to file mechanic's or materialman's liens, nor waive Landlord's prohibition against such liens, nor -4- GROSS LEASE (NEW JERSEY) in any manner abrogate that Section of this Lease requiring Tenant to keep Premises free of liens. 14. TENANT TO KEEP PREMISES FREE OF LIENS. Tenant shall keep the Premises and -------------------------------------- the property on which the Building and the Premises is situated free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. Tenant shall indemnify, hold harmless, and defend Landlord from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Tenant. Such indemnity shall include, without limitation, all attorneys' fees and costs incurred by Landlord due to the filing of any such mechanic's and/or materialman's lien or notice thereof. In the event that Tenant, within twenty (20) days following the imposition of any such lien, shall not cause such lien to be released of record by payment or posting of a proper bond, in addition to all other remedies proved herein and by law, Landlord shall have the right (but not the obligation) to cause the same, to be released by such means as it shall deem proper, including bonding or payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith, including attorneys' fees and costs, shall be payable to Landlord by Tenant on demand with the highest legal interest rate. Landlord shall have the right at all times to give notice or to post and keep posted on the Premises any notice permitted or required by law which Landlord shall deem proper for the protection of Landlord and the Premises or any other party having an interest therein from mechanic's and materialman's liens. Tenant shall give written notice to Landlord at least ten (10) business days prior to the commencement of any work relating to alterations or additions to the Premises and shall post the Premises giving all such persons notice of Landlord's non-liability for work performed or materials supplied. Failure to provide Landlord such notice or post the Premises shall be deemed a material breach of this Lease. 15. MAINTENANCE AND REPAIRS. ----------------------- Tenant shall keep in good order, condition and repair the non-structural portions of the interior of the Premises and every part thereof (whether or not the need for such repairs occurs as a result of Tenant's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment within the Premises, fixtures, walls, ceilings, floors, windows, doors, plate glass and skylights located within the Premises. 16. INSURANCE. ---------- Tenant, during the term and any other period of occupancy, will at its expense maintain insurance reasonably satisfactory to Landlord, but in no event less than: a) Commercial general liability insurance with combined single limits not less than $1,000,000 per occurrence for personal injury or death and property damage occurring in or about or related to the use of the Premises; -5- GROSS LEASE (NEW JERSEY) b) "All Risk" Insurance for the full replacement cost of all Tenant's property in the Premises and all fixtures. Unless this Lease is terminated upon damage or destruction, the proceeds of such insurance will be used to restore the foregoing; c) Worker's Compensation (as required by state law), and Employer's Liability Insurance in the amount of not less than $5,000,000; All policies required hereunder will be issued by carriers rated A:VII or better by Best's Key Rating guide and licensed to do business in the State of California. The policies shall name Landlord and any other person or entity that Landlord may designate from time to time as additional insureds, with primary coverage non-contributing to any insurance such entities may carry, and shall provide that coverage cannot be canceled or materially changed except upon thirty (30) days prior written notice to Landlord. At least thirty (30) days prior to expiration of such policies, and promptly upon any other request by Landlord, Tenant shall furnish Landlord with copies of Policies, or Certificates of Insurance, evidencing maintenance and renewal of the required coverage. In the event Tenant does not maintain said insurance, Landlord may, in its sole discretion and without waiving any other remedies hereunder, procure said insurance and Tenant shall pay to Landlord as rent the cost of said insurance plus a twenty percent (20%) administrative fee. During the term of this Lease, including all extensions thereof, Landlord shall, at Landlord's expense, insure the Building of which the Premises may be a part (excluding any property which Tenant is obligated to insure) against damage with "All Risk" Insurance and public liability insurance, all in such amounts and with such deductions as Landlord considers appropriate. Landlord may, but shall not be obligated to, obtain and carry any other form or forms of insurance as it or its mortgagees may determine advisable. Tenant has no right to receive any proceeds from any insurance policies carried by Landlord. Notwithstanding anything in the foregoing to the contrary, however, Landlord may self-insure. If any of Landlord's insurance is (or is threatened to be) canceled or has coverage reduced in any way because of Tenant's or its employee's acts or omissions, Landlord may terminate this Lease and/or may enter upon the Premises at Tenant's cost and without liability to Tenant, and attempt to remedy such condition. A schedule issued by the organization computing the insurance rate shall be conclusive evidence. 17. WAIVER OF SUBROGATION. Each party hereby releases and relieves the other ---------------------- and waives the right of recovery against the other for loss or damage to property arising out of or incident to perils commonly insured against under all-risk coverage insurance whether due to the negligence of either party, its agents, employees, contractors and/or invitees. -6- GROSS LEASE (NEW JERSEY 18. EXEMPTION OF LANDLORD FROM LIABILITY. Except for acts or omissions of ------------------------------------- Landlord, Tenant shall defend, indemnify and hold Landlord harmless from and against all costs, expenses, attorneys' fees, liabilities and damages arising out of (a) any breach or default on the part of Tenant in the observance or performance of any of its agreements or obligations under this Lease, and (b) any injury or damage to any person or property occurring in or on the Premises or any other part of the property on which the Premises may be situated, caused by the acts or omissions of Tenant, its agents, employees or contractors. All personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Building of which the Premises may be a part shall be there at the risk of Tenant or of such other person only, and Landlord, its agents and employees shall not be liable for any damage thereto or for the theft or misappropriation thereof unless such damage, theft or misappropriation is a result of the sole negligence of Landlord or Landlord's agents or employees. In addition, in no event shall Landlord be liable for loss of business of Tenant nor salaries paid to Tenant's employees, agents, or contractors, nor for any latent defect in the Premises or in the Building of which the Premises may be a part. 19. DESTRUCTION. "Destruction" shall mean damage or destruction to the ------------ Premises or the Building of which the Premises may be a part, including parking, to the extent that the cost of the repair is greater than 30% of the fair market value thereof immediately prior to such damage or destruction. If at any time during the term of this Lease there is damage to such Building or the Premises, including parking area, whether or not insured (including destruction required by any authorized public authority), which falls into the classification of Destruction, Landlord shall have the right to terminate this Lease by giving Tenant written notice of such election to terminate within thirty (30) days following such Destruction. Upon the giving of such notice, this Lease shall terminate as of the date of such Destruction. If at any time during the term of this Lease there is damage which does not fall within the classification of Destruction, such damage shall be repaired by Landlord at Landlord's expense and, in such event, there shall be no abatement of rent. 20. CONDEMNATION. "Condemnation" shall mean the taking of more than 30% of the ------------- rentable space in the Building of which the Premises may be a part or any part of the Premises by a governmental body under condemnation law or similar authority. In the event of condemnation Landlord shall have the right to terminate this Lease by giving Tenant written notice of such election to terminate within thirty (30) days following such Condemnation. Upon the giving of such notice, this Lease shall terminate as of the date of such Condemnation. If there is a lesser taking, then Tenant's rental shall be proportionately reduced to the extent its use of the Building is impaired. Tenant shall have no claim against Landlord and shall not have any claim or rights to any portion of the -7- GROSS LEASE (NEW JERSEY) amount that may be awarded as damages or paid as a result of any such condemnation; and all rights of Tenant to damages therefor, if any, are hereby assigned by Tenant to Landlord. 21. ABATEMENT OF RENT; TENANT'S REMEDIES. In the event of damage described in ------------------------------------- the "Destruction" and/or "Condemnation" Sections of this Lease, while Landlord repairs or restores the Premises, the rent payable hereunder for the period during which such damage, repair and restoration continues shall be abated in proportion to the degree to which Tenant's use of the Premises is impaired. 22. SUBORDINATION. This Lease is subject and subordinate to all ground or -------------- underlying leases now or hereafter entered into and to all present mortgages affecting the real estate on which the Building of which the Premises may be a part, or such Building, to all renewals and extensions thereof (if any), and to any mortgage or deed of trust which may hereafter be executed affecting the real estate upon which such Building is located, or such Building. Tenant hereby agrees to execute, if the same is required or requested, any and all instruments in writing to subordinate Tenant's rights acquired by this Lease to the lien of any such mortgage, lease, or deed of trust. Tenant hereby appoints Landlord its attorney-in-fact irrevocably to execute, acknowledge, and deliver any such instrument or instruments for Tenant as Landlord may determine necessary to carry out the intent of this Section. Notwithstanding the foregoing, Tenant agrees to attorn to any purchaser at foreclosure sale, to any grantee or transferee designated in any deed given in lieu of foreclosure, or to any mortgagee in possession, and this Lease shall thereafter continue in full force and effect. 23. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to time, upon --------------------- not less than five (5) days prior written notice from Landlord, execute, acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the rental, the security deposit, if any, and other charges are paid in advance, if any, and acknowledging that, to the best of Tenant's knowledge, there are no uncured defaults on the part of Landlord hereunder and no events or conditions then in existence, which, with the passage of time or notice or both, would constitute a default on the part of Landlord hereunder or specifying such defaults, events, or conditions if any are claimed. It is expressly understood and agreed that any such statement may be relied upon by Landlord or any prospective purchaser or encumbrancer of all or any portion of the Building of which the Premises may be a part or the property upon which it is situated. Tenant's failure to deliver such statement within such time shall constitute a breach and default under this Lease, and shall be conclusive upon Tenant that this Lease is in full force and effect without modifications except as may be represented by Landlord, and that there are no uncured defaults in Landlord's performance. -8- GROSS LEASE (NEW JERSEY) 24. UTILITIES. Landlord shall pay for all water, gas, heat, light, power, and ---------- other utilities and services supplied to the Premises, except telephone which shall be Tenant's responsibility. 25. REAL PROPERTY TAXES AND PERSONAL PROPERTY TAXES. Landlord shall pay prior ------------------------------------------------ to delinquency all real estate taxes assessed against and levied upon the Premises and the real property of which the Premises is a part. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises. 26. ASSIGNMENT AND SUBLETTING. Tenant may not assign, sublease, transfer, -------------------------- sell, encumber or otherwise convey its interest in this Lease, or any portion thereof, or its interest in the Premises, or any portion thereof, without the prior written consent of Landlord, which consent may be granted or withheld in the sole discretion of Landlord. Any such attempted purported assignment, subletting, transfer, sale, encumbrance or other conveyance obtained without first obtaining such prior written consent shall be void and of no force or effect, and shall not confer any interest or estate in the purported transferee and shall, at Landlord's option, constitute an incurable default under this Lease. 27. SIGNAGE. Tenant may install exterior building signs if allowed by law and -------- in conformance with local sign ordinances after obtaining Landlord's written approval of the drawings. The removal of such signage shall be treated in the same fashion as the removal of Trade Fixtures as set forth in Section 12 of this Lease. 28. TENANT DEFAULTS AND REMEDIES. ----------------------------- DEFAULTS. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a) If Tenant shall fail to make any payment of any rent when due and payable, and such default shall continue for a period of five (5) days; or b) (i) If Tenant shall be in default in the performance of any of the other terms, covenants or conditions of this Lease and such default shall not have been remedied within ten (10) days after written notice by Landlord to Tenant specifying such default and requiring it to be remedied; or (ii) where such default reasonably cannot be remedied within such period of ten (10) days, if Tenant shall not have commenced the remedying thereof within such period of time and shall not be proceeding with due diligence to remedy it; or c) If Tenant shall desert or abandon the Premises and such desertion or abandonment shall continue for a period of ten (10) days; or -9- GROSS LEASE (NEW JERSEY) d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition of reorganization or arrangement under any law relating to bankruptcy unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days; or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where possession is not restored to Tenant within thirty (30) days; or the attachment, execution, or judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days after the levy thereof. REMEDIES. Upon the occurrence of an event of default, Landlord, in addition to any other rights or remedies available to Landlord at law or in equity, shall have all of the rights and remedies of a landlord as provided under New Jersey law including the right to a) terminate this Lease and all rights of Tenant under this Lease by giving Tenant written notice that this Lease is terminated, in which case Landlord may recover from Tenant the aggregate sum of (i) the worth at the time of award of any unpaid Rent that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which (A) the unpaid Rent that would have been earned after termination until the time of award exceeds (B) the amount of the Rental loss, if any, as Tenant affirmatively proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which (A) the unpaid Rent for the balance of the term after the time of award exceeds (B) the amount of Rental loss, if any, as Tenant affirmatively proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all the detriment caused by Tenant's failure to perform Tenant's obligations or that, in the ordinary course of things, would be likely to result from Tenant's failure; and (v) all other amounts in addition to or in lieu of those previously set out as may be permitted from time to time by applicable New Jersey law. As used in clauses (i) and (ii) of subsection (a) of this Section, the "worth at the time of award" is computed by allowing interest at the rate of ten percent (10%) per annum. As used in clause (iii) of subsection (a) of this Section, the "worth at the time of award" is computed by discounting that amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). As used in -10- GROSS LEASE (NEW JERSEY) this Section, the term "Rent" shall include Base Rent and any other payments required by Tenant under this Lease. b) continue this Lease, and from time to time, without terminating this Lease either (i) recover all Rent and other amounts payable as they become due or (ii) relet the Premises or any part on behalf of Tenant on terms and at the rent that Landlord, in Landlord's sole discretion, may deem advisable, all with the right to make alterations and repairs to the Premises, at Tenant's cost, and apply the proceeds of reletting to the Rent and other amounts payable by Tenant. To the extent that the Rent and other amounts payable by Tenant under this Lease exceed the amount of the proceeds from reletting, the Landlord may recover the excess from Tenant as and when due. c) Upon the occurrence of an event of default, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises. Landlord may store the property removed from the Premises in a public warehouse or elsewhere at the expense and for the account of Tenant. d) None of the following remedial actions, alone or in combination, shall be construed as an election by Landlord to terminate this Lease unless Landlord has in fact given Tenant written notice that this Lease is terminated or unless a court of competent jurisdiction decrees termination of this Lease: any act by Landlord to maintain or preserve the Premises; any efforts by Landlord to relet the Premises; any re-entry, repossession, or reletting of the Premises; or any re-entry, repossession, or reletting of the Premises by Landlord pursuant to this Section. If Landlord takes any of the previous remedial actions without terminating this Lease, Landlord may nevertheless at any later time terminate this Lease by written notice to Tenant. e) If Landlord relets the Premises, Landlord shall apply the revenue from the reletting as follows: first, to the payment of any indebtedness other than Rent due from Tenant to Landlord; second, to the payment of any cost of reletting, including without limitation finder's fees and leasing commissions; third, to the payment of the cost of any maintenance and repairs to the Premises; and fourth, to the payment of Rent and other amounts due and unpaid under this Lease. Landlord shall hold and apply the residue, if any, to payment of future amounts payable under this Lease as the same may become due, and shall be entitled to retain the eventual balance with no liability to Tenant. If the revenue from reletting during any month, after application pursuant to the previous provisions, is less than the sum of (i) Landlord's expenditures for the Premises, during that month and (ii) the amounts due from Tenant during that month, Tenant shall pay the deficiency to Landlord immediately upon demand. -11- GROSS LEASE (NEW JERSEY) f) After the occurrence of an event of default, Landlord, in addition to or in lieu of exercising other remedies, may, but without any obligation to do so, cure the breach underlying the event of default for the account and at the expense of Tenant. However, Landlord must by prior notice first allow Tenant a reasonable opportunity to cure, except in cases of emergency, where Landlord may proceed without prior notice to Tenant. Tenant shall, upon demand, immediately reimburse Landlord for all costs, including costs of settlements, defense, court costs, and attorney fees, that Landlord may incur in the course of any cure. g) No security or guaranty for the performance of Tenant's obligations that Landlord may now or later hold shall in any way constitute a bar or defense to any action initiated by Landlord for unlawful detainer or for the recovery of the Premises, for enforcement of any obligation of Tenant, or for the recovery of damages caused by a breach of this Lease by Tenant or by an event of default. h) Except where this is inconsistent with or contrary to any provisions of this Lease, no right or remedy conferred upon or reserved to either party is intended to be exclusive of any other right or remedy, or any right or remedy given or now or later existing at law or in equity or by statute. 29. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord -------------------- fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant. If the nature of Landlord's obligation is such that more than thirty (30) days is required for performance then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes same to completion; however, Tenant shall not be entitled to reasonable rental abatement from the date of default. 30. TERMINATION. Either Landlord or Tenant may terminate this Lease, without ------------ penalty, with or without cause upon One-Hundred and Eighty (180) days written Notice to the other party. In addition to all post termination obligations as well as the terms and conditions that survive the termination of this Lease Agreement, both Landlord and Tenant agree to comply with all terms and conditions of this Lease Agreement until the Tenant vacates the premises. 31. NOTICES. Any notice, demand, consent, payment or communication given -------- hereunder shall be in writing and shall be given by personal delivery, by commercial overnight delivery service or by certified mail, postage prepaid, return receipt requested at the following address: To Landlord: HFS Incorporated 6 Sylvan Way Parsippany, NJ 07054 Attention: General Counsel -12- GROSS LEASE (NEW JERSEY) If to Tenant: NRT Incorporated 6 Sylvan Way Parsippany, NJ 07054 Attention: President Either Landlord or Tenant may, by like notice at any time and from time to time, designate a different address to which such notice shall be sent. Such notices, requests, consents, payments or communications shall be deemed sufficiently given (a) if personally served, upon such service, (b) if sent by commercial overnight delivery service, upon the next business day following such sending, or (c) if mailed, forty-eight (48) hours following the first attempt of the postal service to deliver same. 32. HOLDING OVER. If Tenant, with Landlord's consent, remains in possession of ------------- the Premises after the expiration of the Term, such occupancy shall be a tenancy from month to month upon all of the provisions of this Lease at 100% of the last-paid monthly rental rate. If Tenant fails to surrender the Premises after expiration or termination of the Lease, Tenant shall indemnify, defend and hold Landlord harmless from all loss or liability, including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises, and losses to Landlord due to lost opportunities to lease any portion of the Premises to succeeding tenants, together with, in each case, actual attorney's fees and court costs. 33. ATTORNEYS' FEES. If either party brings an action to enforce the terms ---------------- hereof, the prevailing party shall be entitled to receive reasonable attorneys' fees and court costs from the other party. 34. CONSENTS. Notwithstanding anything contained in this Lease to the --------- contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. 35. FORCE MAJEURE. Landlord shall have no liability whatsoever to Tenant on -------------- account of (a) the inability or delay of Landlord in fulfilling any of Landlord's obligations under this Lease by reason of war, strike, other labor trouble, governmental controls in connection with a national or other public emergency, or shortages of fuel, supplies or labor resulting therefrom or any other cause, whether similar or dissimilar to the above, beyond Landlord's reasonable control; or (b) any failure or defect in the supply, quantity or character of electricity or water furnished to the Premises, by reason of any requirement, act or omission of the public utility or others furnishing the Premises with electricity or water, or for any reason, whether similar or dissimilar to the above, beyond Landlord's reasonable control. Any time period for performance of an obligation of -13- GROSS LEASE (NEW JERSEY) Landlord shall be extended by the period of any delay in Landlord's performance caused by any of the events of force majeure described above. 36. WAIVER. No delay or omission in the exercise of any right or remedy of ------- Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such right, remedy or default. The receipt and acceptance by Landlord of delinquent rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular rent payment involved. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. 37. EXCULPATION. If Landlord or any successor in interest be an individual, ------------ corporation, joint venture, tenancy in common, co-partnership, or other unincorporated aggregate of individuals or a mortgagee (all of which are herein referred to individually and collectively as "Landlord"), then anything elsewhere in this Lease to the contrary notwithstanding, Tenant shall look solely to the estate and property of such Landlord in the Building of which the Premises may be a part for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants, or conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of such Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies. 38. SEVERABILITY. If any clause or provision of this Lease is or becomes ------------- illegal, invalid, or unenforceable because of present or future laws or judicial interpretations, or any rule or regulation of any governmental body or entity, effective during its Term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such invalidity is, in the sole determination of Landlord, essential to the rights of both parties in which event Landlord has the right to terminate this Lease on written notice to Tenant. 39. SURRENDER OF THE PREMISE. At the termination of this Lease, Tenant shall ------------------------- return the Premises broom-clean and in as good condition as when Tenant took possession, ordinary wear and tear excepted, failing which Landlord may restore the Premises to such condition and Tenant shall pay the cost thereof on demand. 40. BROKERS AND COMMISSIONS. Deleted. ------------------------ -14- GROSS LEASE (NEW JERSEY) 41. MISCELLANEOUS. No act or conduct of Landlord, including, without -------------- limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by both parties or their respective successors in interest. The captions, section numbers and table of contents appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of this Lease nor in any way affect this Lease. This Lease, and the rights and obligations of the parties hereto, shall be construed and enforced in accordance with the laws of the State of New Jersey. Except as otherwise expressly provided herein, the terms and agreements as contained in this Lease shall apply to, run in favor of, and shall be binding upon and inure to the benefit of, the parties hereto, and also their respective heirs, executors, administrators, personal representatives, assigns and successors in interest. Nothing herein contained shall be deemed or construed as creating the relationship of principal and agent or of partnership or joint venture between the parties hereto; it being understood and agreed that neither the method of computing rent nor any provision contained herein nor any acts of the parties hereto shall be deemed to create any relationship between the parties other than that of landlord and tenant. 42. EXAMINATION. The submission of this Lease to Tenant shall be for ------------ examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the property on which the Premises may be situated. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. 43. ADDENDUM TO LEASE. The "Addendum to Lease" attached hereto and executed ------------------ contemporaneously herewith, containing Section 43, is incorporated herein by reference as though fully set forth. -15- GROSS LEASE NEW JERSEY) IN WITNESS WHEREOF, the parties have executed this Lease as of the date first written above. HFS Incorporated By: /s/ Samuel L. Katz --------------------------- Name: Samuel L. Katz Title: Sr. V.P.--Acquisitions Landlord NRT INCORPORATED By: /s/ Joshua Harris --------------------------- Title: Vice President Tenant -16- GROSS LEASE (NEW JERSEY) EXHIBIT A 1. Landlord, at Landlord's sole cost and expense, shall provide the following: a. Janitorial service b. Mail services c. Building supplies (e.g., cleaning products, paper goods, etc.) d. Office supplies e. Security f. General lobby reception 2. Landlord shall also be responsible for payment of all other costs related to the building and Premises including, but not limited to the following: a. Property tax b. Property insurance c. Maintenance and repairs of building and Premises Exhibit A GROSS LEASE (NEW JERSEY) ADDENDUM TO LEASE ----------------- THIS ADDENDUM is to that certain lease ("Lease") dated, for reference purposes only, May 7, 1997 by and between HFS Incorporated, a Delaware corporation, ("Landlord") and NRT Incorporated, a Delaware corporation, ("Tenant"), is executed contemporaneously therewith, is to be deemed a part thereof and incorporated therein. 43. ADJUSTMENT OF PREMISES. Landlord acknowledges that in order to suit its ----------------------- business purpose, Tenant's space requirements may vary from time to time and Tenant shall be allowed to reduce or increase the square footage of the Premises as needed and as space becomes available. Tenant shall give Landlord sixty (60) days notice of its intent to adjust the size of or reallocate the space in the Premises. Said adjustments and/or reallocations shall be accomplished pursuant to an amendment to the Lease and the rental amount due shall be amended accordingly. IN WITNESS WHEREOF, the parties have executed this Addendum to Lease contemporaneously with the Lease to which it is attached. HFS INCORPORATED By: /s/ Samuel L. Katz ----------------------------- Name: Samuel L. Katz Title: Sr. V.P.--Acquisitions Landlord NRT INCORPORATED By: /s/ Joshua Harris --------------------------- Title: Vice President Tenant -1- EX-10.11 14 LEASE, DATED AS OF AUGUST 11, 1997 EXHIBIT 10.11 LEASE BETWEEN HFS INCORPORATED LANDLORD AND NRT INCORPORATED TENANT AT 27271 LAS RAMBLAS MISSION VIEJO, CA 92691 ---------------------
TABLE OF CONTENTS ----------------- 1. Parties.......................................... 1 2. Premises......................................... 1 3. Term............................................. 1 4. Possession....................................... 1 5. Rent............................................. 1 6. Security Deposit................................. 2 7. Use.............................................. 2 8. Condition Of Premises............................ 2 9. Observance Of Law................................ 3 10. Hazardous Materials.............................. 3 11. Rights Reserved By Landlord...................... 3 12. Trade Fixtures................................... 4 13. Improvements And Alterations..................... 4 14. Tenant To Keep Premises Free Of Liens............ 5 15. Maintenance And Repairs.......................... 5 16. Insurance........................................ 5 17. Waiver Of Subrogation............................ 6 18. Exemption Of Landlord From Liability............. 7 19. Destruction...................................... 7 20. Condemnation..................................... 7 21. Abatement Of Rent; Tenant's Remedies............. 8 22. Subordination.................................... 8 23. Estoppel Certificate............................. 8 24. Utilities........................................ 9 25. Real Property Taxes And Personal Property Taxes.. 9 26. Assignment And Subletting........................ 9 27. Signage.......................................... 9 28. Tenant Defaults And Remedies..................... 9 29. Default By Landlord.............................. 12 30. Termination...................................... 12 31. Notices.......................................... 12 32. Holding Over..................................... 13 33. Attorney's Fees.................................. 13 34. Consents......................................... 13 35. Force Majeure.................................... 13 36. Waiver........................................... 14 37. Exculpation...................................... 14 38. Severability..................................... 14 39. Surrender Of The Premises........................ 14 40. Brokers And Commissions.......................... 14 41. Miscellaneous.................................... 15 42. Examination...................................... 15 43. Addendum To Lease................................ 15
LEASE 1. Parties. This Lease, dated, August __, 1997 is made by and between HFS -------- INCORPORATED, a Delaware corporation, ("Landlord") and NRT INCORPORATED, a Delaware Corporation, ("Tenant"). 2. Premises. Landlord hereby leases to Tenant and Tenant leases from --------- Landlord for the term, at the rental, and upon all of the conditions set forth herein, certain portions of that certain real property commonly known as 27271 Las Ramblas, Mission Viejo, CA 92691. 3. Term. The term of this Lease ("Term") shall be for five (5) years ----- commencing on September __, 1997 the ("Commencement Date") and ending on August 31, 2002. In addition, Tenant is hereby granted one option to extend the term of this Lease, for five (5) years upon 30 days written notice to Landlord ("Option Exercise Notice") prior to the end of the current term. The Parties acknowledge and agree that the amount of space needed by Tenant has not yet been finally determined. Consequently, the Parties agree to negotiate in good faith in determining the premises actually leased as needed by Tenant. 4. Possession. Tenant may assume possession of the Premises on the ----------- Commencement Date. Landlord agrees to perform all buildout functions for Tenant at Landlord's actual costs. Tenant agrees to pay Landlord all buildout costs upon completion of said buildout. 5. Rent. Landlord and Tenant agree that the Rent is on a Full Service ----- Gross basis meaning Tenant shall pay only the monthly rent and Landlord shall be responsible for all other charges associated with the property, including, but not limited to, those listed in Exhibit A attached hereto and made a part hereof. As rental for the Premises during the initial term and option period, Tenant covenants and agrees to pay to Landlord the greater of the following amounts: a. $1.67 per square foot of rental space per month; or b. Landlord's total annual actual costs of operating the Premises. Tenant will pay Landlord the monthly rent of $1.67 per square foot on or before the tenth day of each month based on the actual square feet rented by the Tenant on the first of the month. At the end of each calendar year, Landlord will calculate (True Up) the total, annual, actual costs for operation of the Premises. In the event that Landlord's actual costs exceed the total annual rent or were less than the total annual rent, Tenant will pay Landlord or Landlord will pay Tenant, as the case may be, on or before February 1 of the following calendar year, the difference between Landlord's actual costs for the leased Premises and the total amount of Rent paid during the calendar year. GROSS LEASE (CALIFORNIA) If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to Pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any monthly installment of Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within five (5) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. Any payment of any kind returned for insufficient funds will be subject to an additional handling charge of $25.00. 6. SECURITY DEPOSIT. None. ---------------- 7. Use. Tenant, along with its successors or assigns, shall be limited in ---- the use of the Premises to that of general business purposes. Tenant shall not conduct any activity or perform any act prohibited by the laws of the United States of America or the state of California or the ordinances of the city or county in which the Premises is situated and shall not commit waste nor suffer waste to be committed, nor permit any nuisance on or in the Premises. The statement regarding the nature of the business to be conducted by Tenant in the demised Premises shall not be deemed or construed to constitute a representation or guarantee by Landlord that such business may be conducted in the demised Premises. Tenant shall obtain any and all permits, licenses or special hearings needed, necessary and required in conjunction with the operation of said business. Tenant shall not utilize any unethical method of business operation, nor shall any space in the Premises be used for living quarters, whether temporary or permanent. Tenant shall not do anything, or permit anything to be done, in or about the Premises, or bring or keep anything therein, that will in any way increase the possibility of fire or other casualty or do anything in conflict with the valid, pertinent laws, rules or regulations of any governmental authority. Tenant shall not use or keep in the Premises any hazardous, inflammable or explosive fluid or substance or any illuminating material, unless it is battery powered, UL approved. Landlord shall at all times maintain an adequate number of suitable fire extinguishers on the Premises for use in case of local fires, including electrical or chemical fires. 8. CONDITION OF PREMISES. Tenant's taking possession of the Premises ---------------------- shall be conclusive evidence that the Premises was in good order and satisfactory condition when Tenant took possession. No promises of Landlord to alter, remodel, repair or improve the Premises or the Building of which the Premises may be a part have been made GROSS LEASE (CALIFORNIA) -2- by Landlord to Tenant, other than as may be contained herein or in a separate Work Letter Agreement signed by Landlord and Tenant. 9. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything ------------------ to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental or environmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental or environmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirement of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises. The judgment of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 10. HAZARDOUS MATERIALS. Tenant, including its agents, employees, --------- ---------- contractors and invitees, shall not cause nor permit the presence, release, storage, use or handling of any toxic substances or hazardous materials in, about or under the Premises, nor the Building nor the real property of which the Premises may be a part. If Tenant breaches the obligations stated in the preceding sentence, or if the presence of any such toxic substances or hazardous materials on or about the Premises caused or permitted by Tenant results in contamination of the Premises, the real property of which the Premises may be a part, or any adjacent property, then Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises and/or adjacent property, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises and/or adjacent property, damages arising from any adverse impact on marketing of the Premises and/or adjacent property, costs incurred in connection with any cleanup, remedial, removal or restoration work, and sums paid in settlement of claims, attorney's fees, consultant fees and expert fees) which arise during or after the Term hereof, as a result of such contamination. Nothing contained herein shall be deemed or construed to limit the liability of Tenant to Landlord hereunder for the breach of any covenant of Tenant under this Section. The provisions of this Section shall survive the expiration or earlier termination of this Lease and Tenant's surrender of the Premises to Landlord. 11. RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights: --------------------------- a) After thirty (30) days notice to Tenant, to change the name, number or designation of the Building of which the Premises may be a part during the term of this Lease or any extensions hereof without liability to Tenant; GROSS LEASE (CALIFORNIA) -3- b) To constantly have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes. Said keys shall only be for use in the event of emergency; c) To exhibit the Premises to prospective tenants during the last one hundred and eighty (180) days of the term, and to exhibit the Premises at any time during the term to any prospective purchaser, mortgagee, or assignee of any mortgagee on the property on which the Premises may be situated and to others having a legitimate interest; d) Tenant shall permit Landlord at any time to enter the Premises to examine and inspect the same or make such repairs, additions or alterations as the Landlord may deem necessary or proper for the safety, improvement, or preservation thereof. Landlord shall at all times have the right at its reasonable election to make such alterations or changes in other portions of the Building of which the Premises may be a part as it may from time to time deem necessary or desirable. Landlord shall not be liable to Tenant for any damage or inconvenience thereby suffered by Tenant. 12. TRADE FIXTURES. Tenant may install telephone systems, computers and --------------- trade fixtures at its own expense during the term of this Lease. At the termination of this Lease, Tenant may either leave the trade fixtures or remove some or all of them, at the option of Landlord. If Tenant removes trade fixtures any damage caused by such removal shall be repaired by Tenant at Tenant's sole expense. In the event Tenant fails to remove such office equipment and trade fixtures at the termination of this Lease after being requested by Landlord so to do, the same shall be deemed abandoned by Tenant, and shall immediately become the property of Landlord. Landlord shall have the right, without notice to Tenant, to sell or otherwise dispose of same, at the expense of Tenant, and Landlord shall not be accountable to Tenant for any part of the proceeds of such sale. 13. IMPROVEMENTS AND ALTERATIONS. Tenant shall not make or allow any ----------------------------- alterations, additions or improvements to the Premises without first obtaining the written consent of Landlord. Any alterations, additions, or improvements made to the Premises at the expense of Tenant, including but not limited to, wall covering, carpeting or other floor covering, paneling and built-in cabinets shall be deemed a part of the real estate and the property of Landlord and shall be surrendered with the Premises unless Landlord, by notice given to Tenant no later than thirty (30) days prior to the end of the Term, shall elect to have Tenant remove such alterations, additions, or improvements. Tenant shall thereupon accomplish such removal at its sole cost and repair any damage to the Premises or the Building of which the Premises may be a part caused by such removal. In the event that Landlord consents in writing to any alterations, additions, or improvements to the Premises by Tenant, they shall be made at the sole cost of Tenant by licensed contractors or workmen approved by Landlord. Tenant shall secure all appropriate governmental approvals and permits and shall complete such alterations with due diligence. Any consent or approval given by Landlord hereunder shall not give rise to rights to third parties to file mechanic's or materialman's liens, nor waive Landlord's prohibition against such liens, nor -4- GROSS LEASE (CALIFORNIA) in any manner abrogate that Section of this Lease requiring Tenant to keep Premises free of liens. 14. TENANT TO KEEP PREMISES FREE OF LIENS. Tenant shall keep the Premises -------------------------------------- and the property on which the Building and the Premises is situated free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. Tenant shall indemnify, hold harmless, and defend Landlord from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Tenant. Such indemnity shall include, without limitation, all attorneys' fees and costs incurred by Landlord due to the filing of any such mechanic's and/or materialman's lien or notice thereof. In the event that Tenant, within twenty (20) days following the imposition of any such lien, shall not cause such lien to be released of record by payment or posting of a proper bond, in addition to all other remedies proved herein and by law, Landlord shall have the right (but not the obligation) to cause the same, to be released by such means as it shall deem proper, including bonding or payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith, including attorneys' fees and costs, shall be payable to Landlord by Tenant on demand with the highest legal interest rate. Landlord shall have the right at all times to give notice or to post and keep posted on the Premises any notice permitted or required by law which Landlord shall deem proper for the protection of Landlord and the Premises or any other party having an interest therein from mechanic's and materialman's liens. Tenant shall give written notice to Landlord at least ten (10) business days prior to the commencement of any work relating to alterations or additions to the Premises and shall post the Premises giving all such persons notice of Landlord's non-liability for work performed or materials supplied. Failure to provide Landlord such notice or post the Premises shall be deemed a material breach of this Lease. 15. MAINTENANCE AND REPAIRS. ----------------------- Tenant shall keep in good order, condition and repair the non-structural portions of the interior of the Premises and every part thereof (whether or not the need for such repairs occurs as a result of Tenant's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment within the Premises, fixtures, walls, ceilings, floors, windows, doors, plate glass and skylights located within the Premises. 16. INSURANCE. ---------- Tenant, during the term and any other period of occupancy, will at its expense maintain insurance reasonably satisfactory to Landlord, but in no event less than: a) Commercial general liability insurance with combined single limits not less than $1,000,000 per occurrence for personal injury or death and property damage occurring in or about or related to the use of the Premises; GROSS LEASE (CALIFORNIA) -5- b) "All Risk" Insurance for the full replacement cost of all Tenant's property in the Premises and all fixtures. Unless this Lease is terminated upon damage or destruction, the proceeds of such insurance will be used to restore the foregoing; c) Worker's Compensation (as required by state law), and Employer's Liability Insurance in the amount of not less than $5,000,000; All policies required hereunder will be issued by carriers rated A:VII or better by Best's Key Rating guide and licensed to do business in the State of California. The policies shall name Landlord and any other person or entity that Landlord may designate from time to time as additional insureds, with primary coverage non-contributing to any insurance such entities may carry, and shall provide that coverage cannot be canceled or materially changed except upon thirty (30) days prior written notice to Landlord. At least thirty (30) days prior to expiration of such policies, and promptly upon any other request by Landlord, Tenant shall furnish Landlord with copies of Policies, or Certificates of Insurance, evidencing maintenance and renewal of the required coverage. In the event Tenant does not maintain said insurance, Landlord may, in its sole discretion and without waiving any other remedies hereunder, procure said insurance and Tenant shall pay to Landlord as rent the cost of said insurance plus a twenty percent (20%) administrative fee. During the term of this Lease, including all extensions thereof, Landlord shall, at Landlord's expense, insure the Building of which the Premises may be a part (excluding any property which Tenant is obligated to insure) against damage with "All Risk" Insurance and public liability insurance, all in such amounts and with such deductions as Landlord considers appropriate. Landlord may, but shall not be obligated to, obtain and carry any other form or forms of insurance as it or its mortgagees may determine advisable. Tenant has no right to receive any proceeds from any insurance policies carried by Landlord. Notwithstanding anything in the foregoing to the contrary, however, Landlord may self-insure. If any of Landlord's insurance is (or is threatened to be) canceled or has coverage reduced in any way because of Tenant's or its employee's acts or omissions, Landlord may terminate this Lease and/or may enter upon the Premises at Tenant's cost and without liability to Tenant, and attempt to remedy such condition. A schedule issued by the organization computing the insurance rate shall be conclusive evidence. 17. WAIVER OF SUBROGATION. Each party hereby releases and relieves the ---------------------- other and waives the right of recovery against the other for loss or damage to property arising out of or incident to perils commonly insured against under all-risk coverage insurance whether due to the negligence of either party, its agents, employees, contractors and/or invitees. -6- GROSS LEASE (CALIFORNIA) 18. EXEMPTION OF LANDLORD FROM LIABILITY. Except for acts or omissions of ------------------------------------- Landlord, Tenant shall defend, indemnify and hold Landlord harmless from and against all costs, expenses, attorneys' fees, liabilities and damages arising out of (a) any breach or default on the part of Tenant in the observance or performance of any of its agreements or obligations under this Lease, and (b) any injury or damage to any person or property occurring in or on the Premises or any other part of the property on which the Premises may be situated, caused by the acts or omissions of Tenant, its agents, employees or contractors. All personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Building of which the Premises may be a part shall be there at the risk of Tenant or of such other person only, and Landlord, its agents and employees shall not be liable for any damage thereto or for the theft or misappropriation thereof unless such damage, theft or misappropriation is a result of the sole negligence of Landlord or Landlord's agents or employees. In addition, in no event shall Landlord be liable for loss of business of Tenant nor salaries paid to Tenant's employees, agents, or contractors, nor for any latent defect in the Premises or in the Building of which the Premises may be a part. 19. DESTRUCTION. "Destruction" shall mean damage or destruction to the ------------ Premises or the Building of which the Premises may be a part, including parking, to the extent that the cost of the repair is greater than 30% of the fair market value thereof immediately prior to such damage or destruction. If at any time during the term of this Lease there is damage to such Building or the Premises, including parking area, whether or not insured (including destruction required by any authorized public authority), which falls into the classification of Destruction, Landlord shall have the right to terminate this Lease by giving Tenant written notice of such election to terminate within thirty (30) days following such Destruction. Upon the giving of such notice, this Lease shall terminate as of the date of such Destruction. If at any time during the term of this Lease there is damage which does not fall within the classification of Destruction, such damage shall be repaired by Landlord at Landlord's expense and, in such event, there shall be no abatement of rent. 20. CONDEMNATION. "Condemnation" shall mean the taking of more than 30% ------------- of the rentable space in the Building of which the Premises may be a part or any part of the Premises by a governmental body under condemnation law or similar authority. In the event of condemnation Landlord shall have the right to terminate this Lease by giving Tenant written notice of such election to terminate within thirty (30) days following such Condemnation. Upon the giving of such notice, this Lease shall terminate as of the date of such Condemnation. If there is a lesser taking, then Tenant's rental shall be proportionately reduced to the extent its use of the Building is impaired. Tenant shall have no claim against Landlord and shall not have any claim or rights to any portion of the amount that may be awarded as damages or paid as a result of any such condemnation; -7- GROSS LEASE (CALIFORNIA) and all rights of Tenant to damages therefor, if any, are hereby assigned by Tenant to Landlord. 21. ABATEMENT OF RENT; TENANT'S REMEDIES. In the event of damage described ------------------------------------- in the "Destruction" and/or "Condemnation" Sections of this Lease, while Landlord repairs or restores the Premises, the rent payable hereunder for the period during which such damage, repair and restoration continues shall be abated in proportion to the degree to which Tenant's use of the Premises is impaired. 22. SUBORDINATION. This Lease is subject and subordinate to all ground or -------------- underlying leases now or hereafter entered into and to all present mortgages affecting the real estate on which the Building of which the Premises may be a part, or such Building, to all renewals and extensions thereof (if any), and to any mortgage or deed of trust which may hereafter be executed affecting the real estate upon which such Building is located, or such Building. Tenant hereby agrees to execute, if the same is required or requested, any and all instruments in writing to subordinate Tenant's rights acquired by this Lease to the lien of any such mortgage, lease, or deed of trust. Tenant hereby appoints Landlord its attorney-in-fact irrevocably to execute, acknowledge, and deliver any such instrument or instruments for Tenant as Landlord may determine necessary to carry out the intent of this Section. Notwithstanding the foregoing, Tenant agrees to attorn to any purchaser at foreclosure sale, to any grantee or transferee designated in any deed given in lieu of foreclosure, or to any mortgagee in possession, and this Lease shall thereafter continue in full force and effect. 23. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to time, --------------------- upon not less than five (5) days prior written notice from Landlord, execute, acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the rental, the security deposit, if any, and other charges are paid in advance, if any, and acknowledging that, to the best of Tenant's knowledge, there are no uncured defaults on the part of Landlord hereunder and no events or conditions then in existence, which, with the passage of time or notice or both, would constitute a default on the part of Landlord hereunder or specifying such defaults, events, or conditions if any are claimed. It is expressly understood and agreed that any such statement may be relied upon by Landlord or any prospective purchaser or encumbrancer of all or any portion of the Building of which the Premises may be a part or the property upon which it is situated. Tenant's failure to deliver such statement within such time shall constitute a breach and default under this Lease, and shall be conclusive upon Tenant that this Lease is in full force and effect without modifications except as may be represented by Landlord, and that there are no uncured defaults in Landlord's performance. GROSS LEASE (CALIFORNIA) -8- 24. UTILITIES. Landlord shall pay for all water, gas, heat, light, power, ---------- and other utilities and services supplied to the Premises, except telephone which shall be Tenant's responsibility. 25. REAL PROPERTY TAXES AND PERSONAL PROPERTY TAXES. Landlord shall pay ------------------------------------------------ prior to delinquency all real estate taxes assessed against and levied upon the Premises and the real property of which the Premises is a part. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises. 26. ASSIGNMENT AND SUBLETTING. Tenant may not assign, sublease, transfer, -------------------------- sell, encumber or otherwise convey its interest in this Lease, or any portion thereof, or its interest in the Premises, or any portion thereof, without the prior written consent of Landlord, which consent may be granted or withheld in the sole discretion of Landlord. Any such attempted purported assignment, subletting, transfer, sale, encumbrance or other conveyance obtained without first obtaining such prior written consent shall be void and of no force or effect, and shall not confer any interest or estate in the purported transferee and shall, at Landlord's option, constitute an incurable default under this Lease. 27. SIGNAGE. Tenant may install exterior building signs if allowed by law -------- and in conformance with local sign ordinances after obtaining Landlord's written approval of the drawings. The removal of such signage shall be treated in the same fashion as the removal of Trade Fixtures as set forth in Section 12 of this Lease. 28. TENANT DEFAULTS AND REMEDIES. ----------------------------- DEFAULTS. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a) If Tenant shall fail to make any payment of any rent when due and payable, and such default shall continue for a period of five (5) days; or b) (i) If Tenant shall be in default in the performance of any of the other terms, covenants or conditions of this Lease and such default shall not have been remedied within ten (10) days after written notice by Landlord to Tenant specifying such default and requiring it to be remedied; or (ii) where such default reasonably cannot be remedied within such period of ten (10) days, if Tenant shall not have commenced the remedying thereof within such period of time and shall not be proceeding with due diligence to remedy it; or c) If Tenant shall desert or abandon the Premises and such desertion or abandonment shall continue for a period of ten (10) days; or -9- GROSS LEASE (CALIFORNIA) d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition of reorganization or arrangement under any law relating to bankruptcy unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days; or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where possession is not restored to Tenant within thirty (30) days; or the attachment, execution, or judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days after the levy thereof. REMEDIES. Upon the occurrence of an event of default, Landlord, in addition to any other rights or remedies available to Landlord at law or in equity, shall have all of the rights and remedies of a landlord as provided under California law including the right to a) terminate this Lease and all rights of Tenant under this Lease by giving Tenant written notice that this Lease is terminated, in which case Landlord may recover from Tenant the aggregate sum of (i) the worth at the time of award of any unpaid Rent that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which (A) the unpaid Rent that would have been earned after termination until the time of award exceeds (B) the amount of the Rental loss, if any, as Tenant affirmatively proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which (A) the unpaid Rent for the balance of the term after the time of award exceeds (B) the amount of Rental loss, if any, as Tenant affirmatively proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all the detriment caused by Tenant's failure to perform Tenant's obligations or that, in the ordinary course of things, would be likely to result from Tenant's failure; and (v) all other amounts in addition to or in lieu of those previously set out as may be permitted from time to time by applicable California law. As used in clauses (i) and (ii) of subsection (a) of this Section, the "worth at the time of award" is computed by allowing interest at the rate of ten percent (10%) per annum. As used in clause (iii) of subsection (a) of this Section, the "worth at the time of award" is computed by discounting that amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). As used in - 10 - GROSS LEASE (CALIFORNIA) this Section, the term "Rent" shall include Base Rent and any other payments required by Tenant under this Lease. b) continue this Lease, and from time to time, without terminating this Lease either (i) recover all Rent and other amounts payable as they become due or (ii) relet the Premises or any part on behalf of Tenant on terms and at the rent that Landlord, in Landlord's sole discretion, may deem advisable, all with the right to make alterations and repairs to the Premises, at Tenant's cost, and apply the proceeds of reletting to the Rent and other amounts payable by Tenant. To the extent that the Rent and other amounts payable by Tenant under this Lease exceed the amount of the proceeds from reletting, the Landlord may recover the excess from Tenant as and when due. c) Upon the occurrence of an event of default, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises. Landlord may store the property removed from the Premises in a public warehouse or elsewhere at the expense and for the account of Tenant. d) None of the following remedial actions, alone or in combination, shall be construed as an election by Landlord to terminate this Lease unless Landlord has in fact given Tenant written notice that this Lease is terminated or unless a court of competent jurisdiction decrees termination of this Lease: any act by Landlord to maintain or preserve the Premises; any efforts by Landlord to relet the Premises; any re-entry, repossession, or reletting of the Premises; or any re-entry, repossession, or reletting of the Premises by Landlord pursuant to this Section. If Landlord takes any of the previous remedial actions without terminating this Lease, Landlord may nevertheless at any later time terminate this Lease by written notice to Tenant. e) If Landlord relets the Premises, Landlord shall apply the revenue from the reletting as follows: first, to the payment of any indebtedness other than Rent due from Tenant to Landlord; second, to the payment of any cost of reletting, including without limitation finder's fees and leasing commissions; third, to the payment of the cost of any maintenance and repairs to the Premises; and fourth, to the payment of Rent and other amounts due and unpaid under this Lease. Landlord shall hold and apply the residue, if any, to payment of future amounts payable under this Lease as the same may become due, and shall be entitled to retain the eventual balance with no liability to Tenant. If the revenue from reletting during any month, after application pursuant to the previous provisions, is less than the sum of (i) Landlord's expenditures for the Premises, during that month and (ii) the amounts due from Tenant during that month, Tenant shall pay the deficiency to Landlord immediately upon demand. -11- GROSS LEASE (CALIFORNIA) f) After the occurrence of an event of default, Landlord, in addition to or in lieu of exercising other remedies, may, but without any obligation to do so, cure the breach underlying the event of default for the account and at the expense of Tenant. However, Landlord must by prior notice first allow Tenant a reasonable opportunity to cure, except in cases of emergency, where Landlord may proceed without prior notice to Tenant. Tenant shall, upon demand, immediately reimburse Landlord for all costs, including costs of settlements, defense, court costs, and attorney fees, that Landlord may incur in the course of any cure. g) No security or guaranty for the performance of Tenant's obligations that Landlord may now or later hold shall in any way constitute a bar or defense to any action initiated by Landlord for unlawful detainer or for the recovery of the Premises, for enforcement of any obligation of Tenant, or for the recovery of damages caused by a breach of this Lease by Tenant or by an event of default. h) Except where this is inconsistent with or contrary to any provisions of this Lease, no right or remedy conferred upon or reserved to either party is intended to be exclusive of any other right or remedy, or any right or remedy given or now or later existing at law or in equity or by statute. 29. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord -------------------- fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant. If the nature of Landlord's obligation is such that more than thirty (30) days is required for performance then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes same to completion; however, Tenant shall not be entitled to reasonable rental abatement from the date of default. 30. TERMINATION. Either Landlord or Tenant may terminate this Lease, ------------ without penalty, with or without cause upon One-Hundred and Eighty (180) days written Notice to the other party. In addition to all post termination obligations as well as the terms and conditions that survive the termination of this Lease Agreement, both Landlord and Tenant agree to comply with all terms and conditions of this Lease Agreement until the Tenant vacates the premises. 31. NOTICES. Any notice, demand, consent, payment or communication given -------- hereunder shall be in writing and shall be given by personal delivery, by commercial overnight delivery service or by certified mail, postage prepaid, return receipt requested at the following address: To Landlord: HFS Incorporated 6 Sylvan Way Parsippany, NJ 07054 Attention: General Counsel GROSS LEASE (CALIFORNIA) -12- If to Tenant: NRT Incorporated 6 Sylvan Way Parsippany, NJ 07054 Attention: President Either Landlord or Tenant may, by like notice at any time and from time to time, designate a different address to which such notice shall be sent. Such notices, requests, consents, payments or communications shall be deemed sufficiently given (a) if personally served, upon such service, (b) if sent by commercial overnight delivery service, upon the next business day following such sending, or (c) if mailed, forty-eight (48) hours following the first attempt of the postal service to deliver same. 32. Holding Over. If Tenant, with Landlord's consent, remains in ------------- possession of the Premises after the expiration of the Term, such occupancy shall be a tenancy from month to month upon all of the provisions of this Lease at 100% of the last-paid monthly rental rate. If Tenant fails to surrender the Premises after expiration or termination of the Lease, Tenant shall indemnify, defend and hold Landlord harmless from all loss or liability, including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises, and losses to Landlord due to lost opportunities to lease any portion of the Premises to succeeding tenants, together with, in each case, actual attorney's fees and court costs. 33. ATTORNEYS' FEES. If either party brings an action to enforce the terms ---------------- hereof, the prevailing party shall be entitled to receive reasonable attorneys' fees and court costs from the other party. 34. CONSENTS. Notwithstanding anything contained in this Lease to the --------- contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. 35. FORCE MAJEURE. Landlord shall have no liability whatsoever to Tenant -------------- on account of (a) the inability or delay of Landlord in fulfilling any of Landlord's obligations under this Lease by reason of war, strike, other labor trouble, governmental controls in connection with a national or other public emergency, or shortages of fuel, supplies or labor resulting therefrom or any other cause, whether similar or dissimilar to the above, beyond Landlord's reasonable control; or (b) any failure or defect in the supply, quantity or character of electricity or water furnished to the Premises, by reason of any requirement, act or omission of the public utility or others furnishing the Premises with electricity or water, or for any reason, whether similar or dissimilar to the above, beyond Landlord's reasonable control. Any time period for performance of an obligation of -13- GROSS LEASE (CALIFORNIA) Landlord shall be extended by the period of any delay in Landlord's performance caused by any of the events of force majeure described above. 36. Waiver. No delay or omission in the exercise of any right or remedy of ------- Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such right, remedy or default. The receipt and acceptance by Landlord of delinquent rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular rent payment involved. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. 37. EXCULPATION. If Landlord or any successor in interest be an ------------ individual, corporation, joint venture, tenancy in common, co-partnership, or other unincorporated aggregate of individuals or a mortgagee (all of which are herein referred to individually and collectively as "Landlord"), then anything elsewhere in this Lease to the contrary notwithstanding, Tenant shall look solely to the estate and property of such Landlord in the Building of which the Premises may be a part for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants, or conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of such Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies. 38. SEVERABILITY. If any clause or provision of this Lease is or becomes ------------- illegal, invalid, or unenforceable because of present or future laws or judicial interpretations, or any rule or regulation of any governmental body or entity, effective during its Term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such invalidity is, in the sole determination of Landlord, essential to the rights of both parties in which event Landlord has the right to terminate this Lease on written notice to Tenant. 39. SURRENDER OF THE PREMISE. At the termination of this Lease, Tenant ------------------------- shall return the Premises broom-clean and in as good condition as when Tenant took possession, ordinary wear and tear excepted, failing which landlord may restore the Premises to such condition and Tenant shall pay the cost thereof on demand. 40. BROKERS AND COMMISSIONS. Deleted. ------------------------ -14- GROSS LEASE (CALIFORNIA) 41. MISCELLANEOUS. No act or conduct of Landlord, including, without -------------- limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by both parties or their respective successors in interest. The captions, section numbers and table of contents appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of this Lease nor in any way affect this Lease. This Lease, and the rights and obligations of the parties hereto, shall be construed and enforced in accordance with the laws of the State of California. Except as otherwise expressly provided herein, the terms and agreements as contained in this Lease shall apply to, run in favor of, and shall be binding upon and inure to the benefit of, the parties hereto, and also their respective heirs, executors, administrators, personal representatives, assigns and successors in interest. Nothing herein contained shall be deemed or construed as creating the relationship of principal and agent or of partnership or joint venture between the parties hereto; it being understood and agreed that neither the method of computing rent nor any provision contained herein nor any acts of the parties hereto shall be deemed to create any relationship between the parties other than that of landlord and tenant. 42. EXAMINATION. The submission of this Lease to Tenant shall be for ------------ examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the property on which the Premises may be situated. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. 43. ADDENDUM TO LEASE. The "Addendum to Lease" attached hereto and ----------------- executed contemporaneously herewith, containing Section 43, is incorporated herein by reference as though fully set forth. -15- GROSS LEASE (CALIFORNIA) IN WITNESS WHEREOF, the parties have executed this Lease as of the date first written above. HFS INCORPORATED By: /s/ Samuel L. Katz --------------------------------- Samuel L. Katz Sr, V.P. Acquisition Landlord NRT INCORPORATED By: /s/ Joshua Harris ------------------------------- Vice President Tenant -16- GROSS LEASE (CALIFORNIA) EXHIBIT A 1. Landlord, at Landlord's sole cost and expense, shall provide the following: a. Janitorial service b. Mail services c. Building supplies (e.g., cleaning products, paper goods, etc.) d. Office supplies e. Security f. General lobby reception 2. Landlord shall also be responsible for payment of all other costs related to the building and Premises including, but not limited to the following: a. Property tax b. Property insurance c. Maintenance and repairs of building and Premises Exhibit A GROSS LEASE (CALIFORNIA) ADDENDUM TO LEASE ----------------- THIS ADDENDUM is to that certain lease ("Lease") dated, for reference purposes only, May 7, 1997 by and between HFS Incorporated, a Delaware corporation, ("Landlord") and NRT Incorporated, a Delaware corporation, ("Tenant"), is executed contemporaneously therewith, is to be deemed a part thereof and incorporated therein. 43. ADJUSTMENT OF PREMISES. Landlord acknowledges that in order to suit ----------------------- its business purpose, Tenant's space requirements may vary from time to time and Tenant shall be allowed to reduce or increase the square footage of the Premises as needed and as space becomes available. Tenant shall give Landlord sixty (60) days notice of its intent to adjust the size of or reallocate the space in the Premises. Said adjustments and/or reallocations shall be accomplished pursuant to an amendment to the Lease and the rental amount due shall be amended accordingly. IN WITNESS WHEREOF, the parties have executed this Addendum to Lease contemporaneously with the Lease to which it is attached. HFS INCORPORATED By: /s/ Samuel L. Katz ------------------------------------ Samuel L. Katz Sr. V.P. Acquisitions Landlord NRT INCORPORATED By: /s/ Joshua Harris ------------------------------------ Vice President Tenant - 1 - EX-10.12 15 ACQUISITION SERVICES AGREEMENT EXHIBIT 10.12 ACQUISITION SERVICES AGREEMENT ------------------------------ ACQUISITION SERVICES AGREEMENT (this "Agreement"), dated as of --------- February 9, 1999, by and among NRT Incorporated, a Delaware corporation (the "Company"), and Cendant Corporation, a Delaware corporation ("Cendant"). - -------- ------- WHEREAS, concurrent with the execution hereof, Cendant and the Company are entering into an Acquisition Cooperation Agreement (the "Acquisition ----------- Cooperation Agreement") relating to, among other things, Cendant's participation - --------------------- in real estate brokerage acquisitions completed by the Company after the date hereof; WHEREAS, the Company and Cendant desire that the Company provide Cendant with certain Advisory Services (as defined below) in connection with brokerage acquisitions by the Company pursuant to the Acquisition Cooperation Agreement; and WHEREAS, on the date hereof, Cendant has paid the Company $30 million in cash, the receipt of which is hereby acknowledged, as an advance payment in respect of the Advisory Services to be provided hereunder. NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements and covenants contained herein, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Provision of Advisory Services. Beginning on the date ------------------------------ hereof and continuing until the earlier of (i) the date on which Cendant's commitment under Section 2.1(c) of the Acquisition Cooperation Agreement has been exhausted or (ii) such earlier date as the Company and Cendant may mutually agree to terminate this Agreement (the "Termination Date"), the Company shall ---------------- provide advisory services to Cendant relating to the identification of acquisition candidates, the negotiation of agreements and other services in connection with brokerage acquisitions by the Company occurring after the date hereof pursuant to the Acquisition Cooperation Agreement (such services being referred to herein as the "Advisory Services"), the extent of such services to ----------------- be mutually agreed upon by the Company and Cendant. Section 2. Compensation. Cendant has paid the Company $30 million ------------ on the date hereof, the receipt of which is hereby acknowledged by the Company, as an advance payment for the Advisory Services to be provided hereunder (the "Advance"). The fees to be charged for the Advisory Services to be provided hereunder, which shall be charged against such Advance as such services are provided, are set forth on Schedule I to this Agreement. In the event that this Agreement has terminated in accordance with its terms, any remaining portion of the Advance which has not been earned by the Company for the provision of Advisory Services hereunder shall be refunded to Cendant promptly following such termination. Cendant shall use its reasonable best efforts to utilize the services to be provided by the Company hereunder, and shall utilize such services in connection with each brokerage acquisition presented to Cendant for its participation pursuant to the Acquisition Cooperation Agreement; provided -------- that Cendant may determine not to utilize such services if it agrees nonetheless to permit an offset against the Advance of the minimum amount that would have been payable under this Agreement had such services been provided. In no event shall Cendant be obligated to pay additional amounts to the Company in respect of the Advisory Services to be provided pursuant to this Agreement. Section 3. Non-Liability of the Company. The Company shall only be ---------------------------- responsible for providing the Advisory Services in accordance with this Agreement shall have no implied covenants or obligations to perform any other duties or provide any other services under this Agreement. The Company shall not be responsible for any losses, liabilities, damages, claims or expenses (collectively, the "Losses") incurred by Cendant arising from any acts or ------ omissions by the Company in connection with the performance of its duties under this Agreement other than Losses resulting or arising from its gross negligence or willful misconduct. Section 4. Notice. Any notice or other communication required or ------ permitted to be given under this Agreement shall be given in the manner set forth in Section 3.1 of the Acquisition Cooperation Agreement. Section 5. Binding Nature of Agreement; No Third Party Beneficiaries. --------------------------------------------------------- This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto or their successors in interest. Nothing in this Agreement shall convey any rights upon any person or entity which is not a party or an assignee of a party to this Agreement. Section 6. Descriptive Headings. The descriptive headings of the -------------------- several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. Section 7. Specific Performance. Without limiting the rights of each -------------------- party hereto to pursue all other legal and equitable rights available to such party for the other parties' failure to perform their obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. Section 8. Governing Law. This Agreement shall be construed and ------------- enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York, without regard to the principles of conflicts of law. Each party irrevocably consents to the service of any and all process in any action or proceeding arising out of or relating to this Agreement by the mailing of copies of such process to each party at its address specified herein. 2 The parties hereto irrevocably submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York (or, if subject matter jurisdiction in that court is not available, in any state court located within the City of New York) over any dispute arising out of or relating to this Agreement or any agreement or instrument contemplated hereby or entered into in connection herewith or any of the transactions contemplated hereby or thereby. Each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum in connection therewith. Section 9. Counterparts. This Agreement may be executed ------------ simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Section 10. Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unen forceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. Section 11. Entire Agreement. This Agreement is intended by the ---------------- parties hereto as a final and complete expression of their agreement and understanding in respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understandings, written or oral, between the parties with respect to such subject matter. Section 12. Amendment and Waiver. Any provision of this Agreement -------------------- may be amended if, but only if, such amendment is in writing and is signed by each of the parties hereto. 3 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the date first above written. NRT INCORPORATED By: /s/ Steven L. Barnett ------------------------------------- Name: Steven L. Barnett Title: Senior Vice President, General Counsel and Secretary CENDANT CORPORATION By: /s/ Samuel L. Katz ------------------------------------- Name: Samuel L. Katz Title: Executive Vice President 4 SCHEDULE I ---------- ADVISORY SERVICE FEES The fees to be charged against the Advance pursuant to this Agreement will be earned by the Company on a transaction by transaction basis and be based on the following table: Transaction Size Fees Per Transaction - ---------------- -------------------- Annual gross commission income of 3% of Total Acquisition Cost (as the acquired brokerage is less than defined in the Acquisition $10 million Cooperation Agreement) plus $2,000 per office Annual gross commission income of the 2% of Total Acquisition Cost plus acquired brokerage is less than $100 $2,000 per office million but greater than or equal to $10 million Annual gross commission income of the 1.5% of Total Acquisition Cost acquired brokerage is greater than or plus $2,000 per office equal to $100 million 5 EX-10.13 16 DEVELOPMENT ADVANCE PROMISSORY NOTE Exibit 10.13 DEVELOPMENT ADVANCE PROMISSORY NOTE $18,750,000 Parsippany, New Jersey Dated: September 1, 1997 1. FOR GOOD AND VALUABLE CONSIDERATION, the undersigned NRT INCORPORATED ("Maker") promises to pay to COLDWELL BANKER REAL ESTATE CORPORATION or its successors or assigns ("Holder"), or order, on August 14, 2037, at 6 Sylvan Way, Parsippany, New Jersey, or at such other place as Holder may from time to time designate, in writing, the principal sum of $18,750,000 (the "Principal"), which amount shall, except as set forth below, bear no interest. 2. If Maker is not in material default with respect to its obligations under any franchise or membership agreement with Holder or any affiliate thereof (including Century 21 Real Estate Corporation and ERA Franchise Systems, Inc.), as each may be amended from time to time (the "Franchise Agreements") (including payment of Royalties and Advertising Fees thereunder) $39,062.50 of the Principal (the "Monthly Principal") shall be forgiven on September 14, 1997 and on the fourteenth day of each month until August 14, 2037. On each such date, to the extent no Monthly Principal has been forgiven on such date as provided for herein, an amount of Principal equal to the Monthly Principal shall become due and payable. In the event Maker fails to make any payment when due, including any payment due upon acceleration of this Note, the entire outstanding Principal shall thereafter bear simple interest at a rate equal to the lesser of fifteen percent (15%) per annum or the highest rate allowed by law from its due date until paid in full. 3. All payments shall be made in lawful money of the United States of America without set-off, offset, recoupment, deduction or counterclaim of any kind whatsoever. Payments, when made, shall first be applied to accrued and unpaid interest, if any, and then to Principal. 4. Maker may prepay this Note in whole or in part on any date without premium or penalty. No partial prepayment shall extend or postpone the due date of any subsequent installment payment or change the amount of the installment payment. Prepayments will be applied without notation on this Note. 5. Holder of this Note may determine that Maker is in default and may accelerate the unpaid Principal and all interest accrued thereon to become immediately due and payable, without presentment for payment or any notice or demand, (A) if Maker (i) suspends business; (ii) becomes insolvent or offers settlement to any creditors; (iii) files a petition in bankruptcy, either voluntary or involuntary; (iv) institutes any proceeding under any bankruptcy or insolvency laws relating to the relief of debtors or (v) makes an assignment for the benefit of creditors, (B) upon material breach of any of the Franchise Agreements or (C) upon termination of any of the Franchise Agreements. For the purposes of this Note, a material breach of a Franchise Agreement shall mean that Maker shall have been given notice of a default thereunder which would constitute grounds for termination under such agreement in accordance with the terms of such agreement, and, as to those defaults for which the Maker is afforded an opportunity to cure pursuant to such agreement, Maker shall have failed to make such cure within the applicable period provided. Maker's obligation to pay the Principal and interest thereon, if accelerated, shall be absolute and unconditional, and shall not be subject to any rights of set-off, offset or recoupment. 1 of 3 6. Holder of this Note may determine that Maker is in default and may accelerate the unpaid Principal and all interest accrued thereon to become immediately due and payable, without presentment for payment or any notice or demand, if Maker fails to maintain a minimum gross commission income in any continuous rolling twelve month period during the term of this Note of $425,000,000. The rolling twelve month average will be calculated commencing on the date hereof and include the previous twelve months; thereafter the GCI test will be calculated on the same basis each following month. For purposes of this paragraph only, Maker will receive credit for GCI from Maker's offices that are sold during the term of this Note so long as the sold offices remain affiliated with one or more of the franchised real estate brands owned by HFS Incorporated (currently Coldwell Banker, Century 21 and ERA). Maker will only receive credit under this paragraph for GCI earned on offices that were operating as of May 31, 1996 (it being understood that such offices were at such time being operated by National Realty Trust) (the "Measurement Offices"). Commencing on September 30, 1997 and continuing on the thirtieth day of each month thereafter, Holder will review the GCI for each of the Measurement Offices to ensure that the combined GCI for all such offices maintains the required twelve month rolling average. 7. Maker agrees to pay all expenditures made in any attempt to collect any amounts due pursuant to this Note. If any legal action is necessary to enforce or collect this Note, the prevailing party shall be entitled to reasonable attorney's fees (including in-house attorneys) and court costs and all costs of collection in addition to any other relief to which that party may be entitled. 8. Maker hereby waives, to the fullest extent permitted by law, diligence, demand, notice of demand, presentment for payment, notice of non-payment, notice of dishonor, protest and notice of protest. The claiming of any statute of limitations as a defense to any demand against Maker is expressly waived by Maker. 9. This Note shall be construed and enforced in accordance with the laws of the State of New Jersey. The terms of this Note are confidential and will not be disclosed to any third party by Maker without the prior written consent of Holder, unless otherwise required by law. 10. This Note shall be binding upon Maker and its heirs, executors, personal representatives, successors and assigns and shall inure to the benefit of Holder and its successors and assigns. This Note shall not be assignable by Maker without the prior written consent of Holder. IN WITNESS WHEREOF, the undersigned Maker has executed this Note as of the date first set forth above. NRT INCORPORATED By: /s/ Thomas J. Freeman ---------------------- Name: Thomas J. Freeman Title: Senior Vice President 2 0f 3 Holder acknowledges that this Note replaces the Promissory Note, dated January 14, 1997, executed by National Realty Trust and Coldwell Banker Residential Brokerage Corporation in favor of Coldwell Banker Residential Affiliates, Inc., in the principal amount of $20,000,000, which promissory note is hereby cancelled with no further obligations thereunder. Coldwell Banker Real Estate Corporation (formerly Coldwell Banker Residential Affiliates, Inc.) By: /s/ John Kornfeind ----------------------- Name: John Kornfeind Title: 3 0f 3 56567 EX-10.14 17 CREDIT AGREEMENT - -------------------------------------------------------------------------------- EXHIBIT 10.14 CREDIT AGREEMENT among NRT INCORPORATED, VARIOUS LENDING INSTITUTIONS, THE CHASE MANHATTAN BANK, AS ARRANGER and SYNDICATION AGENT, and BANKERS TRUST COMPANY, AS ARRANGER and ADMINISTRATIVE AGENT ________________________________ Dated as of January 7, 1999 ________________________________ - -------------------------------------------------------------------------------- TABLE OF CONTENTS ------------------
Page ---- SECTION 1. Amount and Terms of Credit 2 1.01 Commitments.................................................................... 2 1.02 Minimum Borrowing Amounts, etc................................................. 5 1.03 Notice of Borrowing............................................................ 5 1.04 Disbursement of Funds.......................................................... 6 1.05 Notes.......................................................................... 7 1.06 Conversions.................................................................... 8 1.07 Pro Rata Borrowings............................................................ 9 1.08 Interest....................................................................... 9 1.09 Interest Periods............................................................... 10 1.10 Increased Costs; Illegality; etc............................................... 12 1.11 Compensation; Breakage......................................................... 13 1.12 Change of Lending Office....................................................... 14 1.13 Replacement of Banks........................................................... 16
(i) SECTION 2. Letters of Credit.......................................................................18 2.01 Letters of Credit.......................................................................18 2.02 Letter of Credit Requests...............................................................20 2.03 Letter of Credit Participations.........................................................20 2.04 Agreement to Repay Letter of Credit Drawings............................................23 2.05 Increased Costs.........................................................................24 2.06 Indemnification..........................................................................25 SECTION 3. Fees; Commitments.......................................................................26 3.01 Fees....................................................................................26 3.02 Voluntary Termination or Reduction of Total Unutilized Revolving Loan Commitment........27 3.03 Mandatory Reduction of Commitments......................................................28 SECTION 4. Payments................................................................................28 4.01 Voluntary Prepayments...................................................................28 4.02 Mandatory Repayments and Commitment Reductions..........................................30 4.03 Method and Place of Payment.............................................................34 4.04 Net Payments............................................................................34 SECTION 5. Conditions Precedent to Effective Date..................................................38 5.01 Execution of Agreement; Notes...........................................................38 5.02 Officer's Certificate...................................................................38 5.03 Opinions of Counsel.....................................................................38 5.04 Company Documents; Proceedings..........................................................38 5.05 Adverse Change, etc.....................................................................39 5.06 Litigation..............................................................................40 5.07 Approvals...............................................................................40
(ii) 5.08 Refinancing of Indebtedness...............................................................40 5.09 Pledge Agreement..........................................................................41 5.10 Subsidiaries Guaranty.....................................................................41 5.11 Employee Benefit Plans; Shareholders' Agreements; Management Agreements; Employment Agreements; Existing Indebtedness Agreements..............................................41 5.12 Solvency Certificate......................................................................42 5.13 Financial Statements; Balance Sheet.......................................................42 5.14 Payment of Fees...........................................................................43 SECTION 6. Conditions Precedent to All Credit Events................................................43 6.01 No Default; Representations and Warranties................................................43 6.02 Notice of Borrowing; Letter of Credit Request.............................................43 SECTION 7. Representations and Warranties...........................................................44 7.01 Company Status............................................................................44 7.02 Company Power and Authority...............................................................44 7.03 No Violation..............................................................................45 7.04 Litigation................................................................................45 7.05 Use of Proceeds; Margin Regulations.......................................................46 7.06 Governmental Approvals....................................................................46 7.07 Investment Company Act....................................................................46 7.08 Public Utility Holding Company Act........................................................46 7.09 True and Complete Disclosure..............................................................47 7.10 Financial Condition; Financial Statements.................................................47 7.11 Security Interests........................................................................48 7.12 Compliance with ERISA.....................................................................49 7.13 Capitalization............................................................................50 7.14 Subsidiaries..............................................................................50 7.15 Intellectual Property, etc................................................................50
(iii) 7.16 Compliance with Statutes, etc.............................................51 7.17 Environmental Matters.....................................................51 7.19 Labor Relations...........................................................52 7.20 Tax Returns and Payments..................................................53 7.21 Existing Indebtedness.....................................................53 7.22 Insurance.................................................................53 7.23 Year 2000 Representation..................................................53 SECTION 8. Affirmative Covenants....................................................54 8.01 Information Covenants.....................................................54 8.02 Books, Records and Inspections............................................58 8.03 Insurance.................................................................58 8.04 Payment of Taxes..........................................................58 8.07 Compliance with Environmental Laws........................................59 8.08 ERISA.....................................................................60 8.09 Good Repair...............................................................61 8.10 End of Fiscal Years; Fiscal Quarters......................................61 8.11 Additional Security; Further Assurances...................................61 8.12 Ownership of Subsidiaries.................................................62 8.13 Permitted Acquisitions....................................................63 8.14 Maintenance of Company Separateness.......................................65 8.15 Performance of Obligations................................................65 8.16 Use of Proceeds...........................................................66 SECTION 9. Negative Covenants.......................................................66 9.01 Changes in Business.......................................................66 9.02 Consolidation; Merger; Sale or Purchase of Assets; etc....................66 9.03 Liens.....................................................................70 9.04 Indebtedness..............................................................73
(iv)
Page ---- 9.05 Advances; Investments; Loans............................................................. 76 9.06 Dividends; etc........................................................................... 79 9.07 Transactions with Affiliates and Unrestricted Subsidiaries............................... 81 9.08 Consolidated Adjusted Interest Coverage Ratio............................................ 82 9.09 Total Leverage Ratio..................................................................... 82 9.10 Limitation on Voluntary Payments and Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements; Issuances of Capital Stock; etc....................................................................... 83 9.11 Limitation on Issuance of Capital Stock.................................................. 84 9.12 Limitation on Certain Restrictions on Subsidiaries....................................... 85 9.13 Limitation on the Creation of Subsidiaries, Joint Ventures and Unrestricted Subsidiaries............................................................................. 86 9.14 De Minimis Subsidiaries.................................................................. 87 9.15 Burnet Realty, Inc. Title Insurance Business............................................. 88 SECTION 10. Events of Default........................................................................ 88 10.01 Payments................................................................................. 88 10.02 Representations, etc..................................................................... 88 10.03 Covenants................................................................................ 88 10.04 Default Under Other Agreements........................................................... 88 10.05 Bankruptcy, etc.......................................................................... 89 10.06 ERISA.................................................................................... 89 10.07 Security Documents....................................................................... 90 10.08 Guaranties............................................................................... 91 10.09 Judgments................................................................................ 91 10.10 Ownership................................................................................ 91 10.11 Franchise Agreements..................................................................... 91
(v)
Page ---- SECTION 11. Definitions.............................................................................. 92 SECTION 12. The Administrative Agent................................................................. 128 12.01 Appointment.............................................................................. 128 12.02 Delegation of Duties..................................................................... 128 12.03 Exculpatory Provisions................................................................... 128 12.04 Reliance by the Administrative Agent..................................................... 129 12.05 Notice of Default........................................................................ 130 12.06 Nonreliance on Administrative Agent and Other Banks...................................... 130 12.07 Indemnification.......................................................................... 131 12.08 Administrative Agent in its Individual Capacity.......................................... 131 12.09 Holders.................................................................................. 132 12.10 Resignation of the Administrative Agent.................................................. 132 12.11 Syndication Agent ^??^ SECTION 13. Miscellaneous............................................................................ 133 13.01 Payment of Expenses, etc................................................................. 133 13.02 Right of Setoff.......................................................................... 134 13.03 Notices.................................................................................. 134 13.04 Benefit of Agreement..................................................................... 135 13.05 No Waiver; Remedies Cumulative........................................................... 137 13.06 Payments Pro Rata........................................................................ 138 13.07 Calculations; Computations............................................................... 138 13.08 Governing Law; Submission to Jurisdiction; Venue......................................... 140 13.09 Counterparts............................................................................. 140 13.10 Effectiveness............................................................................ 141 13.11 Headings Descriptive..................................................................... 141 13.12 Amendment or Waiver; etc................................................................. 141
(vi)
Page ---- 13.13 Survival................................................................................. 143 13.14 Domicile of Loans and Commitments........................................................ 143 13.15 Confidentiality.......................................................................... 143 13.16 Waiver of Jury Trial..................................................................... 144 13.17 Register................................................................................. 144 13.18 Limitation on Additional Amounts, etc.................................................... 145
(vii) CREDIT AGREEMENT, dated as of January 7, 1999 among NRT Incorporated, a Delaware corporation (the "Borrower"), the Banks from time to time party hereto, BANKERS TRUST COPANY ("BTCo") and THE CHASE MANHATTAN BANK ("Chase" and, together with BTCo, each an "Arranger" and, collectively, the "Arrangers") and BTCo, as Administrative Agent (in such capacity, the "Administrative Agent") and Chase, as Syndication Agent (in such capacity, the "Syndication Agent"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 11 are used herein as so defined. W I T N E S S E T H: - - - - - - - - - - WHEREAS, subject to and upon the terms and conditions set forth herein, the Banks are willing to make available to the Borrower the credit facility provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. -------------------------- 1.01 Commitments. (a) Subject to and upon the terms and conditions herein ----------- set forth, each Bank severally agrees to make a revolving loan or revolving loans to the Borrower, which revolving loans shall be made and maintained in U.S. Dollars (each, a "Revolving Loan" and, collectively, the "Revolving Loans") and which Revolving Loans: (i) shall be made at any time and from time to time on and after the Effective Date and prior to the Maturity Date; (ii) shall, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that (x) -------- except as otherwise specifically provided in Section 1.10(b), all Revolving Loans made as part of the same Borrowing shall at all times be of the same Type; (iii) may be repaid and reborrowed in accordance with the provisions hereof; -2- (iv) shall not be made (or be required to be made) by any Bank on any date if, after giving effect thereto, the Revolving Credit Exposure of such Bank would exceed the Revolving Loan Commitment of such Bank at such time; and (v) shall not, in the case of all Revolving Loans, be made at any time if, after giving effect thereto, the Aggregate Revolving Credit Exposure (exclusive of Unpaid Drawings and Swingline Loans which are to be repaid with the proceeds of and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) would exceed the Total Revolving Loan Commitment at such time. (b) Subject to and upon the terms and conditions herein set forth, BTCo in its individual capacity agrees to make at any time and from time to time on and after the Effective Date and prior to the Swingline Expiry Date, a loan or loans to the Borrower (each, a "Swingline Loan" and, collectively, the "Swingline Loans"), which Swingline Loans: (i) shall be denominated in U.S. Dollars; (ii) shall be made and maintained as Base Rate Loans; (iii) may be repaid and reborrowed in accordance with the provisions hereof; (iv) shall not be made (or be required to be made) on any date, if after giving effect thereto, the Aggregate Revolving Credit Exposure would exceed the Total Revolving Loan Commitment at such time; and (v) shall not exceed in aggregate principal amount at any time outstanding the Maximum Swingline Amount. BTCo shall not be obligated to make any Swingline Loans at a time when a Bank Default exists unless BTCo has entered into arrangements satisfactory to it and the Borrower to eliminate BTCo's risk with respect to the Defaulting Bank's or Banks' participation in such Swingline Loans, including by cash collateralizing such Defaulting Bank's or Banks' RL Percentage of the outstanding Swingline Loans. BTCo will not make a Swingline Loan after it has received written notice from the Borrower or the Required Banks stating that a Default or an Event of Default exists until such time as BTCo shall have received a written notice of -3- (i) rescission of such notice from the party or parties originally delivering the same or (ii) a waiver of such Default or Event of Default from the requisite Banks hereunder. (c) On any Business Day, BTCo may, in its sole discretion, give notice to the Banks that its outstanding Swingline Loans shall be funded with a Borrowing of Revolving Loans (provided that each such notice shall -------- be deemed to have been automatically given upon the occurrence of a Default or an Event of Default under Section 10.05 or upon the exercise of any of the remedies provided in the last paragraph of Section 10), in which case a Borrowing of Revolving Loans constituting Base Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all Banks pro rata based on each Bank's RL --- ---- Percentage, and the proceeds thereof shall be applied directly to repay BTCo for such outstanding Swingline Loans. Each Bank hereby irrevocably agrees to make Revolving Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by BTCo notwithstanding (i) that the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any conditions specified in Section 5 or 6 are then satisfied, (iii) whether a Default or an Event of Default has occurred and is continuing, (iv) the date of such Mandatory Borrowing and (v) the amount of the Total Revolving Loan Commitment or such Bank's Revolving Loan Commitment at such time. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code or any other bankruptcy, reorganization, dissolution, insolvency, receivership, liquidation or similar law with respect to the Borrower), each Bank (other than BTCo) hereby agrees that it shall forthwith purchase from BTCo (without recourse or warranty) such assignment of the outstanding Swingline Loans as shall be necessary to cause the Banks to share in such Swingline Loans ratably based upon their respective RL Percentages, provided that (x) all interest payable on the Swingline Loans -------- shall be for the account of BTCo until the date the respective assignment is purchased and, to the extent attributable to the purchased assignment, shall be payable to the Bank purchasing same from and after such date of purchase and (y) at the time any purchase of assignments pursuant to this sentence is actually made, the purchasing Bank shall be required to pay BTCo interest on the principal amount of assignment purchased for each day from and including the day upon which the Mandatory Borrowing would otherwise have occurred to but excluding the date of payment for such assignment, at the rate otherwise applicable to Revolving Loans maintained as Base Rate Loans hereunder for each day thereafter. -4- 1.02 Minimum Borrowing Amounts, etc. The aggregate principal ------------------------------ amount of each Borrowing of Loans shall not be less than the Minimum Borrowing Amount applicable to such Loans, provided that Mandatory -------- Borrowings shall be made in the amounts required by Section 1.01(c). More than one Borrowing may be incurred on any day, provided, that at no time shall there be outstanding more than ten Borrowings of Eurodollar Loans. 1.03 Notice of Borrowing. (a) Whenever the Borrower desires to ------------------- make a Borrowing hereunder (excluding (x) Borrowings of Swingline Loans and (y) Mandatory Borrowings), an Authorized Officer of the Borrower shall give the Administrative Agent at its Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans, and at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Base Rate Loans to be made hereunder. Each such notice (each, a "Notice of Borrowing") shall, except as otherwise expressly provided in Section 1.10, be irrevocable, and, in the case of each written notice and each confirmation of telephonic notice, shall be in the form of Exhibit A, appropriately completed to specify: (i) the aggregate principal amount of the Loans to be made pursuant to such Borrowing, (ii) the date of such Borrowing (which shall be a Business Day), (iii) whether the respective Borrowing shall consist of Base Rate Loans or, to the extent permitted hereunder, Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto, and (iv) in the case of a Borrowing of Revolving Loans the proceeds of which are to be utilized to finance, in whole or in part, the purchase price of a Permitted Acquisition, (x) a reference to the officer's certificate, if any, delivered in accordance with Section 8.13, (y) the aggregate principal amount of such Revolving Loans to be utilized in connection with such Permitted Acquisition and (z) the Total Unutilized Revolving Loan Commitment then in effect after giving effect to the respective Permitted Acquisition (and all payments to be made in connection therewith). The Administrative Agent shall promptly give each Bank written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing, of such Bank's proportionate share thereof and of the other matters required by the immediately preceding sentence to be specified in the Notice of Borrowing. (b) (i) Whenever the Borrower desires to incur Swingline Loans hereunder, an Authorized Officer of the Borrower shall give BTCo not later than 2:00 P.M. (New York time) on the day such Swingline Loan is to be made, written notice (or telephonic notice promptly confirmed in writing) of each Swingline Loan to be made hereunder. Each such notice shall be irrevocable and shall specify in each case (x) the date of such Borrowing -5- (which shall be a Business Day) and (y) the aggregate principal amount of the Swingline Loan to be made pursuant to such Borrowing. (ii) Mandatory Borrowings shall be made upon the notice specified in Section 1.01(c), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of Mandatory Borrowings as set forth in such Section 1.01(c). (c) Without in any way limiting the obligation of the Borrower to confirm in writing any telephonic notice permitted to be given hereunder, the Administrative Agent or BTCo (in the case of a Borrowing of Swingline Loans) or the respective Letter of Credit Issuer (in the case of the issuance of Letters of Credit), as the case may be, may prior to receipt of written confirmation act without liability upon the basis of such telephonic notice, believed by the Administrative Agent, BTCo or such Letter of Credit Issuer, as the case may be, in good faith to be from an Authorized Officer of the Borrower. In each such case, the Administrative Agent's, BTCo's or the respective Letter of Credit Issuer's, as the case may be, record of the terms of such telephonic notice shall be conclusive evidence of the contents of such notice, absent manifest error. 1.04 Disbursement of Funds. (a) Not later than 1:00 P.M. (New --------------------- York time) on the date specified in each Notice of Borrowing (or (x) in the case of Swingline Loans, not later than 3:00 P.M. (New York time) on the date specified in Section 1.03(b)(i) or (y) in the case of Mandatory Borrowings, not later than 12:00 Noon (New York time) on the date specified in Section 1.01(c)), each Bank will make available its pro rata share --- ---- (determined in accordance with Section 1.07), of each Borrowing requested to be made on such date (or in the case of Swingline Loans, BTCo shall make available the full amount thereof) in the manner provided below. All amounts shall be made available to the Administrative Agent in U.S. Dollars and in immediately available funds at the Payment Office and the Administrative Agent promptly will make available to the Borrower (or BTCo in the case of a Mandatory Borrowing) by depositing to its account at the Payment Office the aggregate of the amounts so made available. Unless the Administrative Agent shall have been notified by any Bank prior to the date of Borrowing that such Bank does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Bank has made such amount available to the Administrative Agent on such date of Borrowing, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount -6- is not in fact made available to the Administrative Agent by such Bank and the Administrative Agent has made available same to the Borrower, the Administrative Agent shall be entitled to recover such corresponding amount on demand from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover on demand from such Bank or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Bank, the overnight Federal Funds Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.08. (b) Nothing in this Agreement shall be deemed to relieve any Bank from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any default by such Bank hereunder. 1.05 Notes. (a) The Borrower's obligation to pay the principal ----- of, and interest on, all the Loans made to the Borrower by each Bank shall be set forth on the Register maintained by the Administrative Agent pursuant to Section 13.17 and, subject to the provisions of Section 1.05(e), shall be evidenced (i) if Revolving Loans, by a promissory note substantially in the form of Exhibit B-1 with blanks appropriately completed in conformity herewith (each, a "Revolving Note" and, collectively, the "Revolving Notes") and (ii) if Swingline Loans, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed in conformity herewith (the "Swingline Note"). (b) The Revolving Note issued to each Bank shall (i) be executed by the Borrower, (ii) be payable to such Bank or its registered assigns and be dated the date of issuance thereof, (iii) be in a stated principal amount equal to the Revolving Loan Commitment of such Bank and be payable in the principal amount of the outstanding Revolving Loans evidenced thereby, (iv) mature on the Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01 and mandatory repayment as provided in Section 4.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. -7- (c) The Swingline Note issued to BTCo shall (i) be executed by the Borrower, (ii) be payable to BTCo or its registered assigns and be dated the Effective Date, (iii) be in a stated principal amount equal to the Maximum Swingline Amount and be payable in the principal amount of the outstanding Swingline Loans evidenced thereby, (iv) mature on the Swingline Expiry Date, (v) bear interest as provided in Section 1.08 in respect of the Base Rate Loans evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01 and mandatory repayment as provided in Section 4.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (d) Each Bank will note on its internal records the amount of each Loan made by it to the Borrower and each payment in respect thereof and will prior to any transfer of any of its Notes endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation or any error in such notation shall not affect the Borrower's obligations in respect of such Loans. (e) Notwithstanding anything to the contrary contained above or elsewhere in this Agreement, Revolving Notes and the Swingline Note shall only be delivered to Banks which at any time specifically request the delivery of such Notes. No failure of any Bank to request or obtain a Note evidencing its Loans to the Borrower shall affect or in any manner impair the obligations of the Borrower to pay the Loans (and all related Obligations) which would otherwise be evidenced thereby in accordance with the requirements of this Agreement, and shall not in any way affect the security or guaranties therefor provided pursuant to the various Credit Documents. Any Bank which does not have a Note evidencing its outstanding Loans shall in no event be required to make the notations otherwise described in preceding clause (d). At any time when any Bank requests the delivery of a Note to evidence any of its Loans, the Borrower shall promptly execute and deliver to the respective Bank the requested Note or Notes in the appropriate amount or amounts to evidence such Loans. 1.06 Conversions. The Borrower shall have the option to convert ----------- on any Business Day occurring on or after the Effective Date, all or a portion at least equal to the applicable Minimum Borrowing Amount of the outstanding principal amount of Loans (other than Swingline Loans which shall at all times be maintained as Base Rate Loans) made pursuant to one or more Borrowings of one or more Types of Loans into a Borrowing or Borrowings of another Type of Loan; provided, that (i) except as otherwise provided in Section 1.10(b) or unless the Borrower pays all breakage costs -------- and other amounts owing to -8- each Bank pursuant to Section 1.11 concurrently with any such conversion, Eurodollar Loans may be converted into Base Rate Loans only on the last day of an Interest Period applicable to the Loans being converted, and no partial conversion of a Borrowing of Eurodollar Loans shall reduce the outstanding principal amount of the Eurodollar Loans made pursuant to such Borrowing to less than the Minimum Borrowing Amount applicable thereto, (ii) Base Rate Loans may only be converted into Eurodollar Loans if no Default under Sections 10.01 or 10.05 or Event of Default is in existence on the date of the conversion and the Administrative Agent or the Required Banks have notified the Borrower that such an election at such time would be disadvantageous to the Banks and (iii) Borrowings of Eurodollar Loans resulting from this Section 1.06 shall be limited in number as provided in Section 1.02. Each such conversion shall be effected by the Borrower by giving the Administrative Agent at its Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' (or one Business Day's in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Loans to be so converted, the Borrowing or Borrowings pursuant to which the Loans were made and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Bank prompt notice of any such proposed conversion affecting any of its Loans. Upon any such conversion, the proceeds thereof will be deemed to be applied directly on the day of such conversion to prepay the outstanding principal amount of the Loans being converted. 1.07 Pro Rata Borrowings. Subject to the provisions of 1.01(c), ------------------- all Borrowings of Revolving Loans under this Agreement (including Mandatory Borrowings) shall be incurred by the Borrower from the Banks pro rata on the basis of their RL Percentages. It is understood that no Bank shall be responsible for any default by any other Bank of its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitments hereunder. 1.08 Interest. (a) The Borrower agrees to pay interest in -------- respect of the unpaid principal amount of each Base Rate Loan made to it from the date of the Borrowing thereof until the earlier of (i) the maturity (whether by acceleration or otherwise) of such Base Rate Loan and (ii) the conversion of such Base Rate Loan to a Eurodollar Loan pursuant to Section 1.06, at a rate per annum which shall at all times be the relevant Applicable Margin plus the Base Rate, each as in effect from time to time. ---- (b) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan made to it from the date of the Borrowing thereof until the earlier of (i) the maturity (whether by acceleration or otherwise) of such Eurodollar Loan and (ii) the conversion of such Eurodollar Loan to a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10(b), as applicable, at a rate per annum which shall at all times be the relevant Applicable Margin plus the Eurodollar Rate for such Interest Period, each as in effect from time to time. (c) To the extent permitted by law, overdue principal and overdue interest in respect of each Loan shall, in each case, bear interest at a rate per annum equal to the greater of (x) the rate which is 2% in excess of the rate borne by such Loan immediately prior to the respective payment default and (y) the rate which is 2% in excess of the rate otherwise applicable to Base Rate Loans from time to time. Interest which accrues under this Section 1.08(c) shall be payable on demand. (d) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable (i) in respect of each Base Rate Loan, quarterly in arrears on each Quarterly Payment Date, (ii) in respect of each Eurodollar Loan, on (x) the date of any conversion into a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10(b), as applicable (on the amount converted) and (y) the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period and (iii) in respect of each Loan, (x) at maturity (whether by acceleration or otherwise) and (y) after such maturity, on demand. (e) All computations of interest hereunder shall be made in accordance with Section 13.07(c). (f) Upon each Interest Determination Date, the Administrative Agent shall determine the Eurodollar Rate for the respective Interest Period or Interest Periods and shall promptly notify the Borrower and the Banks thereof. Each such determination shall, absent manifest error, be final and conclusive and binding on all parties hereto. 1.09 Interest Periods. At the time the Borrower gives a Notice ---------------- of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 12:00 -10- Noon (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans (in the case of any subsequent Interest Period), the Borrower shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) of the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of the Borrower be a one, two, three, six or, to the extent available to each Bank, nine or twelve month period. Notwithstanding anything to the contrary contained above : (i) all Eurodollar Loans comprising a Borrowing shall at all times have the same Interest Period; (ii) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period applicable thereto expires; (iii) if any Interest Period for any Borrowing of Eurodollar Loans begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iv) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided, that if any Interest Period for any -------- Borrowing of Eurodollar Loans would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (v) no Interest Period for a Borrowing of Eurodollar Loans shall be selected which would extend beyond the Maturity Date; (vi) no Interest Period may be elected at any time when a Default under Section 10.01 or 10.05 or an Event of Default is then in existence and the Administrative Agent or the Required Banks have notified the Borrower that such an election at such time would be disadvantageous to the Banks; and -11- If upon the expiration of any Interest Period applicable to a Borrowing of Eurodollar Loans, the Borrower has failed to elect, or is not permitted to elect, a new Interest Period to be applicable to the respective Borrowing of Eurodollar Loans as provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Base Rate Loans effective as of the expiration date of such current Interest Period. 1.10 Increased Costs; Illegality; etc. (a) In the event that -------------------------------- (x) in the case of clause (i) below, the Administrative Agent or (y) in the case of clauses (ii) and (iii) below, any Bank, shall have determined in good faith (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any Interest Determination Date, that, by reason of any changes arising after the Effective Date affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans because of (x) any change since the Effective Date in any applicable law, governmental rule, regulation, guideline, order or request (whether or not having the force of law), or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline, order or request (other than, in each case, any such change with respect to taxes or any similar charges), such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate and/or (y) other circumstances affecting such Bank, the interbank Eurodollar market or the position of such Bank in such market (other than circumstances relating to taxes or any similar charges); or (iii) at any time since the Effective Date, that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Bank with any law, governmental rule, regulation, guideline or order (or would conflict with any governmental rule, regulation, guideline, request or order not having the force of law but with which such Bank customarily complies even though the failure to comply therewith would not be unlawful), or has become impracticable as a result of a contingency occurring after the Effective Date which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Administrative Agent in the case of clause (i) above) shall promptly give notice (by telephone confirmed in writing) to the Borrower and (except in the case of clauses (i)) to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Banks). Thereafter, (w) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Administrative Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred (including by way of conversion) shall be deemed rescinded by the Borrower, (x) in the case of clause (ii) above, the Borrower agrees, subject to the provisions of Section 13.18 (to the extent applicable), to pay to such Bank, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its sole discretion shall determine) as shall be required to compensate such Bank for such increased costs or reductions in amounts received or receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing in reasonable detail the basis for the calculation thereof, prepared in good faith and submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding upon all parties hereto, although the failure to give any such notice shall not release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1.10(a) upon the subsequent receipt of such notice) and (y) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.10(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and in the case of a Eurodollar Loan affected pursuant to Section 1.10(a)(iii), the Borrower shall) either (i) if the affected Eurodollar Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the Borrower was notified by a Bank pursuant to Section 1.10(a)(ii) or (iii)), or (ii) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Administrative Agent, require the affected Bank to convert each such Eurodollar Loan into a Base Rate Loan (which conversion, in the case of the circumstance described in Section 1.10(a)(iii), shall occur no later than the last day of the Interest Period then applicable to such Eurodollar Loan or such earlier day as shall be required by applicable law); provided, that if more than one Bank is affected at any time, then -------- all affected Banks must be treated the same pursuant to this Section 1.10(b). (c) If any Bank shall have determined that after the Effective Date, the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Bank or any corporation controlling such Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's or such other corporation's capital or assets as a consequence of such Bank's Revolving Loan Commitment or its obligations hereunder to the Borrower to a level below that which such Bank or such other corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Bank's or such other corporation's policies with respect to capital adequacy), then from time to time, upon written demand by such Bank (with a copy to the Administrative Agent), accompanied by the notice referred to in the last sentence of this clause (c), the Borrower agrees, subject to the provisions of Section 13.18 (to the extent applicable), to pay to such Bank such additional amount or amounts as will compensate such Bank or such other corporation for such reduction in the rate of return to such Bank or such other corporation. Each Bank, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.10(c), will give prompt written notice thereof to the Borrower (a copy of which shall be sent by such Bank to the Administrative Agent), which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the failure to give any such notice shall not release or diminish the Borrower's obligation to pay additional amounts pursuant to this Section 1.10(c) upon the subsequent receipt of such notice. In determining any additional amounts owing under this Section 1.10(c), each Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable; provided that such Bank's -------- reasonable good faith determination of compensation owing under this Section 1.10(c) shall, absent manifest error, be final and conclusive and binding on all the parties hereto. 1.11 Compensation; Breakage. The Borrower agrees, subject to ---------------------- the provisions of Section 13.18 (to the extent applicable), to compensate each Bank, upon its written request (which request shall set forth in reasonable detail the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without -14- limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans but excluding any loss of anticipated profits) which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Administrative Agent) a Borrowing of, or conversion from or into, Eurodollar Loans does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion given by the Borrower (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii) if any repayment (including any repayment made pursuant to Section 4.01 or 4.02 or as a result of an acceleration of the Loans pursuant to Section 10 or as a result of the replacement of a Bank pursuant to Section 1.13 or 13.12(b)) or conversion of any Eurodollar Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any Eurodollar Loans, is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Eurodollar Loans when required by the terms of this Agreement or (y) an election made by the Borrower pursuant to Section 1.10(b). Each Bank's calculation of the amount of compensation owing pursuant to this Section 1.11 shall be made in good faith. A Bank's basis for requesting compensation pursuant to this Section 1.11 and a Bank's calculation of the amount thereof made in accordance with the requirements of this Section 1.11, shall, absent manifest error, be final and conclusive and binding on all parties hereto. 1.12 Change of Lending Office. (a) Each Bank may at any time ------------------------ or from time to time designate, by written notice to the Administrative Agent to the extent not already reflected on Schedule II, one or more lending offices (which, for this purpose, may include Affiliates of the respective Bank) for the various Loans made, and Letters of Credit participated in, by such Bank; provided that, for designations made after the Effective Date, to the extent such designation shall result in increased costs under Section 1.10, 2.05 or 4.04 in excess of those which would be charged in the absence of the designation of a different lending office (including a different Affiliate of the respective Bank), then the Borrower shall not be obligated to pay such excess increased costs (although the Borrower, in accordance with and pursuant to the other provisions of this Agreement, shall be obligated to pay the costs which would apply in the absence of such designation and any subsequent increased costs of the type described above resulting from changes after the date of the respective designation). Each lending office and Affiliate of any Bank designated as provided above shall, for all purposes of this Agreement, be treated in the same manner as the respective Bank (and shall be entitled to all indemnities and similar provisions in respect of its acting as such hereunder). -15- (b) Each Bank agrees that, upon the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), 1.10(c), 2.05 or 4.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans or Letters of Credit affected by such event; provided, that such designation is made on -------- such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequences of the event giving rise to the operation of any such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Section 1.10, 2.05 or 4.04 (although each such Bank shall nevertheless have an obligation to change its applicable lending office subject to the terms set forth in the immediately preceding sentence). 1.13 Replacement of Banks. (x) If any Bank becomes a Defaulting -------------------- Bank, (y) upon the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c), Section 2.05 or Section 4.04 with respect to any Bank which results in such Bank charging to the Borrower increased costs in a material amount in excess of those being generally charged by the other Banks or (z) in the case of a refusal by a Bank to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required Banks as provided in Section 13.12(b), the Borrower shall have the right, in accordance with Section 13.04(b), if no Default or Event of Default will exist after giving effect to such replacement, to replace such Bank (the "Replaced Bank") with one or more other Eligible Transferee or Transferees, none of whom shall constitute a Defaulting Bank at the time of such replacement (collectively, the "Replacement Bank") and each of which shall be reasonably acceptable to the Administrative Agent; provided that: -------- (i) at the time of any replacement pursuant to this Section 1.13, the Replacement Bank shall enter into one or more Assignment and Assumption Agreements pursuant to Section 13.04(b) (and with all fees payable pursuant to said Section 13.04(b) to be paid by the Replacement Bank) pursuant to which the Replacement Bank shall acquire all of the Revolving Loan Commitment and outstanding Revolving Loans and participations in Letter of Credit Outstandings by, the Replaced Bank and, in connection therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Revolving Loans of the Replaced Bank, (B) an amount equal to all Unpaid Drawings (unless there are no Unpaid Drawings) that have been funded by (and not reimbursed to) such Replaced Bank, together with all then unpaid interest with respect thereto at such time -16- and (C) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to Section 3.01, (y) to BTCo an amount equal to such Replaced Bank's RL Percentage of any Mandatory Borrowing to the extent such amount was not theretofore funded by such Replaced Bank; and (ii) all obligations of the Borrower then owing to the Replaced Bank (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid, but including all amounts, if any, owing under Section 1.11 shall be paid in full to such Replaced Bank concurrently with such replacement; and Upon the execution of the respective Assignment and Assumption Agreements, the payment of amounts referred to in clauses (i) and (ii) above, recordation of the assignment on the Register by the Administrative Agent pursuant to Section 13.17 and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note or Notes executed by the Borrower, (x) the Replacement Bank shall become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement (including, without limitation, Sections 1.10, 1.11, 2.05, 4.04, 13.01 and 13.06), which shall survive as to such Replaced Bank and (y) the RL Percentages of the Banks shall be automatically adjusted at such time to give effect to such replacement. -17- SECTION 2. Letters of Credit. ----------------- 2.01 Letters of Credit. (a) Subject to and upon the terms and ----------------- conditions herein set forth, the Borrower may request a Letter of Credit Issuer at any time and from time to time after the Effective Date and prior to the tenth Business Day (or the 30th day in the case of Trade Letters of Credit) preceding the Maturity Date to issue on a sight basis, (x) for the account of the Borrower and for the benefit of any holder (or any trustee, agent or other similar representative for any such holders) of L/C Supportable Obligations, irrevocable sight standby letters of credit in a form customarily used by such Letter of Credit Issuer or in such other form as has been approved by such Letter of Credit Issuer (each such standby letter of credit, a "Standby Letter of Credit") in support of such L/C Supportable Obligations and (y) for the account of the Borrower and for the benefit of sellers of goods and materials to the Borrower or any of its Subsidiaries in the ordinary course of business, irrevocable sight trade letters of credit in a form customarily used by such Letter of Credit Issuer or in such other form as has been approved by such Letter of Credit Issuer (each such trade letter of credit, a "Trade Letter of Credit," and each such Standby Letter of Credit and Trade Letter of Credit, a "Letter of Credit" and, collectively, the "Letters of Credit"). (b) Subject to and upon the terms and conditions set forth herein, each Letter of Credit Issuer hereby agrees that it will, at any time and from time to time after the Effective Date and prior to the tenth Business Day (or the 30th day in the case of Trade Letters of Credit) preceding the Maturity Date, following its receipt of the respective Letter of Credit Request, issue for the account of the Borrower one or more Letters of Credit, (x) in the case of Trade Letters of Credit, in support of trade obligations of the Borrower or any of its Subsidiaries that arise in the ordinary course of business or (y) in the case of Standby Letters of Credit, in support of such L/C Supportable Obligations as is permitted to remain outstanding hereunder. Notwithstanding the foregoing, no Letter of Credit Issuer shall be under any obligation to issue any Letter of Credit if at the time of such issuance: (i) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain such Letter of Credit Issuer from issuing such Letter of Credit or any requirement of law applicable to such Letter of Credit Issuer or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over such Letter of Credit Issuer shall prohibit, or request that such Letter of Credit Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Letter of Credit Issuer with respect -18- to such Letter of Credit any restriction or reserve or capital requirement (for which such Letter of Credit Issuer is not otherwise compensated) not in effect on the Effective Date, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to such Letter of Credit Issuer as of the Effective Date and which such Letter of Credit Issuer in good faith deems material to it; or (ii) such Letter of Credit Issuer shall have received written notice from the Borrower or the Required Banks prior to the issuance of such Letter of Credit of the type described in clause (vii) of Section 2.01(c) or the last sentence of Section 2.02(b). (c) Notwithstanding the foregoing, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) at such time, would exceed $10,000,000; (ii) no Letter of Credit shall be issued, if, after giving effect thereto, (x) the Aggregate Revolving Credit Exposure would exceed the Total Revolving Loan Commitment at such time or (y) the Revolving Credit Exposure of any Bank would exceed its Revolving Loan Commitment as then in effect; (iii) (x) each Standby Letter of Credit shall have an expiry date occurring not later than one year after such Standby Letter of Credit's date of issuance, provided, that any such -------- Standby Letter of Credit may be extendible for successive periods of up to one year, but not beyond the tenth Business Day preceding the Maturity Date, on terms acceptable to the Letter of Credit Issuer and (y) each Trade Letter of Credit shall have an expiry date occurring not later than 180 days after such Trade Letter of Credit's date of issuance; (iv) (x) no Standby Letter of Credit shall have an expiry date occurring later than the tenth Business Day preceding the Maturity Date and (y) no Trade Letter of Credit shall have an expiry date occurring later than 30 days prior to the Maturity Date; (v) each Letter of Credit shall be denominated in U.S. Dollars; (vi) the Stated Amount of each Letter of Credit shall not be less than $100,000 or such lesser amount as is acceptable to the respective Letter of Credit Issuer; and (vii) no Letter of Credit Issuer will issue any Letter of Credit after it has received written notice from the Borrower, the Administrative Agent or the Required Banks stating that a Default or an Event of Default exists until such time as such Letter of Credit Issuer shall have received a written notice of (x) rescission of such notice from the party or parties originally delivering the same or (y) a waiver of such Default or Event of Default by the requisite Banks hereunder. (d) Notwithstanding the foregoing, in the event a Bank Default exists, no Letter of Credit Issuer shall be required to issue any Letter of Credit unless the respective -19- Letter of Credit Issuer has entered into arrangements satisfactory to it and the Borrower to eliminate such Letter of Credit Issuer's risk with respect to the participation in Letters of Credit of the Defaulting Bank or Banks, including by cash collateralizing such Defaulting Bank's or Banks' RL Percentage of the Letter of Credit Outstandings, as the case may be. 2.02 Letter of Credit Requests. (a) Whenever the Borrower ------------------------- desires that a Letter of Credit be issued, the Borrower shall give the Administrative Agent and the respective Letter of Credit Issuer written notice thereof prior to 12:00 Noon (New York time), via courier delivery or facsimile transmission, at least three Business Days (or such shorter period as may be acceptable to the respective Letter of Credit Issuer) prior to the proposed date of issuance (which shall be a Business Day) which written notice shall be in the form of Exhibit C (each, a "Letter of Credit Request"). Each Letter of Credit Request shall include any other documents as such Letter of Credit Issuer customarily requires in connection therewith. (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be issued in accordance with, and it will not violate the requirements of, Section 2.01(c). Unless the respective Letter of Credit Issuer has received notice from the Borrower, the Administrative Agent or the Required Banks before it issues a Letter of Credit that one or more of the applicable conditions specified in Section 5 or 6, as the case may be, are not then satisfied, or that the issuance of such Letter of Credit would violate Section 2.01(c), then such Letter of Credit Issuer may issue the requested Letter of Credit for the account of the Borrower in accordance with such Letter of Credit Issuer's usual and customary practice. 2.03 Letter of Credit Participations. (a) Immediately upon the ------------------------------- the issuance by a Letter of Credit Issuer of any Letter of Credit, such Letter of Credit Issuer shall be deemed to have sold and transferred to each other Bank, and each such Bank (each, a "Participant") shall be deemed irrevocably and unconditionally to have purchased and received from such Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's RL Percentage, in such Letter of Credit, each substitute Letter of Credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto (although Letter of Credit Fees shall be payable directly to the Administrative Agent for the account of the Banks as provided in Section 3.01(b) and the Participants shall have no right to receive any portion of any Facing Fees with respect to such Letters of Credit) and any security therefor or guaranty pertaining thereto. Upon any change -20- in the Revolving Loan Commitments or the RL Percentages of the Banks pursuant to Sections 1.13 or 13.04(b) or as a result of a Bank Default, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings with respect thereto, there shall be an automatic adjustment to the participations pursuant to this Section 2.03 to reflect the new RL Percentages of the assigning and assignee Bank or of all Banks, as the case may be. (b) In determining whether to pay under any Letter of Credit, no Letter of Credit Issuer shall have any obligation relative to the Participants other than to determine that any documents required to be delivered under such Letter of Credit have been delivered and that they appear to substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Letter of Credit Issuer under or in connection with any Letter of Credit issued by it if taken or omitted in the absence of gross negligence or willful misconduct as determined by a court of competent jurisdiction, shall not create for such Letter of Credit Issuer any resulting liability. (c) In the event that any Letter of Credit Issuer makes any payment under any Letter of Credit issued by it and the Borrower shall not have reimbursed such amount in full to the Letter of Credit Issuer pursuant to Section 2.04(a), such Letter of Credit Issuer shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Participant of such failure, and each such Participant shall promptly and unconditionally pay to the Administrative Agent for the account of such Letter of Credit Issuer, the amount of such Participant's RL Percentage of such payment in U.S. Dollars and in same day funds. If the Administrative Agent so notifies any Participant required to fund a payment under a Letter of Credit prior to 11:00 A.M. (New York time) on any Business Day, such Participant shall make available to the Administrative Agent at the Payment Office for the account of the respective Letter of Credit Issuer such Participant's RL Percentage of the amount of such payment on such Business Day in same day funds (and, to the extent such notice is given after 11:00 A.M. (New York time) on any Business Day, such Participant shall make such payment on the immediately following Business Day). If and to the extent such Participant shall not have so made its RL Percentage of the amount of such payment available to the Administrative Agent for the account of the respective Letter of Credit Issuer, such Participant agrees to pay to the Administrative Agent for the account of such Letter of Credit Issuer, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Letter of Credit Issuer at the overnight Federal Funds Rate. The failure of any -21- Participant to make available to the Administrative Agent for the account of the respective Letter of Credit Issuer its RL Percentage of any payment under any Letter of Credit issued by it shall not relieve any other Participant of its obligation hereunder to make available to the Administrative Agent for the account of such Letter of Credit Issuer its RL Percentage of any payment under any such Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Administrative Agent for the account of such Letter of Credit Issuer such other Participant's RL Percentage of any such payment. (d) Whenever any Letter of Credit Issuer receives a payment of a reimbursement obligation as to which the Administrative Agent has received for the account of such Letter of Credit Issuer any payments from the Participants pursuant to clause (c) above, such Letter of Credit Issuer shall pay to the Administrative Agent and the Administrative Agent shall promptly pay to each Participant which has paid its RL Percentage thereof, in U.S. Dollars and in same day funds, an amount equal to such RL Percentage of the principal amount thereof and interest thereon accruing after the purchase of the respective participations. (e) Each Letter of Credit Issuer shall, promptly after each issuance of, or amendment or modification to, a Standby Letter of Credit issued by it, give the Administrative Agent and the Borrower written notice of the issuance of, or amendment or modification to, such Standby Letter of Credit. Upon receipt of any such written notice from the Letter of Credit Issuer, the Administrative Agent shall promptly notify each Participant. Upon request from a Participant, the Administrative Agent will furnish to such Participant copies of each Letter of Credit issued and amendments or modifications, if any. (f) Each Letter of Credit Issuer (other than BTCo) shall deliver to the Administrative Agent, promptly on the first Business Day of each week, by facsimile transmission, the aggregate daily Stated Amount available to be drawn under the outstanding Trade Letters of Credit issued by such Letter of Credit Issuer for the previous week. The Administrative Agent shall, within 10 days after the last Business Day of each calendar month, deliver to each Participant a report setting forth for such preceding calendar month the aggregate daily Stated Amount available to be drawn under all outstanding Trade Letters of Credit during such calendar month. -22- (g) The obligations of the Participants to make payments to the Administrative Agent for the account of the respective Letter of Credit Issuer with respect to Letters of Credit issued by it shall be irrevocable and not subject to counterclaim, set-off or other defense or any other qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower or any of its Subsidiaries may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, any Arranger, any Letter of Credit Issuer, any Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower or any of its Subsidiaries and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or (v) the occurrence of any Default or Event of Default. 2.04 Agreement to Repay Letter of Credit Drawings. (a) The -------------------------------------------- Borrower hereby agrees to reimburse the respective Letter of Credit Issuer, by making payment to the Administrative Agent in U.S. Dollars and in immediately available funds at the Payment Office, for any payment or disbursement made by such Letter of Credit Issuer under any Letter of Credit issued by it (each such amount so paid or disbursed until reimbursed, an "Unpaid Drawing") immediately after, and in any event on the date of such payment or disbursement, with interest on the amount so paid or disbursed by such Letter of Credit Issuer, to the extent not reimbursed prior to 2:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but not including the date -23- such Letter of Credit Issuer is reimbursed therefor at a rate per annum which shall be the Applicable Margin for Revolving Loans maintained as Base Rate Loans as in effect from time to time (plus an additional 2% per annum if not reimbursed by the third Business Day after the date of such payment or disbursement), such interest also to be payable on demand. Each Letter of Credit Issuer shall provide the Borrower prompt notice of any payment or disbursement made by it under any Letter of Credit issued by it; provided, -------- that (i) the notices referred to above shall not be required to be given if a Default or an Event of Default under such Section 10.05 shall have occurred and be continuing (in which case the Unpaid Drawings shall be due and payable immediately without presentment, demand, protest or notice of any kind (all of which are hereby waived by the Borrower) and (ii) the failure of, or delay in, giving any such notice shall not release or diminish the obligations of the Borrower under this Section 2.04(a) or under any other Section of this Agreement. (b) The Borrower's obligation under this Section 2.04 to reimburse the respective Letter of Credit Issuer with respect to drawings on Letters of Credit (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower or any of its Subsidiaries may have or have had against any beneficiary named in any Letter of Credit, the Letter of Credit Issuer, the Administrative Agent, any Arranger or any Bank or other Person, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit issued by it to conform to the terms of the Letter of Credit, any nonapplication or misapplication by the beneficiary of the proceeds of such drawing; provided, however, that the Borrower shall not be -------- ------- obligated to reimburse such Letter of Credit Issuer for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit issued by it as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer as determined by a court of competent jurisdiction; provided, further, that ----------------- any reimbursement made by the Borrower shall be without prejudice to any claim it may have against such Letter of Credit Issuer as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer. 2.05 Increased Costs. If after the Effective Date, any Letter of --------------- Credit Issuer or any Participant determines that the adoption or effectiveness of any applicable law, rule or regulation, order, guideline or request or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance -24- by any Letter of Credit Issuer or any Participant with any request or directive (whether or not having the force of law) by any such authority, central bank or comparable agency shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against Letters of Credit issued by such Letter of Credit Issuer or such Participant's participation therein, or (ii) impose on any Letter of Credit Issuer or any Participant any other conditions directly or indirectly affecting this Agreement, any Letter of Credit or such Participant's participation therein; and the result of any of the foregoing is to increase the cost to such Letter of Credit Issuer or such Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Letter of Credit Issuer or such Participant hereunder or reduce the rate of return on its capital (other than any increased costs or reduction in the amount received or receivable resulting from the imposition of or a change in the rate of taxes or any similar charges) with respect to Letters of Credit, then, upon written demand to the Borrower by such Letter of Credit Issuer or such Participant (a copy of which notice shall be sent by such Letter of Credit Issuer or such Participant to the Administrative Agent), accompanied by the certificate described in the last sentence of this Section 2.05, the Borrower agrees, subject to the provisions of Section 13.18 (to the extent applicable), to pay to such Letter of Credit Issuer or such Participant such additional amount or amounts as will compensate such Letter of Credit Issuer or such Participant for such increased cost or reduction. Any Letter of Credit Issuer or any Participant, upon determining that any additional amounts will be payable pursuant to this Section 2.05, will give prompt written notice thereof to the Borrower, which notice shall include a certificate submitted to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which certificate shall be sent by such Letter of Credit Issuer or such Participant to the Administrative Agent), setting forth in reasonable detail the basis for the determination of such additional amount or amounts necessary to compensate such Letter of Credit Issuer or such Participant as aforesaid and such certificate, if delivered in good faith, shall be final and conclusive and binding on the Borrower absent manifest error, although the failure to deliver any such certificate shall not release or diminish the Borrower's obligations to pay additional amounts pursuant to this Section 2.05 upon subsequent receipt of such certificate. 2.06 Indemnification. The Banks agree to indemnify the Letter of --------------- Credit Issuers in their capacity as such, ratably according to their respective "percentages" as used in determining the Required Banks at such time or, if the Revolving Loan Commitments have terminated and all Loans have been repaid in full, as determined immediately prior to such termination and repayment (with such "percentages" to be determined as if there are no -25- Defaulting Banks), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Letter of Credit Issuers in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Letter of Credit Issuers under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by the Borrower or any of its Subsidiaries; provided, that no -------- Bank shall be liable to the Letter of Credit Issuers for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting primarily from the gross negligence or willful misconduct of the Letter of Credit Issuers. If any indemnity furnished to the Letter of Credit Issuers for any purpose shall, in the opinion of the Letter of Credit Issuers be insufficient or become impaired, the Letter of Credit Issuers may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 2.06 shall survive the payment of all Obligations. SECTION 3. Fees; Commitments. ----------------- 3.01 Fees. (a) The Borrower shall pay to the Administrative ---- Agent for distribution to each Non-Defaulting Bank, a commitment fee (the "Commitment Fee") for the period from the Effective Date to but not including the Maturity Date (or such earlier date as the Total Revolving Loan Commitment shall have been terminated), computed at a rate for each day equal to .50% per annum on the daily average Unutilized Revolving Loan Commitment of such Non-Defaulting Bank. Accrued Commitment Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and on the Maturity Date (or such earlier date upon which the Total Revolving Loan Commitment is terminated). (b) The Borrower shall pay to the Administrative Agent for pro --- rata distribution to each Non-Defaulting Bank (based on its RL Percentage), ---- a fee in respect of each Letter of Credit (the "Letter of Credit Fee") computed at a rate per annum equal to the Applicable Margin for Revolving Loans maintained as Eurodollar Loans then in effect on the daily Stated Amount of such Letter of Credit. Accrued Letter of Credit Fees shall be due and -26- payable quarterly in arrears on each Quarterly Payment Date and upon the first day on or after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (c) The Borrower shall pay to each Letter of Credit Issuer a fee in respect of each Letter of Credit issued by such Letter of Credit Issuer (the "Facing Fee") computed at the rate of .25% per annum on the daily Stated Amount of such Letter of Credit. Accrued Facing Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and upon the first day on or after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (d) The Borrower shall pay directly to each Letter of Credit Issuer upon each issuance of, payment under, and/or amendment of, a Letter of Credit issued by such Letter of Credit Issuer such amount as shall at the time of such issuance, payment or amendment be the administrative charge which such Letter of Credit Issuer is generally charging for issuances of, payments under or amendments of, letters of credit issued by it. (e) The Borrower shall pay to the Arrangers, for their own accounts, such other fees as may be agreed to in writing from time to time between the Borrower and the Arrangers, when and as due. 3.02 Voluntary Termination or Reduction of Total Unutilized ------------------------------------------------------ Revolving Loan Commitment. (a) Upon at least three Business Days' prior ------------------------- notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to terminate or partially reduce the Total Unutilized Revolving Loan Commitment, in integral multiples of $1,000,000 in the case of partial reductions to the Total Unutilized Revolving Loan Commitment. Each reduction to the Total Unutilized Revolving Loan Commitment pursuant to this Section 3.02(a) shall apply to permanently reduce the Revolving Loan Commitments of the various Banks pro rata based on their respective RL Percentages. --- ---- (b) In the event of certain refusals by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as provided in Section 13.12(b), the Borrower shall have the right, subject to obtaining the consents required by Section 13.12(b), upon five Business Days' prior written notice to the Administrative Agent at its Notice Office (which -27- notice the Administrative Agent shall promptly transmit to each of the Banks), to terminate the entire Revolving Loan Commitment of such Bank, so long as all Loans, together with accrued and unpaid interest, Fees and all other amounts, owing to such Bank (including all amounts, if any, owing pursuant to Section 1.11) are repaid concurrently with the effectiveness of such termination (at which time Schedule I shall be deemed modified to reflect such changed amounts) and at such time, such Bank shall no longer constitute a "Bank" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, Sections 1.10, 1.11, 2.05, 4.04, 13.01 and 13.06), which shall survive as to such repaid Bank. 3.03 Mandatory Reduction of Commitments. (a) The Total Revolving ---------------------------------- Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate in its entirety on the Maturity Date. (b) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, the Total Revolving Loan Commitment shall be reduced from time to time to the extent required by Section 4.02. (c) Each reduction to the Total Revolving Loan Commitment pursuant to this Section 3.03 (or pursuant to Section 4.02) shall apply to proportionally and permanently reduce the Revolving Loan Commitment of each Bank (based on their RL Percentages). SECTION 4. Payments. -------- 4.01 Voluntary Prepayments. The Borrower shall have the right to --------------------- prepay the Loans, and the right to allocate such prepayments to Revolving Loans and/or Swingline Loans, made to the Borrower as the Borrower elects, in whole or in part, without premium or penalty except as otherwise provided in this Agreement, from time to time on the following terms and conditions: (i) the Borrower shall give the Administrative Agent at its Notice Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay the Loans, whether such Loans are Revolving Loans or Swingline Loans, the amount of such prepayment, the Types of Loans to be repaid and (in the case of Eurodollar Loans) the specific Borrowing or Borrowings pursuant to which made, which notice (I) shall be given by the Borrower prior to 12:00 Noon (New York time) (x) at least one Business Day prior -28- to the date of such prepayment in the case of Base Rate Loans, (y) on the date of such prepayment in the case of Swingline Loans and (z) at least three Business Days prior to the date of such prepayment in the case of Eurodollar Loans and (II) shall, except in the case of Swingline Loans, promptly be transmitted by the Administrative Agent to each of the Banks; (ii) each prepayment (other than prepayments in full of (I) all outstanding Base Rate Loans or (II) any outstanding Borrowing of Eurodollar Loans) shall be in an aggregate principal amount of at least (x) $1,000,000, in the case of Eurodollar Loans, (y) $500,000, in the case of Revolving Loans maintained as Base Rate Loans and (z) $100,000, in the case of Swingline Loans and, in each case, if greater, in integral multiples of $100,000, provided, that no partial prepayment of Eurodollar Loans made -------- pursuant to a Borrowing shall reduce the aggregate principal amount of the Eurodollar Loans outstanding pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto; (iii) at the time of any prepayment of Eurodollar Loans pursuant to this Section 4.01 on any date other than the last day of the Interest Period applicable thereto, the Borrower shall pay the amounts required pursuant to Section 1.11; (iv) except as provided in clause (v) below, each prepayment in respect of any Loans made pursuant to a Borrowing shall be applied pro rata --- ---- among the Banks which make such Loans, provided, that at the Borrower's -------- election in connection with any prepayment of Revolving Loans pursuant to this Section 4.01, such prepayment shall not be applied to any Revolving Loans of a Defaulting Bank; (v) in the event of certain refusals by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as provided in Section 13.12(b), the Borrower may, upon five Business Days' prior written notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks), repay all Loans of such Bank (including all amounts, if any, owing pursuant to Section 1.11), together with accrued and unpaid interest, Fees and all other amounts then owing to such Bank in accordance with said Section 13.12(b), so long as (A), the Revolving Loan Commitment of such Bank is terminated concurrently with such repayment (at which time Schedule I shall be deemed modified to reflect the changed Revolving Loan -29- Commitments) and (B) the consents required by Section 13.12(b) in connection with the repayment pursuant to this clause (v) shall have been obtained; and 4.02 Mandatory Repayments and Commitment Reductions. (a) If on ---------------------------------------------- any day the Aggregate Revolving Credit Exposure exceeds the Total Revolving Loan Commitment as then in effect, the Borrower shall prepay on such day the principal of outstanding Swingline Loans and, after all Swingline Loans have been repaid in full or if no Swingline Loans are outstanding, principal of outstanding Revolving Loans in an amount equal to such excess. If, after giving effect to the prepayment of all such outstanding Swingline Loans and Revolving Loans, the sum of the outstanding Letter of Credit Outstandings exceeds the Total Revolving Loan Commitment as then in effect, the Borrower shall pay to the Administrative Agent cash and/or Cash Equivalents in an amount equal to such excess (up to a maximum amount equal to the Letter of Credit Outstandings at such time), such cash and/or Cash Equivalents to be held as security for all obligations of the Borrower hereunder and under the other Credit Documents in a cash collateral account to be established by the Administrative Agent. (b) In addition to any other commitment reductions pursuant to this Section 4.02, on each date on or after the Effective Date upon which the Borrower or any of its Subsidiaries receives Net Sale Proceeds from any Asset Sale, the Total Revolving Loan Commitment shall be reduced by an amount equal to the Applicable Prepayment Percentage of the Net Sale Proceeds from such Asset Sale, provided that (x) with respect to no more -------- than $5,000,000 in the aggregate of such Net Sale Proceeds received by the Borrower or its Subsidiaries in any fiscal year of the Borrower, such Net Sale Proceeds shall not give rise to a mandatory commitment reduction on such date to the extent that no Default or Event of Default then exists and the Borrower delivers a certificate to the Administrative Agent on or prior to such date stating that such Net Sale Proceeds shall be used or contractually committed to be used to purchase assets used or to be used in the businesses permitted pursuant to Section 9.01 (including, without limitation (but only to the extent permitted by Section 9.02), the purchase of the capital stock of a Person engaged in such businesses) within 270 days following the date of receipt of such Net Sale Proceeds from such Asset Sale (which certificate shall set forth the estimates of the proceeds to be so expended) and (y)(i) if all or any portion of such Net Sale Proceeds are not so used (or contractually committed to be used) within such 270-day period, the Total Revolving Loan Commitment shall be reduced by an amount equal to such remaining portion as provided above and (ii) if all or any portion of such Net Sale Proceeds are not so used within such 270-day period referred to in clause (i) -30- of this clause (y) because such amount is contractually committed to be used and subsequent to such date such contract is terminated or expires without such portion being so used, the Total Revolving Loan Commitment shall be reduced by an amount equal to such remaining portion as provided above. (c) In addition to any other mandatory commitment reductions pursuant to this Section 4.02, on each date on or after the Effective Date on which the Borrower or any of its Subsidiaries receives any cash proceeds from any incurrence of Indebtedness (other than Indebtedness permitted to be incurred pursuant to Section 9.04 as in effect on the Effective Date) or issuance of Preferred Stock (other than (w) Disqualified Preferred Stock to the extent the proceeds therefrom are used to effect Permitted Acquisitions and (x) Qualified Preferred Stock by the Borrower or any of its Subsidiaries), the Total Revolving Loan Commitment shall be reduced by an amount equal to the Applicable Prepayment Percentage of the Net Cash Proceeds of the respective incurrence of Indebtedness or issuance of Preferred Stock. (d) In addition to any other mandatory commitment reductions pursuant to this Section 4.02, within 10 days following each date on or after the Effective Date on which the Borrower or any of its Subsidiaries receives any proceeds from any Recovery Event (other than proceeds from any Excluded Recovery Event), the Total Revolving Loan Commitment shall be reduced by an amount equal to 100% of the proceeds of such Recovery Event (net of reasonable costs (including, without limitation, legal costs and expenses) and taxes incurred in connection with such Recovery Event and the amount of such proceeds required to be used to repay any Indebtedness (other than Indebtedness of the Banks pursuant to this Agreement) which is secured by the respective assets subject to such Recovery Event)); provided -------- that (x) so long as no Default or Event of Default then exists and such proceeds do not exceed $5,000,000, the Total Revolving Loan Commitment shall not be reduced on such date to the extent that an Authorized Officer of the Borrower has delivered a certificate to the Administrative Agent on or prior to such date stating that such proceeds shall be used or shall be committed to be used to replace or restore any properties or assets in respect of which such proceeds were paid within 360 days following the date of such Recovery Event (which certificate shall set forth the estimates of the proceeds to be so expended) and (y) so long as no Default or Event of Default then exists and to the extent that (a) the amount of such proceeds exceeds $5,000,000, (b) the amount of such proceeds, together with other cash available to the Borrower and its Subsidiaries and permitted to be spent by them on Capital Expenditures during the relevant period, equals at least 100% of the -31- cost of replacement or restoration of the properties or assets in respect of which such proceeds were paid as determined by the Borrower and as supported by such estimates or bids from contractors or subcontractors or such other supporting information as the Administrative Agent may reasonably accept, (c) an Authorized Officer of the Borrower has delivered to the Administrative Agent a certificate on or prior to the date the application would otherwise be required pursuant to this Section 4.02(d) in the form described in clause (x) above and also certifying its determination as required by preceding clause (b) and certifying the sufficiency of business interruption insurance as required by succeeding clause (d), and (d) an Authorized Officer of the Borrower has delivered to the Administrative Agent such evidence as the Administrative Agent may reasonably request in form and substance reasonably satisfactory to the Administrative Agent establishing that the Borrower has sufficient business interruption insurance and that the Borrower will receive payment thereunder in such amounts and at such times as are necessary to satisfy all obligations and expenses of the Borrower (including, without limitation, all debt service requirements, including pursuant to this Agreement), without any delay or extension thereof, for the period from the date of the respective casualty, condemnation or other event giving rise to the Recovery Event and continuing through the completion of the replacement or restoration of respective properties or assets, then the entire amount of the proceeds of such Recovery Event and not just the portion in excess of $5,000,000 shall be deposited with the Administrative Agent pursuant to a cash collateral arrangement reasonably satisfactory to the Administrative Agent whereby such proceeds shall be disbursed to the Borrower from time to time as needed to pay or reimburse the Borrower or such Subsidiary actual costs incurred by it in connection with the replacement or restoration of the respective properties or assets (pursuant to such certification requirements as may be established by the Administrative Agent), provided -------- further, that at any time while an Event of Default has occurred and is ------- continuing, the Required Banks may direct the Administrative Agent (in which case the Administrative Agent shall, and is hereby authorized by the Borrower to, follow said directions) to apply any or all proceeds then on deposit in such collateral account to the repayment of Obligations hereunder in the same manner as proceeds would be applied pursuant to the Pledge Agreement, and provided further, that if all or any portion of such ---------------- proceeds not required to cause a mandatory commitment reduction pursuant to the second preceding proviso (whether pursuant to clause (x) or (y) thereof) are either (A) not so used or committed to be so used within 360 days after the date of the respective Recovery Event or (B) if committed to be used within 360 days after the date of receipt of such net proceeds and not so used within 18 months after the date of respective Recovery Event then, in either such case, the Total Revolving Loan Commitment shall be reduced by an amount equal to such -32- remaining portion not used or committed to be used in the case of preceding clause (A) and not used in the case of preceding clause (B) on the date occurring 360 days after the date of the respective Recovery Event in the case of clause (A) above or the date occurring 18 months after the date of the respective Recovery Event in the case of clause (B) above. (e) With respect to each repayment of Loans required by this Section 4.02, the Borrower may designate the Types of Loans which are to be repaid and, in the case of Eurodollar Loans, the specific Borrowing or Borrowings pursuant to which made, provided that: (i) repayments of -------- Eurodollar Loans pursuant to this Section 4.02 may only be made on the last day of an Interest Period applicable thereto unless (x) all Eurodollar Loans with Interest Periods ending on such date of required repayment and all Base Rate Loans have been paid in full and/or (y) concurrently with such repayment, the Borrower pays all breakage costs and other amounts owing to each Bank pursuant to Section 1.11; (ii) if any repayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Eurodollar Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto, such Borrowing shall be converted at the end of the then current Interest Period into a Borrowing of Base Rate Loans; and (iii) each repayment of Revolving Loans made pursuant to a Borrowing shall be applied pro rata among the Banks --- ---- which made such Revolving Loans. In the absence of a designation by the Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.11. Notwithstanding the foregoing provisions of this Section 4.02, if at any time the mandatory repayment of Loans pursuant to Section 4.02(a) (as a result of commitment reductions described in clauses (b), (c) or (d)) would result, after giving effect to the procedures set forth in this clause (i) above, in the Borrower incurring breakage costs under Section 1.11 as a result of Eurodollar Loans being repaid other than on the last day of an Interest Period applicable thereto (any such Eurodollar Loans, "Affected Loans"), the Borrower may elect, by written notice to the Administrative Agent, to have the provisions of the following sentence be applicable. At the time any Affected Loans are otherwise required to be prepaid the Borrower may elect to deposit 100% (or such lesser percentage elected by the Borrower as not being repaid) of the principal amounts that otherwise would have been paid in respect of the Affected Loans with the Administrative Agent to be held as security for the obligations of the Borrower hereunder pursuant to a cash collateral agreement to be entered into in form and substance satisfactory to the Administrative Agent, with such cash collateral to be released from such cash collateral account (and applied to repay the principal amount of such Eurodollar Loans) upon each -33- occurrence thereafter of the last day of an Interest Period applicable to Eurodollar Loans (or such earlier date or dates as shall be requested by the Borrower), with the amount to be so released and applied on the last day of each Interest Period to be the amount of such Eurodollar Loans to which such Interest Period applies (or, if less, the amount remaining in such cash collateral account). (f) Notwithstanding anything to the contrary contained elsewhere in this Agreement, (i) all then outstanding Swingline Loans shall be repaid in full on the Swingline Expiry Date and (ii) all other then outstanding Revolving Loans shall be repaid in full on the Maturity Date. 4.03 Method and Place of Payment. Except as otherwise --------------------------- specifically provided herein, all payments under this Agreement or any Note shall be made to the Administrative Agent for the ratable account of the Bank or Banks entitled thereto not later than 12:00 Noon (New York time) on the date when due and shall be made in U.S. Dollars in immediately available funds at the appropriate Payment Office of the Administrative Agent in respect of any obligation of the Borrower under this Agreement. Any payments under this Agreement or under any Note which are made later than 12:00 Noon (New York time) on any Business Day shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 4.04 Net Payments. (a) All payments made by the Borrower ------------ hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Sections 4.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, in the case of each Bank, except as provided in the second succeeding sentence, any tax, including any income, branch profits, franchise or similar tax, which in each case is imposed on or measured by the net income, net profits or capital of such Bank pursuant to the laws of the jurisdiction in which such Bank is organized or the jurisdiction in which the principal office or applicable lending office of such Bank is located or any political subdivision or taxing authority thereof or therein) and all interest, penalties or -34- similar liabilities with respect to such nonexcluded taxes, levies, imposts, duties, fees, assessments or other charges (all such nonexcluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due by the Borrower under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence (any such amounts, the "Gross-Up Amount"), the Borrower agrees to reimburse each Bank, upon the written request of such Bank, for the net amount, if any, of any taxes such Bank shall determine are incurred by such Bank (taking into account in calculating such net amount any allowable credit, deduction or other benefit available as a result of, or with respect to, the payment by the Borrower to such Bank of (i) the Gross-Up Amount or (ii) any amount paid pursuant to this sentence) that would not have been incurred in the absence of the payment by the Borrower of (i) the Gross-Up Amount or (ii) any amount paid pursuant to this sentence. The Borrower will furnish to the Administrative Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Bank, and reimburse such Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank in respect of any payments by or on behalf of the Borrower. (b) Each Bank party to this Agreement on the Effective Date hereby represents that, as of the Effective Date, all payments of principal, interest, and fees to be made to it by the Borrower pursuant to this Agreement will be totally exempt from withholding of United States federal tax. Each Bank that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees to deliver to the Borrower and the Administrative Agent on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.13 or 13.04, on the date of such assignment or transfer to such Bank, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Bank is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the -35- form of Exhibit D (any such certificate, a "Section 4.04(b)(ii) Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Bank agrees that (a) from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, and (b) upon the Borrower's reasonable request after the occurrence of any other event requiring the delivery of a Form 1001, Form 4224, Form W-8, or any successor form in addition to or in replacement of the forms previously delivered, it will deliver to the Borrower and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224, 1001, Form W-8 and a Section 4.04(b)(ii) Certificate, or any successor form, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Bank to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or it shall immediately notify the Borrower and the Administrative Agent of its inability to deliver any such form or certificate in which case such Bank shall not be required to deliver any such form or certificate pursuant to this Section 4.04(b). Notwithstanding anything to the contrary contained in Section 4.04(a), but subject to the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. federal income tax purposes to the extent that such Bank has not provided to the Borrower U.S. Internal Revenue Service forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.04(a) hereof to gross-up payments to be made to such Bank, or to indemnify and hold harmless or reimburse such Bank, in respect of income or similar taxes imposed by the United States if (I) such Bank has not provided to the Borrower the Internal Revenue Service forms required to be provided to the Borrower pursuant to this Section 4.04(b) or (II) in the case of a payment, other than interest, to a Bank described in clause (ii) above, to the extent that such forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 4.04 and except as set forth in Section 13.04(b), the Borrower agrees to pay additional amounts and to indemnify each Bank in the manner set forth in Section 4.04(a) (without regard to the identity of the jurisdiction requiring -36- the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date (or, if later, after the date such Bank became a party to this Agreement) in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. For purposes of the immediately preceding sentence, the final U.S. Treasury regulations that were issued October 6, 1997 with respect to the withholding of United States Federal income tax (the "New Withholding Regulations") shall not be considered to constitute a change after the Effective Date, or otherwise, in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of Taxes, notwithstanding that the New Withholding Regulations generally are only effective for payments made after December 31, 1999. The Borrower shall not be required to pay any additional amounts or indemnification under Section 4.04(a) to any Bank to the extent that the obligation to pay such additional amounts or indemnification would not have arisen but for the representation set forth in the first sentence of Section 4.04(b) above made by the Bank not being true. (c) If the Borrower pays any additional amount under this Section 4.04 with respect to taxes imposed on any payments made to or on behalf of a Bank and such Bank determines in its sole discretion that it has actually received or realized in connection therewith any refund of tax, or any reduction of, or credit against, its tax liabilities (a "Tax Benefit"), such Bank shall pay to the Borrower an amount that the Bank shall, in its sole discretion, determine is equal to the net benefit, after tax, which was obtained by the Bank as a consequence of such refund, reduction or credit; provided, however, that (i) any Bank may determine, in -------- ------- its sole discretion consistent with the policies of such Bank, whether to seek a Tax Benefit and (ii) nothing in this Section 4.04(c) shall require the Bank to disclose any confidential information to the Borrower (including, without limitation, its tax returns). (d) Each Bank shall use reasonable efforts (consistent with legal and regulatory restrictions and subject to overall policy considerations of such Bank) (i) to file any certificate or document or to furnish any information as reasonably requested by the Borrower pursuant to any applicable treaty, law or regulation or (ii) to designate a different applicable lending office of such Bank, if the making of such filing or the furnishing of such information or the designation of such other lending office would avoid the need for or reduce the amount of any additional amounts payable by the Borrower and would not, in the sole discretion of such Bank, be disadvantageous to such Bank. -37- (e) The provisions of this Section 4.04 are subject to the provisions of Section 13.18 (to the extent applicable). SECTION 5. Conditions Precedent to Effective Date. The -------------------------------------- occurrence of the Effective Date pursuant to Section 13.10, and the obligation of each Bank to make Loans hereunder, and the obligation of the Letter of Credit Issuer to issue Letters of Credit hereunder, in each case on the Effective Date, are subject at the time of the occurrence of the Effective Date to the satisfaction of the following conditions: 5.01 Execution of Agreement; Notes. On or prior to the Effective ----------------------------- Date, (i) this Agreement shall have been executed and delivered as provided in Section 13.10 and (ii) there shall have been delivered to the Administrative Agent for the account of each Bank that requests same, the appropriate Revolving Note and to BTCo the Swingline Note, in each case executed by the Borrower and in the amount, maturity and as otherwise provided herein. 5.02 Officer's Certificate. On the Effective Date, the --------------------- Administrative Agent shall have received a certificate dated such date signed by an appropriate officer of the Borrower stating that all of the applicable conditions set forth in Sections 5.05 through 5.08, inclusive, and 6.01 (other than such conditions that are subject to the satisfaction of the Arrangers and/or the Required Banks), have been satisfied on such date. 5.03 Opinions of Counsel. On the Effective Date, the ------------------- Administrative Agent shall have received opinions, addressed to each Arranger, the Administrative Agent, the Collateral Agent and each of the Banks and dated the Effective Date, from Skadden, Arps, Slate, Meagher & Flom LLP, special New York counsel to the Credit Parties, which opinion shall cover the matters contained in Exhibit E and such other matters incident to the transactions contemplated herein as the Arrangers and the Required Banks may reasonably request and be in form and substance reasonably satisfactory to the Arrangers. 5.04 Company Documents; Proceedings. (a) On the Effective Date, ------------------------------ the Administrative Agent shall have received from the Borrower and each other Credit Party a certificate, dated the Effective Date, signed by an Authorized Officer of such Credit Party, and attested to by the secretary or any assistant secretary of such Credit Party, in the form of Exhibit F with appropriate insertions, together with copies of the certificate of incorporation, by-laws or equivalent organizational documents of such Credit Party and the resolutions of such Credit Party referred to in such certificate and all of the foregoing (including each such -38- certificate of incorporation, by-laws or other organizational document) shall be reasonably satisfactory to the Arrangers. (b) On the Effective Date, the Administrative Agent shall have received a certificate from each Credit Party (x) to the effect that such Credit Party is in good standing in its respective state of organization and in those states where such Credit Party conducts business and (y) providing the resolutions adopted by such Credit Party with respect to the actions contemplated by this Agreement and the other Credit Documents, and all of the foregoing shall be acceptable to the Arrangers. (c) On the Effective Date, all Company and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be reasonably satisfactory in form and substance to the Arrangers, and the Administrative Agent shall have received all information and copies of all certificates, documents and papers, including good standing certificates, bring-down certificates and any other records of Company proceedings and governmental approvals, if any, which any Arranger reasonably may have requested in connection therewith, such documents and papers, where appropriate, to be certified by proper Company or governmental authorities. (d) On the Effective Date, the Cendant Documents (as in effect prior to the Cendant Amendment Effective Date), the Stockholders Agreement and the Existing Preferred Stock shall all be in full force and effect, and shall be in the form delivered to the Arrangers prior to the Effective Date. 5.05 Adverse Change, etc. (a) On the Effective Date, since -------------------- December 31, 1997, nothing shall have occurred which (i) either Arranger shall reasonably determine has had, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Banks or the Administrative Agent, or on the ability of any Credit Party to perform its obligations to them hereunder or under any other Credit Document or (ii) has had a Material Adverse Effect. (b) On the Effective Date, there shall not have occurred and be continuing any material adverse change to the syndication market for credit facilities similar in nature to this Agreement and there shall not have occurred and be continuing a material disruption or a material adverse change in financial, banking or capital markets that would have a material -39- adverse effect on the syndication, in each case as determined by the Arrangers in their reasonable discretion. 5.06 Litigation. On the Effective Date, there shall be no ---------- actions, suits, proceedings or investigations pending or to the Borrower's knowledge threatened (a) with respect to this Agreement or any other Document, (b) with respect to any Existing Indebtedness or (c) which either the Arranger or the Required Banks shall determine could reasonably be expected to have (i) a Material Adverse Effect or (ii) a material adverse effect on the rights or remedies of the Banks, the Administrative Agent or the Arrangers hereunder or under any other Credit Document or on the ability of any Credit Party to perform its respective obligations to the Banks, the Administrative Agent or the Arrangers hereunder or under any other Credit Document. 5.07 Approvals. On the Effective Date, (i) all necessary --------- governmental (domestic and foreign), regulatory and third party approvals in connection with any Existing Indebtedness, the Cendant Documents (as in effect prior to the Cendant Amendment Effective Date), the Stockholders Agreement, the Existing Preferred Stock, the transactions contemplated by the Credit Documents and otherwise referred to herein or therein shall have been obtained and remain in full force and (ii) all applicable waiting periods shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon the making of the Loans and the transactions contemplated by the Credit Documents or otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon, or materially delaying, or making economically unfeasible, the making of the Loans. 5.08 Refinancing of Indebtedness. (a) On the Effective Date, ---------------------------- the Borrower and its Subsidiaries shall have no Indebtedness or Preferred Stock outstanding other than (i) the Loans, (ii) the Existing Preferred Stock, and (iii) certain other indebtedness existing on the Effective Date as listed on Schedule III (with the Indebtedness described in this sub- clause (iii) being herein called the "Existing Indebtedness"). On and as of the Effective Date, all of the Existing Indebtedness shall remain outstanding without any default or event of default existing thereunder or arising as a result of the transactions contemplated hereby (except to the extent amended or waived by the parties thereto on terms and conditions satisfactory to the Arrangers). -40- (b) The Administrative Agent shall have received evidence in form, scope and substance reasonably satisfactory to it that the matters set forth in Section 5.08(a) have been satisfied on the Effective Date. 5.09 Pledge Agreement. On the Effective Date, each of the ----------------- Credit Parties shall have duly authorized, executed and delivered a Pledge Agreement in the form of Exhibit G (as amended, amended and restated, modified or supplemented from time to time in accordance with the terms thereof and hereof, the "Pledge Agreement") and shall have delivered to the Collateral Agent, as pledgee thereunder, all of the Pledged Securities referred to therein then owned by such Credit Parties and required to be pledged pursuant to the terms thereof, endorsed in blank in the case of promissory notes or accompanied by executed and undated stock powers in the case of capital stock, along with evidence that all other actions necessary or, in the reasonable opinion of the Collateral Agent, desirable, to perfect the security interests purported to be created by the Pledge Agreement have been taken, and the Pledge Agreement shall be in full force and effect. 5.10 Subsidiaries Guaranty. On the Effective Date, each --------------------- Guarantor shall have duly authorized, executed and delivered the Subsidiaries Guaranty in the form of Exhibit H (as amended, amended and restated, modified or supplemented from time to time in accordance with the terms thereof and hereof, the "Subsidiaries Guaranty"), and the Subsidiaries Guaranty shall be in full force and effect. 5.11 Employee Benefit Plans; Shareholders' Agreements; ------------------------------------------------- Management Agreements; Employment Agreements; Existing Indebtedness ------------------------------------------------------------------- Agreements. On or prior to the Effective Date, there shall have been ---------- delivered to the Administrative Agent true and correct copies, certified as true and complete by an appropriate officer of the Borrower of the following documents (in each case except to the extent already delivered to or made available for review by the Administrative Agent on or prior to the Effective Date), in each case as same will be in effect on the Effective Date after the transactions contemplated hereby: (a) all Plans (and for each Plan that is required to file an annual report on Internal Revenue Service Form 5500-series, a copy of the most recent such report and any other "employee benefit plans," as defined in Section 3(3) of ERISA, and any other material agreements, plans or arrangements, with or for the benefit of current or former employees of the Borrower or any of its Subsidiaries or any ERISA Affiliate (collectively, the "Employee Benefit Plans"); -41- (b) all agreements (including, without limitation, shareholders' agreements, subscription agreements and registration rights agreements) entered into by the Borrower or any of its Subsidiaries governing the terms and relative rights of its capital stock and any agreements entered into by shareholders relating to any such entity with respect to its capital stock (collectively, the "Shareholders' Agreements"); (c) all material agreements with members of, or with respect to, the management of the Borrower or any of its Subsidiaries after giving effect to the transactions contemplated hereby (collectively, the "Management Agreements"); (d) any material employment agreements entered into by the Borrower or any of its Subsidiaries after giving effect to the transactions contemplated hereby (collectively, the "Employment Agreements"); and (e) all agreements evidencing or relating to Existing Indebtedness of the Borrower or any of its Subsidiaries, which on an individual basis evidence Indebtedness greater than $2,000,000 (collectively, the "Existing Indebtedness Agreements"). all of which Employee Benefit Plans, Shareholders' Agreements, Management Agreements, Employment Agreements, and Existing Indebtedness Agreements shall be in form and substance reasonably satisfactory to the Arrangers and the Required Banks and shall be in full force and effect on the Effective Date. 5.12 Solvency Certificate. On or before the Effective Date, the -------------------- Administrative Agent shall have received a solvency certificate in the form of Exhibit I from the chief financial officer of the Borrower, dated the Effective Date, and supporting the conclusion that, after giving effect to the incurrence of all financings contemplated herein, the Borrower (on a stand-alone basis) and the Borrower and its Subsidiaries (on a consolidated basis), in each case, are not insolvent and will not be rendered insolvent by the indebtedness incurred in connection herewith, will not be left with unreasonably small capital with which to engage in its or their respective businesses and will not have incurred debts beyond its or their ability to pay such debts as they mature and become due. 5.13 Financial Statements; Balance Sheet. (a) On or prior to ----------------------------------- the Effective Date, there shall have been delivered to the Administrative Agent (i) true and correct copies of the financial statements referred to in Section 7.10(b) and (ii) an unaudited consolidated balance sheet of the Borrower and its Subsidiaries as of September 30, 1998, which financial -42- statements, unaudited consolidated balance sheet and funds flow statement shall be reasonably satisfactory to the Arrangers. (b) On or prior to the Effective Date, there shall have been delivered to the Administrative Agent, and the Administrative Agent hereby acknowledges receipt of, detailed projected consolidated financial statements of the Borrower and its Subsidiaries (the "Projections"), satisfactory in form and substance to the Arrangers. 5.14 Payment of Fees. On the Effective Date, all costs, fees --------------- and expenses, and all other compensation due to the Agents or the Banks (including, without limitation, legal fees and expenses) shall have been paid to the extent due. SECTION 6. Conditions Precedent to All Credit Events. The ----------------------------------------- obligation of each Bank to make Loans (including Loans made on the Effective Date but excluding Mandatory Borrowings made thereafter, which shall be made as provided in Section 1.01(c)), and the obligation of a Letter of Credit Issuer to issue any Letter of Credit, is subject, at the time of each such Credit Event (except as hereinafter indicated), to the satisfaction of the following conditions: 6.01 No Default; Representations and Warranties. At the time ------------------------------------------ of each such Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein or in any other Credit Document shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on the date of such Credit Event (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date). 6.02 Notice of Borrowing; Letter of Credit Request. (a) Prior --------------------------------------------- to the making of each Loan (excluding Swingline Loans and Mandatory Borrowings), the Administrative Agent shall have received a Notice of Borrowing meeting the requirements of Section 1.03(a). Prior to the making of any Swingline Loan, BTCo shall have received the notice required by Section 1.03(b)(i). (b) Prior to the issuance of each Letter of Credit, the Administrative Agent and the respective Letter of Credit Issuer shall have received a Letter of Credit Request meeting the requirements of Section 2.02(a). -43- The occurrence of the Effective Date and the acceptance of the benefits or proceeds of each Credit Event shall constitute a representation and warranty by the Borrower to each of the Arrangers and each of the Banks that all the conditions specified in Section 5 and in this Section 6 and applicable to such Credit Event (other than such conditions that are subject to the satisfaction of the Arrangers and/or the Required Banks) exist as of that time. All of the Notes, certificates, legal opinions and other documents and papers referred to in Section 5 and in this Section 6, unless otherwise specified, shall be delivered to the Administrative Agent at the Notice Office for the account of each of the Banks and, except for the Notes, in sufficient counterparts or copies for each of the Banks and shall be in form and substance satisfactory to the Banks. SECTION 7. Representations and Warranties. In order to induce the ------------------------------ Banks to enter into this Agreement and to make the Loans and issue and/or participate in the Letters of Credit provided for herein, the Borrower makes the following representations and warranties to the Banks, all of which shall survive the execution and delivery of this Agreement, the making of the Loans and the issuance of the Letters of Credit (with the occurrence of the Effective Date and each Credit Event on and after the Effective Date being deemed to constitute a representation and warranty by the Borrower that the matters specified in this Section 7 are true and correct in all material respects on and as of the Effective Date and the date of each such Credit Event, unless stated to relate to a specific earlier date in which case such representations and warranties shall be true and correct in all material respects only as of such earlier date): 7.01 Company Status. The Borrower and each of its Subsidiaries (i) -------------- is a duly organized and validly existing Company in good standing under the laws of the jurisdiction of its organization, (ii) has the Company power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified or in good standing would have a Material Adverse Effect. 7.02 Company Power and Authority. Each Credit Party has the --------------------------- Company power and authority to execute, deliver and carry out the terms and provisions of the Credit Documents to which it is a party and has taken all necessary Company action to authorize the execution, delivery and performance of the Documents to which it is a party. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each -44- such Credit Document constitutes the legal, valid and binding obligation of such Credit Party enforceable against it in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). 7.03 No Violation. Neither the execution, delivery or performance ------------ by any Credit Party of the Credit Documents to which it is a party, nor compliance by any Credit Party with the terms and provisions thereof, nor the consummation of the transactions contemplated herein or therein, (i) will contravene any material provision of any applicable law, statute, rule or regulation, or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Pledge Agreement) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of such Credit Party or any of its Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement or instrument to which such Credit Party or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject (including, without limitation, the Existing Indebtedness), or (iii) will violate any provision of the certificate of incorporation, by-laws, certificate of partnership, partnership agreement, certificate of limited liability company, limited liability company agreement or equivalent organizational document, as the case may be, of such Credit Party or any of its Subsidiaries. 7.04 Litigation. There are no actions, suits, proceedings or ---------- investigations pending or, to the knowledge of the Borrower, threatened (i) with respect to any Credit Document, (ii) with respect to the Cendant Documents, the Stockholders Agreement, the Existing Preferred Stock or any other Document that could reasonably be expected to have a Material Adverse Effect or (iii) with respect to the Borrower or any of its Subsidiaries (x) that are likely to have a Material Adverse Effect (after giving effect to projected reserves for remediation expenses, the anticipated timing of remediation expenses, potential insurance and indemnification recoveries and tax savings) or (y) that could reasonably be expected to have a material adverse effect on the rights or remedies of the Arrangers, the Administrative Agent or the Banks or on the ability of any Credit Party to perform its respective obligations to the Arrangers, the Administrative Agent or the Banks hereunder and under the other Credit Documents to which it is, or will be, a party. Additionally, there does not exist any -45- judgment, order or injunction prohibiting or imposing material adverse conditions upon the occurrence of any Credit Event. 7.05 Use of Proceeds; Margin Regulations. ----------------------------------- (a) The proceeds of all Revolving Loans and Swingline Loans shall be utilized for the general corporate and working capital purposes of the Borrower and its Subsidiaries (including, but not limited to, Permitted Acquisitions). (b) Neither the making of any Loan, nor the use of the proceeds thereof, nor the occurrence of any other Credit Event, will violate or be inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System and no part of any Credit Event (or the proceeds thereof) will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock. 7.06 Governmental Approvals. Except as may have been obtained or ---------------------- made on or prior to the Effective Date (and which remain in full force and effect on the Effective Date), no order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance by the Credit Parties of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. 7.07 Investment Company Act. Neither the Borrower nor any of its ---------------------- Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 7.08 Public Utility Holding Company Act. Neither the Borrower nor ---------------------------------- any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.09 True and Complete Disclosure. All factual information (taken ---------------------------- as a whole) heretofore or contemporaneously furnished by or on behalf of the Borrower or any of -46- its Subsidiaries in writing to any Arranger or any Bank (including, without limitation, all information contained in the Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of any such Persons in writing to any Arranger or any Bank will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided, it being understood and agreed that for purposes of this Section 7.09, such factual information shall not include the Projections or any pro forma financial information. --- ----- 7.10 Financial Condition; Financial Statements. (a) On and as of ----------------------------------------- the Effective Date, after giving effect to all Indebtedness (including the Loans) incurred, and to be incurred, and Liens created, and to be created, by each Credit Party in connection therewith, with respect to the Borrower (on a stand-alone basis) and the Borrower and its Subsidiaries (on a consolidated basis), (x) the sum of the assets, at a fair valuation, of the Borrower (on a stand-alone basis) and the Borrower and its Subsidiaries (on a consolidated basis), will exceed its or their debts, (y) it has or they have not incurred nor intended to, nor believes or believe that it or they will, incur debts beyond its or their ability to pay such debts as such debts mature and (z) it or they will have sufficient capital with which to conduct its or their business. For purposes of this Section 7.10, "debt" means any liability on a claim, and "claim" means (i) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (b) Prior to the Effective Date, the Borrower has delivered to the Banks the consolidated balance sheets of the Borrower and its consolidated Subsidiaries at December 31, 1996, December 31, 1997 and September 30, 1998, and the related statements of income and cash flows and changes in shareholders' equity of the Borrower for the fiscal years or nine-month period, as the case may be, ended as of said dates. All such financial statements have been prepared in accordance with GAAP consistently applied except to the -47- extent provided in the notes to said financial statements and subject, in the case of the nine-month statements, to normal year-end audit adjustments (all of which are of a recurring nature and none of which, individually or in the aggregate, would be material) and the absence of footnotes. (c) Since December 31, 1997, nothing has occurred that has had or could reasonably be expected to have a Material Adverse Effect. (d) Except as fully reflected in the financial statements described in Section 7.10(b) and the Indebtedness incurred under this Agreement, (i) there were as of the Effective Date (and after giving effect to any Loans made on such date), no liabilities or obligations (excluding current obligations incurred in the ordinary course of business) with respect to the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in the aggregate, could reasonably be expected to be material to the Borrower and its Subsidiaries taken as a whole and (ii) the Borrower knows of no basis for the assertion against it or any of its Subsidiaries of any such liability or obligation which, either individually or in the aggregate, are or would be reasonably likely to have, a Material Adverse Effect. (e) On and as of the Effective Date, the Projections have been prepared on a basis consistent with the financial statements referred to in Section 7.10(b), and have been prepared in good faith and are based on reasonable assumptions under the then known facts and circumstances. On the Effective Date, the management of the Borrower believes that the Projections are reasonable and attainable based upon the then known facts and circumstances (it being understood that nothing contained in this Section 7.10(e) shall constitute a representation that the results forecasted in such Projections will in fact be achieved). On and as of the Effective Date, there is no fact known to the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Banks for use in connection with the transactions contemplated hereby. 7.11 Security Interests. On and after the Effective Date, the ------------------ Security Documents create (or after the execution and delivery thereof will create), as security for the Obligations, a valid and enforceable perfected security interest in and Lien on all of the Collateral subject thereto, superior to and prior to the rights of all third Persons, and subject to no other Liens (except that such Collateral may be subject to Permitted Liens). No filings -48- or recordings are required in order to perfect and/or render enforceable as against third parties the security interests created under the Security Documents except for filings or recordings required in connection with the Security Documents which shall have been made on or prior to the Effective Date with respect to the Pledge Agreement as contemplated by Section 5.09 or on or prior to the execution and delivery thereof as contemplated by Sections 8.11, 8.13 and 9.13. 7.12 Compliance with ERISA. Part A of Schedule IV sets forth each --------------------- Plan and each Multiemployer Plan; each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including without limitation ERISA and the Code; each Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; except as described in item (i) set forth on Part B of Schedule IV, all contributions required to be made with respect to a Plan have been timely made by the Borrower and each Subsidiary of the Borrower; neither the Borrower nor any Subsidiary of the Borrower has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan pursuant to Section 409, 502(i) or 502(l) of ERISA or Section 4975 of the Code or expects to incur any such liability under any of the foregoing sections with respect to any Plan; no condition exists which presents a material risk to the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate of incurring a material liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no action, suit, proceeding or hearing with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, expected or, to the best knowledge of the Borrower threatened; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) maintained by the Borrower or any Subsidiary which covers or has covered employees or former employees of the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate has at all times been operated in material compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan; and, except as described in item (ii) set forth on Part B of Schedule IV, the Borrower and its Subsidiaries may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. -49- 7.13 Capitalization. On the Effective Date, the authorized capital -------------- stock of the Borrower shall consist of (i) 50,000,000 shares of common stock, $.01 par value per share (such authorized shares of common stock, together with any subsequently authorized shares of common stock of the Borrower, the "Borrower Common Stock"), 10,000,000 of which shares shall be issued and outstanding and (ii) 405,000 shares of preferred stock, $.01 par value per share, (x) 260,000 of which shares are authorized to be the Borrower's 9.00% Series A Cumulative Senior Redeemable Preferred Stock (the "Series A Preferred Stock"), of which 157,591 shares shall be issued and outstanding, (y) 25,000 of which shares are authorized to be the Borrower's 5.00% Series B Cumulative Convertible Redeemable Preferred Stock (the "Series B Preferred Stock"), of which 24,000 shares shall be issued and outstanding, and (z) 125,000 of which shares are authorized to be the Borrower's 18.00% Series C Cumulative Junior Redeemable Preferred Stock (the "Series C Preferred Stock", and together with the Series A Preferred Stock and the Series B Preferred Stock, the "Existing Preferred Stock"), of which 68,510 shares shall be issued and outstanding. All such outstanding shares have been duly and validly issued, are fully paid and nonassessable and have been issued free of preemptive rights. Except as set forth on Schedule V hereto, the Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. 7.14 Subsidiaries. (a) On and as of the Effective Date, the ------------ Borrower has no Subsidiaries other than those Subsidiaries listed on Schedule VI. Schedule VI correctly sets forth, as of the Effective Date, the percentage ownership (direct and indirect) of the Borrower in each class of capital stock or other equity interests of each of its Subsidiaries and also identifies the direct owner thereof. All outstanding shares of capital stock of each Subsidiary of the Borrower have been duly and validly issued, are fully paid and non- assessable and have been issued free of preemptive rights. Except as set forth on Schedule V hereto, no Subsidiary of the Borrower has outstanding any securities convertible into or exchangeable for its capital stock or outstanding any right to subscribe for or to purchase, or any options or warrants for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of or any calls, commitments or claims of any character relating to, its capital stock or any stock appreciation or similar rights. 7.15 Intellectual Property, etc. Each of the Borrower and each of --------------------------- its Subsidiaries owns, licenses or has the right to use all patents, trademarks, permits, service -50- marks, trade names, copyrights, licenses, franchises and other rights with respect to the foregoing reasonably necessary for the conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, would result in a Material Adverse Effect. 7.16 Compliance with Statutes, etc. Each of the Borrower and each ------------------------------ of its Subsidiaries is in compliance with all applicable statutes, regulations, rules and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property, except such non-compliance as is not reasonably likely to, individually or in the aggregate, have a Material Adverse Effect. 7.17 Environmental Matters. (a) Each of the Borrower and its --------------------- Subsidiaries on the date of each Credit Event is in material compliance with, all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws and none of the Borrower or any of its Subsidiaries is liable for any material penalties, fines or forfeitures for failure to comply with any of the foregoing. There are no pending unresolved past or, to the knowledge of the Borrower, threatened Environmental Claims against the Borrower or any of its Subsidiaries, or against any Real Property owned or operated by the Borrower, any of its Subsidiaries. There are no facts, circumstances, conditions or occurrences with respect to the business or operations of the Borrower or any of its Subsidiaries or any Real Property at any time owned or operated by the Borrower or any of its Subsidiaries that would reasonably be expected (i) to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any of their currently owned or operated Real Property or (ii) to cause any such currently owned or operated Real Property to be subject to any restrictions on the ownership, occupancy, use or transferability of such Real Property by the Borrower or any of its Subsidiaries under any applicable Environmental Law. (b) Hazardous Materials have not at any time been generated, used, treated or stored on, or transported by the Borrower or any of its Subsidiaries or by any Person acting for or under contract to the Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any other Person, to or from any Real Property owned or operated by the Borrower or any of -51- its Subsidiaries except in material compliance with all applicable Environmental Laws and as reasonably required in connection with the operation, use and maintenance of such Real Property or by the Borrower's or such Subsidiary's business. Hazardous Materials have not at any time been Released by the Borrower or any of its Subsidiaries or by any Person acting for or under contract to the Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any other Person on or from any Real Property owned or operated by the Borrower or any of its Subsidiaries except in compliance with all applicable Environmental Laws and as reasonably required in connection with the operation, use and maintenance of such Real Property or by the Borrower's or such Subsidiary's business. There are not now any underground storage tanks owned or operated by the Borrower or any of its Subsidiaries, or to the knowledge of the Borrower, by any other Person, located on any Real Property owned or operated by the Borrower or any of its Subsidiaries. (c) Notwithstanding anything to the contrary in this Section 7.17, the representations made in this Section 7.17 shall only be untrue if the aggregate effect of all conditions, failures, noncompliances, Environmental Claims, Releases and presence of underground storage tanks, in each case of the types described above, would reasonably be expected to have a Material Adverse Effect (after giving effect to projected reserves for remediation expenses, the anticipated timing of remediation expenses, potential insurance and indemnification recoveries and tax savings). 7.18 Properties. Each of the Borrower and each of its Subsidiaries ---------- has good and marketable title to, or a validly subsisting leasehold interest in, all material properties owned or leased by it except where failure to do so would not be reasonably likely to have a Material Adverse Effect. 7.19 Labor Relations. Neither the Borrower nor any of its --------------- Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a Material Adverse Effect. There is (i) no unfair labor practice complaint pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower and its Subsidiaries, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower and its Subsidiaries, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower and its Subsidiaries, threatened against the Borrower or any of its Subsidiaries and (iii) no union representation question existing with respect to the employees of the Borrower or any of its Subsidiaries and, to the best knowledge of the Borrower and its Subsidiaries, no union organizing activities are taking place, except (with respect to any -52- matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate) such as is not reasonably likely to have a Material Adverse Effect. 7.20 Tax Returns and Payments. Each of the Borrower and each of its ------------------------ Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and fully provided for on the financial statements of the Borrower and its Subsidiaries in accordance with GAAP. Each of the Borrower and each of its Subsidiaries has provided adequate reserves (in the good faith judgment of the management of the Borrower) for the payment of all federal, state and foreign income taxes which have not yet become due. There is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Borrower or any of its Subsidiaries, threatened by any authority regarding any taxes relating to the Borrower or any of its Subsidiaries. Neither the Borrower nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of the Borrower or any of its Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of the Borrower or any of its Subsidiaries not to be subject to the normally applicable statute of limitations, in each case except to the extent the liability of the Borrower or such Subsidiary giving rise to any extension of any such normally applicable statute of limitation is not material. 7.21 Existing Indebtedness. Schedule III sets forth a true and --------------------- complete list of all Existing Indebtedness of the Borrower and its Subsidiaries as of the Effective Date, in each case showing the aggregate principal amount thereof and the name of the Borrower and any other entity which directly or indirectly guaranteed such debt. 7.22 Insurance. Set forth on Schedule VII hereto is a true, --------- correct and complete summary of all insurance carried by each Credit Party on and as of the Effective Date, with the amounts insured set forth therein. 7.23 Year 2000 Representation. Any reprogramming required to ------------------------ permit the proper functioning, in and following the year 2000, of (i) the Borrower's and its Subsidiaries' computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which the Borrower's and its Subsidiaries' systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be -53- completed by December 31, 1999, except to the extent the failure to complete such reprogramming could not reasonably be expected to result in a Default, an Event of Default or a Material Adverse Effect. The cost to the Borrower and its Subsidiaries of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower and its Subsidiaries (including, without limitation, reprogramming errors and the failure of others' systems or equipment) could not reasonably be expected to result in a Default, an Event of Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower and its Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower and its Subsidiaries to conduct their respective businesses without a Material Adverse Effect. SECTION 8. Affirmative Covenants. The Borrower hereby covenants --------------------- and agrees that as of the Effective Date and thereafter for so long as this Agreement is in effect and until the Total Commitment has terminated, no Letters of Credit or Notes are outstanding and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations (other than any indemnities described in Section 13.13 which are not then due and payable) incurred hereunder, are paid in full: 8.01 Information Covenants. The Borrower will furnish to each --------------------- Bank: (a) Quarterly Financial Statements. Within 50 days after the ------------------------------ close of the first three quarterly accounting periods in each fiscal year of the Borrower, (i) the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such quarterly accounting period and the related consolidated statements of income and retained earnings and of cash flows for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period and the budgeted figures for such quarterly period as set forth in the respective budget delivered pursuant to Section 8.01(c) and (ii) management's discussion and analysis of significant operational and financial developments during such quarterly period, all of which shall be in reasonable detail and certified by the chief financial officer or other Authorized Officer of the Borrower that they fairly present in all material respects the financial condition of the Borrower and its Subsidiaries as of the dates indicated and the results of their operations and changes in their cash flows for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes. -54- (b) Annual Financial Statements. Within 95 days after the --------------------------- close of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year and setting forth comparative consolidated figures for the preceding fiscal year and comparable budgeted figures for such fiscal year as set forth in the respective budget delivered pursuant to Section 8.01(c) and (except for such comparable budgeted figures) certified by such independent certified public accountants of recognized national standing as shall be reasonably acceptable to the Administrative Agent, in each case to the effect that such statements fairly present in all material respects the financial condition of the Borrower and its Subsidiaries as of the dates indicated and the results of their operations and changes in financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted in accordance with generally accepted auditing standards, no Default or Event of Default which has occurred and is continuing has come to their attention or, if such a Default or an Event of Default has come to their attention, a statement as to the nature thereof. (c) Budgets, etc. Not more than 60 days after the commencement ------------- of each fiscal year of the Borrower, consolidated budgets of the Borrower and its Subsidiaries (x) in reasonable detail for each of the four fiscal quarters of such fiscal year and (y) in summary form for each of the two fiscal years immediately following such fiscal year, in each case as customarily prepared by management for its internal use setting forth, with appropriate discussion, the principal assumptions upon which such budgets are based. Together with each delivery of financial statements pursuant to Sections 8.01(a) and (b), a comparison of the current year to date financial results against the budgets required to be submitted pursuant to this clause (c) shall be presented. (d) Officer's Certificates. At the time of the delivery of the ---------------------- financial statements provided for in Sections 8.01(a) and (b), a certificate of the chief financial officer or other Authorized Officer of the Borrower to the effect that, to the best of such officer's knowledge, no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall, if delivered in connection with the financial statements in respect of a period ending on the last day of a fiscal quarter or fiscal year of the Borrower, set forth (x) the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Sections -55- 4.02, 9.02, 9.04(d), 9.05(g), (k) and (s), 9.08 and 9.09 as at the end of such fiscal quarter or year, as the case may be, and (y) the calculation of the Total Leverage Ratio as at the last day of the respective fiscal quarter or fiscal year of the Borrower, as the case may be. (e) Notice of Default or Litigation. Promptly, and in any ------------------------------- event within five Business Days after a senior officer of the Borrower obtains actual knowledge thereof, notice of (i) the occurrence of any event which constitutes a Default or an Event of Default, which notice shall specify the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto, (ii) any litigation or proceeding pending or threatened (x) against the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect, (y) with respect to any material Indebtedness of the Borrower or any of its Subsidiaries or (z) with respect to any Document and (iii) any other event which could reasonably be expected to have a Material Adverse Effect. (f) Auditors' Reports. Promptly upon receipt thereof, a copy ----------------- of each report or "management letter" submitted to the Borrower or any of its Subsidiaries by its independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower or any of its Subsidiaries. (g) Environmental Matters. Promptly and in any event within --------------------- five Business Days after a senior officer of the Borrower obtains actual knowledge of any of the following (but only to the extent that any of the following, either individually or in the aggregate, could reasonably be expected to (x) have a Material Adverse Effect, (y) result in a remedial cost to the Borrower or any of its Subsidiaries not previously disclosed to the Arrangers and the Banks prior to the Effective Date in excess of $500,000 or (z) result in a remedial cost to the Borrower or any of its Subsidiaries in excess of $1,000,000 over and above the established reserve for remediation costs as set forth in the Projections), written notice of: (i) any pending or threatened Environmental Claim against the Borrower or any of its Subsidiaries or any Real Property owned or operated by the Borrower or any of its Subsidiaries; (ii) any condition or occurrence on any Real Property at any time owned or operated by the Borrower or any of its Subsidiaries that (x) results in noncompliance by the Borrower or any of its Subsidiaries with any applicable Environmental Law or (y) could -56- reasonably be anticipated to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any such Real Property; (iii) any condition or occurrence on any Real Property currently owned or operated by the Borrower or any of its Subsidiaries that could reasonably be anticipated to cause such Real Property to be subject to any restrictions on the ownership, occupancy, use or transferability by the Borrower or such Subsidiary, as the case may be, of its interest in such Real Property under any Environmental Law; and (iv) the taking of any removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any Real Property owned or operated by the Borrower or any of its Subsidiaries. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, occurrence or removal or remedial action and the Borrower's response or proposed response thereto. In addition, the Borrower agrees to provide the Banks with copies of all material communications by the Borrower or any of its Subsidiaries with any Person, government or governmental agency relating to Environmental Laws or to any of the matters set forth in clauses (i)-(iv) above, and such reasonably detailed reports relating to any of the matters set forth in clauses (i)- (iv) above as may reasonably be requested by the Administrative Agent or the Required Banks. (h) Annual Meetings with Banks. At the written request of the -------------------------- Administrative Agent, the Borrower shall within 120 days after the close of each of its fiscal years, hold a meeting (at a mutually agreeable location and time) open to all of the Banks at which meeting shall be reviewed the financial results of the previous fiscal year and the financial condition of the Borrower and its Subsidiaries and the budgets presented for the current fiscal year of the Borrower and its Subsidiaries. (i) Notice of Commitment Reductions. On or prior to the date ------------------------------- of any reduction to the Total Revolving Loan Commitment, the Borrower shall provide written notice of the amount of the reduction to the Total Revolving Loan Commitment, and the calculation thereof (in reasonable detail). (j) Other Information. Promptly upon transmission thereof, ----------------- copies of any filings and registrations with, and reports to, the SEC by the Borrower or any of its Subsidiaries and copies of all financial statements, proxy statements, notices and reports as -57- the Borrower or any of its Subsidiaries shall send generally to analysts and, with reasonable promptness, such other information or documents (financial or otherwise) as any Arranger on its own behalf or on behalf of the Required Banks may reasonably request from time to time. 8.02 Books, Records and Inspections. The Borrower will, and will ------------------------------ cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit, upon reasonable notice to the chief financial officer or other Authorized Officer of the Borrower, officers and designated representatives of either Arranger or the Required Banks to visit and inspect under the guidance of officers of the Borrower any of the properties or assets of the Borrower and any of its Subsidiaries in whomsoever's possession, and to examine the books of account of the Borrower and any of its Subsidiaries and discuss the affairs, finances and accounts of the Borrower and of any of its Subsidiaries with, and be advised as to the same by, their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as such Arranger or the Required Banks may desire, provided that so long as no -------- Default or Event of Default is then in existence, the Borrower shall have the right to participate in any discussions of the Arrangers or the Banks with any independent accountants of the Borrowers. 8.03 Insurance. The Borrower will, and will cause each of its --------- Subsidiaries to (i) maintain, with financially sound and reputable insurance companies, insurance on all its property in at least such amounts and against at least such risks as is consistent and in accordance with industry practice and (ii) furnish to the Administrative Agent and each of the Banks, upon request, full information as to the insurance carried. In addition to the requirements of the immediately preceding sentence, the Borrower will at all times cause insurance of the types described in Schedule VII to be maintained (with the same scope of coverage as that described in Schedule VII) at levels which are consistent with its practices immediately before the Effective Date. Such insurance shall include physical damage insurance on all real and personal property (whether now owned or hereafter acquired) on an all risk basis and business interruption insurance. 8.04 Payment of Taxes. The Borrower will pay and discharge, and ---------------- will cause each of its Subsidiaries to pay and discharge, all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any material properties belonging to it, prior to the date on which penalties attach thereto, and all -58- material lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 9.03(a); provided, that neither the Borrower nor any of its Subsidiaries shall be -------- required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP. 8.05 Corporate Franchises. The Borrower will do, and will cause -------------------- each of its Subsidiaries to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, authority to do business, licenses and patents, except for rights, franchises, authority to do business, licenses and patents the loss of which (individually or in the aggregate) could not reasonably be expected to have a Material Adverse Effect; provided, -------- however, that any transaction permitted by Section 9.02 will not constitute ------- a breach of this Section 8.05. 8.06 Compliance with Statutes; etc. The Borrower will, and will ------------------------------ cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property, except for such noncompliances as would not, either individually or in the aggregate, have a Material Adverse Effect or a material adverse effect on the ability of any Credit Party to perform its obligations under any Credit Document to which it is a party. 8.07 Compliance with Environmental Laws. (i) The Borrower will ---------------------------------- comply, and will cause each of its Subsidiaries to comply, in all material respects with all Environmental Laws applicable to their businesses or the ownership or use of its Real Property now or hereafter owned or operated by the Borrower or any of its Subsidiaries, will promptly pay or, with respect to any of its Subsidiaries, cause to be paid all costs and expenses incurred in connection with such compliance, and will keep or cause to be kept all such Real Property free and clear of any Liens imposed pursuant to such Environmental Laws and (ii) none of the Borrower or any of its Subsidiaries will generate, use, treat, store, Release or dispose of, or permit the generation, use, treatment, storage, release or disposal of, Hazardous Materials on any Real Property owned or operated by the Borrower or any of its Subsidiaries other than in compliance with Environmental Laws and as required in connection with the normal business operations of -59- the Borrower or its Subsidiaries, or transport or permit the transportation of Hazardous Materials other than in compliance with Environmental Laws and as required in connection with the normal business operations of the Borrower or its Subsidiaries, unless the failure to comply with the requirements specified in clause (i) or (ii) above, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. If the Borrower or any of its Subsidiaries or any tenant or occupant of any Real Property owned or operated by the Borrower or any of its Subsidiaries causes or permits any intentional or unintentional act or omission resulting in the presence or Release of any Hazardous Material in a quantity or concentration sufficient to require reporting or to trigger an obligation to undertake clean-up, removal or remedial action under applicable Environmental Laws, the Borrower agrees to undertake, and/or to cause any of its Subsidiaries, tenants or occupants to undertake, at their sole expense, any clean up, removal, remedial or other action required pursuant to Environmental Laws to remove and clean up any Hazardous Materials from any Real Property except where the failure to do so would not reasonably be expected to have a Material Adverse Effect; provided -------- that none of the Borrower or any of its Subsidiaries shall be required to comply with any such order or directive which is being contested in good faith and by proper proceedings so long as it has maintained adequate reserves with respect to such compliance to the extent required in accordance with GAAP. Notwithstanding any provision of this Section 8.07, the Borrower shall be required by this Section to exercise any degree of control over the operations of any of its Subsidiaries that could reasonably be construed under applicable Environmental Law to make the Borrower liable for Environmental Claims arising from or causally related to the Real Property or operations of such Subsidiary as an owner or an operator or upon any other basis. 8.08 ERISA. As soon as possible and, in any event, within ----- fifteen Business Days after the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, the Borrower will deliver to each of the Banks a certificate of the chief financial officer of the Borrower setting forth the full details as to such occurrence and the action, if any, that the Borrower, such Subsidiary or an ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower, the Subsidiary, the ERISA Affiliate, the PBGC or any other governmental agency, or a Plan; that any contribution required to be made by the Borrower, any Subsidiary or any ERISA Affiliate with respect to a Plan has not been timely made; that the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate will or is reasonably expected to incur any material liability (including any indirect, contingent, or secondary liability) to or on account; Section 4980 of the Code or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; that the Borrower or any Subsidiary of the -60- Borrower will or is reasonably expected to incur any material liability (including any indirect, contingent, or secondary liability) with respect to a Plan under Section 4975 of the Code or Section 409, 502 (i) or 502(1) of ERISA; or that the Borrower or any Subsidiary of the Borrower will or is reasonably expected to incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA). The Borrower will deliver to each of the Banks at the request of any Bank on ten Business Days' notice a complete copy of the annual report (on Internal Revenue Service Form 5500- series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Banks pursuant to the first sentence hereof, copies of any material documents or other information required to be furnished to the PBGC, and any material notices received by the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate with respect to any Plan shall be delivered to the Banks no later than ten Business Days after the date such documents and/or information has been furnished to the PBGC or such notice has been received by the Borrower, such Subsidiary or such ERISA Affiliate, as applicable. 8.09 Good Repair. The Borrower will, and will cause each of its ----------- Subsidiaries to, ensure that its material properties and equipment used in its business are kept in good repair, working order and condition, ordinary wear and tear excepted, and that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner useful or customary for companies in similar businesses. 8.10 End of Fiscal Years; Fiscal Quarters. The Borrower will, ------------------------------------ for financial reporting purposes, cause (i) each of its, and each of its Subsidiaries', fiscal years to end on December 31 of each year and (ii) each of its, and each of its Subsidiaries', fiscal quarters to end on March 31, June 30, September 30 and December 31 of each year. 8.11 Additional Security; Further Assurances. (a) The Borrower --------------------------------------- will, and will cause each of its Wholly-Owned Subsidiaries to, grant to the Collateral Agent security interests in such assets of the Borrower and its Subsidiaries which are of the type required to be pledged, assigned or hypothecated pursuant to the Pledge Agreement to the extent requested from time to time by the Administrative Agent or the Required Banks (collectively, -61- the "Additional Security Documents"). All such security interests shall be granted pursuant to documentation reasonably satisfactory in form and substance to the Collateral Agent and shall constitute valid and enforceable perfected security interests and hypothecations superior to and prior to the rights of all third Persons and enforceable as against third parties and subject to no other Liens except for Permitted Liens. The Additional Security Documents or instruments related thereto shall have been duly recorded or filed in such manner and in such places as are required by law to establish, perfect, preserve and protect the Liens in favor of the Collateral Agent required to be granted pursuant to the Additional Security Documents and all taxes, fees and other charges payable in connection therewith shall have been paid in full. (b) The Borrower will, and will cause each of its Subsidiaries to, at the expense of the Borrower, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral covered by the Security Documents as the Collateral Agent may reasonably require. Furthermore, the Borrower shall cause to be delivered to the Collateral Agent such opinions of counsel and other related documents as may be reasonably requested by the Collateral Agent to assure itself that this Section 8.11 has been complied with. (c) The Borrower agrees that each action required above by this Section 8.11 shall be completed as soon as possible, but in no event later than 90 days after such action is either requested to be taken by the Administrative Agent, the Collateral Agent or the Required Banks or required to be taken by the Borrowers and their respective Subsidiaries pursuant to the terms of this Section 8.11; provided that in no event will -------- the Borrower or any of its Subsidiaries be required to take any action, other than using its commercially reasonable efforts, to obtain consents from third parties with respect to its compliance with this Section 8.11. 8.12 Ownership of Subsidiaries. Except to the extent expressly ------------------------- permitted herein, by applicable law or as otherwise expressly consented in writing by the Required Banks, and except as set forth on Schedule VI each Credit Party shall directly or indirectly own 100% of the capital stock or other equity interests of each of their respective Subsidiaries. -62- 8.13 Permitted Acquisitions. (a) Subject to the provisions of ---------------------- this Section 8.13 and the requirements contained in the definition of Permitted Acquisition, the Borrower and any of its Wholly-Owned Domestic Subsidiaries may from time to time effect Permitted Acquisitions, so long as (in each case except to the extent the Required Banks otherwise specifically agree in writing in the case of a specific Permitted Acquisition): (A) no Default or Event of Default shall be in existence at the time of the consummation of the proposed Permitted Acquisition or immediately after giving effect thereto, and (B) if the aggregate consideration (which shall include, without limitation, cash or the fair market value of assets transferred, the principal amount of assumed Indebtedness and the principal amount of all issued promissory notes and, without duplication, the amount of Preferred Stock canceled or retired) exceeds $5,000,000 in the case of any Permitted Acquisition (or series of related Permitted Acquisitions) paid, transferred, assumed, issued or cancelled by the Borrower and its Subsidiaries (net of amounts paid to the Borrower or its Subsidiaries by Cendant and its Subsidiaries in connection with such Permitted Acquisition) (i) the Borrower shall have given the Administrative Agent and the Banks at least 5 Business Days' prior written notice of any Permitted Acquisition; (ii) calculations are made by the Borrower of compliance with the covenants contained in Sections 9.08 and 9.09 (in each case, giving effect to the last sentence appearing therein) for the period of four consecutive fiscal quarters (taken as one accounting period) most recently ended prior to the date of such Permitted Acquisition (each, a "Calculation Period"), on a Pro Forma Basis as if the respective --- ----- Permitted Acquisition (as well as all other Permitted Acquisitions theretofore consummated after the first day of such Calculation Period) had occurred on the first day of such Calculation Period, and such recalculations shall show that such financial covenants would have been complied with if the Permitted Acquisition had occurred on the first day of such Calculation Period (for this purpose, if the first day of the respective Calculation Period occurs prior to the Effective Date, calculated as if the covenants contained in said Sections 9.08 and 9.09 (in each case, giving effect to the last sentence appearing therein) had been applicable from the first day of the Calculation Period); (iii) based on good faith projections prepared by the Borrower for the period from the date of the consummation of the Permitted Acquisition to the date which is one year thereafter, the level of financial performance measured by the covenants set forth in Sections 9.08 and 9.09 (in each case, giving effect to the last sentence appearing therein) shall be better than or equal to such level as would be required to provide that no Default or Event of Default would exist under the financial covenants contained in Sections 9.08 and 9.09 (in each case, giving effect to the last sentence appearing therein) of this Agreement as compliance with such covenants would be required through the date which is one year from the date of the consummation of the respective Permitted Acquisition; (iv) calculations are -63- made by the Borrower demonstrating compliance with a Total Leverage Ratio not to exceed 2.0:1.0 on the last day of the relevant Calculation Period, on a Pro Forma Basis as if the respective Permitted Acquisition (as well as --- ----- all other Permitted Acquisitions theretofore consummated after the first day of such Calculation Period) had occurred on the first day of such Calculation Period; (v) all representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Permitted Acquisition (both before and after giving effect thereto), unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date; (vi) the Borrower provides to the Administrative Agent and the Banks as soon as available but not later than 5 Business Days after the execution thereof, a copy of any executed purchase agreement or similar agreement with respect to such Permitted Acquisition; (vii) after giving effect to each Permitted Acquisition (and the payment of all post-closing purchase price adjustments required (in the good faith determination of the Borrower) in connection therewith, the Total Unutilized Revolving Loan Commitment shall equal or exceed $10,000,000; and (viii) the Borrower shall have delivered to the Administrative Agent an officer's certificate executed by an Authorized Officer of the Borrower, certifying to the best of his knowledge, compliance with the requirements of preceding clauses (i) through (v), inclusive, and (vii) and containing the calculations required by the preceding clauses (ii), (iii), (iv) and (vii); provided however, -------- ------- that so long as the aggregate consideration (which shall include without limitation, cash or the fair market value of assets transferred, assumed Indebtedness and the principal amount of all issued promissory notes and the amount of all Preferred Stock canceled or retired) payable by the Borrower and its Subsidiaries in connection with the proposed Permitted Acquisition (or series of related Permitted Acquisitions) (net of amounts paid to the Borrower or its Subsidiaries by Cendant and its Subsidiaries in connection with such Permitted Acquisition) shall not exceed $30,000,000. (b) Within 10 days of each Permitted Acquisition involving the creation or acquisition of a Subsidiary (other than a Regulated Subsidiary and, within 60 days of such Permitted Acquisition with respect to a De Minimis Subsidiary), or the acquisition of capital stock or other equity interest of any Person, the capital stock or other equity interests thereof created or acquired in connection with such Permitted Acquisition shall be pledged for the benefit of the Secured Creditors pursuant to the Pledge Agreement in accordance with the requirements of Section 9.13. -64- (c) Within 10 days of each Permitted Acquisition, the Borrower shall cause each Subsidiary (other than a Regulated Subsidiary and, within 60 days of the Permitted Acquisition with respect to a De Minimis Subsidiary) which is formed to effect, or is acquired pursuant to, such Permitted Acquisition to comply with, and to execute and deliver, all of the documentation required by, Sections 8.11 and 9.13, to the satisfaction of the Administrative Agent. (d) The consummation of each Permitted Acquisition shall be deemed to be a representation and warranty by the Borrower that the certifications by the Borrower (or by one or more of its Authorized Officers) pursuant to Section 8.13(a)(A) are true and correct and that all conditions thereto have been satisfied and that same is permitted in accordance with the terms of this Agreement, which representation and warranty shall be deemed to be a representation and warranty for all purposes hereunder, including, without limitation, Sections 6 and 10. 8.14 Maintenance of Company Separateness. The Borrower will, and ----------------------------------- will cause each of its Subsidiaries and Unrestricted Subsidiaries to, satisfy customary Company formalities, including, as applicable, the holding of regular board of directors' and shareholders' meetings or action by directors or shareholders without a meeting and the maintenance of Company offices and records. Neither the Borrower nor any of its Subsidiaries shall make any payment to a creditor of any Unrestricted Subsidiary in respect of any liability of any Unrestricted Subsidiary, and no bank account of any Unrestricted Subsidiary shall be commingled with any bank account of the Borrower or any of its Subsidiaries. Any financial statements distributed to any creditors of any Unrestricted Subsidiary shall clearly establish or indicate the Company separateness of such Unrestricted Subsidiary from the Borrower and its Subsidiaries. Finally, neither the Borrower nor any of its Subsidiaries shall take any action, or conduct its affairs in a manner, which is likely to result in the Company existence of the Borrower or any of its Subsidiaries or Unrestricted Subsidiaries being ignored, or in the assets and liabilities of the Borrower or any of its Subsidiaries being substantively consolidated with those of any other such Person or any Unrestricted Subsidiary in a bankruptcy, reorganization or other insolvency proceeding. 8.15 Performance of Obligations. The Borrower will, and will -------------------------- cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, deed of trust, indenture, loan agreement or credit agreement and each other material agreement, -65- contract or instrument by which it is bound, except such non-performances as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 8.16 Use of Proceeds. All proceeds of the Loans shall be used as --------------- provided in Section 7.05. SECTION 9. Negative Covenants. The Borrower hereby covenants and ------------------ agrees that as of the Effective Date and thereafter for so long as this Agreement is in effect and until the Total Commitment has terminated, no Letters of Credit or Notes are outstanding and the Loans, together with interest, Fees and all other Obligations (other than any indemnities described in Section 13.13 which are not then due and payable) incurred hereunder, are paid in full: 9.01 Changes in Business. (a) The Borrower will not, nor will ------------------- the Borrower permit any of its Subsidiaries to, engage directly or indirectly in any business other than a Permitted Business. (b) No Unrestricted Subsidiary shall engage (directly or indirectly) in any business other than a Permitted Business. 9.02 Consolidation; Merger; Sale or Purchase of Assets; etc. The ------------------------------------------------------- Borrower will not, nor will the Borrower permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger, amalgamation or consolidation, or convey, sell, lease or otherwise dispose of all or any part of its property or assets (other than inventory in the ordinary course of business), or enter into any sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials, general intangibles and equipment in the ordinary course of business) of any Person or agree to do any of the foregoing at any future time, except that the following shall be permitted: (a) the Borrower and its Subsidiaries may, as lessee, enter into operating leases in the ordinary course of business with respect to real, personal, movable or immovable property; (b) the Borrower and its Subsidiaries may make purchases, sales and other transfers and transactions pursuant to Sections 5.8 and 5.10 of the Stockholders Agreement, and after the Cendant Amendment Effective Date, the Acquisition Cooperation -66- Agreement and agreements entered into with Cendant or one of its Subsidiaries to effectuate such transactions; provided that Permitted Acquisitions shall be subject to the requirements of Section 8.13; (c) the Borrower and its Subsidiaries may enter into license and sublicense agreements of software, customer lists, trademarks and other intellectual property with Cendant or one or more of its Subsidiaries and otherwise in the ordinary course of business; (d) the Borrower and its Subsidiaries may make (i) investments in the Hunneman Mortgage Corporation in connection with the residential mortgage business or (ii) investments in connection with Arbitrage Loans; (e) Investments permitted pursuant to Section 9.05 and the disposition or liquidation of Cash Equivalents in the ordinary course of business; (f) the Borrower and any of its Subsidiaries may sell or otherwise dispose of assets (excluding capital stock of, or other equity interests in, Subsidiaries, Joint Ventures and Unrestricted Subsidiaries) which, in the reasonable opinion of such Person, are obsolete, uneconomic or no longer useful in the conduct of such Person's business, provided that -------- except with respect to asset dispositions or transfers arising out of, or in connection with, the events described in clauses (i) and (ii) of the definition of Recovery Event, (w) each such sale or disposition shall be for an amount at least equal to the fair market value thereof (as determined in good faith by senior management of the Borrower in cases of sales in excess of $1,000,000), (x) each such sale or disposition (I) results in consideration at least 80% of which (taking the amount of cash, the principal amount of any promissory notes and the fair market value, as determined by the Borrower in good faith, of any other consideration) shall be in the form of cash or (II) results in the assumption of all of the Capitalized Lease Obligations or other purchase money obligations of the Borrower or such Subsidiary in respect of such asset by the purchaser thereof, (y) the aggregate Net Sale Proceeds from all assets sold or otherwise disposed of pursuant to this clause (d), when added to the aggregate amount of all Capitalized Lease Obligations and all other purchase money obligations assigned in connection with all assets sold or otherwise disposed of pursuant to this clause (d), shall not exceed $10,000,000 in the aggregate in any fiscal year of the Borrower and (z) the Net Sale Proceeds therefrom are applied to reduce the Total Revolving Loan Commitment to the extent required by Section 4.02(b) or reinvested in -67- replacement assets or retained to the extent permitted by Section 4.02(b) and/or the other relevant provisions of this Agreement; (g) the Borrower or any Subsidiary of the Borrower may convey, lease, license, sell or otherwise transfer all or any part of its business, properties and assets to the Borrower or any other Guarantor, so long as any security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets so transferred shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such transfer) and all actions required to maintain said perfected status have been taken; (h) any Subsidiary of the Borrower may merge with and into, or be dissolved or liquidated into, the Borrower or any Guarantor, so long as (i) the Borrower or such Guarantor is the surviving corporation of any such merger, dissolution or liquidation and (ii) any security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of such Subsidiary shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger, dissolution or liquidation) and all actions required to maintain said perfected status have been taken; (i) any Foreign Subsidiary may be merged or amalgamated with and into, or be dissolved or liquidated into, or transfer any of its assets to, any other Wholly-Owned Foreign Subsidiary of the Borrower, so long as (i) a Wholly-Owned Foreign Subsidiary of the Borrower is the surviving corporation of any such merger, amalgamation, dissolution or liquidation and (ii) any security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of such Wholly-Owned Foreign Subsidiary and such Foreign Subsidiary shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger, amalgamation, dissolution, liquidation or transfer) and all actions required to maintain said perfected status have been taken; (j) the Borrower and its Domestic Subsidiaries may transfer assets to Wholly-Owned Foreign Subsidiaries, so long as (x) no Default or Event of Default exists as the time of the respective transfer and (y) the aggregate fair market value of all such assets so transferred (determined in good faith by the Board of Directors or senior management of the Borrower) to all such Foreign Subsidiaries does not exceed the sum of (i) $5,000,000 -68- plus (ii) the aggregate fair market value of all assets of Foreign ---- Subsidiaries of the Borrower (as determined in good faith by senior management of the Borrower) transferred by such Foreign Subsidiaries to the Borrower and any Guarantor, pursuant to Section 9.02(g); (k) the Borrower and its Subsidiaries may lease, as lessor, or sublease, as sublessor, equipment, machinery or Real Property in the ordinary course of business, so long as such lease is for fair consideration (determined in good faith by the Board of Directors or senior management of the Borrower); (l) the Borrower and any of its Subsidiaries may sell or otherwise dispose of the capital stock of, or other equity interests in, any of their respective Subsidiaries, Unrestricted Subsidiaries and Joint Ventures which, in the reasonable opinion of such Person, are uneconomic or no longer useful in the conduct of such Person's business, provided that -------- (v) in the case of a sale or other disposition of the capital stock or other equity interests of any Wholly-Owned Subsidiary of the Borrower, 100% of the capital stock or other equity interests of such Subsidiary shall be so sold or disposed of, (w) each such sale or disposition shall be for an amount at least equal to the fair market value thereof (as determined in good faith by senior management of the Borrower), (x) each such sale results in consideration at least 80% of which (taking the amount of cash, the principal amount of any promissory notes and the fair market value, as determined by the Borrower in good faith, of any other consideration) shall be in the form of cash, (y) the aggregate Net Sale Proceeds of all assets sold or otherwise disposed of pursuant to this clause (l) after the Effective Date shall not exceed $10,000,000 in the aggregate and (z) the Net Sale Proceeds therefrom are either applied to reduce the Total Revolving Loan Commitment as required by Section 4.02(b) or reinvested in replacement assets or retained to the extent permitted by Section 4.02(b) and/or the other relevant provisions of this Agreement; (m) the Borrower and its Subsidiaries may enter into agreements to effect acquisitions and dispositions of stock or assets, so long as the respective transaction is permitted pursuant to the provisions of this Section 9.02; provided that the Borrower and its Subsidiaries may enter -------- into agreements to effect acquisitions and dispositions of capital stock or assets in transactions not permitted by the provisions of this Section 9.02 at the time the respective agreement is entered into, so long as in the case of each such agreement, such agreement shall be expressly conditioned upon obtaining the requisite consent of the Required Banks under this Agreement or the repayment of all Obligations hereunder as a condition precedent to the consummation of the respective transaction and, if for any reason -69- the transaction is not consummated because of a failure to obtain such consent, the aggregate liability of the Borrower and its Subsidiaries under any such agreement shall not exceed $1,000,000; (n) the Borrower or any of its Subsidiaries may effect Permitted Sale-Leaseback Transactions in accordance with the definition thereof; provided that the aggregate amount of all proceeds received by the -------- Borrower and its Subsidiaries from all Permitted Sale-Leaseback Transactions consummated on and after the Effective Date shall not exceed $10,000,000. To the extent the Required Banks waive the provisions of this Section 9.02 with respect to the sale or other disposition of any Collateral, or any Collateral is sold or otherwise disposed of as permitted by this Section 9.02, such Collateral (unless transferred to the Borrower or a Subsidiary thereof) shall (except as otherwise provided above) be sold or otherwise disposed of free and clear of the Liens created by the Security Documents and the Administrative Agent shall take such actions (including, without limitation, directing the Collateral Agent to take such actions) as are appropriate in connection therewith. 9.03 Liens. The Borrower will not, nor will any Borrower permit ----- any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets of any kind (real or personal, tangible or intangible, movable or immovable) of such Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable or notes with recourse to such Borrower or any of its Subsidiaries) or assign any right to receive income, except for the following (collectively, the "Permitted Liens"): (a) inchoate Liens for taxes, assessments or governmental charges or levies not yet due and payable or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law which were incurred in the ordinary course of business and which have not arisen to secure Indebtedness for borrowed money, such as carriers', materialmen's, warehousemen's and mechanics' Liens, statutory and common law -70- landlord's Liens, and other similar Liens arising in the ordinary course of business, and which either (x) do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Borrower or any of its Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Lien; (c) Liens created by or pursuant to this Agreement and the Security Documents; (d) Liens in existence on the Effective Date which are listed, and the property subject thereto described, in Schedule VIII, without giving effect to any extensions or renewals thereof; (e) Liens arising from judgments, decrees, awards or attachments in circumstances not constituting an Event of Default under Section 10.09, provided that the amount of cash and property (determined on a fair market -------- value basis) deposited or delivered to secure the respective judgment or decree or subject to attachment shall not exceed $3,000,000 at any time; (f) Liens (other than any Lien imposed by ERISA) (x) incurred or deposits made in the ordinary course of business of the Borrower and its Subsidiaries in connection with workers' compensation, unemployment insurance and other types of social security, (y) to secure the performance by the Borrower and its Subsidiaries of tenders, statutory obligations (other than excise taxes), surety, stay, customs and appeal bonds, statutory bonds, bids, leases, government contracts, trade contracts, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money) or (z) to secure the performance by the Borrower and its Subsidiaries of leases of Real Property, to the extent incurred or made in the ordinary course of business consistent with past practices, provided that the aggregate amount -------- of deposits at any time pursuant to sub-clause (y) and sub-clause (z) shall not exceed $3,000,000 in the aggregate; (g) licenses, sublicenses, leases or subleases granted to third Persons in the ordinary course of business not interfering in any material respect with the business of the Borrower or any of its Subsidiaries; -71- (h) easements, rights-of-way, restrictions, minor defects or irregularities in title, encroachments and other similar charges or encumbrances, in each case not securing Indebtedness and not interfering in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens arising from precautionary UCC financing statements regarding operating leases; (j) Liens created pursuant to Capital Leases permitted pursuant to Section 9.04(d), provided that (x) such Liens only serve to secure the -------- payment of Indebtedness arising under such Capitalized Lease Obligation (and other Indebtedness permitted by Section 9.04(d) and incurred from the same Person as such Indebtedness) and (y) the Lien encumbering the asset giving rise to the Capitalized Lease Obligation does not encumber any other asset of the Borrower or any of its Subsidiaries (other than other assets subject to Capitalized Lease Obligations and/or Indebtedness incurred pursuant to Section 9.04(d), in each case owing to the same Person as such Capitalized Lease Obligation); (k) Permitted Encumbrances; (l) Liens arising pursuant to purchase money mortgages or security interests securing Indebtedness representing the purchase price (or financing of the purchase price within 90 days after the respective purchase) of assets acquired after the Effective Date, provided that (i) -------- any such Liens attach only to the assets so purchased, upgrades thereon and, if the asset so purchased is an upgrade, the original asset itself (and such other assets financed by the same financing source), (ii) the Indebtedness (other than Indebtedness incurred from the same financing source to purchase other assets and excluding Indebtedness representing obligations to pay installation and delivery charges for the property so purchased) secured by any such Lien does not exceed 100% of the lesser of the fair market value or the purchase price of the property being purchased at the time of the incurrence of such Indebtedness and (iii) the Indebtedness secured thereby is permitted to be incurred pursuant to Section 9.04(d); (m) Liens on property or assets acquired pursuant to a Permitted Acquisition, or on property or assets of a Subsidiary of the Borrower in existence at the time such Subsidiary is acquired pursuant to a Permitted Acquisition, provided that (i) any Indebtedness that is secured by such -------- Liens is permitted to exist under Section 9.04(d), and -72- (ii) such Liens are not incurred in connection with, or in contemplation or anticipation of, such Permitted Acquisition and do not attach to any other asset of the Borrower or any of its Subsidiaries; (n) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Borrower or any of its Subsidiaries in the ordinary course of business; (o) Liens incurred by the Borrower and its Subsidiaries, so long as the value of the property subject to such Liens, and the Indebtedness and other obligations secured thereby, do not exceed $2,000,000; and (p) Liens securing the Indebtedness permitted under Sections 9.04(j) and (k) and encumbering the assets financed with such Indebtedness; and (q) Liens securing seller Indebtedness and other Indebtedness permitted to exist under Section 9.04(d). 9.04 Indebtedness. The Borrower will not, nor will the Borrower ------------ permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except (without duplication): (a) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (b) Existing Indebtedness outstanding on the Effective Date and listed on Schedule III (as reduced by any repayments thereof before, on or after the Effective Date); (c) Indebtedness under (i) Interest Rate Protection Agreements entered into to protect the Borrower against fluctuations in interest rates in respect of the Obligations otherwise permitted under this Agreement or (ii) Other Hedging Agreements providing protection against fluctuations in currency values in connection with the Borrower's or any of its Subsidiaries' operations, so long as management of the Borrower or such Subsidiary, as the case may be, has determined that the entering into of any such Other Hedging Agreement is a bona fide hedging activity (and is not for speculative purposes) and is in the ordinary course of business and consistent with its past practices; -73- (d) (w) Indebtedness of a Subsidiary acquired pursuant to a Permitted Acquisition (or Indebtedness assumed by the Borrower or any Wholly-Owned Domestic Subsidiary pursuant to a Permitted Acquisition as a result of a merger or consolidation or the acquisition of an asset securing such Indebtedness) (the "Permitted Acquired Debt"), so long as (i) such Indebtedness was not incurred in connection with, or in anticipation or contemplation of, such Permitted Acquisition and (ii) such Indebtedness does not constitute debt for borrowed money (except to the extent such Indebtedness cannot be repaid in accordance with its terms at the time of its assumption pursuant to such Permitted Acquisition and the aggregate principal amount of all such Indebtedness for borrowed money permitted pursuant to this parenthetical does not exceed $15,000,000), it being understood and agreed that Capitalized Lease Obligations and purchase money Indebtedness shall not constitute debt for borrowed money for purposes of this clause (ii), (x) Capitalized Lease Obligations and Indebtedness of the Borrower and its Subsidiaries representing purchase money Indebtedness secured by Liens permitted pursuant to Section 9.03(l), (y) Indebtedness issued by the Borrower or its Subsidiaries to the seller of an asset or entity constituting a Permitted Acquisition and (z) other Indebtedness of the Borrower and its Subsidiaries, provided, that the sum of (I) the -------- aggregate principal amount of all Permitted Acquired Debt at any time outstanding plus (II) the aggregate amount of Capitalized Lease Obligations ---- incurred on and after the Effective Date and outstanding at any time (including Indebtedness evidenced by Capitalized Lease Obligations arising from Permitted Sale-Leaseback Transactions) plus (III) the aggregate ---- principal amount of all such purchase money Indebtedness incurred on and after the Effective Date and outstanding at any time plus (IV) the aggregate principal amount of Indebtedness permitted under clauses (y) and (z) above, shall not exceed $75,000,000 (provided the aggregate amount of Indebtedness under clauses (I), (II) and (III) which is secured by a Lien or any assets of the Borrower and/or its Subsidiaries shall not exceed $25,000,000); (e) Indebtedness constituting Intercompany Loans to the extent permitted by Section 9.05(f); (f) Indebtedness of the Borrower or any of its Subsidiaries which may be deemed to exist in connection with agreements providing for indemnification, purchase price adjustments and similar obligations in connection with acquisitions or sales of assets and/or businesses effected in accordance with the requirements of this Agreement (so long as any such obligations are those of the Person making the respective acquisition or sale, and are not guaranteed by any other Person); -74- (g) Contingent Obligations of (x) the Borrower or any of its Subsidiaries as a guarantor (A) of the lessee under any lease pursuant to which the Borrower or any of its Wholly-Owned Subsidiaries is the lessee so long as such lease is otherwise permitted hereunder or (B) of indemnity or similar obligations under agreements for acquisitions or dispositions of stock or assets so long as such agreements are otherwise permitted hereunder, (y) the Borrower or any of its Subsidiaries as a guarantor of any Capitalized Lease Obligation to which a Joint Venture or Unrestricted Subsidiary is a party or any contract entered into by such Joint Venture or Unrestricted Subsidiary in the ordinary course of business; provided that -------- the maximum liability of the Borrower or any of its Subsidiaries in respect of any obligations as described pursuant to preceding clause (y) is permitted as an Investment on such date pursuant to the requirements of Section 9.05(k) and (z) the Borrower which may be deemed to exist pursuant to acquisition agreements entered into in connection with Permitted Acquisitions (including any obligation to pay the purchase price therefor and any indemnification, purchase price adjustment and similar obligations); (h) Indebtedness with respect to performance bonds, surety bonds, appeal bonds or customs bonds required in the ordinary course of business or in connection with the enforcement of rights or claims of the Borrower or any of its Subsidiaries or in connection with judgments that do not result in a Default or an Event of Default, provided that the aggregate -------- outstanding amount of all such performance bonds, surety bonds, appeal bonds and customs bonds permitted by this subsection (h) shall not at any time exceed $5,000,000; (i) (x) Permitted Subordinated Indebtedness incurred in accordance with the requirements of the definition thereof, so long as the aggregate principal amount of all Indebtedness permitted by this clause (i), when added to the aggregate liquidation preference for all Disqualified Preferred Stock issued after the Effective Date pursuant to Section 9.11(c), does not exceed $75,000,000 at any time outstanding; (j) Indebtedness incurred with respect to Arbitrage Loans entered into from time to time by the Borrower and/or its Subsidiaries; and (k) Indebtedness in connection with mortgage warehousing lines of credit between Hunneman Mortgage Corporation and First Union National Bank, and any -75- exhibitions or refinancing thereof on substantially similar terms so long as such Indebtedness does not exceed $30,000,000. 9.05 Advances; Investments; Loans. The Borrower will not, nor ---------------------------- will the Borrower permit any of its Subsidiaries to, lend money or extend credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract (any of the foregoing, an "Investment"), except: (a) the Borrower and its Subsidiaries may invest in cash and Cash Equivalents; (b) the Borrower and its Subsidiaries may acquire and hold receivables owing to it, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms (including the dating of receivables) of the Borrower or such Subsidiary; (c) the Borrower and its Subsidiaries may acquire and own investments (including debt obligations and equity securities) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (d) Interest Rate Protection Agreements and Other Hedging Agreements entered into in compliance with Section 9.04(c) shall be permitted; (e) advances, loans and investments in existence on the Effective Date and listed on Schedule IX shall be permitted, without giving effect to any additions thereto or replacements thereof, it being understood that any additional Investments made with respect to such existing Investments shall be permitted only if independently justified under the other provisions of this Section 9.05; (f) any Credit Party may make intercompany loans and advances to any other Credit Party and any Credit Party may make intercompany loans and advances to any Foreign Subsidiary that is not a Credit Party (collectively, "Intercompany Loans"), provided, that (w) at no time shall -------- the aggregate outstanding principal amount of all -76- Intercompany Loans made pursuant to this clause (f) by the Credit Parties to Foreign Subsidiaries, when added to the amount of contributions, capitalizations and forgiveness theretofore made pursuant to Section 9.05(o) exceed $5,000,000 (determined without regard to any write-downs or write-offs of such loans and advances), (x) each Intercompany Loan in excess of $500,000 shall be evidenced by an Intercompany Note, (y) each such Intercompany Note shall be pledged to the Collateral Agent pursuant to the Pledge Agreement; (g) loans and advances by the Borrower and its Subsidiaries to employees, officers and directors of the Borrower and its Subsidiaries in connection with relocations, purchases by such employees of Borrower Common Stock or options or similar rights to purchase Borrower Common Stock and other ordinary course of business purposes (including travel and entertainment expenses) shall be permitted, so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $3,000,000; (h) the Borrower may acquire and hold obligations of one or more officers or other employees of the Borrower or its Subsidiaries in connection with such officers' or employees' acquisition of shares of Borrower Common Stock, so long as no cash is actually advanced by the Borrower or any of its Subsidiaries to such officers or employees in connection with the acquisition of any such obligations; (i) the Borrower and any of its Subsidiaries may make Permitted Acquisitions in accordance with the relevant requirements of Section 8.13 and the component definitions as used therein; (j) the Borrower and its Subsidiaries may own the capital stock of their respective Subsidiaries created or acquired in accordance with the terms of this Agreement; (k) so long as no Default or Event of Default exists or would exist immediately after giving effect to the respective Investment, the Borrower and its Wholly-Owned Domestic Subsidiaries shall be permitted to make Investments in (x) any Joint Venture on any date in an amount not to exceed the Available Basket Amount on such date and (y) any Unrestricted Subsidiary on any date in an amount not to exceed the Available Basket Sub- Limit on such date (after giving effect to all prior and contemporaneous adjustments thereto, except as a result of such Investment), it being understood and agreed -77- that, to the extent the Borrower or one or more other Credit Parties (after the respective Investment has been made) receives a cash return from the respective Joint Venture or Unrestricted Subsidiary of amounts previously invested pursuant to this clause (k) (which cash return may be made by way of repayment of principal in the case of loans and cash equity returns (whether as a distribution, dividend or redemption) in the case of equity investments) or a return in the form of an asset distribution from the respective Joint Venture or Unrestricted Subsidiary of any asset previously contributed pursuant to this clause (k) then the amount of such cash return of investment or the fair market value of such distributed asset (as determined in good faith by senior management of the Borrower), as the case may be, shall, upon the Administrative Agent's receipt of a certification of the amount of the return of investment from an Authorized Officer, apply to increase the Available Basket Amount and/or the Available Basket Sub- Limit, as applicable, provided that the aggregate amount of increases to -------- the Available Basket Amount and/or the Available Basket Sub-Limit described above shall not exceed the amount of returned investment and, in no event, shall the amount of the increases made to the Available Basket Amount and/or the Available Basket Sub-Limit in respect of any Investment exceed the amount previously invested pursuant to this clause (k); (l) the Borrower and its Subsidiaries may receive and hold promissory notes and other non-cash consideration received in connection with any asset sale permitted by Sections 9.02(d), (f) and (l); (m) the Borrower and its Subsidiaries may convey, lease, license, sell or otherwise transfer assets and properties to the extent permitted by Sections 9.02(b), (d), (g), (i), (j), (k) and (n); (n) the Borrower and its Subsidiaries may make advances in the form of a prepayment of expenses, so long as such expenses were incurred in the ordinary course of business and are being paid in accordance with customary trade terms of the Borrower or such Subsidiary; (o) the Borrower and its Domestic Subsidiaries may make cash capital contributions to Foreign Subsidiaries, and may capitalize or forgive any Indebtedness owed to them by a Foreign Subsidiary and outstanding under clause (f) of this Section 9.05, provided that the -------- aggregate amount of such contributions, capitalizations and forgiveness on and after the Effective Date, when added to the aggregate outstanding principal amount of -78- Intercompany Loans made to Foreign Subsidiaries under such clause (f) (determined without regard to any write-downs or write-offs thereof) shall not exceed an amount equal to $10,000,000; (p) the Borrower and its Subsidiaries may make the investments listed on, and in the amounts described on Schedule XII hereto; (q) the Borrower and any Guarantor may make cash equity contributions to any Guarantor; (r) the Borrower and its Subsidiaries may make investments in connection with any joint venture with Cendant or affiliates thereof involving the residential mortgage business; and (s) in addition to investments permitted by clauses (a) through (r) of this Section 9.05, the Borrower and its Subsidiaries may make additional loans, advances and Investments to or in a Person in an aggregate amount for all loans, advances and Investments made pursuant to this clause (s) (determined without regard to any write-downs or write-offs thereof), net of cash repayments of principal in the case of loans, sale proceeds in the case of Investments in the form of debt instruments and cash equity returns (whether as a distribution, dividend, redemption or sale) in the case of equity investments, not to exceed $10,000,000. 9.06 Dividends; etc. The Borrower will not, nor will the -------------- Borrower permit any of its Subsidiaries to, declare or pay any dividends (other than dividends payable solely in common stock of such Borrower or any such Subsidiary, as the case may be) or return any capital to, its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock, now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares), or set aside any funds for any of the foregoing purposes, and the Borrower will not permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of the Borrower or any other Subsidiary, as the case may be, now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by such Person with respect to its capital stock) or enter into any derivatives or other transaction with any financial institution, commodities or stock -79- exchange or clearinghouse (a "Derivatives Counterparty") obligating it to make payments to such Derivatives Counterparty as a result of any change in market value of its capital stock (all of the foregoing "Dividends"), except that: (i) any Subsidiary of the Borrower may pay Dividends (directly or indirectly) to the Borrower or any Guarantor; (ii) the Borrower may redeem or purchase shares of Borrower Common Stock or options to purchase Borrower Common Stock, as the case may be, held by former employees or directors of the Borrower or any of its Subsidiaries following the termination of their employment (by death, disability or otherwise), provided that (w) the only consideration paid by -------- the Borrower in respect of such redemptions and/or purchases shall be cash, forgiveness of liabilities and/or Shareholder Subordinated Notes, (x) the sum of (A) the aggregate amount paid by the Borrower in cash in respect of all such redemptions and/or purchases plus (B) the aggregate amount of liabilities so forgiven and (C) the aggregate amount of all cash principal and interest payments made on Shareholder Subordinated Notes, in each case after the Effective Date, shall not exceed $5,000,000, and (y) at the time of any cash payment or forgiveness of liabilities permitted to be made pursuant to this Section 9.06(ii), including any cash payment under a Shareholder Subordinated Note, no Default or Event of Default shall then exist or result therefrom; (iii) so long as no Default or Event of Default exists or would result therefrom, the Borrower may pay regularly accruing cash Dividends on Disqualified Preferred Stock issued pursuant to Section 9.11(c), with such Dividends to be paid in accordance with the terms of the respective certificate of designation therefor; (iv) any non-Wholly-Owned Subsidiary of the Borrower may pay cash Dividends to its shareholders or partners generally, so long as the Borrower or its respective Subsidiary which owns the equity interest or interests in the Subsidiary paying such Dividends receives at least its proportionate share thereof (based upon its relative holdings of equity interest in the Subsidiary paying such Dividends and taking into account the relative preferences, if any, of the various classes of equity interests in such Subsidiary or the terms of any agreements applicable thereto); (v) so long as no Default or Event of Default exists or would arise therefrom, the Borrower may pay special dividends in an amount equal to the sum of (i) -80- $15,000,000 plus (ii) cash received by the Borrower from Cendant and/or its Subsidiaries in the first six months after the Effective Date in connection with the Cendant Documents; (vi) so long as no Default or Event of Default exists or would result therefrom, the Borrower may, after the Qualified IPO, redeem the Existing Preferred Stock with the proceeds received therefrom; (vii) so long as no Default or Event of Default exists or would result therefrom, the Borrower may pay cash Dividends on the Existing Preferred Stock payable in accordance with the terms thereof; (viii) so long as no Default or Event of Default exists or would result therefrom, after a Qualified IPO, the Borrower may pay additional Dividends, not to exceed an amount equal to (x) the Consolidated Cumulative Net Income Amount at the time of such payment minus (y) all Dividends paid pursuant to this Section 9.06(viii) prior to such payment; (ix) the Borrower may cancel the Existing Preferred Stock held by Cendant in connection with transactions under, and pursuant to the provisions of Sections 5.10 and 5.18 of the Stockholders Agreement, and after the Cendant Amendment Effective Date, the Acquisition Cooperation Agreement; and (x) to the extent constituting Dividends, all payments or transfers made by the Borrower and/or its Subsidiaries pursuant to the Cendant Documents. 9.07 Transactions with Affiliates and Unrestricted --------------------------------------------- Subsidiaries. The Borrower will not, nor will the Borrower permit any of its Subsidiaries to, enter into any transaction or series of transactions with any Affiliate of the Borrower or any of its Subsidiaries or any of its Unrestricted Subsidiaries other than on terms and conditions substantially as favorable to the Borrower or such Subsidiary as would be reasonably expected to be obtainable by the Borrower or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate; provided, that the following shall in any event be permitted: -------- (i) the Borrower may pay fees, royalties, and any and all other amounts payable under the Franchise Agreements and the other Cendant Documents; (ii) intercompany transactions among the Borrower and its Subsidiaries to the extent expressly permitted by Sections 9.02, 9.04, 9.05 and 9.06 shall be permitted; (iii) so long as no Default or Event of Default is then in existence or would result therefrom, payments due to -81- Apollo in an aggregate amount not to exceed $1,000,000 in any fiscal quarter of the Borrower pursuant to, and in accordance with the terms of, the Advisory Services Agreement, provided that, if during any fiscal -------- quarter of the Borrower, a Default or Event of Default is in existence and such fees cannot be paid as provided above, such fees shall continue to accrue and may be paid at such time as all Defaults and Events of Default have been cured or waived and so long as no Default or Event of Default will exist immediately after giving effect to the payment thereof; (iv) customary fees to non-officer directors of the Borrower and its Subsidiaries; (v) the Borrower and its Subsidiaries may enter into employment arrangements with respect to the procurement of services with their respective officers and employees in the ordinary course of business; (vi) the reimbursement of Apollo and Cendant for their out-of-pocket expenses incurred in connection with performing management services to the Borrower and its Subsidiaries or in connection with this Agreement, the Cendant Documents or the Stockholders Agreement and the transactions contemplated thereby; (vii) the payment of consulting, management or other fees to the Borrower or any Guarantor by any of their respective Subsidiaries in the ordinary course of business; (viii) the payment of marketing fees to the Borrower by Cendant Mortgage in connection with the Marketing Agreement, and after the Cendant Amendment Effective Date, the payments relating to of such fees in any joint venture between Cendant and/or its Subsidiaries and the Borrower; and (ix) the transactions set forth on Schedule XI hereto. In no event shall any management, consulting or similar fee be paid or payable by the Borrower or any of its Subsidiaries to any Person except in compliance with this Section 9.07. 9.08 Consolidated Adjusted Interest Coverage Ratio. The Borrower --------------------------------------------- will not permit the Consolidated Adjusted Interest Coverage Ratio for any Test Period ending after the Effective Date to be less than 2.00:1.00. Notwithstanding anything to the contrary contained in this Agreement, all calculations of compliance with this Section 9.08 shall be made on a Pro --- Forma Basis. ----- 9.09 Total Leverage Ratio. The Borrower will not permit the -------------------- Total Leverage Ratio on the last day of any fiscal quarter ending after the Effective Date to exceed 2.00:1.00 . Notwithstanding anything contrary contained above or elsewhere in this Agreement, all calculations of compliance with this Section 9.09 shall be made on a Pro Forma Basis. --- ----- -82- 9.10 Limitation on Voluntary Payments and Modifications of ----------------------------------------------------- Indebtedness; Modifications of Certificate of Incorporation, By-Laws and ------------------------------------------------------------------------ Certain Other Agreements; Issuances of Capital Stock; etc. Except as set ---------------------------------------------------------- forth in Schedule XII in connection with the Qualified IPO, the Borrower will not, nor will the Borrower permit any of its Subsidiaries to: (i) amend or modify, or permit the amendment or modification of, any provision of any Shareholder Subordinated Note, any Existing Preferred Stock, or, after the incurrence or issuance thereof, any Qualified Preferred Stock or Permitted Debt or of any agreement (including, without limitation, any purchase agreement, indenture, loan agreement, security agreement or certificate of designation) relating thereto in a manner that could reasonably be expected to in any way be adverse to the interests of the Banks; (ii) make (or give any notice in respect of) any voluntary or optional payment or prepayment on or redemption, repurchase or acquisition for value of, or any prepayment or redemption as a result of any asset sale, change of control or similar event of, after the incurrence thereof, any Permitted Debt, or enter into any derivative or other transaction with any Derivatives Counterparty obligating it to make payments to such Derivatives Counterparty as a result of any change in market value of any of the foregoing agreements; (iii) make (or give any notice in respect of) any principal or interest payment on, or any redemption or acquisition for value of, any Shareholder Subordinated Note (except to the extent permitted by Section 9.06(ii)); and (iv) amend, modify or change in any way which could reasonably be expected to be adverse to the interests of the Banks in any material respect any Management Agreement, any Cendant Document (other than the amendments thereto contemplated in connection with any Cendant Amendment Effective Date), its certificate of incorporation (including, without limitation, by the filing or modification of any certificate of designation other than any certificates of designation relating to Qualified Preferred Stock or Disqualified Preferred Stock issued as permitted herein), by-laws, certificate of partnership, partnership agreement, certificate of limited liability company, limited liability company agreement or any agreement entered into by it, with respect to its capital stock or other equity interest (including any Shareholders' Agreement (other than the amendments thereto -83- contemplated in connection with any Cendant Amendment Effective Date)), or enter into any new Management Agreement or agreement with respect to its capital stock or other equity interest which could reasonably be expected to in any way be adverse to the interests of the Banks in any material respect; provided that the foregoing clause -------- shall not restrict the ability of the Borrower and its Subsidiaries to amend their respective certificates of incorporation to authorize the issuance of capital stock otherwise permitted to be issued pursuant to the terms of this Agreement. 9.11 Limitation on Issuance of Capital Stock. (a) The Borrower --------------------------------------- will not, nor will the Borrower permit any of its Subsidiaries to, issue (i) any Preferred Stock (other than (x) the Existing Preferred Stock or Preferred Stock issued pursuant to clauses (c) and (d) below, respectively and (y) Preferred Stock issued pursuant to capital calls under Section 5.7 of the Stockholders Agreement) or any options, warrants or rights to purchase Preferred Stock or (ii) any redeemable common stock unless, in either case, the issuance thereof is, and all terms thereof are, satisfactory to the Required Banks in their sole discretion. (b) The Borrower shall not permit any of its Subsidiaries to issue any capital stock (including by way of sales of treasury stock) or any options or warrants to purchase, or securities convertible into, capital stock, except (i) for transfers and replacements of then outstanding shares of capital stock, (ii) for stock splits, stock dividends and additional issuances which do not decrease the percentage ownership of the Borrower or any of its Subsidiaries in any class of the capital stock of such Subsidiaries, (iii) to qualify directors to the extent required by applicable law, (iv) Subsidiaries formed after the Effective Date pursuant to Section 9.13 may issue capital stock in accordance with the requirements of Section 9.13 and (v) that Subsidiaries may issue common stock in connection with any transaction permitted by Section 9.05(q). All capital stock issued in accordance with this Section 9.12(b) shall, to the extent required by the Pledge Agreement, be delivered to the Collateral Agent for pledge pursuant to such Pledge Agreement. (c) The Borrower may issue Disqualified Preferred Stock so long as (i) no Default or Event of Default then exists or would exist immediately after giving effect to the respective issuance, (ii) the aggregate liquidation preference for all Disqualified Preferred Stock issued after the Effective Date pursuant to this Section 9.12(c) shall not exceed, when combined with the aggregate principal amount of all then outstanding Indebtedness permitted by Section 9.04(i), $75,000,000 (iii) with respect to each issue of Disqualified Preferred Stock, the gross cash proceeds therefrom (or in the case of Disqualified Preferred Stock -84- directly issued as consideration for a Permitted Acquisition, the fair market value thereof (as determined in good faith by the Borrower) of the assets received therefor) shall not exceed the liquidation preference thereof at the time of issuance, (iv) calculations are made by the Borrower of compliance with the covenants contained in Sections 9.08 and 9.09 for the Calculation Period most recently ended prior to the date of the respective issuance of Disqualified Preferred Stock, on a Pro Forma Basis --- ----- after giving effect to the respective issuance of Disqualified Preferred Stock, and such calculations shall show that such financial covenants would have been complied with if such issuance of Disqualified Preferred Stock had been consummated on the first day of the respective Calculation Period, and (v) the Borrower shall furnish to the Administrative Agent a certificate by an Authorized Officer of the Borrower certifying to the best of his or her knowledge as to compliance with the requirements of this Section 9.12(c) and containing the pro forma calculations required by the --- ----- preceding clause (iv). (d) The Borrower may issue Qualified Preferred Stock so long as, with respect to each issue of Qualified Preferred Stock, the Borrower receives reasonably equivalent consideration (as determined in good faith by the Borrower). 9.12 Limitation on Certain Restrictions on Subsidiaries. The -------------------------------------------------- Borrower will not, nor will the Borrower permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective, any encumbrance or restriction on the ability of any such Subsidiary to (x) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by the Borrower or any Subsidiary of the Borrower, or pay any Indebtedness owed to the Borrower or a Subsidiary of the Borrower, (y) make loans or advances to the Borrower or any Subsidiary of the Borrower or (z) transfer any of its properties or assets to the Borrower or any of its Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (i) applicable law, (ii) this Agreement, the other Credit Documents and the Cendant Documents, (iii) the provisions contained in the Existing Indebtedness, (iv) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of the Borrower or a Subsidiary of the Borrower, (v) customary provisions restricting assignment of any contract entered into by the Borrower or any Subsidiary of the Borrower in the ordinary course of business, (vi) any agreement or instrument governing Permitted Acquired Debt, which encumbrance or restriction is not applicable to any Person or the properties or assets of any Person, other than the Person or the properties or assets of the Person acquired pursuant to the respective Permitted Acquisition and so long as the respective encumbrances or restrictions were not -85- created (or made more restrictive) in connection with or in anticipation of the respective Permitted Acquisition, (vii) customary provisions restricting subletting or assignments of leases and/or customary provisions restricting subletting or assignments of leases and/or non-assignment provisions entered into in the ordinary course of business and consistent with past practices; (viii) customary provisions restricting the assignment of licensing agreements, management agreements or franchise agreements entered into by the Borrower or any of its Subsidiaries in the ordinary course of business; (ix) restrictions applicable to any Joint Venture that is a Subsidiary existing at the time of the acquisition thereof as a result of an Investment pursuant to Section 9.05 or a Permitted Acquisition effected in accordance with Section 8.13, provided that the restrictions -------- applicable to the respective such Joint Venture are not made worse, or more burdensome, from the perspective of the Borrower and its Subsidiaries, than those as in effect immediately before giving effect to the consummation of the respective Investment or Permitted Acquisition, (x) any restriction or encumbrance with respect to a Subsidiary imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the capital stock or assets of such Subsidiary, so long as such sale or disposition of all or substantially all of the capital stock or assets of such Subsidiary is permitted under this Agreement and (xi) the documentation governing Permitted Debt (other than Permitted Acquired Debt). 9.13 Limitation on the Creation of Subsidiaries, Joint Ventures ---------------------------------------------------------- and Unrestricted Subsidiaries. (a) Notwithstanding anything to the contrary ----------------------------- contained in this Agreement, the Borrower will not, and will not permit any of its Subsidiaries to, establish, create or acquire after the Effective Date any Subsidiary or Unrestricted Subsidiary (other than Joint Ventures permitted to be established in accordance with the requirements of Section 9.05(k)); provided that (A) the Borrower, any of its Wholly-Owned Domestic -------- Subsidiaries and any Unrestricted Subsidiary shall be permitted to establish or create an Unrestricted Subsidiary, so long as (i) if a Domestic Unrestricted Subsidiary of the Borrower, all of the capital stock or other equity interests of such new Domestic Unrestricted Subsidiary owned by the Borrower or any such Wholly-Owned Domestic Subsidiary shall be pledged pursuant to the Pledge Agreement to the extent then required thereunder and the certificates representing such stock or other equity interests, together with appropriate powers duly executed in blank, shall be delivered to the Collateral Agent and (ii) if a Foreign Unrestricted Subsidiary of the Borrower, all of the capital stock or other equity interests of such new Foreign Unrestricted Subsidiary owned by the Borrower or any such Wholly-Owned Domestic Subsidiary (except that not more than 65% of the outstanding voting stock of any Foreign Unrestricted Subsidiary need be so pledged, except in the circumstances -86- contemplated by Section 8.12) shall be pledged pursuant to the Pledge Agreement and the certificates representing such stock or other equity interests, together with appropriate powers duly executed in blank, shall be delivered to the Collateral Agent, (B) the Borrower and its Wholly-Owned Subsidiaries shall be permitted to establish or create Wholly-Owned Subsidiaries so long as, in each case, (i) at least 10 days' prior written notice thereof is given to the Administrative Agent (or such shorter period of time as is acceptable to the Administrative Agent), (ii) the capital stock or other equity interests of such new Subsidiary (other than any Regulated Subsidiary) are promptly pledged pursuant to, and to the extent required by, this Agreement and the Pledge Agreement and the certificates, if any, representing such stock or other equity interests, together with stock or other appropriate powers duly executed in blank, are delivered to the Collateral Agent, (iii) in the case of a Domestic Subsidiary (other than any Regulated Subsidiary), such new Domestic Subsidiary promptly executes a counterpart of the Subsidiaries Guaranty and the Pledge Agreement, (C) Subsidiaries may be acquired pursuant to Permitted Acquisitions so long as, in each such case (i) with respect to each Wholly- Owned Subsidiary acquired pursuant to a Permitted Acquisition, the actions specified in preceding clauses (B) and (C), as applicable, shall be taken and (ii) with respect to each Subsidiary which is not a Wholly-Owned Subsidiary and is acquired pursuant to a Permitted Acquisition, all capital stock or other equity interests thereof owned by any Credit Party shall be pledged pursuant to the Pledge Agreement, and (D) the Borrower and any of its Wholly-Owned Subsidiaries shall be permitted to establish or create Wholly-Owned Subsidiaries with Cendant principally involved in the residential mortgage business. In addition, each new Subsidiary that is required to execute any Credit Document shall execute and deliver, or cause to be executed and delivered, all other relevant documentation of the type described in Section 5. (b) The Borrower will not, nor permit any of its Subsidiaries to, enter into any Joint Venture, except to the extent permitted by Sections 9.05(k) and (r). 9.14 De Minimis Subsidiaries. Notwithstanding anything to the ----------------------- contrary stated herein, a De Minimis Subsidiary of the Borrower shall not be required to comply with any of the covenants set forth in Section 8, Section 9 (other than Sections 9.01, 9.04, 9.08 and 9.09) or the representations and warranties set forth in Section 7 until such De Minimis Subsidiaries become Credit Parties as required under this Agreement and the other Credit Documents; provided, however, that (i) the value of assets held in all De Minimis - -------- ------- Subsidiaries shall not exceed $35,000,000 and (ii) the gross revenues of all De Minimis -87- Subsidiaries at any time shall not exceed 7.5% of the gross revenues of the Borrower and its Subsidiaries at such time. 9.15 Burnet Realty, Inc. Title Insurance Business. -------------------------------------------- Notwithstanding anything to the contrary stated herein or in any other Credit Document, Burnet Realty, Inc., will be permitted to transfer all of its assets which relate to its title insurance business to a Subsidiary after the Effective Date. Such title insurance subsidiary will be a Regulated Subsidiary (as such term is defined herein) and treated as a Regulated Subsidiary hereunder. SECTION 10. Events of Default. Upon the occurrence of any of the ----------------- following specified events (each, an "Event of Default"): 10.01 Payments. The Borrower shall (i) default in the payment -------- when due of any principal of the Loans or (ii) default, and such default shall continue for three or more Business Days, in the payment when due of any Unpaid Drawing, any interest on the Loans or any Fees or any other amounts owing hereunder or under any other Credit Document; or 10.02 Representations, etc. Any representation, warranty or -------------------- statement made by any Credit Party herein or in any other Credit Document or in any statement or certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 10.03 Covenants. Any Credit Party shall (a) default in the due --------- performance or observance by it of any term, covenant or agreement contained in Section 8.01(e)(i), 8.10, 8.12, 8.13 or 9, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 10.01, 10.02 or clause (a) of this Section 10.03) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days after notice to the defaulting party by the Administrative Agent or the Required Banks; or 10.04 Default Under Other Agreements. (a) The Borrower or any of ------------------------------ its Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the -88- holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required), any such Indebtedness to become due prior to its stated maturity; or (b) any Indebtedness (other than the Obligations) of the Borrower or any of its Subsidiaries shall be declared to be due and payable, or shall be required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment (unless such required prepayment or mandatory prepayment results from a default thereunder or an event of the type that constitutes an Event of Default), prior to the stated maturity thereof; provided, that it shall not -------- constitute an Event of Default pursuant to clause (a) or (b) of this Section 10.04 unless the principal amount of any one issue of such Indebtedness, or the aggregate amount of all such Indebtedness referred to in clauses (a) and (b) above, exceeds $2,500,000 at any one time; or 10.05 Bankruptcy, etc. The Borrower or any of its Subsidiaries --------------- shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Subsidiaries and the petition is not controverted within 20 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Subsidiaries; or the Borrower or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Subsidiaries; or there is commenced against the Borrower or any of its Subsidiaries any such proceeding which remains undismissed for a period of 60 days; or the Borrower or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 10.06 ERISA. (a) (i) Any Plan shall fail to satisfy the minimum ----- funding standard required for any plan year or part thereof under Section 412 of the Code or Section 302 of ERISA or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or Section 303 or 304 of ERISA, (ii) a Reportable -89- Event shall have occurred, (iii) a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA shall be subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof) and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 shall be reasonably expected to occur within the following 30 days, (iv) any Plan which is subject to Title IV of ERISA shall have had or is likely to have a trustee appointed to administer such Plan, (v) any Plan which is subject to Title IV of ERISA is, shall have been or is likely to be terminated or to be the subject of termination proceedings under ERISA, (vi) any Plan shall have an Unfunded Current Liability, (vii) a contribution required to be made by the Borrower or any Subsidiary of the Borrower with respect to a Plan has not been timely made, (viii) the Borrower or any Subsidiary of the Borrower has incurred or is likely to incur any liability to or on account of a Plan under Section 409, 502(i) or 502(1) of ERISA or Section 4975 of the Code, (ix) the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate has incurred or is likely to incur any liability to or on account of a Plan under Section 4062, 4063, 4064, 4069 of ERISA or Section 401(a)(29) or 4971 of the Code or on account of a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code, ; or (x) the Borrower or the Subsidiary of the Borrower has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) that provide benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or pursuant to any Plan; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) such lien, security interest or liability, individually, and/or in the aggregate, in the reasonable opinion of the Required Banks, has had, or could reasonably be expected to have, a Material Adverse Effect; or 10.07 Security Documents. (a) The Pledge Agreement, or after the ------------------ execution and delivery thereof, any Additional Security Document, shall cease to be in full force and effect, or shall cease to give the Collateral Agent the Liens, rights, powers and privileges purported to be created thereby in favor of the Collateral Agent, superior to and prior to the rights of all third Persons (except as permitted by Section 9.03), and subject to no other Liens (except as permitted by Section 9.03), or (b) any Credit Party shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to such security Documents and such default shall continue beyond any cure or grace period specifically applicable thereto pursuant to the terms of the Pledge Agreement; or -90- 10.08 Guaranties. The Subsidiaries Guaranty or any provision ---------- thereof shall cease to be in full force and effect, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under the Subsidiaries Guaranty or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Subsidiaries Guaranty; or 10.09 Judgments. One or more judgments or decrees shall be --------- entered against the Borrower or any of its Subsidiaries involving a liability (to the extent not paid or not fully covered by insurance) in excess of $10,000,000 for all such judgments and decrees and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 10.10 Ownership. A Change of Control Event shall have occurred; --------- or 10.11 Franchise Agreements. A (i) termination of any Franchise -------------------- Agreement or (ii) default which would enable the franchisor to terminate any Franchise Agreement or receive liquidated damage payments applicable to substantially all of the Borrower's offices, under, any of the Franchise Agreements shall have occurred; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent shall, upon the written request of the Required Banks, by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of the Administrative Agent or any Bank to enforce its claims against any Guarantor or the Borrower, except as otherwise specifically provided for in this Agreement (provided, that if an Event of Default specified in Section -------- 10.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Administrative Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Revolving Loan Commitment terminated, whereupon the Revolving Loan Commitment of each Bank shall forthwith terminate immediately and any Commitment Fees shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and all Obligations owing hereunder (including Unpaid Drawings) to be, whereupon the same shall become, forthwith due and payable by the Borrower without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; (iii) enforce, as Collateral Agent (or direct the Collateral Agent to enforce), any -91- or all of the Liens and security interests created pursuant to the Security Documents; (iv) terminate any Letter of Credit which may be terminated in accordance with its terms; (v) direct the Borrower to pay (and the Borrower hereby agrees upon receipt of such notice, or upon the occurrence of any Event of Default specified in Section 10.05, to pay) to the Collateral Agent at the Payment Office such additional amounts of cash, to be held as security for the Borrower's reimbursement obligations in respect of Letters of Credit then outstanding, equal to the aggregate Stated Amount of all Letters of Credit then outstanding; and (vi) apply any cash collateral as provided in Section 4.02. SECTION 11. Definitions. As used herein, the following terms ----------- shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Acquired Business" shall mean any Person or business, division or product line acquired pursuant to a Permitted Acquisition. "Acquired Person" shall have the meaning provided in the definition of Permitted Acquisition. "Acquired Revenues" shall mean, with respect to any Acquired Business, the gross revenues of such Acquired Business for the twelve-month period most recently ended prior to the date of the acquisition of such Acquired Business as set forth in the financial statements for such Acquired Business delivered to the Borrower and the Banks in connection with such acquisition. "Acquisition Cooperation Agreement" shall mean the Acquisition Cooperation Agreement dated as of the Cendant Amendment Effective Date, by and between the Borrower and Cendant. "Acquisition Services Agreement" shall mean the Acquisition Services Agreement, dated as of the Cendant Amendment Effective Date, by and between the Borrower and Cendant. "Additional Royalty Agreement" shall mean the Additional Royalty Agreement dated as of August 11, 1997 by and among the Borrower, Coldwell Banker Real Estate Corporation, Century 21 Real Estate Corporation and HFS Incorporated. -92- "Additional Security Documents" shall have the meaning provided in Section 8.11. "Administrative Agent" shall have the meaning provided in the first paragraph of this Agreement and shall include any successor to the Administrative Agent appointed pursuant to Section 12.10. "Advisory Services Agreement" shall mean the Advisory Services Agreement, dated as of August 11, 1997, by and between the Borrower and Apollo Management, L.P. "Affected Loans" shall have the meaning provided in Section 4.02(e). "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person; provided, however, that for -------- ------- purposes of Section 9.07, an Affiliate of the Borrower shall include any Person that directly or indirectly owns more than 5% of any class of the capital stock of the Borrower and any officer or director of the Borrower or any such Person. "Aggregate Revolving Credit Exposure" shall mean, at any time, the sum of (I) the aggregate principal amount of all Revolving Loans then outstanding plus (II) the aggregate principal amount of all Swingline Loans then outstanding plus (III) the aggregate amount of all Letter of Credit Outstandings at such time. "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Applicable Margin" shall mean a percentage equal to (i) in the case of Loans maintained as (x) Base Rate Loans, 0.75% and (y) Eurodollar Loans, 1.75%. "Applicable Prepayment Percentage" shall mean, at any time, 100%. "Apollo Group" shall mean Apollo Management, L.P., Apollo Advisors, L.P., Apollo Investment Fund, L.P., Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo (U.K.) Partners III, L.P., AIF II, L.P., and Apollo Advisors II, L.P., all -93- Delaware limited partnerships (except that Apollo (U.K.) Partners III, L.P. is a limited partnership organized under the laws of England). "Arbitrage Loans" shall mean any loan incurred in the ordinary course of business, in connection with title insurance and escrow operations to the extent that the principal and interest thereon is secured by an amount of cash or U.S. governmental securities to ensure the full payment of principal and interest after giving effect to the interest income earned thereon. "Arranger" shall have the meaning provided in the first paragraph of this Agreement. "Asset Sale" shall mean any sale, transfer or other disposition by the Borrower or any of its Subsidiaries to any Person other than the Borrower or any Wholly-Owned Subsidiary of the Borrower of any asset (including, without limitation, any capital stock or other securities of another Person, but excluding the sale by such Person of its own capital stock) of the Borrower or such Subsidiary other than (i) sales, transfers or other dispositions of inventory made in the ordinary course of business, (ii) dispositions or transfers arising out of, or in connection with, the events described in clauses (i) and (ii) of the definition of Recovery Event, (iii) any sale or other disposition of Cash Equivalents in the ordinary course of business, (iv) any merger, consolidation or liquidation permitted by Sections 9.02(f) and (g), (v) any transfer of assets permitted pursuant to Section 9.02(e), (g), (i) or (j), (vi) any transaction permitted pursuant to Section 9.02(m), (vii) sales, transfers and other dispositions made pursuant to Section 5.8 of the Stockholders Agreement, and after the Cendant Amendment Effective Date, the Acquisition Cooperation Agreement or one or more agreements entered into with Cendant or one of its subsidiaries to effectuate same and (viii) other sales and dispositions that generate Net Sale Proceeds of less than $2,500,000 in the aggregate in any fiscal year of the Borrower. "Assignment and Assumption Agreement" shall mean the Assignment and Assumption Agreement substantially in the form of Exhibit J (appropriately completed). "Authorized Officer" shall mean, with respect to (i) the delivery of Notices of Borrowing, Notices of Conversion, Letter of Credit Requests and similar notices, the chief operating officer, any treasurer or other financial officer of the Borrower, (ii) delivery of financial information and officer's certificates pursuant to this Agreement, the chief operating -94- officer, any treasurer or other financial officer of the Borrower and (iii) any other matter in connection with this Agreement or any other Credit Document, any officer (or a person or persons so designated by any two officers) of the Borrower, in each case to the extent reasonably acceptable to the Administrative Agent. "Available Basket Amount" shall mean, on any date of determination, an amount equal to the sum of (i) $15,000,000 minus (ii) the aggregate amount of ----- Investments made pursuant to Section 9.05(k) after the Effective Date minus ----- (iii) the aggregate amount of Indebtedness or other obligations (whether absolute, accrued, contingent or otherwise and whether or not due) of any Joint Venture or Unrestricted Subsidiary for which the Borrower or any of its Subsidiaries (other than the respective Joint Venture or Unrestricted Subsidiary) is liable, minus (iv) all payments made by the Borrower or any of ----- its Subsidiaries (other than the respective Joint Venture) in respect of Indebtedness or other obligations of the respective Joint Venture or Unrestricted Subsidiary (including, without limitation, payments in respect of obligations described in preceding clause (iii)) after the Effective Date, plus ---- (v) the amount of any increase to the Available Basket Amount made after the Effective Date in accordance with the provisions of Section 9.05(k). In connection with the foregoing, it is understood that the acquisition of an Acquired Person which has ownership interests in one or more Joint Ventures, pursuant to a Permitted Acquisition effected in accordance with the relevant requirements of this Agreement shall not be deemed to constitute an Investment pursuant to Section 9.05(k) and the Available Basket Amount shall not be reduced as a result of the payment of consideration owing to effect the Permitted Acquisition (although the Available Basket Amount would be affected to the extent preceding clauses (iii) or (iv) apply with respect to the Joint Venture so acquired or to the extent additional Investments are made in the respective Joint Venture pursuant to Section 9.05(k)). "Available Basket Sub-Limit" shall mean, on any date of determination, an amount equal to the sum of (i) $5,000,000 minus (ii) the aggregate amount of ----- Investments made in Unrestricted Subsidiaries pursuant to Section 9.05(k) after the Effective Date, minus (iii) the aggregate amount of Indebtedness or other ----- obligations (whether absolute, accrued, contingent or otherwise and whether or not due) of any Unrestricted Subsidiary for which the Borrower or any of its Subsidiaries is liable, minus (iv) all payments made by the Borrower or any of ----- its Subsidiaries in respect of Indebtedness or other obligations of the respective Unrestricted Subsidiary (including, without limitation, payments in respect of obligations described in preceding clause (iii)) after the Effective Date, plus (v) the amount of any increase to the Available Basket Sub-Limit made ---- after the Effective Date in accordance with -95- the provisions of Section 9.05(k); provided that the Available Basket Sub-Limit -------- shall not exceed at any time the Available Basket Amount as then in effect. "Bank" shall mean each financial institution with a Revolving Loan Commitment listed on Schedule I (as amended from time to time), as well as any Person which becomes a "Bank" hereunder pursuant to Section 1.13 and/or 13.04(b). "Bank Default" shall mean (i) the refusal (which has not been retracted) of a Bank to make available its portion of any Borrowing (including any Mandatory Borrowing) or to fund its portion of any unreimbursed payment under Section 2.03 or (ii) a Bank having notified the Administrative Agent and/or the Borrower that it does not intend to comply with the obligations under Section 1.01(a), 1.01(c) or 2.03. "Bankruptcy Code" shall have the meaning provided in Section 10.05. "Base Rate" at any time shall mean the higher of (x) the rate which is 1/2 of 1% in excess of the Federal Funds Rate and (y) the Prime Lending Rate. "Base Rate Loan" shall mean each Loan bearing interest at the rates provided in Section 1.08(a). "Benefitted Bank" shall have the meaning provided in Section 13.06(b). "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrower Common Stock" shall have the meaning provided in Section 7.13. "Borrowing" shall mean the borrowing of one Type of Loan by the Borrower from all the Banks (or from BTCo in the case of Swingline Loans) on a given date (or resulting from a conversion or conversions on such date) having in the case of Eurodollar Loans the same Interest Period; provided that, Base -------- Rate Loans incurred pursuant to Section 1.10(b) shall be considered part of the related Borrowing of Eurodollar Loans. "BTCo" shall mean Bankers Trust Company, in its individual capacity, and any successor corporation thereto by merger, consolidation or otherwise. -96- "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day except Saturday, Sunday and any day which shall be in New York City a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) above and which is also a day for trading by and between banks in the New York or London interbank Eurodollar market. "Calculation Period" shall have the meaning provided in Section 8.13. "Capital Expenditures" shall mean, with respect to any Person, for any period, all expenditures by such Person which should be capitalized in accordance with GAAP during such period, including all such expenditures with respect to fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with GAAP) and, without duplication, the amount of all Capitalized Lease Obligations incurred by such Person during such period. "Capital Lease," as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of the Borrower or any of its Subsidiaries, in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Cash Equivalents" shall mean, as to any Person, (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (ii) time deposits, certificates of deposit and bankers' acceptances of any Bank or any commercial bank having, or which is the principal banking subsidiary of a bank holding company organized under the laws of the United States, any State thereof, the District of Columbia or any foreign jurisdiction having capital, surplus and undivided profits aggregating in excess of $200,000,000 and having a long-term unsecured debt rating of at least "A" or the equivalent thereof from S&P or "A2" or the equivalent thereof from Moody's, with maturities of not more than six months from the date of acquisition by such Person, (iii) repurchase -97- agreements with a term of not more than 30 days, involving securities of the types described in preceding clause (i), and entered into with commercial banks meeting the requirements of preceding clause (ii), (iv) commercial paper issued by any Person incorporated in the United States rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's and in each case maturing not more than six months after the date of acquisition by such Person, (v) investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (i) through (iv) above and (vi) overnight deposits and demand deposit accounts (in the respective local currencies) maintained in the ordinary course of business. "Cendant" shall mean Cendant Corporation. "Cendant Amendment Effective Date" shall mean any date on which the Borrower and its Subsidiaries execute and deliver copies of the Cendant Documents to the Administrative Agent, as amended in a manner substantially similar to the proposed amendments thereto delivered to the Administrative Agent on the Effective Date. "Cendant Documents" shall mean, (A) prior to the Cendant Amendment Effective Date, collectively, (i) the Advisory Services Agreement, (ii) the Preferred Alliance Agreement, (iii) the Development Advance Promissory Note and Security Agreement, (iv) the Franchise Override Agreement, (v) the Incremental Royalty Agreement, (vi) the Additional Royalty Agreement, (vii) the Support Agreement, (viii) the Franchise Agreements, (ix) the Subscription Agreement, (x) the Subordination Agreement, (xi) the Guarantee and (xii) the Indemnification Agreement, and (B) on and after each applicable Cendant Amendment Effective Date, collectively, (i) the Acquisition Services Agreement, (ii) the Program Outsourcing Agreement, (iii) the Acquisition Cooperation Agreement, (iv) the Development Advance Promissory Note and Security Agreement, (v) the Incremental Royalty Agreement as in effect on and after such date, (vi) the Support Agreement, (vii) the Master Letter Agreement, (viii) the Franchise Agreements, (ix) the Subscription Agreement, (x) the Subordination Agreement, (xi) the Guarantee and (xii) the Indemnification Agreement. "Change of Control Event" shall mean, (I) at any time prior to the consummation of a Qualified IPO, (a) Apollo Group, Cendant and their Affiliates shall cease to own on a fully diluted basis in the aggregate at least 30% of the economic and voting interest in the Borrower's capital stock (for such purposes, excluding any Qualified Preferred -98- Stock and any Disqualified Preferred Stock, in each case to the extent same is not Voting Stock) or (b) Apollo Group, Cendant and their Affiliates, together with the Management Participants and other investors which own shares of Borrower Common Stock on the Effective Date, shall cease to own on a fully diluted basis in the aggregate at least a majority of the outstanding Voting Stock of the Borrower or (c) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in effect on the Effective Date, other than the Permitted Holders, shall (A) have acquired beneficial ownership of 30% or more on a fully diluted basis of the voting and/or economic interest in the Borrower's capital stock or (B) obtained the power (whether or not exercised) to elect a majority of the Borrower's directors or (d) the Board of Directors of the Borrower shall cease to consist of a majority of Continuing Directors or shall not be nominees of Apollo and/or Cendant or (e) a "change of control" or similar event shall occur as provided in any Existing Indebtedness, Permitted Debt, Disqualified Preferred Stock, Qualified Preferred Stock or Existing Preferred Stock to the extent the outstanding principal amount or liquidation preference, as the case may be, of such Existing Indebtedness, Permitted Debt, Disqualified Preferred Stock, Qualified Preferred Stock or Existing Preferred Stock exceeds $10,000,000 (II) at any time after a Qualified IPO, (a) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in effect on the Effective Date), other than the Permitted Holders, shall have acquired beneficial ownership of 25% or more on a fully diluted basis of the voting and/or economic interest in the Borrower's capital stock and Apollo Group, Cendant and their Affiliates shall own less than such Person or "group" on a fully diluted basis of the economic and voting interest in the Borrower's capital stock or (b) the Board of Directors of the Borrower shall cease to consist of a majority of Continuing Directors or (c) a "change of control" or similar event shall occur as provided in any Cendant Documents, Existing Indebtedness, Permitted Debt, Disqualified Preferred Stock, Qualified Preferred Stock or Existing Preferred Stock to the extent the outstanding principal amount or liquidation preference, as the case may be, of such Existing Indebtedness, Permitted Debt, Disqualified Preferred Stock, Qualified Preferred Stock or Existing Preferred Stock exceeds $10,000,000. "Chase" shall mean The Chase Manhattan Bank, in its individual capacity, and any successor corporation thereto by merger, consolidation or otherwise. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder. Section references to the Code are to -99- the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property (whether real or personal, movable or immovable) with respect to which any security interests have been granted (or purported to be granted) pursuant to any Security Document, including, without limitation, all Pledge Agreement Collateral and all cash and Cash Equivalents delivered as collateral pursuant to any Credit Document. "Collateral Agent" shall mean the Administrative Agent acting as collateral agent for the Secured Creditors. "Commitment Fee" shall have the meaning provided in Section 3.01(a). "Common Stock" shall mean the Common Stock, par value $0.01 per share of the Borrower. "Company" shall mean any corporation, limited liability company, partnership or other business entity (or the adjectival form thereof, where appropriate). "Consolidated Adjusted Interest Coverage Ratio" for any period shall mean the ratio of Consolidated EBITDA to Consolidated Interest Expense for such period. "Consolidated Cumulative Net Income Period" shall mean each period consisting of a fiscal quarter of the Borrower ending after the Initial Borrowing Date and for which the related financial statements required to be delivered pursuant to Section 8.01(a) or (b), as the case may be, have theretofore been delivered. "Consolidated Cumulative Net Income Amount" shall mean, at any date an amount determined on a cumulative basis equal to (i) the sum of 15% of Consolidated Net Income for all Consolidated Cumulative Net Income Periods ending after the Initial Borrowing Date and prior to such date of determination for which Consolidated Net Income was a positive number, minus (ii) 100% of Consolidated Net Income (expressed as a positive number) for all Consolidated Cumulative Net Income Periods ending after the last day of the Initial Borrowing Date and prior to such date of determination for which Consolidated Net Income was a negative number, in each case after adding back the amortization of costs relating to the acquisition of (a) open real estate listing contracts and -100- (b) pending real estate sales contracts to the extent deducted in the calculation of net income. "Consolidated Debt" shall mean, at any time, the sum of (without duplication) (i) all Indebtedness of the Borrower and its Subsidiaries as would be required to be reflected on the liability side of a balance sheet of such Person in accordance with GAAP as determined on a consolidated basis (other than (A) Indebtedness permitted under Section 9.04(k), (B) Indebtedness permitted under Section 9.04(j) and (C) Indebtedness in connection with the Development Advance Promissory Note and Security Agreement, so long as, in the case of (A) and (B) above, there is a corresponding asset reflected on the balance sheet), (ii) all Indebtedness of the Borrower and its Subsidiaries of the type described in clauses (iii) and (vii) of the definition of Indebtedness and (iii) all Contingent Obligations of the Borrower and its Subsidiaries in respect of Indebtedness of other Persons (i.e., Persons other than the Borrower or any of ---- its Subsidiaries) of the type referred to in preceding clauses (i) and (ii) of this definition; provided, that for purposes of this definition, any -------- Disqualified Preferred Stock of the Borrower and any Preferred Stock of any of its Subsidiaries shall be treated as Indebtedness, with an amount equal to the greater of the liquidation preference or the maximum mandatory fixed repurchase price of any such outstanding Preferred Stock deemed to be a component of Consolidated Debt. "Consolidated EBIT" shall mean, for any period, the Consolidated Net Income of the Borrower and its Subsidiaries, determined on a consolidated basis, before Consolidated Interest Expense (to the extent deducted in arriving at Consolidated Net Income) and provision for taxes based on income or gains or losses from sales of assets other than inventory sold in the ordinary course of business, in each case that were included in arriving at Consolidated Net Income. "Consolidated EBITDA" shall mean, for any period, Consolidated EBIT, adjusted by adding thereto the amount of (i) all amortization and depreciation and other non-cash items, (ii) the portion of acquisition related costs which have been or will be paid by Cendant and/or its Subsidiaries pursuant to Sections 5.8 and 5.10 of the Stockholders Agreement or, after the Cendant Amendment Effective Date, the Acquisition Cooperation Agreement, and (iii) any management fees and consulting fees paid pursuant to, and in accordance with the requirements of, clause (iv) of Section 9.07 that were deducted in arriving at Consolidated EBIT for such period. -101- "Consolidated Interest Expense" shall mean, for any period, the total consolidated interest expense of the Borrower and its Subsidiaries for such period (calculated without regard to any limitations on the payment thereof) plus, without duplication, (i) that portion of Capitalized Lease Obligations of - ---- the Borrower and its Subsidiaries representing the interest factor for such period, and capitalized interest expense, (ii) the amount of all cash Dividend requirements (whether or not declared or paid) on Disqualified Preferred Stock of the Borrower, and on any Preferred Stock of any of its Subsidiaries paid, accrued or scheduled to paid or accrued during such period, and the amount of all cash Dividends paid on Existing Preferred Stock during such period, which amounts described in preceding clause (ii) shall be treated as interest expense of the Borrower and its Subsidiaries for purposes of this definition regardless of the treatment of such amounts under GAAP, in each case net of the total consolidated cash interest income of the Borrower and its Subsidiaries for such period, but excluding the amortization of any deferred financing costs or of any costs in respect of any Interest Rate Protection Agreement. "Consolidated Net Income" shall mean, for any period, the net after- tax income of the Borrower and its Subsidiaries determined on a consolidated basis, without giving effect to any after-tax non-recurring gains or losses or after-tax items classified as extraordinary gains or losses, any other non-cash expenses incurred or payments made in connection with the transactions contemplated by the Agreement, and without giving effect to gains and losses from the sale or disposition of assets (other than sales or dispositions of inventory, equipment, raw materials and supplies) by the Borrower and its Subsidiaries; provided that the following items shall be excluded in computing -------- Consolidated Net Income (without duplication): (i) the net income or net losses of any Person in which any other Person or Persons (other than the Borrower and its Wholly-Owned Domestic Subsidiaries) has an equity interest or interests, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or such Wholly-Owned Subsidiaries by such Person during such period, (ii) except for determinations expressly required to be made on a Pro Forma Basis, the net income (or loss) of any Person accrued prior to the - --- ----- date it becomes a Wholly-Owned Subsidiary or all or substantially all of the property or assets of such Person are acquired by a Wholly-Owned Subsidiary and (iii) the net income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary. -102- "Contingent Obligations" shall mean as to any Person any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; provided, however, that -------- ------- the term Contingent Obligation shall not include endorsements of instruments for deposit or collection or standard contractual indemnities entered into, in each case in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Directors" shall mean the directors of the Borrower on the Effective Date and each other director if such director's nomination for the election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors. "Credit Documents" shall mean this Agreement, the Notes, the Subsidiaries Guaranty and each Security Document. "Credit Event" shall mean the making of a Loan (other than a Revolving Loan made pursuant to a Mandatory Borrowing) or the issuance of a Letter of Credit. "Credit Party" shall mean the Borrower and each Guarantor. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. -103- "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. "De Minimis Subsidiary" shall mean each Subsidiary of the Borrower to the extent that (i) it holds no capital stock of any other Subsidiary that is not a De Minimis Subsidiary, (ii) its revenues at any time represents less than 1% of the total revenues of the Borrower and its Subsidiaries at such time and (iii) its assets have a value of less than $5,000,000. "Derivatives Counterparty" shall have the meaning provided in Section 9.06. "Development Advance Promissory Note and Security Agreement" shall mean the Development Advance Promissory Note, dated as of September 1, 1997, between NRT and Coldwell Banker Real Estate Corporation, and the accompanying Security Agreement between the same parties, dated as of September 1, 1998. "Disqualified Preferred Stock" shall mean any Preferred Stock of the Borrower other than Qualified Preferred Stock and Existing Preferred Stock. "Dividend" shall have the meaning provided in Section 9.06. "Dividend Guarantee" shall mean the Guarantee dated August 11, 1997, by and among Berry Referral Network, Inc., Burgdorff Referral Associates, Inc., Coldwell Banker Ira E. Berry, Inc., Coldwell Banker Real Estate, Inc., Coldwell Banker Real Estate Services, Inc., Coldwell Banker Residential Brokerage Company, Coldwell Banker Residential Brokerage Corporation, Coldwell Banker Residential Real Estate, Coldwell Banker Residential Real Estate Services of Wisconsin, Inc., Coldwell Banker Residential Referral Network, Coldwell Banker Residential Referral Network, Inc., Contempo Holdings, Contempo Realty, Inc., Contempo Relocation, Inc., Del Monte Realty Company, Douglas and Jean Burgdorff, Inc. Forest E. Olson, Inc., Fox Realty Corporation, Grey City Graphics, Inc., Kahn Realty Companies, Inc., Referral Network, Inc. (FL), Referral Network, Inc. (TX), Relocation Chicago, Inc., Valley of California, Inc., in favor of Apollo Group, guarantying certain obligations of the Borrower to make additional Dividend payments to Apollo. "Documents" shall mean and include the Credit Documents, the Stockholders Agreement and all Cendant Documents. -104- "Dollar Equivalent" of an amount denominated in a currency other than U.S. Dollars (the "Other Currency") shall mean, at any time for the determination thereof, the amount of U.S. Dollar which could be purchased with the amount of the Other Currency involved in such computation at the spot exchange rate therefor as quoted by the Administrative Agent as of 11:00 A.M. (New York time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Domestic Subsidiary" shall mean each Subsidiary of the Borrower incorporated or organized in the United States or any State or territory thereof. "Domestic Unrestricted Subsidiary" shall mean any Unrestricted Subsidiary which is not a Foreign Unrestricted Subsidiary. "Effective Date" shall have the meaning provided in Section 13.10. "Eligible Transferee" shall mean and include a commercial bank, mutual fund, financial institution, a "qualified institutional buyer" (as defined in Rule 144A of the Securities Act), any fund that invests in bank loans or any other "accredited investor" (as defined in Regulation D of the Securities Act) (other than an individual). "Employee Benefit Plans" shall have the meaning set forth in Section 5.11. "Employment Agreements" shall have the meaning set forth in Section 5.11. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of non-compliance or violation, investigations or proceedings relating in any way to any violation (or alleged violation) by the Borrower or any of its Subsidiaries under any Environmental Law (hereafter "Claims") or any permit issued to the Borrower or any of its Subsidiaries under any such law, including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. -105- "Environmental Law" shall mean any federal, state, provincial, foreign or local policy, statute, law, rule, regulation, ordinance, code or rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment (for purposes of this definition (collectively, "Laws")), relating to the environment, or Hazardous Materials or health and safety to the extent such health and safety issues arise under the Occupational Safety and Health Act of 1970, as amended, or any such similar Laws. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Eurodollar Loans" shall mean each Loan bearing interest at the rates provided in Section 1.08(b). "Eurodollar Rate" shall mean with respect to each Interest Period for a Eurodollar Loan, (i) the rate per annum determined by the Administrative Agent, at approximately 11:00 A.M. (London time) on the date which is two Business Days prior to the beginning of the relevant Interest Period (as specified in the applicable Notice of Borrowing or Notice of Conversion) by reference to the British Bankers' Association Interest Settlement Rates for deposits in U.S. Dollars (as set forth by any service which has been nominated by the British Bankers' Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period (provided that, to the extent that -------- an interest rate is not ascertainable pursuant to the foregoing provision of this definition, the "Eurodollar Rate" shall be the interest rate per annum, determined by the Administrative Agent to be the average of the rates per annum at which deposits in U.S. Dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Administrative Agent at approximately 11:00 A.M. (London time) on the date which is two Business Days prior to the beginning of such Interest Period) divided (and ------- -106- rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D). "Event of Default" shall have the meaning provided in Section 10. "Excluded Recovery Event" shall mean (i) any Recovery Event resulting in the receipt of proceeds by the Borrower or any of its Subsidiaries of less than $1,000,000 and (ii) any receipt of insurance proceeds by the Borrower or any of its Subsidiaries payable under an insurance policy covering environmental liabilities, to the extent (and only to the extent) (x) the Borrower or such Subsidiary has, prior to the date of its receipt of such proceeds, used monies to remediate or restore properties in respect of which such proceeds were paid, (y) the amount of the insurance proceeds included for purposes of this clause (ii) does not exceed the amount of the monies so used to remediate or restore properties as provided in the immediately preceding clause (x) and (z) within 10 days following receipt by the Borrower or such Subsidiary of such insurance proceeds, an Authorized Officer of the Borrower has delivered to the Administrative Agent an officer's certificate, certifying the Borrower's compliance with preceding clauses (x) and (y) and attaching invoices and such other supporting information as the Administrative Agent may reasonably request. For avoidance of doubt, the parties hereto acknowledge and agree that the receipt by the Borrower or any of its Subsidiaries of any proceeds from a single Recovery Event of the type described in clause (ii) above not entitled to inclusion in said clause (ii) by virtue of the qualification contained in clause (y) thereof shall be subject to the provisions of Section 4.02(d) as if such receipt of proceeds were a separate and distinct Recovery Event. "Existing Indebtedness" shall have the meaning provided in Section 5.08(a). "Existing Indebtedness Agreements" shall have the meaning provided in Section 5.11. "Existing Preferred Stock" shall have the meaning provided in Section 7.13. "Facing Fee" shall have the meaning provided in Section 3.01(c). -107- "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.01. "Foreign Subsidiary" shall mean each Subsidiary of the Borrower other than a Domestic Subsidiary. "Foreign Unrestricted Subsidiary" shall mean each Unrestricted Subsidiary that is incorporated under the laws of any jurisdiction other than the United States of America, any State thereof, the United States Virgin Islands or Puerto Rico. "Franchise Agreements" shall mean (x) prior to the Cendant Amendment Effective Date, (i) the Amended and Restated Master Real Estate Franchise Agreement, dated as of August 1997, by and between the Borrower and Coldwell Banker Real Estate Corporation, (ii) the Master Membership Agreement, dated as of August 1997, by and between ERA Franchise Systems, Inc. and the Borrower and (iii) the Master Century 21 Real Estate Franchise Agreement, dated as of August 1997, by and between Century 21 Real Estate Corporation and the Borrower, and (y) on and after the Cendant Amendment Effective Date, each such agreement as amended on such date substantially in the manner described to the Administrative Agent on the Effective Date. "Franchise Override Agreement" shall mean the Franchise Override Agreement dated as of August 11, 1997, between the Borrower and Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc. and Century 21 Real Estate Corporation. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time; it being understood and agreed that determinations in accordance with GAAP for purposes of Section 9, including defined terms as used therein, are subject (to the extent provided therein) to Section 13.07(a). -108- "Gross-Up Amount" shall have the meaning provided in Section 4.04(a). "Guarantors" shall mean and include each Wholly-Owned Subsidiary (excluding (i) Regulated Subsidiaries, and (ii) in the case of De Minimis Subsidiaries existing on the Effective Date, such De Minimis Subsidiaries for a period of 120 days from the Effective Date, and in the case of De Minimis Subsidiaries created or acquired after the Effective Date, excluding such De Minimis Subsidiaries for a period of 60 days after such date) of the Borrower. "HFS, Inc." shall mean HFS Incorporated, a Delaware corporation and predecessor to Cendant. "Hazardous Materials" shall mean (a) any petrochemical or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; and (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "restricted hazardous materials," "extremely hazardous wastes," "restrictive hazardous wastes," "toxic pollutants," "contaminants" or "pollutants" under any Environmental Law, or words of similar meaning and regulatory effect. "Incremental Royalty Agreement" shall mean (x) prior to the Cendant Amendment Effective Date, the Incremental Royalty Agreement dated as of August 11, 1997, by and among the Borrower, Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc., Century 21 Real Estate Corporation and HFS Incorporated and (y) on and after the Cendant Amendment Effective Date, each such agreement as amended on such date substantially in the manner described to the Administrative Agent on the Effective Date. "Indebtedness" of any Person shall mean, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services payable to the sellers thereof or any of such seller's assignees which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person but excluding deferred rent as determined in accordance with GAAP, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts -109- drawn thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (vii) all obligations under ---- Interest Rate Protection Agreements and Other Hedging Agreements and (viii) all Contingent Obligations of such Person, provided, that Indebtedness -------- shall not include trade payables and accrued expenses, in each case arising in the ordinary course of business. "Indemnification Agreement" shall mean the Indemnification Agreement dated August 11, 1997, by and between HFS, Inc. and the Borrower. "Initial Borrowing Date" shall mean the date on which the initial Credit Event occurs. "Intercompany Loan" shall have the meaning provided in Section 9.05(f). "Intercompany Notes" shall mean promissory notes, in the form of Exhibit K, evidencing Intercompany Loans. "Interest Determination Date" shall mean, with respect to any Eurodollar Loan, the second Business Day prior to the commencement of any Interest Period relating to such Eurodollar Loan. "Interest Period," with respect to any Eurodollar Loan, shall mean the interest period applicable thereto, as determined pursuant to Section 1.09. "Interest Rate Protection Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or arrangement. "Investment" shall have the meaning provided in the preamble to Section 9.05. "Joint Venture" shall mean any Person, other than an individual or a Wholly-Owned Subsidiary of the Borrower, (i) in which the Borrower or a Subsidiary of the Borrower holds or acquires an ownership interest (whether by way of capital stock, -110- partnership or limited liability company interest, or other evidence of ownership) and (ii) which is engaged in a Permitted Business. "L/C Supportable Obligations" shall mean obligations of the Borrower or its Wholly-Owned Subsidiaries incurred in the ordinary course of business and otherwise permitted to exist pursuant to the terms of this Agreement. "Leasehold" of any Person shall mean all of the right, title and interest of such Person as lessee or licensee in, to and under leases or licenses of land, improvements and/or fixtures. "Letter of Credit" shall have the meaning provided in Section 2.01(a). "Letter of Credit Fees" shall have the meaning provided in Section 3.01(b). "Letter of Credit Issuer" shall mean BTCo and any other Bank which, at the request of the Borrower and with the consent of the Administrative Agent, agrees in such Bank's sole discretion to become a Letter of Credit Issuer for purposes of issuing Letters of Credit pursuant to Section 2. The sole Letter of Credit Issuer on the Effective Date shall be BTCo. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section 2.02(a). "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien, hypothecation or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any similar recording or notice statute, and any lease having substantially the same effect as the foregoing). "Loan" shall mean each Revolving Loan and each Swingline Loan. "Management Agreements" shall have the meaning provided in Section 5.11. -111- "Management Participants" shall mean those employees, members of management and directors of the Borrower eligible for awards under the 1997 Equity Participation Plan. "Mandatory Borrowing" shall have the meaning provided in Section 1.01(c). "Margin Stock" shall have the meaning provided in Regulation U. "Marketing Agreement" shall mean the Marketing Agreement, dated as of August 11, 1997, by and between Cendant Mortgage Corporation and the Borrower. "Master Letter Agreement" shall mean that Master Letter Agreement dated as of the Cendant Amendment Effective Date, by and among the Borrower, Apollo Management L.P., Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo (UK) Partners III, L.P., Cendant Corporation and Cendant Operations, Inc. "Material Adverse Effect" shall mean a material adverse effect on the business, properties, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower, and its Subsidiaries taken as a whole. "Maturity Date" shall mean May 29, 2001. "Maximum Swingline Amount" shall mean $2,500,000. "Minimum Borrowing Amount" shall mean (i) for Revolving Loans, $1,000,000 and (ii) for Swingline Loans, $500,000. "Moody's" shall mean Moody's Investors Service, Inc. "Net Cash Proceeds" shall mean for any event requiring a reduction of the Total Revolving Loan Commitment pursuant to Sections 3.03 or 4.02, as the case may be, the gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or otherwise, but only as and when received) received from such event, net of reasonable transaction costs (including, as applicable, any underwriting, brokerage or other customary commissions and reasonable legal, advisory and other fees and expenses associated therewith) received from any such event. -112- "Net Sale Proceeds" shall mean for any sale of assets, the gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or otherwise, but only as and when received) received from any sale of assets, net of (i) reasonable transaction costs (including, without limitation, any underwriting, brokerage or other customary selling commissions and reasonable legal, advisory and other fees and expenses, including title and recording expenses, associated therewith) and payments of unassumed liabilities relating to the assets sold at the time of, or within 30 days after, the date of such sale, (ii) the amount of such gross cash proceeds required to be used to repay any Indebtedness (other than Indebtedness of the Banks pursuant to this Agreement) which is secured by the respective assets which were sold, and (iii) the estimated marginal increase in income taxes which will be payable by the Borrower's consolidated group with respect to the fiscal year in which the sale occurs as a result of such sale; provided, -------- however, that such gross proceeds shall not include any portion of such ------- gross cash proceeds which the Borrower determines in good faith should be reserved for post-closing adjustments (including indemnification payments) (to the extent the Borrower delivers to the Banks a certificate signed by its chief financial officer or treasurer, controller or chief accounting officer as to such determination), it being understood and agreed that on the day that all such post-closing adjustments have been determined (which shall not be later than six months following the date of the respective asset sale), the amount (if any) by which the reserved amount in respect of such sale or disposition exceeds the actual post-closing adjustments payable by the Borrower or any of its Subsidiaries shall constitute Net Sale Proceeds on such date received by the Borrower and/or any of its Subsidiaries from such sale, lease, transfer or other disposition. The parties hereto acknowledge and agree that Net Sale Proceeds shall not include any trade-in-credits or purchase price reductions received by the Borrower or any of its Subsidiaries in connection with an exchange of equipment for replacement equipment that is the functional equivalent of such exchanged equipment. "New Withholding Regulations" shall have the meaning provided in Section 4.04(b). "Non-Defaulting Bank" shall mean each Bank other than a Defaulting Bank. "Non-Wholly Owned Entity" shall have the meaning provided in the definition of Permitted Acquisition. -113- "Note" shall mean each Revolving Note and/or the Swingline Note, as the context may require. "Notice of Borrowing" shall have the meaning provided in Section 1.03(a). "Notice of Conversion" shall have the meaning provided in Section 1.06. "Notice Office" shall mean the office of the Administrative Agent located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006 or such other office as the Administrative Agent may designate to the Borrower and the Banks from time to time. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to the Administrative Agent, the Collateral Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Other Hedging Agreements" shall mean any foreign exchange contracts, currency swap agreements or other similar agreements or arrangements designed to protect against fluctuations in currency values. "Participant" shall have the meaning provided in Section 2.03(a). "Payment Office" shall mean the office of the Administrative Agent located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Acquired Debt" shall have the meaning set forth in Section 9.04(d). "Permitted Acquisition" shall mean the acquisition by the Borrower or any of its Wholly-Owned Domestic Subsidiaries of assets constituting a business, division or product line of any Person not already a Subsidiary of the Borrower or any of its Wholly-Owned Subsidiaries or of 100% of the capital stock or other equity interests of any such Person, provided that -------- (A) the consideration paid by the Borrower or such Wholly-Owned -114- Subsidiary consists solely of cash (including proceeds of Revolving Loans), the issuance of the Borrower Common Stock, the issuance of any Qualified Preferred Stock or Disqualified Preferred Stock otherwise permitted in Section 9.11, the issuance of Indebtedness otherwise permitted in Section 9.04 (including Permitted Subordinated Indebtedness) and the assumption/acquisition of any Permitted Acquired Debt (calculated in accordance with GAAP) relating to such business, division, product line or Person which is permitted to remain outstanding in accordance with the requirements of Section 9.04, or the cancellation of Preferred Stock held by Cendant pursuant to the Acquisition Cooperation Agreement (B) those acquisitions that are structured as stock acquisitions shall be effected through a purchase of 100% of the capital stock or other equity interests of such Person by the Borrower or such Wholly-Owned Domestic Subsidiary or through a merger between such Person and a Wholly-Owned Domestic Subsidiary of the Borrower, so that after giving effect to such merger, 100% of the capital stock of the surviving corporation of such merger is owned by the Borrower or a Wholly-Owned Domestic Subsidiary, (C) in the case of the acquisition of 100% of the capital stock or other equity interests of any Person, such Person (the "Acquired Person") shall own no capital stock or other equity interests of any other Person unless either (x) the Acquired Person owns 100% of the capital stock or other equity interests of such other Person or (y) if the Acquired Person owns capital stock or equity interests in any other Person which is not a Wholly-Owned Subsidiary of the Acquired Person (a "Non-Wholly Owned Entity"), both (1) the Acquired Person shall not have been created or established in contemplation of, or for purposes of, the respective Permitted Acquisition and (2) any Non-Wholly Owned Entity of the Acquired Person shall have been non-wholly-owned prior to the date of the respective Permitted Acquisition and not created or established in contemplation thereof, (D) substantially all of the business, division or product line acquired pursuant to the respective Permitted Acquisition, or the business of the Person acquired pursuant to the respective Permitted Acquisition and its Subsidiaries taken as a whole, is in the United States, (E) the assets acquired, or the business of the Person whose stock is acquired, shall be in a Permitted Business and (F) all applicable requirements of Sections 8.13 and 9.02 applicable to Permitted Acquisitions are satisfied. Notwithstanding anything to the contrary contained in the immediately preceding sentence, an acquisition which does not otherwise meet the requirements set forth above in the definition of "Permitted Acquisition" shall constitute a Permitted Acquisition if, and to the extent, the Required Banks agree in writing that such acquisition shall constitute a Permitted Acquisition for purposes of this Agreement. -115- "Permitted Acquisition Additional Cost Savings" shall mean, in connection with each Permitted Acquisition, those demonstrable cost-savings adjustments (in each case not included pursuant to clause (iii) or (iv) of the definition of Pro Forma Basis contained herein) reasonably anticipated --- ----- by the Borrower to be achieved in connection with such Permitted Acquisition for the 12 month period following the consummation of such Permitted Acquisition, which cost-savings adjustments shall be estimated on a good faith basis by the Borrower and, if requested by the Administrative Agent, be verified by a nationally recognized accounting firm or as otherwise agreed to by the Administrative Agent. "Permitted Business" shall mean any business principally engaged in or related to real estate brokerage services, mortgage, title, escrow and relocation services and other products and services pursuant to the Program Outsourcing Agreement and reasonable extensions of the foregoing. "Permitted Debt" shall mean and include Permitted Acquired Debt and Permitted Subordinated Indebtedness. "Permitted Encumbrances" shall mean (i) those liens, encumbrances, hypothecations and other matters affecting title to any Real Property and found reasonably acceptable by the Administrative Agent, (ii) as to any particular Real Property at any time, such easements, encroachments, covenants, rights of way, minor defects, irregularities or encumbrances on title which would reasonably be expected to materially impair such Real Property for the purpose for which it is held by the mortgagor or grantor thereof, (iii) zoning and other municipal ordinances which are not violated in any material respect by the existing improvements and the present use made by the mortgagor or grantor thereof of the premises, (iv) general real estate taxes and assessments not yet delinquent, and (v) such other similar items as the Administrative Agent may consent to (such consent not be unreasonably withheld). "Permitted Holders" shall mean Apollo Group, Cendant and their Affiliates and the Management Participants. "Permitted Liens" shall have the meaning provided in Section 9.03. "Permitted Subordinated Indebtedness" shall mean subordinated Indebtedness of the Borrower incurred in connection with a Permitted Acquisition and in accordance with Section 8.13, which Permitted Subordinated Indebtedness and all terms and conditions -116- thereof (including, without limitation, the maturity thereof, the interest rate applicable thereto, amortization, defaults, remedies, voting rights, subordination provisions, etc.), and the documentation therefor, shall be reasonably satisfactory to the Arrangers, provided, that in any event, -------- unless the Required Banks otherwise expressly consent in writing prior to the incurrence thereof, (i) no such Indebtedness shall be guaranteed by any Subsidiary of the Borrower and (ii) no such Indebtedness shall be secured by any asset of the Borrower or any of its Subsidiaries. The incurrence of Permitted Subordinated Indebtedness shall be deemed to be a representation and warranty by the Borrower that all conditions thereto have been satisfied in all material respects and that same is permitted in accordance with the terms of this Agreement, which representation and warranty shall be deemed to be a representation and warranty for all purposes hereunder, including, without limitation, Sections 6 and 10. "Person" shall mean any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an ERISA Affiliate, and each such plan for the five year period immediately following the latest date on which the Borrower, or a Subsidiary of the Borrower or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan but excluding all Multiemployer Plans. "Pledge Agreement Collateral" shall mean all of the Collateral as defined in the Pledge Agreement. "Pledge Agreement" shall have the meaning provided in Section 5.09. "Pledged Securities" shall mean all the Pledged Securities as defined in the Pledge Agreement, and shall exclude in any event (i) all Regulated Subsidiaries, (ii) for the period starting on the Effective Date until the date which is 120 days thereafter, all De Minimis Subsidiaries existing on the Effective Date and (iii) for a period of 60 days after the creation or acquisition of De Minimis Subsidiaries after the Effective Date, all such De Minimis Subsidiaries. "Preferred Alliance Agreement" shall mean the Preferred Alliance Agreement dated as of August 11, 1997, by and between HFS Incorporated and the Borrower. -117- "Preferred Stock," as applied to the capital stock of any Person, means capital stock of such Person (other than common stock of such Person) of any class or classes (however designed) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of capital stock of any other class of such Person, and shall include the Existing Preferred Stock and any Qualified Preferred Stock, and Disqualified Preferred Stock. "Prime Lending Rate" shall mean the rate which BTCo announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. BTCo may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Pro Forma Basis" shall mean, in connection with any calculation of --- ----- compliance with any financial covenant or financial term, the calculation thereof after giving effect on a pro forma basis to (v) if the relevant --- ----- period to be tested includes any period prior to the Effective Date, the consummation of the transactions contemplated by this Agreement as if the same had occurred on the first day of such period (for such purpose, without giving pro forma effect to synergies and cost savings which have --- ----- been, or may be realized, such synergies and cost savings having been independently accounted for in the proviso to the definition of "Consolidated EBITDA"), (x) the incurrence of any Indebtedness (other than revolving Indebtedness, except to the extent same is incurred to finance the transactions contemplated by this Agreement, to refinance other outstanding Indebtedness or to finance Permitted Acquisitions) or Preferred Stock (other than Qualified Preferred Stock of the Borrower) after the first day of the relevant Calculation Period as if such Indebtedness or Preferred Stock had been incurred or issued (and the proceeds thereof applied) on the first day of the relevant Calculation Period, (y) the permanent repayment of any Indebtedness (other than revolving Indebtedness except to the extent paid with Permitted Debt or Disqualified Preferred Stock) or Preferred Stock (other than Qualified Preferred Stock of the Borrower) after the first day of the relevant Calculation Period as if such Indebtedness or Preferred Stock had been retired or redeemed on the first day of the relevant Calculation Period and (z) the Permitted Acquisition, if any, then being consummated as well as any other Permitted Acquisition consummated after the first day of the relevant Calculation -118- Period and on or prior to the date of the respective Permitted Acquisition then being effected, with the following rules to apply in connection therewith: (i) all Indebtedness and Preferred Stock (other than Qualified Preferred Stock of the Borrower) (x) (other than revolving Indebtedness, except to the extent same is incurred to finance the transactions contemplated by this Agreement, to refinance other outstanding Indebtedness, or to finance Permitted Acquisitions) incurred or issued after the first day of the relevant Calculation Period (whether incurred to finance a Permitted Acquisition, to refinance Indebtedness or otherwise) shall be deemed to have been incurred or issued (and the proceeds thereof applied) on the first day of the respective Calculation Period and remain outstanding through the date of determination (and thereafter in the case of projections pursuant to Section 8.13(a)(B)(iii)) and (y) (other than revolving Indebtedness except to the extent paid with Permitted Debt or Disqualified Preferred Stock) permanently retired or redeemed after the first day of the relevant Calculation Period shall be deemed to have been retired or redeemed on the first day of the respective Calculation Period and remain retired through the date of determination (and thereafter in the case of projections pursuant to Section 8.13(a)(B)(iii)); (ii) all Indebtedness or Preferred Stock (other than Qualified Preferred Stock of the Borrower) assumed to be outstanding pursuant to preceding clause (i) shall be deemed to have borne interest or accrued dividends, as the case may be, at (x) the rate applicable thereto, in the case of fixed rate indebtedness or Preferred Stock or (y) the rates which would have been applicable thereto during the respective period when same was deemed outstanding, in the case of floating rate Indebtedness or Preferred Stock (although interest expense with respect to any Indebtedness or Preferred Stock for periods while same was actually outstanding during the respective period shall be calculated using the actual rates applicable thereto while same was actually outstanding); provided that for purposes of -------- calculations pursuant to Section 8.13(a)(B)(iii), all Indebtedness or Preferred Stock (whether actually outstanding or deemed outstanding) bearing interest at a floating rate of interest shall be tested on the basis of the rates applicable at the time the determination is made pursuant to said provisions; (iii) in making any determination of Consolidated EBITDA, pro forma --- ----- effect shall be given to any Permitted Acquisition consummated after the first day of the respective period being tested, taking into account, for any portion of the relevant period being tested occurring prior to the consummation of such Permitted Acquisition, -119- demonstrable cost savings actually achieved simultaneously with the closing of the respective Permitted Acquisition, as if such cost-savings were realized on the first day of the relevant period; (iv) without duplication of adjustments provided above, in case of any Permitted Acquisition consummated after the first day of the relevant period being tested, pro forma effect shall be given to the termination or --- ----- replacement of operating leases with Capitalized Lease Obligations or other Indebtedness, and to any replacement of Capitalized Lease Obligations or other Indebtedness with operating leases, in each case effected at the time of the consummation of such Permitted Acquisition or thereafter, in each case if effected after the first day of the period being tested and prior to the date the respective determination is being made, as if such termination or replacement had occurred on the first day of the relevant period; and (v) in making any determination of Consolidated EBITDA for purposes of any calculation of the Total Leverage Ratio or the only, (x) for any Permitted Acquisition which occurred during the last two fiscal quarters comprising the respective Test Period (and, in the case of Section 8.13, thereafter and on or prior to the relevant date of determination), there shall be added to Consolidated EBITDA the amount of Permitted Acquisition Additional Cost Savings, determined in accordance with the definition thereof contained herein, expected to be realized with respect to such Permitted Acquisition, (y) for any Permitted Acquisition effected in the second fiscal quarter of the respective Test Period, the Consolidated EBITDA shall be increased by 75% of the Permitted Acquisition Additional Cost Savings estimated to arise in connection with the respective Permitted Acquisition and (z) for any Permitted Acquisition effected in the first fiscal quarter of the respective Test Period, the Consolidated EBITDA shall be increased by 37.5% of the Permitted Acquisition Additional Cost Savings estimated to arise in connection with the respective Permitted Acquisition; provided that the aggregate additions to Consolidated EBITDA, for any period being tested, pursuant to this clause (v) shall not exceed 15% of the amount which would have been Consolidated EBITDA in the absence of the adjustment pursuant to this clause (v). Notwithstanding anything to the contrary contained above, (x) for purposes of Sections 9.08 and 9.09 and, for purposes of all determinations of the Applicable Margins, pro forma effect (as otherwise provided above) shall --- ----- only be given for events or occurrences which occurred during the respective Test Period but not thereafter and (y) for purposes of Section 8.13, pro forma effect (as otherwise provided above) shall be given for --- ----- events or occurrences which -120- occurred during the respective Test Period and thereafter but on or prior to the respective date of determination. "Program Outsourcing Agreement" shall mean the Program Outsourcing Agreement, dated as of the Cendant Amendment Effective Date, by and between the Borrower and Cendant. "Projections" shall have the meaning provided in Section 5.13(b). "Qualified IPO" shall mean an underwritten public offering of Borrower Common Stock which generates cash proceeds of at least $50,000,000. "Qualified Preferred Stock" shall mean any Preferred Stock of the Borrower, the express terms of which shall provide that dividends thereon shall not be required to be paid at any time (and to the extent) that such payment would be prohibited by the terms of this Agreement or any other agreement of the Borrower relating to outstanding indebtedness and which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event (including any Change of Control Event), cannot mature and is not mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, and is not redeemable, or required to be repurchased, at the sole option of the holder thereof (including, without limitation, upon the occurrence of a Change of Control Event), in whole or in part, on or prior to the date occurring one year after the Maturity Date. "Quarterly Payment Date" shall mean the last Business Day of each March, June, September and December. "Real Property" of any Person shall mean all of the right, title and interest of such Person in and to land, immovable property, improvements and fixtures, including Leaseholds. "Recovery Event" shall mean the receipt by the Borrower or any of its Subsidiaries of any insurance or condemnation proceeds payable (i) by reason of theft, physical destruction or damage or any other similar event with respect to any properties or assets of the Borrower or any of its Subsidiaries, (ii) by reason of any condemnation, taking, seizing or similar event with respect to any properties or assets of the Borrower or any of its -121- Subsidiaries and (iii) under any policy of insurance required to be maintained under Section 8.03. "Register" shall have the meaning provided in Section 13.17. "Regulated Subsidiaries" shall mean Subsidiaries of the Borrower engaged solely in the title, escrow and similar businesses, which Subsidiaries are regulated by State or local governmental authorities and which either (x) would be prohibited from being a party to the Guaranty or having its capital stock pledged pursuant to the Pledge Agreement or (y) it could be unreasonably burdensome in the good faith opinion of the Borrower to have such Subsidiary become a party to the Guaranty or have its capital stock pledged pursuant to the Pledge Agreement. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System as from to time in effect and any successor to all or any portion thereof. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or any portion thereof. "Release" means disposing, discharging, injecting, spilling, pumping, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing, pouring and the like, into or upon any land or water or air, or otherwise entering into the environment. "Replaced Bank" shall have the meaning provided in Section 1.13. "Replacement Bank" shall have the meaning provided in Section 1.13. -122- "Required Banks" shall mean Non-Defaulting Banks, the sum of whose outstanding Revolving Loan Commitments (or after the termination thereof, outstanding Revolving Loans and RL Percentage of Swingline Loans and Letter of Credit Outstandings) represent an amount greater than 50% of the sum of the Total Revolving Loan Commitment (or after the termination thereof, the sum of the then total outstanding Revolving Loans of Non-Defaulting Banks and the aggregate RL Percentages of all Non-Defaulting Banks of the total outstanding Swingline Loans and Letter of Credit Outstandings at such time). "Revolving Credit Exposure" shall mean, for any Bank at any time, the sum of (i) the aggregate principal amount of all Revolving Loans made by such Bank plus (ii) the product of (A) such Bank's RL Percentage and (B) the sum of (x) the aggregate amount of all Letter of Credit Outstandings at such time and (y) the aggregate principal amount of all Swingline Loans then outstanding. "Revolving Loan" shall have the meaning provided in Section 1.01(b). "Revolving Loan Commitment" shall mean, with respect to each Bank, the amount set forth opposite such Bank's name in Part A of Schedule I directly below the column entitled "Revolving Loan Commitment," as the same may be reduced from time to time pursuant to Sections 3.02, 3.03, 4.02 and/or Section 10. "Revolving Note" shall have the meaning provided in Section 1.05(a). "RL Percentage" of any Bank at any time shall mean a fraction (expressed as a percentage) the numerator of which is the Revolving Loan Commitment of such Bank at such time and the denominator of which is the aggregate amount of Revolving Loan Commitments of all Banks at such time. Notwithstanding anything to the contrary contained above, if the RL Percentage of any Bank is to be determined after the Total Revolving Loan Commitment has been terminated, then the RL Percentages of the Banks shall be determined immediately prior (and without giving effect) to such termination (and without giving effect to the termination of the Revolving Loan Commitments). "SEC" shall mean the Securities and Exchange Commission or any successor thereto. "Section 4.04(b)(ii) Certificate" shall have the meaning provided in Section 4.04(b)(ii). -123- "Secured Creditors" shall have the meaning provided in the Security Documents. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Security Documents" shall mean and include the Pledge Agreement and each Additional Security Document, if any. "Shareholder Subordinated Note" shall mean an unsecured junior subordinated note issued by the Borrower (and not guaranteed or supported in any way by the Borrower or any of its Subsidiaries) in the form of Exhibit L. "Shareholders' Agreements" shall have the meaning provided in Section 5.11. "Standby Letter of Credit" shall have the meaning provided in Section 2.01(a). "Stated Amount" of each Letter of Credit shall mean the maximum amount available to be drawn thereunder (regardless of whether any conditions for drawing could then be met). "Stockholders Agreement" shall mean the Stockholders Agreement, dated as of August 11, 1997, by and among the Borrower, Apollo Management, L.P. and the stockholders of the Borrower as amended prior to the date hereunder. "Subordination Agreement" shall mean the Subordination Agreement dated August 11, 1997, by and between HFS, Inc. and Apollo Group. "Subscription Agreement" shall mean the Subscription Agreement dated August 11, 1997, by and among the Borrower, Apollo Group and HFS, Inc. "Subsidiaries Guaranty" shall have the meaning provided in 5.10. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not -124- at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity (other than a corporation) in which such Person directly or indirectly through Subsidiaries, has more than a 50% equity interest at the time. Notwithstanding the foregoing (and except for purposes of Sections 7.01, 7.04, 7.12, 7.16, 7.17, 7.20, 8.01(g), 8.07, 8.08, 10.05, 10.06 and 10.09, and the definitions of Unrestricted Subsidiary and Wholly-Owned Unrestricted Subsidiary contained herein), an Unrestricted Subsidiary shall be deemed not to be a Subsidiary of the Borrower or any of its other Subsidiaries for purposes of this Agreement. "Support Agreement" shall mean the Support Agreement, dated as of August 11, 1997, by and between Cendant and the Borrower. "Swingline Expiry Date" shall mean the date which is five Business Days prior to the Maturity Date. "Swingline Loan" shall have the meaning provided in Section 1.01(b). "Swingline Note" shall have the meaning provided in Section 1.05(a). "Tax Benefit" shall have the meaning provided in Section 4.04(c). "Taxes" shall have the meaning provided in Section 4.04(a). "Test Period" shall mean each period of four consecutive fiscal quarters ended on the last day of the then most recently ended fiscal quarter of the Borrower. "Total Leverage Ratio" shall mean on any date the ratio of (i) Consolidated Debt on such date to (ii) Consolidated EBITDA for the Test Period most recently ended on or prior to such date. All calculations of the Total Leverage Ratio shall be made on a Pro Forma Basis, it being --- ----- understood and agreed that, as provided in the definition of Pro Forma --- ----- Basis, the adjustments contained in clause (v) thereof shall not be taken into account in determining the Total Leverage Ratio. "Total Revolving Loan Commitment" shall mean the sum of the Revolving Loan Commitments of each of the Banks. -125- "Total Unutilized Revolving Loan Commitment" shall mean, at any time, (i) the Total Revolving Loan Commitment at such time less (ii) the sum of ---- (I) the aggregate principal amount of all Revolving Loans then outstanding, (II) the aggregate principal amount of Swingline Loans then outstanding plus (III) the Letter of Credit Outstandings at such time. "Trade Letter of Credit" shall have the meaning set forth in Section 2.01(a). "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e., a Base Rate Loan or a Eurodollar ---- Loan. "UCC" shall mean the Uniform Commercial Code as in effect from time to time in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the value of the accumulated plan benefits under the Plan determined on a plan termination basis in accordance with actuarial assumptions at such time consistent with those prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds the fair market value of all plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions). "Unpaid Drawing" shall have the meaning provided in Section 2.04(a). "Unrestricted Subsidiary" shall mean any Subsidiary of the Borrower that is acquired or created after the Effective Date and designated by the Borrower as an Unrestricted Subsidiary hereunder by written notice to the Administrative Agent, provided that the Borrower shall only be permitted to -------- so designate a new Unrestricted Subsidiary after the Effective Date and so long as (i) no Default or Event of Default exists or would result therefrom, (ii) in the case of any Unrestricted Subsidiary directly owned by the Borrower or any of its Wholly-Owned Domestic Subsidiaries, 100% of the capital stock of such newly-designated Unrestricted Subsidiary is owned by the Borrower or such Wholly-Owned Domestic Subsidiary and (iii) all of the provisions of Section 9.13 shall have been complied with in respect of such newly-designated Unrestricted Subsidiary and such Unrestricted Subsidiary shall be capitalized (to the extent capitalized by the Borrower or any of its Subsidiaries) through Investments as permitted by, and in compliance with, Section 9.05(k), with any assets owned by such Unrestricted Subsidiary at the time of the initial designation thereof to be treated as Investments pursuant to Section 9.05(k), provided that at the -------- time of -126- the initial Investment by the Borrower or any Wholly-Owned Domestic Subsidiary in such Subsidiary, the Borrower shall designate such entity as an Unrestricted Subsidiary in a written notice to the Administrative Agent. "Unutilized Revolving Loan Commitment" with respect to any Bank at any time shall mean such Bank's Revolving Loan Commitment at such time less the ---- sum of (i) the aggregate outstanding principal amount of all Revolving Loans made by such Bank and (ii) such Bank's RL Percentage of the Letter of Credit Outstandings at such time. "U.S. Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States of America. "Voting Stock" shall mean, as to any Person, any class or classes of capital stock of such Person pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the Board of Directors of such Person. "Wholly-Owned Domestic Subsidiary" shall mean, as to any Person, any Wholly-Owned Subsidiary of such Person which is a Domestic Subsidiary. "Wholly-Owned Foreign Subsidiary" shall mean, as to any Person, any Wholly-Owned Subsidiary of such Person which is a Foreign Subsidiary. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock (other than director's qualifying shares and/or other nominal amounts of shares required to be held other than by such Person under applicable law) is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time; provided that (x) other than in the -------- definition of Wholly-Owned Unrestricted Subsidiary, no Unrestricted Subsidiary shall be considered a Wholly-Owned Subsidiary. "Wholly-Owned Unrestricted Subsidiary" shall mean any Wholly-Owned Subsidiary which is an Unrestricted Subsidiary.. -127- "Written" (whether lower or upper case) or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile device, telegraph or cable. SECTION 12. The Administrative Agent. ------------------------ 12.01 Appointment. Each Bank hereby irrevocably designates and ----------- appoints BTCo as Administrative Agent of such Bank (for purposes of this Section 12, the term "Administrative Agent" shall mean BTCo in its capacity as Administrative Agent hereunder and Collateral Agent pursuant to the Security Documents), and each such Bank hereby irrevocably authorizes the Administrative Agent, to take such action on its behalf under the provisions of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent agrees to act as such upon the express conditions contained in this Section 12. Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Credit Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein or in the other Credit Documents, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Administrative Agent. The provisions of this Section 12 are solely for the benefit of the Administrative Agent and the Banks, and neither the Borrower nor any of its Subsidiaries shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Administrative Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for the Borrower or any of its Subsidiaries. 12.02 Delegation of Duties. The Administrative Agent may execute any -------------------- of its duties under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 12.03 Exculpatory Provisions. The Administrative Agent nor any of its ---------------------- officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any -128- action lawfully taken or omitted to be taken by it or such Person in its capacity as Administrative Agent, under or in connection with this Agreement or the other Credit Documents (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Borrower, any of its respective Subsidiaries or any of their respective officers contained in this Agreement or the other Credit Documents, any other Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Document or for any failure of the Borrower or any of its Subsidiaries or any of their respective officers to perform its obligations hereunder or thereunder. The Administrative Agent shall be under no obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Documents, or to inspect the properties, books or records of the Borrower or any of its Subsidiaries. The Administrative Agent shall not be responsible to any Bank for the effectiveness, genuineness, validity, enforceability, collectability or sufficiency of this Agreement or any other Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Administrative Agent, to the Banks or by or on behalf of any Borrower or any of its Subsidiaries to the Administrative Agent, or any Bank or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. 12.04 Reliance by the Administrative Agent. The Administrative Agent ------------------------------------ shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower or any of its Subsidiaries), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and -129- expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks. 12.05 Notice of Default. The Administrative Agent shall be deemed to ----------------- have knowledge or notice of the occurrence of any Default or Event of Default unless the Administrative Agent has actually received notice from a Bank or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks; provided, that, unless and until the Administrative Agent shall have -------- received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 12.06 Nonreliance on Administrative Agent and Other Banks. Each Bank --------------------------------------------------- expressly acknowledges that the Administrative Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Bank. Each Bank represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other condition, prospects and creditworthiness of the Borrower and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of the Borrower and its Subsidiaries. The Administrative Agent shall not have any duty or responsibility to -130- provide any Bank with any credit or other information concerning the business, operations, assets, property, financial and other condition, prospects or creditworthiness of the Borrower or any of its Subsidiaries which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 12.07 Indemnification. The Banks agree to indemnify the --------------- Administrative Agent in its capacity as such, ratably according to their respective "percentages" as used in determining the Required Banks at such time or, if the Revolving Loan Commitments have terminated and all Loans have been repaid in full, as determined immediately prior to such termination and repayment (with such "percentages" to be determined as if there are no Defaulting Banks), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Administrative Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by the Borrower or any of its Subsidiaries; provided, that no Bank shall be liable to the Administrative Agent for the -------- payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting primarily from the gross negligence or willful misconduct of the Administrative Agent. If any indemnity furnished to the Administrative Agent for any purpose shall, in the opinion of the Administrative Agent be insufficient or become impaired, the Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 12.07 shall survive the payment of all Obligations. 12.08 Administrative Agent in its Individual Capacity. The ----------------------------------------------- Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and its Subsidiaries as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Administrative Agent and the terms "Bank" and "Banks" shall include the Administrative Agent in its individual capacity. -131- 12.09 Holders. The Administrative Agent may deem and treat the payee ------- of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Administrative Agent. Any request, authority or consent of any Person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or endorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 12.10 Resignation of the Administrative Agent. (a) The Administrative --------------------------------------- Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 30 Business Days' prior written notice to the Borrower and the Banks. Such resignation shall take effect upon the appointment of a successor Administrative Agent pursuant to clauses (b) and (c) below or as otherwise provided below. (b) Upon any such notice of resignation, the Required Banks shall appoint a successor Administrative Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower. (c) If a successor Administrative Agent shall not have been so appointed within such 30 Business Day period, the Administrative Agent, with the consent of the Borrower (which consent shall not be unreasonably withheld or delayed), shall then appoint a successor Administrative Agent who shall serve as Administrative Agent hereunder or thereunder until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. (d) If no successor Administrative Agent has been appointed pursuant to clause (b) or (c) above by the 30th Business Day after the date such notice of resignation was given by the Administrative Agent, the Administrative Agent's resignation shall become effective and the Required Banks shall thereafter perform all the duties of the Administrative Agent hereunder and/or under any other Credit Document until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. 12.11 Syndication Agent. Each Bank hereby irrevocably designates and ----------------- appoints Chase as Syndication Agent hereunder, it being understood and agreed that Chase shall have no duties or obligations in such capacity hereunder. -132- SECTION 13. Miscellaneous. ------------- 13.01 Payment of Expenses, etc. The Borrower agrees to: (i) whether ------------------------ or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Arrangers (including, without limitation, the reasonable fees and disbursements of White & Case LLP and local counsel) in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto and in connection with the Arrangers' syndication efforts with respect to this Agreement; (ii) pay all reasonable out-of-pocket costs and expenses of each Arranger, the Administrative Agent, each Letter of Credit Issuer and each of the Banks in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein and, after an Event of Default shall have occurred and be continuing, the protection of the rights of each Arranger, the Administrative Agent, each Letter of Credit Issuer and each of the Banks thereunder (including, without limitation, the reasonable fees and disbursements of counsel (including in-house counsel) for each Arranger, the Administrative Agent, for each Letter of Credit Issuer and for each of the Banks); (iii) pay and hold each of the Banks harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iv) indemnify each Arranger, the Administrative Agent, the Collateral Agent, each Letter of Credit Issuer and each Bank, their respective officers, directors, employees, representatives, trustees and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, (a) any investigation, litigation or other proceeding (whether or not any Arranger, the Administrative Agent, the Collateral Agent, any Letter of Credit Issuer or any Bank is a party thereto and whether or not any such investigation, litigation or other proceeding is between or among any Arranger, the Administrative Agent, the Collateral Agent, any Letter of Credit Issuer, any Bank, any Credit Party or any third Person or otherwise) related to the entering into and/or performance of this Agreement or any other Document or the use of the proceeds of any Loans hereunder or any drawing on any Letter of Credit or the consummation of any other transactions contemplated in any Document (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified), or (b) the actual or alleged presence of Hazardous Materials in the air, surface water or groundwater or on the surface or subsurface -133- of any Real Property or any Environmental Claim, in each case, including, without limitation, the reasonable fees and disbursements of counsel and independent consultants incurred in connection with any such investigation, litigation or other proceeding (but excluding any losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 13.02 Right of Setoff. In addition to any rights now or hereafter --------------- granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Arranger, each Letter of Credit Issuer and each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or any of its Subsidiaries or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Arranger, such Letter of Credit Issuer or such Bank (including, without limitation, by branches and agencies of such Arranger, such Letter of Credit Issuer and such Bank wherever located) to or for the credit or the account of the Borrower or any of its Subsidiaries against and on account of the Obligations of the Borrower or any of its Subsidiaries to such Arranger, such Letter of Credit Issuer or such Bank under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of the Borrower or any of its Subsidiaries purchased by such Bank pursuant to Section 13.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Arranger, such Letter of Credit Issuer or such Bank shall have made any demand hereunder and although said Obligations shall be contingent or unmatured. 13.03 Notices. Except as otherwise expressly provided herein, all ------- notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to any Credit Party, at the address specified opposite its signature below or in the other relevant Credit Documents, as the case may be; if to any Bank, at its address specified for such Bank on Schedule II; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, and shall be effective when received. -134- 13.04 Benefit of Agreement. (a) This Agreement shall be binding upon -------------------- and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, the Borrower may not -------- ------- assign or transfer any of its rights, obligations or interest hereunder or under any other Credit Document without the prior written consent of each of the Banks, except as provided in clause (v) of the first proviso to Section 13.12(a), and, provided further, that, although any Bank may grant ---------------- participations in its rights hereunder, such Bank shall remain a "Bank" for all purposes hereunder (and may not transfer or assign all or any portion of its Revolving Loan Commitment or Loans hereunder except as provided in Section 13.04(b)) and the participant shall not constitute a "Bank" hereunder and, provided further, that no Bank shall transfer or grant any ---------------- participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Maturity Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Revolving Loan Commitment or of a mandatory repayment of Loans shall not constitute a change in the terms of such participation, that an increase in any Revolving Loan Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof and that any amendment or modification to the financial definitions in this Agreement shall not constitute a reduction in any rate of interest or fees for purposes of this clause (i)), (ii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement (except as provided in clause (v) of the first proviso to Section 13.12(a)) or (iii) release all or substantially all of the Collateral under the Security Documents (except as expressly provided in the Security Documents) supporting the Loans hereunder in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation. -135- (b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (x) assign all or a portion of its Revolving Loan Commitment (and related outstanding Obligations hereunder) to (i) its parent company and/or any affiliate of such Bank which is at least 50% owned by such Bank or its parent company or to one or more Banks or (ii) in the case of any Bank that is a fund that invests in bank loans, any other fund that invests in bank loans and is managed by the same investment advisor of such Bank or by an Affiliate of such investment advisor or (y) assign all, or if less than all, a portion equal to at least $5,000,000 in the aggregate for the assigning Bank or assigning Banks, of such Revolving Loan Commitments (and related outstanding Obligations hereunder) to one or more Eligible Transferees (treating (x) any fund that invests in bank loans and (y) any other fund that invests in bank loans and is managed by the same investment advisor as such fund or by an Affiliate of such investment advisor, as a single Eligible Transferee), each of which assignees shall become a party to this Agreement as a Bank by execution of an Assignment and Assumption Agreement, provided that, (i) any assignment -------- of all or any portion of the Revolving Loan Commitment and related outstanding Obligations (or, if the Revolving Loan Commitment has terminated, any assignment of Obligations originally extended pursuant to the Revolving Loan Commitments) shall be made on a basis such that the respective assignee participates in Revolving Loans, and in Letter of Credit Outstandings, in accordance with the Revolving Loan Commitment so assigned (or if the Revolving Loan Commitment has been terminated, on the same basis as participated in by the Banks with Revolving Loan Commitments prior to the termination thereof), (ii) at such time Schedule I shall be deemed modified to reflect the Revolving Loan Commitments of such new Banks and of the existing Banks (and their respective Affiliates), (iii) upon surrender of the old Notes (or the furnishing of a standard indemnity letter from the respective assigning Bank in respect of any lost Notes), new Notes will be issued, at the Borrower's expense, to such new Bank and to the assigning Bank, such new Notes to be in conformity with the requirements of Section 1.05 (with appropriate modifications) to the extent needed to reflect the revised Revolving Loan Commitments, (iv) the consent of the Administrative Agent and, so long as no Default or Event of Default is then in existence, the Borrower shall be required in connection with any assignment to an Eligible Transferee pursuant to clause (y) of this Section 13.04(b) (which consent, in each case, shall not be unreasonably withheld or delayed), (v) the Administrative Agent shall receive at the time of each assignment, from the assigning or assignee Bank, the payment of a non- refundable assignment fee of $3,500 and, provided further, that such ---------------- transfer or assignment will not be effective until recorded by the Administrative Agent on the Register pursuant to Section 13.17. To the extent of any assignment pursuant to this Section 13.04(b), the assigning Bank shall be relieved of its -136- obligations hereunder with respect to its assigned Revolving Loan Commitments. At the time of each assignment pursuant to this Section 13.04(b) to a Person which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes, the respective assignee Bank shall provide to the U.S. Borrower and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable a Section 4.04(b)(ii) Certificate) described in Section 4.04(b). To the extent that an assignment of all or any portion of a Bank's Revolving Loan Commitment and outstanding Obligations pursuant to Section 1.13 or this Section 13.04(b) would, due to circumstances existing at the time of such assignment, result in increased costs under Section 1.10, 1.11, 2.05 or 4.04 from those being charged by the respective assigning Bank prior to such assignment, then the Borrowers shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective assignment). Notwithstanding anything to the contrary contained above, at any time after the termination of the Total Revolving Loan Commitment, if any Revolving Loans or Letters of Credit remain outstanding, assignments may be made as provided above, except that the respective assignment shall be of a portion of the outstanding Revolving Loans of the respective Bank and its participation in Letters of Credit and its obligation to make Mandatory Borrowings, although any such assignment effected after the termination of the Total Revolving Loan Commitment shall not release the assigning Bank from its obligations as a Participant with respect to outstanding Letters of Credit or to fund its share of any Mandatory Borrowing (although the respective assignee may agree, as between itself and the respective assigning Bank, that it shall be responsible for such amounts). (c) Nothing in this Agreement shall prevent or prohibit any Bank or BTCo from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank and, with the consent of the Administrative Agent, any Bank which is a fund may pledge all or any portion of its Notes or Loans to its trustee in support of its obligations to its trustee. No pledge pursuant to this clause (c) shall release the transferor Bank from any of its obligations hereunder. 13.05 No Waiver; Remedies Cumulative. No failure or delay on the part ------------------------------ of the Administrative Agent, the Collateral Agent or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Credit Party and the Administrative Agent, the Collateral Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further -137- exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Administrative Agent, the Collateral Agent or any Bank would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent, the Collateral Agent or the Banks to any other or further action in any circumstances without notice or demand. 13.06 Payments Pro Rata. (a) The Administrative Agent agrees that ----------------- promptly after its receipt of each payment from or on behalf of any Credit Party in respect of any Obligations of such Credit Party, it shall, except as otherwise provided in this Agreement, distribute such payment to the Banks (other than any Bank that has consented in writing to waive its pro --- rata share of such payment) pro rata based upon their respective shares, if ---- --- ---- any, of the Obligations with respect to which such payment was received. (b) Except to the extent that this Agreement provides for payments to be allocated to the Banks with particular Obligations, if any Bank (a "Benefitted Bank") shall at any time receive any payment of all or part of its Loans or the other Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 10.05, or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Loans or the other Obligations owing to such other Bank, or interest thereon, such Benefitted Banks shall purchase for cash from the other Banks a participating interest in such portion of each such other Bank's Loans and/or other Obligations owing to each such other Banks, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks; provided, however, that if all -------- ------- or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. 13.07 Calculations; Computations. (a) The financial statements to be -------------------------- furnished to the Banks pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks); provided, that except as -------- -138- otherwise specifically provided herein, all computations determining compliance with Sections 4.02, 8.14 and 9, including definitions used therein shall, in each case, utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the December 31, 1997 financial statements of the Borrower delivered to the Banks pursuant to Section 7.10(b); provided further, that ---------------- (i) to the extent expressly required pursuant to the provisions of this Agreement, certain calculations shall be made on a Pro Forma Basis, (ii) to --- ----- the extent compliance with any of Section 9.08 and 9.09 would include periods occurring prior to the Effective Date, such calculation shall be adjusted on a Pro Forma Basis to give effect to the transactions --- ----- contemplated by the Agreement as if same had occurred on the first day of the respective period, (iii) in the case of any determinations of Consolidated Interest Expense or Consolidated EBITDA for any portion of any Test Period which ends prior to the Effective Date, all computations determining compliance with Sections 9.08 and 9.09 and all determinations of the Total Leverage Ratio shall be calculated in accordance with the definition of Test Period contained herein and (iv) for purposes of calculating financial terms, all covenants and related definitions, all such calculations based on the operations of the Borrower and its Subsidiaries on a consolidated basis shall be made without giving effect to the operations of any Unrestricted Subsidiaries. (b) For purposes of determining compliance with any incurrence or expenditure tests set forth in Sections 8 and/or 9 (excluding Sections 9.08 and 9.09), any amounts so incurred or expended (to the extent incurred or expended in a currency other than U.S. Dollars) shall be converted into U.S. Dollars on the basis of the Dollar Equivalent of the respective such amounts as in effect on the date of such incurrence or expenditure under any provision of any such Section that has an aggregate Dollar limitation provided for therein (and to the extent the respective incurrence or expenditure test regulates the aggregate amount outstanding or made at any time and it is expressed in terms of U.S. Dollars, all amounts originally incurred or spent in currencies other that U.S. Dollars shall be converted into U.S. Dollars on the basis of the Dollar Equivalent of the respective such amounts as in effect on the date any new incurrence or expenditures made under any provision of any such Section that regulates the Dollar amount outstanding or made at any time). (c) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. -139- 13.08 Governing Law; Submission to Jurisdiction; Venue. (a) THIS ------------------------------------------------ AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrower hereby further irrevocably waives any claim that any such courts lack jurisdiction over such Borrower, and agrees not to plead or claim, in any legal action or proceeding with respect to this Agreement or any other Credit Document brought in any of the aforesaid courts, that any such court lacks jurisdiction over such Borrower. The Borrower further irrevocably consents to the service of process in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Borrower, at its address for notices pursuant to Section 13.03, such service to become effective 30 days after such mailing. The Borrower hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other Credit Document that service of process was in any way invalid or ineffective. Nothing herein shall affect the right of the Administrative Agent, the Collateral Agent, any Bank or the holder of any Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Credit Party in any other jurisdiction. (b) The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 13.09 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. -140- 13.10 Effectiveness. This Agreement shall become effective on the ------------- date (the "Effective Date") on which (i) the Borrower, the Administrative Agent, and each of the Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered the same (including by way of facsimile transmission) to the Administrative Agent and (ii) the conditions contained in Sections 5 and 6 are met to the satisfaction of the Administrative Agent and the Required Banks (determined immediately after the occurrence of the Effective Date). Unless the Administrative Agent has received actual notice from any Bank that the conditions contained in Sections 5 and 6 have not been met to its satisfaction, upon the satisfaction of the condition described in clause (i) of the immediately preceding sentence and upon the Administrative Agent's good faith determination that the conditions described in clause (ii) of the immediately preceding sentence have been met, then the Effective Date shall have been deemed to have occurred, regardless of any subsequent determination that one or more of the conditions thereto had not been met (although the occurrence of the Effective Date shall not release the Borrower from any liability for failure to satisfy one or more of the applicable conditions contained in Section 5 or 6). The Administrative Agent will give the Borrower and each Bank prompt written notice of the occurrence of the Effective Date. 13.11 Headings Descriptive. The headings of the several sections and -------------------- subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 13.12 Amendment or Waiver; etc. (a) Neither this Agreement nor any ------------------------ other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the respective Credit Parties party thereto and the Required Banks, provided that no such change, waiver, -------- discharge or termination shall, without the consent of each Bank (other than a Defaulting Bank) (with Obligations being directly affected thereby in the case of the following clause (i)), (i) extend the final scheduled maturity of any Loan or Note or extend the stated maturity of any Letter of Credit beyond the Maturity Date, or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof (it being understood that any amendment or modification to the financial definitions in this Agreement shall not constitute a reduction in any rate of interest or fees for purposes of this clause (i)), (ii) release all or substantially all of the Collateral (except as expressly provided in the Security Documents) under the Security Documents, (iii) amend, modify or waive any provision of this Section 13.12 (it being understood that with the Consent of the Required -141- Banks, additional extensions of credit pursuant to the Agreement may provide for additional voting or consent rights with respect thereto), (iv) reduce the percentage specified in the definition of Required Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Banks on substantially the same basis as the extensions of Revolving Loan Commitments are included on the Effective Date) or (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement, except that the Borrower may assign or otherwise transfer its rights, obligations and interests hereunder or under the other Credit Documents to any Wholly-Owned Domestic Subsidiary of the Borrower to the extent (but only to the extent) that (i) the Borrower guarantees all of the Obligations of such assignee Subsidiary pursuant to a guaranty in form and substance satisfactory to the Required Banks and (ii) the Required Banks shall have consented to such assignment or transfer; provided further, that no such change, waiver, ---------------- discharge or termination shall (v) increase the Revolving Loan Commitments of any Bank over the amount thereof then in effect without the consent of such Bank (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of a mandatory reduction in the Total Revolving Loan Commitment shall not constitute an increase of the Revolving Loan Commitment of any Bank, and that an increase in the available portion of any Revolving Loan Revolving Loan Commitment of any Bank shall not constitute an increase in the Revolving Loan Commitment of such Bank), (w) without the consent of each Letter of Issuer, amend, modify or waive any provision of Section 2 or alter its rights or obligations with respect to Letters of Credit, (x) without the consent of BTCo, alter its rights or obligations with respect to Swingline Loans, (y) without the consent of the Administrative Agent, amend, modify or waive any provision of Section 12 as same applies to the Administrative Agent or any other provision as same relates to the rights or obligations of the Administrative Agent and (z) without the consent of the Collateral Agent, amend, modify or waive any provision relating to the rights or obligations of the Collateral Agent. (b) If, in connection with any proposed change, waiver, discharge or termination of or to any of the provisions of this Agreement as contemplated by clauses (i) through (v), inclusive, of the first proviso to Section 13.12(a), the consent of the Required Banks is obtained but the consent of one or more of such other Banks whose consent is required is not obtained, then the Borrower shall have the right, so long as all non- consenting Banks whose individual consent is required are treated as described in either clause (A) or (B) below, to either (A) replace each such non-consenting Bank or Banks with one or more -142- Replacement Banks pursuant to Section 1.13 so long as at the time of such replacement, each such Replacement Bank consents to the proposed change, waiver, discharge or termination or (B) terminate such non-consenting Bank's Revolving Loan Commitment and/or repay outstanding Loans of such Bank which gave rise to the need to obtain such Bank's consent and/or cash collateralize its applicable RL Percentage of the Letter of Credit of Outstandings, in accordance with Sections 3.02(b) and/or 4.01(v), provided -------- that, unless the Revolving Loan Commitments which are terminated and Loans which are repaid pursuant to preceding clause (B) are immediately replaced in full at such time through the addition of new Banks or the increase of the Revolving Loan Commitments and/or outstanding Loans of existing Banks (who in each case must specifically consent thereto), then in the case of any action pursuant to preceding clause (B), the remaining Banks (determined after giving effect to the proposed action) shall specifically consent thereto, provided further, that the Borrower shall not have the ---------------- right to replace a Bank, terminate its Revolving Loan Commitment or repay its Loans solely as a result of the exercise of such Bank's rights (and the withholding of any required consent by such Bank) pursuant to the second proviso to Section 13.12(a). 13.13 Survival. All indemnities set forth herein including, without -------- limitation, in Sections 1.10, 1.11, 2.05, 4.04, 12.07 and 13.01, shall, subject to the provisions of Section 13.18 (to the extent applicable), survive the execution and delivery of this Agreement and the making and repayment of the Loans. 13.14 Domicile of Loans and Commitments. Each Bank may transfer and --------------------------------- carry its Loans and/or Revolving Loan Commitments at, to or for the account of any branch office, subsidiary or affiliate of such Bank; provided, that -------- the Borrower shall not be responsible for costs arising under Section 1.10, 1.11, 2.05 or 4.04 resulting from any such transfer (other than a transfer pursuant to Section 1.12) to the extent such costs would not otherwise be applicable to such Bank in the absence of such transfer. 13.15 Confidentiality. (a) Each of the Banks agrees that it will use --------------- its reasonable efforts not to disclose without the prior consent of the Borrower (other than to its directors, trustees, employees, auditors, counsel or other professional advisors, to affiliates or to another Bank if the Bank or such Bank's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to the Borrower or any of its Subsidiaries which is furnished pursuant to this Agreement; provided, that any Bank may -------- disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate (x) in any report, -143- statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Bank or to the Federal Reserve Board or the Federal Deposit Insurance Corporation or similar organizations (whether in the United States or elsewhere) or their successors or (y) in connection with any request or requirement of any such regulatory body (including any securities exchange or self- regulatory organization), (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) to comply with any law, order, regulation or ruling applicable to such Bank, and (e) to any prospective transferee in connection with any contemplated transfer of any of the Notes or any interest therein by such Bank; provided, that such prospective transferee agrees to be bound by this -------- Section 13.15 to the same extent as such Bank. (b) The Borrower hereby acknowledges and agrees that each Bank may share with any of its affiliates any information related to the Borrower or any of its Subsidiaries (including, without limitation, any nonpublic customer information regarding the creditworthiness of the Borrower and its Subsidiaries), provided that such Persons shall be subject to the -------- provisions of this Section 13.15 to the same extent as such Bank. 13.16 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT -------------------- HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 13.17 Register. The Borrower hereby designates the Administrative -------- Agent to serve as such Borrower's agent, solely for purposes of this Section 13.17, to maintain a register (the "Register") on which it will record the Revolving Loan Commitments from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation shall not affect the Borrower's obligations in respect of such Loans. With respect to any Bank, the transfer of any Revolving Loan Commitment of such Bank and the rights to the principal of, and interest on, any Loan shall not be effective until such transfer is recorded on the Register maintained by the Administrative Agent with respect to ownership of such Revolving Loan Commitment and Loans and prior to such recordation all amounts owing to the transferor with respect to such Revolving Loan Commitment and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Revolving Loan Commitment and -144- Loans shall be recorded by the Administrative Agent on the Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 13.04(b). Coincident with the delivery of such an Assignment and Assumption Agreement to the Administrative Agent for acceptance and registration of assignment or transfer of all or part of a Revolving Loan Commitment and/or Loan, or as soon thereafter as practicable, the assigning or transferor Bank shall surrender the Note evidencing such Revolving Loan Commitment and/or Loan, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the assigning or transferor Bank and/or the new Bank. The Borrower jointly and severally agrees to indemnify the Administrative Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Administrative Agent in performing its duties under this Section 13.17. 13.18 Limitation on Additional Amounts, etc. Notwithstanding anything ------------------------------------- to the contrary contained in Section 1.10, 1.11, 2.05 or 4.04 of this Agreement, unless a Bank gives notice to the Borrower that it is obligated to pay an amount under such Section within six months after the later of (x) the date the Bank incurs the respective increased costs, Taxes, loss, expense or liability, reduction in amounts received or receivable or reduction in return on capital or (y) the date such Bank has actual knowledge of its incurrence of the respective increased costs, Taxes, loss, expense or liability, reductions in amounts received or receivable or reduction in return on capital, then such Bank shall only be entitled to be compensated for such amount by the Borrower pursuant to said Section 1.10, 1.11, 2.05 or 4.04, as the case may be, to the extent of the costs, Taxes, loss, expense or liability, reduction in amounts received or receivable or reduction in return on capital that are incurred or suffered on or after the date which occurs six months prior to such Bank giving notice to the Borrower that it is obligated to pay the respective amounts pursuant to said Section 1.10, 1.11, 2.05 or 4.04, as the case may be. This Section 13.18 shall have no applicability to any Section of this Agreement other than said Sections 1.10, 1.11, 2.05 and 4.04. * * * * -145- IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. NRT INCORPORATED. By: /s/ Gregory W. Hunt -------------------------- Title: Senior Vice President & Chief Financial Officer BANKERS TRUST COMPANY, Individually and as Administrative Agent and Arranger By: /s/ Anthony LoGrippo -------------------------- Title: Vice President THE CHASE MANHATTAN BANK, Individually and as Syndication Agent and Arranger By: /s/ William J. Caggiano -------------------------- Title: Managing Director SCHEDULE I ---------- PART A ------ LIST OF BANKS AND COMMITMENTS ----------------------------- Revolving Bank Loan Commitment ---- --------------- Bankers Trust Company $25,000,000 The Chase Manhattan Bank $25,000,000 Total $50,000,000 =========== SCHEDULE II ----------- ADDRESSES --------- Bank Address ---- ------- Bankers Trust Company One Bankers Trust Plaza New York, New York 10006 Attention: Jennifer Laino Telephone No.: (212) 250-5062 Facsimile No.: (212) 250-7351 The Chase Manhattan Bank 270 Park Avenue New York, New York Attention: Bill Caggiano Telephone No: (212) 270-1338 Facsimile No.: (212) 972-0009 SCHEDULE I List of Banks and Commitments SCHEDULE II Bank Addresses SCHEDULE III Existing Indebtedness SCHEDULE IV Plans SCHEDULE V Capitalization SCHEDULE VI Subsidiaries SCHEDULE VII Insurance SCHEDULE VIII Existing Liens SCHEDULE IX Existing Investments SCHEDULE X Letters of Credit SCHEDULE XI Affiliate Transactions SCHEDULE XII IPO Amendments EXHIBIT A Form of Notice of Borrowing EXHIBIT B-1 Revolving Note EXHIBIT B-2 Swingline Note EXHIBIT C Form of Letter of Credit Request EXHIBIT D Form of Section 4.04(b)(ii) Certificate EXHIBIT E Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special New York counsel to the Credit Parties EXHIBIT F Form of Officers' Certificate EXHIBIT G Form of Pledge Agreement EXHIBIT H Form of Subsidiaries Guaranty EXHIBIT I Form of Solvency Certificate EXHIBIT J Form of Assignment and Assumption Agreement EXHIBIT K Form of Intercompany Note EXHIBIT L Form of Shareholder Subordinated Note (v) EX-10.15 18 EQUITY PARTICIPATION PLAN EXHIBIT 10.15 THE 1997 EQUITY PARTICIPATION PLAN OF NRT INCORPORATED NRT Incorporated, a Delaware corporation, has adopted The 1997 Equity Participation Plan of NRT Incorporated (the "Plan"), effective September 6, 1997, for the benefit of its eligible employees, consultants and directors. The Plan consists of two plans, one for the benefit of key Employees (as such term is defined below) and consultants and one for the benefit of Independent Directors (as such term is defined below). The purposes of this Plan are as follows: (1) To provide an additional incentive for directors, key Employees and consultants to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors, key Employees and consultants considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I DEFINITIONS 1.1 General. Wherever the following terms are used in this Plan ------- they shall have the meanings specified below, unless the context clearly indicates other wise. 1.2 Award Limit. "Award Limit" shall mean 300,000 shares of Common ----------- Stock, as adjusted pursuant to Section 10.3. 1.3 Board. "Board" shall mean the Board of Directors of the ----- Company. 1.4 Code. "Code" shall mean the Internal Revenue Code of 1986, as ---- amended. 1.5 Committee. "Committee" shall mean the Compensation Committee --------- of the Board, or another committee or subcommittee of the Board, appointed as provided in Section 9.1. 1.6 Common Stock. "Common Stock" shall mean the common stock of ------------ the Company, par value $.01 per share, and any equity security of the Company issued or authorized to be issued in the future, but excluding any preferred stock and any warrants, options or other rights to purchase Common Stock. Debt securities of the Company convertible into Common Stock shall be deemed equity securities of the Company. 1.7 Company. "Company" shall mean NRT Incorporated, a Delaware ------- corporation. 1.8 Deferred Stock. "Deferred Stock" shall mean whole or -------------- fractional shares of Common Stock awarded under Article VII of this Plan. 1.9 Director. "Director" shall mean a member of the Board. -------- 1.10 Dividend Equivalent. "Dividend Equivalent" shall mean a right ------------------- to receive the equivalent value (in cash or Common Stock) of dividends paid on Common Stock, awarded under Article VII of this Plan. 1.11 Employee. "Employee" shall mean any officer or other employee -------- (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation which is a Subsidiary. 1.12 Exchange Act. "Exchange Act" shall mean the Securities ------------ Exchange Act of 1934, as amended. 1.13 Fair Market Value. "Fair Market Value" of a share of Common ----------------- Stock as of a given date shall be (i) the closing price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any (or as reported on any composite index which includes such principal exchange), on the trading day previous to such date, or if shares were not traded on the trading day previous to such date, then on the next preceding date on which a trade occurred, or (ii) if Common Stock is not traded on an exchange but is quoted on Nasdaq or a successor quotation system, the mean between the closing representative bid and asked prices for the Common Stock on the trading day previous to such date as reported by Nasdaq or such successor quotation system; or (iii) if Common Stock is not publicly traded on an exchange and not quoted on Nasdaq or a successor quotation system, the Fair Market Value of a share of Common Stock as established by the Committee (or the Board, in the case of Options granted to Independent Directors) acting in good faith. 1.14 Formation Documents. "Formation Documents" shall mean the ------------------- following documents: (i) the Certificate of Designation, Preferences, and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, 2 Limitations and Restrictions Thereof of 9.00% Series A Cumulative Senior Redeemable Preferred Stock of the Company, as filed with the Secretary of the State of the State of Delaware on August 29, 1997; (ii) the Certificate of Designation, Preferences, and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifi cations, Limitations and Restrictions Thereof of 5.00% Series B Cumulative Convertible Redeemable Preferred Stock of the Company, as filed with the Secretary of the State of the State of Delaware on August 29, 1997; (iii) the Certificate of Designation, Prefer ences, and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 18.00% Series C Cumulative Junior Redeemable Preferred Stock of the Company, as filed with the Secretary of the State of the State of Delaware on August 29, 1997; (iv) the Stockholders Agreement, dated as of August 11, 1997, by and among the Company, Apollo Management, L.P., and certain stockholders set forth therein; (v) the Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on August 11, 1997; (vi) the By-Laws of the Company; (vii) the Amended and Restated Master Real Estate Franchise Agreement between Coldwell Banker Real Estate Corporation, a California corporation, and National Realty Trust, a New York Trust; (viii) the Amended and Restated ERA Franchise Systems, Inc. Master Membership Agreement by and between ERA Franchise Systems, Inc., a Delaware corporation and National Realty Trust, a New York Trust; (ix) the Amended and Restated Master Century 21 Real Estate Franchise Agreement by and between Century 21 Real Estate Corporation, a Delaware corporation, and National Realty Trust, a New York Trust; (x) the Franchise Override Agreement, dated August 11, 1997, between the Company, and Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc. and Century 21 Real Estate Corporation; (xi) the Incremental Royalty Agreement, dated as of August 11, 1997, by and among the Company on the one hand, and Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc., Century 21 Real Estate Corporation and HFS Incorporated on the other hand; (xii) the Additional Royalty Agreement, dated as of August 11, 1997, by and among the Company on the one hand, and Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc., Century 21 Real Estate Corporation and HFS Incorporated on the other hand; (xiii) the Marketing Agreement, dated August 11, 1997, by and between the Company and PHH Mortgage Services Corporation; (xiv) the Preferred Alliance Agreement, dated as of August 11, 1997, by and between the Company and HFS Incorporated, a Delaware corporation; (xv) the Advisory Services Agreement, dated as of August 11, 1997 by and among the Company and Apollo Management, L.P.; (xvi) the Subordination Agreement, dated as of August 11, 1997 among HFS Incorporated on the one hand, and Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo U.K. Partners, III, L.P., on the other hand; and (xvii) the Guarantee, dated as of August 11, 1997, made in favor of Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo U.K. Partners, III, L.P. 1.15 Grantee. "Grantee" shall mean an Employee or consultant ------- granted a Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation Right, or an award of Deferred Stock, under this Plan. 3 1.16 Incentive Stock Option. "Incentive Stock Option" shall mean an ---------------------- option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. 1.17 Independent Director. "Independent Director" shall mean a -------------------- member of the Board who is not an Employee of the Company. 1.18 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall -------------------------- mean an Option which is not designated as an Incentive Stock Option by the Committee. 1.19 Option. "Option" shall mean a stock option granted under ------ Article III of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to Independent -------- ------- Directors and consultants shall be Non-Qualified Stock Options. 1.20 Optionee. "Optionee" shall mean an Employee, consultant or -------- Independent Director granted an Option under this Plan. 1.21 Performance Award. "Performance Award" shall mean a cash ----------------- bonus, stock bonus or other performance or incentive award that is paid in cash, whole or fractional shares of Common Stock, or a combination thereof, awarded under Article VII of this Plan. 1.22 Plan. "Plan" shall mean The 1997 Equity Participation Plan of ---- NRT Incorporated. 1.23 QDRO. "QDRO" shall mean a qualified domestic relations order ---- as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.24 Restricted Stock. "Restricted Stock" shall mean whole or ---------------- fractional shares of Common Stock awarded under Article VI of this Plan. 1.25 Restricted Stockholder. "Restricted Stockholder" shall mean an ---------------------- Employee or consultant granted an award of Restricted Stock under Article VI of this Plan. 1.26 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 ---------- under the Exchange Act, as such Rule may be amended from time to time. 1.27 Section 162(m) Participant. "Section 162(m) Participant" shall -------------------------- mean any key Employee designated by the Committee as a key Employee whose compen- 4 sation for the fiscal year in which the key Employee is so designated or a future fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. 1.28 Stock Appreciation Right. "Stock Appreciation Right" shall ------------------------ mean a stock appreciation right granted under Article VIII of this Plan. 1.29 Stock Payment. "Stock Payment" shall mean (i) a payment in the ------------- form of whole or fractional shares of Common Stock, or (ii) an option or other right to purchase whole or fractional shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee or consultant in cash, awarded under Article VII of this Plan. 1.30 Subsidiary. "Subsidiary" shall mean any corporation in an ---------- unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1.31 Termination of Consultancy. "Termination of Consultancy" -------------------------- shall mean the time when the engagement of an Optionee, Grantee or Restricted Stockholder as a consultant to the Company or a Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, by resignation, discharge, death or retirement; but excluding terminations where there is a simultaneous commencement of employment with the Company or any Subsidiary. The Committee, in its sole discretion, shall determine the effect of all matters and questions relating to Termination of Consultancy, including, but not by way of limitation, the question of whether a Termination of Consultancy resulted from a discharge for good cause, and all questions of whether a particular leave of absence constitutes a Terminations of Consultancy. Notwithstanding any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate a consultant's service at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. 1.32 Termination of Directorship. "Termination of Directorship" --------------------------- shall mean the time when an Optionee who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole discretion, shall determine the effect of all matters and questions relating to Termination of Directorship with respect to Independent Directors. 1.33 Termination of Employment. "Termination of Employment" shall ------------------------- mean the time when the employee-employer relationship between an Optionee, Grantee or Restricted Stockholder and the Company or any Subsidiary is terminated for 5 any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement; but excluding (i) terminations where there is a simultaneous reemployment or continuing employment of an Optionee, Grantee or Restricted Stockholder by the Company or any Subsidiary, (ii) at the discretion of the Committee, terminations which result in a temporary severance of the employee-employer relationship, and (iii) at the discretion of the Committee, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. The Committee, in its sole discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether a particular leave of absence constitutes a Terminations of Employment; provided, however, that, with respect to Incentive Stock Options -------- ------- unless otherwise determined by the Committee in its discretion, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. Notwithstanding any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate an Employee's employment at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. ARTICLE II SHARES SUBJECT TO PLAN 2.1 Shares Subject to Plan. ---------------------- (a) The whole or fractional shares of stock subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock, initially whole or fractional shares of the Company's Common Stock, par value $.01 per share. The aggregate number of such whole or fractional shares which may be issued upon exercise of such Options or rights or upon any such awards under the Plan shall not exceed 1,500,000. The whole or fractional shares of Common Stock issuable upon exercise of such Options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (b) The maximum whole or fractional number of shares which may be subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights granted under the Plan to any individual in any calendar year shall not exceed the Award Limit. To the extent required by Section 162(m) of the Code, shares subject to Options 6 which are canceled continue to be counted against the Award Limit and if, after grant of an Option, the price of shares subject to such Option is reduced, the transaction is treated as a cancellation of the Option and a grant of a new Option and both the Option deemed to be canceled and the Option deemed to be granted are counted against the Award Limit. Furthermore, to the extent required by Section 162(m) of the Code, if, after grant of a Stock Appreciation Right, the base amount on which stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Company's Common Stock, the transaction is treated as a cancellation of the Stock Appreciation Right and a grant of a new Stock Appreciation Right and both the Stock Appreciation Right deemed to be canceled and the Stock Appreciation Right deemed to be granted are counted against the Award Limit. 2.2 Add-back of Options and Other Rights. If any Option, or other ------------------------------------ right to acquire whole or fractional shares of Common Stock under any other award under this Plan, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by this Plan, the whole or fractional number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Furthermore, any whole or fractional shares subject to Options or other awards which are adjusted pursuant to Section 10.3 and become exercisable with respect to whole or fractional shares of stock of another corporation shall be considered cancelled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Whole or fractional shares of Common Stock which are delivered by the Optionee or Grantee or withheld by the Company upon the exercise of any Option or other award under this Plan, in payment of the exercise price thereof, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. If any whole or fractional share of Restricted Stock is forfeited by the Grantee or repurchased by the Company pursuant to Section 6.6 hereof, such whole or fractional share may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Notwithstanding the provisions of this Section 2.2, no whole or fractional shares of Common Stock may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. ARTICLE III GRANTING OF OPTIONS 3.1 Eligibility. Any Employee, Independent Director or consultant ----------- selected by the Committee (or the Board, in the case of Options granted to Independent Directors) pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. 7 3.2 Disqualification for Stock Ownership. No person may be granted ------------------------------------ an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary or parent corporation (within the meaning of Section 422 of the Code) unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 3.3 Qualification of Incentive Stock Options. No Incentive Stock ---------------------------------------- Option shall be granted to any person who is not an Employee. 3.4 Granting of Options ------------------- (a) Pursuant to Schedule 1 of this Plan or otherwise, the Commit tee (or the Board, in the case of Options granted to Independent Directors) shall from time to time, in its sole discretion, and subject to applicable limitations of this Plan: (i) Determine which Employees are key Employees and select from among the key Employees, Independent Directors or consultants (including Employees, Independent Directors or consultants who have previously received Options or other awards under this Plan) such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the whole or fractional number of shares to be subject to such Options granted to the selected key Employees, Independent Directors or consultants; (iii) Subject to Section 3.3, determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and (iv) Determine the terms and conditions of such Options, consistent with this Plan; provided, however, that the terms and conditions -------- ------- of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) Upon the selection of a key Employee, Independent Director or consultant to be granted an Option, the Committee (or the Board, in the case of Options granted to Independent Directors) shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee (or the Board, in 8 the case of Options granted to Independent Directors) may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Optionee that the Optionee surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or other rights which have been previously granted to him under this Plan or otherwise. An Option, the grant of which is conditioned upon such surrender, may have an Option price lower (or higher) than the exercise price of such surrendered Option or other award, may cover the same, or a lesser or greater, (whole or fractional) number of shares as such surrendered Option or other award, may contain such other terms as the Committee (or the Board, in the case of Options granted to Independent Directors) deems appropriate, and shall be exercisable in accordance with its terms, without regard to the (whole or fractional) number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. (c) Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such Option from treatment as an "incentive stock option" under Section 422 of the Code. ARTICLE IV TERMS OF OPTIONS 4.1 Option Agreement. Each Option shall be evidenced by a written ---------------- Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee (or the Board, in the case of Options granted to Independent Directors) shall determine, consistent with this Plan. Stock Option Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 4.2 Option Price. The price per share of the shares subject to each ------------ Option shall be set by the Committee (or the Board, in the case Options granted to Independent Directors); provided, however, that such price shall be no less -------- ------- than the par value of a share of Common Stock, unless otherwise permitted by applicable state law, and (i) in the case of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; (ii) in the case of Incentive Stock Options such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code); 9 and (iii) in the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code), such price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code). 4.3 Option Term. The term of an Option shall be set by the ----------- Committee (or the Board, in the case of Options granted to Independent Directors) in its discretion; provided, however, that in the case of Incentive -------- ------- Stock Options, the term shall not be more than ten (10) years from the date the Incentive Stock Option is granted, or five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee (or the Board, in the case of Options granted to Independent Directors) may extend the term of any outstanding Option in connection with any Termination of Employment, Termination of Directorship or Termination of Consultancy of the Optionee, or amend any other term or condition of such Option relating to such a termination. 4.4 Option Vesting -------------- (a) The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee (or the Board, in the case of Options granted to Independent Directors) and the Committee (or the Board, in the case of Options granted to Independent Directors) may determine that an Option may not be exercised in whole or in part for a specified period after it is granted. At any time after grant of an Option, the Committee (or the Board, in the case of Options granted to Independent Directors) may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option vests. (b) No portion of an Option which is unexercisable at Termination of Employment, Termination of Directorship or Termination of Consultancy, as applicable, shall thereafter become exercisable, except as may be otherwise provided by the Committee in the case of Options granted to Employees or consultants (or the Board, in the case of Options granted to Independent Directors) either in the Stock Option Agreement or by action of the Committee (or the Board, in the case of Options granted to Independent Directors) following the grant of the Option. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, 10 but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any parent or subsidiary corporation (within the meaning of Section 422 of the Code) of the Company) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.4(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 4.5 Consideration. In consideration of the granting of an Option, ------------- the Optionee shall agree, in the written Stock Option Agreement, to remain in the employ of (or to consult for or to serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year (or such shorter period as may be fixed in the Stock Option Agreement or by action of the Committee following grant of the Option) after the Option is granted (or, in the case of an Independent Director, until the next annual meeting of stockholders of the Company or such shorter period as may be fixed in the Stock Option Agreement or by action of the Board following grant of the Option). Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without good cause. ARTICLE V EXERCISE OF OPTIONS 5.1 Partial Exercise. An exercisable Option may be exercised in ---------------- whole or in part with respect to a whole or fractional number of shares. The Committee (or the Board, in the case of Options granted to Independent Directors) may require that, by the terms of the Option, a partial exercise be with respect to a minimum whole or fractional number of shares. 5.2 Manner of Exercise. All or a portion of an exercisable Option ------------------ shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his office: (a) A written notice complying with the applicable rules established by the Committee (or the Board, in the case of Options granted to Independent Directors) stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion of the Option; 11 (b) Such representations and documents as the Committee (or the Board, in the case of Options granted to Independent Directors), in its sole discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee or Board may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 10.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the Secretary of the Company for the whole or fractional shares with respect to which the Option, or portion thereof, is exercised. However, the Committee (or the Board, in the case of Options granted to Independent Directors), may in its discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of whole or fractional shares of Common Stock owned by the Optionee, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of whole or fractional shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (v) allow payment, in whole or in part, through the delivery of a full recourse promissory note (i.e., full recourse with respect to the Optionee, and not merely with respect to shares of Common Stock) bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee or the Board; (vi) allow payment, in whole or in part, through the delivery of a notice that the Optionee has placed a market sell order with a broker with respect to whole or fractional shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; or (vii) allow payment through any combination of the consideration provided in the forego ing subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or the Board, in the case of Options granted to Independent Directors) may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 5.3 Conditions to Issuance of Stock Certificates. The Company shall -------------------------------------------- not be required to issue or deliver any certificate or certificates for whole or fractional 12 shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Commit tee or Board shall, in its sole discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee (or Board, in the case of Options granted to Independent Directors) shall, in its sole discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee (or Board, in the case of Options granted to Independent Directors) may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. 5.4 Rights as Stockholders. The holders of Options shall not be, ---------------------- nor have any of the rights or privileges of, stockholders of the Company in respect of any whole or fractional shares purchasable upon the exercise of any part of an Option unless and until certificates representing such whole or fractional shares have been issued by the Company to such holders. 5.5 Ownership and Transfer Restrictions. The Committee (or Board, ----------------------------------- in the case of Options granted to Independent Directors), in its sole discretion, may impose such restrictions on the ownership and transferability of the whole or fractional shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such whole or fractional shares. The Committee may require the Employee to give the Company prompt notice of any disposition of whole or fractional shares of Common Stock acquired by exercise of an Incentive Stock Option within (i) two years from the date of granting (including the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code) such Option to such Employee or (ii) one year after the transfer of such whole or fractional shares to such Employee. The Committee may direct that the certificates evidencing whole or fractional shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. 13 ARTICLE VI AWARD OF RESTRICTED STOCK 6.1 Eligibility. Subject to the Award Limit, Restricted Stock may ----------- be awarded to any Employee who the Committee determines is a key Employee or any consultant whom the Committee determines should receive such an award. 6.2 Award of Restricted Stock ------------------------- (a) The Committee may from time to time, in its sole discretion: (i) Determine which Employees are key Employees and select from among the key Employees or consultants (including Employees or consultants who have previously received other awards under this Plan) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. (b) The Committee shall establish the purchase price, if any, and form of payment for Restricted Stock; provided, however, that such purchase -------- ------- price shall be no less than the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law. In all cases, legal consideration shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee or consultant to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 6.3 Restricted Stock Agreement. Restricted Stock shall be issued -------------------------- only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected key Employee or consultant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 6.4 Consideration. As consideration for the issuance of Restricted ------------- Stock, in addition to payment of any purchase price, the Restricted Stockholder shall agree, in the written Restricted Stock Agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after the Restricted Stock is issued (or such shorter period as may be fixed in the Restricted Stock Agreement or by action of the Committee following grant of the Restricted Stock). Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted 14 Stockholder any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stock holder at any time for any reason whatsoever, with or without good cause. 6.5 Rights as Stockholders. Subject to Section 6.6, upon delivery ---------------------- of the shares of Restricted Stock to the escrow holder pursuant to Section 6.8, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in his Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Commit tee, any -------- ------- extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.6. 6.6 Restriction. All shares of Restricted Stock issued under this ----------- Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance; provided, however, -------- ------- that, except with respect to shares of Restricted Stock granted pursuant to Section 6.10, by action taken after the Restricted Stock is issued, the Commit tee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. If no consideration was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment or, if applicable, upon Termination of Consultancy with the Company; provided, however, -------- ------- that the Committee in its sole discretion may provide that such rights shall not lapse in the event of a Termination of Employment following a "change of ownership control" (within the meaning of Treasury Regulation Section 1.162- 27(e)(2)(v) or any successor regulation thereto) of the Company or because of the Restricted Stockholder's death or disability; provided, further, except -------- ------- with respect to shares of Restricted Stock granted pursuant to Section 6.10, the Committee in its sole discretion may provide that no such right of repurchase shall exist in the event of a Termination of Employment, or a Termination of Consultancy, without cause or following any change in control or ownership of the Company or because of the Restricted Stockholder's retirement, or otherwise. 6.7 Repurchase of Restricted Stock. The Committee shall provide in ------------------------------ the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of 15 Employment or, if applicable, upon a Termination of Consultancy between the Restricted Stockholder and the Company, at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; provided, -------- however, that the Committee in its sole discretion may provide that no such - ------- right of repurchase shall exist in the event of a Termination of Employment following a "change of ownership or control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or because of the Restricted Stockholder's death or disability; provided, further, that, except with respect to shares of Restricted Stock - -------- ------- granted pursuant to Section 6.10 the Committee in its sole discretion may provide that no such right of repurchase shall exist in the event of a Termination of Employment or a Termination of Consultancy without cause or following any change in control or ownership of the Company or because of the Restricted Stockholder's retirement, or otherwise. 6.8 Escrow. The Secretary of the Company or such other escrow ------ holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. 6.9 Legend. In order to enforce the restrictions imposed upon ------ shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. 6.10 Provisions Applicable to Section 162(m) Participants. ---------------------------------------------------- (a) Notwithstanding anything in the Plan to the contrary, the Committee may grant Restricted Stock to a Section 162(m) Participant the restrictions with respect to which lapse upon the attainment of performance goals for the Company which are related to one or more of the following business criteria: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets, (vii) cost reductions or savings, (viii) funds from operations, (ix) appreciation in the fair market value of Common Stock and (x) earnings before any one or more of the following items: interest, taxes, depreciation or amortization. (b) To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to Re stricted Stock which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the performance goal or goals applicable to the fiscal year or other designated fiscal period or period of service, (iii) 16 establish the various targets and amounts of Restricted Stock which may be earned for such fiscal year or other designated fiscal period or period of service and (iv) specify the relationship between performance goals and targets and the amounts of Restricted Stock to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period or period of service. Following the completion of each fiscal year or other designated fiscal period or period of service, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period or period of service. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account addi tional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period or period of service. ARTICLE VII PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS 7.1 Eligibility. Subject to the Award Limit, one or more Perfor ----------- mance Awards, Dividend Equivalents, awards of Deferred Stock, and/or Stock Payments may be granted to any Employee whom the Committee determines is a key Employee or any consultant whom the Committee determines should receive such an award. 7.2 Performance Awards. Any key Employee or consultant selected by ------------------ the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee or consultant. 7.3 Dividend Equivalents. Any key Employee or consultant selected -------------------- by the Committee may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option, Stock Appreciation Right, Deferred Stock or Performance Award is granted, and the date such Option, Stock Appreciation Right, Deferred Stock or Perfor mance Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by 17 such formula and at such time and subject to such limitations as may be determined by the Committee. With respect to Dividend Equivalents granted with respect to Options intended to be qualified performance-based compensation for purposes of Section 162(m) of the Code, such Dividend Equivalents shall be payable regardless of whether such Option is exercised. 7.4 Stock Payments. Any key Employee or consultant selected by the -------------- Committee may receive Stock Payments in the manner determined from time to time by the Committee. The whole or fractional number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. 7.5 Deferred Stock. Any key Employee or consultant selected by the -------------- Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The whole or fractional number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. 7.6 Performance Award Agreement, Dividend Equivalent Agree ment, ------------------------------------------------------------ Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award, - ------------------------------------------------- Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 7.7 Term. The term of a Performance Award, Dividend Equivalent, ---- award of Deferred Stock and/or Stock Payment shall be set by the Committee in its discretion. 7.8 Exercise or Purchase Price. The Committee may establish the -------------------------- exercise or purchase price of a Performance Award, shares of Deferred Stock, or shares received as a Stock Payment; provided, however, that such price shall not -------- ------- be less than the par value for a share of Common Stock, unless otherwise permitted by applicable state law. 18 7.9 Exercise Upon Termination of Employment. A Performance Award, --------------------------------------- Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercis able or payable only while the Grantee is an Employee or consultant; provided, -------- however, that the Committee in its sole discretion may provide that the - ------- Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent to a Termination of Employment following a "change of control or ownership" (within the meaning of Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company; provided, -------- further, that except with respect to Performance Awards granted pursuant to - ------- Section 7.12, the Committee in its sole discretion may provide that the Performance Awards may be exercised or paid following a Termination of Employment or a Termination of Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. 7.10 Payment on Exercise. Payment of the amount determined under ------------------- Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 5.3. 7.11 Consideration. In consideration of the granting of a ------------- Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall agree, in a written agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after such Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is granted (or such shorter period as may be fixed in such agreement or by action of the Committee following such grant). Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. 7.12 Provisions Applicable to Section 162(m) Participants. ---------------------------------------------------- (a) Notwithstanding anything in the Plan to the contrary, the Committee may grant any performance or incentive awards described in Article VII to a Section 162(m) Participant that vest or become exercisable or payable upon the attainment of performance goals for the Company which are related to one or more of the following business criteria: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets, (vii) cost reduc tions or savings, (viii) funds from operations, (ix) appreciation in the fair market value of Common Stock and (x) earnings before any one or more of the following items: interest, taxes, depreciation or amortization. 19 (b) To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to performance or incentive awards described in Article VII which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the performance goal or goals applicable to the fiscal year or other designated fiscal period or period of service, (iii) establish the various targets and bonus amounts which may be earned for such fiscal year or other designated fiscal period or period of service and (iv) specify the relationship between performance goals and targets and the amounts to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period or period of service. Following the completion of each fiscal year or other designated fiscal period or period of service, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period or period of service. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period or period of service. ARTICLE VIII STOCK APPRECIATION RIGHTS 8.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right ---------------------------------- may be granted to any key Employee or consultant selected by the Committee. A Stock Appreciation Right may be granted (i) in connection and simultaneously with the grant of an Option, (ii) with respect to a previously granted Option, or (iii) independent of an Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with this Plan as the Committee shall impose and shall be evidenced by a written Stock Appreciation Right Agreement, which shall be executed by the Grantee and an authorized officer of the Company. The Committee, in its discretion, may determine whether a Stock Appreciation Right is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights intended to so qualify shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Without limiting the generality of the foregoing, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition of the grant of a Stock Appreciation Right to an Employee or consultant that the Employee or consultant surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, or other rights which have been previously granted to him 20 under this Plan or otherwise. A Stock Appreciation Right, the grant of which is condi tioned upon such surrender, may have an exercise price lower (or higher) than the exercise price of the surrendered Option or other award, may cover the same, or a lesser or greater, (whole or fractional) number of shares as such surrendered Option or other award, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the (whole or fractional) number of shares, price, exercise period or any other term or condition of such surren dered Option or other award. 8.2 Coupled Stock Appreciation Rights --------------------------------- (a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable. (b) A CSAR may be granted to the Grantee for no more than the whole or fractional number of shares subject to the simultaneously or previously granted Option to which it is coupled. (c) A CSAR shall entitle the Grantee (or other person entitled to exercise the Option pursuant to this Plan) to surrender to the Company unexercised a portion of the Option to which the CSAR relates (to the extent then exercisable pursuant to its terms) and to receive from the Company in exchange therefor an amount determined by multiplying the difference obtained by subtracting the Option exercise price from the Fair Market Value of a share of Common Stock on the date of exercise of the CSAR by the whole or fractional number of shares of Common Stock with respect to which the CSAR shall have been exercised, subject to any limitations the Committee may impose. 8.3 Independent Stock Appreciation Rights ------------------------------------- (a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated to any Option and shall have a term set by the Committee. An ISAR shall be exercisable in such installments as the Committee may determine. An ISAR shall cover such whole or fractional number of shares of Common Stock as the Committee may determine. The exercise price per share of Common Stock subject to each ISAR shall be set by the Committee. An ISAR is exercisable only while the Grantee is an Employee or consultant; provided that the Committee may determine that the ISAR may be exercised subsequent to Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. (b) An ISAR shall entitle the Grantee (or other person entitled to exercise the ISAR pursuant to this Plan) to exercise all or a specified portion of the ISAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an 21 amount determined by multiplying the difference obtained by subtracting the exercise price per share of the ISAR from the Fair Market Value of a share of Common Stock on the date of exercise of the ISAR by the whole or fractional number of shares of Common Stock with respect to which the ISAR shall have been exercised, subject to any limitations the Committee may impose. 8.4 Payment and Limitations on Exercise ----------------------------------- (a) Payment of the amount determined under Section 8.2(c) and 8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee. To the extent such payment is effected in Common Stock it shall be made subject to satisfaction of all provisions of Section 5.3 above pertaining to Options. (b) Grantees of Stock Appreciation Rights may be required to comply with any timing or other restrictions with respect to the settlement or exercise of a Stock Appreciation Right, including a window-period limitation, as may be imposed in the discretion of the Board or Committee. 8.5 Consideration. In consideration of the granting of a Stock ------------- Appreciation Right, the Grantee shall agree, in the written Stock Appreciation Right Agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after the Stock Appreciation Right is granted (or such shorter period as may be fixed in the Stock Appreciation Right Agreement or by action of the Committee following grant of the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right Agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE IX ADMINISTRATION 9.1 Compensation Committee. Prior to the Company's initial ---------------------- registration of Common Stock under Section 12 of the Exchange Act, the Compensation Committee shall consist of the entire Board. Following such registration, The Compensa tion Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under this Plan) shall consist solely of two or more Independ ent Directors appointed by and holding office at the pleasure of the Board, each of whom is both a "non- employee director" as defined by Rule 16b-3 and an "outside director" for purposes of Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by 22 delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 9.2 Duties and Powers of Committee. It shall be the duty of the ------------------------------ Committee to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to interpret this Plan and the agreements pursuant to which Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments are granted or awarded, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend or revoke any such rules. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Options granted to Independent Directors. Any such grant or award under this Plan need not be the same with respect to each Optionee, Grantee or Restricted Stockholder. Any such interpreta tions and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. 9.3 Majority Rule; Unanimous Written Consent. The Committee shall ---------------------------------------- act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 9.4 Compensation; Professional Assistance; Good Faith Actions. --------------------------------------------------------- Members of the Committee shall receive such compensation, if any, for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpreta tions and determinations made by the Committee or the Board in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. 23 ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Not Transferable. Options, Restricted Stock awards, Deferred ---------------- Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution or pursuant to a QDRO, unless and until such rights or awards have been exercised, or the whole or fractional shares underlying such rights or awards have been issued, and all restrictions applicable to such shares have lapsed. No Option, Restricted Stock award, Deferred Stock award, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or interest or right therein shall be liable for the debts, contracts or engagements of the Optionee, Grantee or Restricted Stockholder or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence. During the lifetime of the Optionee or Grantee, only he may exercise an Option or other right or award (or any portion thereof) granted to him under the Plan, unless it has been disposed of pursuant to a QDRO. After the death of the Optionee or Grantee, any exercisable portion of an Option or other right or award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement or other agreement, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's or Grantee's will or under the then applicable laws of descent and distribution. 10.2 Amendment, Suspension or Termination of this Plan. Except as ------------------------------------------------- otherwise provided in this Section 10.2, this Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without approval of the Company's stockholders given within twelve months before or after the action by the Board or the Committee, no action of the Board or the Committee may, except as provided in Section 10.3, increase the limits imposed in Section 2.1 on the maximum whole or fractional number of shares which may be issued under this Plan, and no action of the Board or the Committee may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule. Furthermore, no modification of the Award Limit shall be effective prior to the approval of the Company's stockholders. No amendment, suspension or termination of this Plan shall, without the consent of the holder of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, alter or impair any rights or obligations under 24 any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted or awarded, unless the award itself otherwise expressly so provides. No Options, Restricted Stock, Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or awarded during any period of suspension or after termination of this Plan, and in no event may any Incentive Stock Option be granted under this Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted by the Board; or (b) The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 10.4. 10.3 Changes in Common Stock or Assets of the Company, Acquisition ------------------------------------------------------------- or Liquidation of the Company and Other Corporate Events. - -------------------------------------------------------- (a) Subject to Section 10.3(d), in the event that the Committee determines in its sole discretion (or the Board determines in its sole discretion, in the case of Options granted to Independent Directors) that any corporate transaction or event, including without limitation, any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion (or in the case of Options granted to Independent Directors, the Board's sole discretion), affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an award under the Plan, then the Committee (or the Board, in the case of Options granted to Independent Directors) may, in any such manner as it may deem equitable and appropriate, adjust any or all of the terms of such award, including without limitation (i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted under the Plan, or which may be granted as Restricted Stock or Deferred Stock (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit), 25 (ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the number and kind of shares of outstanding Restricted Stock or Deferred Stock, and (iii) the grant or exercise price with respect to any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. Notwithstanding the foregoing, no adjustment under this Section 10.3 shall be required to be made in respect of any corporate transaction or event that arises or results from the exercise, performance or operation of any right, obligation, term or provision of, or under, any of the Formation Documents. (b) Subject to Section 10.3(d), in the event of any transaction or event described in Section 10.3(a) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, the Committee (or the Board, in the case of Options granted to Independent Directors) in its discretion is hereby authorized to take any one or more of the following actions whenever the Committee (or the Board, in the case of Options granted to Independent Directors) determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any option, right or other award under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: (i) In its sole discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of the agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the optionee's request, for either the purchase of any such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock for an amount of cash equal to the amount that could have been attained upon the exercise of such option, right or award or realization of the optionee's rights had such option, right or award been currently exercisable or payable or fully vested or the replacement of such option, right or award with other rights or property selected by the Committee (or the Board, in the case of Options granted to Independent Directors) in its sole discretion; (ii) In its sole discretion, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action 26 taken prior to the occurrence of such transaction or event that it cannot vest, be exercised or become payable after such event; (iii) Except as provided in Schedule 1 hereto, the Committee (or the Board, in the case of Options granted to Independent Directors) in its sole discretion, and on such terms and conditions as it deems appropriate, may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that for a specified period of time prior to such transaction or event, such option, right or award shall be exercisable as to all or a specified portion of the shares covered thereby, notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the provisions of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock; (iv) In its sole discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that upon such event, such option, right or award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (v) In its sole discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future; and (vi) In its sole discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of a Restricted Stock award or Deferred Stock award or by action taken prior to the occurrence of such event that, for a specified period of time prior to such event, the restrictions imposed under a Restricted Stock Agreement or a Deferred Stock Agreement upon some or all whole or fractional shares of Restricted Stock or Deferred Stock may be terminated, and, in the case of Restricted Stock, some or all whole or fractional 27 shares of such Restricted Stock may cease to be subject to repurchase under Section 6.6 or forfeiture under Section 6.5 after such event. (c) Subject to Sections 10.3(d) and 10.8, the Committee (or the Board, in the case of Options granted to Independent Directors) may, in its discretion, include such further provisions and limitations in any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it may deem equitable and in the best interests of the Company. (d) With respect to Options, Stock Appreciation Rights and performance or incentive awards described in Article VII which are granted to Section 162(m) Participants and are intended to qualify as performance-based compensation under Section 162(m)(4)(C), no adjustment or action described in this Section 10.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code or would cause such option or stock appreciation right to fail to so qualify under Section 162(m)(4)(C), as the case may be, or any successor provisions thereto. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Committee (or the Board, in the case of Options granted to Independent Directors) determines that the option or other award is not to comply with such exemptive conditions. 10.4 Approval of Plan by Stockholders. This Plan will be submitted -------------------------------- for the approval of the Company's stockholders within twelve months after the date of the Board's initial adoption of this Plan. Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted and Restricted Stock or Deferred Stock may be awarded prior to such stockholder approval, provided that such Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such Restricted Stock or Deferred Stock shall not vest prior to the time when this Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments previously granted and all Restricted Stock or Deferred Stock previously awarded under this Plan shall thereupon be canceled and become null and void. 10.5 Tax Withholding. The Company shall be entitled to require --------------- payment in cash or deduction from other compensation payable to each Optionee, Grantee or Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting, exercise or payment of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the Board, in the case of Options granted to Independent Directors) may in its discretion and in satisfaction of the 28 foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to elect to have the Company withhold whole or fractional shares of Common Stock otherwise issuable under such Option or other award (or allow the return of whole or fractional shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 10.6 Loans. The Committee may, in its discretion, extend one or ----- more full recourse loans to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted under this Plan, or the issuance of Restricted Stock or Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee. 10.7 Forfeiture Provisions. Pursuant to its general authority to --------------------- determine the terms and conditions applicable to awards under the Plan, the Committee (or the Board, in the case of Options granted to Independent Directors) shall have the right (to the extent consistent with the applicable exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other awards made under the Plan, or to require the recipient to agree by separate written instrument, that (i) any proceeds, gains or other economic benefit actually or constructively received by the recipient upon any receipt or exercise of the award, or upon the receipt or resale of any Common Stock underlying such award, must be paid to the Company, and (ii) the award shall terminate and any unexercised portion of such award (whether or not vested) shall be forfeited, if (a) a Termination of Employment, Termination of Consultancy or Termination of Directorship occurs prior to a specified date, or within a specified time period following receipt or exercise of the award, or (b) the recipient at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Committee (or the Board, as applicable). 10.8 Limitations Applicable to Section 16 Persons and Performance- ------------------------------------------------------------ Based Compensation. Notwithstanding any other provision of this Plan, this - ------------------ Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. 29 Furthermore, notwithstanding any other provision of this Plan, any Option, Stock Appreciation Right or performance or incentive award described in Article VII which is granted to a Section 162(m) Participant and is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 10.9 Effect of Plan Upon Options and Compensation Plans. The -------------------------------------------------- adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of the Company or any Subsidiary or (ii) to grant or assume options or other rights or awards otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association. 10.10 Compliance with Laws. This Plan, the granting and vesting of -------------------- Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan and the issuance and delivery of whole or fractional shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 10.11 Titles. Titles are provided herein for convenience only and ------ are not to serve as a basis for interpretation or construction of this Plan. 30 10.12 Governing Law. This Plan and any agreements hereunder shall be ------------- administered, interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts of laws thereof. * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of __________________ on ____________, 199__. Executed on this ____ day of _______________, 199___. Secretary 31 SCHEDULE 1 TO 1997 NRT EQUITY PARTICIPATION PLAN TIME VESTING AND PERFORMANCE OPTIONS I. Definitions ----------- (a) "Incremental Royalty Agreement" shall have the meaning ascribed ----------------------------- to it in the in the Stockholders Agreement. (b) "Management Group" means the group of management Employees of ---------------- the Company granted Time Vesting and Performance Options as of September 6, 1997. (c) "Price Elements" shall mean the excess of -------------- (i) (A) the Available Cash Balance (as defined in the Incremental Royalty Agreement) of the Company as of the end of the immediately preceding calendar year, and (B) the number of shares of capital stock issued or issuable to management multiplied by the aggregate consideration to be received by the Company upon exercise of such options, over (ii) (A) the present value, calculated using a discount rate equal to the current prime rate, of the future tax liability of the Company related to the unamortized portion of the Original Trust Development Advance (as defined in the Incremental Royalty Agreement) as of the end of the immediately preceding calendar year, and (B) the liquidation value of outstanding preferred stock and convertible preferred stock of the Company (other than the Series B Preferred Stock and the Series C Preferred Stock) plus accrued and unpaid dividends (if not reflected in the liquidation preference) to the end of the immediately preceding fiscal year, and (C) the redemption price of then-outstanding Series C Preferred Stock of the Company as of the end of the immediately preceding calendar year, and 32 (D) the outstanding principal amount of indebtedness owed to third parties outstanding and the end of the immediately preceding calendar year, (other than debt due on demand excluding Original Trust Development Advances (as defined in the Incremental Royalty Agreement), any other debt to HFS Incorporated or its subsidiaries and Arbitrage Loans (as defined in the Incremental Royalty Agreement), and (E) the Selected Liability Value (as defined in the Incremental Royalty Agreement) as of the end of the immediately preceding calendar year. (d) "Qualifying Triggering Event" means the first Triggering Event --------------------------- to occur after the date hereof if the Triggering Event Share Price at the time of such Triggering Event equals or exceeds, on a per share basis, the Triggering Event Share Price Target set forth in Exhibit 1 applicable for such date. (e) "Series B Preferred Stock" means the Company's 5.00% Series B ------------------------ Cumulative Convertible Redeemable Preferred Stock due 2012. (f) "Series C Preferred Stock" means the Company's 18.00% Series C ------------------------ Cumulative Junior Redeemable Preferred Stock due 2001. (g) "Stockholders Agreement" means that certain Stockholders ---------------------- Agreement, dated as of August 11, 1997, by and among the Company, each of the stockholders of the Company listed on Schedule A thereto and such other stockholders of the Company as may, from time to time, become parties to the Stockholders Agreement in accordance with the terms thereof. (h) "Triggering Event" shall mean the earlier of (i) such time as ---------------- at least 20% of the Company's issued and outstanding common stock has been distributed through a primary public offering registered under the Securities Act of 1933, as amended, (ii) the sale by the Company, in one or a series of related transactions of assets representing 80% or more in value of the Company's consolidated assets on a fair market value basis and (iii) the dividend or distribution to stockholders of cash or assets representing 80% or more in value of the Company's consolidated assets net of liabilities on a fair market value basis. (i) "Triggering Event Share Price" means, ---------------------------- (i) with respect to a Triggering Event that is a public offering, the per share price to the public of Common Stock sold in the public offering, and 33 (ii) with respect to a Triggering Event that is an asset sale or a distribution or dividend, the ratio of the sum of (A) the product of the EBITDA Valuation Multiple (as determined pursuant to clause (ii) or (iii) of the definition thereof in the Incremental Royalty Agreement, as the case may be) and EBITDA (as defined in the Incremental Royalty Agreement) of the Company for the immediately preceding calendar year but adjusted to give pro-forma effect to any Incremental Royalties (as described in the Incremental Royalty Agreement) payable after such Triggering Event as if paid during such period, and (B) the Price Elements, to (C) the number of shares of Common Stock then outstanding on a fully diluted basis including all options. II. Grant of Time Vesting Options ----------------------------- Options covering up to 750,000 shares of Common Stock shall be granted to the Management Group as of September 6, 1997 (the "Time Vesting Options") as ---- ------- ------- described herein. All Time Vesting Options shall be subject to the following terms and conditions. (a) Exercise Price. The exercise price per share shall be $2.00. -------------- (b) Term. Time Vesting Options shall cease to be exercisable on ---- the tenth anniversary following the date of grant. (c) Exercisability. Time Vesting Options shall become exercisable -------------- in five (5) cumulative installments as follows: (i) The first installment shall consist of twenty percent (20%) of the shares covered by the Option and shall become exercisable on the first anniversary of the date the Option is granted; (ii) The second installment shall consist of twenty percent (20%) of the shares covered by the Option and shall become exercisable on the second anniversary of the date the Option is granted; 34 (iii) The third installment shall consist of twenty percent (20%) of the shares covered by the Option and shall become exercisable on the third anniversary of the date the Option is granted; (iv) The fourth installment shall consist of twenty percent (20%) of the shares covered by the Option and shall become exercisable on the fourth anniversary of the date the Option is granted; (v) The fifth installment shall consist of twenty percent (20%) of the shares covered by the Option and shall become exercisable on the fifth anniversary of the date the Option is granted; provided, however, that no portion of any Option which is unexercisable at -------- ------- Termination of Employment shall thereafter become exercisable. All additional terms and conditions with respect to Time Vesting Options shall be set forth in a Non-Qualified Stock Option Agreement entered into between the Company and each member of the Management Group which shall contain certain "bring-along" and "tag-along" rights applicable prior to any public offering as described in Section I(h)(i) of this Schedule 1. III. Grant of Performance Vesting Options ------------------------------------ Options covering up to 750,000 shares of Common Stock shall be granted to the Management Group as of September 6, 1997 (the "Performance Options") as ----------- ------- described herein. All Performance Options shall be subject to the following terms and conditions. (a) Exercise Price. The exercise price per share shall be $2.00. -------------- (b) Term. Performance Options shall cease to be exercisable on the ---- tenth anniversary following the date of grant. (c) Exercisability. Performance Options shall become fully -------------- exercisable upon the eighth anniversary following the date of grant; provided, however, that no portion of any Performance Option which is -------- ------- unexercisable at Termination of Employment shall thereafter become exercisable; provided, further, that upon the occurrence of a Qualifying -------- ------- Triggering Event, Performance Options shall become exercisable only in accordance with, and to the extent provided by, the Time Vesting Option exercisability schedule as set forth in Section II(c)(i)-(v) of this Schedule 1. All additional terms and conditions with respect to Time Vesting Options shall be set forth in a Non-Qualified Stock Option Agreement entered into between the Company and each member of the Management Group which shall contain certain "bring-along" and "tag- 35 along" rights applicable prior to any public offering as described in Section I(h)(i) of this Schedule 1. 36 EXHIBIT 1 TO SCHEDULE 1 TO 1997 NRT EQUITY PARTICIPATION PLAN TRIGGERING EVENT SHARE PRICE Date Triggering Event Share Price Targets ---- ------------------------------------ Prior to 12/31/99 $ 3.36 On or after 12/31/99 $ 4.70 and prior to 12/31/00 On or after 12/31/00 $ 6.58 and prior to 12/31/01 On or after 12/31/01 $ 9.22 and prior to 12/31/02 On or after 12/31/02 $12.90 37 EX-10.16 19 LICENSE AGREEMENT DATED 2/9/1999 Exhibit 10.16 LICENSE AGREEMENT ----------------- This License Agreement is effective as of the 9th day of February, 1999, by and between Cendant Corporation, a Delaware corporation (the "Licensor") and NRT Incorporated, a Delaware corporation (the "Licensee"). WITNESSETH: ---------- The Licensor, or one of its subsidiaries, is the owner of certain trade and service marks, all described in Schedule A attached hereto (the "Marks"). Licensee is engaged in the real estate brokerage business, pursuant to franchise or membership agreements, each dated as of the date hereof, with ERA Franchise Systems, Inc., Coldwell Banker Real Estate Corporation and Century 21 Real Estate Corporation (the "Franchise Agreements"), and related ancillary businesses (collectively, the "Business"). Licensor and Licensee desire and intend that the Licensee be permitted to use the Marks in the conduct of the Business. NOW, THEREFORE, in consideration of the mutual promises herein exchanged and for other good and valuable consideration, the parties agree as follows: 1. License. The Licensor, for itself and its subsidiaries, hereby grants to - -- ------- the Licensee and its subsidiaries the exclusive right and license to use the Marks in the conduct of the Business. Included in this grant is the right to use the Marks to provide services, and to advertise and promote the Business, its products and services, including the use of the Marks in conjunction with signage, stationery, convenience items for customers, employee uniforms and forms used in conjunction with the Business. Notwithstanding the exclusive nature of this License Agreement, Licensee hereby acknowledges that certain Marks have been, and may in the future be, licensed to persons and entities in connection with Brokerage Acquisitions (as defined in Schedule A attached hereto) and that this License Agreement is subject in all respects to such licenses. In conjunction with the use of the Marks, the Licensee shall take all necessary measures to ensure that the services provided by Licensee and its subsidiaries continue to conform to quality standards. In order to maintain such standards, Licensee shall and shall cause its subsidiaries to: Maintain a high moral and ethical standard of operation at each office utilizing the Marks; Maintain each office in a clean, attractive and orderly condition; Provide efficient, courteous and high-quality service to the public at each office; Operate each office during the periods required by Licensee; Permit inspection of each office by Licensor's representative at any time; Advertise and promote each office subject to Licensor's approval as to form and content of all advertising and promotional material; Comply with Licensor's reasonable requirements so as to maintain the high quality of equipment and supplies at each office; Display outdoor signs and other signs, promotional material and identifying characteristics at each office as approved and required by Licensor; Send samples or descriptions to Licensor of all proposed new uses of the Marks for Licensor's approval. Licensor shall have the right to specify additional standards to ensure compliance with these requirements and to ensure that the validity and enforceability of the Marks, and the goodwill associated therewith, is maintained and protected. Licensee shall use the Marks in accordance with sound trademark and trade name usage principles and in accordance with all applicable laws and regulations, including without limitation all laws and regulations relating to the maintenance of the validity and enforceability of the Marks; and Licensee shall not use the Marks in any manner which would tarnish, disparage, or reflect adversely on Licensor, the Marks, or the goodwill associated therewith. 2. Duration. This License Agreement shall remain in full force and effect -- -------- until termination or expiration of all of the Franchise Agreements or any replacements, renewals or amendments thereof. 3. Royalties. No additional royalty shall be payable by Licensee hereunder; - --------- it being understood that Licensee is already paying a royalty to Licensor's subsidiaries under the Franchise Agreements with respect to its residential real estate brokerage operations. Notwithstanding any prior agreement to the contrary, the Marks shall not be deemed to be additional trademarks under any of the Franchise Agreements; this License Agreement shall contain the entire agreement between the parties regarding a license of the Marks to Licensee. 4. Maintenance of the Marks. In the event that Licensee learns of any -- ------------------------ infringement or unauthorized use of the Marks, it shall notify Licensor, such notice not to be unreasonably delayed. Licensor shall have the sole right to bring infringement actions or other similar proceedings against infringing third parties in order to protect the Marks. Licensee, at its expense, shall take all reasonable actions necessary to assist Licensor in the maintenance of the Marks including joining in any action which Licensor deems necessary to bring in order to maintain and/or prevent material infringement of the Marks. Licensee acknowledges that the Marks and all rights therein, if any (with the exception of those rights expressly granted to Licensee hereunder), and the goodwill pertaining thereto belong exclusively to Licensor. Licensee's use of the Marks shall inure to the benefit of Licensor for all purposes, including without limitation trademark registration. Without limiting the generality of the foregoing, Licensee shall not challenge the validity of Licensor's ownership of the Marks or any registration or application for registration thereof or contest the fact that Licensee's rights under this License Agreement are solely those of a licensee, which rights terminate upon termination of this License Agreement. 4. Right to Sublicense; Assignment. The Licensee shall not have the right to -- ------------------------------- sublicense the use of the Marks or otherwise assign its rights under this License Agreement. 5. Title. Licensee agrees that nothing herein shall give to the Licensee any -- ----- right, title or interest in the Marks (except the right to use the Marks in accordance with the terms of this License Agreement), that the Marks are the sole property of the Licensor or one of its subsidiaries, and that any and all uses by the Licensee of the Marks shall inure to the benefit of the Licensor or one of its subsidiaries. 6. Defaults and Termination. The following shall be deemed to be events of -- ------------------------ default ("Events of Default") under this License Agreement: (a) With respect to any Mark, failure to maintain the quality standards required under Section 1 of this License Agreement and failure to submit to quality review, after notice and failure to cure within thirty (30) days of receipt of notice from Licensor. (b) With respect to any Mark, breach of any other provision of this License Agreement by Licensee and failure to cure such breach within thirty (30) days of receipt of notice from Licensor. Upon occurrence of an Event of Default, Licensor at its sole discretion may terminate this License Agreement with respect to such Mark upon written notice to Licensee. In the event of such termination, Licensee shall deliver to Licensor or at the option of Licensor, destroy, free of any charges to Licensor, all items incorporating such Mark. 3. Notices. Any notices required or permitted to be given under this License -- ------- Agreement shall be in writing and given to the parties by mail, return receipt requested. IN WITNESS WHEREOF, the undersigned have caused this License Agreement to be signed as of the day and year first above written. CENDANT CORPORATION By: /s/ Samuel L. Katz ------------------------ Name: Samuel L. Katz Title: Executive Vice President NRT INCORPORATED By: /s/ Steven L. Barnett ------------------------ Name: Steven L. Barnett Title: Senior Vice President, General Counsel and Secretary Schedule A To License Agreement -------------------- All tradenames and trademarks acquired by Licensor or one of its subsidiaries in connection with Brokerage Acquisitions (as defined in the Stockholders Agreement, dated as of August 11, 1997, between Licensee, HFS Incorporated and others, and the Acquisition Cooperation Agreement, dated as of the date hereof, between Licensor, Licensee and others), including those hereafter acquired, other than those relating to mortgage operations. 64940 EX-21.1 20 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES O'Connor, Piper & Flynn, Inc. OPF Home First, LLC Real Estate Referrals, Inc. Home Team Systems, LLC First Rate Cleaners, Inc. The Farrell Institute, Inc. Southern Maryland Referrals, Inc. O'Connor, Piper & Flynn Coastal Partnership OPF Title Services, LLC OPF Mortgage Services, LLC Prestige Auctions, LLC O'Connor, Piper & Flynn Insurance Agency, LLC OPF Property Management, LLC OPF Social & Recreational Club, Inc. OPF, Inc. Burnet Realty, Inc. Burnet Insurance Corporation Burnet Realty Chicago, Inc. Referral Associates of Illinois, Inc. 1501 Realty Referral Associates, Inc. Burnet Realty, Inc. Burnet Title, LLC Guardian Title Company DM Title Company BSSP Acquisition Corporation West Coast Escrow Company Equity Title Company Referral Associates of California, Inc. Del Monte Realty Coldwell Banker Residential Brokerage Corporation Valley of California, Inc. Fox Realty Corporation Coldwell Banker Ira E. Berry, Inc. Coldwell Banker Residential Brokerage California Forest E. Olson, Inc. Contempo Holdings Contempo Relocations, Inc. Contempo Realty, Inc. Seville Properties Realty, Inc. Coldwell Banker Residential Brokerage Corporation Douglas and Jean Burgdorff, Inc. Burgdorff Referral Associates, Inc. Coldwell Banker Residential Real Estate Grey City Graphics Coldwell Banker Residential Real Estate Services of Wisconsin, Inc. Referral Network, Inc. Coldwell Banker Real Estate Services, Inc. Professional Asset Recovery Services, Inc. Coldwell Banker Real Estate, Inc. Keystone Closing Services, LLC Coldwell Banker Residential Referral Network, Inc. Kahn Realty Companies, Inc. Relocation Chicago, Inc. Coldwell Banker Residential Referral Network Berry Referral Network, Inc. Referral Network, Inc. 2 EX-23.2 21 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NRT Incorporated on Form S-1 of our report dated July 9, 1998, relating to the consolidated balance sheet of NRT Incorporated and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the four months then ended; the consolidated balance sheet of National Realty Trust and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, Trust equity, and cash flows for the period from June 1, 1996 to December 31, 1996, and the period from January 1, 1997 to August 31, 1997; and the consolidated statements of operations, stockholders' equity (deficit), and cash flows of Coldwell Banker Residential Brokerage Corporation for the year ended December 31, 1995, and the period from January 1, 1996 to May 31, 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Costa Mesa, California February 9, 1999 EX-23.3 22 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NRT Incorporated on Form S-1 of our report dated July 10, 1998, related to the combined statements of operations, shareholders' deficit and cash flows of Jon Douglas Company, San Vicente Escrow Company, Equity Title Company, Douglas Referral Associates, and Jon Douglas Financial, for the period January 1, 1995 through November 14, 1995, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Costa Mesa, California February 9, 1999 EX-23.4 23 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NRT Incorporated on Form S-1 of our report dated July 10, 1998, related to the consolidated statements of operations, shareholders' deficit, and cash flows of Jon Douglas Real Estate Services Group, Inc., for the nine months ended September 30, 1997, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Costa Mesa, California February 9, 1999 EX-23.5 24 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.5 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NRT Incorporated on Form S-1 of our report dated June 19, 1998, related to the statements of operations, shareholders' equity, and cash flows of Cornish & Carey Residential, Inc. for the years ended December 31, 1995 and 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP San Francisco, California February 9, 1999 EX-23.6 25 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.6 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NRT Incorporated on Form S-1 of our report dated June 26, 1998, related to the combined statements of operations, owners' equity, and cash flows of Contempo Realty, Inc., Contempo Relocation, Inc. and the Blossom Valley, Morgan Hill and Bascom general partnerships, for each of the three years in the period ended December 31, 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP San Francisco, California February 9, 1999 EX-23.7 26 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.7 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NRT Incorporated on Form S-1 of our report dated July 1, 1998, related to the statement of operations and retained earnings and of cash flows of Barbara Sue Seal Properties, Inc. for the year ended December 31, 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Portland, Oregon February 9, 1999 EX-23.8 27 CONSENT OF ARTHUR ANDERSON LLP EXHIBIT 23.8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated March 19, 1997 and to all references to our Firm included or made a part of this Form S-1 Registration Statement filed by NRT Incorporated. Arthur Andersen LLP Los Angeles, California February 8, 1999 EX-27.1 28 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF NRT INCORPORATED AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND FOR THE FOUR MONTHS THEN ENDED AND AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS THEN ENDED (UNAUDITED). 1,000 4-MOS 9-MOS DEC-31-1997 DEC-31-1998 SEP-01-1997 JAN-01-1998 DEC-31-1997 SEP-30-1998 205,676 132,202 0 0 15,521 50,875 0 0 0 0 256,235 217,182 54,635 98,160 3,090 16,302 416,671 470,418 111,804 127,164 4,844 13,753 237,858 242,875 0 0 100 100 (34,332) (50,723) 416,671 470,418 0 0 463,514 1,565,949 0 0 330,169 1,091,039 203,884 474,910 0 0 (2,843) (2,068) (67,696) 19,372 (25,453) 8,444 (42,243) 10,928 0 0 0 0 0 0 (42,243) 10,928 0 0 0 0
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