-----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, Cf/SzNTjkNNiFngXAgdhz1nCkG2RK4+IRNIvK0XDQmuSG/KVyv84paCjxp+Pd5DR b8BnnNdu5GMUc+JRdMxyoA== 0000940180-99-000461.txt : 19990503 0000940180-99-000461.hdr.sgml : 19990503 ACCESSION NUMBER: 0000940180-99-000461 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19990430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NRT INC CENTRAL INDEX KEY: 0001067584 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531] IRS NUMBER: 330769705 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-72093 FILM NUMBER: 99605273 BUSINESS ADDRESS: STREET 1: 6 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9734965700 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 As filed with the Securities and Exchange Commission on April 29, 1999. Registration No. 333-72093 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- AMENDMENT NO. 2 TO 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 LLP 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. [_] ----------- 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 14,062,500 Shares of Common Stock - -------------------------------------------------------------------------------- NRT Incorporated: The Offering: . NRT is offering . NRT is the largest 9,375,000 of residential real the shares and estate brokerage Apollo is offering company in the 4,687,500 of the United States based shares. on home sales volume. . The underwriters have an option to . Affiliates of purchase an Apollo Management, additional 2,109,375 L.P. and Cendant shares from Cendant Corporation (upon conversion of currently own all of its convertible NRT's outstanding preferred stock of common and preferred NRT) and Apollo to stock. cover over-allotments. . Principal . This is NRT's Executive Offices: initial public NRT Incorporated offering, and 6 Sylvan Way no public market Parsippany, New currently exists for Jersey 07054 NRT's shares. NRT (973) 496-5700 estimates that the price of the shares Proposed Symbol & will be between $15 Market: and $17 per share. . NRTX/Nasdaq . NRT plans to use National Market the proceeds from this offering to repurchase shares of its preferred stock held by Apollo and Cendant and for general corporate purposes, which may include acquisitions. NRT will not receive any proceeds from the shares sold by the selling stockholders. . Closing: , 1999. --------------------------------------------
Per Share Total --------------------------------------------------- Public offering price: $ $ Underwriting fees: $ $ Net proceeds to NRT: $ $ Net proceeds to selling stockholders: $ $ ---------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on Page 12. - -------------------------------------------------------------------------------- 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. BT Alex. Brown Lehman Brothers Merrill Lynch & Co. Morgan Stanley Dean Witter 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: .""NRT'' means NRT Incorporated and its subsidiaries and predecessors; .""Cendant'' means Cendant Corporation and its subsidiaries and predecessors; and . ""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......................... 12 Special Note Regarding Forward- Looking Statements.................. 20 Use of Proceeds...................... 21 Dividend Policy...................... 21 Dilution............................. 22 Capitalization....................... 23 Unaudited Pro Forma Condensed Consolidated Financial Information.. 24 Selected Consolidated Financial Data................................ 34 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 36 Business............................. 49
Management.......................... 63 Principal and Selling Stockholders.. 73 Related Party Transactions.......... 75 Description of Capital Stock........ 89 Description of Indebtedness......... 98 Shares Eligible for Future Sale..... 100 United States Federal Tax Considerations Relating to Non-U.S. Holders............................ 101 Underwriting........................ 104 Notice to Canadian Residents........ 108 Legal Matters....................... 111 Experts............................. 111 Additional Information.............. 113 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 gives effect to a 1.875-for-1 split of NRT's common stock that will occur immediately before the closing of the offering and assumes the underwriters' over-allotment option is not exercised. Statistical information on the residential real estate brokerage industry has been derived from publicly available sources, which NRT has not independently verified but believes to be reliable. NRT Incorporated NRT is the largest residential real estate brokerage company in the United States based on home sales volume. NRT operates approximately 681 full service real estate brokerage offices nationwide under the franchised COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. Based on data provided by Real Facts, an industry publication, multiple listing service data and other publicly available industry information, NRT believes that: . NRT is approximately five times larger than its next largest competitor, based on home sales volume. . NRT operates in 18 of the 30 largest domestic markets measured by population and believes it has a leading market presence in each of the markets in which it operates. . NRT is the only national residential real estate brokerage company. . NRT markets more homes on the internet than any other residential real estate brokerage company based on the number of homes listed with NRT, all of which are marketed on the internet. As a full service brokerage, NRT offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional real estate brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems and other services. NRT believes it benefits from: . operating economies of scale; . national brand identity; . training programs for its sales associates; . offering a wide variety of brokerage-related services; and . access to capital. NRT was formed in August 1997 by Apollo and Cendant. Shortly after its formation, NRT acquired the assets of National Realty Trust, which included the former real estate brokerage operations of Coldwell Banker Corporation. Although NRT had only recently been formed, the operations acquired from National Realty Trust provided NRT with a strong core operating business. NRT has grown rapidly since the National Realty Trust acquisition, completing 79 acquisitions representing a total of over 500 brokerage offices. NRT has acquired five of the fifteen largest residential real estate brokerage companies in the United States, based on home sales volume before being acquired by NRT. 3 Growth Strategy Internal Growth Strategy. NRT will seek to expand its market presence and increase its revenues and profitability through initiatives that are intended to: . capitalize on the benefits provided by operating under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names; . increase ancillary revenues by offering a broad range of services to the homeowner; . recruit, retain and develop high-quality sales associates; and . enhance productivity with information technology. Acquisition Strategy. NRT will seek to take advantage of acquisition opportunities in the highly fragmented real estate brokerage industry by continuing to: . expand its presence within its existing markets through acquisitions of local and regional brokerages; . enter new markets by selectively acquiring high-quality, leading real estate brokerage firms; and . improve operations of acquired companies through the elimination of duplicative operations and costs. The Industry . NRT estimates that in 1998, the domestic residential real estate brokerage industry generated over $50 billion of real estate commissions, based on information reported by the National Association of Realtors and the United States Census Bureau. . According to the National Association of Realtors, since 1990, home sales volume in the domestic residential real estate brokerage industry has grown at an average annual rate of 9.4%. . According to the latest edition of Real Facts, the 20 largest residential real estate brokerage companies in the United States represented 8.1% of home sales volume for 1997. 4 Relationship with Apollo and Cendant Control by Apollo and Cendant. Apollo and Cendant currently own all of the common and preferred stock of NRT. After giving effect to the offering and the repurchase by NRT of shares of convertible preferred stock from Cendant following the closing of the offering and assuming the conversion of all of the convertible preferred stock of NRT then held by Cendant, Apollo will beneficially own approximately 39.6% and Cendant will beneficially own approximately 19.0% of NRT's outstanding common stock. Upon the closing of the offering, the convertible preferred stock held by Cendant will have the right to vote on an as converted basis together with the holders of NRT's common stock. As a result, Apollo and Cendant will have the power to elect the entire Board of Directors and approve other matters submitted to a vote of stockholders. In addition, Apollo, Cendant and NRT are parties to a stockholders agreement relating to the voting, transfer and registration of the shares of NRT's capital stock held by Apollo and Cendant. Under this agreement, both Apollo and Cendant have agreed to vote their shares of NRT's capital stock in favor of a Board of Directors consisting of five directors nominated by Apollo, five directors nominated by Cendant and two directors nominated by a majority of the Board of Directors. Acquisition Cooperation Agreement. NRT and Cendant have entered into an acquisition cooperation agreement under which NRT and Cendant cooperate to jointly fund brokerage acquisitions in which Cendant agrees to participate. Under this agreement, when NRT and Cendant jointly fund an acquisition, NRT acquires the brokerage operations and Cendant acquires the trademarks and, in most cases, any mortgage operations of the acquired brokerage. While Cendant can decline to participate in any brokerage acquisition, it has participated in each of NRT's brokerage acquisitions to date and has provided more than 50% of the total acquisition cost for all of NRT's brokerage acquisitions, excluding the National Realty Trust acquisition. Cendant has agreed to provide approximately $1.446 billion for brokerage acquisitions, of which $461 million has already been provided through March 31, 1999. Under the acquisition cooperation agreement, $500 million of Cendant's commitment will not become available before February 9, 2004, unless Cendant agrees otherwise. Other Operational Agreements and Arrangements. NRT has entered into a number of other agreements with Cendant relating to NRT's operations, including: . franchise agreements between NRT and subsidiaries of Cendant under which NRT licenses the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names; . a program outsourcing agreement under which Cendant acts as NRT's exclusive agent in negotiating arrangements with third party service and product providers; . a marketing agreement relating to the marketing of Cendant's mortgage origination services; . a relocation management arrangement under which NRT provides brokerage services to relocating employees referred to it by Cendant Mobility Services Corporation; . an acquisition services agreement under which NRT provides acquisition related services to Cendant in connection with NRT's brokerage acquisitions; . lease agreements under which NRT leases its executive offices from Cendant; and . a support agreement under which Cendant provides NRT with computer and data related information services. In addition, NRT and Cendant may from time to time enter into other agreements and arrangements affecting NRT's operations. The relationships between NRT and each of Apollo and Cendant could result in potential conflicts of interest. For a discussion of these potential conflicts of interest, you should refer to "Risk Factors--NRT's relationship with Apollo and Cendant could result in potential conflicts of interest." 5 The Offering The number of shares of common stock to be outstanding after the offering: . includes 6,473,503 shares of common stock issuable upon conversion of convertible preferred stock held by Cendant, after giving effect to the repurchase by NRT of 725.4 shares of convertible preferred stock from Cendant following the closing of the offering (based on an assumed initial public offering price of $16 per share, the mid-point of the estimated initial public offering price per share); and . excludes 3,399,141 shares of common stock currently reserved for issuance under NRT's stock option plan, under which a total of 4,687,500 shares are authorized for issuance (the weighted average exercise price of outstanding options under the stock option plan is $4.85 per share). Common stock offered by: NRT................... 9,375,000 shares Apollo................ 4,687,500 shares Total............... 14,062,500 shares Common stock to be outstanding after the offering............... 34,023,928 shares Use of proceeds......... NRT intends to use the net proceeds of the offering to redeem all outstanding shares of NRT's Series C junior preferred stock held by Apollo and to repurchase 725.4 shares of NRT's Series B convertible preferred stock held by Cendant. The remainder of the net proceeds will be used for general corporate purposes, which may include acquisitions. NRT will not receive any of the proceeds from the sale of shares by the selling stockholders. Proposed Nasdaq trading symbol................. NRTX
6 Summary Financial and Other Data The following tables present summary historical and pro forma financial and other data of NRT. 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 NRT 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 NRT had the events described below occurred on the dates specified. In addition, the pro forma data are not indicative of NRT's future financial condition or results of operations. 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. In August 1997, NRT 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. Historical Data
Predecessors --------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated --------------- ----------------------- ------------------------------------------------- Three Five Seven Eight Four Three Months Months Months Months Months Year Months Ended Ended Ended Ended Ended Ended Ended March March 31, May 31, December 31, August 31, December 31, December 31, 31, 1998 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) --------------- ------------ ---------- ------------ ------------ ----------- ----------- (in thousands, except per share amounts) Statement of Operations Data: Real estate commissions............ $228,005 $400,076 $570,150 $446,134 $2,010,123 $330,241 $469,596 Other revenues.......... 7,810 12,101 14,636 17,380 110,879 15,434 31,289 -------- -------- -------- -------- ---------- -------- -------- Total revenues........ 235,815 412,177 584,786 463,514 2,121,002 345,675 500,885 Commissions and royalties(a)........... 141,404 276,364 393,235 330,169 1,482,719 237,284 345,380 Selling, general and administrative expenses............... 93,532 119,862 168,863 124,785 571,938 115,805 164,904 Amortization of goodwill............... 482 104 1,162 637 3,403 1,083 1,610 Acquisition related costs.................. 26 22,188 10,735 78,462 61,150 34,266 5,618 -------- -------- -------- -------- ---------- -------- -------- Operating income (loss)............... 371 (6,341) 10,791 (70,539) 1,792 (42,763) (16,627) Interest expense, net... 11 44 117 (2,843) (1,819) (868) 568 Provision (benefit) for income taxes........... 156 -- 4,432 (25,453) 2,302 (16,758) (6,772) -------- -------- -------- -------- ---------- -------- -------- Net income (loss)..... $ 204 $ (6,385) $ 6,242 $(42,243) $ 1,309 $(25,137) $(10,423) ======== ======== ======== ======== ========== ======== ======== Loss applicable to common shareholders.... $(54,232) $ (35,309) $(34,046) $(19,704) ======== ========== ======== ======== Loss per common share: basic and diluted(b)... $ (2.89) $ (1.88) $ (1.82) $ (1.05) Weighted average shares outstanding: basic and diluted(b)... 18,750 18,750 18,750 18,750
7
Predecessors --------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated --------------- ----------------------- ------------------------------------------------- Seven Eight Four Three Three Five Months Months Months Months Year Months Months Ended Ended Ended Ended Ended Ended March Ended March May 31, December 31, August 31, December 31, December 31, 31, 1998 31, 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) ----------- ------------ ---------- ------------ ------------ ----------- ----------- (in thousands) Other Data: Depreciation and amortization........... $ 3,812 $ 1,129 $ 3,026 $ 2,998 $ 18,909 $ 3,733 $ 7,036 Amortization of goodwill............... 482 104 1,162 637 3,403 1,083 1,610 Acquisition related costs: Amortization of pending real estate sales contracts and real estate listing contracts.............. $ 26 $ 21,449 $ 9,314 $ 69,896 $ 44,153 $ 20,301 $ 5,310 Office conversion costs.................. -- 739 1,421 8,566 16,997 13,965 308 -------- -------- -------- --------- --------- --------- ------- Total acquisition related costs........ $ 26 $ 22,188 $ 10,735 $ 78,462 $ 61,150 $ 34,266 $ 5,618 ======== ======== ======== ========= ========= ========= ======= EBITDA(c)............... $ 4,691 $ 16,341 $ 24,293 $ 2,992 $ 68,257 $ (17,646) $(2,671) Net cash provided by (used in) operating activities............. 4,855 29,810 20,625 9,527 31,977 (36,872) (7,264) Net cash used in investing activities... (18,420) (14,770) (44,795) (107,475) (186,651) (54,365) (9,506) Net cash provided by (used in) financing activities............. 14,577 (3,953) 30,759 263,308 42,015 (15,212) (13,923)
Three Three Combined Combined Months Months Year Ended Year Ended Year Ended Ended Ended December 31, December 31, December 31, March 31, March 31, 1996 1997 1998 1998 1999 ------------ ------------ ------------ --------- --------- (dollars in thousands) Operating Data: Sides(d)................ 109,994 154,066 300,229 47,732 65,471 Average sales price per home................... $ 205 $ 239 $ 245 $ 243 $ 255 Home sales volume (in millions).............. 22,593 36,822 73,686 11,613 16,710 Average sales commission per side as a percentage of home sales volume(e)........ 2.78% 2.76% 2.73% 2.84% 2.81% Number of offices (at period end)............ 353 463 692 604 681 Number of sales associates (at period end) .................. 13,765 19,914 30,658 26,515 30,131 Real estate listing contracts (at period end) .................. 27,170 33,256 54,614 54,932 60,108
8 Pro Forma Data The following pro forma statement of operations and balance sheet data give effect to (1) the offering and the application of the estimated net proceeds, (2) the repurchase on April 6, 1999 of 574,575 shares of common stock from Apollo, (3) the additional royalties that will be payable to NRT's franchisors following the closing of the offering and (4) the acquisitions described under "Unaudited Pro Forma Condensed Consolidated Financial Information."
NRT Incorporated ------------------------------------ Pro Forma Pro Forma Year Ended Three Months Ended December 31, March 31, ------------ ----------------------- 1998 1998 1999 (unaudited) (unaudited) (unaudited) ------------ ----------- ----------- (in thousands, except per share amounts) Statement of Operations Data: Real estate commissions................... $2,315,367 $ 422,879 $469,596 Other revenues............................ 146,902 20,434 31,289 ---------- --------- -------- Total revenues.......................... 2,462,269 443,313 500,885 Commissions and royalties................. 1,761,337 310,098 351,380 Selling, general and administrative expenses................................. 646,564 149,353 164,904 Amortization of goodwill.................. 4,270 1,441 1,610 Acquisition related costs................. 66,347 61,730 876 ---------- --------- -------- Operating loss.......................... (16,249) (79,309) (17,885) Interest expense, net..................... (1,066) (641) 568 Benefit for income taxes.................. (5,309) (31,651) (7,281) ---------- --------- -------- Net loss................................ $ (9,874) $( 47,017) $(11,172) ========== ========= ======== Loss applicable to common shareholders.... $ (25,312) $ (50,863) $(15,725) ========== ========= ======== Loss per common share: basic and diluted(f)..................... $ (0.89) $ (1.79) $ (0.55) Weighted average shares outstanding: basic and diluted(f)..................... 28,416 28,416 28,416 Other Data: Depreciation and amortization............. $ 21,691 $ 5,070 $ 7,036 Acquisition related costs: Amortization of pending real estate sales contracts and real estate listing contracts................................ $ 49,350 $ 44,733 $ 568 Office conversion costs................... 16,997 16,997 308 ---------- --------- -------- Total acquisition related costs......... $ 66,347 $ 61,730 $ 876 ========== ========= ======== EBITDA(c)................................. $ 59,062 $ (28,065) $ (8,671) Net cash provided by (used in) operating activities............................... 22,782 (47,291) (13,264) Net cash used in investing activities..... (186,651) (54,635) (9,506) Net cash provided by (used in) financing activities............................... 58,110 16,883 (13,441)
As of March 31, 1999 -------------------- Historical Pro Forma ---------- --------- (unaudited) (in thousands) Balance Sheet Data: Cash and cash equivalents................................ $ 22,008 $ 49,391 Total assets............................................. 507,993 535,376 Long-term debt........................................... 42,735 42,735 Redeemable preferred stock, net.......................... 261,358 188,642 Stockholders' deficit.................................... (134,413) (34,313)
9 (a) Royalties were not payable by Coldwell Banker Residential Brokerage during the five months ended May 31, 1996. (b) Before the closing of the offering, NRT intends to effect a 1.875-for-1 split of its common stock. Accordingly, historical loss per share has been restated to reflect this stock split. (c) EBITDA is defined as operating income (loss) plus depreciation and amortization of goodwill and other intangibles. EBITDA is calculated as follows:
Predecessors ------------------------------------- Coldwell Banker Residential National Brokerage Realty Trust NRT Incorporated ----------- ------------------------- ------------------------------------------------- Three Three Five Seven Eight Four Months Months Months Months Months Months Year Ended Ended Ended Ended Ended Ended Ended March 31, March 31, May 31, December 31, August 31, December 31, December 31, 1998 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) ----------- ------------- ----------- ------------ ------------ ----------- ----------- (in thousands) Historical Operating income (loss)................. $ 371 $(6,341) $10,791 $(70,539) $ 1,792 $(42,763) $(16,627) Depreciation and amortization........... 3,812 1,129 3,026 2,998 18,909 3,733 7,036 Amortization of goodwill............... 482 104 1,162 637 3,403 1,083 1,610 Amortization of pending real estate contracts and real estate listing contracts.............. 26 21,449 9,314 69,896 44,153 20,301 5,310 ------ ------- ------- -------- -------- -------- -------- EBITDA.................. 4,691 16,341 24,293 2,992 68,257 (17,646) (2,671) ------ ------- ------- -------- -------- -------- -------- Office conversion costs.................. -- 739 1,421 8,566 16,997 13,965 308 ------ ------- ------- -------- -------- -------- -------- EBITDA before office conversion costs....... $4,691 $17,080 $25,714 $ 11,558 $ 85,254 $ (3,681) $ (2,363) ====== ======= ======= ======== ======== ======== ======== NRT Incorporated ------------------------------------ Pro Forma Pro Forma Three Months Ended Year Ended ----------------------- December 31, March 31, March 31, 1998 1998 1999 (unaudited) (unaudited) (unaudited) ------------ ----------- ----------- (in thousands) Pro Forma Operating loss............................................................. $(16,249) $(79,309) $(17,885) Depreciation and amortization.............................................. 21,691 5,070 7,036 Amortization of goodwill................................................... 4,270 1,441 1,610 Amortization of pending real estate contracts and real estate listing contracts................................................................. 49,350 44,733 568 -------- -------- -------- EBITDA..................................................................... 59,062 (28,065) (8,671) Office conversion costs.................................................... 16,997 16,997 308 -------- -------- -------- EBITDA before office conversion costs...................................... $ 76,059 $(11,068) $ (8,363) ======== ======== ========
Management believes that EBITDA is a widely accepted financial indicator used by investors and analysts to analyze and compare companies. Management uses EBITDA as a supplementary tool to measure NRT's ability to generate operating cash flow. Management also uses EBITDA to establish performance goals and related bonuses for its employees. 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. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. NRT understands that, while EBITDA is frequently used by securities analysts in the evaluation of companies, EBITDA is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation. Office conversion costs include primarily signage change, name change advertising and other transitional costs. (d) Each real estate transaction has two sides, the selling side and the buying side. NRT may participate as broker on one or both sides of a transaction. (e) Represents the average sales commission rate received by NRT per side in home sale transactions in which NRT participated as broker. This amount is calculated by dividing NRT's real estate commissions by NRT's home sales volume. 10 (f) In addition to the stock split described in (b) above, pro forma loss per common share gives effect to acquisitions by NRT, additional royalties that will be payable to NRT's franchisors following the closing of the offering, the additional shares that will be outstanding as a result of the offering and the additional shares that would be issued to fund the repurchase of common stock from Apollo, the intended repurchase of convertible preferred stock from Cendant, the redemption of the junior preferred stock and the $45.0 million cash dividend paid to Apollo described under "Unaudited Pro Forma Condensed Consolidated Financial Information." 11 RISK FACTORS Set forth below is a description of material risks to investors considering an investment in the common stock. You should consider carefully the following factors and other information in this prospectus before deciding to invest in shares of common stock. NRT has a limited operating history upon which an evaluation of NRT and its prospects can be based While NRT's predecessors have conducted real estate brokerage operations for a significant period of time, NRT has conducted operations only since August 1997, when it acquired the assets of National Realty Trust. NRT has completed 79 acquisitions, including 9 acquisitions in 1997, 55 acquisitions in 1998 and 15 acquisitions in 1999. As a result, NRT and its acquired operations have a limited operating history on a combined basis upon which an evaluation of NRT and its prospects can be based. NRT has recorded operating losses in the past and may record operating losses in the future NRT recorded an operating loss of approximately $70.5 million for the four months ended December 31, 1997 and approximately $16.6 million for the three months ended March 31, 1999. NRT's operating loss for the four months ended December 31, 1997 was due primarily to the large number of acquisitions completed by NRT and NRT's amortization of a significant portion of the purchase price for these acquisitions during the first year following completion of the acquisition. NRT believes its operating loss for the three months ended March 31, 1999 was due primarily to the seasonal nature of NRT's business. NRT may incur significant operating losses in the future, particularly if it continues to make acquisitions, which could adversely affect the price of NRT's common stock. NRT is required to make substantial royalty payments As a franchisee of the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) real estate franchise systems, NRT is required to pay royalties to its franchisors. NRT paid royalties of $121.3 million for the year ended December 31, 1998. Under its franchise agreements, following the closing of the offering, NRT will incur additional royalties that were not incurred during prior periods. If NRT had incurred these additional royalties beginning on January 1, 1998, NRT's royalty payments to its franchisors would have increased by approximately $24.0 million and net income would have been reduced by $14.3 million for the year ended December 31, 1998. The payment of these increased royalties could adversely affect NRT's ability to be profitable in the future. NRT's business activities are restricted by its franchise agreements As a franchisee, NRT operates each of its offices under one of its franchisors' brand names, but does not own any of the brand names under which it operates. The franchisors have significant rights over the use of the franchised service marks by NRT and the conduct of NRT's business. Under the franchise agreements, NRT is not permitted to engage in any business other than the residential real estate brokerage business and businesses permitted under its program outsourcing agreement with Cendant. In addition, the franchise agreements require NRT to: . coordinate with the franchisors on significant matters relating to NRT's operations, including the opening and closing of offices; 12 . contribute significant amounts to national advertising funds maintained by the franchisors; . indemnify the franchisors against losses arising out of the operation of NRT's business under the franchise agreements; and . maintain standards and comply with guidelines relating to its operations which are applicable to all franchisees of the franchisors' real estate franchise systems. NRT's franchise agreements restrict NRT's ability to incur indebtedness and pay dividends. They also permit NRT's franchisors to prevent NRT's acquisition of one or more new offices if the acquisition would have an adverse impact on other existing franchisees of NRT's franchisors. In addition, under the acquisition cooperation agreement, Cendant has the right to cause NRT to sell one or more of the brokerage offices that were acquired in connection with a brokerage acquisition. These provisions may prevent NRT from pursuing acquisitions that it otherwise wishes to pursue. Termination of any of NRT's franchise agreements would adversely affect NRT NRT's franchisors have the right to terminate NRT's franchise if any of the following occur: . a bankruptcy or insolvency event affecting NRT; . a transfer by NRT of any right or obligation under the franchise agreements; . a change in control of NRT; . NRT's affiliation with another real estate franchisor that is not an affiliate of NRT's existing franchisors; or . NRT's failure to promptly pay amounts due under the franchise agreements. If a franchisor terminates NRT's franchise due to a material breach of its franchise agreement, the franchisor could require NRT to pay damages equal to the franchisor's lost future royalties for the remaining term of the franchise agreement, up to 25 years. The franchisors could also seek damages and/or equitable relief for other violations of the franchise agreements. Any termination of one or more of the franchise agreements would have a material adverse effect on NRT. The cyclical nature of the residential real estate market could adversely affect NRT's business In recent years, existing home sales have risen to their highest levels in history. However, the residential real estate market tends to be cyclical and typically is affected by changes in general economic conditions which are beyond NRT's control. Any of the following could have a material adverse effect on NRT'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: . periods of economic slowdown or recession; . rising interest rates; . decreasing home ownership rates; or . declining demand for real estate. As a result, NRT would be adversely affected if economic conditions do not continue to be favorable or an economic slowdown were to occur in the United States or elsewhere. The National Association of Realtors has forecasted that existing home sales will be lower in 1999 than in 1998. This decline in existing home sales could adversely affect NRT's revenues and profitability. 13 Seasonal fluctuations in the residential real estate brokerage business could adversely affect NRT The residential real estate brokerage business is subject to seasonal fluctuations. Historically, NRT's revenues have been strongest in the second and third quarters of the calendar year. While NRT pays commissions to its sales associates only upon the sale of a home, many of NRT's other expenses, such as rent and personnel, are fixed and cannot be reduced during a seasonal slowdown. As a result, NRT may be required to borrow cash in order to fund its operations during seasonal slowdowns or at other times. Since the terms of NRT's franchise agreements and bank facility restrict the ability of NRT to incur indebtedness, NRT cannot assure that it would be able to borrow cash. NRT's inability to finance its funding needs during a seasonal slowdown or at other times could have a material adverse effect on NRT. NRT's operations are concentrated in metropolitan areas NRT owns real estate brokerage offices located in and around 18 large metropolitan markets in the United States. NRT's offices operate principally within these markets. Local and regional economic conditions in these markets could differ materially from prevailing conditions in other parts of the country. While NRT believes that its offices are located in geographically diverse metropolitan markets of the United States, NRT 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 1998, NRT realized approximately 44% of its gross commission income in Northern and Southern California and the New York metropolitan area. A downturn in residential real estate markets or economic conditions in these regions could result in a decline in NRT's total gross commission income and have a material adverse effect on NRT. NRT cannot assure its ability to complete future acquisitions NRT has pursued an active acquisition strategy as a means of entering or strengthening its position within metropolitan markets and has sought to integrate acquisitions into NRT's operations to achieve economies of scale. As a result, NRT has derived a substantial portion of its revenues and profits from acquired brokerages. The success of NRT's future acquisition strategy will continue to depend upon NRT's ability to find suitable acquisition candidates on favorable terms and to finance and complete these transactions. The inability of NRT to complete brokerage acquisitions could have a material adverse effect on NRT's growth strategy. NRT's ability to complete future acquisitions will also depend in large part on Cendant's continued participation in such acquisitions under the acquisition cooperation agreement. Cendant is not required to participate in any brokerage acquisition. As a result, NRT cannot assure that Cendant will participate in any future brokerage acquisition or that NRT will obtain alternative sources of financing if Cendant does not participate in any brokerage acquisition. In addition, due to a change in the purchase price calculation applicable to Cendant's agreement to fund future brokerage acquisitions under the acquisition cooperation agreement, NRT expects to pay a higher percentage of the total purchase price in its brokerage acquisitions than in the past. Furthermore, Cendant and NRT may agree to pursue an acquisition on terms different from those set forth in the acquisition cooperation agreement, in which case NRT could be required to pay a greater share of the total purchase price than it otherwise would pay. In that case, NRT may not have sufficient funding for other acquisitions that it otherwise would have pursued. 14 The franchise agreements limit the ability of NRT to incur indebtedness and open new offices. These restrictions may prevent NRT from completing acquisitions that it otherwise wishes to pursue. NRT cannot assure that it will realize anticipated benefits from future acquisitions Upon completion of an acquisition, NRT encounters risks related to the possible inability of NRT to integrate the acquired business into NRT'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. These risks may adversely affect NRT's ability to realize anticipated cost savings and revenue growth from its acquisitions. The program outsourcing agreement restricts NRT's ability to pursue alternative third party purchasing and marketing programs Under its program outsourcing agreement with Cendant, NRT has appointed Cendant as its exclusive outsourcing agent to negotiate the terms of NRT's participation in purchasing and marketing programs. The program outsourcing agreement restricts the ability of NRT to pursue alternative marketing arrangements and 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 NRT to pursue alternative arrangements or the termination or modification of any program or fee arrangement could have a material adverse effect on NRT. The terms of the programs established under the program outsourcing agreement could be less favorable to NRT than the terms of programs that NRT could have obtained absent the program outsourcing agreement. The marketing agreement restricts NRT's ability to pursue alternative third party mortgage marketing arrangements Under its marketing agreement with Cendant Mortgage Corporation, NRT assists in the marketing of Cendant Mortgage's mortgage origination services. The marketing agreement restricts the ability of NRT to pursue and enter into alternative mortgage marketing arrangements with other parties. NRT intends to enter into a joint venture with Cendant to provide mortgage services, at which time the marketing agreement will be terminated. The terms of the marketing agreement (and the anticipated mortgage joint venture with Cendant that would replace the marketing agreement) could be less favorable to NRT than the terms of any arrangements that NRT could have obtained from third parties. The loss of key employees and sales associates could adversely affect NRT The ability of NRT 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 NRT's key employees or a significant number of sales associates could have a material adverse effect on NRT's growth and development. Changes in government regulation could adversely affect NRT NRT's business activities are subject to substantial regulation by governmental authorities. The jurisdictions in which NRT does business have established requirements governing the licensing and 15 conduct of real estate brokerage and brokerage-related businesses. In addition, the federal Real Estate Settlement Procedures Act and comparable state statutes impose restrictions on the manner in which NRT may conduct its business. In addition, more restrictive laws, regulations or interpretations could be adopted in the future that could make compliance more difficult or expensive. Furthermore, regulatory authorities have broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, these regulatory authorities could prevent or temporarily suspend NRT from carrying on some or all of its activities or otherwise penalize NRT if its practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of these requirements by the regulatory authority. NRT's failure to comply with any of these requirements or interpretations could have a material adverse effect on NRT's operations and financial performance. Year 2000 problems could disrupt NRT's business Many existing computer systems and software products are coded to accept only two-digit entries in the date code field and cannot properly recognize dates in the year 2000 and beyond. Consequently, these systems and software products need to be either upgraded or replaced to function properly from and after January 1, 2000. If, due to hardware or software problems, NRT's systems were unable to operate due to year 2000 problems, NRT would face the risks of incurring additional costs to correct its year 2000 problems or losing revenue due to its inability to deliver services to its customers. These costs or losses, if incurred, could have a material adverse effect on NRT. However, NRT believes that it is taking the necessary steps to eliminate or reduce these risks where possible and that year 2000 issues will not have a material effect on NRT's financial condition or results of operations. For a description of NRT's year 2000 compliance efforts, you should refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." NRT is speaking with third party vendors and service providers regarding their year 2000 compliance. NRT's major software and hardware vendors and service providers, including Cendant, have indicated that their systems currently are or will be year 2000 compliant prior to December 31, 1999. NRT is in the process of contacting all of its other major vendors and service providers, including multiple listing service providers, to confirm their systems will be year 2000 compliant in a timely manner. NRT expects to have this assessment complete and a contingency plan in place by the end of the third quarter of 1999. However, NRT cannot assure that the systems of those companies will be converted in a timely manner or that the third parties will mitigate the effects of noncompliance. Any failure by NRT's third party vendors and service providers to convert in a timely manner could have an adverse effect on NRT's operations. The terms of NRT's bank credit facility restrict NRT's business activities The terms and conditions of NRT's bank credit facility restrict NRT's ability to incur debt, pay dividends and other distributions, create liens, sell assets and make investments. The terms of the bank credit facility also require NRT to maintain specified financial ratios. These provisions will 16 limit NRT's ability to obtain additional funds for its operations or future acquisitions and pay dividends, which could have a material adverse effect on NRT's operations and acquisition strategy and the rights of holders of NRT's common stock. The absence of a trading market for the common stock could make it difficult for investors to resell their shares at or above the initial public offering price Prior to the offering, there has been no trading market for the common stock. Although NRT has applied to have the common stock approved for listing on the Nasdaq National Market, it 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 NRT, Apollo, Cendant and representatives of the underwriters. The initial public offering price may be higher than the market price of the common stock after the offering. New investors will experience immediate and substantial dilution The initial public offering price of the common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding common stock. As a result, NRT currently expects that new investors will experience immediate dilution of $17.37 per share in the net tangible book value per share of the common stock from the initial public offering price, assuming an initial public offering price of $16 per share, the mid-point of the estimated range of initial public offering price per share. If NRT issues additional shares of common stock in the future, investors may experience further dilution. In addition, NRT has outstanding options which, if exercised, could result in further dilution. Any further dilution could adversely affect the price of NRT's common stock. NRT does not expect to pay dividends on its common stock NRT does not anticipate paying any cash dividends on its common stock in the foreseeable future. Any payment of future dividends and the amounts thereof will depend upon NRT's earnings, financial requirements and other factors deemed relevant by NRT's Board of Directors. Future dividends will be subject to the terms of NRT's bank credit facility, which restricts NRT's ability to pay dividends on its common stock. In addition, NRT's franchise agreements prevent NRT from incurring indebtedness to pay dividends and prohibit the payment of extraordinary dividends unless financial ratio tests are satisfied. The terms of NRT's preferred stock also restrict the ability of NRT to pay dividends on its common stock. Although NRT declared and paid in 1999 a $45 million cash dividend on its common stock to Apollo, NRT does not expect to pay dividends on its common stock in the foreseeable future. NRT's relationship with Apollo and Cendant could result in potential conflicts of interest The ownership of NRT's capital stock by Apollo and Cendant, the ownership of Cendant's common stock or options to purchase Cendant's common stock by directors and officers of NRT and the service by directors of NRT as directors or officers of both NRT and Apollo or Cendant could 17 result in potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for NRT and Apollo or Cendant. Such decisions could impact: .potential acquisitions; .the issuance of additional securities; .the entry into or modification of contractual or other arrangements; .the election of directors; and .the payment of dividends by NRT. NRT has not instituted any formal plan or arrangement to address potential conflicts of interest that may arise among NRT, Apollo, Cendant and their affiliates. However, under Delaware law, officers and directors of NRT owe fiduciary duties to NRT and its stockholders. In addition, NRT has entered into agreements with Cendant, including the following: .the franchise agreements; .the stockholders agreement (to which Apollo is also a party); .the acquisition cooperation agreement (to which Apollo is also a party); .the program outsourcing agreement; .the marketing agreement; .the acquisition services agreement; .lease agreements; and .the support agreement. These agreements were entered into when Cendant and Apollo owned all of NRT's outstanding capital stock. NRT and Cendant also intend to implement a joint venture that will provide mortgage services, at which time the marketing agreement will be terminated. NRT may enter into additional agreements or arrangements in the future. The terms of these agreements may be less favorable to NRT than the terms that could have been obtained absent the stock ownership by Cendant and Apollo. Cendant's discovery of accounting irregularities could adversely affect NRT After discovering accounting irregularities in the former CUC International Inc. business units of Cendant, Cendant restated its earnings for 1998 and prior years and experienced a significant decline in its market capitalization. In addition, lawsuits have been filed against Cendant, its predecessor, HFS Incorporated, their current and former officers and directors and others, including Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, asserting claims under the federal securities laws and state common and statutory law. If, as a result of its accounting irregularities, the resulting decline in market capitalization or an adverse outcome in the pending lawsuits, Cendant is unable to perform its obligations under its agreements with NRT, including its obligations under the acquisition cooperation agreement, its failure to perform could have a material adverse effect on NRT's operations and financial performance, including NRT's ability to implement its growth strategy. 18 The control of NRT by Apollo and Cendant could reduce the ability of other stockholders to influence NRT Immediately following the offering, assuming the repurchase by NRT of 725.4 shares of Series B convertible preferred stock held by Cendant after the closing of the offering and the conversion of all of the Series B convertible preferred stock then held by Cendant into shares of common stock: . Apollo will beneficially own 39.6% of NRT's common stock (35.3% if the underwriters' over-allotment option is exercised in full); . Cendant will beneficially own 19.0% of NRT's common stock (17.2% if the underwriters' over-allotment option is exercised in full); and . NRT's other stockholders will beneficially own 41.3% of NRT's common stock (47.5% if the underwriters' over-allotment option is exercised in full). As a result, Apollo and Cendant, acting together, will have the power to elect the entire Board of Directors of NRT and approve other matters submitted to a vote of NRT's stockholders, including extraordinary corporate matters. In addition, under the stockholders agreement, NRT's Board of Directors will consist of twelve directors, including: .five directors nominated by Apollo; .five directors nominated by Cendant; and .two directors nominated by a majority of the Board of Directors. Apollo and Cendant have agreed to vote all of their shares in favor of the other's director nominees. As a result of these agreements, the restrictions imposed by NRT's franchise agreements on acquisitions of shares by third parties, and the exclusivity provisions of the program outsourcing agreement and the marketing agreement, Apollo and Cendant will likely continue to exercise substantial influence over NRT and its operations for the foreseeable future. As a result, the ability of other stockholders to influence NRT could be reduced. In addition, the interests of NRT's public stockholders may be different from the interests of Apollo and Cendant. The availability of a significant number of shares for future sale by Apollo and Cendant could adversely affect the market price of the common stock Subject to applicable federal securities laws, the transfer restrictions of the stockholders agreement and restrictions contained in the underwriting agreement with the underwriters, Apollo and Cendant may sell any or all of the shares of common stock (or, in the case of Cendant, convertible preferred stock) owned by them. In addition, under the stockholders agreement, Apollo and Cendant have registration rights with respect to the shares of common stock and convertible preferred stock owned by them, which would facilitate any future disposition. Sales in the public market of substantial amounts of common stock, or the perception that such sales could occur, could cause the prevailing market prices for the common stock to fall. NRT cannot predict the period of time during which Apollo and Cendant will maintain their ownership of common stock following the offering. Provisions of NRT's charter and by-laws and agreements with Cendant and Apollo could deter takeover attempts Following the offering, provisions of NRT's certificate of incorporation and by-laws could delay or impede the removal of incumbent directors or discourage a third party from attempting to acquire 19 control of NRT. Similarly, the stockholders agreement limits Apollo's ability to transfer its shares of common stock to persons that Cendant believes may have an intent to acquire or influence control of NRT. In addition, NRT's 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 generally. The franchise agreements provide that damages based on lost future royalties would be payable by NRT if any person or group acquired beneficial ownership of over 30%. As a result, in addition to effectively restricting a third party from acquiring over 30% of NRT's outstanding common stock generally, the franchise agreements could effectively restrict Apollo's ability to transfer significant amounts of its shares of common stock to parties other than Cendant. These provisions could adversely effect the amount that potential acquirors might be willing to pay in an acquisition of NRT's common stock or the price that investors might be willing to pay in the future for shares of NRT's common stock. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. These statements may be found under "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements contain the words "believes," "anticipates," "expects" and words of similar import. Because these statements involve risks and uncertainties, actual results could differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause these differences include those discussed under "Risk Factors" in this prospectus. The forward-looking statements are made as of the date of this prospectus. 20 USE OF PROCEEDS NRT estimates the net proceeds to NRT from the offering, after deducting applicable underwriting discounts and commissions and estimated offering expenses payable by NRT, to be approximately $137.0 million. NRT expects that: . approximately $88.2 million of the net proceeds from the offering will be used to redeem all of the outstanding shares of Series C junior preferred stock of NRT held by Apollo, including a redemption premium of $12.3 million; . approximately $10.7 million of the net proceeds from the offering will be used to repurchase 725.4 shares of Series B convertible preferred stock of NRT held by Cendant, plus accrued dividends; and . the remainder of the net proceeds of the offering to NRT will be used for general corporate purposes, which may include acquisitions of real estate brokerages and their related service businesses. NRT does not currently have any specific plans for the use of these proceeds. NRT will not receive any proceeds from the sale of shares by the selling stockholders. DIVIDEND POLICY NRT does not anticipate paying cash dividends to its common stockholders in the foreseeable future after the offering. The timing, amount and form of any dividends will be at the discretion of NRT's Board of Directors and will depend on NRT's results of operations, financial condition, cash requirements and other factors considered relevant by the Board of Directors. NRT's ability to pay dividends is restricted under its franchise agreements, the terms of its preferred stock and its bank credit facility. NRT has paid dividends to Cendant as the sole holder of NRT's Series A senior preferred stock and Series B convertible preferred stock and to Apollo as the sole holder of NRT's Series C junior preferred stock and common stock. Through March 31, 1999, NRT has paid a total of $20.2 million of dividends on its Series A senior preferred stock, $1.7 million of dividends on its Series B convertible preferred stock and $19.2 million of dividends on its Series C junior preferred stock. NRT declared and paid in 1999 a $45.0 million cash dividend on its common stock held by Apollo. This dividend is not indicative of the dividends, if any, that may be paid by NRT in the future. NRT intends to continue to pay regularly scheduled quarterly dividends on its Series A senior preferred stock at the annual rate of 9.00% of its then face amount (or $14.5 million per year based on the current amount outstanding) and its Series B convertible preferred stock at the annual rate of 5.00% of its then face amount (or $1.2 million per year based on the current amount outstanding). 21 DILUTION At March 31, 1999, the net tangible book value of NRT, after giving effect to the intended 1.875-for-1 stock split, was approximately $(74.3) million, or $(2.95) per share. Net tangible book value is defined as the book value of all assets of NRT, less all liabilities and intangible assets. NRT's intangible assets consist primarily of goodwill, pending real estate contracts and real estate listing contracts. Without taking into account any changes in net tangible book value after March 31, 1999, other than to give effect to the offering, the application of the estimated net proceeds and the repurchase of 574,575 shares of common stock from Apollo, the pro forma net tangible book value of NRT's common stock as of March 31, 1999 would have been approximately $(46.9) million, or $(1.37) per share. The following table gives effect to the offering as if it had occurred on March 31, 1999 at an assumed initial public offering price of $16 per share (the mid-point of the estimated range of initial public offering price per share). The table illustrates the immediate increase in net tangible book value of $1.58 per share to NRT's existing stockholders and an immediate dilution of $17.37 per share to new investors: Public offering price per share............................ $16.00 Net tangible book value per share as of March 31, 1999..... ($2.95) Increase in net tangible book value per share attributable to the offering........................................... 1.58 ------ Pro forma net tangible book value per share as of March 31, 1999, after giving effect to the offering................. (1.37) ------ Immediate dilution per share to new investors.............. $17.37 ======
The calculations in the table above include 6,473,503 shares issuable upon conversion of the convertible preferred stock held by Cendant after the repurchase by NRT of 725.4 shares of convertible preferred stock from Cendant, but excludes 3,399,141 shares reserved for issuance as of March 31, 1999 under NRT's 1997 Equity Participation Plan. The following table presents as of March 31, 1999, on a pro forma basis after giving effect to the offering, the positions of existing common stockholders assuming the conversion of Cendant's convertible preferred stock, the repurchase of 574,575 shares of common stock from Apollo and the repurchase of 725.4 shares of convertible preferred stock from Cendant, and new investors with respect to the number of shares of common stock purchased from NRT, the total consideration paid and the average price paid per share, at an assumed initial public offering price of $16 per share (the mid-point of the estimated range of initial public offering price per share).
Shares Purchased Total Consideration Average --------------------- ------------------- Price per Number Percentage Amount Percentage Share ---------- ---------- -------- ---------- --------- (dollars in thousands, except per share amounts) New investors........... 14,062,500 41.3 % $225,000 90.8 % $16.00 Existing common stockholders........... 19,961,428 58.7 22,673 9.2 1.14 ---------- ----- -------- ----- Total................. 34,023,928 100.0 % $247,673 100.0 % ========== ===== ======== =====
22 CAPITALIZATION The following table sets forth NRT's cash and cash equivalents, short-term debt and capitalization as of December 31, 1998 on an actual basis and on a pro forma basis after giving effect to: .the offering and the application of the estimated net proceeds; and . the repurchase by NRT on April 6, 1999 of 574,575 shares of common stock from Apollo and the repurchase by NRT following the closing of the offering of 725.4 shares of convertible preferred stock from Cendant. You should read this table together with the consolidated financial statements and the related notes, "Unaudited Pro Forma Condensed Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of March 31, 1999 ----------------------- Actual Pro Forma ---------- ----------- (in thousands) Cash and cash equivalents.............................. $ 22,008 $ 49,391 ========== ========== Restricted cash(a)..................................... $ 93,561 $ 93,561 ========== ========== Short-term debt: Cash secured bank loans(a)........................... $ 93,561 $ 93,561 Mortgage warehousing loans(b)........................ 12,668 12,668 Other................................................ 10,528 10,528 ---------- ---------- Total short-term debt.............................. $ 116,757 $ 116,757 ========== ========== Long-term debt(c)...................................... $ 42,735 $ 42,735 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........ 164,763 164,763 5.00% Series B Cumulative Convertible Redeemable Preferred Stock, 24,000 shares issued and outstanding (actual); 23,275 shares outstanding (pro forma).............................................. 24,604 23,879 18.00% Series C Cumulative Junior Redeemable Preferred Stock, net, 68,510 shares issued and outstanding (redemption value of $88,185)........... 71,991 -- ---------- ---------- Total redeemable preferred stock................... 261,358 188,642 ---------- ---------- Stockholders' deficit: Common Stock, $0.01 par value, 50,000,000 shares authorized; 18,750,000 shares issued and outstanding (actual); 27,550,425 shares outstanding (pro forma)(d)...................................... 188 276 Additional paid-in capital........................... -- 100,012 Accumulated deficit.................................. (134,601) (134,601) ---------- ---------- Total stockholders' deficit........................ (134,413) (34,313) ---------- ---------- Total capitalization............................... $ 169,680 $ 197,063 ========== ==========
- --------------------- (a) 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. (b) Mortgage warehousing loans are collaterized by mortgage loans held for sale and are generally repaid within 60 days. (c) Long-term debt as of March 31, 1999 includes notes payable of $12.8 million and $30.0 million drawn under NRT's credit facility. (d) Actual and pro forma gives effect to the intended 1.875-for-1 stock split to be effected before the closing of the offering. 23 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated financial information of NRT presents the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 and March 31, 1998 and the pro forma condensed consolidated balance sheet as of March 31, 1999. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 and March 31, 1998 give effect to the following transactions as if they occurred on January 1, 1998: the offering at an assumed offering price per share of $16, the mid-point of the estimated range of the initial public offering price per share, the payment in 1999 of a $45 million cash dividend on NRT's common stock to Apollo, the application of the estimated net proceeds from the offering, the additional royalties payable to NRT's franchisors following the closing of the offering and the effect of the following acquisitions during 1998 of brokerages with annual gross commission income in excess of $5 million. .Buckhead Brokers of Georgia, Inc. .Joseph J. Murphy Realty, Inc. .Burnet Financial Group .Moore and Company .Carriage Properties, Ltd. .O'Conor, Piper & Flynn, Inc. .Pardoe Real Estate, Inc. .Coker Ewing Cook & Cook .Polley, Polley & Madsen, Inc. .1st American Realtors, L.L.C. .Gimelstob Realty, Inc. .Premier Van Schaak, Inc. (Denver .Graham Realty, Inc. operations) .Higgins & Heath, Inc. .Steve Schmidt & Co. .Hunneman Real Estate Corporation .TAM-BAY Realty, Inc. .Waterside Property Sales, Inc. The pro forma statements of operations do not give effect to the interest income that would have been earned on proceeds of the offering that are not used by NRT or the initial capitalization of NRT had such transactions occurred on January 1, 1998. The unaudited pro forma condensed consolidated balance sheet as of March 31, 1999 gives effect to the following transactions as if they occurred on March 31, 1999: .the receipt of the estimated net proceeds to NRT from the offering; .the redemption of all outstanding shares of NRT's Series C junior preferred stock; . the repurchase by NRT on April 6, 1999 of 574,575 shares of common stock from Apollo and the repurchase by NRT after the closing of the offering of 725.4 shares of convertible preferred stock from Cendant. 24 NRT's 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 acquisitions will differ materially from the preliminary allocations. NRT has also completed smaller transactions that did not have a material effect on NRT's financial condition or results of operations and are not reflected in the unaudited pro forma condensed consolidated statements of operations. The pro forma adjustments reflect NRT's determination of all adjustments necessary to present fairly NRT's pro forma financial position and results of operations. These adjustments are based on available information and assumptions NRT considers reasonable under the circumstances. The unaudited pro forma condensed consolidated financial information is provided for informational purposes only. This information is not necessarily indicative of the financial position or the results of operations of NRT had the transactions referred to above occurred on the dates specified. In addition, this information is not necessarily indicative of the financial condition or results of operations which may exist in the future. You should read the unaudited pro forma condensed consolidated financial information together with the historical consolidated financial statements of NRT, its predecessors and acquired companies and the related notes included elsewhere in this prospectus. 25 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 1998 (in thousands, except per share amounts)
Pro Forma Before Pro Forma Pro Forma Offering Offering Acquisition Related Related Historical Acquisitions Adjustments Adjustments Adjustments Pro Forma ---------- ------------ ----------- ----------- ----------- ---------- REVENUES: Real estate commissions.... $2,010,123 $293,875 $ 11,369 (a) $2,315,367 $2,315,367 Other revenues............. 110,879 36,023 146,902 146,902 ---------- -------- -------- ---------- -------- ---------- Total revenues............ 2,121,002 329,898 11,369 2,462,269 2,462,269 EXPENSES: Commissions and royalties.. 1,482,719 230,497 8,709 (a) 1,737,337 $ 24,000 (b) 1,761,337 15,412 (c) Selling, general and administrative............ 571,938 74,626 646,564 646,564 Amortization of goodwill... 3,403 867 (d) 4,270 4,270 Acquisition related costs.. 61,150 5,197 (d) 66,347 66,347 ---------- -------- -------- ---------- -------- ---------- Operating income (loss)... 1,792 24,775 (18,816) 7,751 (24,000) (16,249) Interest expense, net...... (1,819) 753 (1,066) (1,066) Provision (benefit) for income taxes.............. 2,302 9,729(e) (7,620)(e) 4,411 (9,720)(e) (5,309) ---------- -------- -------- ---------- -------- ---------- Net income (loss)......... $ 1,309 $ 14,293 $(11,196) $ 4,406 $(14,280) $ (9,874) ========== ======== ======== ========== ======== ========== Per share information: Loss per common share: basic and diluted......... $ (1.88) $ (0.89)(f) Weighted average shares outstanding: basic and diluted......... 18,750 28,416 (f)
See notes to unaudited pro forma condensed consolidated statements of operations. 26 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended March 31, 1998 (in thousands, except per share amounts)
Pro Forma Before Pro Forma Pro Forma Offering Offering Acquisition Related Related Historical Acquisitions Adjustments Adjustments Adjustments Pro Forma ---------- ------------ ----------- ----------- ----------- --------- REVENUES: Real estate commissions.... $330,241 $81,269 $ 11,369 (a) $422,879 $422,879 Other revenues............. 15,434 5,000 20,434 20,434 -------- ------- -------- -------- ------- -------- Total revenues............ 345,675 86,269 11,369 443,313 443,313 EXPENSES: Commissions and royalties.. 237,284 54,133 8,709 (a) 304,098 $ 6,000 (b) 310,098 3,972 (c) Selling, general and administrative............ 115,805 33,548 149,353 149,353 Amortization of goodwill... 1,083 358 (d) 1,441 1,441 24,162 (d) Acquisition related costs.. 34,266 3,302 (d) 61,730 61,730 -------- ------- -------- -------- ------- -------- Operating income (loss)... (42,763) (1,412) (29,134) (73,309) (6,000) (79,309) Interest expense, net...... (868) 227 (641) (641) Benefit for income taxes... (16,758) (664)(e) (11,799)(e) (29,221) (2,430) (e) (31,651) -------- ------- -------- -------- ------- -------- Net loss.................. $(25,137) $ (975) $(17,335) (43,447) $(3,570) (47,017) ======== ======= ======== ======== ======= ======== Per share information: Loss per common share: basic and diluted......... $ (1.82) $ (1.79)(f) Weighted average shares outstanding: basic and diluted......... 18,750 28,416 (f)
See notes to unaudited pro forma condensed consolidated statements of operations. 27 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended March 31, 1999 (in thousands, except per share amounts)
Pro Forma Before Pro Forma Pro Forma Offering Offering Acquisition Related Related Historical Adjustments Adjustments Adjustments Pro Forma ---------- ----------- ----------- ----------- --------- REVENUES: Real estate commissions.... $469,596 $ $469,596 $ $469,596 Other revenues............. 31,289 31,289 31,289 -------- ------ -------- ------- -------- Total revenues............ 500,885 500,885 500,885 EXPENSES: Commissions and royalties.. 345,380 345,380 $ 6,000 (b) 351,380 Selling, general and administrative............ 164,904 164,904 164,904 Amortization of goodwill... 1,610 1,610 1,610 Acquisition related costs.. 5,618 (4,742)(d) 876 876 -------- ------ -------- ------- -------- Operating loss............ (16,627) (4,742) (11,885) (6,000) (17,885) Interest expense, net...... 568 568 568 Provision (benefit) for income taxes.............. (6,772) 1,921 (e) (4,851) (2,430) (e) (7,281) -------- ------ -------- ------- -------- Net income (loss)......... $(10,423) $2,821 $ (7,602) $(3,570) $(11,172) ======== ====== ======== ======= ======== Per share information: Loss per common share: basic and diluted......... $ (1.05) $ (0.55)(f) Weighted average shares outstanding: basic and diluted......... 18,750 28,416 (f)
See notes to unaudited pro forma condensed consolidated statements of operations. 28 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (a) Reflects adjustments to recognize revenue and the related commission and royalty expense upon the closing of real estate transactions for acquired companies that recognized revenue on a different basis prior to being acquired. (b) Reflects adjustment to give effect to additional royalties payable to NRT's franchisors following the closing of the offering. These royalties are equal to: . approximately 1.1% of NRT's monthly gross commission income, subject to an annual maximum currently estimated at $22.1 million; plus .$156,250 per month. (c) Reflects adjustment to give effect to royalties payable to NRT's franchisors under the franchise agreements as if the acquired companies were subject to such agreements from January 1, 1998 through their dates of acquisition. Under the franchise agreements, royalties are payable by NRT based upon a percentage of NRT's gross commission income (6% for all of NRT's offices, other than NRT's CENTURY 21(R) offices in Northern California for which NRT currently pays 4.89%). All of NRT's acquired brokerages are franchised under one of the franchisors' franchised brand names and are required to pay the applicable royalties. (d) Reflects the additional amortization of intangible assets that would have been recognized had the acquisitions occurred on January 1, 1998. The amortization period and pro forma adjustments are summarized as follows (dollars in thousands):
Pro Forma Adjustment ---------------------------- Three Months Year Ended Ended March 31, Amortization December 31, --------------- Intangible assets Period 1998 1998 1999 - ----------------- ------------ ------------ ------- ------- Pending real estate contracts...... 3 months $2,829 $20,890 $(2,872) Real estate listing contracts...... 6 months 2,368 3,272 (1,870) ------ ------- ------- Intangible assets, excluding goodwill........................ $5,197 $24,162 $(4,742) ====== ======= ======= Excess of cost over fair value of net assets acquired............... 40 years $ 867 $ 358 $ -- ====== ======= =======
(e) 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. 29 (f) Pro forma loss per share gives effect to the 1998 acquisitions by NRT, additional royalties that will be payable to NRT's franchisors following the closing of the offering, the additional shares which will be outstanding as a result of the offering and the application of the net proceeds from the offering. The reconciliation of historical loss per share to pro forma loss per share is as follows:
Year Ended December 31, 1998 ------------------------------------ Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- (in thousands, except per share amounts) Net income (loss) ....................................... $ 1,309 $(11,183)(i) $ (9,874) Dividends on cumulative redeemable and cumulative convertible redeemable preferred stock.................. (29,910) 14,472(ii) (15,438) Accretion of Series C preferred stock discount and redemption premium...................................... (6,708) 6,708(ii) -- -------- -------- -------- Loss applicable to common shareholders................... $(35,309) $ 9,997 $(25,312) ======== ======== ======== Weighted average shares outstanding; basic and diluted ...................................... 18,750 9,666(iii) 28,416 Loss per common share: basic and diluted ...................................... $ (1.88) $ (0.89)
Three Months Ended March 31, Three Months Ended March 31, 1998 1999 ------------------------------------ ------------------------------------ Pro Forma Pro Forma Historical Adjustments Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- ---------- ----------- --------- Net loss ............... $(25,137) $(21,880)(i) $(47,017) $(10,423) $ (749)(i) $(11,172) Dividends on cumulative redeemable and cumulative convertible redeemable preferred stock.................. (7,255) 3,409(ii) (3,846) (7,627) 3,074(ii) (4,553) Accretion of Series C preferred stock discount and redemption premium................ (1,654) 1,654(iii) -- (1,654) 1,654(iii) -- -------- -------- -------- -------- -------- -------- Loss applicable to common shareholders.... $(34,046) $(16,817) $(50,863) $(19,704) $ 3,979 $(15,725) ======== ======== ======== ======== ======== ======== Weighted average shares outstanding; basic and diluted ..... 18,750 9,666(iii) 28,416 18,750 9,666(iii) 28,416 Loss per common share: basic and diluted ..... $ (1.82) $ (1.79) $ (1.05) $ (0.55)
(i) Represents the net effect of all pro forma adjustments included in the pro forma condensed consolidated statement of operations for the year ended December 31, 1998 and the three months ended March 31, 1998 and March 31, 1999. (ii) Reflects adjustment to give effect to the redemption of the Series C junior preferred stock as if the redemption took place on January 1, 1998. Accordingly, historical dividends declared and accretion of stock discount and the redemption premium on the Series C junior preferred stock during the respective periods have been eliminated. The pro forma adjustments exclude the one-time impact related to the redemption premium on the Series C junior preferred stock as if the redemption took place on January 1, 1998.
(in thousands) -------------- Redemption value of cumulative junior preferred stock.......... $88,185 Carrying value of cumulative junior preferred stock as of January 1, 1998............................................... 56,267 ------- $31,918 =======
30 (iii) Reflects adjustment to give effect to the additional shares that will be outstanding as a result of the offering and the additional shares that would be issued to fund the repurchase of common stock from Apollo, the intended repurchase of the convertible preferred stock from Cendant and the redemption of the junior preferred stock held by Apollo and the $45 million cash dividend paid to Apollo. 31 NRT INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET March 31, 1999 (in thousands)
Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- ASSETS: Cash and cash equivalents................... $ 22,008 $137,000 (a) $ 49,391 (88,185)(b) (21,432)(c) Restricted cash............................. 93,561 93,561 Commissions and accounts receivable, net.... 33,191 33,191 Mortgage loans held for sale................ 13,057 13,057 Other current assets........................ 39,531 39,531 -------- -------- -------- Total current assets.................... 201,348 27,383 228,731 Property and equipment, net................. 94,700 94,700 Goodwill and other intangibles, net......... 201,239 201,239 Other assets................................ 10,706 10,706 -------- -------- -------- Total assets............................ $507,993 $ 27,383 $535,376 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT: Accounts payable and accrued expenses....... $175,239 $175,239 Restricted cash bank loans.................. 93,561 93,561 Mortgage warehousing loan................... 12,668 12,668 Notes payable, current portion.............. 10,528 10,528 -------- -------- Total current liabilities............... 291,996 291,996 Deferred revenues........................... 26,705 26,705 Notes payable .............................. 12,735 12,735 Borrowings under credit facility............ 30,000 30,000 Other liabilities .......................... 19,612 19,612 Redeemable preferred stock, net: 9.00% Series A Cumulative Senior Redeem- able Preferred........................... 164,763 164,763 5.00% Series B Cumulative Convertible Redeemable Preferred..................... 24,604 (725)(c) 23,879 18.00% Series C Cumulative Junior Redeemable Preferred..................... 71,991 (71,991)(b) -- -------- -------- -------- Total redeemable preferred stock, net... 261,358 (72,716) 188,642 -------- -------- -------- Stockholders' deficit Common stock.............................. 188 88 (a) 276 (6)(c) Additional paid-in capital................ -- 136,906 (a) 100,012 (16,194)(b) (20,701)(c) Accumulated deficit....................... (134,601) (134,601) -------- -------- -------- Total stockholders' deficit ............ (134,413) 100,100 (34,313) -------- -------- -------- Total liabilities and stockholders' deficit ........................................... $507,993 $ 27,383 $535,376 ======== ======== ========
See notes to unaudited pro forma condensed consolidated balance sheet. 32 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (a) Reflects the receipt of the estimated net proceeds to NRT from the offering at an assumed initial public offering price of $16 per share, the mid- point of the estimated range of the initial public offering price per share, less estimated fees and expenses of $13.0 million to be paid by NRT, and the issuance of common stock. (b) Reflects the redemption of all outstanding shares of NRT's Series C junior preferred stock, including the redemption premium, upon the closing of the offering. (c) Reflects the repurchase by NRT on April 6, 1999 of 574,575 shares of common stock from Apollo and the repurchase by NRT following the closing of the offering of 725.4 shares of convertible preferred stock from Cendant for a total of $21.4 million. 33 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of December 31, 1994 and for the year ended December 31, 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, 1997 and 1998 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, the four-month period ended December 31, 1997 and the year ended December 31, 1998 are derived from the audited consolidated financial statements of NRT and its predecessors, Coldwell Banker Residential Brokerage Corporation and National Realty Trust. The selected consolidated financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are derived from the unaudited consolidated financial statements of NRT. The operating results of NRT and its predecessors include the results of operations of companies that were acquired in 1996, 1997 and 1998 and accounted for by the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included in the consolidated operating results of NRT only from their 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 and from the records of Coldwell Banker Corporation. These financial statements are not necessarily indicative of the conditions that would have existed if Coldwell Banker Residential Brokerage Corporation had operated as an independent entity. You should read the financial data presented below together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of NRT and its predecessors and the related notes included in this prospectus.
Predecessors ---------------------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated ---------------------------------- ----------------------- ------------------------------------------------ Three Three Five Seven Eight Four Months Months Months Months Months Months Year Ended Ended Year Ended Year Ended Ended Ended Ended Ended Ended March 31, March 31, December 31, December 31, May 31, December 31, August 31, December 31, December 1998 1999 1994 1995 1996 1996 1997 1997 31, 1998 (unaudited) (unaudited) ------------ ------------ -------- ------------ ---------- ------------ ---------- ----------- ----------- (in thousands, except per share amounts) Statement of Operations Data: Real estate commissions..... $526,229 $540,302 $228,005 $400,076 $570,150 $446,134 $2,010,123 $330,241 $469,596 Other revenues... 17,620 16,042 7,810 12,101 14,636 17,380 110,879 15,434 31,289 -------- -------- -------- -------- -------- -------- ---------- -------- -------- Total revenues.. 543,849 556,344 235,815 412,177 584,786 463,514 2,121,002 345,675 500,885 Commissions and royalties....... 322,694 333,869 141,404 276,364 393,235 330,169 1,482,719 237,284 345,380 Selling, general and administrative.. 198,907 212,013 93,532 119,862 168,863 124,785 571,938 115,805 164,904 Amortization of goodwill........ -- 532 482 104 1,162 637 3,403 1,083 1,610 Acquisition related costs... -- 4,240 26 22,188 10,735 78,462 61,150 34,266 5,618 -------- -------- -------- -------- -------- -------- ---------- -------- -------- Operating income (loss)......... 22,248 5,690 371 (6,341) 10,791 (70,539) 1,792 (42,763) (16,627) Interest expense, net............. (686) (137) 11 44 117 (2,843) (1,819) (868) 568 Provision (benefit) for income taxes.... 4,796 2,459 156 -- 4,432 (25,453) 2,302 (16,758) (6,772) -------- -------- -------- -------- -------- -------- ---------- -------- -------- Net income (loss)......... $ 18,138 $ 3,368 $ 204 $ (6,385) $ 6,242 $(42,243) $ 1,309 $(25,137) $(10,423) ======== ======== ======== ======== ======== ======== ========== ======== ======== Net loss applicable to common shareholders......................................................... $(54,232) $ (35,309) $(34,046) $(19,704) ======== ========== ======== ======== Loss per common share: basic and diluted........................................................... $ (2.89) $ (1.88) $ (1.82) $ (1.05)
34
Predecessors NRT Incorporated ------------------------ ------------------------------- As of As of March 31, As of December 31, December 31, 1999 ------------------------ ------------------ ----------- 1994 1995 1996 1997 1998 (unaudited) -------- ------- ------- -------- -------- ----------- (in thousands) Balance Sheet Data: Cash and cash equivalents............ $ 1,202 $ 89 $11,087 $165,360 $ 52,701 $ 22,008 Total assets............ 119,999 65,519 71,296 416,671 530,712 507,993 Long-term debt.......... 843 785 1,152 4,844 16,791 42,735 Redeemable preferred stock.................. -- -- -- 237,858 252,047 261,358 Stockholders' equity (deficit).............. 21,278 24,646 (1,385) (34,232) (69,541) (134,413)
35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read together with the consolidated financial statements and related notes appearing elsewhere in this prospectus. General In May 1996, Cendant 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 licensed the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names owned by it to National Realty Trust. NRT was formed in August 1997. Shortly after its formation, NRT acquired the real estate brokerage operations owned by National Realty Trust. NRT earns real estate commissions for providing brokerage services to customers in the purchase and sale of new and existing homes. Real estate commissions typically range from approximately 5% to 7% of the sales price. When NRT acts as a broker on one side of a transaction (either the buying side or the selling side) and a third-party broker acts as a broker on the other side of the transaction, NRT generally must share with the other broker 50% of the sales commission. When NRT is the sole broker, NRT generally receives 100% of the sales commission. In addition to real estate brokerage services, NRT generates revenues through: . mortgage marketing services provided under a marketing arrangement with Cendant Mortgage Corporation; . title services for which NRT receives a fee from title insurance underwriters; . escrow and other closing services for which NRT typically receives a fee from home buyers; . relocation services through an arrangement with Cendant Mobility Services Corporation, for which NRT receives fees from Cendant Mobility, and NRT's own relocation company, for which NRT receives fees from customers; and . a variety of other brokerage-related services through marketing and purchasing programs established by Cendant with leading service providers, including home warranties, home security systems, temporary housing, temporary storage, moving truck rentals and telephone services, for which NRT 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. Revenues derived from NRT's brokerage-related services are recorded as revenue at the time that the services are performed. 36 Commissions and royalties payable by NRT include commissions paid to NRT's sales associates and royalties paid to its 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 by region and by office, the average commission rate paid to NRT's sales associates is affected by NRT's acquisitions. NRT's royalty expenses are 6% of gross commission income (currently 4.89% for NRT's CENTURY 21(R) offices in Northern California), plus $166,667 per month. In February 1999, NRT entered into new franchise agreements with its franchisors, which require NRT to pay additional royalties of: .$156,250 per month following the closing of the offering; .until the closing of the offering, a monthly royalty which has averaged $273,900 per month for the first three months of 1999; .upon the closing of the offering, approximately 1.1% of NRT's monthly gross commission income, subject to an annual maximum currently estimated at $22.1 million; and .0.15% of NRT's total revenue per quarter for each quarter (up to a total of 20 quarters) in which NRT's EBITDA for the prior twelve months exceeds $225 million. Selling, general and administrative expenses consist primarily of employee compensation, advertising and marketing, occupancy costs, general office expenses and depreciation of property 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 brokerages. Office conversion costs include primarily signage change, name change advertising and other transitional costs. NRT 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 NRT estimates that such contracts will result in closed real estate transactions. NRT believes that pending real estate sales contracts are an indicator of revenues to be recognized in the near future. Pending real estate sales contracts represent transactions in which a binding contract of sale has been signed, but the home sale has not yet closed. NRT considers real estate contracts to be binding only after any rescission period expires, a good faith deposit is placed in escrow and the only remaining significant conditions are financing and property inspection. Historically, an average of approximately 13% of NRT's pending real estate sales contracts have failed to close. NRT'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 NRT's other expenses, such as rent and personnel, are fixed. As a result, the relationship between NRT's expenses and revenues is subject to significant fluctuation on a quarter-to-quarter basis. 37 Results of Operations The following table presents statement of operations and other data for the periods indicated.
Predecessors --------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated --------------------- ----------------------- ------------------------------------------------- Seven Eight Four Three Three Five Months Months Months Months Year Months Months Ended Ended Ended Ended Ended Ended March Ended March May 31, December 31, August 31, December 31, December 31, 31, 1998 31, 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) --------------------- ------------ ---------- ------------ ------------ ----------- ----------- (in thousands, except per share amounts) Real estate commissions..... $228,005 $400,076 $570,150 $ 446,134 $2,010,123 $330,241 $469,596 Other revenues.............. 7,810 12,101 14,636 17,380 110,879 15,434 31,289 -------- -------- -------- --------- ---------- -------- -------- Total revenues........... 235,815 412,177 584,786 463,514 2,121,002 345,675 500,885 Commissions and royalties... 141,404 276,364 393,235 330,169 1,482,719 237,284 345,380 Selling, general and administrative expenses.... 93,532 119,862 168,863 124,785 571,938 115,805 164,904 Amortization of goodwill.... 482 104 1,162 637 3,403 1,083 1,610 Acquisition related costs... 26 22,188 10,735 78,462 61,150 34,266 5,618 -------- -------- -------- --------- ---------- -------- -------- Operating income (loss).. 371 (6,341) 10,791 (70,539) 1,792 (42,763) (16,627) Interest expense, net....... 11 44 117 (2,843) (1,819) (868) 568 Provision (benefit) for income taxes............... 156 -- 4,432 (25,453) 2,302 (16,758) (6,772) -------- -------- -------- --------- ---------- -------- -------- Net income (loss)........ $ 204 $ (6,385) $ 6,242 $ (42,243) $ 1,309 $(25,137) $(10,423) ======== ======== ======== ========= ========== ======== ======== Loss applicable to common shareholders............... $ (54,232) $ (35,309) $(34,046) $(19,704) ========= ========== ======== ======== Loss per common share: basic and diluted.......... $ (2.89) $ (1.88) $ (1.82) $ (1.05) Weighted average shares outstanding: basic and diluted.......... 18,750 18,750 18,750 18,750 EBITDA(a)................... $ 4,691 $ 16,341 $ 24,293 $ 2,992 $ 68,257 $(17,646) $ (2,671) Net cash provided by (used in) operating activities... 4,855 29,810 20,625 9,527 31,977 (36,872) (7,264) Net cash used in investing activities................. (18,420) (14,770) (44,795) (107,475) (186,651) (54,365) (9,506) Net cash provided by (used in) financing activities... 14,577 (3,953) 30,759 263,308 42,015 (15,212) (13,923)
(footnote on following page) 38 (continued from previous page) (a) EBITDA is defined as operating income (loss) plus depreciation and amortization of goodwill and other intangibles. EBITDA is calculated as follows:
Coldwell Banker Residential National Brokerage Realty Trust NRT Incorporated ----------- ------------------------- --------------------------------------------------- Three Three Five Seven Eight Four Months Months Months Months Months Months Year Ended Ended Ended Ended Ended Ended Ended March 31, March 30, May 3, December 31, August 31, December 31, December 31, 1998 1998 1996 1996 1997 1997 1998 (unaudited) (unaudited) ----------- ------------- ----------- ------------ ------------ ----------- ----------- (in thousands) Operating income (loss).... $ 371 $(6,341) $10,791 $(70,539) $ 1,792 $(42,763) $(16,627) Depreciation and amortization.............. 3,812 1,129 3,026 2,998 18,909 3,733 7,036 Amortization of goodwill... 482 104 1,162 637 3,403 1,083 1,610 Amortization of pending real estate contracts and real estate listing contracts................. 26 21,449 9,314 69,896 44,153 20,301 5,310 ------ ------- ------- -------- ------- -------- ----------- EBITDA..................... 4,691 16,341 24,293 2,992 68,257 (17,646) (2,671) Office conversion costs.... -- 739 1,421 8,566 16,997 13,965 308 ------ ------- ------- -------- ------- -------- ----------- EBITDA before office conversion costs.......... $4,691 $17,080 $25,714 $11,558 $85,254 $ (3,681) $ (2,363) ====== ======= ======= ======== ======= ======== ============
Management believes that EBITDA is a widely accepted financial indicator used by investors and analysts to analyze and compare companies. Management uses EBITDA as a supplementary tool to measure NRT's ability to generate operating cash flow. Management also uses EBITDA to establish performance goals and related bonuses for its employees. 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. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. NRT understands that, while EBITDA is frequently used by securities analysts in the evaluation of companies, EBITDA is not necessarily comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation. 39 Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Revenue. Total revenues for the three months ended March 31, 1999 increased 44.9% to $500.9 million from $345.7 million for the three months ended March 31, 1998. Total revenues include revenues from real estate commissions generated by existing operations and by operations acquired during 1999 and 1998 from their respective dates of acquisition. Real estate commissions increased 42.2% to $469.6 million for the three months ended March 31, 1999 from $330.2 million for the three months ended March 31, 1998. Other revenues increased to $31.3 million for the three months ended March 31, 1999 from $15.4 million for the three months ended March 31, 1998. This increase of $15.9 million consists of $5.5 million of revenues from title, escrow and other closing services, $4.5 million of revenues from mortgage marketing services and $5.9 million of revenues from relocation and other brokerage-related services. In addition to the revenues generated by acquired operations in 1999 and 1998, NRT's revenues benefitted from a strong residential real estate market throughout the United States as well as income from its mortgage marketing agreement with Cendant Mortgage Corporation and from NRT's focus on deriving other brokerage-related revenues from its real estate sales transactions. Commissions and Royalties. Commissions and royalties as a percentage of total revenues increased to 69.0% for the three months ended March 31, 1999 from 68.6% for the three months ended March 31, 1998. This increase was due primarily to acquired operations that pay a higher percentage of the real estate commission to sales associates, partially offset by increases in other revenues from operations that pay a lower commission percentage to sales associates. Selling, General and Administrative. Selling, general and administrative expenses were $164.9 million for the three months ended March 31, 1999 as compared to $115.8 million for the three months ended March 31, 1998. These expenses include the expenses of NRT's existing operations and of acquired operations from their respective dates of acquisition. As a percentage of total revenues, selling, general and administrative expenses decreased to 32.9% for the three months ended March 31, 1999 from 33.5% for the three months ended March 31, 1998, reflecting savings realized as the result of combining certain branch locations and eliminating duplicative administrative functions to the extent possible. Amortization of Goodwill. Amortization of goodwill for the three months ended March 31, 1999 was $1.6 million as compared to $1.1 million for the three months ended March 31, 1998. Goodwill recognized in connection with acquisitions is being amortized over 40 years. Acquisition Related Costs. Acquisition related costs were $5.6 million for the three months ended March 31, 1999 as compared to $34.3 million for the three months ended March 31, 1998. Such amounts reflect the volume and timing of acquisitions during the respective periods. Pending Real Estate Sales Contracts. At March 31, 1999, NRT had pending real estate sales contracts representing approximately 62,577 sides, reflecting an increase of 20.7% from the 51,844 sides represented by NRT's pending real estate contracts at March 31, 1998. NRT's pending real estate sales contracts at March 31, 1999 represented approximately $448.4 million of real estate commissions, reflecting an increase of 25.3% from the $357.8 million of real estate commissions represented by NRT's pending real estate sales contracts at March 31, 1998. These increases reflect the effects of NRT's acquisitions, the continued strength of the residential real estate market throughout the United States and an increase in NRT's average home sales price. 40 Year Ended December 31, 1998 Revenues. Total revenues were $2,121.0 million for the year ended December 31, 1998. Total revenues for the year ended December 31, 1998 include real estate commissions of $2,010.1 million generated by NRT's existing operations and by operations acquired during 1998 from their respective dates of acquisition. Other revenues of $110.9 million include $77.7 million of revenues from title, escrow and other closing services, $11.2 million of revenues from mortgage marketing services and $22.0 million of revenues from relocation and other brokerage-related services. In addition to the revenues generated by operations acquired in 1998, NRT's revenues benefitted from the continued strength of the residential real estate market throughout the United States, from its mortgage marketing agreement with Cendant Mortgage Corporation and from its focus on deriving increasing brokerage-related revenues from its real estate sales transactions. Commissions and Royalties. Commissions and royalties were $1,482.7 million, or 69.9% of total revenues, for the year ended December 31, 1998. Selling, General and Administrative. Selling, general and administrative expenses were $571.9 million, or 27.0% of total revenues, for the year ended December 31, 1998. These expenses include the expenses of NRT's existing operations and of acquired operations from their respective dates of acquisition. Selling, general and administrative expenses also reflect savings realized as the result of combining branch locations and eliminating duplicative administrative functions to the extent possible. Amortization of Goodwill. Amortization of goodwill was $3.4 million for the year ended December 31, 1998. Goodwill recognized in connection with NRT's acquisitions is being amortized over 40 years. Acquisition Related Costs. Acquisition related costs were $61.2 million for the year ended December 31, 1998, including $17.0 million of office conversion costs and $44.2 million of amortization of pending real estate sales contracts and real estate listing contracts of acquired brokerages. Amortization included $3.5 million of amortization of real estate listing contracts capitalized in connection with NRT's acquisition of the assets of National Realty Trust. Acquisition related costs are fully recognized within six months of the respective acquisitions. At December 31, 1998, NRT had $5.7 million of unamortized pending real estate sales contracts and real estate listing contracts of acquired brokerages, which will be fully amortized by May 31, 1999. Income Taxes. NRT's effective income tax rate was 63.7% for the year ended December 31, 1998, reflecting the effect of non-deductible expenses. Net Income. Net income was $1.3 million for the year ended December 31, 1998, reflecting NRT's strong operations during the period, offset by acquisition related costs recognized in connection with NRT's acquisitions in 1998. Pending Real Estate Sales Contracts. At December 31, 1998, NRT had pending real estate sales contracts representing approximately 52,300 sides, reflecting an increase of 94.4% from the 26,900 sides represented by NRT's pending real estate contracts at December 31, 1997. NRT's pending real estate sales contracts at December 31, 1998 represented approximately $349.9 million of real estate commissions, reflecting an increase of 97.2% from the $177.4 million of real estate 41 commissions represented by NRT's pending real estate sales contracts at December 31, 1997. These increases reflect the effects of NRT's acquisitions, the continued strength of the residential real estate market throughout the United States and an increase in NRT's average home sales price. Four Months Ended December 31, 1997 Revenues. Total revenues were $463.5 million for the four months ended December 31, 1997. Total revenues include real estate commissions of $446.1 million generated by existing operations and by operations acquired during the period from their respective dates of acquisition. Other revenues of $17.4 million include $14.0 million of revenues from title, escrow and other closing services, $0.7 million of revenues from marketing related fees and $2.7 million of revenues from relocation and other brokerage-related services. Commissions and Royalties. Commissions and royalties were $330.2 million, or 71.2% of total revenues, for the four months ended December 31, 1997. Generally, real estate commissions are higher at the end of the year as the percentage of NRT's real estate commissions shared with sales associates increases based on closing volume on a calender year basis. Selling, General and Administrative. Selling, general and administrative expenses were $124.8 million, or 26.9% of total revenues, for the four months ended December 31, 1997. These expenses include the expenses of acquired operations from their respective dates of acquisition. Selling, general and administrative expenses also reflect savings realized as the result of combining branch locations and eliminating duplicative administrative functions to the extent possible. Acquisition Related Costs. Acquisition related costs were $78.5 million for the four months ended December 31, 1997, including $8.6 million of office conversion costs and $69.9 million of amortization of pending real estate sales contracts and real estate listing contracts of acquired brokerages. Amortization included $52.3 million of amortization of real estate listing contracts capitalized in connection with NRT's acquisition of the assets of National Realty Trust. Income Taxes. NRT's effective income tax benefit was 37.6% for the four months ended December 31, 1997, reflecting the effect of non-deductible expenses and limitations on the carryforward of losses for state tax purposes. Net Loss. NRT had a net loss of $42.2 million for the four months ended December 31, 1997, resulting primarily from acquisition related costs of $78.5 million, partially offset by earnings from total revenues less commissions, royalties and selling, general and administrative expenses. Eight Months Ended August 31, 1997 Revenues. Total revenues for the eight months ended August 31, 1997 were $584.8 million. Total revenues include real estate commissions of $570.2 million generated by existing operations and by operations acquired during the period from their respective dates of acquisition. Other revenues of $14.6 million include $12.7 million of title, escrow and other closing services and $1.9 million of relocation and other brokerage-related services. Commissions and Royalties. Commissions and royalties were $393.2 million, or 67.2% of total revenues, for the eight months ended August 31, 1997. 42 Selling, General and Administrative. Selling, general and administrative expenses were $168.9 million, or 28.9% of total revenues, for the eight months ended August 31, 1997. Acquisition Related Costs. Acquisition related costs were $10.7 million for the eight months ended August 31, 1997, including $1.4 million of office conversion costs and $9.3 million of amortization of pending real estate sales contracts and real estate listing contracts of acquired brokerages. Income Taxes. NRT's effective income tax rate was 41.5% for the eight months ended August 31, 1997, reflecting the effect of non-deductible expenses. Net Income. Net income of $6.2 million for the eight months ended August 31, 1997 resulted primarily from total revenues less commissions, royalties and selling, general and administrative expenses, partially offset by acquisition related costs of $10.7 million. Seven Months Ended December 31, 1996 Revenues. Total revenues were $412.2 million for the seven months ended December 31, 1996, resulting primarily from real estate commissions generated by existing operations. Other revenues of $12.1 million for the seven months ended December 31, 1996 include $10.6 million of revenues from title, escrow and other closing services and $1.5 million of revenues from relocation and other brokerage-related services. Commissions and Royalties. Commissions and royalties totaled $276.4 million, or 67.0% of total revenues, for the seven months ended December 31, 1996. Selling, General and Administrative. Selling, general and administrative expenses were $119.9 million, or 29.1% of total revenues, for the seven months ended December 31, 1996. Acquisition Related Costs. Acquisition related costs were $22.2 million for the seven months ended December 31, 1996, including $0.7 million of office conversion costs and $21.5 million of amortization of pending real estate sales contracts and real estate listing contracts of acquired brokerages. Such amortization includes $18.2 million of amortization of real estate listing contracts capitalized in connection with the contributions of Coldwell Banker Corporation's residential real estate brokerage operations to National Realty Trust. Income Taxes. National Realty Trust recorded a valuation reserve for its income tax benefit associated with losses experienced during this period. Accordingly, no tax benefit was realized. Net Loss. A net loss of $6.4 million for the seven months ended December 31, 1996 resulted primarily from acquisition related costs of $22.2 million partially offset by earnings from total revenues less commissions, royalties and selling, general and administrative expenses. Five Months Ended May 31, 1996 Revenues. Total revenues for the five months ended May 31, 1996 were $235.8 million. Other revenues of $7.8 million for the five months ended May 31, 1996 include $5.8 million of revenues from title, escrow and other closing services and $2.0 million of revenues from relocation and other brokerage-related services. 43 Commissions and Royalties. Commissions and royalties were $141.4 million, or 60.0% of total revenues, for the five months ended May 31, 1996. Coldwell Banker Residential Corporation had no royalty expense for the five months ended May 31, 1996. Selling, General and Administrative. Selling, general and administrative expenses were $93.5 million, or 39.7% of total revenues, for the five months ended May 31, 1996. Income Taxes. NRT's effective income tax rate was 43.3% for the five months ended May 31, 1996 reflecting the effect of non-deductible expenses. Net Income. Net income was $204,000 for the five months ended May 31, 1996, reflecting the lower real estate closings typically experienced during this period of the year. Liquidity and Capital Resources NRT's operating cash requirements consist principally of working capital requirements, capital expenditures, acquisitions and dividends payable on its preferred stock. NRT currently believes that cash flows from operating activities will be adequate to meet NRT's working capital, capital expenditure and dividend requirements. Net cash provided by operating activities was $4.9 million for the five months ended May 31, 1996, $29.8 million for the seven months ended December 31, 1996, $20.6 million for the eight months ended August 31, 1997 and $9.5 million for the four months ended December 31, 1997. In 1998, net cash provided by operating activities was $32.0 million. The increase in cash flows provided by operating activities during the year ended December 31, 1998 compared to the four months ended December 31, 1997 and the eight months ended August 31, 1997 is due primarily to cash flows generated by NRT's acquisitions, offset by the funding of mortgage loans held for sale and cash used to fund liabilities in connection with NRT's acquisitions. The decrease in net cash provided by operating activities for the eight months ended August 31, 1997 and the four months ended December 31, 1997 as compared to the five months ended May 31, 1996 and the seven months ended December 31, 1996 is due to the payment of royalties for only seven months during the period ended December 31, 1996 as compared to a full year of royalty payments in 1997. Net cash used in operating activities for the three months ended March 31, 1999 was $7.3 million as compared to $36.9 million for the three months ended March 31, 1998. During the three months ended March 31, 1999, NRT received $30 million from Cendant in connection with the acquisition services agreement. Net cash used in investing activities was $18.4 million for the five months ended May 31, 1996, $14.8 million for the seven months ended December 31, 1996, $44.8 million for the eight months ended August 31, 1997 and $107.5 million for the four months ended December 31, 1997. Net cash used in investing activities was $186.7 million for the year ended December 31, 1998. Cash paid for acquisitions and the acquisition of National Realty Trust's assets was $0.2 million for the five months ended May 31, 1996 and $13.5 million for the seven months ended December 31, 1996. Cash paid for acquisitions was $25.2 million for the eight months ended August 31, 1997 and $86.3 million for the four months ended December 31, 1997. Cash paid in connection with NRT's acquisitions was $97.1 million for the year ended December 31, 1998. Additional net investments in restricted cash were $14.9 million for the five months ended May 31, 1996 as compared to a decrease in 44 investments in restricted cash of $3.8 million for the seven months ended December 31, 1996. Investments in restricted cash were $14.4 million for the eight months ended August 31, 1997 and $14.6 million for the four months ended December 31, 1997. Additional net restricted cash investments were $53.6 million for the year ended December 31, 1998. This cash can only be used to repay loans entered into to fund the restricted cash. Capital expenditures were $3.4 million for the five months ended May 31, 1996 and $5.0 million for the seven months ended December 31, 1996. Capital expenditures were $5.2 million for the eight months ended August 31, 1997 and $6.7 million for the four months ended December 31, 1997. Capital expenditures were $36.2 million for the year ended December 31, 1998. This increase is due to investments to improve operations, new information technology systems and the replacement of personal computers. Net cash used in investing activities was $9.5 million for the three months ended March 31, 1999 and $54.4 million for the three months ended March 31, 1998. Payments made for NRT's acquisitions for the three months ended March 31, 1999 were $2.2 million as compared to $56.1 million for the three months ended March 31, 1998. Decrease in investments in restricted bank loans was $0.3 million for the three months ended March 31, 1999 and $7.4 million for the three months ended March 31, 1998. Capital expenditures were $7.7 million for the three months ended March 31, 1999 and $6.1 million for the three months ended March 31, 1998. The increase is due to investments to improve operations, new information technology systems and the replacement of personal computers. Net cash inflows from financing activities were $14.6 million for the five months ended May 31, 1996 as compared to net cash outflows of $4.0 million for the seven months ended December 31, 1996. Net cash inflows from financing activities were $30.8 million for the eight months ended August 31, 1997 and $263.3 million for the four months ended December 31, 1997. Net cash inflows from financing activities were $42.0 million for the year ended December 31, 1998. Cash from financing activities for the periods ended May 31, 1996 and December 31, 1996 were due primarily to changes in restricted cash bank loans. For the eight months ended August 31, 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 the four month period ended December 31, 1997, NRT was funded with $255.6 million in capital contributions from its stockholders, which were used to fund NRT's acquisitions in this period. Also during this period, NRT had net cash inflows of $14.6 million from restricted cash bank loans from financial institutions. During 1998, net cash inflows from restricted cash bank loans were $53.6 million. These loans are secured by and payable from investments of restricted cash described above. Additionally, during the year ended December 31, 1998, NRT paid $22.1 million in dividends on its preferred stock and received $17.9 million under its mortgage warehousing loan to fund mortgage loans held for sale. Net cash used in financing activities for the three months ended March 31, 1999 were $13.9 million as compared to $15.2 million for the three months ended March 31, 1998. Net decrease in secured bank loans were $0.3 million for the three months ended March 31, 1999 and $7.4 million for the three months ended March 31, 1998. Dividends paid on common stock during the three months ended March 31, 1999 were $30 million and dividends paid on preferred stock during the three months ended March 31, 1998 were $7.2 million. 45 NRT had restricted cash totaling $40.3 million at December 31, 1997, $93.9 million at December 31, 1998 and $93.6 million at March 31, 1999, which can be used only to repay loans entered into to fund investments by NRT. These loans are included with the current portion of notes payable. NRT believes that it will have sufficient capital resources over both the long and short term to facilitate its acquisition strategy. These resources include cash generated from operations, proceeds from the offering, NRT's bank credit facility, future public offering or private placements of equity or debt securities and Cendant's participation in acquisitions under the acquisition cooperation agreement. As a result of an amendment to the calculation of the purchase price payable by Cendant under 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 in the past. This may adversely affect NRT's ability to find acquisition candidates on terms acceptable to NRT and to finance and complete such transactions. NRT is party to a $100 million bank credit facility. Borrowings may be used for NRT's general working capital needs in the ordinary course of business and permitted acquisitions. NRT is seeking to expand the available borrowing capacity under this facility. Upon its formation, NRT issued senior preferred stock and convertible preferred stock to Cendant and junior preferred stock to Apollo. Each class of preferred stock is mandatorily redeemable. NRT intends to use approximately $88.2 million of the net proceeds of the offering to redeem all outstanding shares of the junior preferred stock held by Apollo and $10.7 million to repurchase 725.4 shares of convertible preferred stock from Cendant. In addition, on April 6, 1999, NRT repurchased 574,575 shares of common stock from Apollo for $10.7 million. In February 1999, NRT received a $30.0 million advance in connection with entering into an acquisition services agreement with Cendant. Under the terms of this agreement, NRT will 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 in which Cendant participates. NRT will earn fees under the agreement based on the size of the brokerage acquisitions. NRT declared a $45 million cash dividend on its common stock to Apollo, of which $30 million was paid during the first quarter of 1999 and $15 million was paid during the second quarter of 1999. Market Risk In connection with its mortgage banking operations, NRT grants mortgage loans and holds the loans until sale to third parties. These loans are funded through a mortgage warehousing loan, which represents borrowings under a $25 million line of credit with a commercial bank. Borrowings under the line of credit bear interest at the prime rate and are collateralized by mortgage loans held for sale. The fair values of mortgage loans held for sale and the mortgage warehousing loan fluctuate with changes in interest rates. However, mortgage loans are only granted after NRT has a binding commitment to sell the loan to a third party on a servicing released basis. Mortgage loans held for sale are generally sold within 60 days and proceeds from the sale are then used to repay the related mortgage warehousing loans. Based on this relatively short time frame, a near-term change in interest rates would not materially affect NRT's consolidated financial position, results of operations or cash flows. 46 NRT enters into restricted cash bank loans which are invested in cash equivalents and cannot be used other than to repay the related loans. Both the loans and the related investments have fixed rates of interest and mature monthly. Based on the short time frame of these loans and investments, near- term changes in interest rates would not materially affect NRT's consolidated financial position, results of operations or cash flows. NRT is party to a $100 million credit facility. At the option of NRT, 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 the federal funds rate plus 0.5% and the prime lending rate. Interest accrues on Eurodollar loans at a rate equal to 1.75% plus the British Bankers' association interest settlement rate (or if not available, by reference to the London interbank market rate). Changes in interest rates could have a material effect on NRT's consolidated financial position, results of operations and cash flows. Year 2000 Compliance Many existing computer systems and software products are coded to accept only two digit entries in the date code field and cannot properly recognize dates in the year 2000 and beyond. Consequently, these systems and software products need to be either upgraded or replaced to function properly from and after January 1, 2000. NRT has established a year 2000 program to evaluate, confirm compliance and identify any necessary changes to its information technology and other systems. In 1997, NRT evaluated the information technology systems acquired from National Realty Trust for the ability to meet the future needs of NRT. NRT determined that the existing systems did not contain the features and capacity necessary to implement its business plan. Accordingly, during 1998 NRT replaced all of its significant information technology systems. The hardware and software related to the new systems are year 2000 compliant. NRT is in the process of assessing and inventorying the year 2000 compliance of its non-critical information technology systems and other systems. NRT has identified certain of these systems which are not year 2000 compliant and plans to correct these systems before September 30, 1999. NRT believes the total costs associated with correcting these systems will be less than $5 million, consisting mostly of computer hardware and system software. NRT is in the process of contacting third party vendors and service providers on whom it relies, including Cendant and multiple listing service providers, to confirm that their systems will be year 2000 compliant in a timely manner. NRT expects to have this assessment complete and a contingency plan in place by the end of the third quarter of 1999. However, NRT cannot assure that the systems of third parties upon which it relies will be year 2000 compliant in a timely manner or that third parties' contingency plans will mitigate the effects of non-compliance. Based upon the progress of its comprehensive plan, NRT expects that it will not experience a disruption of its operations as a result of year 2000 issues. In a reasonable worst case scenario, the failure by NRT or a third party vendor or service provider to be year 2000 compliant on a timely basis could negatively impact NRT's ability to market homes and offer brokerage-related services and require NRT to devote more resources and capital to resolve year 2000 problems. 47 In connection with each of NRT's acquisitions, NRT evaluates the systems of the acquired company to determine whether its systems are year 2000 compliant. If an acquired company's systems are not year 2000 compliant, NRT will prepare a plan to bring the systems into compliance. While NRT 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 NRT's financial condition or results of operations. Impact of New Accounting Pronouncements NRT adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, on January 1, 1998. SFAS 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. NRT does not have any comprehensive income components requiring separate disclosure. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosure about products and services, geographic areas and major customers. NRT conducts its business activity in a single operating segment. Brokerage operations comprised approximately 97%, 97% and 95% of total revenues during 1996, 1997 and 1998, respectively. Operations related to ancillary real estate services amounted to 3%, 3% and 5% of total revenues during 1996, 1997 and 1998, respectively. 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 NRT'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 NRT's increased commission revenues. 48 BUSINESS Company Overview NRT is the largest residential real estate brokerage company in the United States based on home sales volume. NRT operates approximately 681 full service real estate brokerage offices nationwide. As a full service brokerage, NRT offers, either directly or through third party arrangements, a wide variety of homeowner services in addition to traditional real estate brokerage services, including mortgage, title, escrow and relocation services, home warranties, home security systems and other services. Based on data provided by Real Facts, an industry publication, multiple listing service data and publicly available industry information, NRT believes that: . NRT is approximately five times larger than its next largest competitor, based on home sales volume. . NRT operates in 18 of the 30 largest domestic markets measured by population and NRT believes that it has a leading market presence in each of the markets in which it operates. . NRT is the only national residential real estate brokerage company. . NRT markets more homes on the internet than any other residential real estate brokerage company based on the number of homes listed with NRT, all of which are listed on the internet. NRT operates all of its brokerage offices under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names pursuant to franchise agreements with subsidiaries of Cendant. NRT operates approximately 85% of its offices under the COLDWELL BANKER(R) brand name, 13% of its offices under the ERA(R) brand name and 2% of its offices under the CENTURY 21(R) brand name. NRT 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. NRT believes that the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names provide NRT 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. Shortly after its formation in August 1997, NRT acquired the assets of National Realty Trust, which included the former real estate brokerage operations of Coldwell Banker Corporation. Although NRT had only recently been formed, the operations acquired from National Realty Trust provided NRT with a strong core operating business. NRT has grown rapidly, completing 79 acquisitions, representing a total of over 500 brokerage offices. NRT's larger acquisitions to date include the following: . Jon Douglas Real Estate Services Group, Inc., the third largest residential real estate brokerage company; . Burnet Financial Group, the fourth largest residential real estate brokerage company; . Hunneman Real Estate Corporation, the ninth largest residential real estate brokerage company; 49 . Cornish & Carey Residential, Inc., the tenth largest residential real estate brokerage company; and . O'Conor, Piper & Flynn, Inc., the fifteenth largest residential real estate brokerage company. Rankings are based on home sales volume during the last completed calendar year prior to being acquired by NRT, as reported by Real Facts. Cendant has participated in each of these transactions pursuant to the acquisition cooperation agreement (or its predecessor) with NRT. The Industry Recent years have been among the strongest ever for existing home sales. Based on information reported by the National Association of Realtors and the United States Census Bureau: . NRT estimates that the 1998 domestic residential real estate brokerage industry generated over $50 billion of gross commission income, based on approximately $940 billion in home sales and assuming an average commission rate of 5 1/2%. . 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%. . 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, a small number of multi- office regional brokerage companies and one national real estate brokerage company, NRT. The 20 largest real estate brokerage firms included in the Real Facts listing of the largest real estate brokerage companies in the United States represented 8.1% of home sales volume in 1997. In addition, according to a 1996 report of the National Association of Realtors, approximately 87% of all real estate brokerage firms consisted of a single office. 50 The following table contains 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. Each real estate transaction has two sides, the selling side and the buying side. Brokers may participate on one or both sides of a transaction. (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 NRT 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. On March 1, 1999, it was renamed Arvida Realty Services, and it currently operates as a company unaffiliated with a national brand. NRT believes that the future of the real estate brokerage industry will be dominated by large companies offering multiple services and 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 Internal Growth Strategy NRT will seek to expand its market presence and increase its revenue and profitability through the following initiatives: Leverage Well Known, National Brand Names. NRT intends to capitalize on the benefits provided by operating under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names. Such benefits include: . the name recognition and reputation of the brands among consumers for quality and consistency; . access to the franchisors' sales associate training and educational programs; and . 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. NRT believes that brand recognition is important in the real estate business because home buyers and sellers are generally infrequent users of brokerage services and typically rely on reputation as well as word-of-mouth recommendations. NRT believes that brand reputation is also important to real estate sales associates. According to a study conducted by the National Association of Realtors, real estate sales associates believe that a brokerage firm's image with customers is its most important attribute. 51 Increase Ancillary Revenues. NRT intends to capitalize on the purchasing power of home buyers and sellers and take advantage of the relationship between homeowners and NRT's sales associates to market a wide range of homeowner services. NRT 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. NRT intends to continue to broaden the range of services that it offers to strengthen NRT's position as a full service brokerage company and to capitalize on the high margin opportunities offered by these services. Recruit, Retain and Develop High-Quality Sales Associates. The success of NRT's business is largely driven by its ability to retain high-quality real estate sales associates. NRT believes that its reputation and its ability to provide its sales associates with extensive training and educational programs, marketing support, sophisticated information technology and other resources help NRT recruit, retain and develop high quality sales associates. NRT believes its sales associates generally have a reputation for quality of service and professionalism. While individual results vary widely, the productivity of NRT's sales associates increased by over 25% to an average of 10.3 closed sides per sales associate in 1998 from 8.2 closed sides per sales associate in 1996. Enhance Productivity with Information Technology. NRT's technology-based systems combine software applications with features such as prospective customer management, location mapping, financial analysis, property information, photographs and forms. NRT believes that these systems, which provide NRT's sales associates with quick access to current market information, are powerful productivity enhancing and marketing tools. NRT intends to continue to upgrade its information technology and use technology to enhance the productivity of its sales associates. Acquisition Strategy NRT will seek to continue to take advantage of consolidation opportunities in the highly fragmented real estate brokerage industry. 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 "roll-in" acquisitions of smaller firms often consisting of a single office. NRT believes that these businesses can be integrated into NRT's existing operations, resulting in the elimination of 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, NRT believes it can enhance the profitability of its consolidated operations. Since its formation, NRT has completed over 50 "roll-in" acquisitions. 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, NRT considers financial performance, the quality of management and sales associates, demographics and economic conditions of the new market and competitive position of the acquisition target. Improve Operations of Acquired Companies. NRT 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 52 has constrained expansion and modernization at many small and mid-sized real estate brokerage firms. NRT believes that it can increase internal growth at many of the acquired companies through its: .affiliation with nationally recognized brand names; .offering of a wide range of brokerage-related services; .improved use of information technology; .sales associate training and educational programs; .marketing and business promotion; and . skilled senior management. From September 1, 1997 through December 31, 1998, NRT completed 26 acquisitions of brokerages which each had over $5 million of annual gross commission income. Through December 31, 1998, NRT had taken actions to reduce the annual operating costs of the acquired companies by an aggregate of approximately $56.8 million, which represents approximately 13.8% of the acquired companies' selling, general and administrative expenses. Other Growth Opportunities NRT intends to pursue other growth opportunities and has identified the following areas for possible expansion. Commercial. Approximately 400 of NRT's sales associates concentrate principally on commercial real estate sales. NRT may pursue opportunities to expand its network of commercial real estate sales associates by making strategic acquisitions of regional and local commercial brokerage companies. International. NRT 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. NRT may seek to enter such markets by: .acquiring master franchise rights in such markets; .entering into partnerships with brokers operating in such markets; or .making acquisitions of brokers operating in such markets. Acquisitions Identification and Evaluation NRT has a dedicated group of professionals whose function is to identify, evaluate and complete acquisitions. In the ordinary course of business, NRT continuously evaluates possible acquisition candidates and from time to time conducts discussions with third parties regarding acquisitions. 53 NRT conducts the following analyses when evaluating potential acquisition targets: . financial analyses of historical performance, comparisons to peers and NRT and potential cost reductions and synergy enhancements; . consolidation analyses of occupancy costs, employee count, advertising expenditures and conversion costs that an office is expected to incur in the consolidation process; . non-financial analyses of the quality of the target's management and sales associates and the target's competitive positioning; and . market analyses of the demographics and economic conditions of the geographic market and the relative position of the acquisition target compared to its competitors in such market. NRT's target markets fall into the following three categories: . Large Metropolitan Markets. NRT defines large metropolitan markets as markets with annual gross commission income of greater than $250 million. In these markets, NRT seeks to acquire firms with strong management and significant consolidation and cost saving opportunities. NRT estimates that there are currently 28 markets in the United States meeting these criteria, of which it operates in 16. . Feeder Markets. NRT defines feeder markets as those markets that are directly linked to NRT's large metropolitan markets. NRT seeks to make acquisitions in these markets if they exhibit fluid population movement and demographic strength and the acquisition targets exhibit consolidation and cost saving opportunities. NRT currently operates in two of these markets (and typically classifies such markets as part of the larger market into which they are directly linked). . Smaller Metropolitan Markets. NRT defines smaller metropolitan markets as markets with annual gross commission income of less than $250 million but greater than $100 million. In these markets, NRT seeks to acquire firms that exhibit significant consolidation and cost saving opportunities. NRT estimates that there are currently 14 markets in the United States meeting these criteria, of which it operates in two. Once NRT 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 expand its market presence. NRT 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. Integration Following completion of an acquisition, NRT further refines its consolidation analysis and consolidates the newly acquired operations with its existing operations. By consolidating operations, NRT 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, NRT can enhance the profitability of its consolidated operations. 54 NRT also seeks to enhance the profitability of newly acquired operations by increasing the productivity of the acquired brokerages' sales associates. NRT provides its sales associates with specialized tools, training and resources that are often unavailable at smaller firms, such as: . access to sophisticated information technology and ongoing technical support; . increased advertising and marketing support; . corporate relocation referrals; and . a wide offering of brokerage-related services. Brokerage Services NRT 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 data for the 10 largest markets in which NRT operates as of and for the year ended March 31, 1999:
Pro Forma(a) ---------------- Gross Commission Offices Sales Associates Income ------- ---------------- ---------------- Metropolitan Regions (in thousands) San Francisco/Northern California (b)................................ 78 3,969 $ 493,321 Los Angeles/Southern California (c)................................ 68 3,601 411,054 New York Metropolitan Area.......... 119 4,872 241,099 Chicago............................. 68 3,127 189,981 Minneapolis......................... 37 2,081 161,527 Washington DC/Baltimore............. 59 2,338 163,461 Boston.............................. 67 1,601 115,739 Denver.............................. 24 875 116,869 Tampa/West Central Florida (d)...... 37 1,624 103,328 Miami/Southeast Florida............. 38 1,797 97,383
- --------------------- (a) Assumes all 1998 acquisitions of brokerages with annualized gross commission income in excess of $5 million were completed on January 1, 1998. (b) Includes Sacramento, California. (c) Includes San Diego, California. (d) Includes Orlando, Florida. In its residential real estate brokerage business, NRT provides services to consumers in the purchase and sale of new and existing homes. In assisting the seller in a real estate transaction, NRT's sales associates provide the seller with a full service marketing program, which includes: .developing a direct marketing plan for the property; .assisting the seller in pricing the property and preparing it for sale; . advertising the property, including listing it on multiple listing services and/or websites on the internet; .showing the property to prospective buyers; 55 .assisting the seller in sale negotiations; and .assisting the seller in closing the transaction. When NRT assists the buyer in a real estate transaction, its sales associates provide the buyer with services, including: . assisting the buyer in locating specific properties that meet the buyer's personal and financial specifications; . showing properties to the buyer; . where permissible, assisting the buyer in negotiating the terms of the contract to purchase; . assisting the buyer in closing the transaction, including assisting with mortgage qualification; and . offering a wide range of brokerage related services. Commissions In a typical brokerage transaction, NRT receives its commission upon the closing of the transaction. Sales commissions typically range from approximately 5% to 7% of the sales price. In transactions in which NRT 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 acting as broker on the other side of the transaction, NRT generally must share with the other broker 50% of the sales commission. In transactions in which NRT is acting as the sole broker, NRT generally receives 100% of the sales commission. The following table sets forth the gross commission income and related data of NRT and its predecessors during the periods indicated:
Years Ended Three Months December 31, Ended March 31, -------------------------------- ------------------ 1996 1997 1998 1998 1999 -------- ---------- ---------- -------- -------- (dollars in thousands) Sides................... 109,994 154,066 300,229 47,732 65,471 Average sales price per home................... $205 $239 $245 $243 $255 Average commission rate per side............... 2.78% 2.76% 2.73% 2.84% 2.81% Real estate sales com- missions............... $628,081 $1,016,284 $2,010,123 $330,241 $469,596
The commission earned by NRT's sales associates is based upon a percentage of the sales commissions earned by NRT. Typically, the percentage of the real estate commissions which is shared with NRT's sales associates will vary based on 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 NRT has shared with sales associates has averaged between 60% and 67% in recent years. Sales Associates The success of NRT's business largely depends upon its ability to recruit, retain and develop highly motivated and well trained sales associates. NRT believes that the reputation of particular sales associates, in addition to the reputation of NRT's local offices and brands, is an important 56 factor for many consumers when choosing a brokerage. NRT currently has over 30,000 sales associates, substantially all of whom are independent contractors. Either NRT or the sales associate can terminate the independent contractor relationship at any time. In 1998, NRT experienced a turnover of sales associates who collectively generated less than 10% of NRT's gross commission income. NRT believes this level of turnover is no worse than the industry average. NRT generally replaces departing sales associates through the recruitment of sales associates. NRT is dedicated to the recruitment and retention of both new and experienced sales associates. NRT provides extensive programs aimed at both improving sales associates' 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 NRT's sales associates has increased by 25% to an average of 10.3 closed sides per sales associate in 1998 from 8.2 closed sides per sales associate in 1996. NRT provides extensive training programs for its sales associates in areas such as 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 and professional skills. Sales associates are responsible for purchasing of the marketing tools they use in their business. 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 on them by consumers to offer a greater range of services in connection with a home sale or purchase. In order to meet the increasing demands of customers and the needs of NRT's sales associates, NRT has diversified its offering of services. NRT believes that by offering a broad range of services, in addition to the marketing and technological assistance and training programs provided to sales associates, NRT will be able to continue to attract and retain productive, full-time real estate sales professionals. Referral Network Within its 18 markets, NRT has established an informal network of referral associates who refer home buyers and sellers to other sales associates of NRT. Referral associates generally are non-practicing, licensed real estate agents who pay NRT an annual membership fee to participate in NRT'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 NRT. Marketing and Information Technology NRT markets its real estate services and specific real estate listings through major area and local newspapers, the internet, real estate publications, magazines, luxury homes divisions of the brands, television, radio and outdoor advertising. NRT's newspaper advertising includes both traditional classified advertising to market each of NRT's listings and full- page advertisements with descriptions of selected homes in the market, typically with photographs of the properties. In addition to 57 newspaper advertising, NRT publishes and distributes Buyers Guides, which display selected listings by region. NRT also markets its properties through a direct mail program implemented at the local level. NRT's sales associates may supplement NRT's direct mail programs with specialized programs that they fund on their own. NRT provides its sales associates with promotional materials which can be customized for those sales associates who choose to utilize this opportunity. NRT also participates in luxury marketing programs established by its 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. NRT has sales associates who specialize in marketing these homes. Properties covered in these programs are listed separately through: . newspaper advertisements; . in quarterly mailings to a qualified list of prospective purchasers throughout the metropolitan areas in which NRT operates; and . relocation companies for use by potential transferees to the area. In addition to NRT's direct expenditures on marketing, NRT contributes a portion of its gross commission income to segregated national advertising funds maintained by its franchisors. The national advertising funds collect marketing contributions from all of their franchisees and allocate such funds, together with funds contributed by the franchisors, for national media purchases and brand awareness and positioning campaigns. In 1998, the national advertising funds' expenditures on advertising promoting the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) brand names totaled approximately $65 million. NRT believes that the use of information technology as a marketing tool will continue to increase. Accordingly, NRT has sought to become a leader among residential real estate brokerage firms in the use and application of information technology. Key features of NRT's information technology include: .access to information from any location; . integration of NRT'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; . comparative market analyses; . mapping and preparation of property tours; . desktop publishing for personalized feature sheets and marketing materials; and . customized forms and contracts. NRT's internet presence features NRT's entire listing inventory in its regional and national markets, plus community profiles, home buying and selling advice, relocation tips and mortgage financing information. Customers are able to check NRT's listings by providing search parameters. A list of all available properties conforming to the user's search criteria is then generated with 58 information relating to each property, including a photograph. In addition, the customer can contact NRT interactively as to his or her particular interest. NRT's internet presence enables its customers to familiarize themselves with NRT's sales associates, local markets and information on available homes from anywhere in the world prior to their arrival in a local market for a home search. Office Management NRT operates its brokerage offices in a decentralized manner, which permits significant marketing flexibility and management control at the local level. NRT believes that local management is better situated to understand local markets and is best able to tailor its services to those markets. Following an acquisition, NRT seeks to centralize the acquired company's finance, accounting, payroll, human resources and legal support functions, thereby eliminating duplicative operations and realizing economies of scale. By centralizing these functions, NRT is able to utilize its existing infrastructure to support an increased level of revenues without a corresponding increase in expenses. Mortgage Services NRT markets mortgage origination services to its customers under its marketing agreement with Cendant Mortgage Corporation, the tenth largest mortgage originator in the United States. Cendant Mortgage provides mortgage services through a centralized inbound telemarketing mortgage origination service in most of NRT's offices and through loan officers located in other offices. This service includes providing the prospective home buyer with an immediate mortgage preapproval with respect to an anticipated home purchase. NRT believes that obtaining this mortgage preapproval makes the prospective home buyer more attractive to the seller. NRT earns marketing fees for the services it provides under the marketing agreement. NRT's agreement with Cendant Mortgage provides it with access to a nationwide mortgage underwriter believed to be well suited to provide mortgage services to clients of a large, geographically dispersed network of real estate offices. NRT intends to enter into a joint venture with Cendant to provide mortgage services, at which time the Marketing Agreement will be terminated. Title, Escrow and Other Closing Services NRT operates full service title insurance agencies which provide real estate closing and title insurance services in a number of NRT's markets. NRT 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, NRT does not underwrite the insurance, but retains a significant portion of the title insurance premium in consideration of the services it provides. NRT 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 NRT's brokerage revenues. 59 Additional Services Brokerage-Related Services NRT offers, either directly or through marketing and purchasing arrangements with or established by Cendant under the program outsourcing agreement, brokerage-related services, including home warranties, home security systems, temporary housing, temporary storage and utility services. NRT generally earns fees for the marketing of such services. NRT believes that its offering of a wide range 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 NRT also offers relocation services to its customers either directly or through an arrangement with Cendant Mobility Services Corporation, the country's largest relocation company. Relocation services generally include: .home sale and marketing assistance programs; .mortgage services; .property rental management; .expense management; .closing services; .policy counseling; .home finding assistance; .consulting services; and .moving services; .group move management. .rental assistance; NRT also 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 NRT 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, NRT has an arrangement with Cendant Mobility under which NRT 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, NRT seeks to assist the buyer in completing a home sale. Upon completion of a home sale, NRT 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. NRT believes that these fees are comparable to the fees charged by other relocation companies. Competition The residential real estate brokerage industry is highly competitive, particularly in the densely populated metropolitan markets in which NRT 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. Companies compete for sales and 60 marketing business primarily on the basis of services offered, reputation, personal contacts, and, to a lesser extent, brokerage commissions. NRT competes primarily with: . franchisees of local and regional real estate franchisors; . franchisees of its franchisors and other national real estate franchisors, such as RE/MAX, Prudential Real Estate and Better Homes and Gardens; . regional independent real estate organizations, such as Weichert, Realtors, Long & Foster and Fred Sands Realtors; and .smaller niche companies competing in local areas. Government Regulation NRT's businesses are subject to governmental regulation. The residential real estate brokerage business is subject to regulatory and licensing requirements of government agencies. As a result, NRT 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 information in real estate forms. Under state law, a real estate broker such as NRT has a duty to supervise and is responsible for the conduct of its sales associates. NRT is subject to the Real Estate Settlement Procedures Act, a federal law that requires timely disclosure of the relationships or financial interests between providers of real estate settlement services and fees and prohibits referral fees between providers of settlement services. NRT 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 NRT may conduct its business. NRT's title and escrow services businesses are regulated by state regulatory authorities that possess broad powers relating to the granting and revocation of licenses. These state authorities also regulate insurance rates and the form of the policies. NRT's business depends on the validity of, and NRT's continued good standing under, the licenses and approvals under which it operates, and NRT's compliance with pertinent regulations. NRT therefore devotes a significant amount of effort toward maintaining its licenses and ensuring compliance with applicable regulations. 61 Employees and Sales Associates As of April 15, 1999, NRT had over 4,000 full-time employees and over 30,000 sales associates (substantially all of whom are independent contractors). None of NRT's employees or sales associates is covered by a collective bargaining agreement. Management believes that NRT's relations with its employees and sales associates are good. Properties NRT's principal executive offices are located in Parsippany, New Jersey, where NRT leases approximately 7,500 square feet from Cendant. NRT also leases approximately 35,000 square feet of office space from Cendant in Mission Viejo, California. NRT owns 18 of its approximately 681 brokerage offices. Owned offices represent a total of approximately 56,000 square feet of office space. NRT leases all remaining properties, which represent representing a total of approximately 3.4 million square feet. NRT believes that its present facilities are adequate for its current level of operations. NRT's office leases generally have initial terms of five years with an option to extend the lease for additional periods. The leases generally require NRT to pay for property taxes, utilities and maintenance. Legal Proceedings In the ordinary course of business, NRT is involved in legal proceedings incident to its operations. In the opinion of management, NRT is not currently involved in any legal proceeding which it believes would have a material adverse effect on the operations or financial condition of NRT taken as a whole. 62 MANAGEMENT Directors and Executive Officers The following table sets forth information concerning the executive officers and directors of NRT as of April 15, 1999. There are no family relationships among any of NRT's executive officers and directors.
Name Age Position Robert M. Becker........ 57 President, Chief Executive Officer and Director Chandler B. Barton...... 65 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......... 45 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 NRT's executive officers and directors is based on information provided by them. Robert M. Becker has been President and Chief Executive Officer of NRT 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, 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 Coldwell Banker Schlott Realtors from February 1990 (when it was acquired by Coldwell Banker Corporation ) to 1994 and served in a similar capacity at the predecessor to Coldwell Banker Schlott Realtors from 1980 to February 1990. Chandler B. Barton has been Chairman of the Board and a director of NRT since August 1997. Mr. Barton served as Chairman of National Realty Trust from May 1996 to August 1997 and 63 President and Chief Executive Officer of Coldwell Banker Corporation from January 1989 to May 1996. Before 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 NRT since August 1998. Mr. Good was Senior Vice President--Southeastern Region of NRT 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. Before serving as an officer of National Realty Trust, 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 NRT since January 1998 and Treasurer since September 1998. Before 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 NRT since April 1998. From May 1997 to April 1998, Mr. Barnett served as Associate General Counsel for Venator Group, Inc. 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 NRT 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 NRT in February 1998. Before joining NRT, 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. Larry Knapp has been Senior Vice President--Western Region of NRT 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. 64 Bruce G. Zipf has been Senior Vice President--Northeast Region of NRT since August 1997 and President and Chief Operating Officer of the Metro New York Region of NRT from August 1997 through November 1998. Mr. Zipf served as Senior Vice President--Northeast Region and President of the Metro New York Region of National Realty 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 NRT since October 1998. Mr. Webber was the owner of Coldwell Banker Van Schaak and Company from March 1994 to October 1998. From October 1989 to October 1998, Mr. Webber was President of Premier Van Schaak, which includes Coldwell Banker Premier Realty in Salt Lake City and Las Vegas and Coldwell Banker Van Schaak in Denver. From October 1988 to October 1989, 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 NRT since September 1997. Mr. Edwards has been President and Chief Executive Officer of Cendant Mortgage (and its predecessor PHH Mortgage Services Corporation) since February 1996. Mr. Edwards was Vice President, Investor Relations and Treasurer of PHH Corporation 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 NRT 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., Quality Distribution, Inc. and SMT Health Services Inc. David M. Johnson has been a director of NRT 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. From July 1986 to April 1998, Mr. Johnson worked in the Investment Banking group of Merrill Lynch & Co., Inc., most recently as a Managing Director. Samuel L. Katz has been a director of NRT 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. Marc J. Rowan has been a director of NRT 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, Quality Distribution, Inc. and Vail Resorts, Inc. 65 Richard A. Smith has been a director of NRT 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. Before joining HFS, 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 NRT 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 NRT since September 1997. Mr. Weiner has been an officer of certain affiliates of Apollo Management, L.P. since 1992. Before 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., Quality Distribution, Inc., SMT Health Services Inc. and WMC Finance Co. Under the terms of the stockholders agreement to be in effect on the closing of the offering, Apollo and Cendant have agreed to vote their shares of NRT's voting stock in favor of a twelve-member Board of Directors consisting of five directors nominated by Apollo, five directors nominated by Cendant and two directors nominated by a majority of the Board. NRT'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) nominated by Apollo, four directors (Terence W. Edwards, David M. Johnson, Samuel L. Katz and Richard A. Smith) nominated by Cendant, and two directors (Chandler B. Barton and Robert M. Becker) jointly nominated by Apollo and Cendant. Before the closing of the offering, a majority of the Board of Directors will nominate two additional directors who are "independent directors" (within the meaning of the rules of the New York Stock Exchange or interdealer quotation system on which NRT's common stock is listed). Before 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 term of the Class I directors will expire at the annual meeting of stockholders of NRT in 2000, the term of the Class II directors will expire in 2001 and the term of the Class III directors will expire in 2002. Messrs. , and will be Class I directors, Messrs. , and will be Class II directors and Messrs. , , and will be Class III directors. Officers of NRT 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. Committees of the Board of Directors NRT's Board of Directors currently has three standing committees, a compensation and human resource committee, an audit committee and an executive committee. 66 NRT's compensation and human resource committee administers NRT's 1997 Equity Participation Plan and reviews and makes recommendations to the Board of Directors with respect to NRT's compensation and hiring programs and policies. The current members of the compensation committee are Messrs. Harris, Katz, Rowan and Smith. NRT's audit committee recommends the annual appointment of NRT's auditors, with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, accounting principles used by NRT in financial reporting, internal auditing procedures, and the adequacy of NRT'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. NRT'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. NRT may establish other committees to facilitate the management of NRT. Compensation of Directors Directors of NRT who are also employees receive no additional compensation for their service as a director. Non-employee directors receive, as compensation for their service as directors: . 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; . $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; and . reimbursement for expenses incurred in attending meetings of the Board of Directors and committees. Under NRT's 1997 Equity Participation Plan, each non-employee director of NRT was granted options on December 13, 1998 to purchase 56,250 shares of common stock at an exercise price equal to $10.67 per share (with the exception of Mr. Katz, whose options, which were granted on September 6, 1997, have an exercise price of $0.01 per share). With the exception of options to purchase 56,250 shares of common stock granted to Michael P. Monaco, who served as a director of NRT 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. 67 Executive Compensation Summary Compensation Table The following table sets forth the compensation earned by the Chief Executive Officer of NRT and the four other most highly paid executive officers of NRT who served as executive officers of NRT as of December 31, 1998, for the fiscal year ended December 31, 1998 and for NRT'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 93,750 $ -- Executive Officer $108,336 $ 83,333 375,000 $ -- Chandler B. Barton......... 1998 $249,988 $312,500 -- $ 4,000 Chairman of the Board 1997 $ 83,328 $104,167 140,625 $ 1,250 Gregory W. Hunt............ 1998 $243,435 $156,250 281,250 $ -- Senior Vice President, 1997 -- -- -- $ -- Chief Financial Officer and Treasurer Michael R. Good............ 1998 $217,917 $138,021 46,875 $52,856 Executive Vice President 1997 $ 63,333 $ 35,417 93,750 $ 1,250 Bruce G. Zipf.............. 1998 Senior Vice President-- 1997 $190,000 $125,000 -- $12,592 Northeast Region $ 62,864 $ 36,458 93,750 $ 3,937
- --------------------- (1) Includes options to acquire shares of common stock of NRT. Option figures have been adjusted to give effect to the 1.875-for-1 split of the common stock which will occur prior to the closing. In addition to the options listed above, 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 NRT (based on NRT's current estimates) on behalf of the named executive officers under NRT's 401(k) savings plan as follows: Mr. Barton ($4,000 for 1998 and $1,250 for 1997); Mr. Good ($4,000 for 1998 and $1,250 for 1997); and Mr. Zipf ($4,000 for 1998 and $1,073 for 1997). Also included are car allowances of $8,592 for 1998 and $2,864 for 1997 for Mr. Zipf and a moving allowance and tax gross-up payment totalling $48,856 for 1998 for Mr. Good. 68 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........ 93,750 6.6% $ 9.60 9/01/08 $628,895 $1,593,742 Chandler B. Barton...... -- -- -- -- -- -- Gregory W. Hunt......... 168,750 11.9% $ 4.16 1/12/08 554,685 1,405,681 56,250 4.0% $ 9.60 1/12/08 377,336 956,245 56,250 4.0% $10.67 12/13/08 377,336 956,245 Michael R. Good......... 46,875 3.3% $10.67 10/01/08 314,447 796,871 Bruce G. Zipf........... -- -- -- -- -- --
- --------------------- (1) Represents options granted under NRT's 1997 Equity Participation Plan, the terms of which are described under "--Equity Participation Plan." The number of options has been adjusted to give effect to the 1.875-for-1 split of the common stock that will occur prior to the closing of the offering. (2) Exercise prices have been adjusted to give effect to the 1.875-for-1 split of the common stock that will occur prior to the closing of the offering. On September 28, 1998, NRT's Board of Directors approved adjustments 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 $30 million dividend to Apollo; and . specified payments to NRT's franchisors under the franchise agreements. In no event, however, may the exercise price for such options be adjusted to less than $0.01 per share. Of the options reflected in the above table, the options granted to Mr. Becker and 225,000 of the options granted to Mr. Hunt are subject to, and their exercise prices give effect to the adjustments. (3) The amounts shown in these two columns represent the potential realizable values using the options granted and the exercise price. The assumed rates of stock price appreciation are set by the Securities and Exchange Commission's executive compensation disclosure rules and are not intended to forecast the future appreciation of the common stock. 69 Options Exercised in Last Fiscal Year; Fiscal Year End Option Values at Year End No options were exercised during the year ended December 31, 1998. The following table presents information on the value of options held by the executive officers named in the Summary Compensation Table as of December 31, 1998.
Fiscal Year End Option Values(1) ------------------------------------------------------ Number of Securities Value of Unexercised Underlying Options at In-the-Money Options Fiscal Year End (#) at Fiscal Year End ($) Name Exercisable/Unexercisable Exercisable/Unexercisable(2) - ---- ------------------------- ---------------------------- Robert M. Becker......... 37,500/431,250 $599,625/$5,999,438 Chandler B. Barton....... 14,062/126,562 224,851/2,023,742 Gregory W. Hunt.......... 0/281,250 0/2,666,250 Michael R. Good.......... 9,375/131,250 149,906/1,599,000 Bruce G. Zipf............ 9,375/84,375 149,906/1,349,156
- --------------------- (1) Figures shown give effect to the 1.875-for-1 split of the common stock that will occur prior to the closing of the offering. Represents options to acquire shares of common stock granted under NRT's 1997 Equity Participation Plan. Fiscal year end option values are based on the difference between $16 (the mid-point of the estimated range of initial public offering price per share) and the exercise price of each option. In addition to the options listed above, at December 31, 1998, options to acquire shares of Cendant common stock were held by the named executive officers in connection with their former employment by Cendant as follows: Mr. Becker (374,940 shares); Mr. Good (24,031 shares); and Mr. Zipf (9,612 shares). (2) Upon the closing of the offering, the number of exercisable options will double as a result of the conversion of performance-vesting options into time-vesting options. Employment Agreements NRT 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 authorizes an aggregate of 4,687,500 shares of common stock for awards (after giving effect to the 1.875-for-1 split of the common stock), of which 3,399,141 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 NRT and its subsidiaries to further the growth, development and financial success of NRT and to enable NRT to obtain and retain the services of its 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. 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 makes 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- termination exercise provisions. The Compensation Committee also interprets the provisions of the Equity Participation Plan. 70 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 or non-qualified stock options within the meaning of Section 422 of the Internal Revenue 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), subject to the following limitations: . in the case of incentive stock options and options intended to be performance based compensation under Section 162(m)(4)(C) of the Internal Revenue Code, the exercise price may not be less than 100% of the fair market value of the common stock on the date the option is granted. . in the case of incentive stock options granted to an individual then owning over 10% of the total combined voting power of NRT's capital stock, the exercise price may 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). However, the term may not be more than ten years from the date of grant, or five years from the date of grant in the case of an incentive stock option granted to an individual owning more than 10% of the total combined voting power of all classes of NRT's stock. No participant in the Equity Participation Plan may receive awards in any year with respect to more than 562,450 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 3,399,141 shares of common stock, with a weighted average exercise price of $4.85. In general: . upon the closing of the offering, all of the options granted to employees will be time vesting options that vest in equal installments over a five-year period and are fully exercisable at the end of the five-year period; and . options held by employees of NRT 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. 71 Each non-employee director of NRT was granted options on December 13, 1998 to purchase 56,250 shares of common stock at an exercise price (after giving effect to the 1.875-for-1 split of the common stock) equal to $10.67 per share (other than Mr. Katz, whose options were granted on September 6, 1997 and have an exercise price of $0.01 per share). With the exception of an option to purchase 56,250 shares of common stock granted to Michael P. Monaco, who served as a director of NRT from September 1997 to December 1998 and whose options are fully vested, all options granted to non-employee directors vest as follows: .one-third on the date of grant; .one-third on September 6, 1999; and . one-third on September 6, 2000. All options held by non-employee directors will become fully vested upon a change in control of NRT occurring after the offering. Amendment/Termination The Board of Directors of NRT may amend or terminate the Equity Participation Plan, except that the consent of each participant is required for any amendment or termination that adversely affects the rights of the participant. In addition, to the extent required by any law, regulation or stock exchange rule, no amendment will be effective without the approval of NRT's stockholders. Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Board of Directors currently consists of Messrs. Harris, Katz, Rowan and Smith. Mr. Katz was President of NRT and Mr. Harris was Vice President and Treasurer of NRT at the time of NRT's formation in August 1997. 72 PRINCIPAL AND SELLING STOCKHOLDERS The table below presents information regarding the beneficial ownership of the common stock as of April 15, 1999 by: . each person known by NRT to be the beneficial owner of five percent or more of its outstanding common stock and convertible preferred stock; .each of the executive officers of NRT listed in the Summary Compensation Table above; .each of the directors of NRT; and . all directors and executive officers of NRT as a group. Unless otherwise indicated, NRT believes that each beneficial owner below has sole voting and investment power over such shares. The figures shown with respect to the common stock assume the conversion of all outstanding shares of convertible preferred stock held by Cendant.
Beneficial Ownership Beneficial Ownership Beneficial Ownership of of Common Stock of Common Stock Convertible Preferred Before the Offering After the Offering(1) Stock(1) ---------------------- Shares of --------------------- --------------------------- Number Common Number of Number Percentage of Shares Percentage Stock Being Shares of Percentage of of Name of Class(2) 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.(3) 1301 Avenue of the Americas 38th Floor New York, New York 10019................... 18,175,425 72.1% 4,687,500 13,487,925 39.6% -- -- Cendant Operations, Inc. c/o Cendant Corporation(4) 9 West 57th Street New York, New York 10019................... 7,047,060 27.9% -- 6,473,503 19.0% 23,275 100% Robert M. Becker........ 75,000 * -- 75,000 * -- -- Chandler B. Barton...... 28,125 * -- 28,125 * -- -- Gregory W. Hunt......... 45,000 * -- 45,000 * -- -- Michael R. Good......... 18,750 * -- 18,750 * -- -- Bruce G. Zipf........... 18,750 * -- 18,750 * -- -- Terence W. Edwards(5)... 18,750 * -- 18,750 * -- -- Joshua J. Harris(6)..... 18,750 * -- 18,750 * -- -- David M. Johnson(5)..... 18,750 * -- 18,750 * -- -- Samuel L. Katz(5)....... 18,750 * -- 18,750 * -- -- Marc J. Rowan(6)........ 18,750 * -- 18,750 * -- -- Richard A. Smith(5)..... 18,750 * -- 18,750 * -- -- Michael L. Tarnopol(7).. 18,750 * -- 18,750 * -- -- Michael D. Weiner(6).... 18,750 * -- 18,750 * -- -- All executive officers and directors as a group (17 persons)..... 424,687 1.7% 424,687 1.2% -- --
(footnotes on following page) 73 (continued from previous page) * Less than one percent. (1) Beneficial ownership of common stock after the offering and beneficial ownership of convertible preferred stock give effect to the repurchase of 725.4 shares of convertible preferred stock held by Cendant. After giving effect to the offering, but before giving effect to the repurchase, Cendant would beneficially own 20.7% of the outstanding common stock. (2) Includes options to acquire shares of common stock which are exercisable within 60 days following the closing of the offering as follows: . Mr. Becker (75,000) . Mr. Knapp (23,437) . Mr. Katz (18,750) . Mr. Barton (28,125) . Mr. Zipf (18,750) . Mr. Rowan (18,750) . Mr. Hunt (45,000) . Mr. Webber (0) . Mr. Smith (18,750) . Mr. Barnett (18,750) . Mr. Edwards (18,750) . Mr. Tarnopol (18,750) . Mr. Burnet (28,125) . Mr. Harris (18,750) . Mr. Weiner (18,750) . Mr. Good (18,750) . Mr. Johnson (18,750)
(3) Beneficial ownership of common stock before the offering includes 16,569,195 shares held by Apollo Investment Fund III, L.P., 992,073 shares held by Apollo Overseas Partners III, L.P. and 614,157 shares held by Apollo (UK) Partners III, L.P., each of which is a private investment fund managed by Apollo Management, L.P. Beneficial ownership of common stock after the offering includes 12,295,947 shares held by Apollo Investment Fund III, L.P., 736,214 shares held by Apollo Overseas Partners III, L.P. and 455,764 shares by Apollo (UK) Partners III, L.P. Under a participation agreement, dated as of August 11, 1997, Bear, Stearns & Co. Inc. is entitled to a 49% non-voting equity participation in Apollo's investment in NRT. Bear, Stearns & Co. Inc. is entitled to receive its pro rata share of any amounts received by Apollo in respect of the investment, including the proceeds to Apollo from the sale of shares of common stock in the offering. Bear, Stearns & Co. Inc. expressly disclaims beneficial ownership of the shares held by Apollo. (4) Cendant Operations, Inc. is a wholly owned subsidiary of Cendant Corporation. Cendant, Apollo and NRT have agreed that if the underwriters' over-allotment option is exercised, up to 468,750 shares subject to the over-allotment option will be sold by Cendant and any remaining over- allotment shares will be sold 10% by Cendant and 90% by Apollo. (5) Messrs. Edwards, Johnson, Katz and Smith are officers of Cendant and expressly disclaim beneficial ownership of any shares of NRT's capital stock owned by Cendant. (6) 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. (7) 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. See Note 3 above. 74 RELATED PARTY TRANSACTIONS Immediately prior to the offering, Apollo beneficially owns 72.1% and Cendant beneficially owns 27.9% of the issued and outstanding shares of common stock, assuming the repurchase by NRT of shares of convertible preferred stock held by Cendant and conversion of all other outstanding shares of convertible preferred stock held by Cendant into common stock. Immediately following the offering and after giving effect to the repurchase by NRT of 725.4 shares of convertible preferred stock from Cendant following the offering: . Apollo will beneficially own approximately 39.6% (35.3% if the underwriters' over-allotment option is exercised in full); and . Cendant will beneficially own approximately 19.0% (17.2% 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 four principal divisions--real estate related services, travel related services, alliance marketing related services and other consumer and business services--Cendant is a global provider of consumer and business services. The real estate related services division assists in employee relocation, provides home buyers with mortgages and franchises real estate brokerage businesses; the travel related services division facilitates vacation timeshare exchanges, manages corporate and government vehicle fleets and franchises car rental and hotel businesses; the alliance marketing related services division provides an array of value driven products and services and the other consumer and business services division offers tax preparation services, information technology services, car park services and vehicle emergency support and rescue services in the United Kingdom, credit information services, financial products and other consumer- related services. Headquartered in New York, New York, Cendant has more than 35,000 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 $8 billion. Apollo, Cendant, the franchisors and NRT have entered or will enter into agreements and arrangements setting forth their on going rights and responsibilities regarding the matters outlined below. The agreements summarized below are included as exhibits to the Registration Statement that contains this prospectus. The following summaries do not contain all of the information contained in the exhibits. Franchise Agreements NRT's status as a franchisee is governed by its franchise agreements with its franchisors, Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc. and Century 21 Real Estate Corporation, each of which is a wholly owned subsidiary of Cendant. Under the franchise agreements, NRT has the non- exclusive right to operate under the COLDWELL BANKER(R), ERA(R) and CENTURY 21(R) real estate franchise systems at listed locations. Under a related license agreement, NRT 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, NRT entered into new 75 franchise agreements with each of its franchisors. The new agreements superseded the franchise agreements then in effect. The following is a summary of the material terms of the new franchise agreements. General The franchise agreements impose restrictions on the business and operations of NRT and require NRT to comply with the operating standards set forth in the franchisors' operating manuals. NRT's failure to comply with these restrictions and standards could result in a termination of the franchise agreement. The franchise agreements also provide that NRT is entitled to participate in the programs established by its franchisors for the benefit of their franchisees, including: .marketing programs; .relocation services; .referral systems; and .orientation and training programs. Each of the franchise agreements has a 50-year term expiring on February 9, 2049. The initial term may be extended at NRT's option for an additional 50- year term on the same terms, so long as NRT is not then in violation of the terms of the franchise agreement. Royalties Under the franchise agreements, NRT has agreed to pay the franchisors a monthly royalty of 6% of NRT's gross commission income (with the exception of NRT's CENTURY 21(R) offices in Northern California, for which NRT is currently required to pay a royalty fee of 4.89% (subject to adjustment for acquisitions) of the gross commission income from such offices) plus $166,667. If NRT acquires or opens additional offices, NRT will generally be required to pay royalties for revenues generated by the additional offices at the 6% royalty rate. However, if NRT acquires offices in a transaction in which Cendant does not participate under the acquisition cooperation agreement after NRT has requested Cendant to participate, the franchise royalty rate will be between 2% and 4%, depending on the acquired brokerage's gross commission income for the twelve months prior to its acquisition by NRT. If the acquired brokerage operates in a territory in which NRT then operates, the franchise royalty rate will be either 2% or 3% depending on the acquired brokerage's gross commission income for the twelve months prior to its acquisition. Upon exhaustion of the amounts Cendant has agreed to provide for NRT's acquisitions under the acquisition cooperation agreement, the franchise royalty rate for brokerages acquired without Cendant's participation will be either 3% or 4% depending on the acquired brokerage's gross commission income for the twelve months prior to its acquisition and whether the acquired brokerage operates in a territory in which NRT then has operations. Under the franchise agreements, NRT is also required to pay the following additional royalties: .$156,250 per month; . if Cendant acquires the stock of the brokerage being acquired by NRT and then sells the brokerage assets to NRT under the acquisition cooperation agreement, a monthly royalty equal to one-tenth of the federal income tax payable by Cendant on the sale of the assets to 76 NRT in the acquisition, divided by 12, as payment to Cendant for the stepped-up tax basis received by NRT for the assets acquired; . until the closing of the offering, a royalty that has averaged $273,900 per month over the first three months of 1999; . following the closing of the offering, a royalty equal to approximately 1.1% of NRT's monthly gross commission income, subject to a maximum of approximately $22.1 million per year (which maximum may decrease in any year in which NRT's gross commission income falls below specified threshold amounts); and . 0.15% of NRT's total revenue per quarter payable for each quarter (up to a total of 20 quarters) in which NRT's EBITDA for the preceding twelve months exceeds $225 million. NRT paid franchise royalties to its franchisors totaling approximately $24.0 million during 1996 (from May 31, 1996), $57.7 million during 1997, $121.3 million during 1998 and $27.5 million for the three months ended March 31, 1999. If the additional royalties described in the first and fourth bullets above had been incurred by NRT during the year ended December 31, 1998, NRT's royalties for that year would have increased by $24.0 million. Additional Offices Under the franchise agreements, NRT is required to give Cendant prior notice before opening or acquiring new brokerage offices. The franchisors may prevent the opening or acquisition of such new brokerage offices if: .the opening or acquisition would have an adverse impact on other existing franchisees of NRT's franchisors; . the opening or acquisition would result in the franchisor being in violation of any agreement with its other franchisees; or . 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 NRT resulting from newly acquired or opened offices, NRT is required to pay the franchisors, subject to a maximum of $100,000 per acquisition: . an initial fee of $4,000 for each newly acquired or opened office not previously affiliated with the franchisors; and . 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. Each acquired office is required to be operated under one of the franchisor's brands, unless the office is closed within one year of its acquisition under a business plan presented to NRT's Board of Directors and Cendant at the time of acquisition. NRT has incurred approximately $1.6 million in initial office 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. 77 Office Closings In the event that NRT wishes to sell or close one or more of its real estate brokerage offices, it will be required to obtain the franchisor's consent prior to the intended closure. However, NRT has the right to close the following offices without the franchisor's consent: . offices acquired by NRT from National Realty Trust, which represent a total of no more than $150 million of annual gross commission income; . offices closed within one year of being acquired by NRT, if the offices were identified to Cendant at the time of acquisition and were not operating under any of the franchisors' brands at any time; and . other offices to the extent that the total gross commission income for the 12-month period prior to closure for those offices closed (excluding offices otherwise permitted to be closed) does not exceed the sum of 3% of NRT's aggregate gross commission income for the preceding calendar year (pro forma for new offices opened and office closings) and any unused amounts under this 3% cap for the two prior years (commencing in August 1997). NRT may close offices under the previous sentence only if all fees payable to the franchisors have been paid, the franchise for the closed offices is not being assigned and the closure does not reduce any of the brands' market share for the applicable market by more than 10%. Advertising NRT is required to make monthly contributions to national advertising funds maintained by its franchisors for the creation and development of advertising, public relations and programs promoting the franchisors' brands. Under the CENTURY 21(R) and ERA(R) franchise agreements, NRT is required to pay a monthly fee of 2% of NRT's gross commission income. Under the COLDWELL BANKER(R) franchise agreement, NRT is required to pay a monthly fee of 2 1/2% of NRT's gross commission income. Under each agreement, however, these fees are subject to minimum and maximum advertising fees per brokerage office. In addition, the fees payable under the COLDWELL BANKER(R) franchise agreement are subject to temporary abatement for acquired offices with gross commission income of over $750,000. As a result of the maximum advertising fee limitation, NRT paid an average of 0.33% in 1997 and 0.27% in 1998 of its gross commission income to the national advertising funds. NRT contributed to these advertising funds a total of $1.4 million during 1996 (from May 31, 1996), $3.4 million during 1997, $5.5 million during 1998 and $1.5 million for the three months ended March 31, 1999. Cendant has informed NRT that substantially all amounts contributed to the national advertising funds maintained by the franchisors have been spent on the franchisors' marketing and advertising programs. Indemnification NRT has agreed to indemnify the franchisors and their subsidiaries, affiliates, parents, directors, officers and employees and all of their other franchisees against liabilities arising out of the operation of NRT's business under the franchise agreements. However, 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 NRT's business, including those that arise out of disputes under any agreement between Cendant and NRT (other than disputes involving successful claims for indemnification under the franchise agreements). 78 Change in Control of NRT Each franchise agreement provides that the franchisor's consent will be required for any issuance or transfer of NRT'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 transfer which is made without first obtaining the franchisor's consent will result in an event of default under the franchise agreement (unless caused by Cendant) which could result in NRT being required to pay damages based on the franchisor's lost future royalties. Limitations on Indebtedness and Dividends Under the franchise agreements, NRT is not permitted to incur indebtedness (including acquired indebtedness) if the incurrence would cause NRT's pro forma ratio of debt to EBITDA for the preceding 12-month period to exceed 2.0 to 1. NRT is permitted, however, to incur: . loans from financial institutions that are secured by and payable from the proceeds of the loans in the ordinary course of business; . working capital revolving loans equal to or less than 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 debt no greater than the debt being refinanced; and . other debt equal to or less than 1% of gross commission income over the preceding 12-month period. The maximum permitted ratio of debt to EBITDA will increase to 3.0 to 1 from 2.0 to 1 if the amounts that Cendant has agreed to provide under the acquisition cooperation agreement have been provided in full, so long as Cendant has not then agreed to provide additional funds on substantially similar economic terms. Immediately prior to incurring any debt, NRT is required to furnish Cendant with a certificate to the effect that the incurrence would not be in violation of the maximum ratio of debt to EBITDA and that the ratio of debt to EBITDA would not reasonably be expected to exceed 2.0 to 1 or 3.0 to 1, as applicable, for the following 12 months. Under the franchise agreements, debt includes redeemable preferred stock but does not include: . pay-in-kind preferred stock that does not require NRT to make any cash payments (other than upon liquidation) or include sanctions for the non- payment of cash; . perpetual preferred stock that pays cash dividends and does not impose penalties for the non-payment of required amounts other than the right to elect with all other preferred stock no more than two directors of NRT, if the annual dividend rate on such preferred stock does not exceed 13% and, at the time of issuance, NRT would have been permitted to incur debt with fixed charges equal to the fixed charges of the preferred stock; and . NRT's existing preferred stock (including any shares issued as dividends on the preferred stock). In addition, NRT's franchise agreements prohibit NRT from incurring debt to finance the payment of dividends on its common or preferred stock. NRT is also prohibited from declaring or paying any dividend that exceeds 20% of NRT's net income for the year in which declared or paid 79 (less any dividends paid during such period) and is not a regularly scheduled quarterly dividend consistent with past practice, unless NRT's ratio of debt to EBITDA 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 one of the following events (subject to notice and an opportunity to cure): . a material violation by NRT of the terms of the franchise agreements (including those violation set forth under "--Termination Damages" below); . the suspension or revocation of NRT's real estate brokerage license; . NRT's failure to conduct its business in accordance with applicable ethical standards; . NRT's failure to produce gross commission income per office during any six-month period equal to at least 50% of the average gross commission income per office generated by all franchisees during any six-month period in the same local area; . insolvency or bankruptcy events involving NRT; and . a change in control of NRT. Termination Damages The franchise agreements provide that NRT must pay its franchisors damages upon the occurrence of an early termination of the franchise agreements by the franchisors due to: . a change in control of NRT (other than a change in control caused by Cendant); . the affiliation by NRT with another real estate brokerage franchisor that is not an affiliate of the franchisors; . the failure of NRT to operate one or more of its offices under one of its 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 NRT that has a material adverse effect on, or which is reasonably expected to have a material adverse effect on, the franchisor's brand, in each case after notice and an opportunity to cure. The damages payable in the event of a termination described above are equal to the franchisor's lost future royalties, based on the average monthly royalty payments paid by NRT, for up to 25 years. In addition, any 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 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 NRT, the franchisors are entitled to seek other forms of legal and equitable relief. Acquisition Cooperation Agreement On February 9, 1999, NRT and Cendant entered into an acquisition cooperation agreement relating to the funding of NRT's brokerage acquisitions in which Cendant agrees to participate, which superseded the provisions of a stockholders agreement then in effect. Under the acquisition cooperation agreement, Cendant agreed, subject to its approval of each brokerage acquisition in 80 which it participates, to purchase the trade names, trademarked operating names and, so long as the marketing agreement is in effect, any mortgage operations of the brokerage being acquired by NRT. Cendant pays a substantial portion of the purchase price that would otherwise be payable by NRT. NRT purchases all other assets of the acquired brokerage. Cendant is not required to participate in any brokerage acquisition. NRT has agreed to operate each office that it acquires (with or without Cendant's participation) in one of its existing franchisors' real estate brokerage franchise systems at the royalty rates set forth in the franchise agreements. If Cendant does not participate in a brokerage acquisition in which NRT has requested Cendant to participate, NRT will have the right to complete the brokerage acquisition without Cendant's participation, subject to Cendant's right to prohibit the transaction based on a determination that the acquisition will adversely affect other franchisees. The franchise royalty rate with respect to any such acquired brokerage will be lower than the 6% royalty rate that generally applies to NRT's offices. When NRT was formed in August 1997, Cendant agreed to provide approximately $446 million for NRT's brokerage acquisitions. Cendant has agreed to provide an additional $1 billion for future brokerage acquisitions in which Cendant agrees to participate under the acquisition cooperation agreement. The first $500 million of Cendant's additional $1 billion commitment is currently available (of which $24 million has been provided). The second $500 million will be available after the first $500 million has been contributed by Cendant but in no case earlier than February 9, 2004, unless Cendant agrees otherwise. Brokerage acquisitions in which Cendant agrees to participate under the acquisition cooperation agreement generally are completed in one of two ways: . If NRT elects to acquire a brokerage directly through the purchase of assets, Cendant purchases the trade names, trademarked operating names and any mortgage operations of the acquired brokerage in exchange for a cash payment either to the seller of the brokerage or to NRT. . In other brokerage acquisitions, Cendant (rather than NRT) purchases a brokerage from the seller and immediately sells to NRT the acquired brokerage's assets other than trade names, trademarked operating names and any mortgage operations. Purchases and sales of assets between NRT and Cendant are typically completed under one or more purchase and sale agreements between NRT and Cendant. Under the acquisition cooperation agreement, Cendant's portion of the total acquisition cost is equal to 100% (or 125% with respect to Cendant's original commitment of approximately $446 million) of the additional royalty fees that would have been payable to NRT's franchisors during the prior 12 months had the acquisition occurred at the beginning of the period, multiplied by an acquisition multiple. . The acquisition multiple is calculated by dividing the cost of the acquisition by the acquired brokerage's pro forma EBITDA before anticipated cost savings and before royalty payments. 81 . Cendant's share of the 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. If the mortgage operations' EBITDA is greater than $1 million, Cendant's acquisition cost will be increased (or decreased if the following amount is negative) by an amount equal to the acquisition multiple multiplied by the difference between the mortgage operations' EBITDA and the product of $58.37 and the number of the acquired brokerage's closed transaction sides for the twelve months prior to the acquisition. . Cendant's share of the acquisition cost may not exceed 90% of the total acquisition cost of the brokerage acquisition. From September 1, 1997 through March 31, 1999, Cendant participated in each of NRT's 75 acquisitions. Through March 31, 1999, Cendant paid NRT or the seller a total of approximately $461 million, and NRT 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 September 1, 1997, Cendant would have paid a total of approximately $389 million and NRT would have paid a total of approximately $302 million in such brokerage acquisitions. Under the acquisition cooperation agreement, following the closing of the offering, Cendant will have the right to pay up to 50% of its acquisition cost by cancelling a portion of its senior preferred stock. Cendant may exercise this right only if NRT has at least $50 million in available borrowing capacity under the debt to EBITDA test under the franchise agreements. In addition, if NRT does not have available funds to close the brokerage acquisition without Cendant's participation, NRT will have the right to postpone the cancellation of preferred stock for up to 90 days following the brokerage acquisition. Cendant would then be required to pay its share of the acquisition cost in cash. Cendant has the right under the acquisition cooperation agreement, no later than 60 days after each brokerage acquisition, to require NRT to sell to Cendant or its designee one or more of the brokerage offices acquired by NRT unless the offices' pro forma revenues or EBITDA before royalties over the preceding 12-month period are greater than 5% (10% with Apollo's consent) of the acquired brokerage's pro forma revenues or EBITDA before royalties over the preceding 12-month period. The purchase price for any such offices will be equal to the product of the acquisition multiple and the greater of: . the difference between the pro forma EBITDA before royalties for the acquired brokerage before giving effect to the sale of offices and the pro forma EBITDA before royalties after giving effect to the sale of offices; and . the gross revenues of the offices to be sold multiplied by pro forma EBITDA before royalties 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 When NRT was formed, NRT, Apollo and Cendant entered into a stockholders agreement to govern the relationship among Apollo and Cendant and their respective affiliates as stockholders of NRT. Immediately prior to the closing of the offering, the stockholders agreement will be amended and restated. The following is a summary of the new stockholders agreement. 82 Voting Agreement The stockholders agreement provides that Apollo and Cendant will vote all of their voting stock of NRT in favor of a Board of Directors consisting of: . five directors to be nominated by Cendant; . five directors to be nominated by Apollo; and . two directors to be nominated by the majority of the Board of Directors, each of whom must be an "independent director" within the meaning of the rules of the New York Stock Exchange or interdealer quotation system on which the common stock is listed. One of the directors nominated by Cendant and one of the directors nominated by Apollo must not be employees of, consultants to, or officers or directors of Cendant, Apollo or any of their affiliates (other than NRT). Upon notice by either stockholder that it desires to remove a director nominated by it, Apollo and Cendant will vote all of their shares of voting stock of NRT in favor of the removal of that director. Registration Rights NRT has granted to Apollo and Cendant registration rights for the registration under the Securities Act of 1933 of 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. Under the stockholders agreement, upon Apollo's or Cendant's request, NRT is required to use its best efforts to register the shares requested to be registered. During the three-year period following the closing of the offering, in any registration requested by Apollo or Cendant, Apollo will have the right to register in such offering up to the greater of: . 80% of the shares to be sold in the offering; and . a number of shares such that Apollo will have sold 70% of all shares sold by Apollo and Cendant in all offerings by Apollo and Cendant following the offering. After the third anniversary of the closing, 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 NRT register up to $25 million of its common stock per quarter, but no more than $50 million of its common stock in any twelve-month period. Apollo and Cendant are each entitled to request four registrations. In addition, Apollo and Cendant may request NRT to use its reasonable efforts to register shares of common stock held by them in other registrations initiated by NRT on its own behalf or on behalf of any other stockholder of NRT. 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 NRT. The stockholders agreement also contains customary provisions with respect to registration procedures, underwritten offerings and indemnification and contribution rights in connection with the registration of common stock on behalf of Apollo and Cendant. 83 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 acquire beneficial ownership of 20% or more of the common stock or securities convertible into or exchangeable for common stock; or . 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. 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 that the proposed transferee may be acquiring such securities with the purpose of acquiring, changing or influencing control of NRT (or facilitating any such acquisition, change or influence of control). Cendant's belief may be based 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 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 terminated earlier 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: . 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 NRT; . the registration rights provisions of the stockholders agreement will terminate when neither Cendant nor Apollo owns any of the outstanding voting stock of NRT; and . so long as any of the franchise agreements is 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, NRT and Cendant entered into the acquisition services agreement, under which NRT 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 NRT. In exchange for advisory services, Cendant paid NRT $30 million as an advance against the fees that are payable to NRT under the acquisition services agreement. The fees payable under the acquisition services agreement are based upon the size of NRT's future brokerage acquisitions. Cendant will not be required to pay any additional amounts to 84 NRT for these advisory services. The fees advanced but not earned under the acquisition services agreement are refundable to Cendant if services under the acquisition services agreement are not performed. The acquisition services agreement has a ten-year term, unless the parties agree to an earlier termination. Lease Agreements NRT 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. Each lease has an initial term of five years commencing on September 1, 1997, with an option exercisable by NRT to extend the term for an additional five years upon 30 days' written notice to Cendant. Under the leases, Cendant is responsible for property taxes, maintenance and insurance and 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, NRT is permitted to amend the lease to increase or reduce the square footage of the premises as needed and as space becomes available, so long as it 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 for any reason upon 180 days' written notice to the other party. NRT paid Cendant a total of $529,000 during 1997, $853,000 during 1998 and $258,000 during the three months ended March 31, 1999, under these leases. Marketing Agreement Under the marketing agreement, NRT markets Cendant Mortgage's mortgage programs and products through NRT's real estate brokerage offices. NRT receives a fee for marketing Cendant Mortgage's services. The term of the marketing agreement is 40 years unless terminated earlier by Cendant Mortgage for any reason or at NRT's option if Cendant Mortgage materially breaches the marketing agreement or if a nationwide third party provider of mortgage services meeting certain conditions offers NRT a comparable marketing agreement on economic terms more favorable to NRT than those in the marketing agreement and Cendant Mortgage declines to match the economic terms. During the term of the marketing agreement, NRT may not enter into any similar arrangement with another party. During the four-month period in 1997 when the marketing agreement was in effect, Cendant Mortgage paid NRT a total of $699,000 under the marketing agreement. Cendant Mortgage paid NRT a total of $11.2 million during the year ended December 31, 1998 and $5.7 million for the three months ended March 31, 1999, 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 with Cendant 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 third party vendors, on February 9, 1999 NRT entered into a program outsourcing agreement with Cendant, which supersedes a preferred alliance agreement, dated as of August 11, 1997, between NRT and Cendant. Under the program outsourcing agreement, NRT has appointed Cendant as NRT's exclusive outsourcing agent to negotiate the terms of NRT's participation in purchasing relationships and programs, including corporate purchasing relationships, 85 with vendors and programs through which NRT markets vendors' products or services to its customers. NRT 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 NRT 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 these 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: . the program does not afford NRT terms at least as advantageous taken as a whole as those afforded to any other franchisees of Cendant's real estate brokerage systems; and . NRT is already participating in a program covering a similar good or service as a program established by Cendant. No title insurance agency or escrow service business serving NRT will be required to participate in any marketing program established by Cendant. In addition, the provisions of the program outsourcing agreement will not apply to any marketing program established by NRT relating to title insurance or escrow services. If NRT 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 for three months to explore the sale of the businesses to Cendant or the combination of the businesses with Cendant's related operations. If Cendant establishes a program with a title insurance underwriter or owns a title insurance underwriter, NRT will use the underwriter exclusively as long as it provides service and economic terms comparable to the terms of NRT's then current arrangements. NRT is permitted to enter into: . a purchasing program if no Cendant purchasing program covers the good or service and NRT's aggregate purchases of the good or service do not exceed $250,000 per calendar year; . a purchasing program covering a good or service sought by NRT if a purchasing program exists which covers the good or service, but NRT is not otherwise required to participate in a Cendant purchasing program; . a marketing program in which NRT receives buyer leads, listing leads or barter consideration and no other consideration, if the 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 NRT, if a Cendant program covering the good or service has expired or has been terminated and Cendant has either not replaced, renewed or extended the program; . a program with respect to a good or service sought to be purchased or marketed by NRT, if NRT has notified Cendant of its desire to have Cendant implement a new program covering such good or service and Cendant has not, within 30 days of the notice from NRT, notified NRT of its decision to pursue such new program or has not implemented the new program within 180 days of Cendant notifying NRT of its decision to pursue such new program; and . a program covering a geographic area which is not covered by a Cendant program. 86 If Cendant subsequently implements a new program covering the same or a similar product or service covered by an existing NRT program, then NRT will terminate its 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. NRT 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. Under the franchise agreements, Cendant has the right to provide to any third party the customer information provided to Cendant under each franchise agreement. The program outsourcing agreement terminates upon the termination or expiration of the last of the franchise agreements to terminate or expire. The program outsourcing agreement may be terminated by the non-breaching party in the event of a material breach that is not cured after notice. Relocation Management NRT has entered into arrangements and agreements with Cendant Mobility, the country's largest relocation company, under which NRT provides its brokerage services to relocating employees of the clients of Cendant Mobility, which are typically large corporations and governmental agencies. Under this arrangement, when receiving a referral from Cendant Mobility, NRT 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. NRT believes that such fees are comparable to the fees charged by other relocation companies. NRT paid a total of $6.4 million during 1997 and $11.6 million during 1998 in referral fees to Cendant Mobility. The arrangements with Cendant Mobility may be subject to termination or modification at any time. Support Agreement NRT and Cendant entered into a support agreement, dated as of August 11, 1997, under which Cendant has agreed to furnish NRT with computer and data related information services. In consideration of the provision of such services, NRT has agreed to reimburse Cendant directly for actual costs incurred by Cendant on behalf of NRT. In addition, NRT was required to pay Cendant a monthly fee of $77,500 during 1997 and $41,667 during 1998 and is required to pay a monthly fee of $12,500 during 1999. NRT paid Cendant a total of $1.4 million during 1997, $2.0 million during 1998 and $417,000 during the three months ended March 31, 1999 under the support agreement. The support agreement terminates on December 31, 1999, unless earlier terminated by either party. Advisory Services Agreement NRT and Apollo Management, L.P. have entered into an advisory services agreement, dated as of August 11, 1997, under which Apollo Management, L.P. has provided management, advisory and other services to NRT in connection with the operation of its business. In consideration for these services, NRT 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. NRT paid Apollo Management, L.P. a total of $667,000 during 1997, and $2.0 million during 1998 and $500,000 during the three months ended March 31, 1999 under the advisory services agreement. 87 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 NRT in August 1997. The advance was replaced on September 1, 1997 with an advance of $18.8 million 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 NRT is not in material breach of the terms of the franchise agreements. In the event that NRT 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 13, 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 the acquisition, NRT issued to Mr. Burnet notes in an aggregate principal amount of $5.8 million, of which approximately $3.9 million is currently outstanding. Acquisition of Denver Operations of Premier Van Schaak In September 1998, NRT acquired the Denver operations of Premier Van Schaak, a residential real estate brokerage firm then owned by R. Scott Webber. During 1999, Mr. Webber will be entitled, subject to sales associates meeting performance targets, to receive additional payments of up to $500,000 from NRT in connection with such acquisition. Special Dividend NRT declared a $45 million cash dividend on its common stock to Apollo of which $30 million was paid during the first quarter of 1999 and $15 million was paid during the second quarter of 1999. Repurchase of Shares from Apollo and Cendant On April 6, 1999, NRT repurchased 574,575 shares of its common stock from Apollo for $10.7 million. NRT has agreed to purchase 725.4 shares of its convertible preferred stock from Cendant for $10.7 million, plus accrued dividends on such shares, after the closing of the offering. 88 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of NRT currently consists of 50,000,000 shares of common stock and 405,000 shares of preferred stock. There currently are 18,175,425 shares of common stock issued and outstanding, all of which are held by Apollo. Upon the closing of the offering, . 27,550,425 shares of common stock will be issued and outstanding (28,183,238 if the underwriters' over-allotment option is exercised in full); . 13,487,925 shares will be held by Apollo (12,011,363 if the underwriters' over-allotment option is exercised in full); . 14,062,500 shares will be held by NRT's public stockholders (16,171,875 if the underwriters' over-allotment option is exercised in full); . 6,473,503 shares will be reserved for issuance upon conversion of the convertible preferred stock held by Cendant following the repurchase of 725.4 shares of convertible preferred stock from Cendant (5,840,691 if the underwriters' over-allotment option is exercised in full); and . 3,399,141 shares will be reserved for issuance under the 1997 Equity Participation Plan. The following summary of the capital stock of NRT is qualified by reference to NRT's restated certificate of incorporation and its amended and restated by- laws, which will become effective prior to the closing of the offering. Forms of NRT's restated certificate of incorporation and amended and restated by-laws are filed as exhibits to the registration statement that includes this prospectus. 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 NRT, 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 89 the payment of all debts and other liabilities of NRT. 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 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 Under NRT's restated certificate of incorporation, 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. 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. A total 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. NRT has agreed to redeem all of the outstanding shares of junior preferred stock with a portion of the proceeds of the offering. Accordingly, following the offering, there will be no shares of junior preferred stock outstanding. NRT has also agreed to repurchase 725.4 shares of convertible preferred stock from Cendant following the closing of the offering. Although NRT 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 NRT 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 NRT legally available therefor, cumulative preferential dividends at the rate of 9% per annum on the then outstanding amount 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. Dividends are payable: . in cash, to the extent NRT has sufficient available cash in excess of certain prescribed amounts; and . by increasing the face value of the senior preferred stock, to the extent NRT has insufficient available cash (unless the Board of Directors of NRT, including one Cendant nominee and one Apollo nominee, elects to pay such dividend in 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 may be declared or paid or set apart, and no common 90 stock or any other capital stock of NRT ranking junior to or on parity with the senior preferred stock (other than the junior preferred stock on a mandatory redemption date) may be redeemed, purchased or otherwise acquired by NRT 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 NRT at any time at a redemption price equal to 100% of the then current liquidation preference of the senior preferred stock plus 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, NRT is required to redeem 10% of the total number of shares of senior preferred stock ever issued at the applicable redemption price. On August 29, 2009, NRT is required to redeem all remaining outstanding shares of senior preferred stock. Dissolution, Liquidation, Winding Up. Upon the dissolution, liquidation or winding up of NRT, 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 may 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 NRT'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 NRT to: . 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; . amend or otherwise alter the certificate of incorporation of NRT in a manner that adversely affects the rights of holders of the senior preferred stock; . 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 . 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 NRT'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 NRT has agreed to repurchase 725.4 shares of convertible preferred stock from Cendant following the closing of the offering. 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 NRT legally available therefor, cumulative preferential dividends at the rate of 5% per annum on the then outstanding amount of such preferred stock, payable quarterly in arrears on each February 15, May 15, August 15 and 91 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: . in cash, to the extent NRT has sufficient available cash in excess of certain prescribed amounts; and . by increasing the face value of the convertible preferred stock, to the extent NRT has insufficient available cash (unless the Board of Directors of NRT, including one Apollo nominee and one Cendant nominee, elects to pay such dividend in 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 may be declared or paid or set apart, and no common stock or any other capital stock of NRT 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) may be redeemed, purchased or otherwise acquired by NRT 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 NRT from and after the third anniversary of the closing of the offering at a redemption price equal to the sum of all accrued and unpaid dividends through the redemption date, plus: . 103% of the then current face value of the convertible preferred stock if the convertible preferred stock is redeemed on or prior to the fourth anniversary of the closing of the offering; . 102% of the then current face value of the convertible preferred stock if the convertible preferred stock is redeemed on or prior to the fifth anniversary of the closing of the offering; . 101% of the then current face value of the convertible preferred stock if the convertible preferred stock is redeemed on or prior to the sixth anniversary of the closing of the offering; or . 100% of the then current face value of the convertible preferred stock if the convertible preferred stock is redeemed after the sixth anniversary of the closing of the offering. In addition, on August 29, 2012, NRT 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 face value of the convertible preferred stock then outstanding. Dissolution, Liquidation, Winding Up. Upon the dissolution, liquidation or winding up of NRT, 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 may 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. Holders may convert that fraction of 92 each share of the convertible preferred stock then outstanding equal to the aggregate face value of the convertible preferred stock at the time of issuance divided by the aggregate outstanding amount of the convertible preferred stock at the conversion rate then in effect. Initially, all 23,275 shares of convertible preferred stock held by Cendant will be convertible into a total of 6,473,503 shares of common stock, assuming no change in the aggregate outstanding amount of the convertible preferred stock before the time of conversion and assuming the repurchase of 725.4 shares of convertible preferred stock from Cendant following the closing of the offering and an initial public offering price of $16 per share, the mid-point of the estimated 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 NRT to: . 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; . amend or otherwise alter the certificate of incorporation of NRT in a manner that adversely affects the rights of holders of the convertible preferred stock; . 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 . waive compliance 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 NRT'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 NRT 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. 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 NRT legally available therefor, cumulative preferential dividends at the rate of 18% per annum on the then outstanding amount 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 93 additional dividend in an amount equal to 0.1% of the gross commission income of NRT 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: . in cash, to the extent NRT has sufficient available cash in excess of certain prescribed amounts; and . by increasing the face value of the convertible preferred stock, to the extent NRT has insufficient available cash (unless the Board of Directors of NRT, including one Cendant nominee and one Apollo nominee, elects to pay such dividends in 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 NRT 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 NRT 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 NRT, at any time prior to August 29, 2001 at a redemption price equal to the sum of the following: .the then current liquidation preference for such junior preferred stock; .any accrued and unpaid dividends through the redemption date; and . 18% of the product of the initial liquidation preference for such junior preferred stock and the number of days from the date of issuance of such junior preferred stock to August 29, 2001 divided by 1460. NRT estimates that upon the closing of the offering the redemption price for all outstanding shares of junior preferred stock will be $88.2 million. Anti-Takeover Provisions The restated certificate of incorporation of NRT, the amended and restated by-laws of NRT, the franchise agreements and the General Corporation Law of the State of Delaware contain provisions that could make more difficult the acquisition of control of NRT. The following description is intended as a summary only and should be read together with the restated certificate, the restated by-laws, the stockholders agreement and the Delaware General Corporation Law. Classified Board of Directors; Removal of Directors The restated certificate of incorporation 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. NRT believes that a classified board of directors will help 94 to assure the continuity and stability of the Board of Directors and NRT'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 NRT. NRT 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, NRT's directors may be removed by NRT's stockholders only for cause. Action by Written Consent; Special Meetings of Stockholders NRT's restated certificate of incorporation provides that no action required or permitted to be taken by stockholders of NRT may be taken except at a meeting of stockholders. The restated by-laws provide that special meetings may be called only by: . the Chairman of the Board; .the President; or . 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 of incorporation prohibiting action by written consent without a meeting and the provisions of the amended and 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 NRT's amended and restated by-laws contain 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 NRT 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. 95 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. NRT could be required to pay the franchisors 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 without Cendant's consent: . shares representing 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. 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 NRT (or facilitating any such acquisition, change or influence of control). In addition, the terms of NRT's bank credit facility provide that a change in control of NRT will constitute an event of default under its terms. These provisions may render an unsolicited takeover of NRT more difficult or less likely to occur or might prevent such a takeover. Delaware Business Combination Statute Section 203 of the Delaware General Corporation Law imposes a three-year moratorium on business combinations between a Delaware corporation and an "interested stockholder" (in general, a stockholder owning 15% or more of a corporation's outstanding voting stock) or an affiliate or associate thereof unless: . 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; . 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 . on or after an interested stockholder becomes an interested stockholder, the business combination is approved by the board of directors and holders of at least 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 Delaware General Corporation Law applies to any corporation incorporated in the State of Delaware unless the corporation expressly elects not be governed by such legislation. NRT has not made such an election and is therefore subject to Section 203. 96 Limitations on Directors' Liability NRT's restated certificate of incorporation provides that no director of NRT shall be liable to NRT or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to NRT or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . in respect of certain unlawful dividend payments or stock redemptions or repurchases; or . for any transaction from which the director derived an improper personal benefit. The effect of those provisions is to eliminate the rights of NRT and its stockholders (through stockholders' derivative suits on behalf of NRT) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions do not limit the liability of directors under federal securities laws. Listing NRT has applied to have the common stock approved for quotation on the Nasdaq National Market under the symbol NRTX. Transfer Agent And Registrar The transfer agent and registrar for the common stock is BankBoston, N.A. 97 DESCRIPTION OF INDEBTEDNESS NRT is a party to a credit facility with commercial banks. The following is a summary of the material terms and conditions of NRT's credit facility. The credit facility consists of a revolving credit facility of up to $100,000,000, which will be available to NRT until May 29, 2001. NRT is seeking to expand the available borrowing capacity under this facility. Advances may be used for the general working capital needs of NRT in the ordinary course of business and for certain permitted acquisitions. At the option of NRT, 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 the federal funds rate plus 0.5% and the prime lending rate. Interest accrues on Eurodollar loans at a rate equal to 1.75% plus the British Bankers' Association interest settlement rate (or if not available, by reference to the London interbank market rate). NRT's obligations arising under the credit facility are secured by a pledge of the capital stock of NRT's subsidiaries and are guaranteed by NRT's subsidiaries. The guarantees are secured by a pledge of the capital stock of the guarantors' subsidiaries. Under the terms of the credit facility, NRT must make mandatory prepayments following the receipt of funds from specified events. These events include: .asset dispositions; .permitted incurrences of additional debt or issuances of additional preferred stock; or . instances where NRT 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 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. NRT is also required to maintain compliance with 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 other agreements, bankruptcy events, ERISA events, judgments against NRT or its subsidiaries, the termination of or payment of liquidated damages under the franchise agreements and a change in control of NRT (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 NRT's capital stock on a fully-diluted basis). 98 In addition to the credit facility, in connection with NRT's acquisition of Hunneman Real Estate Corporation, NRT assumed a line of credit, of which $22.8 million was outstanding at December 31, 1998 and $12.7 million was outstanding at March 31, 1999. The line of credit is restricted to providing funding for NRT's mortgage loan originations, pursuant to which NRT finances mortgage loans. NRT 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, NRT pays off the amount drawn, typically within 90 days of the draw. 99 SHARES ELIGIBLE FOR FUTURE SALE Immediately after the closing of the offering, NRT will have 27,550,425 shares of common stock issued and outstanding and 9,872,644 shares of common stock issuable upon the exercise of options and the conversion of the remaining convertible preferred stock held by Cendant after the share repurchase. 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 NRT (as that term is defined in Rule 144) will be subject to the resale limitations of Rule 144. In general, under Rule 144, the following classes of persons may sell, within any three-month period, no more than 1% of NRT'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: . any person, or persons whose shares are required to be aggregated, who owns shares of common stock which have been held for at least one year since such shares were sold by NRT or by an affiliate of NRT in a transaction or chain of transactions not involving a public offering; or . any affiliate of NRT who holds shares of common stock that are not restricted securities. Sales under Rule 144 are also subject to provisions relating to the manner and notice of sale and availability of current public information about NRT. Affiliates of NRT must comply with the requirements of Rule 144, including the one-year holding period requirement, to sell shares of common stock that are restricted securities. If at least two years has elapsed from the date restricted securities were acquired from NRT or an affiliate of NRT, a holder of such restricted securities who is not an affiliate of NRT at the time of the sale and has not been an affiliate of NRT 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 NRT, its executive officers and directors, Apollo and Cendant has agreed not to offer, sell or otherwise dispose of any shares of common stock, other than in the offering, or any security convertible into or exchangeable or exercisable for shares of common stock, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the underwriters for a period of 180 days after the date of this prospectus, unless such offer, sale or disposition is expressly permitted by the underwriting agreement. In addition, transfers of shares of common stock by Apollo and Cendant are also restricted by the provisions of the stockholders agreement. Prior to the offering, there has been no public market for common stock. Although NRT 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. 100 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: . a citizen or resident of the United States; . a corporation created or organized in the United States or under the laws of the United States or of any state; . an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source; or . a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and 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 entities that are classified differently for United States federal income tax purposes than for tax purposes in other jurisdictions 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: . effectively connected with the conduct of a U.S. trade or business; or . 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 required 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, 101 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, 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. Under the final United States Treasury Department regulations issued on October 6, 1997 generally effective for payments made after December 31, 1998, a Non-U.S. Holder (including in the case 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 documentation showing 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 and 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: .the gain is U.S. trade or business income; . 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 other tests are met; . 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 . NRT is or has been a United States real property holding corporation for United States federal income tax purposes (which NRT 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 NRT were or were to become a United States real property holding corporation 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 102 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 NRT 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. 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: . a United States person; . a "controlled foreign corporation" for United States federal income tax purposes; or . 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. 103 UNDERWRITING On the terms and conditions contained in the underwriting agreement, dated as of , 1999, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated, have severally agreed to purchase from NRT and Apollo the number of shares of common stock set forth opposite their names.
Number of Shares ---------- Donaldson, Lufkin & Jenrette Securities Corporation............... Bear, Stearns & Co. Inc........................................... BT Alex. Brown Incorporated....................................... Lehman Brothers Inc............................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................ Morgan Stanley & Co. Incorporated................................. ---------- Total........................................................... 14,062,500 ==========
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock in the offering are subject to approval by their counsel of legal matters and to other conditions. The underwriters must purchase and accept delivery of all the shares of common stock in the offering, 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 NRT, 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 that price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may re-allow, to 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 of the underwriters 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 2,109,375 additional shares of common stock at the initial public offering price less underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of the additional shares based on its percentage of the initial underwriting commitment as indicated in the preceding table. On any exercise, the shares of common stock subject to the underwriters' over-allotment option will be sold by Apollo and Cendant in the following manner: . the first 468,750 shares will be sold by Cendant; and 104 . 10% of any remaining over-allotment shares will be sold by Cendant and the other 90% by Apollo. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by NRT, Apollo and Cendant. These amounts are shown assuming either no exercise or full exercise of the underwriters' option to purchase additional shares of common stock.
Total Total Per Without With Share Option Option ----- ------- ------ Fees payable by NRT........................................ $ $ $ Fees payable by Apollo..................................... $ $ $ Fees payable by Cendant.................................... $ $ $
NRT, Apollo and Cendant have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments that the Underwriters may be required to make in respect of these liabilities. Each of NRT, its executive officers and directors, Apollo and Cendant has agreed for a period of 180 days after the date of this prospectus without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation not to: . 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 or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or . 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. However, the following transactions are exempt from these restrictions: . the grant of stock options, restricted stock or other awards pursuant to NRT's 1997 Equity Participation Plan; . the issuance of shares of common stock on exercise of an option or warrant or conversion of convertible securities; .the issuance of shares of common stock by NRT in connection with acquisitions; .the sale by Cendant to NRT of 725.4 shares of NRT's Series B convertible preferred stock; .transfers by Apollo and Cendant to and among their affiliates; and . the transfer of securities by directors and officers of NRT to members of their immediate families, to a trust of which a director or officer or family member is the beneficiary, to the estate of a director or officer upon his death or to any person as a bona fide gift. In any transfer described above, the acquiring entity or transferee must agree in writing to be bound by these restrictions. In addition, during such period, NRT has also agreed not to file any registration statement with respect to, and each of its executive officers and directors and Apollo and Cendant have agreed not to make any demand for, or exercise any right with respect to, the registration of any 105 shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. All of these restrictions may be waived by Donaldson Lufkin & Jenrette Securities Corporation. 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 NRT, Apollo and Cendant and the representatives of the underwriters. The factors to be considered in determining the price include the history of and the prospects for the industry in which NRT competes, the past and present operations of NRT, the historical results of operations of NRT, the prospects for future earnings of NRT and the general condition of securities markets at the time of the offering. NRT has applied to have the common stock approved for quotation on the Nasdaq National Market under the symbol NRTX. No action has been taken in any jurisdiction (other than the United States) by NRT, Apollo, Cendant or the underwriters that would permit a public offering of the common stock offered hereby in any jurisdiction where action for that purpose is required. The shares of common stock offered in this prospectus 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 in compliance with applicable rules and regulations. You should inform yourself about and 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. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters need not engage in these activities, and may end any of these activities at any time. The underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if it repurchases previously distributed common stock in syndicate covering transactions, in stabilizing transactions or otherwise or if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that the clients of the members have "flipped" the common stock. Of the shares offered hereby, 703,125 shares have been reserved for sale to employees of NRT and its subsidiaries, clients and other persons designated by NRT, in each case to the extent permitted by applicable law. The price per share of the shares to be sold will be the same as the price to the public in the offering. The maximum investment of any of these persons may be limited by NRT in its sole discretion. This program is being administered by Donaldson, Lufkin & Jenrette Securities Corporation 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 5% of the number of shares of common stock offered in connection with the offering excluding shares subject to the over-allotment option. 106 NRT estimates that the expenses of the offering, excluding underwriting discounts and commissions, will be approximately $3 million. The representatives of the underwriters from time to time perform investment banking and other financial services for NRT and its affiliates for which they may receive advisory or transaction fees, plus out-of-pocket expenses of the nature and in amounts customary in the industry. In connection with the participation interest described below, Apollo has agreed to vote for one director nominated by Bear, Stearns & Co. Inc. for the Board of Directors of NRT. Michael L. Tarnopol, a member of NRT's Board of Directors, is Vice Chairman, a Senior Managing Director and Chairman of the Investment Banking Division of Bear, Stearns & Co. Inc., which is acting as an underwriter in the offering, and was nominated to NRT's Board of Directors by Bear, Stearns & Co. Inc. Bear, Stearns, a member of the National Association of Securities Dealers, Inc., owns a 49% non-voting equity participation interest in Apollo's investment in NRT. Because of this relationship between Bear, Stearns & Co. Inc. and NRT, the offering is being conducted in accordance with Rule 2720 of the Rules of Conduct of the National Association of Securities Dealers, Inc. That rule requires that 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 as defined by the NASD. In accordance with this requirement, Donaldson, Lufkin & Jenrette Securities Corporation has assumed the responsibilities of acting as qualified independent underwriter and will recommend a price in compliance with the requirements of Rule 2720. In connection with the offering, Donaldson, Lufkin & Jenrette Securities Corporation 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 Donaldson, Lufkin & Jenrette Securities Corporation as qualified independent underwriter, NRT has agreed to pay Donaldson, Lufkin & Jenrette Securities Corporation $5,000. 107 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 NRT 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 NRT and the dealer from whom such purchase confirmation is received that: . 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; . where required by law, such purchaser is purchasing as principal and not as agent; . such purchaser has reviewed the text above under "--Resale Restrictions"; . 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; . 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 . 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 NRT has been organized under the laws of the State of Delaware. All of the directors and officers of NRT reside outside Canada and substantially all of the assets of NRT are located outside Canada. As a result, it may not be possible for Canadian investors to effect service of process within Canada upon NRT or to enforce against NRT in Canada judgments obtained in Canadian courts that are predicated upon the contractual rights of action, if any, granted to certain purchasers by NRT. It may also not be possible for investors to enforce against NRT in the United States judgments obtained in Canadian courts. 108 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 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 NRT'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 NRT or such persons. All or a substantial portion of the assets of NRT and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against NRT or such persons in Canada or to enforce a judgment obtained in Canadian courts against NRT 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: . the seller will not be liable if the seller proves that the purchaser purchased the securities with knowledge of the misrepresentation; . 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; . in no case shall the amount recoverable pursuant to the right of action exceed the price of which the securities were offered; and . 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 109 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: . no person or company is liable where the person or company proves that the purchaser purchased the securities with knowledge of the misrepresentation; . no person or company, other than the issuer or selling security holder, is liable unless that person or company failed to conduct a reasonable investigation sufficient to provide reasonable grounds for a belief that there had been no misrepresentation, or believed there had been a misrepresentation; and . 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: . in the case of rescission, more than 180 days after the date of the transaction that gave rise to the cause of action; and . in the case of any other action, other than an action for rescission, more than the earlier of (1) 180 days after the purchaser first had knowledge of the facts giving rise to the cause of action, or (2)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. 110 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for NRT by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Legal matters in connection with the sale of shares of common stock in the offering will be passed upon for the underwriters by Milbank, Tweed, Hadley & McCloy LLP, New York, New York. 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 their respective affiliates in connection with legal matters. Milbank, Tweed, Hadley & McCloy LLP has from time to time represented and may continue to represent Apollo in connection with legal matters. EXPERTS The consolidated financial statements of Coldwell Banker Residential Brokerage Corporation for the period from January 1, 1996 to May 31, 1996; National Realty Trust and subsidiaries for the period from June 1, 1996 to December 31, 1996, and the period from January 1, 1997 to August 31, 1997; and NRT Incorporated and subsidiaries as of December 31, 1997 and 1998 and for the four months ended December 31, 1997 and the year ended December 31, 1998, each included in this prospectus, and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing in this prospectus (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the preparation of the financial statements of Coldwell Banker Residential Brokerage Corporation), and elsewhere in the registration statement. Such financial statements and financial statement schedule have been included herein and elsewhere in the registration statement 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 in this prospectus, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The 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 in this prospectus, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of 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 to such financial statements, and are included in this prospectus in reliance upon the report of said firm and upon the authority of said firm as experts in accounting and auditing. 111 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, independent auditors, as stated in their report appearing in this prospectus, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The 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 in this prospectus, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The 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 in this prospectus, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 112 ADDITIONAL INFORMATION NRT has filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock to be sold in the offering. This prospectus is a part of the registration statement and does not contain all the information in the registration statement, as permitted by the rules and regulations of the SEC. Statements contained in this prospectus as to the content of any contract, agreement or other document are not necessarily complete. With respect to each contract, agreement or other document filed as an exhibit to the registration statement, you should refer 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 NRT with the SEC following the offering in accordance with the Securities Exchange Act of 1934, can be inspected and copied at the principal office of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may be obtained from the SEC's website, http://www.sec.gov, and from the Public Reference Room of the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees required by the SEC. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC- 0330. After the closing of the offering, NRT will be subject to the informational requirements of the Securities Exchange Act of 1934 and will file reports, proxy and information statements and other information with the SEC. These reports, proxy and information statements and other information can be inspected and copied at the addresses described above. NRT intends to furnish to its stockholders annual reports containing audited consolidated financial statements, including an opinion on the audited financial statements expressed by NRT's independent auditors. 113 INDEX TO FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements of NRT Incorporated and Subsidiaries Independent Auditors' Report............................................ F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited) .................................................. F-4 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited)............................................................ F-5 Consolidated Statements of Trust and Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1999 (unaudited)....................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited) ....................................................................... F-7 Notes to Consolidated Financial Statements.............................. F-9 Consolidated Financial Statements of Jon Douglas Real Estate Services Group, Inc. and Subsidiaries Independent Auditors' Reports........................................... F-28 Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............. F-31 Consolidated Statements of Shareholders' Deficit for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997................................................................... F-32 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............. F-33 Notes to Consolidated Financial Statements.............................. F-34 Financial Statements of Cornish & Carey Residential, Inc. Independent Auditors' Report............................................ F-40 Statements of Operations for the years ended December 31, 1995 and 1996 and the period January 1, 1997 to June 30, 1997 (unaudited)........................... F-41 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-42 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-43 Notes to Financial Statements........................................... F-44 Combined Financial Statements of Contempo Realty, Inc. and Affiliates Independent Auditors' Report............................................ F-48 Combined Statements of Operations for the years ended December 31, 1994, 1995 and 1996.......................................................... F-49 Combined Statements of Owners' Equity for the years ended December 31, 1994, 1995 and 1996.................................................... F-50 Combined Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996......................................................... F-51 Notes to Combined Statements of Operations, Owner's Equity and Cash Flows.................................................................. F-52 Financial Statements of Barbara Sue Seal Properties Inc. Independent Auditors' Report............................................ F-55 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-56 Statements of Cash Flows for the year ended December 31, 1996 and the nine months ended September 30, 1996 and 1997 (unaudited).............. F-57 Notes to Financial Statements........................................... F-58
F-1 INDEPENDENT AUDITORS' REPORT "To the Board of Directors of NRT Incorporated: We have audited the accompanying consolidated balance sheets of NRT Incorporated and subsidiaries ("NRT") as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1998 and the four months ended December 31, 1997 and the consolidated statements of operations, trust equity and cash flows of National Realty Trust and subsidiaries (the "Predecessor Trust") for the period from January 1, 1997 to August 31, 1997 and the period from June 1, 1996 to December 31, 1996, 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 period from January 1, 1996 to May 31, 1996. These financial statements are the responsibility of management of NRT, 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 NRT at December 31, 1998 and 1997 and the results of its operations and its cash flows for the year ended December 31, 1998 and the four months ended December 31, 1997 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 results of operations and cash flows of the Predecessor Trust for the period from January 1, 1997 to August 31, 1997 and the period from June 1, 1996 to December 31, 1996 in conformity with generally accepted accounting principles. Finally, in our opinion, 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 for 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 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. Costa Mesa, California March 19, 1999 (April 2, 1999 as to Notes 2 and 13, April 6, 1999 as to Note 19 and May , 1999 as to the effects of the stock split described in Note 2)" F-2 The accompanying consolidated financial statements include the effects of a stock split of NRT's common stock anticipated to be approved by NRT's Board of Directors. The above opinion is in the form which will be furnished by Deloitte & Touche LLP upon consummation of the stock split, which is described in Note 2 of the notes to the consolidated financial statements, and assuming that, from March 19, 1999 to the date of such stock split, no other events will have occurred that would affect the accompanying financial statements and notes thereto, or required disclosure therein. Deloitte & Touche LLP Costa Mesa, California April 29, 1999 F-3 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
Pro Forma March 31, March 31, 1999 December 31, December 31, 1999 (unaudited) 1997 1998 (unaudited) (Note 19) ------------ ------------ ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents... $165,360 $ 52,701 $ 22,008 $ 11,285 Restricted cash............. 40,316 93,878 93,561 93,561 Commissions and accounts receivable, net............ 15,521 24,119 33,191 33,191 Mortgage loans held for sale....................... -- 23,157 13,057 13,057 Deferred income taxes....... 26,587 33,420 29,850 29,850 Prepaid expenses and other current assets............. 8,451 9,346 9,681 9,681 -------- -------- --------- --------- Total current assets....... 256,235 236,621 201,348 190,625 PROPERTY AND EQUIPMENT, net.. 51,545 94,127 94,700 94,700 GOODWILL, net................ 91,192 189,875 200,106 200,106 OTHER INTANGIBLES, net....... 6,451 5,689 1,133 1,133 DEFERRED INCOME TAXES........ 8,869 -- 6,301 6,301 OTHER ASSETS................. 2,379 4,400 4,405 4,405 -------- -------- --------- --------- $416,671 $530,712 $ 507,993 $ 497,270 ======== ======== ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable and accrued expenses................... $ 99,927 $115,287 $ 109,482 $ 109,482 Franchise fees payable...... 7,821 11,799 13,518 13,518 Accrued salaries and benefits................... 25,347 48,464 31,969 31,969 Restricted cash bank loans.. 40,316 93,878 93,561 93,561 Mortgage warehousing loan... -- 22,756 12,668 12,668 Notes payable, current portion.................... 10,296 10,581 10,528 10,528 Dividends payable........... 4,829 5,120 20,270 20,270 -------- -------- --------- --------- Total current liabilities.. 188,536 307,885 291,996 291,996 NOTES PAYABLE, long-term portion..................... 4,844 16,791 12,735 12,735 BORROWING UNDER CREDIT FACILITY.................... -- -- 30,000 30,000 DEFERRED REVENUE, LONG-TERM PORTION..................... -- -- 26,705 26,705 DEFERRED INCOME TAXES........ -- 3,419 -- -- OTHER LIABILITIES............ 19,665 20,111 19,612 19,612 REDEEMABLE PREFERRED STOCK: 9.00% Series A Cumulative Senior, at redemption value of $1 per share............... 157,591 161,137 164,763 164,763 5.00% Series B Cumulative Convertible, at redemption value of $1 per share............... 24,000 24,300 24,604 24,604 18.00% Series C Cumulative Junior, net; redemption value of $80,822 (1997), $84,457 (1998) and $88,185 (1999), respectively....... 56,267 66,610 71,991 71,991 -------- -------- --------- --------- Total redeemable preferred stock..................... 237,858 252,047 261,358 261,358 -------- -------- --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, $.01 par value; 50,000,000 shares authorized; 18,750,000 shares issued and outstanding at December 31, 1997 and December 31, 1998, and March 31, 1999 (unaudited)................ 188 188 188 182 Additional paid-in capital.. 7,823 -- -- -- Accumulated deficit......... (42,243) (69,729) (134,601) (145,318) -------- -------- --------- --------- Total stockholders' defi- cit....................... (34,232) (69,541) (134,413) (145,136) -------- -------- --------- --------- $416,671 $530,712 $ 507,993 $ 497,270 ======== ======== ========= =========
See independent auditors' report and notes to consolidated financial statements. F-4 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts)
Predecessors --------------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated --------------------- ----------------------- ------------------------------------------------- January 1, June 1, January 1, September 1, January 1, January 1, 1996 1996 1997 1997 Year 1998 to 1999 to to to to to ended March 31, March 31, May 31, December 31, August 31, December 31, December 31, 1998 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) ---------- ------------ ---------- ------------ ------------ ----------- ----------- REVENUES: Real estate commissions.......... $228,005 $400,076 $570,150 $446,134 $2,010,123 $ 330,241 $469,596 Other revenues........ 7,810 12,101 14,636 17,380 110,879 15,434 31,289 -------- -------- -------- -------- ---------- --------- -------- Total revenues....... 235,815 412,177 584,786 463,514 2,121,002 345,675 500,885 -------- -------- -------- -------- ---------- --------- -------- EXPENSES: Commissions and royalties............ 141,404 276,364 393,235 330,169 1,482,719 237,284 345,380 Salaries and benefits............. 30,467 44,953 65,802 47,231 244,778 48,685 75,195 Business promotion and advertising.......... 16,983 23,358 32,521 22,072 90,519 17,504 23,755 Building and equipment expenses............. 20,708 24,546 34,736 24,471 120,919 40,134 34,007 Amortization of goodwill ............ 482 104 1,162 637 3,403 1,083 1,610 Other operating expenses............. 25,374 27,005 35,804 31,011 115,722 9,482 31,947 Acquisition related costs................ 26 22,188 10,735 78,462 61,150 34,266 5,618 -------- -------- -------- -------- ---------- --------- -------- Total expenses....... 235,444 418,518 573,995 534,053 2,119,210 (388,438) 517,512 -------- -------- -------- -------- ---------- --------- -------- OPERATING INCOME (LOSS)................ 371 (6,341) 10,791 (70,539) 1,792 (42,763) (16,627) Interest expense, net.................. 11 44 117 (2,843) (1,819) (868) 568 -------- -------- -------- -------- ---------- --------- -------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)............. 360 (6,385) 10,674 (67,696) 3,611 (41,895) (17,195) INCOME TAX PROVISION (BENEFIT)............. 156 -- 4,432 (25,453) 2,302 (16,758) (6,772) -------- -------- -------- -------- ---------- --------- -------- NET INCOME (LOSS)...... $ 204 $ (6,385) $ 6,242 $(42,243) $ 1,309 $ (25,137) $(10,423) ======== ======== ======== ======== ========== ========= ======== Loss applicable to common shareholders.. $(54,232) $ (35,309) $ (34,046) $(19,704) ======== ========== ========= ======== Per share information: Loss per common share: basic and diluted.................................................... $ (2.89) $ (1.88) $ (1.82) $ (1.05) Weighted average shares outstanding: basic and diluted.................................................... 18,750 18,750 18,750 18,750
See independent auditors' report and notes to consolidated financial statements. F-5 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF TRUST AND STOCKHOLDERS' EQUITY (DEFICIT) (dollars in thousands)
Total trust and Additional Accumulated stockholders' Common paid-in equity Trust equity stock capital (deficit) equity (deficit) ------ ---------- ----------- ------- ------------- Predecessor: Coldwell Banker Residential Brokerage 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..... 188 19,812 -- -- 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..................... 188 7,823 (42,243) -- (34,232) Net income............... -- -- 1,309 -- 1,309 Accretion of Series C preferred stock discount and redemption premium.. -- (1,636) (5,072) -- (6,708) Dividends on preferred stock................... -- (6,187) (23,723) -- (29,910) ----- -------- --------- ------- --------- BALANCE, December 31, 1998..................... 188 -- (69,729) -- (69,541) Net loss (unaudited)..... -- -- (10,423) -- (10,423) Accretion of Series C preferred stock discount and redemption premium (unaudited)............. -- -- (1,654) -- (1,654) Dividends on preferred stock (unaudited)....... -- -- (7,795) -- (7,795) Dividends on common stock (unaudited)............. -- -- (45,000) -- (45,000) ----- -------- --------- ------- --------- BALANCE, March 31, 1999 (unaudited).............. $ 188 $ -- $(134,601) $ -- $(134,413) ===== ======== ========= ======= =========
See independent auditors' report and notes to consolidated financial statements. F-6 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Predecessors ----------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated ----------- ----------------------- ------------------------------------------------- January 1, June 1, January 1, September 1, January 1, January 1, 1996 1996 1997 1997 1998 to 1999 to to to to to Year Ended March 31, March 31, May 31, December 31, August 31, December 31, December 31, 1998 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) ----------- ------------ ---------- ------------ ------------ ----------- ----------- CASH PROVIDED BY OPERATING ACTIVITIES: Net income (loss)....... $ 204 $ (6,385) $ 6,242 $(42,243) $ 1,309 $(25,137) $(10,423) -------- -------- -------- -------- -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......... 3,812 1,129 3,026 2,998 18,909 3,733 7,036 Amortization of goodwill and other intangibles........... 508 21,553 10,477 70,533 47,561 21,384 6,919 Deferred income taxes.. -- -- 4,432 (25,853) (283) (16,758) (6,150) Changes in operating assets and liabilities, net of effects from acquisitions: Commissions and accounts receivable... 2,848 5,541 8,231 (11,472) 2,452 (1,972) (8,096) Prepaid expenses and other assets.......... 6,831 (115) (794) 5,492 5,041 (1,179) 464 (Increase) decrease in mortgage loans held for sale............. -- -- -- -- (19,959) -- 10,100 Accounts payable and accrued expenses...... 3,986 5,170 (8,826) 7,900 (44,135) (7,193) (20,222) Accrued salaries and benefits.............. (1,226) 1,459 (2,808) 1,953 20,148 (8,807) (16,503) Deferred income ....... -- -- -- -- -- -- 29,795 Other liabilities...... (12,256) 1,478 909 226 381 (408) (303) Other.................. 148 (20) (264) (7) 553 (535) 119 -------- -------- -------- -------- -------- -------- -------- Total adjustments..... 4,651 36,195 14,383 51,770 30,668 (11,735) 3,156 -------- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities........... 4,855 29,810 20,625 9,527 31,977 (36,872) (7,264) -------- -------- -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Change in restricted cash.................. (14,935) 3,772 (14,444) (14,581) (53,562) 7,382 317 Expenditures for property and equipment............. (3,394) (5,049) (5,168) (6,668) (36,176) (6,055) (7,707) Payments for acquisitions (230) (13,535) (25,198) (86,326) (97,098) (56,052) (2,231) Other.................. 139 42 15 100 185 360 115 -------- -------- -------- -------- -------- -------- -------- Net cash used in investing activities........... (18,420) (14,770) (44,795) (107,475) (186,651) (54,365) (9,506) -------- -------- -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in restricted cash bank loans....... 14,935 (3,772) 14,444 14,581 53,562 (7,382) (317) Capital contribution... -- -- -- 255,600 -- -- -- Dividends on preferred and common stock...... -- -- -- (4,903) (22,139) (7,233) (30,000) Payment of notes payable............... (358) (181) (3,685) (1,970) (7,268) (597) (3,518) Borrowings under credit facility.............. -- -- -- -- -- -- 30,000 Development advance.... -- -- 20,000 -- -- -- -- Increase (decrease) in mortgage warehousing loan.................. -- -- -- -- 17,860 -- (10,088) -------- -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities........... 14,577 (3,953) 30,759 263,308 42,015 (15,212) (13,923) -------- -------- -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 1,012 11,087 6,589 165,360 (112,659) (106,449) (30,693) CASH AND CASH EQUIVALENTS, beginning of period.............. 89 -- 11,087 -- 165,360 165,360 52,701 -------- -------- -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, end of period................. $ 1,101 $ 11,087 $ 17,676 $165,360 $ 52,701 $ 58,911 $ 22,008 ======== ======== ======== ======== ======== ======== ========
See independent auditors' report and notes to consolidated financial statements. F-7 NRT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) (dollars in thousands)
Predecessors ----------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated ----------- ----------------------- ------------------------------------------------- January 1, June 1, January 1, September 1, January 1, January 1, 1996 1996 1997 1997 1998 to 1999 to to to to to Year Ended March 31, March 31, May 31, December 31, August 31, December 31, December 31, 1998 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) ----------- ------------ ---------- ------------ ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-- Cash paid during period for: Interest............... $ 180 $ 143 $ 124 $ 672 $ 1,284 $ 380 $ 573 ======= ======== ======== ======== ========= ======== ======= Income taxes........... $ -- $ -- $ 28 $ 145 $ 83 $ 27 $ 2,454 ======= ======== ======== ======== ========= ======== ======= SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Fair value of assets purchased............. $ 837 $ 27,188 $ 35,949 $276,807 $ 197,713 $101,899 $ 5,600 Cash payments for acquisitions.......... (230) (13,535) (25,198) (86,326) (97,098) (56,052) (2,231) ------- -------- -------- -------- --------- -------- ------- Liabilities assumed.... $ 607 $ 13,653 $ 10,751 $190,481 $ 100,615 $ 45,847 $ 3,369 ======= ======== ======== ======== ========= ======== ======= Dividend payments in kind.................. $ -- $ -- $ -- $ -- $ 7,480 $ -- $ 7,658 ======= ======== ======== ======== ========= ======== ======= Accretion of Series C preferred stock discount and redemption premium.... $ -- $ -- $ -- $ 2,257 $ 6,708 $ 1,654 $ 1,654 ======= ======== ======== ======== ========= ======== ======= Purchase of property and equipment with capital lease obligations........... $ 168 $ 1,010 $ 2,088 $ 1,085 $ 11,557 $ 913 $ 428 ======= ======== ======== ======== ========= ======== =======
See independent auditors' report and notes to consolidated financial statements. F-8 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except for per share and per option amounts) 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 ("NRT") 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. NRT recognized intangibles of approximately $55,800 and goodwill of approximately $15,100 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 NRT and its predecessors (CB Residential and the Trust) during the three-year period ended December 31, 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 1996 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 NRT. In cases involving amounts not specifically identifiable to any particular division of Coldwell Banker, certain allocations for corporate administrative and overhead charges were made based on NRT's proportionate share of Coldwell Banker's total expenses, which management believes provides 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 the sale of its assets to NRT. The accompanying consolidated financial statements for the four months ended December 31, 1997, the year ended December 31, 1998 and the three months ended March 31, 1998 and 1999 (unaudited) reflect the operations of NRT. Because of acquisition adjustments recorded by NRT and its predecessors as described above, the accompanying consolidated financial statements of NRT are not directly comparable to those of its predecessors. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NRT--NRT 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, 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 and relocation and other services. F-9 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Principles of Consolidation--The consolidated financial statements include the accounts of NRT 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--NRT considers unrestricted short-term investments which have maturities of three months or less at the date of purchase to be cash equivalents. Property and Equipment--Property and equipment, including significant improvements thereto, are carried at cost. NRT 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--NRT 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. NRT 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, NRT 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 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. NRT assesses whether there has been an impairment in the value of long-lived assets and intangible assets by considering factors such as expected undiscounted future cash flows, trends and prospects, the effects of demand, competition and other economic factors and the fair values of tangible assets. Management believes no permanent impairment has occurred. Fair Value of Financial Instruments--The carrying values of cash and cash equivalents, commissions and accounts receivable, accounts payable and accrued expenses approximate fair value due to the short maturities of such instruments. At December 31, 1998 the fair value of mortgage loans held for sale exceeded the cost by approximately $200 and the carrying value of mortgage warehousing loans approximated fair value. F-10 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Mortgage Banking Operations--In connection with its acquisition of Hunneman Real Estate Corporation ("Hunneman"), NRT assumed Hunneman's mortgage banking operations which are conducted in the Boston metropolitan area. NRT grants mortgage loans only after it has a binding commitment to sell the loan to a third party on a servicing released basis. Mortgage loans held for sale are carried at the lower of cost or fair market value. Gain on the sale of mortgage loans is recognized at the time of sale. Income Taxes--NRT and its subsidiaries file a consolidated federal income tax return. NRT 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, NRT 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. Earnings (Loss) Per Share--NRT adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128") on December 31, 1997. SFAS No. 128 specifies the method of computation, presentation and disclosure for earnings per share ("EPS"). SFAS No. 128 requires the presentation of two EPS amounts, basic and diluted. Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding for the period. Diluted EPS includes the dilution that would occur if outstanding stock options and other dilutive securities were exercised. Basic and diluted loss per share is based on the weighted average number of common shares outstanding. Common stock equivalents were not included in the computation of diluted EPS because such inclusion would have been antidilutive for the four months ended December 31, 1997, year ended December 31, 1998 and the three month periods ended March 31, 1998 and 1999. Stock Split--On February 10, 1999, NRT filed a registration statement on Form S-1 with the Securities and Exchange Commission to effect an initial public offering of its common stock (see Note 19). Prior to the offering, NRT intends to effect a 1.875-for-1 split of its common stock. The common share data and loss per common share data in the accompanying consolidated financial statements reflects the effect of this stock split. F-11 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Comprehensive Income--On January 1, 1998, NRT adopted Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income ("SFAS No. 130" ). 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. NRT does not have any items of other comprehensive income requiring separate disclosure. Segment Reporting--In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosure about products and services, geographic areas and major customers. NRT conducts its business activity in a single operating segment. Brokerage operations comprised approximately 97%, 97% and 95% of total revenues during 1996, 1997 and 1998, respectively. Operations related to ancillary real estate services amounted to 3%, 3% and 5% of total revenues during 1996, 1997 and 1998, respectively. 3. ACQUISITIONS NRT's business strategy includes actively pursuing strategic acquisitions of real estate brokerage firms and brokerage-related businesses. NRT has an agreement with Cendant that provides a significant source of funding for NRT's brokerage acquisitions. Under an Acquisition Cooperation Agreement, in acquisitions in which Cendant has agreed to participate, Cendant purchases the trade names, trademarked operating names and any mortgage operations of brokerages being acquired by NRT, thereby paying a substantial portion of the total purchase price that otherwise would be payable by NRT in making such brokerage acquisitions. Upon NRT's formation, Cendant committed approximately $446,000 for NRT's brokerage acquisitions. Cendant has committed an additional $1 billion for 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 $500,000 tranches. The first $500,000 is currently available, and the second $500,000 will be available after the first $500,000 has been provided by NRT but in no case earlier than February 9, 2004. The cumulative amount expended by Cendant under the above commitments was approximately $217,000 at December 31, 1997, and $443,000 at December 31, 1998 and $461,000 at March 31, 1999. Under the Acquisition Cooperation Agreement, following the closing of the offering (Note 19), Cendant will have the right to pay up to 50% of its acquisition cost by canceling a portion of its senior preferred stock. Cendant may exercise this right only if NRT has at least $50,000 in available borrowing capacity under the leverage ratio test under the franchise agreements. In addition, if NRT does not have available funds to close the brokerage acquisition without Cendant's participation, NRT will have the right to postpone the cancellation of preferred stock for up to 90 days following the brokerage acquisition. Cendant would then be required to pay its acquisition cost under the Acquisition Cooperation Agreement. F-12 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 1996, 1997 and 1998, NRT acquired assets and assumed liabilities of residential real estate brokerage companies. The acquisitions were accounted for as purchases in accordance with Accounting Principles Board ("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 NRT's estimates of their respective fair values at the dates of acquisition. Such amounts are subject to further refinements of closed office reserves, legal reserves and other assumed liabilities and the tax effects thereon. The following table sets forth information with respect to such acquisitions.
Company Date 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 John M. Grubb Co. .......................................... October 16, 1997 Seville Properties, Inc..................................... October 17, 1997 Metro Real Estate Services, Inc............................. October 29, 1997 Continental Development Corp................................ November 8, 1997 1998 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 Coker Ewing Cook & Cook..................................... August 3, 1998 1st American Realtors, L.L.C................................ August 20, 1998 Higgins & Heath, Inc........................................ September 4, 1998 Moore and Company........................................... September 30, 1998 Premier Van Schaak, Inc. (Denver operations) ............... September 30, 1998 Hunneman Real Estate Corporation............................ October 14, 1998 Carriage Properties, Ltd. .................................. October 20, 1998 Steve Schmidt & Co. ........................................ October 23, 1998 Pardoe Real Estate, Inc. ................................... December 8, 1998 Graham Realty, Inc. ........................................ December 8, 1998
F-13 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the above acquisitions, NRT paid a total purchase price of $14,960 in 1996, $96,531 in 1997 and $119,308 in 1998. In addition to the above acquisitions, NRT acquired 20 other residential real estate brokerage companies in 1996 for a total purchase price of $1,435, 15 in 1997 for a total purchase price of $785, 37 in 1998 for a total purchase price of $8,420 and 12 during the first three months of 1999 for a total purchase price of $3,007 (unaudited). Goodwill of $76,042 arose from the 1997 acquisitions made subsequent to August 1997 and $102,077 arose from the 1998 acquisitions. Goodwill associated with those companies acquired before the formation of NRT 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 $43,433 in 1998 arose from acquisitions. The results of operations of the acquired companies are included in NRT's consolidated statements of operations for the periods in which they were owned by NRT. Under the terms of certain acquisition agreements, NRT is obligated to fund additional purchase price payments contingent upon the achievement of certain operating targets. NRT 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, for 1997 as though the 1997 and 1998 acquisitions had occurred on January 1, 1997 and for 1998 as though the 1998 acquisitions had occurred on January 1, 1998. Pro forma information for the 1999 acquisitions is not presented as the acquisitions and the related effect on the consolidated statements of operations is not material. 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 December 31, Three months ---------------------------------- ended March 31, 1996 1997 1998 1998 ---------- ---------- ---------- --------------- Total revenues............ $1,226,340 $1,429,258 $2,462,269 $443,313 ========== ========== ========== ======== Net income (loss)......... $ (39,569) $ (42,181) $ 4,406 $(43,447) ========== ========== ========== ======== Pro forma loss per common share: Basic and diluted......... $(2.89) $(1.72) $(2.79)
In connection with the 1997 and 1998 acquisitions, NRT recorded office closure reserves of $22,646 and $30,519, 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, and the year ended December 31, 1998 approximately $8,206, and $18,997 of facility and severance costs were paid, respectively. F-14 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 other transitional costs. Acquisition related costs are summarized as follows:
Predecessors ------------------------------------- Coldwell Banker Residential Brokerage National Realty Trust NRT Incorporated ----------- ------------------------- ------------------------------------------------- Five months Seven months Eight months Four months ended ended ended ended Year ended March 31, March 31, May 31, December 31, August 31, December 31, December 31, 1998 1999 1996 1996 1997 1997 1998 (unaudited) (unaudited) ----------- ------------ ------------ ------------ ------------ ----------- ----------- Office conversion costs.................. $-- $ 739 $ 1,421 $ 8,566 $16,997 $13,965 $ 308 Amortization............ 26 21,449 9,314 69,896 44,153 20,301 5,310 ---- ------- ------- ------- ------- ------- ------ $ 26 $22,188 $10,735 $78,462 $61,150 $34,266 $5,618 ==== ======= ======= ======= ======= ======= ======
4. CASH AND CASH EQUIVALENTS NRT had restricted cash totaling $40,316 at December 31, 1997, $93,878 at December 31, 1998, and $93,561 at March 31, 1999 (unaudited), which can be used only to repay the loans entered into to fund the restricted cash. See Note 7. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, ----------------- March 31, 1999 1997 1998 (unaudited) ------- -------- ----------- Land.................... $ 2,477 $ 1,978 $ 1,978 Buildings and improve- ments.................. 4,983 4,941 4,929 Leasehold improvements.. 14,429 36,756 39,658 Furniture and equip- ment................... 32,746 72,654 77,199 ------- -------- -------- 54,635 116,329 123,764 Less accumulated depre- ciation and amortiza- tion................... (3,090) (22,202) (29,064) ------- -------- -------- Property and equipment, net.................... $51,545 $ 94,127 $ 94,700 ======= ======== ========
Depreciation and amortization expense was $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, $2,998 for the four months ended December 31, 1997 and $18,909 for the year ended December 31, 1998. F-15 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 March 31, ---------------- 1999 1997 1998 (unaudited) ------- -------- ----------- Accounts payable.............................. $14,688 $ 14,981 $ 17,078 Commissions payable........................... 16,914 19,902 12,343 Reserve for office closures................... 24,274 28,696 32,534 Accrued legal reserves........................ 15,467 12,353 11,332 Deferred revenue.............................. -- -- 3,000 Other accrued expenses........................ 28,584 39,355 33,195 ------- -------- -------- $99,927 $115,287 $109,482 ======= ======== ========
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 0.55% to 2.0% at December 31, 1997 and 0.25% to 2.0% at December 31, 1998 and March 31, 1999 (unaudited) and are due monthly. 8. MORTGAGE WAREHOUSING LOAN Mortgage warehousing loan represents borrowings under a $25,000 line of credit with a commercial bank. Borrowings under the line bear interest at the prime rate (7.75% at December 31, 1998), and the federal funds rate plus 1.75% at March 31, 1999 (unaudited). The borrowings are collateralized by mortgage loans held for sale and are generally repaid within 60 days. The line of credit expires March 8, 2000. 9. NOTES PAYABLE Notes payable consist of the following:
December March 31, ----------------- 1999 1997 1998 (unaudited) -------- ------- ----------- Acquisition-related notes................. $ 10,737 $15,096 $11,868 Obligations under capital leases (Note 18)...................................... 3,584 12,103 11,228 Other..................................... 819 173 167 -------- ------- ------- 15,140 27,372 23,263 Less current portion...................... (10,296) (10,581) (10,528) -------- ------- ------- $ 4,844 $16,791 $12,735 ======== ======= =======
Obligations under capital leases bear interest at rates ranging up to 11.0%, 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 NRT, are unsecured with maturities generally under two years and bear interest at rates ranging from 5.0% to 11.0% at December 31, 1997 and 6.0% to 11.0% at December 31, 1998 and March 31, 1999 (unaudited). F-16 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Scheduled maturities of notes payable, excluding capital lease obligations (Note 18), at December 31, 1998 are as follows:
Year ending December 31: 1999............................................................ $ 6,530 2000............................................................ 4,518 2001............................................................ 2,534 2002............................................................ 561 2003............................................................ 491 Thereafter...................................................... 635 ------- $15,269 =======
The carrying value of notes payable approximates market value due to the short maturities of such instruments. 10. 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 NRT in August 1997. The development advance is recorded in other liabilities in the accompanying consolidated balance sheets. The advance was being amortized over a 10-year period 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 NRT is not in material breach of the terms of its franchise agreements. The amount forgiven is reflected as a reduction to royalties in the accompanying consolidated statements of operations. In the event NRT 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. 11. INCOME TAXES NRT's (benefit) provision for income taxes was comprised as follows:
Four Months ended Year ended December 31, December 31, 1997 1998 ----------------- ------------ Current: Federal......................................... $ -- $ 482 State........................................... 400 2,103 -------- ------ 400 2,585 Deferred: Federal......................................... (21,216) 1,338 State........................................... (4,637) (1,621) -------- ------ (25,853) (283) -------- ------ Total (benefit) provision for income taxes...... $(25,453) $2,302 ======== ======
F-17 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of income tax provision (benefit) at the statutory federal income tax rate to NRT's effective income tax rate is as follows:
Four Months ended Year ended December 31, December 31, 1997 1998 ----------------- ------------ Federal tax at statutory rate................... (35.0)% 35.0% State income taxes, net of federal benefit...... (4.1) 8.7 Non-deductible expenses......................... 1.5 20.0 ----- ---- (37.6)% 63.7% ===== ====
The components of NRT's deferred income taxes are summarized as follows at December 31:
1997 1998 ------------------- ------------------- Current Noncurrent Current Noncurrent ------- ---------- ------- ---------- Deferred income tax assets: Net operating loss carryforward...... $10,781 $10,781 $13,617 $ -- Reserves............................. 18,420 -- 18,463 -- Goodwill............................. -- 3,258 -- 2,007 Alternative minimum tax credit carryforward........................ -- -- 569 -- Other................................ 1,692 85 1,878 49 ------- ------- ------- ------- Total deferred income tax assets... 30,893 14,124 34,527 2,056 ------- ------- ------- ------- Deferred income tax liabilities: Fixed assets......................... -- (5,255) -- (3,123) Purchase accounting.................. (4,306) -- (1,107) (2,352) ------- ------- ------- ------- Total deferred income tax liabilities....................... (4,306) (5,255) (1,107) (5,475) ------- ------- ------- ------- Net deferred tax asset (liability)..... $26,587 $ 8,869 $33,420 $(3,419) ======= ======= ======= =======
At December 31, 1998, NRT had federal and state net operating loss carryforwards of approximately $30,000. The federal losses will expire in the year ending December 31, 2012, while the state losses will expire in various years depending on jurisdictions. The provision (benefit) for income taxes for the predecessor entities are based upon the historical effective tax rate of those entities. 12. REDEEMABLE PREFERRED STOCK NRT'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 December 31, 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. NRT may redeem the shares at the liquidation preference at any time prior to the required redemption dates. F-18 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NRT'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 December 31, 1998, there were 25,000 shares of Series B Preferred Stock authorized and 24,000 shares of Series B Preferred Stock issued and outstanding. NRT, at its option, may redeem the shares following the third anniversary of (1) the public offering of 20% or more of NRT's outstanding common stock, (2) the sale by NRT of assets representing 80% or more of NRT's assets on a fair market value basis or (3) the distribution to stockholders of other assets representing 80% or more of NRT 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 fourth anniversary of a Triggering Event, (2) 102% of the principal amount on or prior to the fifth anniversary of a Triggering Event (3) 101% of the principal amount on or prior to the sixth anniversary of a Triggering Event and (4) 100% of the principal amount after the sixth anniversary of a Triggering Event. 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. NRT is required to redeem any remaining Series B Preferred Stock on August 29, 2012. NRT'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, NRT is required to pay an additional dividend equal to 0.1% of NRT's gross commission revenue, as defined in NRT's franchise agreement with Coldwell Banker Real Estate Corporation. At December 31, 1997 and 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 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 NRT over the period from issuance to the mandatory redemption date. At December 31, 1997 and 1998 and March 31, 1999 the redemption price of the Series C Preferred Stock totaled approximately $80,822, $84,457 and $88,185, respectively. NRT is required to redeem any remaining Series C Preferred Stock on August 29, 2001. NRT, at its option, may redeem the shares at the redemption price at any time prior to the mandatory redemption date. NRT plans to redeem the Series C preferred stock with the proceeds from the offering. F-19 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. LOSS PER COMMON SHARE The following table sets for the computation of basic and diluted loss per common share:
Three Months Ended March 31, Four Months Year ----------------------- Ended Ended 1998 1999 December 31, 1997 December 31, 1998 (unaudited) (unaudited) ----------------- ----------------- ----------- ----------- Net (loss) income....... $(42,243) $ 1,309 $(25,137) $(10,423) Less: Preferred stock dividends.............. (9,732) (29,910) (7,255) (7,627) Less: Accretion of preferred stock discount and redemption premium................ (2,257) (6,708) (1,654) (1,654) -------- -------- -------- -------- Loss applicable to common stockholders.... $(54,232) $(35,309) $(34,046) $(19,704) ======== ======== ======== ======== Basic and dilutive weighted average shares outstanding (in thousands) 18,750 18,750 18,750 18,750 ======== ======== ======== ======== Basic and diluted loss per common share....... $ (2.89) $ (1.88) $ (1.82) $ (1.05) ======== ======== ======== ========
Common stock equivalents, which for NRT includes options to purchase common stock and the convertible preferred stock, were excluded from the computation of diluted loss per share as their effect is antidilutive for the four months ended December 31, 1997, the year ended December 31, 1998 and for the three months ended March 31, 1998 and 1999. 14. STOCKHOLDERS' EQUITY Stock Option Plan--In September 1997, NRT 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 NRT. The maximum number of shares of common stock that may be issued pursuant to the Plan is 4,687,500. Options under the Plan generally have 10-year terms and one half of the options granted are time vesting options and are exercisable at 20% per year, commencing one year from the date of grant. One-half of the options granted to employees are performance-based options, which are not earned prior to the earlier of the eighth anniversary of the date of grant or the date of a qualifying triggering event, as defined, under the Plan. Upon the closing of the offering (Note 19), the performance-based options will be converted into time vesting options effective as of the date of the grant. NRT granted options to purchase shares of NRT's common stock as set forth in the following table at prices which NRT'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 and directors of NRT. F-20 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the activity under the Plan for the periods indicated:
Weighted average Options Range of exercise outstanding Exercise Prices price ----------- --------------- -------- OUTSTANDING, September 1, 1997.......... -- $ -- $ -- Grants.................................. 1,650,000 .01 .01 --------- OUTSTANDING, December 31, 1997.......... 1,650,000 .01 Grants.................................. 1,872,656 4.16-10.67 7.98 Cancelled............................... (100,313) .01-4.16 .19 --------- OUTSTANDING, December 31, 1998.......... 3,422,343 $ 4.84 Cancelled............................... (23,203) .01-4.16 3.77 --------- OUTSTANDING, March 31, 1999............. 3,399,140 $ 4.85 =========
On September 28, 1998, NRT Board of Directors approved an adjustment to the exercise price of each option under the Plan outstanding as of such date to give effect to the payment of $30,000 of dividends to Apollo and the payment to NRT's franchisors of an additional royalty pursuant to the franchise agreements of 0.15% of NRT total revenue per quarter for each quarter (up to a total of 20 quarters) in which NRT's EBITDA over the preceding twelve-month period exceeds $225,000. In no event, however, shall the exercise price for such options be adjusted to less than $0.01 per share. The final exercise price adjustment will be determined at the time of the offering or upon a triggering event. The adjustment will affect approximately 2,350,000 shares and is estimated to be $1.07 per share ($1.06 per share for the 1997 grants). Such adjustments have been reflected in the above table. At December 31, 1997, there were no exercisable options to purchase shares, and at December 31, 1998, there were 216,328 exercisable options to purchase shares. At December 31, 1997 and 1998 the weighted average remaining contractual life of options outstanding was 9.75 years and 9.3 years, respectively. SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does not require companies to record compensation cost for employee stock option grants. NRT has chosen to account for employee option grants using APB Opinion No. 25 and uses the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for employee stock option grants. Had compensation expense for the employee stock option grants been recognized based on the calculated fair value at the grant dates, consistent with SFAS No. 123, NRT's loss per share would have been equal to the pro forma amounts indicated below:
Four months ended Year ended December 31, December 31, 1997 1998 ------------ ------------ Loss applicable to common shareholders: As reported......................................... $(54,232) $(35,309) Pro forma........................................... $(54,270) $(36,150) Loss per share: Basic and diluted as reported....................... $ (2.89) $ (1.88) Basic and diluted pro forma......................... $ (2.89) $ (1.93)
The weighted average fair value of options granted under the Plan was $0.51 and $3.61 in 1997 and 1998, respectively. F-21 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of each option grant is estimated on the date of grant using the Minimal Value option-pricing model with the following weighted-average assumptions for options granted in 1997 and 1998:
1997 1998 -------- -------- Dividend Yield.............................................. -- -- Expected Volatility......................................... -- -- Risk-free interest rate..................................... 6.7% 5.6% Expected holding period..................................... 10 years 10 years
As NRT is not a public company and its stock does not have a trading history, NRT used the Minimal Value option-pricing model as permitted under SFAS No. 123. The Minimal Value option-pricing model does not take into account stock price volatility in the determination of fair value. 15. COMMITMENTS AND CONTINGENCIES Litigation--NRT 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, NRT believes that any liability which may result from disposition of these lawsuits will not have a material effect on NRT's consolidated financial position or results of operations. 16. RELATED-PARTY TRANSACTIONS Concurrent with NRT's formation, certain affiliates of Apollo Management, L.P. ("Apollo") acquired all of NRT's outstanding common stock and Series C Preferred Stock and a subsidiary of Cendant acquired all of NRT'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, NRT entered into franchise agreements with Coldwell Banker Real Estate Corporation, ERA Franchise Systems, Inc., and Century 21 Real Estate Corporation. On February 9, 1999, NRT entered into new franchise agreements with each of its franchisors, which superseded the existing franchise agreements. Each franchise agreement has a 50-year term and provides for a royalty payment generally equal to 6% of NRT's gross closed commission income earned (with the exception of CENTURY 21(R) offices in Northern California, for which NRT currently pays royalties of 4.89% of gross closed commission income earned, and offices acquired by NRT without Cendant's participation, for which NRT pays a lower royalty rate), plus approximately $167 per month. Pursuant to the franchise agreements, NRT is also required to pay an additional royalty of approximately $167 per month. In addition, upon the closing of the Offering, NRT will be required to pay an additional $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 NRT in accordance with the Acquisition Cooperation Agreement, NRT will also be required to pay Cendant, in consideration of the stepped-up tax basis received by NRT for such assets, an additional monthly royalty, beginning with the first month after the consummation of such transaction, in an amount equal to one-tenth of the federal income tax payable by Cendant in respect of the gain on the F-22 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) sale of the assets to NRT in such transaction, divided by 12. To date, NRT has not been required to pay Cendant additional royalties as a result of taxes being incurred by Cendant in connection with NRT's brokerage acquisitions. NRT incurred franchise royalties totaling $24,000 for the seven months ended December 31, 1996, $31,500 for the eight months ended August 31, 1997, $26,200 for the four months ended December 31, 1997, and $121,307 for the year ended December 31, 1998 respectively. Since January 1999, NRT 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 NRT's securities, such royalty will be replaced with an additional monthly royalty equal to 1.1% of NRT's gross commission income, up to a maximum additional royalty of $24,000 per year. In addition, an additional royalty of 0.15% of NRT's total revenue per quarter (up to a total of 20 quarters) is payable for each quarter in which NRT's earnings before interest, income taxes, depreciation and amortization for the preceding twelve month period exceeds $225,000. Under the franchise agreements, NRT 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, NRT 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 NRT resulting from newly acquired or opened offices identified by Cendant's franchise sales force, NRT 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 NRT'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. NRT has incurred approximately $1,800 in such fees payable to Cendant for new offices opened since August 1997, of which Cendant will provide $400 pursuant to the Acquisition Cooperation Agreement. The franchise agreements also require NRT 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, NRT is required to pay a monthly fee of 2% of NRT's gross commission income and, under the COLDWELL BANKER(R) franchise agreement, NRT is required to pay a fee in the amount of 2 1/2% of NRT's gross commission income, subject in each case to certain minimum and maximum advertising fees per brokerage office. In addition, the fees payable under the COLDWELL BANKER(R) franchise agreement are subject to temporary abatement for acquired offices with gross commission income of over $750,000. As a result of the maximum advertising fee limitation, NRT paid an average of 0.33% and 0.27% of its gross commission income F-23 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) to the national advertising funds in 1997 and 1998, respectively. NRT contributed to the franchisors' national advertising funds a total of $1,400 during 1996 (from May 31, 1996), $3,400 during 1997, and $5,467 during 1998. The Franchise Agreements also restrict NRT's ability to incur indebtedness (including acquired indebtedness) if such incurrence would cause NRT'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 NRT'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 NRT from incurring indebtedness to finance the payment of any dividends on its common or preferred stock. NRT 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 NRT's net income for the year in which declared or paid (less any dividends paid during such period) unless NRT's leverage ratio (calculating indebtedness net of cash and cash equivalents) is 1.0 to 1 or less. Lease Agreements--NRT 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. NRT paid total rentals of $342 for the seven months ended December 31, 1996, $353 for the eight months ended August 31, 1997, $176 for the four months ended December 31, 1997, and $853 for the year ended December 31, 1998. Prior to June 1, 1996, such costs were allocated to NRT from Coldwell Banker based on usage. Support Agreement--NRT 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 NRT with 90 days' notice. Total costs under this arrangement were $958 for the eight months ended August 31, 1997 and $479 for the four months ended December 31, 1997, and $1,978 for the year ended December 31, 1998. Marketing Agreement--NRT has a Marketing Agreement with Cendant Mortgage Corporation ("Cendant Mortgage") which provides for the joint marketing of Cendant's mortgage products through NRT's real estate brokerage offices. The agreement expires in 2037 and is subject to certain termination provisions. Total fees earned by NRT totaled $699 for the four months ended December 31, 1997, and $11,183 for the year ended December 31, 1998. F-24 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Program Outsourcing Agreement--NRT and Cendant have entered into a Program Outsourcing Agreement pursuant to which NRT has appointed Cendant as its exclusive outsourcing agent to negotiate the terms of NRT's participation in (1) purchasing relationships and programs (including corporate purchasing relationships) with vendors and (2) programs through which NRT markets vendors' products or services to its customers. NRT 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 NRT 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, 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: (1) a program if such program does not afford NRT 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 NRT 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 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, NRT 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 NRT's size and compared to any similar program in which NRT 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. However, NRT 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 NRT's size and compared to any Company program covering a similar good or service. Advisory Services Agreement--NRT also has entered into an Advisory Services Agreement with Apollo which requires NRT 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 NRT and Apollo. 17. FIDUCIARY FUNDS The consolidated financial statements do not include the assets and liabilities or activities of various fiduciary funds held by NRT. At December 31, 1998 and March 31, 1999, such funds amounted to approximately $119,188 and $145,075 (unaudited), respectively. These funds are comprised primarily of deposits by homebuyers pending close of escrow or transfer of title. NRT is subject to various disclosure and fiduciary duties under certain state laws with which NRT believes it currently complies. 18. LEASES Operating Leases--NRT leases certain of its offices and equipment under non- cancelable operating leases. F-25 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Minimum annual rental commitments under non-cancelable operating leases and related sublease rentals are as follows at December 31, 1998:
Minimum Sublease payments rentals -------- ------ Year ending December 31: 1999........................................................ $ 77,141 $2,345 2000........................................................ 65,087 1,598 2001........................................................ 53,348 877 2002........................................................ 38,677 457 2001........................................................ 24,414 424 Thereafter.................................................. 48,622 716 -------- ------ Total..................................................... $307,289 $6,417 ======== ======
Rent expense is summarized as follows:
Net Rent Sublease rent expense income expense ------- ------ ------- 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 Year ended December 31, 1998........................ 74,165 2,237 71,928
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 $1,893 for the eight months ended August 31, 1997, $983 for the four months ended December 31, 1997 and $1,196 for the year ended December 31, 1998. NRT leases certain pieces of equipment under capital lease agreements which expire over the next five fiscal years. Property under capital leases at December 31, 1998 consists of the following: Office equipment................................................. $15,519 Less accumulated depreciation.................................... (3,668) ------- $11,851 =======
Future minimum lease payments under capital leases together with the present value of net minimum lease payments are as follows: 1999............................................................. $ 5,314 2000............................................................. 4,021 2001............................................................. 2,902 2002............................................................. 1,700 2003............................................................. 510 ------- 14,447 Less amount representing interest.............................. (2,344) ------- Present value of net minimum lease payments.................... $12,103 =======
F-26 NRT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 19. SUBSEQUENT EVENTS On January 7, 1999, NRT entered into a $50,000 bank credit facility, which was subsequently increased to $100,000. Advances made thereunder may be used for NRT's general working capital needs in the ordinary course of business and permitted acquisitions. Borrowings under the bank credit facility may be designated and maintained as either a base rate loan or a Eurodollar loan. Interest accrues on the base rate loans at a rate equal to 0.75% plus the higher of the federal funds rate plus 0.5% and the prime lending rate. Interest accrues on the Eurodollar loans at a rate equal to 1.75% plus the British Bankers' Association interest settlement rate (or if not available, by reference to the London interbank market rate). NRT had borrowings of $30,000 under this facility at March 31, 1999 with interest at 6.75%. NRT's obligations arising under the bank credit facility are secured by a pledge of the capital stock of NRT's subsidiaries and are guaranteed by NRT's subsidiaries. The guarantees are secured by a pledge of the capital stock of the guarantors' subsidiaries. The bank credit facility is available to NRT until May 29, 2001. NRT has the intent and ability to maintain the $30,000 borrowing for at least the next twelve months. Accordingly, the borrowing is classified as a long-term liability in the accompanying balance sheet. On February 9, 1999, NRT and Cendant entered into the Acquisition Services Agreement, pursuant to which NRT 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 NRT. In exchange for such advisory services, Cendant paid NRT $30,000 as an advance against the fees that are payable to NRT pursuant to a fee schedule attached to the Acquisition Services Agreement, which, among other things, takes into account the size of NRT's future brokerage acquisitions. In no event will Cendant be required to advance additional amounts to NRT 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 February 9, 1999, NRT declared a $45,000 cash dividend on its common stock to Apollo, $30,000 of which was paid on February 11, 1999 and the remaining $15,000 was paid on April 2, 1999. On April 6, 1999, NRT repurchased 574,575 shares of common stock from Apollo for $10,725. The unaudited pro forma balance sheet at March 31, 1999 gives effect to the stock repurchase. On February 10, 1999, NRT filed a registration statement on Form S-1 with the Securities and Exchange Commission to effect an initial public offering of its common stock. Under the proposed offering, NRT will offer 9,375,000 shares of common stock and Apollo will offer 4,687,500 shares of its common stock. At March 31, 1999, NRT had recorded $1,128 of costs related to the offering in prepaid expenses and other current assets. Such amounts will be recognized as expenses if the offering is not completed. F-27 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-28 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-29 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-30 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 Depreciation and amortization........................................ 1,235 523 3,455 2,421 Merger costs and severence payments (Note 7)......................... 12,089 ------- ------- -------- -------- Total costs and expenses............................................. 82,694 30,394 256,971 234,847 ------- ------- -------- -------- OPERATING (LOSS) INCOME................................................ (2,115) (694) 12,904 67 INTEREST EXPENSE....................................................... (640) (483) (3,629) (2,297) ------- ------- -------- -------- (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-31 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-32 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-33 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-34 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-35 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-36 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-37 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-38 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-39 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-40 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-41 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-42 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-43 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-44 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-45 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-46 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-47 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-48 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-49 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-50 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-51 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-52 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-53 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-54 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. Deloitte & Touche LLP Portland, Oregon July 1, 1998 F-55 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 September 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-56 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-57 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 stated at cost and are depreciated using the straight-line and accelerated methods over the estimated useful lives ranging from 5 to 31 years. 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. 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. Unaudited Information--The financial information for the nine months ended September 30, 1996 and 1997 is unaudited. In the opinion of management, such information contains all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of such periods. The results of operations for the nine months ended September 30, 1996 and 1997 are not necessarily indicative of the results to be expected for the full year. 3. LEASING COMMITMENTS The Company leases office space under 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 F-58 BARBARA SUE SEAL PROPERTIES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) from Seal-Wieden, LLC, a related party. Total rent paid to the stockholder and related parties 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). 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 at September 30, 1997 (unaudited):
Year Ending September 30 (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-59 BARBARA SUE SEAL PROPERTIES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 6. SUBSEQUENT EVENT On October 10, 1997, the Company was acquired by NRT Incorporated. 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-60 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- , 1999 NRT Incorporated 14,062,500 Shares of Common Stock --------------------- PROSPECTUS --------------------- Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. BT Alex. Brown Lehman Brothers 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 NRT. SEC registration fee............................................. $ 62,550 NASD fee......................................................... 23,000 Nasdaq National Market listing fee............................... 95,000 Accounting fees and expenses..................................... 944,000 Legal fees and expenses.......................................... 901,000 Printing and engraving........................................... 1,000,000 Transfer agent's fees............................................ 5,000 Blue sky fees and expenses (including counsel fees).............. 7,500 Miscellaneous expenses........................................... 6,100 ---------- Total.......................................................... $3,044,150 ==========
- --------------------- * To be completed by amendment. Item 14. Indemnification of Directors and Officers As permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, the Restated Certificate of Incorporation of NRT (filed herewith as Exhibit 3.1) provides that no director shall be liable to NRT 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 NRT and its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) the unlawful payment of dividends or unlawful stock purchases or redemptions under Section 174 of the Delaware General Corporation Law and (iv) any transaction from which the director derived an improper personal benefit. Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful, except that if such action shall be in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been adjudged to have been liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which the action was brought shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other court shall deem proper. II-1 The Restated Certificate of Incorporation and the Amended and Restated By- laws of NRT (filed herewith as Exhibit 3.2) provide for indemnification of officers and directors of NRT, both past and present, to the fullest extent permitted by the Delaware General Corporation law, and allow NRT to advance or reimburse litigation expenses upon submission by the director or officer of an undertaking to repay such advances or reimbursements if it is ultimately determined that indemnification is not available to such director or officer pursuant to the Amended and Restated By-laws. The Amended and Restated By-laws also authorize NRT 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 NRT would have the power to indemnify him against such liability under the provisions of its certificate of incorporation or Section 145 of the Delaware General Corporation Law. NRT 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 NRT, whether or not NRT 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 NRT against certain liabilities. Item 15. Recent Sales of Unregistered Securities. In connection with the formation of NRT, on August 29, 1997, certain affiliates of Apollo Management, L.P. purchased 100 shares of Common Stock of NRT (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 of NRT 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 of NRT for $132,500,000 in cash and 24,000 shares of 5.00% Series B Cumulative Convertible Redeemable Preferred Stock of NRT 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 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 NRT. 3.2* Form of Amended and Restated By-laws of NRT. 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 NRT. 10.2* Master Century 21 Real Estate Franchise Agreement, dated as of February 9, 1999, between Century 21 Real Estate Corporation and NRT. 10.3* Master Real Estate Franchise Agreement, dated as of February 9, 1999, between Coldwell Banker Real Estate Corporation and NRT. 10.4* Form of Amended and Restated Stockholders Agreement, among NRT, 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 NRT. 10.6* Marketing Agreement, dated as of August 11, 1997, between NRT and Cendant Mortgage Corporation. 10.7* Program Outsourcing Agreement, dated as of February 9, 1999, between NRT and Cendant Corporation. 10.8* Support Agreement, dated as of August 11, 1997, between Cendant Corporation and NRT. 10.9* Advisory Services Agreement, dated as of August 11, 1997, among NRT and Apollo Management, L.P. 10.10* Lease, dated as of August 11 , 1997, between NRT and Cendant (relating to Parsippany, New Jersey property). 10.11* Lease, dated as of August 11, 1997, between NRT and Cendant (relating to Mission Viejo, California property). 10.12* Acquisition Services Agreement, dated as of February 9, 1999, between NRT and Cendant Corporation. 10.13* Development Advance Promissory Note, dated as of September 1, 1997, between NRT and Coldwell Banker Real Estate Corporation. 10.14+ Amended and Restated Credit Agreement, dated as of March 31, 1999, among NRT, 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 NRT.
II-3
Exhibit Number Description of Exhibit ------- ---------------------- 10.17+ Amendment dated March 24, 1999 to Acquisition Cooperation Agreement between Cendant Corporation and NRT. 10.18+ Purchase Agreement dated April 1, 1999, between Cendant Operations, NRT and Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. 11.1+ Calculation of Loss per Common Share. 21.1* Subsidiaries of NRT. 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* Power of Attorney. 27.1+ Financial Data Schedule.
- ------------------- * Previously filed. + Filed herewith. ++ To be filed by amendment. (b) Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts has been included on page S-1. Item 17. Undertakings. (a) NRT hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of NRT by NRT pursuant to the Underwriting Agreement, the restated certificate of incorporation, the amended and restated by-laws, the Delaware General Corporation Law or otherwise, NRT 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 NRT of expenses incurred or paid by a director, officer or controlling person of NRT 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, NRT will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the adjudication of such issue. II-4 (c) NRT hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by NRT 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-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Parsippany, State of New Jersey, on April 29, 1999. NRT Incorporated By: /s/ Steven L. Barnett --------------------- Name: Steven L. Barnett Title: Senior Vice President, General Counsel and Secretary 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 * President, Chief - ------------------------------------- Executive Officer April 29, 1999 Robert M. Becker and Director (Principal Executive Officer) * Chairman of the - ------------------------------------- Board and Director April 29, 1999 Chandler B. Barton * Senior Vice - ------------------------------------- President, Chief April 29, 1999 Gregory W. Hunt Financial Officer and Treasurer (Principal Financial and Accounting Officer) II-6 Signature Title Date * Director - ------------------------------------ April 29, 1999 Terence W. Edwards * Director - ------------------------------------ April 29, 1999 Joshua J. Harris * Director - ------------------------------------ April 29, 1999 David M. Johnson * Director - ------------------------------------ April 29, 1999 Samuel L. Katz * Director - ------------------------------------ April 29, 1999 Marc J. Rowan * Director - ------------------------------------ April 29, 1999 Richard A. Smith * Director - ------------------------------------ April 29, 1999 Michael L. Tarnopol * Director - ------------------------------------ April 29, 1999 Michael D. Weiner *By: /s/ Steven L. Barnett --------------------- Steven L. Barnett Attorney-in-Fact II-7 INDEPENDENT AUDITORS' REPORT "To the Board of Directors of NRT Incorporated We have audited the consolidated financial statements of NRT Incorporated and subsidiaries ("NRT") as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1998 and the four months ended December 31, 1997 and the consolidated statements of operations, trust equity and cash flows of National Realty Trust and subsidiaries (the "Predecessor Trust") for the period from January 1, 1997 to August 31, 1997 and the period from June 1, 1996 to December 31, 1996, 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 period from January 1, 1996 to May 31, 1996 and have issued our report thereon dated March 19, 1999 (April 2, 1999 as to Notes 2 and 13, April 6 as to Note 19 and May , 1999 as to the effects of the stock split described in Note 2), included elsewhere in this Registration Statement. Our audits also included the financial statement schedule listed at Item 16(b) of this Registration Statement. This financial statement schedule is the responsibility of the management of NRT. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Costa Mesa, California March 19, 1999" The accompanying consolidated financial statements include the effects of a stock split of NRT's common stock anticipated to be approved by NRT's Board of Directors. The above opinion is in the form which will be furnished by Deloitte & Touche LLP upon consummation of the stock split, which is described in Note 2 of the notes to the consolidated financial statements, and assuming that, from March 19, 1999 to the date of such stock split, no other events will have occurred that would affect the accompanying financial statements and the notes thereto and financial statement schedule, or required disclosure therein. Deloitte & Touche LLP Costa Mesa, California April 29, 1999 S-1 NRT Incorporated Schedule II--Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 and the Three Months Ended March 31, 1999
Column A Column B Column C Column D Column E - -------- ----------------------- --------- ---------- ---------- Balance at Charged Balance at Beginning to Operating End of Description of Period Expenses Other (a) Deductions Period - ----------- ---------- ------------ --------- ---------- ---------- Legal Reserves.......... $12,353 $ 296 $ 410 $ 1,727 $11,332 Closed Office Reserves.. 28,696 -- 7,961 4,123 32,534 ------- ------ ------- ------- ------- Total at March 31, 1999................... $41,049 $ 296 $ 8,371 $ 5,850 $43,866 ======= ====== ======= ======= ======= Legal Reserves.......... 15,467 608 5,445 9,167 12,353 Closed Office Reserves.. 24,274 -- 23,419 18,997 28,696 ------- ------ ------- ------- ------- Total at December 31, 1998................... $39,741 $ 608 $28,864 $28,164 $41,049 ======= ====== ======= ======= ======= Legal Reserves.......... 2,988 710 14,070 42,301 15,467 Closed Office Reserves.. 380 -- 32,100 8,206 24,274 ------- ------ ------- ------- ------- Total at December 31, 1997................... $ 3,624 $ 710 $46,170 $10,763 $39,741 ======= ====== ======= ======= ======= Legal Reserves.......... 3,744 969 -- 1,725 2,988 Closed Office Reserves.. 351 -- 285 256 380 ------- ------ ------- ------- ------- Total at August 31, 1997................... $ 4,095 $ 969 $ 285 $ 1,725 $ 3,624 ======= ====== ======= ======= ======= Legal Reserves.......... 3,605 1,278 5 1,144 3,744 Closed Office Reserves.. 3,687 -- 515 3,851 351 ------- ------ ------- ------- ------- Total at December 31, 1996................... $ 7,292 $1,278 $ 520 $ 4,995 $ 4,095 ======= ====== ======= ======= =======
Notes: (a) Amounts relate to acquisitions. S-2 EX-4.1 2 SPECIMEN OF COMMON STOCK CERTIFICATE [NRT LOGO] NRT Incorporated INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 62937Q 1O 0 This Certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF NRT INCORPORATED transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless duly countersigned by the Transfer Agent and registered by the Registrar. WITNESS, the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED BANK BOSTON, N.A. TRANSFER AGENT AND REGISTRAR BY NRT INCORPORATED CORPORATE SEAL 1997 DELAWARE SENIOR VICE PRESIDENT, PRESIDENT AND GENERAL COUNSEL AND SECRETARY CHIEF EXECUTIVE OFFICER NRT Incorporated (the "Corporation"), will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests may be made to the Corporation or the transfer agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT-__________ Custodian ___________ (Cust) (Minor) under Uniform Gifts to Minors Act _________________ (State) Additional abbreviations may also be used thought not in the above list. FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - --------------------------------------- ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the common stock represented by the within Certificate, and does hereby irrevocably constitute and appoint ______________________________________________________________________ Attorney to transfer the said stock on the books of NRT Incorporated with full power of substitution in the premises. Dated _________________ X ________________________________________________ X ________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERNATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: By ___________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.14 3 AMENDED & RESTATED CREDIT AGREEMENT EXHIBIT 10.14 CREDIT AGREEMENT among NRT INCORPORATED, VARIOUS LENDING INSTITUTIONS, THE CHASE MANHATTAN BANK, AS CO-ARRANGER and SYNDICATION AGENT, BANKBOSTON, N.A. as CO-AGENT and BANKERS TRUST COMPANY, AS LEAD ARRANGER and ADMINISTRATIVE AGENT ________________________________ Dated as of January 7, 1999 and Amended and Restated as of March 31, 1999 ________________________________ TABLE OF CONTENTS -----------------
Page ---- SECTION 1. Amount and Terms of Credit.......................................... 1 1.01 Commitments.......................................................... 1 1.02 Minimum Borrowing Amounts, etc....................................... 3 1.03 Notice of Borrowing.................................................. 3 1.04 Disbursement of Funds................................................ 5 1.05 Notes................................................................ 5 1.06 Conversions.......................................................... 6 1.07 Pro Rata Borrowings.................................................. 7 1.08 Interest............................................................. 7 1.09 Interest Periods..................................................... 8 1.10 Increased Costs; Illegality; etc..................................... 9 1.11 Compensation; Breakage............................................... 11 1.12 Change of Lending Office............................................. 12 1.13 Replacement of Banks................................................. 12 SECTION 2. Letters of Credit................................................... 14 2.01 Letters of Credit.................................................... 14 2.02 Letter of Credit Requests............................................ 15 2.03 Letter of Credit Participations...................................... 16 2.04 Agreement to Repay Letter of Credit Drawings......................... 18 2.05 Increased Costs...................................................... 19 2.06 Indemnification...................................................... 20 SECTION 3. Fees; Commitments................................................... 20 3.01 Fees................................................................. 20 3.02 Voluntary Termination or Reduction of Total Unutilized Revolving Loan Commitment.................................................... 21 3.03 Mandatory Reduction of Commitments................................... 22 SECTION 4. Payments............................................................ 22 4.01 Voluntary Prepayments................................................ 22 4.02 Mandatory Repayments and Commitment Reductions....................... 23 4.03 Method and Place of Payment.......................................... 27 4.04 Net Payments......................................................... 27 SECTION 5. Conditions Precedent to Restatement Effective Date.................. 30 5.01 Execution of Agreement; Notes........................................ 30
(i)
Page ---- 5.02 Officer's Certificate................................................ 30 5.03 Opinions of Counsel.................................................. 30 5.04 Company Documents; Proceedings....................................... 30 5.05 Adverse Change, etc.................................................. 31 5.06 Litigation........................................................... 31 5.07 Approvals............................................................ 32 5.08 Refinancing of Indebtedness; Existing Credit Agreement............... 32 5.09 Pledge Agreement..................................................... 32 5.10 Subsidiaries Guaranty................................................ 33 5.11 Employee Benefit Plans; Shareholders' Agreements; Management Agreements; Employment Agreements; Existing Indebtedness Agreements 33 5.12 Solvency Certificate................................................. 34 5.13 Financial Statements; Balance Sheet.................................. 34 5.14 Payment of Fees...................................................... 34 SECTION 6. Conditions Precedent to All Credit Events........................... 34 6.01 No Default; Representations and Warranties........................... 35 6.02 Notice of Borrowing; Letter of Credit Request........................ 35 SECTION 7. Representations and Warranties...................................... 35 7.01 Company Status....................................................... 35 7.02 Company Power and Authority.......................................... 36 7.03 No Violation......................................................... 36 7.04 Litigation........................................................... 36 7.05 Use of Proceeds; Margin Regulations.................................. 37 7.06 Governmental Approvals............................................... 37 7.07 Investment Company Act............................................... 37 7.08 Public Utility Holding Company Act................................... 37 7.09 True and Complete Disclosure......................................... 37 7.10 Financial Condition; Financial Statements............................ 38 7.11 Security Interests................................................... 39 7.12 Compliance with ERISA................................................ 39 7.13 Capitalization....................................................... 40 7.14 Subsidiaries......................................................... 40 7.15 Intellectual Property, etc........................................... 40 7.16 Compliance with Statutes, etc........................................ 41 7.17 Environmental Matters................................................ 41 7.18 Properties........................................................... 42 7.19 Labor Relations...................................................... 42 7.20 Tax Returns and Payments............................................. 42 7.21 Existing Indebtedness................................................ 43 7.22 Insurance............................................................ 43 7.23 Year 2000 Representation............................................. 43
(ii)
Page ---- SECTION 8. Affirmative Covenants............................................... 43 8.01 Information Covenants................................................ 43 8.02 Books, Records and Inspections....................................... 46 8.03 Insurance............................................................ 47 8.04 Payment of Taxes..................................................... 47 8.05 Corporate Franchises................................................. 47 8.06 Compliance with Statutes; etc........................................ 47 8.07 Compliance with Environmental Laws................................... 47 8.08 ERISA................................................................ 48 8.09 Good Repair.......................................................... 49 8.10 End of Fiscal Years; Fiscal Quarters................................. 49 8.11 Additional Security; Further Assurances.............................. 49 8.12 Ownership of Subsidiaries............................................ 50 8.13 Permitted Acquisitions............................................... 50 8.14 Maintenance of Company Separateness.................................. 52 8.15 Performance of Obligations........................................... 52 8.16 Use of Proceeds...................................................... 53 SECTION 9. Negative Covenants.................................................. 53 9.01 Changes in Business.................................................. 53 9.02 Consolidation; Merger; Sale or Purchase of Assets; etc............... 53 9.03 Liens................................................................ 56 9.04 Indebtedness......................................................... 59 9.05 Advances; Investments; Loans......................................... 61 9.06 Dividends; etc....................................................... 64 9.07 Transactions with Affiliates and Unrestricted Subsidiaries........... 66 9.08 Consolidated Adjusted Interest Coverage Ratio........................ 67 9.09 Total Leverage Ratio................................................. 67 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.......... 67 9.11 Limitation on Issuance of Capital Stock.............................. 68 9.12 Limitation on Certain Restrictions on Subsidiaries................... 69 9.13 Limitation on the Creation of Subsidiaries, Joint Ventures and Unrestricted Subsidiaries.......................................... 70 9.14 De Minimis Subsidiaries.............................................. 71 9.15 Burnet Realty, Inc. Title Insurance Business........................ 71 SECTION 10. Events of Default.................................................. 71 10.01 Payments............................................................ 71 10.02 Representations, etc................................................ 71 10.03 Covenants........................................................... 71
(iii)
Page ---- 10.04 Default Under Other Agreements........................................ 72 10.05 Bankruptcy, etc....................................................... 72 10.06 ERISA................................................................. 72 10.07 Security Documents.................................................... 73 10.08 Guaranties............................................................ 73 10.09 Judgments............................................................. 73 10.10 Ownership............................................................. 74 10.11 Franchise Agreements.................................................. 74 SECTION 11. Definitions.......................................................... 74 SECTION 12. The Administrative Agent.............................................103 12.01 Appointment...........................................................103 12.02 Delegation of Duties..................................................104 12.03 Exculpatory Provisions................................................104 12.04 Reliance by the Administrative Agent..................................105 12.05 Notice of Default.....................................................105 12.06 Nonreliance on Administrative Agent and Other Banks...................105 12.07 Indemnification.......................................................106 12.08 Administrative Agent in its Individual Capacity.......................106 12.09 Holders...............................................................107 12.10 Resignation of the Administrative Agent...............................107 12.11 Co-Arranger, Syndication Agent, Co-Agent..............................107 SECTION 13. Miscellaneous........................................................107 13.01 Payment of Expenses, etc..............................................107 13.02 Right of Setoff.......................................................108 13.03 Notices...............................................................109 13.04 Benefit of Agreement..................................................109 13.05 No Waiver; Remedies Cumulative........................................111 13.06 Payments Pro Rata.....................................................112 13.07 Calculations; Computations............................................112 13.08 Governing Law; Submission to Jurisdiction; Venue......................113 13.09 Counterparts..........................................................114 13.10 Effectiveness.........................................................114 13.11 Headings Descriptive..................................................114 13.12 Amendment or Waiver; etc..............................................114 13.13 Survival..............................................................116 13.14 Domicile of Loans and Commitments.....................................116 13.15 Confidentiality.......................................................116 13.16 Waiver of Jury Trial..................................................117
(iv)
Page ---- 13.17 Register....................................................................................... 117 13.18 Additions of New Banks; Conversion of Original Loans of Continuing Banks; Surrender of Notes...................................................................... 117 13.19 Limitation on Additional Amounts, etc.......................................................... 118
(v) 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 Pledge Agreement Acknowledgment EXHIBIT H Subsidiaries Guaranty Acknowledgment 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 (iv) CREDIT AGREEMENT, dated as of January 7, 1999 and amended and restated as of March 31, 1999, among NRT Incorporated, a Delaware corporation (the "Borrower"), the Banks from time to time party hereto, BANKERS TRUST COMPANY ("BTCo") as Lead Arranger, and THE CHASE MANHATTAN BANK ("Chase") as Co- Arranger, (BTCo and Chase, each an "Arranger" and, collectively, the "Arrangers"), BANKBOSTON, N.A. as Co-Agent (in such capacity, "Co-Agent") 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, the Borrower, the Existing Banks, the Administrative Agent and the Syndication Agent are party to a Credit Agreement, dated as of January 7, 1999, (as the same has been amended, modified or supplemented to, but not including, the Restatement Effective Date, the "Existing Credit Agreement"); and 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; and WHEREAS, the parties hereto wish to amend and restate the Existing Credit Agreement as herein provided; NOW THEREFORE, the parties hereto agree that the Existing Credit Agreement shall be and hereby is amended and restated in its entirety as follows: 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 (I) in the case of each Continuing Bank, to convert into Revolving Loans (each a "Revolving Loan Conversion", and together the "Revolving Loan Conversions"), on the Restatement Effective Date, Original Revolving Loans made by such Continuing Bank to the Borrower pursuant to the Existing Credit Agreement and outstanding on the Restatement Effective Date and (II) 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 Restatement 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; (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 Restatement 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 (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. 2 (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. 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 3 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 (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 4 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 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 5 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. (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 Restatement 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. 6 1.06 Conversions. The Borrower shall have the option to convert on ----------- any Business Day occurring on or after the Restatement 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 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. 7 (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 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; 8 (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 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 Restatement 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 Restatement Effective Date in any 9 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 Restatement 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 Restatement 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 13.19 (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. 10 (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 Restatement 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 13.19 (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. 11 1.11 Compensation; Breakage. The Borrower agrees, subject to the ---------------------- provisions of Section 13.19 (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 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 Restatement 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). (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 12 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 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 13 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. 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 Restatement 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 Restatement 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 14 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 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 Restatement 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 Restatement 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 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 15 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 ------------------------------- 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 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 16 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 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 17 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. (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 18 (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 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 Restatement 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 19 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 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 13.19 (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 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 20 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 Restatement 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 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 21 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 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). 22 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 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 23 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 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 Restatement 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) of this clause (y) because such amount is contractually committed to be used and subsequent to such date 24 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 Restatement 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 Restatement 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 Restatement 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 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 25 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 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) 26 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 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. 27 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 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 Restatement Effective Date hereby represents that, as of the Restatement 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 Restatement 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 28 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 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 Restatement 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 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 Restatement Effective Date (or, if later, after the date such Bank became a party to this Agreement) in any 29 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 Restatement 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. (e) The provisions of this Section 4.04 are subject to the provisions of Section 13.19 (to the extent applicable). SECTION 5. Conditions Precedent to Restatement Effective Date. The occurrence -------------------------------------------------- of the Restatement 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 Restatement Effective Date, are subject at the time of the occurrence of the Restatement Effective Date to the satisfaction of the following conditions: 30 5.01 Execution of Agreement; Notes. On or prior to the Restatement ----------------------------- 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 or prior to the Restatement 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 or prior to the Restatement 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 Restatement 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 or prior to the ------------------------------ Restatement Effective Date, the Administrative Agent shall have received from the Borrower and each other Credit Party a certificate, dated the Restatement 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 certificate of incorporation, by-laws or other organizational document) shall be reasonably satisfactory to the Arrangers. (b) On or prior to the Restatement 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 Restatement 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 31 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 Restatement Effective Date, the Cendant Documents, 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 Restatement Effective Date. 5.05 Adverse Change, etc. (a) On the Restatement Effective Date, -------------------- since December 31, 1998, 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 Restatement 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 adverse effect on the syndication, in each case as determined by the Arrangers in their reasonable discretion. 5.06 Litigation. On the Restatement 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 Restatement Effective Date, (i) all necessary --------- governmental (domestic and foreign), regulatory and third party approvals in connection with any Existing Indebtedness, the Cendant Documents, 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 32 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; Existing Credit Agreement. (a) On ------------------------------------------------------- the Restatement 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 Restatement 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 Restatement 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). (b) On the Restatement Effective Date, (i) each Continuing Bank shall convert its Original Revolving Loans as contemplated by Section 1.01, (ii) each Continuing Bank whose Original Loans outstanding on the Restatement Effective Date exceed the aggregate principal amount of Loans to be made available by such Continuing Bank on such date shall have received payment in full of all amounts then due and owing to it as provided in Section 13.18(c), and (iii) the Borrower shall have paid all interest and Fees owing under the Existing Credit Agreement through the Restatement Effective Date. (c) The Administrative Agent shall have received evidence in form, scope and substance reasonably satisfactory to it that the matters set forth in Sections 5.08(a) and (b) have been satisfied on the Restatement Effective Date. 5.09 Pledge Agreement. On the Restatement Effective Date, each of ----------------- the Credit Parties shall have duly authorized, executed and delivered an acknowledgment to the Pledge Agreement in the form of Exhibit G, together with such changes (or with such other documents) as may be requested by the Collateral Agent (the "Pledge Agreement Acknowledgment") 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 as so modified by the Pledge Agreement Acknowledgment and such other documents shall be in full force and effect. 5.10 Subsidiaries Guaranty. On the Restatement Effective Date, each --------------------- Guarantor shall have duly authorized, executed and delivered an acknowledgment to the Subsidiaries Guaranty in the form of Exhibit H (the "Subsidiaries Guaranty Acknowledgment"), and the Subsidiaries Guaranty as so modified by the Subsidiary Guaranty Acknowledgment shall be in full force and effect. 33 5.11 Employee Benefit Plans; Shareholders' Agreements; Management ------------------------------------------------------------ Agreements; Employment Agreements; Existing Indebtedness Agreements. (a) On or - ------------------------------------------------------------------- prior to the Restatement 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 Restatement Effective Date), in each case as same will be in effect on the Restatement Effective Date after the transactions contemplated hereby: (i) 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"); (ii) 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"); (iii) 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"); (iv) 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 (v) 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 Restatement Effective Date. (b) On or prior to the Restatement Effective Date, the Administrative Agent shall have received (i) a certification from the appropriate officer of the Borrower that all agreements and plans referenced in Section 5.11 of the Existing Credit Agreement previously delivered to the Administrative Agent, remain in full force and effect and (ii) 34 any amendments to the agreements and plans referred to in Section 5.11 of the Existing Credit Agreement to the extent not delivered pursuant to Section 5.11(a). 5.12 Solvency Certificate. On or before the Restatement 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 Restatement 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 ----------------------------------- Restatement 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 December 31, 1998, which financial statements, unaudited consolidated balance sheet and funds flow statement shall be reasonably satisfactory to the Arrangers. (b) On or prior to the Restatement 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 Restatement 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 Restatement 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). 35 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). The occurrence of the Restatement 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 Restatement Effective Date and each Credit Event on and after the Restatement 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 Restatement 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 36 Credit Party has duly executed and delivered each Credit Document to which it is a party and each 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 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). 37 (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 Restatement Effective Date (and which remain in full force and effect on the Restatement 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 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 Restatement 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 38 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 Restatement 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 December 31, 1998, and the related statements of income and cash flows and changes in shareholders' equity of the Borrower for the fiscal years ended as of said dates. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements. (c) Since December 31, 1998, 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 Restatement 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 Restatement 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 Restatement 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 39 in such Projections will in fact be achieved). On and as of the Restatement 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 Restatement 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 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 Restatement 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 40 may cease contributions to or terminate any employee benefit plan maintained by any of them without incurring any material liability. 7.13 Capitalization. On the Restatement 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 Restatement Effective Date, ------------ the Borrower has no Subsidiaries other than those Subsidiaries listed on Schedule VI. Schedule VI correctly sets forth, as of the Restatement 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 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. 41 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 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 42 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 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 43 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 Restatement 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 Restatement 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 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 Restatement 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 44 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. (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 45 the provisions of Sections 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 or any of its Subsidiaries 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 or any of its Subsidiaries 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 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 46 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 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 any Bank 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 47 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 Bank 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 Restatement 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 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. 48 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 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 49 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 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, the "Additional Security Documents"). All such security interests shall be granted pursuant to documentation reasonably satisfactory in form and substance to the 50 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. 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 51 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 Restatement 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 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 52 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. (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 53 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, 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 Restatement 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; 54 (b) the Borrower and its Subsidiaries may make purchases, sales and other transfers and transactions pursuant to the Acquisition Cooperation 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 Cash Secured 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 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 55 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 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); 56 (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 Restatement 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 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; and (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 Restatement 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 57 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 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 Restatement 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 58 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; (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 Restatement 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 59 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 (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; (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 Restatement Effective Date and listed on Schedule III (as reduced by any repayments thereof before, on or after the Restatement 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; 60 (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 Restatement 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 Restatement 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); (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 61 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 Restatement Effective Date pursuant to Section 9.11(c), does not exceed $75,000,000 at any time outstanding; (j) Indebtedness incurred with respect to Cash Secured 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 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; 62 (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 Restatement 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 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 63 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 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); 64 (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 Restatement Effective Date, when added to the aggregate outstanding principal amount of 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 IX 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 65 capital stock) or enter into any derivatives or other transaction with any financial institution, commodities or stock 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 Restatement 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) $15,000,000 plus (ii) cash received by the Borrower from Cendant and/or its Subsidiaries in the first six months after the Restatement Effective Date in connection with the Cendant Documents; 66 (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) (x) the Borrower may pay regularly scheduled Dividends on Existing Preferred Stock pursuant to the terms thereof solely through the issuance of additional shares of such Existing Preferred Stock and (y) so long as no Default or Event of Default exists or would result therefrom, the Borrower may (A) pay cash Dividends on the Existing Preferred Stock payable in accordance with the terms thereof and (B) redeem or repurchase shares of Existing Preferred Stock previously issued as pay-in-kind Dividends 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 the Acquisition Cooperation Agreement; (x) to the extent constituting Dividends, all payments or transfers made by the Borrower and/or its Subsidiaries pursuant to the Cendant Documents; (xi) so long as no Default or Event of Default exists or would result therefrom, the Borrower may redeem or purchase shares of Borrower Common Stock and Existing Preferred Stock in an aggregate amount not to exceed $25,000,000; and (xii) the Borrower may increase or decrease the liquidation preference of the Existing Preferred Stock. 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, 67 payments due to 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 for mortgage origination services under the Marketing Agreement; (ix) payments relating to any joint venture between Cendant and the Borrower and its Subsidiaries pursuant to Section 9.05(r); and (x) 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 Restatement 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 Restatement 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. --- ----- 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: 68 (i) (a) amend or modify, or permit the amendment or modification of, any Permitted Subordinated Indebtedness in a manner that could reasonably be expected to in any way be adverse to the interest of the Banks, or (b) 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 Acquired 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 in any material respect; (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, 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) 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 69 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, officers or brokers of record to the extent required by applicable law, (iv) Subsidiaries formed after the Restatement 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 9.11(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 Restatement Effective Date pursuant to this Section 9.11(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 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 9.11(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 70 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 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 Restatement 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 71 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 contemplated by Section 8.11) 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 72 Minimis 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 Restatement 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 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 73 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 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 74 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 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 75 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 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 February 9, 1999 by and between the Borrower, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo (UK) Partners III, L.P. and, for purposes of Section 3.9 only, Apollo Management, L.P. and Cendant. 76 "Acquisition Services Agreement" shall mean the Acquisition Services Agreement, dated as of February 9, 1999, 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. "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 Delaware limited partnerships (except that Apollo (U.K.) Partners III, L.P. is a limited partnership organized under the laws of England). 77 "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 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 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 Restatement 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 Restatement Effective Date, plus (v) the amount of any increase to the Available Basket Amount made ---- after the Restatement 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 78 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 Restatement 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 Restatement Effective Date, plus (v) the amount of any increase to the Available ---- Basket Sub-Limit made after the Restatement Effective Date in accordance with 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. 79 "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. "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 80 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 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. "Cash Secured 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. "Cendant" shall mean Cendant Corporation. "Cendant Documents" shall mean, collectively, (i) the Advisory Services Agreement, (ii) the Development Advance Promissory Note, (iii) the Franchise Override Agreement, (iv) the Incremental Royalty Agreement, (v) the Additional Royalty Agreement, (vi) the Support Agreement, (vii) the Franchise Agreements, (viii) the Subscription Agreement, (ix) the Subordination Agreement, (x) the Dividend Guarantee, (xi) the Indemnification Agreement, (xii) the Acquisition Services Agreement, (xiii) the Program Outsourcing Agreement, (xiv) the Acquisition Cooperation Agreement, (xv) the License Agreement and (xvi) the Master Letter 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 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 Restatement 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 Restatement 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 81 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 Restatement 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. "Co-Agent" shall have the meaning provided in the first paragraph of this agreement. "Co-Arranger" shall have the meaning provided in the first paragraph of this Agreement. "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 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). 82 "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 (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 83 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 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. "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 84 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. "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 Bank" shall mean each Existing Bank with a Revolving Loan Commitment under this Agreement. "Continuing Directors" shall mean the directors of the Borrower on the Restatement 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. "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. 85 "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" shall mean the Development Advance Promissory Note, dated as of September 1, 1997, between NRT and Coldwell Banker Real Estate Corporation. "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. "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. 86 "Domestic Unrestricted Subsidiary" shall mean any Unrestricted Subsidiary which is not a Foreign Unrestricted Subsidiary. "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. "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. 87 "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 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. 88 "Existing Bank" shall mean each Person which was a Bank under, and as defined in, the Existing Credit Agreement. "Existing Credit Agreement" shall have the meaning provided in the recitals to this Agreement. "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). "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 (i) the Master Real Estate Franchise Agreement, dated as of February 9, 1999, by and between the Borrower and Century 21 Real Estate Corporation, (ii) the ERA Franchise Systems, Inc. Master Membership Agreement, dated as of February 9, 1999, by and between ERA Franchise Systems, Inc. and the Borrower and (iii) the Master Real Estate Franchise Agreement, dated as of February 9, 1999, by and between Coldwell Banker Real Estate Corporation and the Borrower. "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. 89 "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). "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 Restatement Effective Date, such De Minimis Subsidiaries for a period of 120 days from the Restatement Effective Date, and in the case of De Minimis Subsidiaries created or acquired after the Restatement 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 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. "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 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. 90 "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, 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. "Lead Arranger" shall have the meaning provided in the first paragraph 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). 91 "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 Restatement 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). "License Agreement" shall mean the License Agreement dated as of February 9, 1999, by and between Cendant and the Borrower. "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. "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 February 9, 1999, 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. 92 "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. "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 Bank" shall mean each Bank on the Restatement Effective Date which is not an Existing Bank. "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. "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. "Original Loans" shall mean the Loans under, and as defined in, the Existing Credit Agreement. "Original Revolving Loans" shall mean the Revolving Loans under, and as defined in, the Existing Credit Agreement. "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. 94 "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 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. 95 "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 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 96 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" shall have the meaning provided in the Existing Credit Agreement. "Pledge Agreement Acknowledgment" shall have the meaning provided in Section 5.09. "Pledge Agreement Collateral" shall mean all of the Collateral as defined in the Pledge Agreement. "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 Restatement Effective Date until the date which is 120 days thereafter, all De Minimis Subsidiaries existing on the Restatement Effective Date and (iii) for a period of 60 days after the creation or acquisition of De Minimis Subsidiaries after the Restatement Effective Date, all such De Minimis Subsidiaries. "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. 97 "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 Restatement 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 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 98 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, 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). 99 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 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 February 9, 1999, 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 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. 100 "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. "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. "Restatement Effective Date" shall have the meaning provided in Section 13.10. "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) 101 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(a)(II). "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 Loan Conversion" shall have the meaning provided in Section 1.01(a)(I). "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). "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. 102 "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 the Existing Credit Agreement. "Subsidiaries Guaranty Acknowledgment" 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 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. "Supermajority Banks" shall mean those Non-Defaulting Banks which would constitute the Required Banks under, and as defined in, this Agreement if the percentage "50%" contained therein were changed to "66-2/3%". "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. 103 "Swingline Loan" shall have the meaning provided in Section 1.01(b). "Swingline Note" shall have the meaning provided in Section 1.05(a). "Syndication Agent" shall have the meaning provided in the first paragraph of this Agreement. "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. "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). 104 "Unrestricted Subsidiary" shall mean any Subsidiary of the Borrower that is acquired or created after the Restatement 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 Restatement 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 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, officer's or brokers of record 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 -------- 105 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. "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 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, 106 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 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 107 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 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; 108 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 Obli gations. 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. 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. 109 (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 Co-Arranger, Syndication Agent, Co-Agent. Each Bank hereby ---------------------------------------- irrevocably designates and appoints Chase as Co-Arranger and Syndication Agent hereunder, and BankBoston, N.A. as Co-Agent hereunder, it being understood and agreed that neither Chase nor BankBoston, N.A. shall have any duties or obligations in such capacity hereunder. 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 110 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 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. 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 111 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. (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 112 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 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 113 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 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 -------- ------- 114 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 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, 1998 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 Restatement 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 Restatement 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. 115 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. 13.10 Effectiveness. This Agreement shall become effective on the ------------- date (the "Restatement 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 Restatement Effective Date). Unless the Administrative Agent has received actual notice from any Bank that the conditions 116 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 Restatement 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 Restatement 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 Restatement 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 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 Restatement Effective Date), (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, or (vi) release all or substantially all of the Guarantors; provided further, that no such change, waiver, discharge ---------------- or termination shall (u) increase the Revolving Loan Commitments of any Bank over the amount thereof then in effect 117 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), (v) 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, (w) without the consent of BTCo, alter its rights or obligations with respect to Swingline Loans, (x) 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, (y) without the consent of the Collateral Agent, amend, modify or waive any provision relating to the rights or obligations of the Collateral Agent and (z) without the consent of the Supermajority Banks, release any Guarantor constituting 10% or more of the assets of the Company and its Subsidiaries (except as expressly set forth in the Subsidiaries Guaranty). (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 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 13.19 (to the extent applicable), survive the execution and delivery of this Agreement and the making and repayment of the Loans. 118 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, 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 119 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 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 Additions of New Banks; Conversion of Original Loans of ------------------------------------------------------- Continuing Banks; Surrender of Notes. (a) On and as of the occurrence of the - ---------- ------------------------- Restatement Effective Date in accordance with Section 13.10 hereof, each New Bank shall become a "Bank" under, and for all purposes of, this Agreement and the other Credit Documents. (b) The parties hereto acknowledge that each Existing Bank has been offered the opportunity to participate in this Agreement, after the occurrence of the Restatement Effective Date, as a Continuing Bank hereunder, but that no Existing Bank is obligated to be a Continuing Bank. (c) Notwithstanding anything to the contrary contained in the Existing Credit Agreement, this Agreement or any other Credit Document, the Borrower agrees and each of the Banks hereby agree that on the Restatement Effective Date, each Bank with a Revolving Loan Commitment as set forth on Schedule I (after giving effect to the Restatement Effective Date) shall make or maintain (including by way of conversion) that principal amount of Revolving Loans to the Borrower as is required by Section 1.01, provided that if the Original Loans of any Continuing Bank outstanding on the Restatement Effective Date (immediately before giving effect thereto) exceed the aggregate principal amount of Loans required to be made available by such Bank on such date (after giving effect to the Restatement Effective Date), then Original Loans of such Continuing Bank in an amount equal to such excess shall be repaid on the Restatement Effective Date, together with interest thereon, to such Continuing Bank. Notwithstanding anything to the contrary contained in the Existing Credit Agreement, this Agreement or 120 any other Credit Document, the parties hereto hereby consent to the repayments and reductions required above. (d) On the Restatement Effective Date, each Existing Bank shall have surrendered to the Administrative Agent for cancellation the promissory notes issued to it pursuant to the Existing Credit Agreement in respect of its Original Loans. 13.19 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 13.19 shall have no applicability to any Section of this Agreement other than said Sections 1.10, 1.11, 2.05 and 4.04. 121 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 ------------------------------------------------ Title: BANKERS TRUST COMPANY, Individually and as Administrative Agent and Arranger By ------------------------------------------------ Title: By ------------------------------------------------ Title: THE CHASE MANHATTAN BANK, Individually and as Syndication Agent and Arranger By ------------------------------------------------ Title: 122 PARIBAS By ------------------------------------------------ Title: 123 CITY NATIONAL BANK By ------------------------------------------------ Title: 124 BANKBOSTON, N.A. By ------------------------------------------------ Title: 125 SCHEDULE I ---------- LIST OF BANKS AND COMMITMENTS -----------------------------
Revolving Bank Loan Commitment - ---- --------------- Bankers Trust Company $25,000,000 The Chase Manhattan Bank $25,000,000 BankBoston, N.A. $25,000,000 Paribas $15,000,000 City National Bank $ 5,000,000 Total $95,000,000
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 BankBoston, N.A. Real Estate Capital Markets 100 Federal Street Boston, Massachusetts 02110 Attention: Tim Dwyer Telephone No.: (617) 434-1659 Facsimile No.: (617) 434-1337 Paribas 787 Seventh Avenue New York, New York 10019 Attention: Patrick Zoro Telephone No.: (212) 841-3544 Facsimile No.: (212) 841-2292 City National Bank 400 North Roxbury drive, 3rd Floor Beverly Hills, CA 90210 Attention: Edward Vasallo Telephone: (310) 888-6147 Facsimile No.: (310) 888-6564
EX-10.17 4 AMENDMENT TO ACQUISITION COOPERATION AGREEMENT EXHIBIT 10.17 AMENDMENT OF ACQUISITION COOPERATION AGREEMENT ---------------------------------------------- AMENDMENT, dated as of March 24, 1999 (the "Amendment"), to the Acquisition Cooperation Agreement, dated as of February 9, 1999 (as amended, the "Acquisition Cooperation Agreement"), by and among NRT Incorporated (the "Company"), Cendant Corporation, Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo (UK) Partners III, L.P. and Apollo Management, L.P. WHEREAS, the parties hereto desire to amend the Acquisition Cooperation Agreement in the manner set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, and intending to be legally bound hereby, the parties hereto hereby agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined ----------------------- herein, each term used herein shall have the meaning assigned to such term in the Acquisition Cooperation Agreement. SECTION 2. Amendment of Acquisition Cooperation Agreement. The second ---------------------------------------------- sentence of Section 3.10 of the Acquisition Cooperation Agreement is hereby amended to read in its entirety as follows; Following the initial public offering of the Company, any provision of this Agreement may be amended if, but only if, such amendment is (i) in writing and signed by each of Cendant, the Company and, with respect to Section 3.9 only, Apollo and (ii) approved by a majority of the members of the Board of Directors of the Company who are not Cendant Designees (as such term is defined in the Stockholders Agreement, dated as of August 11, 1997, as amended, by and among the Company, Cendant Corporation, Cendant Operations, Inc., Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P. and Apollo (UK) Partners III, L.P. and Apollo Management, L.P.). SECTION 3. No Further Amendment. Except as otherwise provided herein, the -------------------- Acquisition Cooperation Agreement shall remain unchanged and in full force and effect. SECTION 4. Effect of Amendment. From and after the execution of this ------------------- Amendment by the parties hereto, any reference to the Acquisition Cooperation Agreement shall be deemed a reference to the Acquisition Cooperation Agreement as amended hereby. SECTION 5. Government Law. This amendment shall be governed by, -------------- enforced under and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof. SECTION 6. Counterparts. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 7. Captions. The captions of the various sections of this -------- Amendment have been inserted only for convenience of reference and shall not be deemed to modify, explain, enlarge or restrict any provision of this Amendment or the Acquisition Cooperation Agreement or affect the construction thereof. 2 IN WITNESS WHEREOF, each of the undersigned has caused this Amendment to be executed as of the date first above written. NRT INCORPORATED By: --------------------------------------------- Name: Title: CENDANT CORPORATION 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: 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: 3 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: APOLLO MANAGEMENT, L.P. By: ---------------------------------------------- Name: Title: 4 EX-10.18 5 PURCHASE AGREEMENT DATED APRIL 1, 1999 EXHIBIT 10.18 PURCHASE AGREEMENT ------------------ PURCHASE AGREEMENT (this "Agreement"), dated as of April 1, 1999, between Cendant Operations, Inc., a Delaware corporation ("Cendant"). NRT Incorporated, ------- a Delaware corporation ("Purchaser") and Apollo Investment Fund III, L.P., --------- Apollo Overseas Partners III, L.P. and Apollo U.K. Partners III, L.P. (the "Apollo Entities" and together with Cendant, the "Sellers"). --------------- ------ W I T N E S S E T H: - - - - - - - - - - WHEREAS, the parties hereto desire that Purchaser purchase from Sellers certain stock of Purchaser owned by Sellers. NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: ARTICLE I --------- SALE AND PURCHASE OF STOCK -------------------------- Section 1.1 Sale and Purchase of Stock. On the terms set forth herein, -------------------------- Cendant hereby agrees to sell, assign, transfer and deliver to Purchaser, and Purchaser hereby agrees to purchase from Cendant (the "Cendant Sale") all of ------------ Cendant's right, title and interest in and to 725.4 shares of Purchaser's Series B Preferred Stock (the "Cendant Shares"). On the terms set forth herein, the -------------- Apollo Entities hereby agree to sell, assign, transfer and deliver to Purchaser, and Purchaser hereby agrees to purchase from the Apollo Entities (the "Apollo ------ Sale"), all of the Apollo Entities' right, title and interest in and to an - ---- aggregate of 306,440 shares of Purchaser's common stock (the "Apollo Shares"). ------------- Section 1.2 Purchase Price. The purchase price for the Cendant Shares --------------- shall be $10,725,400 (the "Cendant Purchaser Price"). The purchase price for ----------------------- the Apollo Shares shall be $10,725,400 (the "Apollo Purchase Price"). --------------------- Section 1.3 Accrued Dividends. Upon payment of the Cendant Purchase ----------------- Price, Purchaser shall pay to Cendant an amount equal to (i) all accrued and unpaid dividends on the Cendant Shares plus (ii) 725.4 multiplied by the amount by which the liquidation preference of each Cendant Share exceeds $1,000 (the "Cendant Accrued Dividends"). ------------------------- Section 1.4 Certificate of Designation. The parties agree that the -------------------------- certificate of designation for the Series B Preferred Stock shall be amended prior to Purchaser's initial public offering so that the number of shares into which such stock is convertible shall be adjusted to take into account the repurchase of shares hereunder, in order to reflect the financial model provided to the Executive Committee of Purchaser's Board of Directors, subject to any prior stock splits. Section 1.5 Closing; Delivery and Payment. ----------------------------- (a) The closing of the Apollo Sale (the "Apollo Closing") shall take place -------------- at the offices of NRT Incorporated, 6 Sylvan Way, Parsippany, New Jersey, at 10:00 A.M., New York 1 City time, on a date as soon as practicable after Purchaser amends and restates its credit agreement. The date on which the Apollo Closing occurs is called the "Apollo Closing Date." The closing of the Cendant Sale (the "Cendant Closing") ------------------- --------------- shall take place at the offices of NRT Incorporated, 6 Sylvan Way, Parsippany, New Jersey, at 10:00 A.M., New York City time, on a date mutually agreed by the parties, which date shall be no earlier than completion of Purchaser's initial public offering of common stock and no later than a date ten business days from completion of Purchaser's initial public offering of common stock. The date on which the Cendant Closing occurs is called the "Cendant Closing Date." -------------------- (b) At the Apollo Closing, (i) Purchaser shall deliver to the Apollo Entities the Apollo Purchase Price in immediately available funds by wire transfer to an account at a United States bank designated in writing by the Apollo Entities and (ii) the Apollo Entities shall deliver to Purchaser (A) the Apollo Shares, (B) duly executed stock powers with respect to the Apollo Shares and (C) such other instruments and documents required to effect the transfer of the Apollo Shares. At the Cendant Closing, (i) Purchaser shall deliver to Cendant the Cendant Purchase Price and the Cendant Accrued Dividends in immediately available funds by wire transfer to an account at a United States bank designated in writing by Cendant and (ii) Cendant shall deliver to Purchase (A) the Cendant Shares, (B) duly executed stock powers with respect to the Cendant Shares and (C) such other instruments and documents required to effect the transfer of the Cendant Shares. ARTICLE II ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ Section 2.1 Authority; Binding Effect. Each party hereto hereby ------------------------- represents and warrants to each other party hereto as follows: Such party has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by such party and the consummation by each such party of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of such party and no other corporate proceedings on the part of such party is necessary to authorize this Agreement or the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by such party and, assuming due execution and delivery by each other party hereto, constitutes a valid and binding obligation of such party enforceable against such party in accordance with its terms. Section 2.2 Title to Shares. Cendant hereby represents and warrants to --------------- Purchaser as follows: Cendant owns, and on the Cendant Closing Date, will own, the Cendant Shares beneficially and of record, free and clear of all liens. The Apollo Entities hereby represent and warrant to Purchaser as follows: The Apollo Entities own, and on the Apollo Closing Date, will own, the Apollo Shares beneficially and of record, free and clear of all liens. ARTICLE III ----------- MISCELLANEOUS ------------- 2 Section 3.1 Amendment; Waiver. Any provision of this Agreement may be ----------------- amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by each of the parties hereto, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Section 3.2 Assignment. No party to this Agreement may assign any of its ---------- rights or obligations under this Agreement without the prior written consent of the other party hereto except that either party may without such consent assign this Agreement to one or more wholly-owned subsidiaries; provided, that no such -------- assignment shall relieve such party of any of its obligations hereunder. Section 3.3 Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties hereto with respect to this subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters, except for any written agreement of the parties that expressly provides that it is not superseded by this Agreement. Section 3.4 Fulfillment of Obligations. Any obligation of any party to any -------------------------- other party under this Agreement, which obligation is performed, satisfied or fulfilled by an affiliate of such party, shall be deemed to have been performed, satisfied or fulfilled by such party. Section 3.5 Parties in Interest. This Agreement shall inure to the benefit ------------------- of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any person other than Purchaser, Sellers, or their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. Section 3.6 Further Assurances. From and after the Closing Date, Sellers ------------------ and Purchaser shall promptly execute, acknowledge and deliver any other assurances or documents reasonably requested by the other party to effect the transaction contemplated hereby. Section 3.7 Governing Law; Jurisdiction; Service of Process. This ----------------------------------------------- Agreement shall be governed by the laws of the State of Delaware, its rules of conflict of laws notwithstanding. The parties hereby agree and consent to be subject to the non-exclusive jurisdiction of the courts of the State of Delaware in any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby. Section 3.8 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same agreement. Section 3.9 Headings. The heading references herein are for convenience -------- purposes only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 3 IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be executed as of the date first written above. CENDANT OPERATIONS, INC., By: ------------------------------------ Name: Title: NRT INCORPORATED By: ___________________________________ Name: Title: APOLLO INVESTMENT FUND III, L.P. By: APOLLO ADVISORS II, L.P. ---------------------------------- its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC. ---------------------------------- By: ___________________________________ Name: Title: APOLLO OVERSEAS PARTNERS III, L.P. By: APOLLO ADVISORS II, L.P. ----------------------------------- its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC. ----------------------------------- By: ____________________________________ Name: Title: APOLLO U.K. PARTNERS III, L.P. By: APOLLO ADVISORS II, L.P. ----------------------------------- its General Partner By: APOLLO CAPITAL MANAGEMENT II, INC. ----------------------------------- By: ___________________________________ Name: Title: 4 EX-11 6 CALCULATION OF LOSS PER COMMON SHARE EXHIBIT 11 NRT INCORPORATED AND SUBSIDIARIES EXHIBIT TO FORM S-1 REGISTRATION STATEMENT For the four months ended December 31, 1997, the year ended December 31, 1998 and the three months ended March 31, 1998 and 1999 COMPUTATION OF LOSS PER COMMON SHARE
Pro Pro Forma Forma Three Three Pro Three Three Four Months Months Forma Months Months Months Ended Ended Year Ended Ended Ended Ended Year Ended March 31, March 31, December 31, March 31, March 31, December 31, December 31, 1998 1999 1998 1998 1999 1997 1998 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) ------------ ------------ ----------- ----------- ------------ ----------- ----------- Net income (loss)....... $(42,243) $ 1,309 $(25,137) $(10,423) $ (9,874) $(47,017) $(11,172) Dividends on cumulative redeemable and cumulative convertible redeemable preferred stock.................. (9,732) (29,910) (7,255) (7,627) (15,438) (3,846) (4,553) Accretion of Series C preferred stock discount and redemption premium................ (2,257) (6,708) (1,654) (1,654) -- -- -- -------- -------- -------- -------- -------- -------- -------- Basic loss applicable to common shareholders.... (54,232) (35,309) (34,046) (19,704) (25,312) (50,863) (15,725) Add: Dividends on cumulative convertible redeemable preferred stock.................. 210 1,200 300 301 1,200 300 301 -------- -------- -------- -------- -------- -------- -------- Diluted loss applicable to common shareholders........... $(54,022) $(34,109) $(33,746) $(19,403) $(24,112) $(50,563) $(15,424) ======== ======== ======== ======== ======== ======== ======== Weighted average number of common shares and common share equivalents outstanding: (A) Weighted Average number of common shares outstanding............ 18,750 18,750 18,750 18,750 18,750 18,750 18,750 Add shares issued in conjunction with the offering(B)............ -- -- -- -- 9,666 9,666 9,666 -------- -------- -------- -------- -------- -------- -------- Weighted average number of common shares outstanding during the year--basic............ 18,750 18,750 18,750 18,750 28,416 28,416 28,416 Add common share equivalents--Weighted average options to purchase common stock-- net.................... -- 2,634 -- -- 2,634 -- -- Add common share equivalents--Cumulative convertible preferred stock.................. 6,006 6,006 6,006 6,006 6,006 6,006 6,006 -------- -------- -------- -------- -------- -------- -------- Weighted Average number of common shares and common share equivalents outstanding--diluted... 24,756 (C) 27,390 (C) 24,756 (C) 24,756 (C) 37,056 (C) 34,422 (C) 34,422 (C) ======== ======== ======== ======== ======== ======== ======== Basic loss per common share.................. $ (2.89)(C) $ (1.88)(C) $ (1.82)(C) $ (1.05)(C) $ (0.89)(C) $ (1.79)(C) $ (0.55)(C) ======== ======== ======== ======== ======== ======== ======== Diluted loss per common share.................. $ (2.18)(C) $ (1.25)(C) $ (1.36)(C) $ (0.78)(C) $ (0.65)(C) $ (1.46)(C) $ (0.45)(C) ======== ======== ======== ======== ======== ======== ========
- --------------------- (A) Gives effect to an intended 1.875-for-1 stock split that is expected to be declared prior to the offering. (B) Gives effect to the additional shares that will be outstanding as a result of the offering and the additional shares that would be issued to fund the repurchase of common stock from Apollo, the intended repurchase of the convertible preferred stock from Cendant, the redemption of the junior convertible preferred stock and the $45 million cash dividend paid to Apollo. (C) In accordance with SFAS No. 128, the inclusion of common stock equivalents in the computation of earnings per share need not be considered if the effect is antidilutive. Therefore, historical and pro forma loss per common share and the weighted average common shares outstanding as shown on the respective consolidated statements of operations for the respective periods does not include common share equivalents as their effect is antidilutive. EX-23.3 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-72093 of NRT Incorporated of our report dated July 1, 1998, related to the statements of operations and retained earnings and 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. Deloitte & Touche LLP Portland, Oregon April 29, 1999 EX-23.4 8 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-72093 of NRT Incorporated 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. Deloitte & Touche LLP San Francisco, California April 29, 1999 EX-23.5 9 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.5 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-72093 of NRT Incorporated 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. Deloitte & Touche LLP San Francisco, California April 29, 1999 EX-23.6 10 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.6 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-72093 of NRT Incorporated 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. Deloitte & Touche LLP Costa Mesa, California April 29, 1999 EX-23.7 11 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.7 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-72093 of NRT Incorporated 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. Deloitte & Touche LLP Costa Mesa, California April 29, 1999 EX-23.8 12 CONSENT OF ARTHUR ANDERSEN 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 April 29, 1999 EX-27 13 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 DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND FOR THE THREE MONTHS ENDED MARCH 31, 1999. 1,000 4-MOS 12-MOS 3-MOS DEC-31-1997 DEC-31-1998 MAR-31-1999 SEP-01-1997 JAN-01-1998 JAN-01-1999 DEC-31-1997 DEC-31-1998 MAR-31-1999 165,360 52,701 22,008 0 0 0 15,521 24,119 33,191 0 0 0 0 0 0 256,235 236,621 201,348 54,635 116,329 123,764 3,090 22,202 29,064 416,671 530,712 507,993 188,536 307,885 291,996 4,844 16,791 42,735 237,858 252,047 261,358 0 0 0 188 188 188 (34,044) (69,729) (134,601) 416,671 530,712 507,993 0 0 0 463,514 2,121,002 500,885 0 0 0 330,169 1,482,719 345,380 203,884 636,491 164,904 0 0 0 (2,843) (1,819) 568 (67,696) 3,611 (17,195) (25,453) 2,302 (6,772) (42,243) 1,309 (10,423) 0 0 0 0 0 0 0 0 0 (42,243) 1,309 (10,423) 0 0 0 0 0 0
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