Prospectus Supplement No. 4
Table of Contents

Prospectus Supplement No. 4

(to prospectus dated June 16, 2011)

  

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-173250

 

LOGO

Realogy Corporation

Up to $1,143,706,000 11.00% Series A Convertible Senior Subordinated Notes due 2018

Up to $291,424,196 11.00% Series B Convertible Senior Subordinated Notes due 2018

Up to $675,111,000 11.00% Series C Convertible Senior Subordinated Notes due 2018

and

Domus Holdings Corp.

Class A Common Stock Issuable upon Conversion of the Notes

This prospectus supplement is being filed to update and supplement the information contained in the prospectus dated June 16, 2011, as supplemented by the prospectus supplements dated August 3, 2011, August 8, 2011 and October 5, 2011, covering resales by selling securityholders of Realogy Corporation’s (i) 11.00% Series A Convertible Senior Subordinated Notes due 2018, (ii) 11.00% Series B Convertible Senior Subordinated Notes due 2018 and (iii) $ 11.00% Series C Convertible Senior Subordinated Notes due 2018 (collectively, the “notes”) and the Class A Common Stock of Domus Holdings Corp., par value $0.01 per share (“Class A Common Stock”), issuable upon conversion of the notes, with the information contained in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission (“SEC”) on November 1, 2011.

This prospectus supplement updates and supplements the information in the prospectus and is not complete without, and may not be delivered or utilized except in combination with, the prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the prospectus and if there is any inconsistency between the information in the prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

Investing in the notes and the Class A Common Stock issuable upon conversion of the notes involves risks. See “Risk Factors” beginning on page 21 of the prospectus.

Neither the SEC nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus or this prospectus supplement. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus supplement is November 1, 2011.


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                 

Commission File Nos. 333-173250, 333-173254 and 333-148153

 

 

DOMUS HOLDINGS CORP.

REALOGY CORPORATION

(Exact name of registrants as specified in its charter)

 

Delaware   20-8050955 and 20-4381990

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Numbers)

One Campus Drive

Parsippany, NJ

  07054
(Address of principal executive offices)   (Zip Code)

(973) 407-2000

(Registrants’ telephone number, including area code)

 

 

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨     Accelerated filer  ¨
Non-accelerated filer  x     Smaller reporting company  ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 105,000 shares of Class A Common Stock, $0.01 par value, and 200,426,906 shares of Class B Common Stock, $0.01 par value, of Domus Holdings Corp. outstanding as of October 31, 2011. There were 100 shares of Common Stock, $0.01 par value, of Realogy Corporation outstanding as of October 31, 2011.

 

 

 


Table of Contents

Table of Contents

 

          Page  

Introductory Note and Forward-Looking Statements

     1   

PART I

   FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

     4   
  

Report of Independent Registered Public Accounting Firm

     4   
  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010

     5   
  

Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

     6   
  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

     7   
  

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     43   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risks

     75   

Item 4.

  

Controls and Procedures

     75   

PART II

  

OTHER INFORMATION

     77   

Item 1.

  

Legal Proceedings

     77   

Item 6.

  

Exhibits

     78   
  

Signatures

     79   


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INTRODUCTORY NOTE

Except as otherwise indicated or unless the context otherwise requires, the terms “we,” “us,” “our,” “our company” and the “Company” refer to Domus Holdings Corp. (“Holdings”) and its consolidated subsidiaries, including Domus Intermediate Holdings Corp., a Delaware limited liability company (“Intermediate”) and Realogy Corporation, a Delaware corporation (“Realogy”). Holdings is not a party to the senior secured credit facility and certain references in this report to our consolidated indebtedness exclude Holdings with respect to indebtedness under the senior secured credit facility. In addition, while Holdings is a guarantor of Realogy’s obligations under the Unsecured Notes and the First and a Half Lien Notes, Holdings is not subject to the restrictive covenants in the agreements governing such indebtedness. Holdings, the indirect parent of Realogy, does not conduct any operations other than with respect to its indirect ownership of Realogy. Intermediate, the parent of Realogy, does not conduct any operations other than with respect to its ownership of Realogy. As a result, the condensed consolidated financial positions, results of operations and cash flows of Holdings, Intermediate and Realogy are the same.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in our public filings or other public statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements or other public statements. These forward-looking statements were based on various facts and were derived utilizing numerous important assumptions and other important factors, and changes in such facts, assumptions or factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives, as well as projections of macroeconomic trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward looking in nature and not historical facts. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:

 

   

we have substantial leverage as a result of our April 2007 acquisition by affiliates of Apollo Management VI, L.P. and the related financings (the “Merger Transactions”). In addition since the Merger Transactions, we have needed to incur additional debt in order to fund negative cash flows, principally due to the significant level of interest expense arising from our substantial leverage. As of September 30, 2011, our total debt (excluding the securitization obligations) was $7,027 million. The housing industry and economy have experienced significant declines since the time of the Merger Transactions that have negatively impacted our operating results. As a result, we have been, and continue to be, challenged by our heavily leveraged capital structure and significant level of interest expense;

 

   

variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase. At September 30, 2011, $2,211 million of our total debt (excluding the securitization obligations and net of interest rate hedges) were at variable rates of interest. Were interest rates to increase 100 basis points (1% change in the interest rate) on our variable rate borrowings, our annual interest expense would increase by approximately $22 million;

 

   

under our senior secured credit facility, our senior secured leverage ratio of total senior secured net debt to trailing 12-month EBITDA, as those terms are defined in the senior secured credit facility, calculated on a “pro forma” basis pursuant to the senior secured credit facility, may not exceed 4.75 to 1 on the last day of each fiscal quarter. For the twelve months ended September 30, 2011, we were in

 

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compliance with the senior secured leverage ratio covenant with a ratio of 4.15 to 1.0. While the housing market has shown signs of stabilization, there remains substantial uncertainty with respect to the timing and scope of a full housing recovery and if a housing recovery is delayed or is weak, we may be subject to additional pressure in maintaining compliance with our senior secured leverage ratio;

 

   

if we experience an event of default under our senior secured credit facility, including but not limited to a failure to meet our cash interest obligations under such facility, or under our indentures or relocation securitization facilities, or a failure to maintain, or a failure to cure a default of, the applicable senior secured leverage ratio under such instruments, or other lack of liquidity caused by substantial leverage and the adverse conditions in the housing market, such an event would materially and adversely affect our financial condition, results of operations and business;

 

   

adverse developments or the absence of sustained improvement in general business, economic, employment and political conditions;

 

   

adverse developments or the absence of improvement in the U.S. residential real estate markets, either regionally or nationally, including but not limited to:

 

   

a lack of improvement in the number of homesales, further declines in home prices caused by either absolute price decreases or a change in the mix of business that we conduct and/or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate;

 

   

a lack of improvement in consumer confidence;

 

   

the impact of future recessions, slow economic growth and high levels of unemployment in the U.S. and abroad;

 

   

increasing mortgage rates and down payment requirements and/or reduced availability of mortgage financing, including but not limited to the potential impact of various provisions of the Dodd-Frank Act and regulations which may be promulgated thereunder relating to mortgage financing, including restrictions imposed on mortgage originators as well as potential retention levels required to be maintained by sponsors to securitize certain mortgages;

 

   

legislative, tax or regulatory changes that would adversely impact the residential real estate market, including but not limited to potential reform relating to Fannie Mae, Freddie Mac and other government sponsored entities that provide liquidity to the U.S. housing and mortgage markets and potential reform of the Internal Revenue Code, including but not limited to any reform that reduces the amount that taxpayers would be allowed to deduct for home mortgage interest;

 

   

negative trends and/or a negative perception of the market trends in value for residential real estate;

 

   

continuing high levels of foreclosure activity including but not limited to the release of homes for sale by financial institutions;

 

   

excessive or insufficient regional home inventory levels;

 

   

the inability or unwillingness of homeowners to enter into homesale transactions due to negative equity in their existing homes;

 

   

lower homeownership rates due to various factors, including, but not limited to, high unemployment levels, reduced demand or preferred use by households of rental housing due in part to uncertainty regarding future home values;

 

   

our geographic and high-end market concentration relating in particular to our company-owned brokerage operations; and

 

   

local and regional conditions in the areas where our franchisees and brokerage operations are located;

 

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our inability to access capital and/or to securitize certain assets of our relocation business, either of which would require us to find alternative sources of liquidity, which may not be available, or if available, may not be on favorable terms;

 

   

limitations on flexibility in operating our business due to restrictions contained in our debt agreements;

 

   

our inability to sustain the improvements we have realized during the past several years in our operating efficiency through cost savings and business optimization efforts;

 

   

our failure to enter into or renew franchise agreements, maintain franchisee satisfaction with our brands;

 

   

the inability of franchisees to survive the ongoing challenges of the real estate market;

 

   

disputes or issues with entities that license us their trade names for use in our business that could impede our franchising of those brands;

 

   

actions by our franchisees that could harm our business or reputation, non-performance of our franchisees or controversies with our franchisees;

 

   

competition in our existing and future lines of business, including, but not limited to, higher costs to retain or attract sales agents for residential real estate brokerages, and the financial resources of competitors;

 

   

our failure to comply with laws and regulations and any changes in laws and regulations;

 

   

seasonal fluctuations in the residential real estate brokerage business could adversely affect our business, financial condition and liquidity, particularly during periods in which we have significant fixed cash obligations;

 

   

the loss of any of our senior management or key managers or employees;

 

   

adverse effects of natural disasters or environmental catastrophes;

 

   

any remaining resolutions or outcomes with respect to Cendant’s (as defined herein) contingent liabilities under the Separation and Distribution Agreement and the Tax Sharing Agreement, including any adverse impact on our future cash flows;

 

   

the cumulative effect of adverse litigation, governmental proceedings or arbitration awards against us and the adverse effect of new regulatory interpretations, rules and laws; and

 

   

new types of taxes or increases in state, local or federal taxes that could diminish profitability or liquidity.

Other factors not identified above, including those described under the headings “Forward-Looking Statements” and “Risk Factors” in our Final Prospectus dated June 16, 2011 covering the resale of the Realogy Corporation 11.00% Senior Subordinated Convertible Notes (the “Convertible Notes”) and the Class A Common Stock of Domus Holdings Corp. issuable upon conversion of the Convertible Notes (the “June 2011 Final Prospectus”), filed with the Securities and Exchange Commission (“SEC”), may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us and our businesses generally.

Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law. For any forward-looking statement contained in our public filings or other public statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Domus Holdings Corp. and Realogy Corporation:

We have reviewed the accompanying condensed consolidated balance sheets of Domus Holdings Corp. and its subsidiaries and Realogy Corporation and its subsidiaries as of September 30, 2011, and the related condensed consolidated statements of operations for the three and nine-month periods ended September 30, 2011 and September 30, 2010 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2011 and September 30, 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of operations, equity (deficit) and cash flows for the year then ended (not presented herein), and in our report dated April 1, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2011, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

November 1, 2011

 

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DOMUS HOLDINGS CORP. AND REALOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011             2010      

Revenues

        

Gross commission income

   $ 831      $ 751      $ 2,279      $ 2,280   

Service revenue

     211        197        567        518   

Franchise fees

     73        67        194        203   

Other

     40        37        125        123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     1,155        1,052        3,165        3,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Commission and other agent-related costs

     547        490        1,498        1,479   

Operating

     324        315        959        925   

Marketing

     45        42        142        138   

General and administrative

     62        45        189        180   

Former parent legacy costs (benefit), net

     (3     (6     (17     (315

Restructuring costs

     3        2        8        12   

Depreciation and amortization

     46        49        139        148   

Interest expense/(income), net

     159        151        499        458   

Loss on the early extinguishment of debt

     —          —          36        —     

Other (income)/expense, net

     —          —          —          (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,183        1,088        3,453        3,019   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes, equity in earnings and noncontrolling interests

     (28     (36     (288     105   

Income tax expense

     10        10        12        134   

Equity in earnings of unconsolidated entities

     (11     (13     (15     (22
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (27     (33     (285     (7

Less: Net income attributable to noncontrolling interests

     (1     —          (2     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Domus Holdings and Realogy

   $ (28   $ (33   $ (287   $ (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to Domus Holdings:

        

Basic earnings (loss) per share:

   $ (0.14   $ (0.16   $ (1.43   $ (0.04

Diluted earnings (loss) per share:

   $ (0.14   $ (0.16   $ (1.43   $ (0.04

Domus Holdings weighted average common and common equivalent shares outstanding:

        

Basic:

     200.4        200.4        200.4        200.4   

Diluted:

     200.4        200.4        200.4        200.4   

See Notes to Condensed Consolidated Financial Statements.

 

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DOMUS HOLDINGS CORP. AND REALOGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 102      $ 192   

Trade receivables (net of allowance for doubtful accounts of $66 and $67)

     142        114   

Relocation receivables

     449        386   

Relocation properties held for sale

     17        21   

Deferred income taxes

     66        76   

Other current assets

     91        109   
  

 

 

   

 

 

 

Total current assets

     867        898   

Property and equipment, net

     169        186   

Goodwill

     2,613        2,611   

Trademarks

     732        732   

Franchise agreements, net

     2,858        2,909   

Other intangibles, net

     450        478   

Other non-current assets

     208        215   
  

 

 

   

 

 

 

Total assets

   $ 7,897      $ 8,029   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY (DEFICIT)

    

Current liabilities:

    

Accounts payable

   $ 155      $ 203   

Securitization obligations

     332        331   

Due to former parent

     78        104   

Revolving credit facilities and current portion of long-term debt

     200        194   

Accrued expenses and other current liabilities

     621        525   
  

 

 

   

 

 

 

Total current liabilities

     1,386        1,357   

Long-term debt

     6,827        6,698   

Deferred income taxes

     885        883   

Other non-current liabilities

     143        163   
  

 

 

   

 

 

 

Total liabilities

     9,241        9,101   
  

 

 

   

 

 

 

Commitments and contingencies (Notes 9 and 10)

    

Equity (deficit):

    

Domus Holdings common stock: $.01 par value; 4,450,000,000 shares authorized, 105,000 Class A shares outstanding, 200,426,906 Class B shares outstanding at September 30, 2011 and 200,430,906 Class B shares outstanding at December 31, 2010 (Realogy common stock: $.01 par value, 100 shares authorized, issued and outstanding)

     2        2   

Additional paid-in capital

     2,029        2,024   

Accumulated deficit

     (3,357     (3,070

Accumulated other comprehensive loss

     (20     (30
  

 

 

   

 

 

 

Total Holdings and Realogy stockholder’s deficit

     (1,346     (1,074
  

 

 

   

 

 

 

Noncontrolling interests

     2        2   
  

 

 

   

 

 

 

Total equity (deficit)

     (1,344     (1,072
  

 

 

   

 

 

 

Total liabilities and equity (deficit)

   $ 7,897      $ 8,029   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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DOMUS HOLDINGS CORP. AND REALOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Nine Months Ended
September 30,
 
         2011             2010      

Operating Activities

    

Net loss

   $ (285   $ (7

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     139        148   

Deferred income taxes

     5        127   

Amortization of deferred financing costs and discount on unsecured notes

     13        23   

Loss on the early extinguishment of debt

     36        —     

Equity in earnings of unconsolidated entities

     (15     (22

De-designation of cash flow interest rate swaps

     17        —     

Other adjustments to net loss

     8        16   

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:

    

Trade receivables

     (28     (35

Relocation receivables and advances

     (64     (77

Relocation properties held for sale

     4        35   

Other assets

     4        1   

Accounts payable, accrued expenses and other liabilities

     51        96   

Due (to) from former parent

     (25     (392

Other, net

     11        (15
  

 

 

   

 

 

 

Net cash used in operating activities

     (129     (102
  

 

 

   

 

 

 

Investing Activities

    

Property and equipment additions

     (37     (33

Net assets acquired (net of cash acquired) and acquisition-related payments

     (5     (2

Net proceeds from sale of assets

     —          5   

Proceeds from (purchases of) certificates of deposits, net

     9        (10

Change in restricted cash

     2        4   

Other, net

     (5     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (36     (36
  

 

 

   

 

 

 

Financing Activities

    

Net change in revolving credit facilities

     20        117   

Proceeds from issuance of First and a Half Lien Notes

     700        —     

Proceeds from term loan extension

     98        —     

Repayments of term loan credit facility

     (705     (24

Net change in securitization obligations

     1        34   

Debt issuance costs

     (34     —     

Other, net

     (5     (9
  

 

 

   

 

 

 

Net cash provided by financing activities

     75        118   
  

 

 

   

 

 

 

Effect of changes in exchange rates on cash and cash equivalents

     —          —     
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (90     (20

Cash and cash equivalents, beginning of period

     192        255   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 102      $ 235   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Interest payments (including securitization interest expense)

   $ 354      $ 334   

Income tax payments, net

   $ 3      $ 7   

See Notes to Condensed Consolidated Financial Statements.

 

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DOMUS HOLDINGS CORP. AND REALOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are in millions)

(Unaudited)

 

1. BASIS OF PRESENTATION

Domus Holdings Corp., a Delaware corporation (“Holdings”) is a holding company for its wholly owned subsidiary, Domus Intermediate Holdings Corp. (“Intermediate”). Intermediate is a holding company for its wholly owned subsidiary, Realogy Corporation, a Delaware corporation (“Realogy”), and its subsidiaries (Holdings, Intermediate and Realogy and its subsidiaries being referred to herein collectively as the “Company”). Holdings derives all of its operating income and cash flows from Realogy and its subsidiaries.

Holdings was incorporated on December 14, 2006. On December 15, 2006, Holdings and its wholly owned subsidiary Domus Acquisition Corp., entered into an agreement and plan of merger (the “Merger”) with Realogy which was consummated on April 10, 2007 with Holdings becoming the indirect parent company of Realogy. Holdings is owned by investment funds affiliated with, or co-investment vehicles managed by, Apollo Management VI, L.P., an entity affiliated with Apollo Management, L.P. (collectively referred to as “Apollo”) and members of the Company’s management. As of September 30, 2011, all of Realogy’s issued and outstanding common stock was currently owned by Intermediate, a direct wholly-owned subsidiary of Holdings.

Realogy is a global provider of real estate and relocation services. Realogy was incorporated on January 27, 2006 to facilitate a plan by Cendant Corporation (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant’s business units—real estate services or Realogy, travel distribution services (“Travelport”), hospitality services, including timeshare resorts (“Wyndham Worldwide”), and vehicle rental (“Avis Budget Group”). On July 31, 2006, the separation (“Separation”) from Cendant became effective.

Realogy incurred indebtedness in connection with the Merger which included borrowings under Realogy’s senior secured credit facility (the “Senior Secured Credit Facility”) and the issuance of unsecured notes. See Note 6, “Short and Long-Term Debt” for additional information on the indebtedness incurred related to the Merger and for additional information related to the senior secured leverage ratio that Realogy is required to maintain. An equity contribution to the Company of $2,001 million was also made by Apollo as well as members of Realogy’s management who purchased Holdings common stock with cash or through rollover equity. Realogy also refinanced the credit facilities covering the relocation securitization facilities (“the Securitization Facilities Refinancing”). The term “Merger Transactions” refer to, collectively, (1) the Merger, (2) the issuance of unsecured notes, (3) the initial borrowings under the Senior Secured Credit Facility, including the synthetic letter of credit facility, (4) the equity investment, and (5) the Securitization Facilities Refinancing.

The accompanying Condensed Consolidated Financial Statements include the financial statements of both Holdings and Realogy and these statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with Article 10 of Regulation S-X. Interim results may not be indicative of full year performance because of seasonal and short-term variations. The Company has eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and the related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates.

Holdings’ only asset is its investment in the common stock of Intermediate, and Intermediate’s only asset is its investment in the common stock of Realogy. Holdings’ only obligations are its guarantees of certain borrowings of Realogy. All expenses incurred by Holdings and Intermediate are for the benefit of Realogy and have been reflected in Realogy’s consolidated financial statements. All issuances of Holdings’ equity securities,

 

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including grants of stock options and restricted stock by Holdings to employees and directors of Realogy and its subsidiaries have been reflected in Realogy’s condensed consolidated financial statements. As a result, the condensed consolidated financial positions, results of operations and cash flows of Holdings, Intermediate and Realogy are the same. Total equity (deficit) for Holdings is equal to Realogy, however, the common stock and additional paid-in capital components are different by $2 million. Holdings has $2 million for the par value of common stock and $2 million less additional paid in capital as compared to Realogy. In management’s opinion, the accompanying Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary to present fairly the Realogy and Holdings’ financial position as of September 30, 2011 and the results of operations and cash flows for the three and nine months ended September 30, 2011 and 2010.

As the interim Condensed Consolidated Financial Statements are prepared using the same accounting principles and policies used to prepare the annual financial statements, they should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2010 included in the June 2011 Final Prospectus as well as our Annual Report on Form 10-K for the year ended December 31, 2010.

Refinancing Transactions

In January and February 2011, the Company refinanced certain of its outstanding indebtedness by (1) consummating private debt exchange offers exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), for its existing unsecured notes pursuant to which Realogy issued new unsecured notes due in 2017 and 2018 and convertible notes due in 2018 that are convertible at the holder’s option into Class A Common Stock of Holdings which has a par value of $0.01 per share (“Class A Common Stock”) (the “Debt Exchange Offering”), (2) amending and extending Realogy’s senior secured credit facility (the “Senior Secured Credit Facility Amendment”) which, among other things, extended the maturity of a significant portion of the first lien term loans and revolving commitments thereunder, and (3) issuing $700 million principal amount of 7.875% senior secured notes due in 2019 (the “First and a Half Lien Notes” and, together with the Debt Exchange Offering and the Senior Secured Credit Facility Amendment, the “Refinancing Transactions”), the net proceeds of which were used to prepay outstanding term loans under the Senior Secured Credit Facility. The Refinancing Transactions, among other things, reduced the Company’s total senior secured debt for purposes of calculating the financial covenant under the Senior Secured Credit Facility, which requires that Realogy maintain a senior secured leverage ratio of total senior secured net debt to trailing 12-month Adjusted EBITDA (as defined in Note 6, “Short and Long-Term Debt”), that may not exceed a maximum amount on the last day of each fiscal quarter. At September 30, 2011, the maximum permitted ratio was 4.75 to 1 and Realogy was in compliance with the senior secured leverage covenant with a senior secured leverage ratio of 4.15 to 1. See Note 6, “Short and Long-Term Debt” for additional information related to the Refinancing Transactions.

Amended and Restated Certificate of Incorporation

On January 5, 2011, in connection with the consummation of the Debt Exchange Offering, Holdings amended and restated its certificate of incorporation. Under its amended and restated certificate of incorporation, Holdings has the authority to issue up to 4,500,000,000 shares, of which Holdings has the authority to issue 4,200,000,000 shares of Class A Common Stock, $0.01 par value (the “Class A Common Stock”), 250,000,000 shares of Class B Common Stock, $0.01 par value and 50,000,000 shares of Preferred Stock, $0.01 par value. Pursuant to Holdings’ amended and restated certificate of incorporation, the outstanding shares of common stock of Holdings were reclassified on a share-for-share basis into shares of Class B Common Stock, the voting of which is controlled by Apollo.

The Convertible Notes are convertible to shares of Class A Common Stock upon conversion. Each share of Class A Common Stock has one vote per share, and each share of Class B Common Stock has five votes per share. The Class B Common Stock will automatically convert into Class A Common Stock on a share-for-share basis once (i) Apollo converts all of the Convertible Notes it received in the Debt Exchange Offering into shares

 

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of Class A Common Stock or (ii) upon a Qualified Public Offering, provided that such conversion would not result in a change of control of Realogy under the Senior Secured Credit Facility or any of Realogy’s other debt arrangements.

Earnings (loss) per share attributable to Holdings

Basic earnings per share is computed based upon weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.

The Company was in a net loss position for the three and nine months ended September 30, 2011 and therefore the impact of stock options, restricted stock and the convertible notes were excluded from the computation of dilutive earnings (loss) per share as the inclusion of such amounts would be anti-dilutive. The number of shares of common stock issuable under the stock options, restricted stock and the convertible notes that were excluded from the computation was 17 million, 0.1 million and 2,026 million, respectively.

Impairment of Goodwill and Other Indefinite-Lived Intangibles

In connection with the FASB’s Intangible—Goodwill and Other guidance, the Company assesses goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs its required annual impairment testing in the fourth quarter of each year subsequent to completing its annual budgeting and forecasting process. The Company is currently preparing its 2012 budgets and long-term financial projections as well as evaluating the impact of industry trends on the impairment analysis. As a result, the Company is in the early stages of completing the first test of its annual impairment review and has not completed the analysis that would indicate whether or not an impairment has occurred. If the Company has an impairment upon completion of its analysis, it could have a significant impact on its results of operations for the fourth quarter of 2011 given that the Company has $2.6 billion of goodwill and $1.9 billion of indefinite-lived intangibles, although it would have no impact on the Company’s cash flows or financial covenant under the Senior Secured Credit Facility.

Derivative Instruments

The Company uses foreign currency forward contracts largely to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and payables. The Company primarily manages its foreign currency exposure to the Swiss Franc, Canadian Dollar, British Pound and Euro. The Company has elected not to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Condensed Consolidated Statements of Operations. However, the fluctuations in the value of these forward contracts generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of September 30, 2011, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $21 million. As of December 31, 2010, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $18 million.

The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. The Company has two interest rate swaps with an aggregate notional value of $425 million to hedge the variability in cash flows resulting from the term loan facility. One swap, with a notional value of $225 million, expires in July 2012 and the other swap, with a notional value of $200 million, expires in December 2012. The Company is utilizing pay fixed interest swaps (in exchange for floating LIBOR rate based payments) to perform this hedging strategy. The derivatives were being accounted for as cash flow

 

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hedges in accordance with the FASB’s derivative and hedging guidance and the unfavorable fair market value of the swaps was recorded within Accumulated Other Comprehensive Income/(Loss) (“AOCI”) at December 31, 2010. Following the completion of the Refinancing Transactions, the Company was not able to maintain hedge effectiveness in accordance with the accounting guidance. As a result, the interest rate swaps were de-designated as cash flow hedging instruments and the fair value of $17 million was reclassified from AOCI and recognized in interest expense in the Condensed Consolidated Statements of Operations during the first quarter of 2011.

The fair value of derivative instruments was as follows:

 

Liability Derivatives

             

Designated as Hedging Instruments

  

Balance Sheet Location

   September 30,
2011
Fair Value
     December 31,
2010
Fair Value
 

Interest rate swap contracts

   Other non-current liabilities    $ —         $ 17   

Not Designated as Hedging Instruments

                  

Interest rate swap contracts

   Other current liabilities    $ 7       $ —     
   Other non-current liabilities      3         —     
     

 

 

    

 

 

 
      $ 10       $ —     

The effect of derivative instruments on earnings was as follows:

 

     Gain or (Loss) Recognized in
Other Comprehensive Income
         Gain or (Loss) Reclassified
from AOCI into Income
 

Derivatives in Cash Flow
Hedge Relationships

   Three
Months Ended
September 30,
2011
     Three
Months Ended
September 30,
2010
   

Location of Gain or

(Loss) Reclassified

from AOCI into

Income (Effective Portion)

   Three
Months  Ended
September 30,
2011
     Three
Months  Ended
September 30,
2010
 

Interest rate swap contracts

   $ —         $ (1   Interest expense    $ —         $ (3

 

     Gain or (Loss) Recognized in
Other Comprehensive Income
          Gain or (Loss) Reclassified
from AOCI into Income
 

Derivatives in Cash Flow
Hedge Relationships

   Nine
Months Ended
September 30,
2011
     Nine
Months Ended
September 30,
2010
    

Location of Gain or

(Loss) Reclassified

from AOCI into

Income (Effective Portion)

   Nine
Months  Ended
September 30,
2011
    Nine
Months  Ended
September 30,
2010
 

Interest rate swap contracts

   $ —         $ 5       Interest expense    $ (17   $ (16

 

          Gain or (Loss) Recognized in
Income on Derivative
 

Derivative Instruments Not

Designated as Hedging Instruments

  

Location of Gain or (Loss) Recognized

in Income for Derivative Instruments

   Three
Months  Ended
September 30,
2011
     Three
Months  Ended
September 30,
2010
 

Interest rate swap contracts

   Interest expense    $ 3       $ —     

Foreign exchange contracts

   Operating expense    $ 1       $ (2

 

           Gain or (Loss) Recognized in
Income on Derivative
 

Derivative Instruments Not

Designated as Hedging Instruments

  

Location of Gain or (Loss) Recognized

in Income for Derivative Instruments

   Nine
Months Ended
September 30,
2011
     Nine
Months Ended
September 30,
2010
 

Interest rate swap contracts

   Interest expense    $ 7       $ —     

Foreign exchange contracts

   Operating expense    $ —         $ (1

 

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Financial Instruments

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

 

Level Input:    Input Definitions:

Level I

   Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level II

   Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.

Level III

   Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The availability of observable inputs can vary from asset to asset and is affected by a wide variety of factors, including, for example, the type of asset, whether the asset is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level III. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The fair value of financial instruments is generally determined by reference to quoted market values. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The fair value of interest rate swaps is determined based upon a discounted cash flow approach that incorporates counterparty and performance risk and therefore is categorized in Level III.

The following table summarizes fair value measurements by level at September 30, 2011 for assets/liabilities measured at fair value on a recurring basis:

 

     Level I      Level II      Level III      Total  

Derivatives

           

Interest rate swaps (primarily included in other current liabilities)

   $ —         $ —         $ 10       $ 10   

Deferred compensation plan assets (included in other non-current assets)

     1         —           —           1   

The following table summarizes fair value measurements by level at December 31, 2010 for assets/liabilities measured at fair value on a recurring basis:

 

     Level I      Level II      Level III      Total  

Derivatives

           

Interest rate swaps (primarily included in other non-current liabilities)

   $ —         $ —         $ 17       $ 17   

Deferred compensation plan assets (included in other non-current assets)

     1         —           —           1   

The following table presents changes in Level III financial liabilities measured at fair value on a recurring basis:

 

Fair value at December 31, 2010

   $ 17   

Changes reflected in interest expense

     (7
  

 

 

 

Fair value at September 30, 2011

   $ 10   
  

 

 

 

 

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The following table summarizes the carrying amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at:

 

     September 30, 2011      December 31, 2010  
Debt    Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Senior Secured Credit Facility:

           

Non-extended revolving credit facility

   $ 22       $ 22       $ —         $ —     

Extended revolving credit facility

     28         28         —           —     

Non-extended term loan facility

     631         566         3,059         2,903   

Extended term loan facility

     1,822         1,494         —           —     

First and a Half Lien Notes

     700         525         —           —     

Second Lien Loans

     650         637         650         720   

Other bank indebtedness

     133         133         163         163   

Existing Notes:

           

10.50% Senior Notes

     64         56         1,688         1,656   

11.00%/11.75% Senior Toggle Notes

     52         43         468         449   

12.375% Senior Subordinated Notes

     187         147         864         806   

Extended Maturity Notes:

           

11.50% Senior Notes

     489         323         —           —     

12.00% Senior Notes

     129         87         —           —     

13.375% Senior Subordinated Notes

     10         11         —           —     

11.00% Convertible Notes

     2,110         1,506         —           —     

Securitization obligations

     332         332         331         331   

Income Taxes

The Company’s provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income (loss) before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. No Federal income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance for domestic operations. Income tax expense for the nine months ended September 30, 2011 was $12 million. This expense included $12 million for an increase in deferred tax liabilities associated with indefinite-lived intangible assets and $7 million was recognized for foreign and state income taxes for certain jurisdictions offset by a $7 million benefit due to the de-designation of the interest rate swaps.

Supplemental Cash Flow Information

The Company had non-cash transactions for the nine months ended September 30, 2011 and 2010 pursuant to the terms of the Senior Toggle Notes. The Company elected to satisfy its interest payment obligations by issuing Senior Toggle Notes of $3 million and $25 million, respectively, which resulted in a non-cash transfer between accrued interest and long term debt.

Defined Benefit Pension Plan

The net periodic pension cost for the three months ended September 30, 2011 was less than $1 million and was comprised of interest cost and amortization of amounts previously recorded as other comprehensive income of $2 million offset by a benefit of less than $2 million for the expected return on assets. The net periodic pension cost for the three months ended September 30, 2010 was less than $1 million and was comprised of interest cost and amortization of amounts previously recorded as other comprehensive income of $2 million offset by a benefit of $1 million for the expected return on assets.

The net periodic pension cost for the nine months ended September 30, 2011 was $2 million and was comprised of interest cost and amortization of amounts previously recorded as other comprehensive income of

 

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$7 million offset by a benefit of $5 million for the expected return on assets. The net periodic pension cost for the nine months ended September 30, 2010 was $2 million and was comprised of interest cost and amortization of amounts previously recorded as other comprehensive income of $6 million offset by a benefit of $4 million for the expected return on assets.

Recently Issued Accounting Pronouncements

In September 2011, the FASB amended the guidance on testing for goodwill impairment that allows an entity to elect to qualitatively assess whether it is necessary to perform the current two-step goodwill impairment test. If the qualitative assessment determines that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step test is unnecessary. If the entity elects to bypass the qualitative assessment for any reporting unit and proceed directly to Step One of the test and validate the conclusion by measuring fair value, it can resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company intends to adopt the amendments on January 1, 2012 for goodwill impairment test to be performed in 2012 and does not expect the adoption to have a significant impact on the consolidated financial statements.

In June 2011, the FASB amended the guidance on comprehensive income to allow companies an option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Companies are also required to present on the face of the financial statements reclassification adjustments between OCI and net income. The amendments do not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income, nor do they change how earnings per share is calculated and presented. In addition, companies continue to have the option to present the OCI components net of tax or one amount reported for the tax effects of all OCI items. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. The Company does not expect the adoption to have a significant impact on the consolidated financial statements.

In May 2011, the FASB amended the guidance on Fair Value Measurement that result in common measurement of fair value and disclosure requirements between U.S. GAAP and the International Financial Reporting Standards (“IFRS”). The amendments mainly change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments are effective prospectively for interim and annual periods beginning after December 15, 2011. The Company intends to adopt the amendments on January 1, 2012 and does not expect the adoption to have a significant impact on the consolidated financial statements.

Recently Adopted Accounting Pronouncements

In October 2009, the FASB issued an amendment to the accounting and disclosure for revenue recognition. The amendment modifies the criteria for recognizing revenue in multiple element arrangements. Under the guidance, in the absence of vendor-specific objective evidence (“VSOE”) or other third party evidence (“TPE”) of the selling price for the deliverables in a multiple-element arrangement, this amendment requires companies to use the best estimated selling price (“BESP”) for the individual deliverables. Companies shall apply the relative-selling price model for allocating an arrangement’s total consideration to its individual deliverables. Under this model, the BESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. The guidance is effective for the fiscal year beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company adopted the new guidance beginning January 1, 2011 and determined that the guidance did not have a significant impact on the consolidated financial statements.

 

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In January 2010, the FASB expanded the disclosure requirements for fair value measurements relating to the transfers in and out of Level II measurements and amended the disclosures for the Level III activity reconciliation to be presented on a gross basis. In addition, valuation techniques and inputs should be disclosed for both Levels II and III recurring and nonrecurring measurements. The new requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the Level III activity reconciliation which are effective for fiscal years beginning after December 15, 2010. The Company adopted the new disclosure requirements on January 1, 2010 except for the disclosure related to the Level III reconciliation, which was adopted on January 1, 2011. The adoption did not have a significant impact on the consolidated financial statements.

In December 2010, the FASB issued guidance to clarify when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. In certain situations, a reporting unit may have a negative carrying amount, particularly for companies that only have a single reporting unit and have significant debt. In that case, since the first step is passed, the negative carrying amount may shield a potential impairment. The guidance requires that reporting units with a zero or negative carrying value should proceed to step two of the impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. This guidance is effective for all interim and annual reporting periods beginning after December 15, 2010. The Company adopted the guidance beginning January 1, 2011 and determined that the adoption did not have a significant impact on the consolidated financial statements.

In December 2010, the FASB issued guidance to clarify the disclosure of supplementary pro forma information for business combinations. Previous guidance on “Business Combinations” requires disclosure of revenue and earnings of the combined entity as if the acquisition had occurred as of the beginning of both the current period and the comparable prior year reporting period. However, presenting pro forma results as if the acquisition occurred at the beginning of each annual period inappropriately results in certain adjustments, such as amortization expense of intangible assets with useful lives of less than two years, being included in the pro forma results of both reporting periods. The new guidance therefore requires pro forma information to be prepared as if the acquisition occurred as of the beginning of the comparable prior period and is applied prospectively for acquisitions consummated after the beginning of the fiscal year beginning on or after December 15, 2010. The Company adopted the guidance beginning January 1, 2011 and determined that the adoption did not have a significant impact on the consolidated financial statements.

 

2. COMPREHENSIVE LOSS

Comprehensive loss consisted of the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       2011         2010         2011         2010    

Net loss

   $ (27   $ (33   $ (285   $ (7

Foreign currency translation adjustments

     (3     2        (1     1   

Change in fair value of interest rate hedges, net

     —          —          —          3   

Change in unrecognized liability included in pension obligations

     1        —          1        —     

Reclassification of interest rate hedges to interest expense, net(1)

     —          —          10        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (29     (31     (275     (3

Less: Comprehensive income attributable to noncontrolling interests

     (1     —          (2     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to Holdings and Realogy

   $ (30   $ (31   $ (277   $ (4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The interest rate swaps were being accounted for as cash flow hedges in accordance with the FASB’s derivative and hedging guidance and the unfavorable fair market value of the swaps was recorded within AOCI at December 31, 2010. However, following the completion of the Refinancing Transactions in early

 

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  2011, the Company was not able to maintain hedge effectiveness. As a result, the interest rate swaps were de-designated and $10 million ($17 million excluding the tax impact of $7 million) was reclassified and recognized in interest expense in the Condensed Consolidated Statements of Operations. See Note 1, “Basis of Presentation” for additional information.

 

3. ACQUISITIONS

Assets acquired and liabilities assumed in business combinations were recorded in the Company’s Condensed Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Company’s Condensed Consolidated Statements of Operations since their respective dates of acquisition.

2011 Acquisitions

During the nine months ended September 30, 2011, the Company acquired eleven real estate brokerage operations through its wholly-owned subsidiary, NRT, for total consideration of $3 million. These acquisitions resulted in goodwill of $2 million that was assigned to the Company Owned Brokerage Services segment.

None of the 2011 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.

2010 Acquisitions

On January 21, 2010, the Company completed the stock acquisition of Primacy Relocation, LLC (“Primacy”) for the assumption of approximately $26 million of indebtedness (excluding $9 million of indebtedness related to the sale of relocation receivables). Primacy was a relocation and global assignment management services company headquartered in the U.S. with international locations in Europe and Asia. The acquisition of Primacy increased goodwill by $16 million, customer relationships intangibles by $62 million and other intangibles by $5 million. Effective January 1, 2011, the Primacy business operates under the Cartus name.

 

4. INTANGIBLE ASSETS

Goodwill by segment and changes in the carrying amount are as follows:

 

     Real Estate
Franchise
Services
    Company
Owned
Brokerage
Services
    Relocation
Services
    Title and
Settlement
Services
    Total
Company
 

Gross goodwill as of December 31, 2010

   $ 2,265      $ 780      $ 641      $ 397      $ 4,083   

Accumulated impairment losses

     (709     (158     (281     (324     (1,472
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     1,556        622        360        73        2,611   

Goodwill acquired

     —          2        —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 1,556      $ 624      $ 360      $ 73      $ 2,613   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Intangible assets are as follows:

 

    As of September 30, 2011     As of December 31, 2010  
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 

Franchise Agreements

           

AmortizableFranchise agreements(a)

  $ 2,019      $ 306      $ 1,713      $ 2,019      $ 255      $ 1,764   

Unamortizable—Franchise agreement(b)

    1,145        —          1,145        1,145        —          1,145   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Franchise Agreements

  $ 3,164      $ 306      $ 2,858      $ 3,164      $ 255      $ 2,909   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unamortizable—Trademarks(c)

  $ 732      $ —        $ 732      $ 732      $ —        $ 732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Intangibles

           

Amortizable—License agreements(d)

  $ 45      $ 4      $ 41      $ 45      $ 3      $ 42   

Amortizable—Customer relationships(e)

    529        135        394        529        107        422   

Amortizable—Pendings and listings(f)

    —          —          —          2        1        1   

Unamortizable—Title plant shares(g)

    10        —          10        10        —          10   

Amortizable—Other(h)

    17        12        5        12        9        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Intangibles

  $ 601      $ 151      $ 450      $ 598      $ 120      $ 478   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Generally amortized over a period of 30 years.
(b) Relates to the Real Estate Franchise Services franchise agreement with NRT, which is expected to generate future cash flows for an indefinite period of time.
(c) Relates to the Century 21, Coldwell Banker, ERA, The Corcoran Group, Coldwell Banker Commercial and Cartus tradenames, which are expected to generate future cash flows for an indefinite period of time.
(d) Relates to the Sotheby’s International Realty and Better Homes and Gardens Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(e) Relates to the customer relationships at the Title and Settlement Services segment and the Relocation Services segment. These relationships are being amortized over a period of 5 to 20 years.
(f) Amortized over the estimated closing period of the underlying contracts (in most cases five months).
(g) Primarily related to the Texas American Title Company title plant shares. Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(h) Generally amortized over periods ranging from 2 to 10 years.

Intangible asset amortization expense is as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Franchise agreements

   $ 17       $ 17       $ 51       $ 51   

Customer relationships

     9         9         28         28   

Other

     2         1         5         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28       $ 27       $ 84       $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

 

Based on the Company’s amortizable intangible assets as of September 30, 2011, the Company expects related amortization expense for the remainder of 2011, the four succeeding years and thereafter to approximate $27 million, $108 million, $105 million, $105 million, $95 million and $1,713 million, respectively.

 

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5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of:

 

     September 30,
2011
     December 31,
2010
 

Accrued payroll and related employee costs

   $ 88       $ 93   

Accrued volume incentives

     14         17   

Accrued commissions

     21         15   

Restructuring accruals

     25         36   

Deferred income

     68         76   

Accrued interest

     230         112   

Relocation services home mortgage obligations

     12         16   

Other

     163         160   
  

 

 

    

 

 

 
   $ 621       $ 525   
  

 

 

    

 

 

 

 

6. SHORT AND LONG TERM DEBT

Total indebtedness is as follows:

 

     September 30,
2011
     December 31,
2010
 

Senior Secured Credit Facility:

     

Non-extended revolving credit facility

   $ 22       $ —     

Extended revolving credit facility

     28         —     

Non-extended term loan facility

     631         3,059   

Extended term loan facility

     1,822         —     

First and a Half Lien Notes

     700         —     

Second Lien Loans

     650         650   

Other bank indebtedness

     133         163   

Existing Notes:

     

10.50% Senior Notes

     64         1,688   

11.00%/11.75% Senior Toggle Notes

     52         468   

12.375% Senior Subordinated Notes

     187         864   

Extended Maturity Notes:

     

11.50% Senior Notes

     489         —     

12.00% Senior Notes

     129         —     

13.375% Senior Subordinated Notes

     10         —     

11.00% Convertible Notes

     2,110         —     

Securitization Obligations:

     

Apple Ridge Funding LLC

     299         296   

Cartus Financing Limited

     33         35   
  

 

 

    

 

 

 
   $ 7,359       $ 7,223   
  

 

 

    

 

 

 

Refinancing Transactions

In January and February of 2011, Realogy completed a series of transactions, referred to herein as the “Refinancing Transactions”, to refinance both its secured and unsecured indebtedness.

Senior Secured Credit Facility

In connection with the closing of the Merger Transactions on April 10, 2007, Realogy entered into the Senior Secured Credit Facility consisting of (i) a $3,170 million term loan facility, (ii) a $750 million revolving

 

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credit facility, (iii) a $525 million synthetic letter of credit facility (the facilities described in clauses (i), (ii) and (iii), as amended by the Senior Secured Credit Facility Amendment, collectively referred to as the “First Lien Facilities”), and (iv) a $650 million incremental (or accordion) loan facility, which was utilized in connection with the incurrence of Second Lien Loans in 2009 as described below.

Effective February 3, 2011, Realogy entered into the Senior Secured Credit Facility Amendment and an incremental assumption agreement, which resulted in the following:

 

   

certain lenders extended the maturity of a significant portion of first lien term loans, revolving commitments and synthetic letter of credit commitments to October 10, 2016, April 10, 2016, and October 10, 2016, respectively, resulting in approximately $2,424 million aggregate principal amount of extended term loans, approximately $461 million aggregate principal amount of commitments in respect of extended revolving loans and approximately $171 million aggregate principal amount of extended synthetic letter of credit commitments;

 

   

certain lenders simultaneously converted approximately $98 million aggregate principal amount of revolving commitments in respect of extended revolving loans to extended term loans, thereby reducing the commitments under the revolving credit facility to $652 million;

 

   

the net proceeds of the $700 million aggregate principal amount of First and a Half Lien Notes together with cash on hand were used to prepay $700 million of the outstanding extended term loans, thereby reducing the aggregate principal amount of extended term loans to $1,822 million;

 

   

the interest rate with respect to the extended term loans was increased by 1.25% from the rate applicable to the non-extended term loans;

 

   

the interest rate with respect to the extended revolving loans was increased by 1.0% from the rate applicable to the non-extended revolving loans; and

 

   

the fee with respect to the synthetic letter of credit facility was increased by 1.25% from the fee applicable to the non-extending synthetic letter of credit facility.

The Senior Secured Credit Facility Amendment also provides for the incurrence of additional incremental term loans that are secured on a junior basis to the second lien loans in an aggregate amount not to exceed $350 million.

The extended term loans do not require any scheduled amortization of principal. The non-extended term loan facility will continue to provide for quarterly amortization payments totaling 1% per annum of the principal amount of the non-extended first lien term loans.

Interest rates with respect to term loans under the Senior Secured Credit Facility are based on, at Realogy’s option, (a) adjusted LIBOR plus 3.0% (or with respect to the extended term loans, 4.25%) or (b) the higher of the Federal Funds Effective Rate plus 0.5% (or with respect to the extended term loans, 1.75%) and JPMorgan Chase Bank, N.A.’s prime rate (“ABR”) plus 2.0% (or with respect to the extended term loans, 3.25%).

The Senior Secured Credit Facility, as amended, provides a $652 million revolving credit facility, which includes a $200 million letter of credit sub-facility and a $50 million swingline loan sub-facility. Realogy uses the revolving credit facility for, among other things, working capital and other general corporate purposes, including permitted acquisitions and investments. Interest rates with respect to revolving loans under the Senior Secured Credit Facility are based on, at Realogy’s option, adjusted LIBOR plus 2.25% (or with respect to the extended revolving loans, 3.25%) or ABR plus 1.25% (or with respect to the extended revolving loans, 2.25%) in each case subject to reductions based on the attainment of certain leverage ratios.

The Senior Secured Credit Facility, as amended, provided a $525 million synthetic letter of credit facility which is for: (1) the support of Realogy’s obligations with respect to Cendant contingent and other liabilities

 

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assumed under the Separation and Distribution Agreement and (2) general corporate purposes in an amount not to exceed $100 million. In light of the reduction in Cendant’s contingent and other liabilities, on January 5, 2011, Realogy reduced the synthetic letter of credit facility to $223 million. As of September 30, 2011, most of the capacity was being utilized by a $100 million letter of credit with Cendant for any remaining potential contingent obligations and $100 million of letters of credit for general corporate purposes.

The loans under the First Lien Facilities (the “First Lien Loans”) are secured to the extent legally permissible by substantially all of the assets of Realogy, Intermediate and the subsidiary guarantors, including but not limited to (a) a first-priority pledge of substantially all capital stock held by Realogy or any subsidiary guarantor (which pledge, with respect to obligations in respect of the borrowings secured by a pledge of the stock of any first-tier foreign subsidiary, is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary), and (b) perfected first-priority security interests in substantially all tangible and intangible assets of Realogy and each subsidiary guarantor, subject to certain exceptions.

In late 2009, Realogy incurred $650 million of Second Lien Loans. The Second Lien Loans are secured by liens on the assets of Realogy and by the guarantors that secure the First Lien Loans. However, such liens are junior in priority to the First Lien Loans. The Second Lien Loans bear interest at a rate of 13.50% per year and interest payments are payable semi-annually in arrears on April 15 and October 15 of each year. The Second Lien Loans mature on October 15, 2017 and there are no required amortization payments.

The Company’s Senior Secured Credit Facility contains financial, affirmative and negative covenants and requires the Company to maintain a senior secured leverage ratio not to exceed a maximum amount on the last day of each fiscal quarter. Specifically, the Company’s total senior secured net debt to trailing twelve month EBITDA (as such terms are defined in the Senior Secured Credit Facility), calculated on a “pro forma” basis pursuant to the Senior Secured Credit Facility, may not exceed 4.75 to 1. Total senior secured net debt does not include the First and a Half Lien Notes, Second Lien Loans, other bank indebtedness not secured by a first lien on the Company’s assets, securitization obligations or the Unsecured Notes (as defined below). At September 30, 2011, the Company’s senior secured leverage ratio was 4.15 to 1. EBITDA, as defined in the Senior Secured Credit Facility, includes certain adjustments and also is calculated on a pro forma basis for purposes of calculating the senior secured leverage ratio. In this report, the Company refers to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated for purposes of determining compliance with the senior secured leverage covenant.

Based upon the Company’s financial forecast, the Company believes that it will continue to be in compliance with the senior secured leverage ratio during the next twelve months. While the housing market has shown signs of stabilization, there remains substantial uncertainty with respect to the timing and scope of a housing recovery and if a housing recovery is delayed or is weak, the Company may be subject to additional pressure in maintaining compliance with its senior secured leverage ratio. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—EBITDA and Adjusted EBITDA” for the detailed covenant calculation.

The Company has the right to cure an event of default of the senior secured leverage ratio in three of any of the four consecutive quarters through the issuance of additional Holdings equity for cash, which would be infused as capital into the Company. The effect of such infusion would be to increase Adjusted EBITDA for purposes of calculating the senior secured leverage ratio for the applicable twelve-month period and reduce net senior secured indebtedness upon actual receipt of such capital. If the Company is unable to maintain compliance with the senior secured leverage ratio and fails to remedy a default through an equity cure as described above, there would be an “event of default” under the Senior Secured Credit Facility. Other events of default under the Senior Secured Credit Facility include, without limitation, nonpayment, material misrepresentations, insolvency, bankruptcy, certain material judgments, change of control and cross-events of default on material indebtedness.

 

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If an event of default occurs under the Senior Secured Credit Facility, and the Company fails to obtain a waiver from the lenders, the Company’s financial condition, results of operations and business would be materially adversely affected. Upon the occurrence of an event of default under the Senior Secured Credit Facility, the lenders:

 

   

would not be required to lend any additional amounts to the Company;

 

   

could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable;

 

   

could require the Company to apply all of its available cash to repay these borrowings; or

 

   

could prevent the Company from making payments on the First and a Half Lien Notes or the Unsecured Notes;

any of which could result in an event of default under the First and a Half Lien Notes, the Unsecured Notes and the Company’s Apple Ridge Funding LLC securitization program.

If the Company were unable to repay those amounts, the lenders under the Senior Secured Credit Facility could proceed against the collateral granted to them to secure that indebtedness. The Company has pledged the majority of its assets as collateral under the Senior Secured Credit Facility. If the lenders under the Senior Secured Credit Facility were to accelerate the repayment of borrowings, then the Company may not have sufficient assets to repay the Senior Secured Credit Facility and its other indebtedness, including the First and a Half Lien Notes and the Unsecured Notes, or be able to borrow sufficient funds to refinance such indebtedness. Even if the Company is able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to the Company.

First and a Half Lien Notes

On February 3, 2011, Realogy issued $700 million aggregate principal amount of First and a Half Lien Notes in a private offering exempt from the registration requirements of the Securities Act. The First and a Half Lien Notes mature on February 15, 2019 and bear interest at a rate per annum of 7.875% payable semiannually to holders of record at the close of business on February 1 or August 1 immediately preceding the interest payment dates of February 15 and August 15 of each year. The First and a Half Lien Notes are secured by substantially the same collateral as Realogy’s existing secured obligations under the Senior Secured Credit Facility, but the priority of the collateral liens securing the First and a Half Lien Notes is (i) junior to the collateral liens securing Realogy’s first lien obligations under the Senior Secured Credit Facility and (ii) senior to the collateral liens securing Realogy’s second lien obligations under the Senior Secured Credit Facility.

As discussed above, the net proceeds from the offering of the First and a Half Lien Notes, along with cash on hand, were used to prepay $700 million of certain of Realogy’s first lien term loans that were extended in connection with the Senior Secured Credit Facility Amendment.

Other Bank Indebtedness

Realogy has separate revolving U.S. credit facilities under which it can borrow up to $125 million and a separate U.K. credit facility under which it can borrow up to £5 million. These facilities are not secured by assets of Realogy or any of its subsidiaries but are supported by letters of credit issued under the Senior Secured Credit Facility. The facilities generally have a one-year term with certain options for renewal. As of September 30, 2011, Realogy had outstanding borrowings of $133 million under these credit facilities with $75 million due in July 2012, $8 million due in August 2012 and $50 million due in January 2013. For the nine months ended September 30, 2011, the weighted average interest rate is 2.9% under the U.S. credit facilities and 2.5% under the U.K. credit facility with interest payable either monthly or quarterly.

 

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Unsecured Notes

On April 10, 2007, Realogy issued $1,700 million aggregate principal amount of 10.50% Senior Notes due 2014 (the “10.50% Senior Notes”), $550 million aggregate principal amount of 11.00%/11.75% Senior Toggle Notes due 2014 (the “Senior Toggle Notes” and, together with the 10.50% Senior Notes, the “Existing Senior Notes”) and $875 million aggregate principal amount of 12.375% Senior Subordinated Notes due 2015 (the “12.375% Senior Subordinated Notes” and, together with the Existing Senior Notes, the “Existing Notes”).

On January 5, 2011, Realogy consummated the Debt Exchange Offering for its Existing Notes pursuant to which Realogy issued 11.50% Senior Notes due 2017 (the “11.50% Senior Notes”), 12.00% Senior Notes due 2017 (the “12.00% Senior Notes” and, together with the 11.50% Senior Notes, the “Extended Maturity Senior Notes” and, together with the Existing Senior Notes, the “Senior Notes”), 13.375% Senior Subordinated Notes due 2018 (the “13.375% Senior Subordinated Notes” and, together with the Extended Maturity Senior Notes, the “Extended Maturity Notes”) and 11.00% Series A Convertible Notes due 2018, the 11.00% Series B Convertible Notes due 2018 and the 11.00% Series C Convertible Notes due 2018 (collectively, the “Convertible Notes”). The term “Senior Subordinated Notes” refers to the 12.375% Senior Subordinated Notes and the 13.375% Senior Subordinated Notes, collectively; and the term “Unsecured Notes” refers to the Senior Notes, the Senior Subordinated Notes and the Convertible Notes, collectively.

Pursuant to the Debt Exchange Offering, approximately $2,110 million aggregate principal amount of the Existing Notes were tendered for Convertible Notes, which are convertible at the holder’s option into Class A Common Stock, and approximately $632 million aggregate principal amount of the Existing Notes were tendered for the Extended Maturity Notes.

On January 5, 2011, Realogy issued:

 

   

$492 million aggregate principal amount of 11.50% Senior Notes and $1,144 million aggregate principal amount of Series A Convertible Notes in exchange for $1,636 million aggregate principal amount of outstanding 10.50% Senior Notes;

 

   

$130 million aggregate principal amount of 12.00% Senior Notes and $291 million aggregate principal amount of Series B Convertible Notes in exchange for $421 million aggregate principal amount of outstanding Senior Toggle Notes; and

 

   

$10 million aggregate principal amount of 13.375% Senior Subordinated Notes and $675 million aggregate principal amount of Series C Convertible Notes in exchange for $685 million aggregate principal amount of outstanding 12.375% Senior Subordinated Notes.

As a result of the Debt Exchange Offering, Realogy extended the maturity of approximately $2,742 million aggregate principal amount of the Unsecured Notes to 2017 and 2018, leaving approximately $303 million aggregate principal amount of Existing Notes that mature in 2014 and 2015. In addition, pursuant to the terms of the indenture governing the terms of the Convertible Notes, the Convertible Notes are redeemable at Realogy’s option at a price equal to 90% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption upon a Qualified Public Offering.

The 10.50% Senior Notes mature on April 15, 2014 and bear interest at a rate per annum of 10.50% payable semiannually to holders of record at the close of business on April 1 or October 1 immediately preceding the interest payment dates of April 15 and October 15 of each year. The 11.50% Senior Notes mature on April 15, 2017 and bear interest at a rate per annum of 11.50% payable semiannually to holders of record at the close of business on April 1 or October 1 immediately preceding the interest payment dates of April 15 and October 15 of each year.

The Senior Toggle Notes mature on April 15, 2014. Interest is payable semiannually on April 15 and October 15 of each year. For any interest payment period after the initial interest payment period and through

 

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October 15, 2011, Realogy had the option to pay interest on the Senior Toggle Notes (1) entirely in cash (“Cash Interest”), (2) entirely by increasing the principal amount of the outstanding Senior Toggle Notes or by issuing Senior Toggle Notes (“PIK Interest”), or (3) 50% as Cash Interest and 50% as PIK Interest. Cash Interest on the Senior Toggle Notes accrues at a rate of 11.00% per annum. PIK Interest on the Senior Toggle Notes accrues at the Cash Interest rate per annum plus 0.75%. Beginning with the interest period which ended October 2008 through the interest period which ended April 2011, Realogy elected to satisfy its interest payment obligations by issuing additional Senior Toggle Notes. Realogy elected to pay Cash Interest for the interest period commencing April 15, 2011 and is required to make all future interest payments on the Senior Toggle Notes entirely in cash until they mature.

Realogy would be subject to certain interest deduction limitations if the Senior Toggle Notes were treated as “applicable high yield discount obligations” (“AHYDO”) within the meaning of Section 163(i)(1) of the Internal Revenue Code, as amended. In order to avoid such treatment, Realogy is required to redeem for cash a portion of each Senior Toggle Note then outstanding at the end of the accrual period ending in April 2012. The portion of a Senior Toggle Note required to be redeemed is an amount equal to the excess of the accrued original issue discount as of the end of such accrual period, less the amount of interest paid in cash on or before such date, less the first-year yield (the issue price of the debt instrument multiplied by its yield to maturity). For the periods that Realogy elected to pay PIK Interest, Realogy will be required to repay approximately $11 million in April 2012.

The 12.00% Senior Notes mature on April 15, 2017 and bear interest at a rate per annum of 12.00% payable semiannually to holders of record at the close of business on April 1 or October 1 immediately preceding the interest payment dates of April 15 and October 15 of each year.

The 12.375% Senior Subordinated Notes mature on April 15, 2015 and bear interest at a rate per annum of 12.375% payable semiannually to holders of record at the close of business on April 1 or October 1 immediately preceding the interest payment date on April 15 and October 15 of each year. The 13.375% Senior Subordinated Notes mature on April 15, 2018 and bear interest at a rate per annum of 13.375% payable semiannually to holders of record at the close of business on April 1 or October 1 immediately preceding the interest payment date on April 15 and October 15 of each year.

The Senior Notes are guaranteed on an unsecured senior basis, and the Senior Subordinated Notes are guaranteed on an unsecured senior subordinated basis, in each case, by each of Realogy’s existing and future U.S. subsidiaries that is a guarantor under the Senior Secured Credit Facility or that guarantees certain other indebtedness in the future, subject to certain exceptions. The Senior Notes are guaranteed by Holdings on an unsecured senior subordinated basis and the Senior Subordinated Notes are guaranteed by Holdings on an unsecured junior subordinated basis.

On June 24, 2011, Realogy completed offers of exchange notes for Extended Maturity Notes issued in the Debt Exchange Offering. The term “exchange notes” refers to the 11.50% Senior Notes due 2017, the 12.00% Senior Notes due 2017 and the 13.375% Senior Subordinated Notes due 2018, all as registered under the Securities Act, pursuant to a Registration Statement on Form S-4 (File No. 333-173254 declared effective by the SEC on May 20, 2011). Each series of the exchange notes are substantially identical in all material respects to the Extended Maturity Notes of the applicable series issued in the Debt Exchange Offering (except that the new registered exchange notes do not contain terms with respect to additional interest or transfer restrictions). Unless the context otherwise requires, the term “Extended Maturity Notes” refers to the exchange notes.

Convertible Notes

The Series A Convertible Notes, Series B Convertible Notes and Series C Convertible Notes mature on April 15, 2018 and bear interest at a rate per annum of 11.00% payable semiannually to holders of record at the close of business on April 1 or October 1 immediately preceding the interest payment dates of April 15 and October 15 of each year. The Convertible Notes are convertible into Class A Common Stock at any time prior to

 

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April 15, 2018. The Series A Convertible Notes and Series B Convertible Notes are initially convertible into 975.6098 shares of Class A Common Stock per $1,000 aggregate principal amount of Series A Convertible Notes and Series B Convertible Notes, which is equivalent to an initial conversion price of approximately $1.025 per share, and the Series C Convertible Notes are initially convertible into 926.7841 shares of Class A Common Stock per $1,000 aggregate principal amount of Series C Convertible Notes, which is equivalent to an initial conversion price of approximately $1.079 per share, subject to adjustment if specified distributions to holders of the Class A Common Stock are made or specified corporate transactions occur, in each case as set forth in the indenture governing the Convertible Notes. The Convertible Notes are guaranteed on an unsecured senior subordinated basis by each of Realogy’s existing and future U.S. subsidiaries that is a guarantor under the Senior Secured Credit Facility or that guarantees certain other indebtedness in the future, subject to certain exceptions. The Convertible Notes are guaranteed on an unsecured junior subordinated basis by Holdings.

Following a Qualified Public Offering, Realogy may, at its option, redeem the Convertible Notes, in whole or in part, at a redemption price, payable in cash, equal to 90% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

On June 16, 2011, the SEC declared effective a Registration Statement on Form S-1 (File No. 333-173250) of Holdings and Realogy, registering for resale the outstanding Convertible Notes and the Class A Common Stock of Holdings issuable upon conversion of the Convertible Notes. Offers and sales of the Convertible Notes and Class A Common Stock may be made by selling securityholders pursuant to the June 2011 Final Prospectus as amended or supplemented from time to time.

Loss on the early extinguishment of debt and write-off of deferred financing costs

As a result of the Refinancing Transactions, the Company recorded a loss on the extinguishment of debt of $36 million and wrote off deferred financing costs of $7 million to interest expense as a result of debt modifications during the nine months ended September 30, 2011.

Securitization Obligations

The Company has secured obligations through Apple Ridge Funding LLC, a securitization program with a five-year term which expires in April 2012. On May 13, 2011, the Company elected to reduce the capacity of the Apple Ridge securitization program from $500 million to $400 million.

In 2010, the Company, through a special purpose entity, Cartus Financing Limited, entered into agreements providing for a £35 million revolving loan facility which expires in August 2015 and a £5 million working capital facility which expires in August 2012. These Cartus Financing Limited facilities are secured by relocation assets of a U.K. government contract in a special purpose entity and are therefore classified as permitted securitization financings as defined in the Company’s senior secured credit facility and the indentures governing the Unsecured Notes.

The Apple Ridge entities and Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of the Company’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay the Company’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program.

Certain of the funds that the Company receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $432 million and $393

 

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million of underlying relocation receivables and other related relocation assets at September 30, 2011 and December 31, 2010, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of the Company’s securitization obligations are classified as current in the accompanying Condensed Consolidated Balance Sheets.

Interest incurred in connection with borrowings under these facilities amounted to $1 million and $4 million for the three and nine months ended September 30, 2011, respectively, and $2 million and $5 million for the three and nine months ended September 30, 2010, respectively. This interest is recorded within net revenues in the accompanying Condensed Consolidated Statements of Operations as related borrowings are utilized to fund the Company’s relocation business where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 1.9% and 2.6% for the nine months ended September 30, 2011 and 2010, respectively.

AVAILABLE CAPACITY

As of September 30, 2011, the total capacity, outstanding borrowings and available capacity under the Company’s borrowing arrangements were as follows:

 

     Expiration
Date
   Total
Capacity
     Outstanding
Borrowings
     Available
Capacity
 

Senior Secured Credit Facility:

           

Non-extended revolving credit facility(1)

   April 2013    $ 289       $ 22       $ 217   

Extended revolving credit facility(1)

   April 2016      363         28         272   

Non-extended term loan facility

   October 2013      631         631         —     

Extended term loan facility

   October 2016      1,822         1,822         —     

First and a Half Lien Notes

   February 2019      700         700         —     

Second Lien Loans

   October 2017      650         650         —     

Other bank indebtedness(2)

   Various      133         133         —     

Existing Notes

           

10.50% Senior Notes

   April 2014      64         64         —     

11.00%/11.75% Senior Toggle Notes

   April 2014      52         52         —     

12.375% Senior Subordinated Notes(3)

   April 2015      190         187         —     

Extended Maturity Notes

           

11.50% Senior Notes(4)

   April 2017      492         489         —     

12.00% Senior Notes(5)

   April 2017      130         129         —     

13.375% Senior Subordinated Notes

   April 2018      10         10         —     

11.00% Convertible Notes

   April 2018      2,110         2,110         —     

Securitization obligations:(6)

           

Apple Ridge Funding LLC

   April 2012      400         299         101   

Cartus Financing Limited(7)

   Various      62         33         29   
     

 

 

    

 

 

    

 

 

 
      $ 8,098       $ 7,359       $ 619   
     

 

 

    

 

 

    

 

 

 

 

(1) The available capacity under these facilities was reduced by $50 million and $63 million of outstanding letters of credit on the non-extended and the extended revolving credit facility, respectively, at September 30, 2011.
(2) Consists of revolving credit facilities that are supported by letters of credit issued under the Senior Secured Credit Facility, $75 million due in July 2012, $8 million due in August 2012 and $50 million due in January 2013.
(3) Consists of $190 million of 12.375% Senior Subordinated Notes due 2015, less a discount of $3 million.
(4) Consists of $492 million of 11.50% Senior Notes due 2017, less a discount of $3 million.
(5) Consists of $130 million of 12.00% Senior Notes due 2017, less a discount of $1 million.

 

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(6) Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations.
(7) Consists of a £35 million facility which expires in August 2015 and a £5 million working capital facility which expires in August 2012.

 

7. RESTRUCTURING COSTS

2011 Restructuring Program

During the first nine months of 2011, the Company committed to various initiatives targeted principally at reducing costs, enhancing organizational efficiencies and consolidating existing facilities. The Company currently expects to incur restructuring charges of $10 million in 2011. As of September 30, 2011, the Company Owned Real Estate Brokerage Services segment recognized $4 million of facility related expenses and $3 million of personnel related expenses. The Title and Settlement Services segment recognized $1 million of facility and personnel related expenses. At September 30, 2011, the remaining liability was $4 million.

2010 Restructuring Program

During 2010, the Company committed to various initiatives targeted principally at reducing costs, enhancing organizational efficiencies and consolidating facilities. The Company recognized $13 million of restructuring expense in the first nine months of 2010 and $21 million for the year ended December 31, 2010.

The table below shows restructuring expense by category and the corresponding payments and other reductions from inception to September 30, 2011:

 

     Personnel
Related
    Facility
Related
    Asset
Impairments
    Total  

Restructuring expense and other additions(a)

   $ 5      $ 16      $ 1      $ 22   

Cash payments and other reductions

     (4     (6     (1     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     1        10        —          11   

Cash payments and other reductions

     (1     (4     —          (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ —        $ 6      $ —        $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Includes $1 million of unfavorable lease liability recorded in purchase accounting for Primacy which was reclassified to restructuring liability as a result of the Company restructuring certain facilities after the acquisition date.

 

8. STOCK-BASED COMPENSATION

Incentive Equity Awards Granted by Holdings

In connection with the closing of the Merger Transactions on April 10, 2007, Holdings adopted the Domus Holdings Corp. 2007 Stock Incentive Plan (the “Plan”) under which non-qualified stock options, rights to purchase shares of common stock, restricted stock and other awards settleable in, or based upon, Holdings common stock may be issued to employees, consultants or directors of the Company or any of its subsidiaries. The stock options and restricted stock granted are either time vesting or performance based awards with an exercise price equal to the grant date fair price of the underlying shares and a contractual term of 10 years. The time vesting options are subject to ratable vesting over the requisite service period. The performance based options are “cliff” vested upon the achievement of certain internal rate of return (“IRR”) targets which are measured based upon distributions made to the stockholders of Holdings. The restricted stock was granted at the grant date fair value and has a three-year requisite service period with one-half “cliff” vesting after 18 months of service and one-half “cliff” vesting at the end of the three-year service period.

 

 

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During the first nine months of 2011, the Holdings Board granted 0.8 million of time vesting stock options and 0.1 million shares of time vesting restricted stock to senior management employees and an independent director of the Company, as well as 0.7 million of performance based stock options granted under the Phantom Value Plan (see discussion below). On August 2, 2011, the Holdings Board approved an amendment and restatement of the Plan to increase the number of shares reserved under the Plan by 5 million shares. As of September 30, 2011, the total number of shares available for future grant was approximately 5.6 million shares.

The fair value of the time vesting options and Phantom Plan options was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following assumptions. Expected volatility was based on historical volatilities of comparable companies. The expected term of the options granted represents the period of time that options were expected to be outstanding. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.

 

     Time Vesting
Options
    Phantom Plan
Options
 

Weighted average grant date fair value

   $ 0.47      $ 0.46   

Expected volatility

     55.5     61.5

Expected term (years)

     6.25        4.75   

Risk-free interest rate

     2.6     2.0

Dividend yield

     —          —     

Equity Award Activity

A summary of option and restricted share activity is presented below (number of shares in millions):

 

     Time-vesting
Options
    Performance
based

Options
     Restricted
Stock
 

Outstanding at January 1, 2011

     12.73        2.52         —     

Granted

     0.84        0.71         0.11   

Exercised

     —          —           —     

Vested

     —          —           —     

Forfeited

     (0.20     —           —     
  

 

 

   

 

 

    

 

 

 

Outstanding at September 30, 2011

     13.37        3.23         0.11   
  

 

 

   

 

 

    

 

 

 

 

     Options
Vested
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual Term
     Aggregate
Intrinsic
Value
 

Exercisable at September 30, 2011

     4.55       $ 4.96         7.8 years       $ —     

As of September 30, 2011, there was approximately $7 million of unrecognized compensation cost related to the time vesting options and restricted stock under the Plan and $5 million of unrecognized compensation cost related to the performance based options. Unrecognized cost for the time vesting options and restricted stock will be recorded in future periods as compensation expense as the awards vest over the next three years with a weighted average period of approximately 1.9 years. The unrecognized cost for the performance based options will be recorded as compensation expense when an IPO or significant capital transaction is probable of occurring.

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense of $2 million and $5 million related to the incentive equity awards granted by Holdings for the three and nine months ended September 30, 2011 and $1 million and $4 million related to the incentive equity awards granted by Holdings for the three and nine months ended September 30, 2010.

 

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Phantom Value Plan

On January 5, 2011, the Board of Directors of the Company approved the Realogy Corporation Phantom Value Plan (the “Phantom Value Plan”), which is intended to provide certain of Realogy’s executive officers, with an incentive (the “Incentive Awards”) to remain in the service of Realogy, increased interest in the success of Realogy and the opportunity to receive compensation based upon Realogy’s success. On January 5, 2011, the Board of Directors of the Company made initial grants of Incentive Awards in three series in an aggregate amount of $22 million to certain executive officers of Realogy.

Under the Phantom Value Plan, each participant is eligible to receive a payment with respect to an Incentive Award relating to the three series of Convertible Notes at such time and from time to time that Apollo receives cash upon the discharge or third-party sale of not less than $267 million of the aggregate principal amount of the Convertible Notes (the “Plan Notes”) (or on any non-cash consideration into which any series of Plan Notes may have been exchanged or converted). The payment with respect to a particular series of an Incentive Award would be an amount which bears the same ratio to the dollar amount of the Incentive Award relating to such series of the aggregate amount of cash received by Affiliate Holders bears to the aggregate principal amount of such series of Plan Notes held by Affiliate Holders on the date of grant of such Incentive Award. In addition, participants may be eligible to receive additional amounts based upon cash received by the Affiliate Holders pursuant to the terms of any non-cash consideration into which any such series of Plan Notes may have been exchanged or converted. Any cash payments made under the Phantom Value Plan will be recorded as compensation expense when Apollo receives cash upon the discharge or third-party sale of the Convertible Notes.

In the event that a payment is to be made with respect to an Incentive Award in conjunction with or subsequent to a qualified public offering of common stock of Realogy or its direct or indirect parent company, a participant may elect to receive stock in lieu of the cash payment in a number of unrestricted shares of common stock with a fair market value, as determined in good faith by the Compensation Committee, equal to the dollar amount then due on such Incentive Award, plus a number of restricted shares of such common stock with a fair market value, as determined in good faith by the Compensation Committee, equal to the amount then due multiplied by 0.15. The restricted shares of common stock will vest, based on continued employment, on the first anniversary of issuance. Compensation expense for the restricted shares of common stock will be recorded over a one-year vesting period upon issuance, while compensation expense for the unrestricted shares of common stock will be recorded on the issuance date. In addition, Incentive Awards will be subject to acceleration and payment upon a change of control as specified in the Phantom Value Plan.

On each date the Affiliate Holders receive cash interest on the Plan Notes, certain executive officers of Realogy may be granted stock options under the Holdings 2007 Stock Incentive Plan. The aggregate value of stock options granted (determined by the Holdings Board or its Compensation Committee in its sole discretion) is equal to an amount which bears the same ratio to the aggregate dollar amount of the participant’s Incentive Award as the aggregate amount of cash interest received by Affiliate Holders on such date bears to the aggregate principal amount of the Plan Notes held by the Affiliate Holders on the date of grant of the Incentive Award. The stock option grants to Realogy’s CEO, however, would be limited to 50% of the foregoing stock option amount. Generally, each grant of stock options will have a three year vesting schedule, subject to the participant’s continued employment, and vested stock options will become exercisable one year following a qualified public offering. As such, compensation expense will be recorded after a public offering becomes probable of occurring. The stock options have a term of 7.5 years. In April and October 2011, Holdings issued approximately 0.7 million and 1.3 million, respectively, of stock options under the Phantom Value Plan in conjunction with the Affiliate Holders receiving cash interest on the Plan Notes.

Incentive Awards are immediately cancelable and forfeitable in the event of the termination of a participant’s employment for any reason. The Incentive Awards also terminate 10 years following the date of grant.

 

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9. SEPARATION ADJUSTMENTS, TRANSACTIONS WITH FORMER PARENT AND SUBSIDIARIES AND RELATED PARTIES

Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates

The Company has certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Wyndham Worldwide and Travelport for such liabilities) and guarantee commitments related to deferred compensation arrangements with Cendant and Wyndham Worldwide. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and other corporate liabilities, of which the Company assumed and is generally responsible for 62.5%. Upon separation from Cendant, the liabilities assumed by the Company were comprised of certain Cendant corporate liabilities which were recorded on the historical books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters and certain others that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, the Company would be responsible for a portion of the defaulting party or parties’ obligation. To the extent such recorded liabilities are in excess or are not adequate to cover the ultimate payment amounts, such deficiency or excess will be reflected in the results of operations in future periods.

The due to former parent balance was $78 million and $104 million at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, the due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.

Transactions with PHH Corporation

In January 2005, Cendant completed the spin-off of its former mortgage, fleet leasing and appraisal businesses in a tax-free distribution of 100% of the common stock of PHH to its stockholders. In connection with the spin-off, the Company entered into a venture, PHH Home Loans, with PHH for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses. The Company owns 49.9% of the venture. In connection with the venture, the Company entered into an agreement with PHH and PHH Home Loans regarding the operation of the venture and a marketing agreement with PHH whereby PHH is the recommended provider of mortgage products and services promoted by the Company to its independently owned and operated franchisees. The Company also entered into a license agreement with PHH whereby PHH Home Loans was granted a license to use certain of the Company’s real estate brand names. The Company maintains a relocation agreement with PHH whereby PHH outsources its employee relocation function to the Company and the Company subleases office space to PHH Home Loans.

In connection with these agreements, the Company recorded revenues of $1 million and $4 million for the three and nine months ended September 30, 2011, respectively and $1 million and $4 million for the three and nine months ended September 30, 2010, respectively. The Company recorded equity earnings of $11 million and $15 million for the three and nine months ended September 30, 2011, respectively and $13 million and $21 million for the three and nine months ended September 30, 2010, respectively. The Company received $15 million and $5 million in dividend distributions from PHH Home Loans during the nine months ended September 30, 2011 and 2010, respectively.

Transactions with Related Parties

The Company has entered into certain transactions in the normal course of business with entities that are owned by affiliates of Apollo. For the three and nine months ended September 30, 2011 and 2010, the Company recognized revenue and expenses related to these transactions of $1 million or less in the aggregate in each period.

 

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10. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in claims, legal proceedings and governmental inquiries related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examples of such matters include but are not limited to allegations:

 

   

concerning adverse impacts to franchisees related to purported changes made to the Century 21® system and its National Advertising Fund after the Company acquired it in 1995, which is referred to elsewhere in this report as the “Cooper Litigation”;

 

   

that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;

 

   

by former franchisees that franchise agreements were improperly terminated;

 

   

that residential real estate agents engaged by NRT—in certain states—are potentially common law employees instead of independent contractors, and therefore may bring claims against NRT for breach of contract, wrongful discharge and negligent supervision and obtain benefits available to employees under various state statutes;

 

   

concerning claims for alleged RESPA or state law violations including but not limited to claims relating to administrative fees or commissions that include both a fixed fee and percentage payment as well as the validity of sales associates indemnification and administrative fees;

 

   

concerning claims generally against the company-owned brokerage operations for negligence or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services; and

 

   

concerning claims generally against the title company contending that, as the escrow company, the company knew or should have known that a transaction was fraudulent.

Real Estate Business Litigation

Frank K. Cooper Real Estate #1, Inc. v. Cendant Corp. and Century 21 Real Estate Corporation (N.J. Super. Ct. L. Div., Morris County, New Jersey). In 2002, Frank K. Cooper Real Estate #1, Inc. filed a putative class action against Cendant and Cendant’s subsidiary, Century 21 Real Estate Corporation (“Century 21”). The complaint alleges breach of certain provisions of the Real Estate Franchise Agreement entered into between Century 21 and the plaintiffs, breach of the implied duty of good faith and fair dealing, violation of the New Jersey Consumer Fraud Act and breach of certain express and implied fiduciary duties. The complaint alleges, among other things, that Cendant diverted money and resources from Century 21 franchisees and allotted them to NRT owned brokerages and otherwise improperly charged expenses to advertising funds. The complaint seeks unspecified compensatory and punitive damages, injunctive relief, interest, attorney’s fees and costs. The New Jersey Consumer Fraud Act, if applicable, provides for treble damages, attorney’s fees and costs as remedies for violation of the Act. On August 17, 2010, the court granted plaintiffs’ renewed motion to certify a class. The certified class includes Century 21 franchisees at any time between August 1, 1995 and April 17, 2002 whose franchise agreements contain New Jersey choice of law and venue provisions and who have not executed releases releasing the claim (unless the release was a provision of a franchise renewal agreement).

A case management order entered on November 29, 2010 established, among other things, a trial date of April 16, 2012. Pursuant to the court order, the Notice Administrator has advised us that the notice of pendency of the action was mailed to possible class members on March 4, 2011, and a summary of that notice has been published in various print and online media.

In August 2011, the court denied, without prejudice, plaintiffs’ motion seeking to invalidate two categories of claims releases. Based on the rulings of the court to date, there are approximately 1,020 franchisees (former

 

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and current) who are members of the class for all or a portion of the class period. Also, based upon the rulings by the court, merits discovery is substantially complete, but the exchange of expert reports and related discovery has not yet occured.

This class action involves substantial, complex litigation. Class action litigation is inherently unpredictable and subject to significant uncertainties. The resolution of the Cooper Litigation could result in substantial losses and there can be no assurance that such resolution will not have a material adverse effect on our results of operations, financial condition or liquidity.

Larsen, et al. v. Coldwell Banker Real Estate Corporation, et al. (case formerly known as Joint Equity Committee of Investors of Real Estate Partners, Inc. v. Coldwell Banker Real Estate Corp., et al). The case, pending in the United States District Court for the Central District of California, arises from the relationship of several of our subsidiaries with a former Coldwell Banker Commercial franchise, whose affiliated entity allegedly utilized the Coldwell Banker Commercial name in the offer and sale of securities during the period in which it was a franchisee and for a period of time after the franchise agreement was terminated. In a SEC civil proceeding asserting violations of various securities laws, by stipulated judgment dated September 2, 2009, a shareholder of the franchisee, Real Estate Partners, Inc. (“REP”), and REP’s affiliated entities were ordered to disgorge approximately $53 million in funds raised from investors. REP filed for Chapter 11 bankruptcy protection in 2007. The bankruptcy trustee is actively working on gathering assets to compensate creditors, including the allegedly defrauded investors. In April 2010, the Joint Equity Committee of Investors of Real Estate Partners, Inc. (“Joint Equity Committee”) filed this action against our subsidiaries Coldwell Banker Real Estate Corporation and Coldwell Banker Real Estate LLC, alleging, among other things, negligence and fraud. The plaintiff alleged that the Coldwell Banker subsidiaries knew or should have known that REP and the Coldwell Banker Commercial franchisee were using the marks in connection with the promotion of securities but that the Coldwell Banker subsidiaries failed to act to stop that use. After the Coldwell Banker subsidiaries filed a motion to dismiss arguing, among other things, that the Joint Equity Committee lacked standing to bring claims on behalf of the investors or creditors in the bankruptcy proceeding, the initial complaint was amended to substitute individual investors as plaintiffs and was re-styled as a putative class action brought on behalf of REP investors. The First Amended Complaint was dismissed for failure to state a claim upon which relief may be granted. Plaintiffs filed a Second Amended Complaint on March 29, 2011, and the court denied the Coldwell Banker subsidiaries’ motion to dismiss on September 8, 2011. On August 22, 2011, plaintiffs filed their motion to certify a class, which has yet to be fully briefed by both parties. Trial is currently scheduled for August 2012.

Cendant Corporate Litigation

Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy, Wyndham Worldwide and Travelport, each of Realogy, Wyndham Worldwide and Travelport have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, Realogy has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy, Wyndham Worldwide, Travelport and/or Cendant’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the date of the separation of Travelport from Cendant.

***

The Company believes that it has adequately accrued for legal matters as appropriate. However, litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle. Lastly, there may be greater risk of unfavorable resolutions in the current economic environment due to various factors including the absence of other defendants (due to business failures) that may be the real cause of the liability and greater negative sentiment toward corporate defendants. As such,

 

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the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.

Tax Matters

The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and in recording the related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain.

Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of tax liabilities that relate to income taxes imposed on Cendant and certain of its subsidiaries with respect to tax periods ending on or prior to December 31, 2006.

At September 30, 2011, the due to former parent balance of $78 million was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.

With respect to the residual legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. Similarly, with respect to the Company’s tax liabilities, the Company believes there is appropriate support for positions taken on its own tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions. The Company believes that the accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter; however, the outcome of tax audits are inherently uncertain. Such tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.

Contingent Liability Letter of Credit

In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The synthetic letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. The stated amount of the standby irrevocable letter of credit is subject to periodic adjustment to reflect the then current estimate of Cendant contingent and other liabilities. In 2010, the Company entered into agreements with Avis Budget Group and Wyndham to reduce the letter of credit from $446 million to $123 million primarily due to Cendant’s IRS tax settlement for the taxable years 2003 through 2006 and other liability adjustments. On June 23, 2011, Realogy further reduced the letter of credit to $100 million. The standby irrevocable letter of credit will be terminated if (i) the Company’s senior unsecured credit rating is raised to BB by Standard and Poor’s or Ba2 by Moody’s or (ii) the aggregate value of the former parent contingent liabilities falls below $30 million.

Apollo Management Fee Agreement

In connection with the Merger Transaction, Apollo entered into a management fee agreement with the Company which allows Apollo and its affiliates to provide certain management consulting services to the Company through the end of 2016 (subject to possible extension). The Company pays Apollo an annual management fee for this service up to the sum of the greater of $15 million or 2.0% of the Company’s annual

 

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Adjusted EBITDA for the immediately preceding year, plus out-of-pocket costs and expenses in connection therewith. At September 30, 2011, the Company had $26 million accrued for the payment of Apollo management fees.

In addition, in the absence of an express agreement to the contrary, at the closing of any merger, acquisition, financing and similar transaction with a related transaction or enterprise value equal to or greater than $200 million, Apollo will receive a fee equal to 1% of the aggregate transaction or enterprise value paid to or provided by such entity or its stockholders (including the aggregate value of (x) equity securities, warrants, rights and options acquired or retained, (y) indebtedness acquired, assumed or refinanced and (z) any other consideration or compensation paid in connection with such transaction). The Company has agreed to indemnify Apollo and its affiliates and their directors, officers and representatives for potential losses relating to the services to be provided under the management fee agreement. Apollo waived any fees payable to it pursuant to the management fee agreement in connection with the Refinancing Transactions.

Escrow and Trust Deposits

As a service to the Company’s customers, it administers escrow and trust deposits which represent undisbursed amounts received for settlements of real estate transactions. With the passage of the Dodd-Frank Act in July 2010, deposits at FDIC-insured institutions are permanently covered up to $250 thousand. In addition, the Dodd-Frank Act temporarily provides unlimited coverage for noninterest-bearing transaction accounts from December 31, 2010 through December 31, 2012. These escrow and trust deposits totaled approximately $321 million and $190 million at September 30, 2011 and December 31, 2010, respectively. These escrow and trust deposits are not assets of the Company and, therefore, are excluded from the accompanying Condensed Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.

 

11. SEGMENT INFORMATION

The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and EBITDA, which is defined as net income (loss) before depreciation and amortization, interest (income) expense, net (other than Relocation Services interest for secured assets and obligations) and income taxes, each of which is presented in the Company’s Condensed Consolidated Statements of Operations. The Company’s presentation of EBITDA may not be comparable to similar measures used by other companies.

 

     Revenues(a)  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011             2010      

Real Estate Franchise Services

   $ 151      $ 138      $ 429      $ 433   

Company Owned Real Estate Brokerage Services

     841        762        2,312        2,319   

Relocation Services

     126        122        323        304   

Title and Settlement Services

     95        84        268        235   

Corporate and Other(b)

     (58     (54     (167     (167
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Company

   $ 1,155      $ 1,052      $ 3,165      $ 3,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Transactions between segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services segment include intercompany royalties and marketing fees paid by the Company Owned Real Estate Brokerage Services segment of $58 million and $167 million for the three and nine months ended

 

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  September 30, 2011, respectively, and $54 million and $167 million for the three and nine months ended September 30, 2010, respectively. Such amounts are eliminated through the Corporate and Other line. Revenues for the Relocation Services segment include $11 million and $29 million of intercompany referral and relocation fees paid by the Company Owned Real Estate Brokerage Services segment during the three and nine months ended September 30, 2011, respectively, and $12 million and $29 million during the three and nine months ended September 30, 2010, respectively. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material inter-segment transactions.
(b) Includes the elimination of transactions between segments.

 

     EBITDA  
     Three Months Ended
September 30,(a)
    Nine Months Ended
September 30,(b)
 
       2011         2010         2011         2010    

Real Estate Franchise Services

   $ 92      $ 90      $ 251      $ 278   

Company Owned Real Estate Brokerage Services

     47        31        58        81   

Relocation Services

     50        51        92        82   

Title and Settlement Services

     8        8        22        14   

Corporate and Other

     (10     (3     (60     277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Company

     187        177        363        732   

Less:

        

Depreciation and amortization

     46        49        139        148   

Interest expense, net

     159        151        499        458   

Income tax expense

     10        10        12        134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Holdings and Realogy

   $ (28   $ (33   $ (287   $ (8
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Includes $3 million of restructuring costs offset by a net benefit of $3 million of former parent legacy items for the three months ended September 30, 2011 compared to $2 million of restructuring costs offset by a net benefit of $6 million of former parent legacy items for the three months ended September 30, 2010.
(b) Includes $8 million of restructuring costs and $36 million related to loss on the early extinguishment of debt, partially offset by a net benefit of $17 million of former parent legacy items for the nine months ended September 30, 2011 compared to $12 million of restructuring costs offset by a net benefit of $315 million of former parent legacy items primarily as a result of tax and other liability adjustments for the nine months ended September 30, 2010.

 

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12. GUARANTOR/NON-GUARANTOR SUPPLEMENTAL FINANCIAL INFORMATION

The following consolidating financial information presents the Consolidating Balance Sheets and Consolidating Statements of Operations and Cash Flows for: (i) Domus Holdings Corp. (“Holdings”); (ii) its direct wholly owned subsidiary Domus Intermediate Holdings Corp. (“Intermediate”); (iii) its indirect wholly owned subsidiary, Realogy Corporation (“Realogy”); (iv) the guarantor subsidiaries of Realogy; (v) the non-guarantor subsidiaries of Realogy; (vi) elimination entries necessary to consolidate Holdings, Intermediate, Realogy and the guarantor and non-guarantor subsidiaries; and (vii) the Company on a consolidated basis. The guarantor subsidiaries of Realogy are comprised of 100% owned entities. Guarantor and non-guarantor subsidiaries are 100% owned by Realogy, either directly or indirectly. Non-guarantor entities are comprised of securitization entities, foreign subsidiaries, unconsolidated entities, insurance underwriter subsidiaries and qualified foreign holding corporations. The guarantor and non-guarantor financial information is prepared using the same basis of accounting as the consolidated financial statements except for the investments in consolidated subsidiaries which are accounted for using the equity method.

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2011

(In millions)

 

    Holdings     Intermediate     Realogy     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

             

Gross commission income

  $ —        $ —        $ —        $ 831      $ —        $ —        $ 831   

Service revenue

    —          —          —          140        71        —          211   

Franchise fees

    —          —          —          73        —          —          73   

Other

    —          —          —          38        2        —          40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    —          —          —          1,082        73        —          1,155   

Expenses

             

Commission and other agent-related costs

    —          —          —          547        —          —          547   

Operating

    —          —          —          273        51        —          324   

Marketing

    —          —          —          45        —          —          45   

General and administrative

    —          —          14        45        3        —          62   

Former parent legacy costs (benefit), net

    —          —          (3     —          —          —          (3

Restructuring costs

    —          —          —          3        —          —          3   

Depreciation and amortization

    —          —          2        44        —          —          46   

Interest expense/(income), net

    —          —          158        1        —          —          159   

Intercompany transactions

    —          —          1        (1     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    —          —          172        957        54        —          1,183   

Income (loss) before income taxes, equity in earnings and noncontrolling interests

    —          —          (172     125        19        —          (28

Income tax expense (benefit)

    —          —          (55     55        10        —          10   

Equity in earnings of unconsolidated entities

    —          —          —          —          (11     —          (11

Equity in (earnings) losses of subsidiaries

    28        28        (89     (19     —          52        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (28     (28     (28     89        20        (52     (27

Less: Net income attributable to noncontrolling interests

    —          —          —          —          (1     —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Holdings and Realogy

  $ (28   $ (28   $ (28   $ 89      $ 19      $ (52   $ (28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2010

(In millions)

 

    Holdings     Intermediate     Realogy     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

             

Gross commission income

  $ —        $ —        $ —        $ 751      $ —        $ —        $ 751   

Service revenue

    —          —          —          139        58        —          197   

Franchise fees

    —          —          —          67        —          —          67   

Other

    —          —          —          37        —          —          37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    —          —          —          994        58        —          1,052   

Expenses

             

Commission and otheragent-related costs

    —          —          —          490        —          —          490   

Operating

    —          —          —          279        36        —          315   

Marketing

    —          —          —          41        1        —          42   

General and administrative

    —          —          8        34        3        —          45   

Former parent legacy costs (benefit), net

    —          —          (6     —          —          —          (6

Restructuring costs

    —          —          —          2        —          —          2   

Depreciation and amortization

    —          —          2        47        —          —          49   

Interest expense/(income), net

    —          —          149        2        —          —          151   

Intercompany transactions

    —          —          1        (1     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    —          —          154        894        40        —          1,088   

Income (loss) before income taxes, equity in earnings and noncontrolling interests

    —          —          (154     100        18        —          (36

Income tax expense (benefit)

    —          —          (46     45        11        —          10   

Equity in earnings of unconsolidated entities

    —          —          —          —          (13     —          (13

Equity in (earnings) losses of subsidiaries

    33        33        (75     (20     —          29        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (33     (33     (33     75        20        (29     (33

Less: Net income attributable to noncontrolling interests

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Holdings and Realogy

  $ (33   $ (33   $ (33   $ 75      $ 20      $ (29   $ (33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2011

(In millions)

 

    Holdings     Intermediate     Realogy     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

             

Gross commission income

  $ —        $ —        $ —        $ 2,279      $ —        $ —        $ 2,279   

Service revenue

    —          —          —          375        192        —          567   

Franchise fees

    —          —          —          194        —          —          194   

Other

    —          —          —          120        5        —          125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    —          —          —          2,968        197        —          3,165   

Expenses

             

Commission and otheragent-related costs

    —          —          —          1,498        —          —          1,498   

Operating

    —          —          —          821        138        —          959   

Marketing

    —          —          —          141        1        —          142   

General and administrative

    —          —          41        137        11        —          189   

Former parent legacy costs (benefit), net

    —          —          (17     —          —          —          (17

Restructuring costs

    —          —          —          8        —          —          8   

Depreciation and amortization

    —          —          7        132        —          —          139   

Interest expense/(income), net

    —          —          495        4        —          —          499   

Loss on the early extinguishment of debt

    —          —          36        —          —          —          36   

Intercompany transactions

    —          —          3        (3     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    —          —          565        2,738        150        —          3,453   

Income (loss) before income taxes, equity in earnings and noncontrolling interests

    —          —          (565     230        47        —          (288

Income tax expense (benefit)

    —          —          (101     94        19        —          12   

Equity in earnings of unconsolidated entities

    —          —          —          —          (15     —          (15

Equity in (earnings) losses of subsidiaries

    287        287        (177     (41     —          (356     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (287     (287     (287     177        43        356        (285

Less: Net income attributable to noncontrolling interests

    —          —          —          —          (2     —          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Holdings and Realogy

  $ (287   $ (287   $ (287   $ 177      $ 41      $ 356      $ (287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2010

(In millions)

 

    Holdings     Intermediate     Realogy     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

             

Gross commission income

  $ —        $ —        $ —        $ 2,280      $ —        $ —        $ 2,280   

Service revenue

    —          —          —          367        151        —          518   

Franchise fees

    —          —          —          203        —          —          203   

Other

    —          —          —          121        2        —          123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    —          —          —          2,971        153        —          3,124   

Expenses

             

Commission and otheragent-related costs

    —          —          —          1,479        —          —          1,479   

Operating

    —          —          —          818        107        —          925   

Marketing

    —          —          —          136        2        —          138   

General and administrative

    —          —          38        134        8        —          180   

Former parent legacy costs (benefit), net

    —          —          (315     —          —          —          (315

Restructuring costs

    —          —          —          12        —          —          12   

Depreciation and amortization

    —          —          6        141        1        —          148   

Interest expense/(income), net

    —          —          453        5        —          —          458   

Other (income)/expense, net

    —          —          (1     (5     —          —          (6

Intercompany transactions

    —          —          4        (4     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    —          —          185        2,716        118        —          3,019   

Income (loss) before income taxes, equity in earnings and noncontrolling interests

    —          —          (185     255        35        —          105   

Income tax expense (benefit)

    —          —          (208     321        21        —          134   

Equity in earnings of unconsolidated entities

    —          —          —          —          (22     —          (22

Equity in (earnings) losses of subsidiaries

    8        8        31        (35     —          (12     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (8     (8     (8     (31     36        12        (7

Less: Net income attributable to noncontrolling interests

    —          —          —          —          (1     —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Holdings and Realogy

  $ (8   $ (8   $ (8   $ (31   $ 35      $ 12      $ (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Balance Sheet

As of September 30, 2011

(In millions)

 

    Holdings     Intermediate     Realogy     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

             

Current assets:

             

Cash and cash equivalents

  $ —        $ —        $ 3      $ 33      $ 68      $ (2   $ 102   

Trade receivables, net

    —          —          —          90        52        —          142   

Relocation receivables

    —          —          —          24        425        —          449   

Relocation properties held for sale

    —          —          —          17        —          —          17   

Deferred income taxes

    —          —          5        63        (2     —          66   

Intercompany note receivable

    —          —          —          46        19        (65     —     

Other current assets

    —          —          10        62        20        (1     91   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    —          —          18        335        582        (68     867   

Property and equipment, net

    —          —          19        147        3        —          169   

Goodwill

    —          —          —          2,613        —          —          2,613   

Trademarks

    —          —          —          732        —          —          732   

Franchise agreements, net

    —          —          —          2,858        —          —          2,858   

Other intangibles, net

    —          —          —          450        —          —          450   

Other non-current assets

    —          —          72        84        52        —          208   

Investment in subsidiaries

    (1,344     (1,344     8,189        187        —          (5,688     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ (1,344   $ (1,344   $ 8,298      $ 7,406      $ 637      $ (5,756   $ 7,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity (Deficit)

             

Current liabilities:

             

Accounts payable

  $ —        $ —        $ 8      $ 136      $ 14      $ (3   $ 155   

Securitization obligations

    —          —          —          —          332        —          332   

Intercompany note payable

    —          —          —          19        46        (65     —     

Due to former parent

    —          —          78        —          —          —          78   

Revolving credit facilities and current portion of long-term debt

    —          —          142        50        8        —          200   

Accrued expenses and other current liabilities

    —          —          285        300        36        —          621   

Intercompany payables

    —          —          2,127        (2,119     (8     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          —          2,640        (1,614     428        (68     1,386   

Long-term debt

    —          —          6,827        —          —          —          6,827   

Deferred income taxes

    —          —          (617     1,503        (1     —          885   

Other non-current liabilities

    —          —          66        54        23        —          143   

Intercompany liabilities

    —          —          726        (726     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    —          —          9,642        (783     450        (68     9,241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity (deficit)

    (1,344     (1,344     (1,344     8,189        187        (5,688     (1,344
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity (deficit)

  $ (1,344   $ (1,344   $ 8,298      $ 7,406      $ 637      $ (5,756   $ 7,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

As of December 31, 2010

(In millions)

 

<
    Holdings