SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

 

For the quarterly period ended September 30, 2013.

OR

 

For the transition period from                 to                 .

Commission file number 001-36101

      

RE/MAX Holdings, Inc.

(Exact name of registrant as specified in its charter)

      

 

   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

Yes  ¨    No  x

Indicate by check mark whether the registrant has 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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “ smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    

Yes  ¨    No  x

The number of outstanding shares of the registrant’s Class A common stock, par value $0.0001 per share, and Class B common stock, par value $0.0001, as of November 13, 2013 was 11,607,971 and 1, respectively.

      

   

   

                       

 

   

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TABLE OF CONTENTS

   

 

   

   

   

   

 

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PART I – FINANCIAL INFORMATION

   

Item 1. Financial Statements

RE/MAX HOLDINGS, INC.

Condensed Balance Sheet

(Unaudited)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed financial statements

   

   

   

 

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RE/MAX HOLDINGS, INC.

Condensed Statement of Income (Loss)

(Unaudited)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed financial statements

   

   

   

 

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RE/MAX HOLDINGS, INC.

Condensed Statement of Cash Flows

(Unaudited)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed financial statements

   

   

   

       

 

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RE/MAX HOLDINGS, INC.

Notes to Condensed Financial Statements

(Unaudited)

   

1. Organization

RE/MAX Holdings, Inc. (the “Corporation”) was formed as a Delaware corporation on June 25, 2013  and was capitalized on July 8, 2013. On October 7, 2013, the Corporation completed an initial public offering (the “IPO”) of 11,500,000 shares of Class A common stock at a public offering price of $22.00 per share  (“IPO”). A portion of the proceeds received by the Corporation during the IPO was used to acquire the business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”) and the remaining proceeds were used to purchase common membership interests in RMCO, LLC (“RMCO”) following the reorganization transactions described in Note 5, Subsequent Events. After the completion of the IPO, the Corporation’s sole asset is now 39.56% of the common membership units in RMCO. The Corporation’s only business is to act as the sole manager of RMCO and, in that capacity, the Corporation operates and controls all of the business and affairs of RMCO. As a result, on October 8, 2013, the Corporation began to consolidate the financial results of RMCO and its subsidiaries. The Corporation’s only source of cash flow from operations will be distributions from RMCO and management fees pursuant to a management services agreement between the Corporation and RMCO. As of September 30, 2013, the Corporation had not engaged in any business or other activities except in connection with its formation and the negotiation of the acquisition of the business assets of HBN and Tails.

   

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated balance sheet, statement of income (loss) and statement of cash flows have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not include all of the information required by GAAP or Securities and Exchange Commission rules and regulations for complete financial statements.  In the opinion of management these financial statements reflect all adjustments  necessary for a fair presentation of the balance sheet and results of operations for the interim period presented.

   

3. Stockholder’s Equity

As of September 30, 2013, the Corporation was authorized to issue 100 shares of common stock, par value $0.01 per share (“Common Stock”). Under the Corporation’s certificate of incorporation as in effect as of June 25, 2013, all shares of Common Stock were identical. On July 8, 2013, the Corporation issued one share of Common Stock in exchange for $1.00.

In connection with the IPO, the Corporation amended its charter to authorize capital stock  consisting of 180,000,000 shares of Class A common stock, par value $0.0001 per share (“Class A common stock”), 1,000 shares of Class B common stock, par value $0.0001 per share (“Class B common stock”), and 10,000,000 shares of preferred stock, par value $0.0001 per share. Each share of Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of the Corporation that is equal to two times the aggregate number of common units of RMCO held by such holder.

The voting rights of the Class B common stock will be reduced to one times the aggregate number of RMCO common units held by a holder from and after any of the following events: (i) the fifth anniversary of this initial public offering; (ii) the death of our Chairman and Founder David L. Liniger; or (iii) at such time as RIHI, Inc.’s (“RIHI”) ownership of RMCO common units is below 30% of the number of RMCO common units held by RIHI immediately after this offering.  Additionally, in the event that any common units of RMCO are validly transferred in accordance with the terms of the Fourth Amended and Restated RMCO, LLC agreement, the voting rights of the corresponding shares of Class B common stock to be transferred will be reduced to one times the aggregate number of RMCO common units held by such transferee, unless the transferee is David Liniger.

Immediately following the IPO, there were 11,500,000 shares of the Corporation’s Class A common stock issued and outstanding and one share of the Corporation’s Class B common stock issued and outstanding. Additionally, on October 1, 2013, the Corporation granted 107,971 restricted stock units to certain employees that vested upon grant but for which the underlying shares will not be issued until May 20, 2014. See Note 5, Subsequent Events.

   

 

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RE/MAX HOLDINGS, INC.

Notes to Condensed Financial Statements

(Unaudited)

4. Net Income per Share

The Corporation’s net income and weighted average shares outstanding for the period from July 8, 2013 to September 30, 2013 consists of the following:

   

 

   

The Corporation did not have any income attributable to the holders of Class A common stock from its inception through September 30, 2013.

   

5. Subsequent Events

On October 7, 2013, the Corporation completed the IPO of 11,500,000 shares of Class A common stock at a public offering price of $22.00 per share. Certain agreements and transactions associated with the IPO are set forth below:

Reorganization Transactions

In connection with the completion of the IPO, RMCO’s Third Amended and Restated Limited Liability Company Agreement, dated as of February 1, 2013 was amended and restated to, among other things, modify its capital structure as follows (collectively referred to as, the “Reorganization Transactions”):

 

 

 

 

 

Initial Public Offering

The IPO closed on October 7, 2013, and the Corporation raised a total of $253,000,000 in gross proceeds from the sale of 11,500,000 shares of Class A common stock at $22.00 per share, or $224,922,500 in net proceeds after deducting $17,077,500 of underwriting discounts and commissions and $11,000,000 of estimated offering expenses, which were incurred by RMCO in connection with the IPO.

The Corporation used $27,305,000 of the proceeds from the IPO to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisitions of the business assets of HBN and Tails. Immediately following the acquisitions of the business assets of HBN and Tails, the Corporation contributed such assets to RMCO in exchange for 1,330,977 common units of RMCO, reflecting the $22.00 per share IPO price net of underwriters’ commissions. The Corporation then used the remaining $208,617,500 of the net proceeds received from the IPO to purchase 10,169,023 common units in RMCO.  See Note 12, Subsequent Events of RMCO’s unaudited condensed consolidated financial statements for more information regarding RMCO’s use of proceeds.

 

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RE/MAX HOLDINGS, INC.

Notes to Condensed Financial Statements

(Unaudited)

Prior to the IPO, the Corporation did not engage in any business or activities except in connection with its formation and the negotiation of the acquisition of the business assets of HBN and Tails. The Corporation’s financial position, results of operations and cash flows included in the unaudited condensed financial statements do not reflect the transactions associated with the Corporation’s IPO. Subsequent to the IPO and related Reorganization Transactions, the Corporation will consolidate the financial results of RMCO and its subsidiaries, and the ownership interest of the other members of RMCO will be reflected as a non-controlling interest in the Corporation’s consolidated financial statements beginning October 8, 2013.

Tax Receivable Agreements

The Corporation entered into separate tax receivable agreements with the historical RMCO’s owners, Weston Presidio V, L.P. (“Weston Presidio” and, together with RIHI, the “Historical Owners”) and RIHI that will provide for the payment by the Corporation to the Historical Owners of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Corporation actually realizes, or in some circumstances is deemed to realize, as a result of an expected increase in its share of tax basis in RMCO’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreements, and deductions attributable to imputed and actual interest that accrues in respect of such payments. These tax benefit payments are not necessarily conditioned upon one or more of the Historical Owners maintaining a continued ownership interest in either RMCO or the Corporation. The Corporation expects to benefit from the remaining 15% of cash savings, if any, that it may actually realize. The substantive provisions of the separate tax receivable agreements that the Corporation entered into with each of its Historical Owners were substantially identical.

Management Services Agreement

In connection with the completion of the IPO, the Corporation entered into a management services agreement with RMCO pursuant to which the Corporation agreed to provide certain specific management services to RMCO. In exchange for the services provided, RMCO will reimburse the Corporation for compensation and other expenses of the Corporation’s officers and employees and for certain out-of-pocket costs. RMCO will also provide administrative and support services to the Corporation, such as office facilities, equipment, supplies, payroll and accounting and financial reporting. The management services agreement also provides that employees of the Corporation may participate in RMCO’s benefit plans, and that RMCO employees may participate in the Corporation’s equity incentive plan. RMCO will indemnify the Corporation for any losses arising from the Corporation’s performance under the management services agreement, except that the Corporation will indemnify RMCO for any losses caused by willful misconduct or gross negligence.

Equity-Based Awards

On October 1, 2013 the Corporation granted 107,971 restricted stock units at a value of $22.00 per unit to certain employees in connection with the Corporation’s IPO that vested upon grant, but for which the underlying shares will not be issued until May 20, 2014. Non-cash compensation expense of approximately $2,051,000 associated with these restricted stock units will be recognized during the fourth quarter of 2013, which reflects a discount for the lack of marketability of the restricted stock units.

In addition, on October 1, 2013, the Corporation granted 115,699 restricted stock units at a value of $22.00 per unit to its officers and employees, which will vest over a three year period and 18,184 restricted stock units at a value of $22.00 per unit to its directors, which will vest over a one year period. As a result of the vesting requirements associated with these restricted stock units, non-cash compensation expense of approximately $264,000 is expected to be recognized in the fourth quarter of 2013 and approximately $1,029,000, $754,000 and $691,000 of non-cash compensation expense is expected to be recognized during 2014, 2015, and 2016, respectively.

   

   

   

           

 

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RMCO, LLC
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except units)

   

 

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

   

 

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RMCO, LLC

AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(Unaudited)

(Amounts in thousands)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

       

 

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RMCO, LLC AND SUBSIDIARIES

Condensed Consolidated Statement of Redeemable Preferred Units and Members’ Deficit

(Unaudited)

(Amounts in thousands, except units)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

       

 

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RMCO, LLC

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

   

 

   

   

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

   

 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

 

Business

RMCO, LLC (a Delaware limited liability company) and subsidiaries (collectively, the “Company” or “RMCO”) are one of the world’s leading franchisors of residential and commercial real estate brokerage services throughout the United States (“U.S.”) and globally. The Company also operates real estate brokerage services businesses in the U.S. The Company’s revenue is derived from continuing franchise fees, annual dues from agents, broker fees, franchise sales and other franchise revenue (which consist of fees from initial sales of and renewals of franchises, regional franchise fees, preferred marketing arrangements, approved supplier programs and event-based revenue from training and other programs) and brokerage revenue (which consists of fees assessed to the Company’s owned brokerages for services provided to their affiliated real estate agents). A franchise grants the broker-owner a license to use the RE/MAX brand, trademark, promotional and operating materials and concepts.

The Company reports its operations in two reportable segments: (1) Real Estate Franchise Services and (2) Brokerage and Other. The Company’s Real Estate Franchise Services reportable segment comprises the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name. The Company’s Brokerage and Other reportable segment includes the Company’s brokerage services business, and reflects the elimination of intersegment revenue and other consolidation entries as well as corporate-wide professional services expenses.

RE/MAX Holdings, Inc. was formed as a Delaware corporation on June 25, 2013 and was capitalized on July 8, 2013. As of September 30, 2013, RE/MAX Holdings, Inc. had not engaged in any business or activities except in connection with its formation and the negotiation of the acquisition of the business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”). On October 1, 2013,  the U.S. Securities and Exchange Commission declared effective a registration statement relating to shares of Class A common stock of RE/MAX Holdings, Inc. to be offered and sold in an initial public offering (the “IPO”).  On October 7, 2013, RE/MAX Holdings, Inc. completed the IPO of 11,500,000 shares of Class A common stock at a public offering price of  at a price of $22.00 per share. RE/MAX Holdings, Inc. used a portion of the proceeds received from the IPO to acquire the business assets of HBN and Tails and contributed these assets to RMCO in exchange for common units in RMCO.  The remaining proceeds received by RE/MAX Holdings, Inc. were used to purchase common membership interests in RMCO following the RMCO reorganization transactions as described in Note 12, Subsequent Events. As a result, RE/MAX Holdings, Inc. became a member and sole manager of the Company and, in that capacity, operates and controls all of the business and affairs of the Company. Subsequent to the closing of the IPO, the results of the Company will be included in the consolidated financial statements of RE/MAX Holdings, Inc.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and comprise the condensed consolidated financial statements of the Company and have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2013, the results of its operations for the three and nine months ended September 30, 2013 and 2012, cash flows for the nine months ended September 30, 2013 and 2012 and changes in redeemable preferred units and members’ deficit for the nine months ended September 30, 2013. Interim results may not be indicative of full year performance.

 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas in which management uses assumptions include, among other things, the establishment of the allowances for doubtful trade accounts and notes receivable, the determination of the estimated lives of intangible assets, estimates used to calculate unit-based compensation expense, the estimates of the fair value of reporting units used in the annual assessment of goodwill and the fair value of assets acquired. Actual results could differ from these estimates.

Deferred offering costs

Through September 30, 2013, the Company incurred approximately $4,816,000 in costs related to the IPO. These costs have been deferred and were recorded as a reduction to the proceeds received from the IPO at the time of closing, which occurred on October 7, 2013. Deferred offering costs are included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets. No costs were deferred as of December 31, 2012.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), RE/MAX Holdings, Inc., including its subsidiaries, meets the definition of an emerging growth company. RE/MAX Holdings, Inc. and the Company have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). This amendment clarifies the applicable guidance for the release of cumulative translation adjustment into net earnings. When an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the entity is required to apply the guidance in FASB Accounting Standards Codification (“ASC”) Topic 830-30, Translation of Financial Statements, to release any related cumulative translation adjustment into net earnings. ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2013, the Company adopted ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). The adoption of ASU 2013-02 concerns only presentation and disclosure and did not have an impact on the Company’s consolidated financial position or results of operations.

   

 

Acquisition of RE/MAX of Texas

Effective December 31, 2012, the Company acquired certain assets of RE/MAX/KEMCO Partnership L.P. d/b/a RE/MAX of Texas (“RE/MAX of Texas”), including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of Texas. The Company acquired these assets in order to expand its owned and operated regional franchising operations. The purchase price was $45,500,000 and was paid in cash using proceeds from borrowings. The assets acquired constitute a business that was accounted for using the fair value acquisition method. The total purchase price was allocated to the assets acquired based on their estimated fair values. The excess of the total purchase price over the fair value of the identifiable assets acquired was recorded as goodwill. The goodwill recognized for RE/MAX of Texas is attributable to expected synergies and projected long-term revenue growth and relates entirely to the Real Estate Franchise Services segment.

 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

Purchase Price Allocation

The following table summarizes the estimated fair value of the assets acquired at the acquisition date (in thousands):

   

 

The valuation of acquired regional franchise agreements was derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation. The regional franchise agreements acquired were valued using an income approach and are being amortized over the remaining contractual term of approximately four years using the straight-line method. For the remaining assets acquired, fair value approximated carrying value.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of RE/MAX of Texas had occurred on January 1, 2012. The historical financial information has been adjusted to give effect to events that are (1) directly attributed to the acquisition, (2) factually supportable and (3) expected to have a continuing impact on the combined results. Such items include interest expense related to debt issued to fund the acquisition as well as additional amortization expense associated with the valuation of the acquired franchise agreement. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisition had actually occurred on that date, nor of the results that may be obtained in the future.

   

 

As described in Note 12, Subsequent Events, in connection with the IPO, on October 7, 2013, RE/MAX Holdings, Inc. acquired the business assets of HBN and Tails for $27,305,000 and contributed these assets to RMCO in exchange for 1,330,977 common units of RMCO valued at $27,305,000.

   

 

The following table provides the components of the Company’s intangible assets (in thousands):

   

 

Amortization expense for the three month periods ended September 30, 2013 and 2012 was $3,141,000 and $2,192,000, respectively. Amortization expense for the nine month periods ended September 30, 2013 and 2012 was $9,431,000 and $7,369,000, respectively.

 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

Based on the Company’s amortizable intangible assets as of September 30, 2013, the Company expects related amortization expense for the remainder of 2013, the four succeeding years and thereafter to approximate $3,142,000, $12,473,000, $12,262,000, $12,024,000, $8,162,000 and $23,823,000, respectively.

The Company performs its annual impairment analysis of goodwill as of August 31 each year or more often if there are indicators of impairment present. The Company tests each reporting unit for goodwill impairment. Reporting units are driven by the level at which management reviews operating results and are one level below the operating segment.  The Company’s impairment assessment begins with a qualitative assessment to determine if it is more likely than not that a reporting unit’s fair value is less than the carrying amount.  The initial qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results as well as other factors which might indicate that the reporting unit’s value has declined since the last assessment date.  If it is determined in the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the standard two-step quantitative impairment test is performed.  The first step of the quantitative impairment test consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required. If step one indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step is performed to measure the amount of goodwill impairment. Goodwill impairment exists when the estimated implied fair value of a reporting unit’s goodwill is less than its carrying value.

The Company determined the fair value of its reporting units utilizing the Company’s best estimate of future revenue, operating expenses, cash flows, market and general economic conditions as well as assumptions that it believes marketplace participants would utilize, including discount rates, cost of capital, and long term growth rates as we all other factors in its analyses. As a result of the first step of the Company’s goodwill impairment test as of August 31, 2013, the fair value of the Company’s reporting units significantly exceeded their carrying value. Thus, no indicators of impairment existed.

Amounts recorded as goodwill in the Company’s accompanying Condensed Consolidated Balance Sheets are attributable to the Real Estate Franchise Services reportable segment. The following table presents changes to goodwill for the nine months ended September 30, 2013 (in thousands):

   

 

   

 

Accrued liabilities consist of the following (in thousands):

 

   

 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

 

Debt consists of the following (in thousands):

   

 

Maturities of debt are as follows (in thousands):

   

 

On April 16, 2010, the Company entered into a credit agreement with several lenders and administered by a bank, collectively referred to herein as “The 2010 Senior Secured Credit Facility.” The 2010 Senior Secured Credit Facility consisted of a $215,000,000 term loan facility and a $10,000,000 revolving loan facility.

On December 31, 2012, the 2010 Senior Secured Credit Facility was amended providing for an additional term loan in an aggregate principal amount equal to $45,000,000. The proceeds were used to fund the acquisition of certain assets of RE/MAX of Texas. See Note 2, Acquisition, for additional disclosures regarding this acquisition.

On July 31, 2013, the Company entered into a new credit agreement with several lenders and administered by a bank, referred to herein as the “2013 Senior Secured Credit Facility.” In connection therewith, proceeds received were used to re-pay existing indebtedness pursuant to the Company’s 2010 Senior Secured Credit Facility. The 2013 Senior Secured Credit Facility consists of a $230,000,000 term loan facility and a $10,000,000 revolving loan facility. The proceeds provided by these term loans were used to refinance and repay existing indebtedness and for working capital, capital expenditures, acquisitions and general corporate purposes. Interest rates with respect to the term and revolving loans are based, at the Company’s option, on (a) adjusted LIBOR, provided that LIBOR shall be no less than 1% plus a maximum applicable margin of 3% or (b) ABR, provided that ABR shall be no less than 2%, which is equal to the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate; (2) the Federal Funds Effective Rate plus 0.5% or (3) calculated Eurodollar Rate plus 1.0%, plus a maximum applicable margin of 2%.  The applicable margin will be adjusted quarterly beginning in the first quarter of 2014 based on the Company’s total leverage ratio as defined in the 2013 Senior Secured Credit Facility. The 2010 Senior Secured Credit Facility was, and the 2013 Senior Secured Credit Facility is, structured as loan syndications, whereby several lenders individually loaned specific amounts to the Company and the Company is obligated to repay each individual lender. Therefore, the Company evaluated if the terms of amounts owed to each lender under the 2010 Senior Secured Credit Facility were substantially different than the amounts owed to each lender under the 2013 Senior Secured Credit Facility. For amounts owed to lenders with terms that were substantially different or for lenders that did not participate in the 2013 Senior Secured Credit Facility, the Company accounted for the contemporaneous exchange of cash as early extinguishments of debt and recorded a loss of $1,664,000 related to unamortized debt discount and issuance costs during the three and nine month periods ended September 30, 2013. For amounts owed to lenders with terms that were not substantially different, the Company accounted for the contemporaneous exchange of cash as a modification. In connection with the 2013 Senior Secured Credit Facility, the Company incurred costs of $3,219,000, of which $1,301,000 was recorded in “Debt issuance costs, net” in the accompanying Condensed Consolidated Balance Sheets and are being amortized to interest expense over the remaining term of the 2013 Senior Secured Credit Facility and the remaining $1,918,000 was expensed as incurred.

 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

The Company is required to make principal payments out of excess cash flow, as defined in the 2013 Senior Secured Credit Facility, as well as from the proceeds of certain asset sales, proceeds from the issuance of indebtedness and from insurance recoveries. As of September 30, 2013, the Company expects it will make an excess cash flow payment of $15,000,000 in the first quarter of 2014. Mandatory principal payments of $575,000 are due quarterly until the facility matures on July 31, 2020. During the nine month periods ended September 30, 2013 and 2012, the Company made mandatory principal excess cash flow prepayments in accordance with the 2010 Senior Secured Credit Facility of $8,000,000 and $6,123,500, respectively. The Company accounted for these mandatory principal prepayments as early extinguishments of debt and recorded a loss during the nine month periods ended September 30, 2013 and 2012 of approximately $134,000 and $136,000, respectively, related to unamortized debt discount and issuance costs. The Company may make optional prepayments of the term loan at any time; however, no such optional prepayments were made during the nine month periods ended September 30, 2013 or 2012.

The estimated fair value of the Company’s debt as of September 30, 2013 and December 31, 2012 represents the amount that would be paid to transfer or redeem the debt in an orderly transaction between market participants at that date and maximizes the use of observable inputs. The fair value of the Company’s debt was estimated using a market approach based on the amount at the measurement date that the Company would pay to enter into the identical liability, since quoted prices for the Company’s debt instruments are not available. As a result, the Company has classified the fair value of its 2013 Senior Secured Credit Facility as Level 2 of the fair value hierarchy. The carrying amounts of the Company’s Senior Secured Credit Facility are included in the Condensed Consolidated Balance Sheets in “Current portion of debt” and “Debt, net of current portion.” The carrying value of the Senior Secured Credit Facility was $228,957,000 and $232,326,000 as of September 30, 2013 and December 31, 2012, respectively. The fair value of the Senior Secured Credit Facility was $229,712,000 and $233,046,000 as of September 30, 2013 and December 31, 2012, respectively.

The Company had no borrowings drawn on the revolving loan facility during the nine month periods ended September 30, 2013 and 2012. The Company must pay a quarterly commitment fee equal to 0.5% on the average daily amount of the unused portion of the revolving loan facility.

   

 

Redeemable Preferred Units

At September 30, 2013, the Company had one series of redeemable preferred units outstanding (“Class A preferred units”) with an initial optional redemption date of April 16, 2014. The total number of authorized Class A preferred units was 150,000 and were held by Weston Presidio. As the holder of the outstanding Class A preferred units, Weston Presidio had voting rights and was entitled to receive a cumulative preferential yield of 10% per annum. As described in Note 12, Subsequent Events, in connection with the IPO, the Class A preferred units were converted into (i) a new preferred membership interest that reflected Weston Presidio’s liquidation preference  and (ii) a common interest that reflected Weston Presidio’s pro-rata share of the residual equity value of RMCO. On October 7, 2013, the Company used the proceeds it received from RE/MAX Holdings, Inc. to pay Weston Presidio’s $49,850,000 liquidity preference associated with its preferred membership interest and to fully redeem all of its outstanding common membership interests at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts, totaling $76,931,250.  

Common Units

As of September 30, 2013, the total number of authorized Class B common units was 900,000 of which 52,500 were reserved for issuance under a unit option plan. As of September 30, 2013, the Company had granted options for 31,500 Class B common units under its 2011 Unit Option Plan to certain employees of one of its wholly owned subsidiaries. See Note 7, Equity-Based Compensation Plan, for further disclosure regarding the unit options granted by the Company during 2012. The remaining 847,500 authorized Class B common units were issued and outstanding with no par value and were held by RIHI. RIHI, in its capacity as a holder of Class B common units, had voting rights, was entitled to receive distributions subject to certain limitations as defined by RMCO’s Third Amended and Restated Limited Liability Company Agreement, and, upon liquidation or dissolution, was entitled to receive assets available for distribution. There were no mandatory redemption or sinking fund provisions with respect to such Class B common units. The Class B common units were subordinate to the Class A preferred units, to the extent of the preference associated with such Class A units, with respect to distributions and rights upon liquidation, winding up, and dissolution of the Company.

 

 18 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

As described in Note 12, Subsequent Events, and the Reorganization Transactions which occurred in connection with the IPO, all outstanding RMCO Class B common units were exchanged for newly issued common units of RMCO. Additionally, RMCO effectuated a 25 for 1 split of the then existing number of outstanding newly issued common units of RMCO so that one common unit could be acquired with the net proceeds received in the IPO from the sale of one share of RE/MAX Holdings, Inc.’s Class A common stock, after the deduction of underwriting discounts and commissions.  

Accumulated Other Comprehensive Income

As of September 30, 2013 and December 31, 2012, the ending balance in “Accumulated other comprehensive income” in the accompanying Condensed Consolidated Balance Sheets of $1,563,000 and $1,747,000, respectively, was entirely related to foreign currency translation adjustments.

   

 

During 2012, the Company adopted an equity-based compensation plan (the “Plan”) pursuant to which the Company’s Board of Managers may grant unit options. Through September 30, 2013, the Company had only granted options settleable in units. The Plan authorizes grants to purchase up to 52,500 units of authorized but unissued common units. Under the terms of the Plan, the exercise price of options granted under the Plan can be no less than the fair value of the underlying security on the date of grant. The term of the option cannot exceed 10 years, and the options will vest as specified in the option grant agreement. At September 30, 2013, there were 21,000 additional unit options available for the Company to grant under the Plan.

The grant-date fair value of each option award was estimated using the Black-Scholes-Merton option pricing model. No option awards were granted during the nine months ended September 30, 2013. The assumptions for 2012 grants are provided in the following table. On the grant date, the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term of the option. As such, the “simplified” method as outlined in the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin No. 110 was used to derive the expected term. Since the Company’s units were not publicly traded and its units were not traded privately, expected volatility was estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option was based on the U.S. Treasury yield curve at the date of grant.

   

 

The grant-date estimated fair value of options granted during the year ended 2012 was $56.83. A portion of the options granted in 2012 vested on the grant date, and the remaining options vested on June 15, 2013. Total compensation expense on the options granted in 2012 recognized during the nine months ended September 30, 2013 was $701,000. As the options were granted in the fourth quarter of 2012, no compensation expense was recognized during the nine months ended September 30, 2012. As of September 30, 2013, there was no unrecognized compensation cost related to unit options granted under the Plan. In October 2013 and in connection with the IPO and the Reorganization Transactions, the unit options were split 25 for 1 and then substituted for 787,500 options to acquire shares of RE/MAX Holdings, Inc.’s Class A common stock.

   

 

Commitments

The Company leases offices and equipment under noncancelable operating leases, subject to certain provisions for renewal options and escalation clauses.

 

 19 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

In 2010, the Company became the primary lessee for all facilities located on its corporate headquarters property and issued subleases to two retail tenants already established on the property. The subleases range from 4,000 square feet to 10,500 square feet, have initial lease terms ranging from 5 to 10 years and renewal options ranging from two 5-year renewal options to nine 5-year renewal options. Anticipated revenue from these subleases exceeds the expected costs that will be incurred by the Company.

During March 2011, the Company entered into a sublease agreement with an unrelated third party to lease up to 20,000 square feet of the office space on its corporate headquarters property. The estimated costs the Company expected to incur related to the subleased space exceeded the anticipated revenue the Company expected to receive under the sublease agreement. As such, the Company recorded a liability with the related loss on the sublease of approximately $1,932,000. The liability was determined using a risk-free rate to discount the estimated future net cash flows, consisting of the minimum lease payments to the lessor, estimated executory costs related to the subleased space and anticipated payments the Company expected to receive under the sublease agreement. In November 2012, the sublease was terminated prior to its expiration date. As a result, the Company commenced efforts to market the office space for sublease with a new tenant. As of September 30, 2013, a sublease agreement was not executed, as such, the Company did not record an adjustment to the existing liability. As of September 30, 2013 and December 31, 2012, the short-term portion of the liability was approximately $375,000 and $351,000, respectively, and is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. As of September 30, 2013 and December 31, 2012, the long-term portion of the liability was approximately $689,000 and $972,000, respectively, and is included in “Other liabilities” in the accompanying Condensed Consolidated Balance Sheets.

During 2008, the Company closed several real estate brokerage offices in the Pacific Northwest and Washington, DC areas of the U.S. Subsequent to 2008, the Company closed four additional real estate brokerage offices in the Pacific Northwest and Washington, DC areas. In connection with these office closures, the Company abandoned office leases with remaining lease terms of eleven months to eight years. During the nine months ended September 30, 2013, the Company abandoned an additional two leases for offices located in the Pacific Northwest with remaining lease terms of three months. The Company recorded a liability, initially measured at its estimated fair value, for costs that will continue to be incurred under these contracts for the remaining lease terms with the related charge recorded to operating expenses in the accompanying consolidated financial statements. At September 30, 2013 and December 31, 2012, total future cash payments were estimated to be $663,000 and $1,061,000, respectively. This liability will be increased by accreting charges over the terms of the leases via charges to rent expense, based on discount rates ranging from 2.75% to 18.03%, and will be reduced by the actual lease payments made. The following table presents a rollforward of the estimated fair value liability established for these costs from January 1, 2013 to September 30, 2013 (in thousands):

   

 

Litigation

The Company is subject to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), the Company has determined that it does not have material exposure, or it is unable to develop a range of reasonably possible losses.

Other Contingencies

The Company maintains a self-insurance program for health benefits. As of September 30, 2013 and December 31, 2012, the Company recorded a liability of $278,000 and $360,000, respectively, related to this program.

 

 20 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

Tax Matters

The Company is a “flow-through” entity for tax purposes. As such, U.S. federal and state income taxes on net domestic taxable earnings are the obligation of the Company’s members. Accordingly, no provision for U.S. income taxes has been made in the accompanying condensed consolidated financial statements; however, the Company makes distributions to its members to enable them to satisfy their tax obligations. On September 30, 2013, the Company agreed to make tax distributions to Weston Presidio and RIHI of $1,000,000 and $5,650,000, respectively to satisfy each member’s tax obligations for the period from January 1, 2013 through the closing date of the IPO. The liability for this tax distribution has been recorded in “Income Taxes Payable” in the accompanying Condensed Consolidated Balance Sheets.

In contrast to the Company’s domestic entities, the Company’s foreign entities are taxable entities. Income taxes incurred by the foreign subsidiaries are recorded in the “Provision for income taxes” in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of September 30, 2013, the Company does not believe it has any significant uncertain tax positions.

   

 

In July 2012, the Company entered into a guarantee of performance by Tails d/b/a RE/MAX Central Atlantic Region, Inc. of all of the obligations under the franchise registration in the Commonwealth of Virginia, and all of the preopening obligations under the franchise agreements executed at any time from July 23, 2012 until such time that this guarantee is no longer required by the Commonwealth of Virginia. The Company did not incur any payments under this guarantee in the three and nine month periods ended September 30, 2013 or 2012, respectively and does not anticipate that it will incur any payments through the duration of the guarantee.

In May 2013, the Company entered into a guarantee of the full and prompt payment and performance when due of all obligations due to a financial institution under a commercial line-of-credit agreement and note entered into by the Company’s equity-method investee, in which the Company has a 50% interest. The term of the line-of-credit agreement is twelve months and the total amount of advances requested and unpaid principal balance cannot exceed $12,500,000. The line of credit bears interest at 0.50% over the financial institution’s base rate with a floor of 4.0%. The Company had entered into a similar guarantee during May 2012, which expired as of May 2013. The outstanding balance on the line of credit was approximately $3,225,000 and $9,285,000 as of September 30, 2013 and December 31, 2012, respectively. The Company did not incur any payments under this guarantee in the nine months ended September 30, 2013 and does not anticipate that it will incur any payments through the duration of the guarantee.

   

 

The Company’s real estate brokerage operations pay advertising fees to regional and international advertising funds, which promote the RE/MAX brand. These advertising funds are corporations owned by a majority stockholder of RIHI as trustee for RE/MAX agents. This stockholder does not receive any compensation from these corporations, as all funds received by the corporations are required to be spent on advertising for the respective regions. During the three months ended September 30, 2013 and 2012, the Company’s real estate brokerage operations paid $286,000 and $292,000, respectively, to these advertising funds. During the nine months ended September 30, 2013 and 2012, the Company’s real estate brokerage operations paid $859,000 and $865,000, respectively, to these advertising funds. These payments are included in “Selling, operating and administrative” expenses in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

The Company’s real estate brokerage operations in the Washington, DC area pay regional continuing franchise fees, broker fees and franchise sales revenue, as do all other RE/MAX franchisees, to a regional franchisor, Tails. Several of the Company’s officers and stockholders of RIHI were also stockholders and officers of Tails. During the three months ended September 30, 2013 and 2012, the real estate brokerage operations expensed $97,000 and $74,000, respectively, in fees to Tails. During the nine months ended September 30, 2013 and 2012, the real estate brokerage operations expensed $244,000 and $196,000, respectively,

 

 21 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

in fees to Tails. These payments are included in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). In addition, the Company’s owned real estate brokerage operations in the Washington DC area record a corresponding payable to Tails and its affiliated regional advertising fund. As of September 30, 2013 and December 31, 2012, the amount of the payable was $2,325,000 and $2,270,000, respectively, and is included in “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets.

The Company receives continuing franchise fees, broker fees, franchise sales and other franchise revenue from regional franchisors. Several of the Company’s officers and stockholders of RIHI were also stockholders and officers of two of these regional franchisors. During the three months ended September 30, 2013 and 2012, the Company received $912,000 and $858,000, respectively, in revenue from these entities. During the nine months ended September 30, 2013 and 2012, the Company received $2,648,000 and $2,550,000, respectively, in revenue from these entities. These amounts are included in continuing franchise fees, broker fees and franchise sales revenue in the accompanying Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). As described in Note 12, Subsequent Events, on October 7, 2013, the business assets of these two regional franchisors were acquired by RE/MAX Holdings, Inc. and contributed to RMCO.

Prior to 2013, the Company paid an annual sponsorship fee to Sanctuary, Inc., a private golf course owned by the majority stockholders of RIHI. The Company was named as the presenting sponsor of all charity golf tournaments held at Sanctuary, Inc. Further, the majority stockholders have made and continue to make the golf course available to the Company for business purposes. During the nine months ended September 30, 2013, the majority stockholders of RIHI who own Sanctuary, Inc. allowed the Company to use the golf course for business purposes at no charge. During the three and nine months ended September 30, 2012, the Company paid $283,000 and $878,000, respectively in sponsorship fees and green fees to Sanctuary, Inc.

The Company also provides services to certain affiliated entities such as accounting, legal, marketing, technology, human resources and public relations as it allows these companies to share its leased office space. During the three months ended September 30, 2013 and 2012, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $838,000 and $828,000, respectively. During the nine months ended September 30, 2013 and 2012, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $2,459,000 and $2,515,000, respectively. In these cases, the Company bills affiliated companies for their actual or pro rata share of such expenses. Such amounts are generally paid within 30 days and no such amounts were outstanding at September 30, 2013 or December 31, 2012. In addition, affiliated regional franchisors have current outstanding continuing franchise fees, broker fees and franchise sales revenue amounts due to the Company. Such amounts are included in the “Accounts receivable from affiliates” and “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets and comprise the balances from the following entities (in thousands):

   

 

In February 2013, the Company engaged Perella Weinberg Partners L.P. (“Perella Weinberg”), a FINRA member, to serve as its financial advisor in connection with the IPO.  Two members of the Company’s Board of Managers are partners at an affiliate of Perella Weinberg.  The engagement of Perella Weinberg as a financial advisor was approved by the independent members of the Company’s Board of Managers.  For the services rendered during the three and nine months ended September 30, 2013, the Company paid or will pay Perella Weinberg $76,000 and $216,000, respectively.  In addition, on October 7, 2013, the Company paid Perella Weinberg a completion fee of $632,500 when the IPO closed.

 

 22 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

   

 

The Company has two reportable segments, (1) Real Estate Franchise Services and (2) Brokerage and Other. Management evaluates the operating results of the Company’s reportable segments based upon revenue and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”). The Company’s presentation of Adjusted EBITDA may not be comparable to similar measures used by other companies.

Adjusted EBITDA for the reportable segments excludes depreciation, amortization, interest and taxes and is adjusted for items in a manner consistent with the calculation of the Company’s compliance with debt covenants. Adjusted EBITDA for the reportable segments is also a key factor that is used by the Company’s internal decision makers to (i) determine how to allocate resources to segments and (ii) evaluate the effectiveness of management for purposes of annual and other incentive compensation plans. The additional items that are adjusted to determine Adjusted EBITDA for the reportable segments include gains and losses on the sale of assets and sublease activity, gains and losses on the early extinguishment of debt, depreciation expense, interest expense, loss on the sale of assets and loss on the extinguishment of debt from non-controlling interest, stock-based compensation, non-cash deferred rent expense and acquisition transaction and reorganization costs. The Company’s Real Estate Franchise Services segment comprises the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name. All of the brokerage offices in the Real Estate Franchise Services segment are franchised. The Company’s Brokerage and Other reportable segment includes the Company’s brokerage services business, the elimination of intersegment revenue and other consolidation entries as well as corporate-wide professional services expenses.

The following tables present the results of the Company’s reportable segments for the three and nine months ended September 30, 2013 and 2012, respectively (in thousands):

   

 

 

 

   

 

 

   

 

 23 

---

RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

   

 

   

 

On October 7, 2013, RE/MAX Holdings, Inc. completed the IPO of 11,500,000 shares of Class A common stock at a public offering  price of  $22.00 per share. Certain transactions and agreements associated with the IPO are set forth below:

Reorganization Transactions

In connection with the completion of the IPO, RMCO’s Third Amended and Restated Limited Liability Company Agreement, dated as of February 1, 2013 was amended and restated to, among other things, modify its capital structure as follows (collectively referred to, the “Reorganization Transactions”):

 

 

 

 

 

Initial Public Offering

The IPO closed on October 7, 2013, and RE/MAX Holdings, Inc. raised a total of $253,000,000 in gross proceeds from the sale of 11,500,000 shares of Class A common stock at $22.00 per share, or $224,922,500 in net proceeds after deducting $17,077,500 of underwriting discounts and commissions and $11,000,000 of estimated offering expenses.

RE/MAX Holdings, Inc. used $27,305,000 of the proceeds from the IPO to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisitions of the business assets of HBN and Tails, which occurred on October 7, 2013. Immediately following the acquisitions of the business assets of HBN and Tails, RE/MAX Holdings, Inc. contributed such assets to RMCO in exchange for 1,330,977 common units of RMCO reflecting the $22.00 public

 

 24 

---

RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

offering price per share of RE/MAX Holdings, Inc. Class A common stock, less underwriting discounts. RE/MAX Holdings, Inc. acquired the business assets of HBN and Tails and contributed the assets to the Company in order to expand the Company’s owned and operated regional franchising operations. The assets acquired constitute a business accounted for using the fair value acquisition method. The preliminary purchase price has been allocated to the assets acquired based on a preliminary estimate of their estimated fair values and is subject to change. The excess of the total purchase price over the fair value of the identifiable assets acquired was recorded as goodwill. The goodwill recognized for the acquisitions of HBN and Tails is attributable to expected synergies and projected long-term revenue growth and relates entirely to the Real Estate Franchise Services segment.

The following table summarizes the preliminary estimated fair value of the assets acquired at the acquisition date (in thousands):

   

 

RE/MAX Holdings, Inc. then used the remaining $208,617,500 of the net proceeds received from the IPO to purchase 10,169,023 common units of RMCO. Of the $208,617,500 of proceeds received by RMCO from RE/MAX Holdings, Inc., $11,000,000 was reserved by RMCO to pay estimated offering expenses. The remaining $197,617,500 of proceeds was used as follows: (i) $49,850,000 was used to pay the liquidity preference associated with Weston Presidio’s preferred membership interest in RMCO; and (ii) $147,767,500 was used to redeem common units of RMCO from Weston Presidio and RIHI at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts.

Prior to the IPO, RE/MAX Holdings, Inc. did not engage in any business or activities except in connection with its formation and the negotiation of the acquisition of the business assets of HBN and Tails. Subsequent to the IPO and related reorganization and offering transactions, RE/MAX Holdings, Inc. will consolidate the financial results of RMCO and its subsidiaries, and the ownership interest of the other members of RMCO will be reflected as a non-controlling interest in RE/MAX Holdings, Inc.’s consolidated financial statements beginning October 8, 2013.

In connection with the successful completion of the IPO, the Company paid $528,000 in cash bonuses to its employees.

Tax Receivable Agreements

RE/MAX Holdings, Inc. entered into separate tax receivable agreements with Weston Presidio and RIHI (collectively, the “Historical Owners”), that will provide for the payment by RE/MAX Holdings, Inc. to the Historical Owners of RMCO of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that RE/MAX Holdings, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of an expected increase in its share of tax basis in RMCO’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreements, and deductions attributable to imputed and actual interest that accrues in respect of such payments. These tax benefit payments are not necessarily conditioned upon one or more of the Historical Owners maintaining a continued ownership interest in either RMCO or RE/MAX Holdings, Inc. RE/MAX Holdings, Inc. expects to benefit from the remaining 15% of cash savings, if any, that it may actually realize. The  provisions of the separate tax receivable agreements that RE/MAX Holdings, Inc. entered into with each of its Historical Owners were identical.

 

 25 

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RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

Management Services Agreement

In connection with the completion of the IPO, the Company entered into a management services agreement with RE/MAX Holdings, Inc. pursuant to which RE/MAX Holdings, Inc. will agree to provide certain specific management services to the Company. In exchange for the services provided, the Company will reimburse RE/MAX Holdings, Inc. for compensation and other expenses of RE/MAX Holdings, Inc.’s officers and employees and for certain out-of-pocket costs. The Company will also provide administrative and support services to RE/MAX Holdings, Inc., such as office facilities, equipment, supplies, payroll and accounting and financial reporting. The management services agreement further provides that employees of RE/MAX Holdings, Inc. may participate in the Company’s benefit plans, and that the Company’s employees may be entitled to compensation in the form of equity awards issued by RE/MAX Holdings, Inc. The Company will indemnify RE/MAX Holdings, Inc. for any losses arising from our performance under the management services agreement, except that RE/MAX Holdings, Inc. will indemnify the Company for any losses caused by willful misconduct or gross negligence.

   

   

   

   

 

 26 

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Item 1a.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

We derived the unaudited pro forma condensed consolidated financial information set forth below by the application of pro forma adjustments to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The unaudited pro forma condensed consolidated statement of income for the nine months ended September 30, 2013 and the unaudited pro forma condensed consolidated balance sheet as of September 30, 2013 present our consolidated results of operations and financial position to give pro forma effect to the Reorganization Transactions (as defined below), the shares of Class A common stock sold in our initial public offering (the “IPO”), and the application of the net proceeds from the IPO, including the acquisitions of the business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”), as if all such transactions had been completed as of January 1, 2013 with respect to the unaudited condensed consolidated pro forma statement of income and as of September 30, 2013 with respect to the unaudited pro forma condensed consolidated balance sheet. The unaudited condensed consolidated pro forma statement of income for the twelve months ended December 31, 2012 is included the prospectus dated October 1, 2013, filed with the U.S. Securities and Exchange Commission (“SEC”) on October 3, 2013 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”).  The unaudited pro forma condensed consolidated financial information reflects pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial information should be read together with our unaudited condensed financial statements and related notes, the RMCO, LLC (“RMCO”) unaudited condensed consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this Quarterly Report on Form 10-Q.

The unaudited pro forma condensed consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma condensed consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Reorganization Transactions and IPO, as well as the use of the net proceeds from the IPO, occurred on the dates assumed. Refer to Note 12 of the RMCO unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. The unaudited pro forma condensed consolidated financial information also does not project our results of operations or financial position for any future period or date.

The pro forma adjustments principally give effect to the following items:

 

 

 

 

 

 

 

   

   

   

 

 27 

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RE/MAX Holdings, Inc.

Pro Forma Condensed Consolidated Statement of Income

Nine months ended September 30, 2013

(Unaudited)

(Amounts in thousands)

   

 

   

The accompanying notes are an integral part of, and should be read together with, this unaudited pro forma condensed consolidated financial information.

   

   

   

 

 28 

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RE/MAX Holdings, Inc.

Pro Forma Condensed Consolidated Balance Sheet

As of September 30, 2013

(Unaudited)

(Amounts in thousands, except units and shares)

   

   

   

   

   

   

 

 

 29 

---

RE/MAX Holdings, Inc.

Pro Forma Condensed Consolidated Balance Sheet

As of September 30, 2013

(Unaudited)

(Amounts in thousands, except units and shares)

   

   

 

The accompanying notes are an integral part of, and should be read together with, this unaudited pro forma condensed consolidated financial information.

   

   

   

       

 

 30 

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RE/MAX Holdings, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements

(Unaudited)

   

Basis of Presentation and Description of Transactions

The IPO closed on October 7, 2013, pursuant to which RE/MAX Holdings, Inc. raised a total of $253,000,000 in gross proceeds from the sale of 11,500,000 shares of Class A common stock at $22.00 per share or $224,922,500 in net proceeds after deducting $17,077,500 of underwriting discounts and commissions and $11,000,000 of estimated offering expenses, which were incurred by RMCO in connection with the IPO. Pursuant to the IPO, we offered and sold 11,500,000 shares of Class A common stock.

RE/MAX Holdings, Inc. used $27,305,000 of the net proceeds of the IPO to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisitions of HBN and Tails. Immediately following the completion of the acquisitions of the business assets of HBN and Tails, such assets were contributed to RMCO in exchange for a number of newly issued common units of RMCO valued at $27,305,000, which reflects the IPO price of $22.00 per share, net of underwriters’ commissions.

All of the remaining net proceeds of the IPO were used to purchase newly issued common units from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. RMCO used a portion of the net proceeds it received from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio and to satisfy its liquidation preference associated with those preferred membership units which was $49,850,000. Following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO then redeemed all common units held by Weston Presidio and used the remaining net proceeds received less $11,000,000 which was reserved for the payment of IPO expenses, to redeem common units of RMCO from RIHI, Inc. (“RIHI”) at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts.

   

1. Historical Results of Operations and Financial Position

Condensed consolidated statement of income data for the nine months ended September 30, 3013 and condensed consolidated balance sheet data as of September 30, 2013 for RMCO were derived from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The historical HBN and Tails results of operations for the nine months ended September 30, 2013 and the historical financial position of HBN and Tails as of September 30, 2013 were derived from the HBN and Tails unaudited financial statements.

   

2. Pro Forma Adjustments for HBN and Tails Transactions

The historical results of operations of HBN and Tails have been adjusted to give pro forma effect to events that are (i) directly attributable to the acquisitions of HBN and Tails, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results, as if the HBN and Tails acquisitions occurred on January 1, 2013 (referred to as “Pro Forma Adjustments for HBN and Tails Acquisitions”).

Unaudited Pro Forma Condensed Consolidated Statement of Income – Nine-month Period Ended September 30, 2013

 

 

 

 

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RE/MAX Holdings, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements

(Unaudited)

Unaudited Pro Forma Condensed Consolidated Balance Sheet – As of September 30, 2013

 

   

 

The valuation of the re-acquired regional franchise agreements were valued using an income approach and will be amortized over the remaining contractual term of approximately 14 years. The estimate of the fair values is preliminary and may change.

   

3. Pro Forma Offering Adjustments

The Pro Forma RE/MAX Holdings, Inc. condensed consolidated financial information includes the Historical Results of Operations and Financial Position of RMCO and the Pro Forma Adjustments for HBN and Tails Acquisitions and gives further effect to the following (referred to as “Pro Forma Offering Adjustments”): (i) the use of all of the remaining net proceeds from our IPO, after deducting underwriting discounts to purchase newly issued common units of RMCO from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts; (ii) RMCO’s subsequent use of $49,850,000 of the net proceeds it received from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio, which represent Weston Presidio’s liquidation preference associated with those preferred membership units and the complete redemption of Weston Presidio’s remaining common membership equity interest at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts totaling $76,931,250; and (iii) subsequent to RMCO’s redemption of all of the outstanding preferred and common membership units in RMCO from Weston Presidio, RMCO used the remaining net proceeds from the IPO, less $11,000,000 which was reserved for the payment of IPO expenses, to redeem common units of RMCO from RIHI at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts.

Unaudited Pro Forma Condensed Consolidated Statement of Income – Nine months ended September 30, 2013

 

 

   

 

 

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RE/MAX Holdings, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet – As of September 30, 2013

 

   

 

 

 

 

 

 

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RE/MAX Holdings, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

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RE/MAX Holdings, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements

(Unaudited)

 

 

   

 

   

   

   

   

 

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited condensed financial statements of RE/MAX Holdings, Inc. and the related notes thereto and the unaudited condensed consolidated financial statements of RMCO, LLC and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2012 included in our prospectus dated October 1, 2013, filed with the U.S. Securities and Exchange Commission (“SEC”) on October 3, 2013 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”) (File No. 333-190699). This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. For example, forward-looking statements include statements we make relating to:

 

 

 

 

 

 

 

 

 

 

 

Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Significant Transactions

The historical results of operations discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of RMCO, LLC and its consolidated subsidiaries (the “Company,” “RMCO,” “we,” “our” or “us”). On October 7, 2013,  RE/MAX Holdings, Inc. issued and sold 11,500,000 shares of Class A common stock at a public offering price of $22.00 per share in its initial public offering (the “IPO”). Prior to the IPO, RMCO was wholly-owned by its previous owners, Weston Presidio V. L.P. (“Weston Presidio”) and RIHI, Inc. (“RIHI”). The net offering proceeds to RE/MAX Holdings, Inc. from the IPO, after deducting underwriting discounts and commissions totaling approximately $17.1 million and offering expenses totaling approximately $11.0 million, were approximately $224.9 million. After the consummation of the IPO, the holders of RE/MAX Holdings., Inc.’s Class A common stock collectively held 100% of its economic interests and have 24.66% of the total outstanding voting power of RE/MAX Holdings, Inc. The holder of RE/MAX Holdings, Inc.’s Class B common stock had the remaining 75.34% of the total outstanding voting power of RE/MAX Holdings, Inc.   

RE/MAX Holdings, Inc.  used $27.3 million of the net proceeds from the IPO to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisitions of the business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”). The remaining $197.6 million of net proceeds was used to purchase newly issued common units of RMCO from RMCO at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts. RMCO used the proceeds it received to pay a $49.9 million liquidity preference associated with RMCO’s preferred membership interest and $147.8 million to redeem common units in RMCO, at a price per common unit equal to the public offering price per share of RE/MAX Holdings, Inc.’s Class A common stock, less underwriting discounts.

 

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In connection with the completion of the IPO, RE/MAX Holdings, Inc. became a member and the sole manager of RMCO. As the sole manager of RMCO, RE/MAX Holdings, Inc. now controls its business and affairs and, therefore,  RE/MAX Holdings, Inc. will consolidate its financial results. However, RIHI, a former member of RMCO, retained common units in RMCO representing a collective 60.44% equity interest in RMCO, and as a result, RIHI’s collective interest will be reflected as a non-controlling interest in RE/MAX Holdings, Inc.’s consolidated financial statements. RE/MAX Holdings, Inc.’s net income will represent its proportionate share of RMCO’s pre-tax net income beginning on October 7, 2013 and its sole asset will be its corresponding controlling equity interest in RMCO.

Business Overview

We are one of the world’s leading franchisors of real estate brokerage services. Our business strategy is to recruit and retain agents and sell franchises. Our franchisees operate under the RE/MAX brand name which has held the number one market share in the U.S. and Canada since 1999 as measured by total residential transaction sides completed by our agents.

Our financial results are driven by the number of agents in our global network. The majority of our revenue is derived from fixed, contractual fees and dues paid to us based on the number of agents in our franchise network.

Our current growth strategies include the following initiatives:

 

 

 

 

As a franchisor (less than 1% of the brokerages in the U.S. RE/MAX system are owned by us), we maintain a low fixed-cost structure which enables us to generate high margins and helps us drive significant operating leverage through incremental revenue growth as reflected in our financial results.

RMCO operates in two reportable segments, (1) Real Estate Franchise Services and (2) Brokerage and Other. The Real Estate Franchise Services reportable segment comprises the operations of our owned and independent global franchising operations. The Brokerage and Other reportable segment contains the operations of our 21 owned brokerage offices in the U.S. which represent less than 1% of RE/MAX brokerages in the U.S., the results of operations of a mortgage brokerage company in which we own a non-controlling interest, the elimination of intersegment revenue and other consolidation entities, as well as corporate and professional services expenses. Our reportable segments represent our operating segments for which separate financial information is available and which is utilized on a regular basis by our management to assess performance and to allocate resources.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results, including agent count, revenue and Adjusted EBITDA.

Agent Count. Agent count reflects the number of licensed agents who have active, independent contractual relationships with RE/MAX offices at a particular time. The majority of our revenue is derived from recurring fixed fee streams we receive from our franchisees and agents that are closely correlated to our aggregate agent count.

Factors Affecting Our Consolidated Operating Results

Various factors affected our results for the periods presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” including the following:

Changes in Agent Count. The majority of our revenue is derived from fees and dues based on the number of agents in the RE/MAX network. Due to the low fixed cost structure of our franchise model, the addition of new agents generally requires little incremental investment in capital or infrastructure. Accordingly, the number of agents in our network (particularly in our owned U.S. and Canadian regions) is the most important factor affecting our results of operations and the addition of new agents can favorably impact our revenue and Adjusted EBITDA. Historically, the number of agents in the residential real estate industry has been highly correlated with overall home sale transaction activity. Our agent count decreased during the downturn in the U.S. housing sector, but has recently returned to growth as the market has started to recover. However, we do not use our overall home sale transaction activity on a per agent or aggregate basis in order to evaluate our results of operations. We believe that the number of agents in our network is the primary statistic that drives our revenue.

 

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Cyclical Residential Real Estate Market. The residential real estate industry in which we operate is cyclical and, consequently, our revenue is affected by general conditions within the residential real estate market.

 

 

Changes in Aggregate Fee Revenue Per Agent. A significant portion of our revenue is tied to various fees that are ultimately tied to the number of agents, including annual dues, continuing franchise fees and certain transaction or service based fees. Our average annual revenue per agent for our Company-owned Regions in the U.S. and Canada is almost two times greater than for our Independent Regions. Our average revenue per agent in regions outside the U.S. and Canada is substantially lower than the average revenue per agent in the U.S. and Canada. We have expanded our owned regional franchising operations through acquisitions of Independent Regions in the U.S. and Canada. We reacquired the regional franchise rights for the Mountain States region in 2011 and for the Texas region in 2012. On October 7, 2013, we reacquired regional RE/MAX franchise rights in the Central Atlantic and Southwest regions, and intend to pursue reacquisition of other regions in the future. In addition, other changes in our aggregate revenue per agent are derived from changes in our fee arrangements with our franchisees and agents over time. Our revenue per agent also increases in other ways including when transaction sides and transaction sizes increase since a portion of our revenue comes from fees tied to the number and size of real estate transactions closed by our agents. Given the low fixed cost structure of our franchise model, modest increases in revenue per agent can have a significant impact on our profitability.

 

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The following table shows our agent count at the end of, and the net change in agent count for the periods indicated:

   

 

 

 

Substantially all of our revenue is derived from the U.S. and Canada. Our agent count decreased during the U.S. housing sector downturn, but has recently returned to growth as the market started to rebound in 2012.

Revenue. The majority of our revenue is derived from recurring, fixed contractual fees and dues paid by our agents, franchisees and regional franchise owners with a smaller percentage of our revenue being based on transaction activity derived from a percentage of agent commissions.

Adjusted EBITDA. We present Adjusted EBITDA because we believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our business and provides greater transparency into our results of operations. Our management uses Adjusted EBITDA as a factor in evaluating the performance of our business. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. See below under “—Non-GAAP Financial Measures” for further discussion of our presentation of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

We define Adjusted EBITDA as EBITDA (consolidated net income before depreciation and amortization, interest expense, net and income taxes, each of which is presented in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), adjusted for the impact of the following items that we do not consider representative of our ongoing operating performance: (gain) loss on sale of assets and sublease, loss on extinguishment of debt, equity-based compensation, deferred rent adjustments, salaries paid to David and Gail Liniger, our Chairman and Vice Chairman, respectively, that we will not continue to pay subsequent to the completion of the IPO, expenses incurred in connection with the IPO, reorganization costs and acquisition transaction costs. See “—Non-GAAP Financial Measures.”

 

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Because Adjusted EBITDA omits certain non-cash items and other infrequent cash charges, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and other infrequent cash charges and is more reflective of other factors that affect our operating performance.

Our Adjusted EBITDA margins result from the high margin Real Estate Franchise Services segment, offset slightly by the owned real estate brokerage operations, which have much lower margins due primarily to higher fixed costs resulting from rent expense, which in turn adversely impacts our consolidated margins.

Components of Operating Results

Revenue

The majority of our revenue is derived from recurring, fixed contractual fees and dues paid by our agents, franchisees and regional franchise owners, with a smaller percentage of our revenue being based on transaction activity derived from a percentage of agent commissions.

 

 

 

 

 

 

 

 

* We base our continuing franchise fees, annual dues and broker fees outside the U.S. and Canada on generally the same structure as our U.S. and Canadian Independent Regions, except that revenue earned by us in those regions is substantially lower than in our U.S. and Canadian Independent Regions.

 

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Operating Expenses

Operating expenses include selling, operating and administrative expenses, depreciation and amortization and the gains and losses on sales of assets. Set forth below is a brief discussion of some of the key operating expenses that impact our results of operations:

 

 

 

Other Expenses, Net

Other expenses, net include interest expense, interest income, foreign currency transactions gains and losses, losses on the early extinguishment of debt and equity in earnings of investees.

The most significant items that are included in other expenses, net are interest expense and interest income, which consist primarily of interest on borrowings under our credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto on July 31, 2013 (the “Senior Secured Credit Facility”) and income earned on our cash and cash equivalents. Our interest expense depends on the level of our outstanding indebtedness as well as the applicable interest rate with respect to outstanding indebtedness which is a variable rate in excess of any contractual interest rate floor, tied to prevailing interest rates.

Provision for Income Taxes

RMCO is classified as a partnership for U.S. federal income tax purposes and thus, is treated as a “flowthrough entity.” As a result, prior to the IPO, our business was not generally subject to direct U.S. federal income tax and certain state income tax obligations. Our subsidiaries that operate in foreign jurisdictions are, however, taxable entities. Income taxes incurred by the subsidiaries that operate in foreign jurisdictions are recorded in the provision for income taxes. RE/MAX Holdings, Inc. is organized as a corporation for tax purposes that is subject to direct U.S. federal corporate income tax and certain state corporate income tax obligations. Following the IPO, these corporate tax obligations will generally arise with respect to, and be payable in respect of, our allocable share of net income attributable to the business operations of RMCO.

Acquisitions and Divestitures

One of our strategies is to pursue reacquisitions of regional franchise rights in Independent Regions in the U.S. and Canada. We receive a higher amount of revenue per agent in our Company-owned Regions than in our Independent Regions. While both Company-owned Regions and Independent Regions charge relatively similar fees to RE/MAX brokerages and agents, we receive the entire amount of the continuing franchise fee, broker fee, initial franchise fee and franchise renewal fee in Company-owned Regions, whereas we receive only a portion of these fees in Independent Regions.

Effective October 7, 2013, RE/MAX Holdings, Inc. used $27.3 million of the proceeds from the IPO to reacquire regional franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisitions of the business assets of HBN and Tails and contributed these assets to us in exchange for ownership interest.  The unaudited condensed consolidated financial statements of RMCO, included elsewhere in this Form 10-Q, as of September 30, 2013 and for the three and nine months ended September 30, 2013 exclude the financial position, results of operations and cash flows of HBN and Tails for the periods presented.

Effective December 31, 2012, we acquired certain assets of RE/MAX of Texas, including the regional franchise agreements permitting the sale of RE/MAX franchises in the state of Texas. The purchase price was $45.5 million and was paid in cash primarily using proceeds from borrowings. We recorded $30.2 million of goodwill in connection with this acquisition, which consisted of the excess of the purchase price over the fair value of the identifiable assets acquired.

 

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Effective November 30, 2012, we sold substantially all of the assets of owned and operated regional franchising operations located in Eastern Australia and New Zealand and entered into regional franchising agreements with new independent owners of these regions. We decided to sell these operations following our determination that due to the costs, logistics and differences in local markets, we were not able to efficiently operate these foreign regions given their remoteness from our U.S. headquarters. We sold these regions for a net purchase price of approximately $0.2 million. We recognized losses on the sale of the assets amounting to approximately $1.7 million, as the consideration received in the transactions was lower than the value of the assets of these operations as reflected in our consolidated financial statements prior to the sale transaction.

We may pursue additional acquisitions or investments in other complementary businesses, services and technologies that would provide access to new markets or customers, or otherwise complement our existing operations.

Results of Operations

For comparability purposes, the following tables set forth our results of operations for the periods presented as dollars (in thousands) for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

   

 

 

 

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Comparison of the Three Months Ended September 30, 2013 and 2012

Revenue

   

 

Continuing Franchise Fees

Revenue from continuing franchise fees increased $1.7 million, or 11.6%, from the three months ended September 30, 2012 to the three months ended September 30, 2013. The acquisition and subsequent growth of RE/MAX of Texas, which resulted in agents within an Independent Region being converted to agents within a Company-owned Region, gave us the right to earn 100% of the fixed continuing franchise fee per agent. This resulted in an increase of $1.4 million in continuing franchise fee revenue. This increase was offset partially by a net decrease of $0.3 million in continuing franchise fees for the Australia and New Zealand regions, which were sold during the fourth quarter of 2012 and, as a result, the agents in Australia and New Zealand are no longer agents of a Company-owned Region. Excluding acquisition and divestiture activity, continuing franchise fees earned from Company-owned regions in the U.S. and Canada, where we receive a higher continuing franchise fee per agent, increased $0.5 million due to an increase in agent count, primarily in the U.S.

Annual Dues

Revenue from annual dues increased $0.2 million, or 3.4%, from the three months ended September 30, 2012 to the three months ended September 30, 2013, primarily due to an overall increase in total agent count of 922 agents for the three months ended September 30, 2013 compared to an overall increase in total agent count of 416 agents for the three months ended September 30, 2012.

Broker Fees

Revenue from broker fees increased $1.5 million, or 26.7%, from the three months ended September 30, 2012 to the three months ended September 30, 2013, principally due to additional broker fees of $0.8 million that resulted from the acquisition of certain assets of RE/MAX of Texas, which converted agents from an Independent Region to a Company-owned Region resulting in a higher portion of broker fees for these agents being retained by us. These increases were partially offset by a net decrease in broker fees of $0.6 million in Australia and New Zealand as these regions were sold during the fourth quarter of 2012 resulting in agents in those regions no longer being agents of a Company-owned Region. Excluding acquisition and divestiture activity, revenue from broker fees earned from Company-owned Regions in the U.S. and Canada increased $1.1 million from the three months ended September 30, 2012 to the three months ended September 30, 2013, while revenue from broker fees earned from Independent Regions in the U.S. increased $0.3 million from the three months ended September 30, 2012 to the three months ended September 30, 2013. The increase in broker fee revenue for our Company-owned and Independent Regions in the U.S. and Canada was due to the overall increase in home sale transaction volume, which increased commissions earned by our U.S. and Canadian agents as well as increased agent count.

Franchise Sales and Other Franchise Revenue

Franchise sales and other franchise revenue decreased $1.7 million, or 25.4%, from the three months ended September 30, 2012 to the three months ended September 30, 2013. $1.6 million of the decrease was related to a decrease in franchise sales revenue due primarily to the 2012 sale of master franchise rights in China/Hong Kong/Macau for $2.1 million, partially offset by smaller master franchise sales during the three months ended September 30, 2013.

 

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Brokerage Revenue

Brokerage revenue, which principally represents fees assessed by our owned brokerages for services provided to their affiliated real estate agents, increased $0.2 million, or 4.0%, from the three months ended September 30, 2012 to the three months ended September 30, 2013 as a result of higher gross sales and transaction volume.

Operating Expenses

A summary of the components of our operating expenses for the three months ended September 30, 2013 and 2012 is as follows:

   

 

Selling, Operating and Administrative Expenses

Selling, operating and administrative expenses increased $1.5 million, or 7.2%, from the three months ended September 30, 2012 to the three months ended September 30, 2013.

 

 

 

 

Depreciation and Amortization

Depreciation and amortization expense increased $0.9 million, or 31.1%, from the three months ended September 30, 2012 to the three months ended September 30, 2013 as a result of $0.9 million of additional amortization expense related to intangible assets acquired from RE/MAX of Texas.

 

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Other Expenses, Net

A summary of the components of our other expenses, net for the three months ended September 30, 2013 and 2012 is as follows:

   

 

 

Other expenses, net increased $4.1 million, or 201.3%, from the three months ended September 30, 2012 to the three months ended September 30, 2013 primarily due to an increase in the loss on early extinguishment of debt of approximately $1.7 million associated with executing our new Senior Secured Credit Facility on July 31, 2013 (See “—Liquidity and Capital Resources—Senior Secured Credit Facility”). Additionally, interest expense increased $2.2 million due to a combination of additional interest expense on the incremental $45.0 million of long-term debt borrowed on December 31, 2012 to finance the acquisition of certain assets of RE/MAX of Texas under the terms of our previous senior secured credit facility, as well as $1.9 million of interest expense incurred during the three months ended September 30, 2013 associated with costs incurred upon entering into our new Senior Secured Credit Facility.

Provision for Income Taxes

RMCO is classified as a partnership for U.S. federal income tax purposes and thus, as of September 30, 2013, was treated as a “flow through entity.” As such the provision for income taxes consists of income taxes on the net taxable earnings of RMCO’s consolidated foreign subsidiaries. Income tax expense for each of the three months ended September 30, 2013 and 2012 was $0.7 million and $0.6 million, respectively.  RE/MAX Holdings, Inc. is organized as a corporation for tax purposes that prospectively will be generally subject to direct U.S. federal, corporate income tax and certain state corporate income tax obligations.  

Adjusted EBITDA

Adjusted EBITDA and Adjusted EBITDA margins were $22.1 million and 54.8%, and $19.5 million and 50.7%, for the three months ended September 30, 2013 and 2012, respectively. The increase in Adjusted EBITDA of $2.6 million, or 13.3%, was principally the result of an increase in total revenue of $1.9 million arising from the acquisition of RE/MAX of Texas, agent growth and higher broker fees, offset by a decrease in franchise sales and other franchise revenue due to the sale of the master franchise agreement in China being sold during the three months ended September 30, 2012. Operating expenses adjusted for certain non-cash items such as amortization expense and other infrequent cash charges, including professional fee expenses incurred in preparation for the IPO, decreased due to lower personnel costs of $0.5 million and a decrease of $0.4 million in other selling, operating and administrative expense due primarily to lower executive and corporate sponsorships.

 

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Comparison of the Nine Months Ended September 30, 2013 and 2012

Revenue

   

 

Continuing Franchise Fees

Revenue from continuing franchise fees increased $4.7 million, or 11.2%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013. The acquisition and subsequent growth of RE/MAX of Texas, which resulted in agents within an Independent Region being converted to agents within a Company-owned Region, gave us the right to earn 100% of the fixed continuing franchise fee per agent. This resulted in an increase of $4.0 million in continuing franchise fee revenue. This increase was offset partially by a net decrease of $1.1 million in continuing franchise fees for the Australia and New Zealand regions, which were sold during the fourth quarter of 2012 and, as a result, the agents in Australia and New Zealand are no longer agents of a Company-owned Region. Excluding acquisition and divestiture activity, continuing franchise fees earned from Company-owned regions in the U.S. and Canada, where we receive a higher continuing franchise fee per agent, increased $1.5 million due to an increase in agent count, primarily in the U.S.

Annual Dues

Revenue from annual dues increased $0.7 million, or 3.2%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, primarily due to an overall increase in total agent count of 3,723 for the nine months ended September 30, 2013, of which 2,576 were located in the U.S. and Canada as compared to an overall increase in total agent count of 1,427 agents for the nine months ended September 30, 2012, of which 1,069 were located in the U.S. and Canada. U.S. and Canadian agents pay us directly annual dues fees of US$390 and C$390, respectively.

Broker Fees

Revenue from broker fees increased $3.9 million, or 26.4%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, principally due to additional broker fees of $2.3 million that resulted from the acquisition of certain assets of RE/MAX of Texas, which converted agents from an Independent Region to a Company-owned Region resulting in a higher portion of broker fees for these agents being retained by us. These increases were partially offset by a net decrease in broker fees of $1.6 million in Australia and New Zealand as these regions were sold during the fourth quarter of 2012, resulting in agents in those regions no longer being agents of a Company-owned Region. Excluding acquisition and divestiture activity, revenue from broker fees earned from Company-owned Regions in the U.S. and Canada increased $2.6 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, while revenue from broker fees earned from Independent Regions in the U.S. increased $0.7 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase in broker fee revenue for our Company-owned and Independent Regions for the U.S. and Canada was due to the overall increase in home sale transaction volume, which increased commissions earned by our U.S. and Canadian agents as well as increased agent count.

Franchise Sales and Other Franchise Revenue

Franchise sales and other franchise revenue remained relatively constant during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2013 at $17.8 million. During the nine months ended September 30, 2013, franchise sales revenue decreased $1.1 million primarily to the sale of master franchise rights in China/Hong Kong/Macau for $2.1 million that occurred in 2012, which was offset partially by smaller master franchise sales during 2013. During the nine months ended September 30, 2013, other franchise revenue increased $1.1 million primarily due to an increase in registration revenue associated with the annual convention which occurred during the first quarter of 2013.

 

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Brokerage Revenue

Brokerage revenue, which principally represents fees assessed by our owned brokerages for services provided to their affiliated real estate agents, increased $0.7 million, or 5.6%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013 as a result of higher gross sales and transaction volume.

Operating Expenses

A summary of the components of our operating expenses for the nine months ended September 30, 2013 and 2012 is as follows:

   

 

Selling, Operating and Administrative Expenses

Selling, operating and administrative expenses increased $6.3 million, or 9.8%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013.

 

 

 

 

Depreciation and Amortization

Depreciation and amortization expense increased $1.9 million, or 20.1%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013 as a result of the following:

 

 

 

 

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Other Expenses, Net

A summary of the components of our other expenses, net for the nine months ended September 30, 2013 and 2012 is as follows:

   

 

 

Other expenses, net increased $5.4 million, or 70.7%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013 primarily due to an increase in the loss on early extinguishment of debt of approximately $1.7 million associated with executing our new Senior Secured Credit Facility on July 31, 2013. Additionally, interest expense increased $3.3 million due to a combination of additional interest expense on the incremental $45.0 million of long-term debt borrowed on December 31, 2012 to finance the acquisition of certain assets of RE/MAX of Texas under the terms of our previous senior secured credit facility as well as $1.9 million of interest expense associated with costs incurred upon entering into our new Senior Secured Credit Facility. Lastly, foreign currency translation gains (losses), net decreased $0.5 million as a result of depreciation in the value of the U.S. dollar against the Canadian dollar.

Provision for Income Taxes

RMCO is classified as a partnership for U.S. federal income tax purposes and thus, as of September 30, 2013 was treated as a “flow through entity.”  As such the provision for income taxes consists of income taxes on the net taxable earnings of RMCO’ consolidated foreign subsidiaries. Income tax expense for each of the nine months ended September 30, 2013 and 2012 was $1.7 million. RE/MAX Holdings, Inc. is organized as a corporation for tax purposes that prospectively will be generally subject to direct U.S. federal, corporate income tax and certain state corporate income tax obligations.  

Adjusted EBITDA

Adjusted EBITDA and Adjusted EBITDA margins were $58.8 million and 49.5%, and $48.9 million and 45.0% for the nine months ended September 30, 2013 and 2012, respectively. The increase in Adjusted EBITDA of $9.9 million, or 20.2%, was principally the result of an increase in total revenue of $10.0 million arising from the acquisition of RE/MAX of Texas, agent growth and higher broker fees. Operating expenses adjusted for certain non-cash items such as amortization expense and equity-based compensation expense and other infrequent cash charges, including professional fee expenses incurred in preparation for the IPO, decreased $0.5 million. These decreases were offset by a $0.5 million increase in foreign currency transaction losses during the nine months ended September 30, 2013.

Non-GAAP Financial Measures

The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of non-U.S. generally accepted accounting principles (“GAAP”) financial measures, such as Adjusted EBITDA and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with GAAP.

We define Adjusted EBITDA as EBITDA (consolidated net income (loss) before depreciation and amortization, interest expense, net and income taxes, each of which is presented in our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q), adjusted for the impact of the following items that we do not consider representative of our ongoing operating performance: (gain) loss on sale of assets and sublease, (gain) loss on extinguishment of debt, equity based compensation, deferred rent adjustments, salaries paid to David and Gail Liniger that we will not continue to pay subsequent to the IPO, expenses incurred in connection with the IPO and acquisition transaction costs.

 

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Because Adjusted EBITDA omits certain non-cash items and other infrequent cash charges, we believe that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and other infrequent cash charges and is more reflective of other factors that affect our operating performance. We present Adjusted EBITDA because we believe it is useful as a supplemental measure in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management uses Adjusted EBITDA as a factor in evaluating the performance of our business.

Adjusted EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider Adjusted EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:

 

 

 

 

 

 

 

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A reconciliation of Adjusted EBITDA to net income attributable to controlling interests for our consolidated results and reportable segments for the three and nine months ended September 30, 2013 and 2012 is set forth in the following table:

   

 

(1) Represents (gains) and losses on the sale of assets as well as the loss on the sublease of our corporate headquarters office building.

(2) Represents losses incurred on early extinguishment of debt related to the entire repayment of our pre-existing debt facility during the three months ended September 30, 2013 and losses incurred on the early extinguishment of debt on our previous senior secured credit facility during the nine months ended September 30, 2013 and 2012.

(3) Equity-based compensation includes non-cash compensation expense recorded related to unit options granted to employees pursuant to our 2011 Unit Option Plan. See Note 7 to RMCO’s unaudited condensed consolidated financial statements.

 

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(4) Represents the non-cash charge to appropriately record rent expense on a straight-line basis over the term of the lease agreement taking into consideration escalation in monthly cash payments.

(5) Represents the elimination of annual salaries we paid to David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chairman and Co-Founder, that we will not continue to pay following the consummation of the IPO.

(6) Acquisition integration costs include fees incurred in connection with our acquisition of certain assets of RE/MAX of Texas in December 2012, and our acquisitions of HBN and Tails in connection with the IPO including legal, accounting and advisory fees as well as consulting fees for integration services.

(7) Represents expenses incurred in connection with the IPO.

Liquidity and Capital Resources

General Overview

Our liquidity position has been positively affected by the growth of our agent base and improving conditions in the real estate market, which have contributed to increasing annual operating cash flows. In this regard, our short-term liquidity position from time to time has been, and will continue to be, affected by the number of agents in the RE/MAX network. Our liquidity position has been negatively affected by the principal payments and related interest expense on our Senior Secured Credit Facility.

We experienced an increase in the number of our agents during the three and nine months ended September 30, 2013 compared to the comparable periods of the prior year. However, we cannot be certain agent growth will continue. Moreover, if the real estate market or the economy as a whole deteriorates, we may experience adverse effects on our business, financial condition and liquidity, including our ability to access capital and grow our business.

Our primary liquidity needs historically have been to service our debt, finance our working capital, and finance acquisition activity. We have historically satisfied these needs with cash flows from operations and funds available under our Senior Secured Credit Facility.

We will continue to evaluate potential financing transactions, including refinancing our Senior Secured Credit Facility and extending maturities. There can be no assurance that financing or refinancing will be available to us on acceptable terms or at all. Future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities. Our ability to make payments to fund debt service and strategic acquisitions will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive and other factors that are beyond our control.

Cash Flows

Cash and cash equivalents increased $5.0 million from $68.5 million as of December 31, 2012 to $73.5 million as of September 30, 2013. The following table summarizes our cash flows for the nine months ended September 30, 2013 and 2012:

   

 

Cash provided by operating activities decreased $0.2 million from the nine months ended September 30, 2012 to the nine months ended September 30, 2013. The decrease in cash provided by operating activities is primarily attributable to a decrease in net income of $3.5 million offset by an increase in non-cash adjustments to net income of $4.5 million.  The increase in non-cash adjustments is related to increased amortization expense from the acquisition of RE/MAX of Texas of $1.9 million, the loss on extinguishment of debt of $1.8 million and equity-based compensation of $0.7 million.   The net impact of the change in net income after taking into effect the non-cash adjustments was an increase of $1.0 million.  This increase was attributable to an increase in revenue partially offset by a decrease in cash provided due to higher cash payments for interest.  This net increase was offset by a decrease in working

 

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capital of $1.2 million primarily driven by a decrease in deferred revenue resulting from higher registration fees received and deferred in 2012 for our 2013 annual convention as compared to registration fees received and deferred in 2011.

Cash used in investing activities decreased $0.7 million from the nine months ended September 30, 2012 to the nine months ended September 30, 2013 due to a decrease in the purchase of property, equipment and software due to a reduction in acquired software during the nine months ended September 30, 2013, offset partially by an increase in leasehold improvements during that period.

Cash used in financing activities increased $13.6 million from the nine months ended September 30, 2012 to the nine months ended September 30, 2013 due primarily to an $11.2 million increase in distributions paid to our members pursuant to the terms of the Third Amended and Restated RMCO, LLC agreement (the “Third LLC Agreement”). The increase in member distributions is primarily the result of an increase in taxable income in 2012 compared to 2011, which is the basis for determining the amount of distributions paid to our members. In this regard, distributions made during the nine months ended September 30, 2013 and 2012 were $20.7 million and $9.5 million, respectively. Cash used in financing activities also increased as a result of a $4.8 million increase in capitalized costs incurred in connection with the IPO offset by $3.7 million of additional net debt payments made during the nine months ended September 30, 2012.

During the fourth quarter of 2013, we made tax distributions totaling $6.7 million to Weston Presidio and RIHI pursuant to the terms of the Third LLC Agreement to cover tax liabilities associated with their share of RMCO’s taxable income from January 1, 2013 to October 7, 2013.

Senior Secured Credit Facility

In July 2013, RE/MAX, LLC entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto. Under the Senior Secured Credit Facility, RE/MAX, LLC has a revolving line of credit available of up to $10.0 million. On the closing date of the Senior Secured Credit Facility, RE/MAX, LLC borrowed $230.0 million of term loans thereunder. The proceeds provided by these term loans were used to refinance and repay existing indebtedness and for working capital, capital expenditures, acquisitions and general corporate purposes.

Term loans are repaid in quarterly installments of $575,000, with the balance of the term loan due at maturity. The maturity date of all of the term loans under the Senior Secured Credit Facility is July 31, 2020. Term loans may be optionally prepaid by RMCO’s wholly owned subsidiary, RE/MAX, LLC, at any time. All amounts outstanding under the revolving line of credit must be repaid on July 31, 2018.

The Senior Secured Credit Facility requires RE/MAX, LLC to repay term loans and reduce revolving commitments with (i) 100% of proceeds of any incurrence of additional debt not permitted by the Senior Secured Credit Facility, (ii) 100% of proceeds of asset sales and 100% of amounts recovered under insurance policies, subject to certain exceptions and a reinvestment right, and (iii) 50% of excess cash flow at the end of the applicable fiscal year, with such percentage decreasing as RE/MAX, LLC’s leverage ratio decreases.

The Senior Secured Credit Facility is guaranteed by RMCO and RE/MAX of Western Canada (1998), LLC, a subsidiary of RE/MAX, LLC, and is secured by a lien on substantially all of the assets of RMCO, RE/MAX, LLC and each guarantor.

Borrowings under the term loans and revolving loans accrue interest, at our option on (a) adjusted LIBOR, provided that LIBOR shall be no less than 1% plus a maximum applicable margin of 3% or (b) alternative base rate (“ABR”), provided that ABR shall be no less than 2%, which is equal to the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate; (2) the Federal Funds Effective Rate plus 0.5% or (3) calculated Eurodollar Rate plus 1.0%, plus a maximum applicable margin of 2%.  A commitment fee of 0.50% per annum accrues on the amount of unutilized revolving line of credit.

The Senior Secured Credit Facility provides for customary restrictions on, among other things, additional indebtedness, liens, dispositions of property, dividends, transactions with affiliates and fundamental changes such as mergers, consolidations and liquidations. We do not anticipate that the restriction on the payment of dividends will prevent us from being able to pay regular dividends with respect to our Class A common stock at rates we establish from time to time. With certain exceptions, any default under any of our other agreements evidencing indebtedness in the amount of $10.0 million or more constitutes an event of default under the Senior Secured Credit Facility.

The Senior Secured Credit Facility restricts the aggregate acquisition consideration for permitted acquisitions to $50.0 million in any fiscal year. Any unused amounts may be carried over to the subsequent year to be used towards additional expenditures for permitted acquisitions, with an aggregate cap of $100.0 million in any fiscal year. Aggregate outstanding indebtedness consisting of (i) the deferred purchase price of permitted acquisitions may not exceed $15.0 million at any time and (ii) earn-outs arising out of permitted acquisitions may not exceed $15.0 million at any time.

 

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At any time revolving loans are outstanding, the Senior Secured Credit Facility requires compliance with a leverage ratio and an interest coverage ratio. As of September 30, 2013, we had no revolving loans outstanding.

As of September 30, 2013, we had $229.0 million of term loans outstanding, net of an unamortized discount, and no revolving loans outstanding under our Senior Secured Credit Facility.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2013 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

   

 

 

 

 

 

 

As described in elsewhere in this Quarterly Report on Form 10-Q, we entered into separate tax receivable agreements with Weston Presidio and RIHI (collectively, the “Historical Owners”), that will provide for the payment by RE/MAX Holdings, Inc. to the Historical Owners of RMCO of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that RE/MAX Holdings, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of an expected increase in its share of tax basis in RMCO’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreements, and deductions attributable to imputed and actual interest that accrues in respect of such payments. These payment obligations are our obligations and not RMCO’s. Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the tax receivable agreement, we expect that future payments under the tax receivable agreements related to the IPO to aggregate $53.5 million over the next 15 years

Off Balance Sheet Arrangements

Other than the guarantee of a performance agreement and a line of credit agreement disclosed in Note 9 of our unaudited consolidated financial statements, we have no material off balance sheet arrangements as of September 30, 2013.

Critical Accounting Policies, Judgments and Estimates

We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on

 

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historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe the estimates, assumptions and judgments involved in revenue recognition, allowances for accounts and notes receivable, goodwill, franchise agreements and other intangible assets, and stock-based compensation, have the greatest potential impact on our consolidated financial statements, and consider these to be our critical accounting policies and estimates.

There have been no material changes to our critical accounting policies, judgments and estimates as compared to the critical accounting policies, judgments and estimates described in our prospectus dated October 1, 2013, filed with the SEC on October 3, 2013 pursuant to Rule 424(b)(4) under the Securities Act.

   

Item 3. Quantitative and Qualitative Disclosures about Market Risks

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large franchisees. In addition, our investment strategy has been to invest in financial instruments that are highly liquid, readily convertible into cash and mature within three months from the date of purchase. We do not use derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes. We are exposed to financial market risks, primarily changes in interest rates.

Interest Rate Risk

We are subject to interest rate risk in connection with borrowings under our Senior Secured Credit Facility which bear interest at variable rates. At September 30, 2013, $229.0 million in term loans were outstanding under our Senior Secured Credit Facility net of an unamortized discount. As of September 30, 2013, the undrawn borrowing availability under the revolving line of credit under our Senior Secured Credit Facility was $10.0 million. The interest rate on our Senior Secured Credit Facility entered into in July 2013 is currently subject to a LIBOR rate floor of 1%, plus an applicable margin. If LIBOR rates rise above the floor, then each hypothetical 1/8% increase would result in additional annual interest expense of $0.3 million.

Currency Risk

We have a network of international franchisees in Canada and over 90 other countries. Fees imposed on franchisees and agents in foreign countries are charged in the local currency. Fluctuations in exchange rates of the U.S. dollar against foreign currencies can result, and have resulted, in foreign exchange transaction gains and losses. We had foreign currency translation gains and (losses) of approximately $0.3 million and $0.4 million for the three months ended September 30, 2013 and 2012, respectively and $(0.1) million and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. If exchange rates on currencies in foreign jurisdictions where we conduct business were to fluctuate 10%, we believe that our consolidated financial position, results of operations and cash flows would not be materially affected.

   

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officers and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our principal executive officers and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

   

   

       

 

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PART II – OTHER INFORMATION

   

Item 1. Legal Proceedings

From time to time we are involved in litigation, claims and other proceedings relating to the conduct of our business. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. We do not believe we have any currently pending litigation of which the outcome will have a material adverse effect on our business, financial condition or operations; however, litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability and could also materially adversely affect our operations and our reputation.

   

Item 1a. Risk Factors

For a detailed description of the risks that could materially affect our business, financial condition, prospects, operating results or cash flows, please refer to the section entitled “Risk Factors” in our final prospectus filed with the SEC on October 3, 2013. There have been no material changes to the risks listed in the final prospectus.

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from Initial Public Offering of Class A Common Stock

On October 1, 2013, our Registration Statement on Form S-1, as amended (File No. 333-190699), was declared effective, pursuant to which, on October 7, 2013, we issued and sold 11,500,000 shares of our Class A common stock, at a price to the public of $22.00 per share for an aggregate offering price of $253.0 million. Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, William Blair & Company, L.L.C, RBC Capital Markets, LLC and JMP Securities LLC acted as the underwriters.

As a result of the initial public offering, we raised approximately $224.9 million in net proceeds after deducting the underwriting discounts and commissions of approximately $17.1 million and $11.0 million in offering expenses. On October 7, 2013, we paid approximately $27.3 million to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through our acquisition of the business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”).

Following our acquisition of the business assets of HBN and Tails, we contributed such assets to RMCO, LLC (“RMCO”), in exchange for a number of newly issued common units of RMCO valued at approximately $27.3 million, at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts.

We used approximately $208.6 million to purchase newly issued common units from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. Of the $208.6 million in proceeds received by RMCO from us, $11.0 million has been or will be used to pay estimated offering expenses. The remaining $197.6 million RMCO received from us was used as follows: (i) RMCO used approximately $49.9 million first to redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio V, L.P. (“Weston Presidio”) and (ii) following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO used approximately $147.8 million to redeem common units of RMCO from Weston Presidio and RIHI, Inc. (“RIHI”) at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. The price per common unit of RMCO paid by RMCO to Weston Presidion and RIHI was equal to the public offering price per share of our Class A common stock, less underwriting discounts.

   

Item 3. Defaults Upon Senior Securities

Not applicable.

   

Item 4. Mine Safety Disclosures

Not applicable.

   

Item 5. Other Information

Not applicable.

   

 

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Item 6. Exhibits

   

 

   

 

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SIGNATURES

   

   

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   

 

   

 

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