UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013.

OR

 

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to                 .

Commission file number 001-36101

      

RE/MAX Holdings, Inc.

(Exact name of registrant as specified in its charter)

      

 

Delaware

80-0937145

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

   

   

5075 South Syracuse Street

Denver, Colorado

80237

(Address of principal executive offices)

(Zip Code)

   

   

(303) 770-5531

(Registrant’s telephone number, including area code)

   

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.

   

 

Large accelerated filer

   

¨

      

Accelerated filer

   

¨

Non-accelerated filer

   

x (Do not check if a smaller reporting company)

      

Smaller reporting company

   

¨

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.

      

   

   

                       

 

   


   

TABLE OF CONTENTS

   

 

   

   

   

Page
No.

   

   

PART I. – FINANCIAL INFORMATION

   

   

   

   

   

Item 1.

   

Financial Statements

   

   

   

   

RE/MAX Holdings, Inc. Unaudited Condensed Balance Sheet as of September 30, 2013  

 

 3

   

   

   

RE/MAX Holdings, Inc. Unaudited Condensed Statement of Income (Loss) for the period from July 8, 2013 to September 30, 2013  

 

 4

   

   

   

RE/MAX Holdings, Inc. Unaudited Condensed Statement of Cash Flows for the period from July 8, 2013 to September 30, 2013  

 

 5

   

   

   

RE/MAX Holdings, Inc. Notes to Unaudited Condensed Financial Statements  

 

 6

   

   

   

RMCO, LLC Unaudited Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012  

 

 9

   

   

   

RMCO, LLC Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and September 30, 2012  

 

 10

   

   

   

RMCO, LLC Unaudited Condensed Consolidated Statement of Redeemable Preferred Units and Members’ Deficit  

 

 11

   

   

   

RMCO, LLC Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and September 30, 2012  

 

 12

   

   

   

RMCO, LLC Notes to Unaudited Condensed Consolidated Financial Statements  

 

 13

   

   

   

   

Item 1a.

   

RE/MAX Holdings, Inc. Unaudited Pro Forma Condensed Consolidated Financial Information  

 

 27

   

   

   

   

Item 2.

   

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

 

 36

   

   

   

   

Item 3.

   

Quantitative and Qualitative Disclosures About Market Risks  

 

 54

   

   

   

   

Item 4.

   

Controls and Procedures  

 

 54

   

   

   

   

   

   

PART II. – OTHER INFORMATION  

   

   

   

   

   

Item 1.

   

Legal Proceedings  

 

 56

   

   

   

   

Item 1a.

   

Risk Factors  

 

 56

   

   

   

   

Item 2.

   

Unregistered Sales of Equity Securities and Use of Proceeds  

 

 56

   

   

   

   

Item 3.

   

Defaults upon Senior Securities  

 

 56

   

   

   

   

Item 4.

   

Mine Safety Disclosures  

 

 56

   

   

   

   

Item 5.

   

Other Information  

 

 56

   

   

   

   

Item 6.

   

Exhibits  

 

 57

   

   

   

   

   

   

Signatures  

 

 58

   

   

   

   

 

 2 


   

PART I – FINANCIAL INFORMATION

   

Item 1. Financial Statements

RE/MAX HOLDINGS, INC.

Condensed Balance Sheet

(Unaudited)

   

 

   

September 30,
2013

   

Assets

   

   

   

Cash

$

1

      

Total assets

$

1

      

   

   

   

   

Commitments and contingencies

   

   

   

   

   

   

   

Stockholder’s equity

   

   

   

Common stock, $0.01 par value, 100 shares authorized, 1 share issued and outstanding as of September 30, 2013

$

—  

      

Additional paid-in capital

   

1

      

Total stockholder’s equity

$

1

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed financial statements

   

   

   

 

 3 


   

RE/MAX HOLDINGS, INC.

Condensed Statement of Income (Loss)

(Unaudited)

   

 

   

For the period
from July 8, 2013
to September 30,
2013

   

Total revenue

$

—  

      

Total operating expenses

   

—  

      

Operating income

   

—  

      

Total other expenses, net

   

—  

      

Income before provision for income taxes

   

—  

      

Provision for income taxes

   

—  

      

Net income

$

—  

      

Less: Net income attributable to non-controlling interest

   

—  

      

Net income attributable to RE/MAX Holdings, Inc.

$

—  

      

   

   

   

   

Net income attributable to RE/MAX Holdings, Inc. per Class A common share

   

   

   

Basic

$

—  

      

Diluted

$

—  

      

Weighted average shares of Class A common stock outstanding

   

   

   

Basic

   

—  

      

Diluted

   

—  

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed financial statements

   

   

   

 

 4 


   

RE/MAX HOLDINGS, INC.

Condensed Statement of Cash Flows

(Unaudited)

   

 

   

For the period from
July 8, 2013 to
September 30, 2013

   

Cash flows provided by (used in) operating activities:

$

—  

      

Cash flows provided by (used in) investing activities:

   

—  

      

Cash flows from financing activities:

   

   

   

Proceeds from issuance of common stock

   

1

      

Net cash provided by financing activities

   

1

      

Effect of exchange rate changes on cash

   

—  

      

Net increase in cash and cash equivalents

   

1

      

Cash and cash equivalents, beginning of period

   

—  

      

Cash and cash equivalents, end of period

$

1

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed financial statements

   

   

   

       

 

 5 


   

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.

   

 

 6 


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:

   

 

   

For the period from
July 8, 2013 to
September 30, 2013

   

Net income attributable to RE/MAX Holdings, Inc.

$

—  

   

Weighted-average shares outstanding:

   

   

   

Basic

   

—  

   

Diluted

   

—  

   

   

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”):

 

RMCO’s existing Class A preferred membership interest was converted into (i) a new preferred membership interest that reflected RMCO’s preferred equity holder’s liquidation preference of $49,850,000 and (ii) a common interest that reflected RMCO’s preferred equity holders pro-rata share of the residual equity value of RMCO;

 

RMCO effectuated a 25 for 1 split of the then existing number of outstanding common units so that one common unit of RMCO could be acquired with the net proceeds received in the Corporation’s IPO from the sale of one share of the Corporation’s Class A common stock, after the deduction of underwriting discounts and commissions;

 

The Corporation became a member and the sole manager of RMCO following the purchase of common units of RMCO, as described below;

 

Previously outstanding and unexercised options to acquire common units of RMCO were split 25 for 1 and then substituted for 787,500 options to acquire shares of the Corporation’s Class A common stock; and

 

Unit holders of RMCO (other than the Corporation) were granted the right to redeem each of their common units of RMCO for, at the Corporation’s option, newly issued shares of Class A common stock of the Corporation on a one-for-one basis or for a cash payment equal to the market price of one share of the Corporation’s Class A common stock.

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.

 

 7 


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.

   

   

   

           

 

 8 


   

RMCO, LLC
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except units)

   

 

   

September 30,
2013

   

   

December 31,
2012

   

   

   

   

   

   

   

Assets

   

   

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

Cash and cash equivalents

$

73,482

      

   

$

68,501

      

Escrow cash—restricted

   

912

      

   

   

780

      

Accounts and notes receivable, current portion, less allowances of $4,219 and $3,913, respectively

   

16,385

      

   

   

15,034

      

Accounts receivable from affiliates

   

116

      

   

   

55

      

Other current assets

   

2,733

      

   

   

2,707

      

Total current assets

   

93,628

      

   

   

87,077

      

   

   

   

   

   

   

   

   

Property and equipment, net of accumulated depreciation of $20,996 and $20,426, respectively

   

2,528

      

   

   

3,332

      

Franchise agreements, net of accumulated amortization of $72,395 and $61,489, respectively

   

69,439

      

   

   

78,338

      

Other intangible assets, net of accumulated amortization of $7,586 and $7,053, respectively

   

2,511

      

   

   

2,821

      

Goodwill

   

70,902

      

   

   

71,039

      

Investments in equity method investees

   

3,710

      

   

   

3,900

      

Debt issuance costs, net

   

2,424

      

   

   

2,930

      

Other assets

   

6,820

      

   

   

2,075

      

Total assets

$

251,962

      

   

$

251,512

      

   

   

   

   

   

   

   

   

Liabilities, Redeemable Preferred Units and Members’ Deficit

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

Accounts payable

$

840

      

   

$

530

      

Accounts payable to affiliates

   

2,397

      

   

   

2,385

      

Escrow liabilities

   

912

      

   

   

780

      

Accrued liabilities

   

10,188

      

   

   

9,397

      

Income taxes and tax distribution payables

   

7,266

      

   

   

400

      

Deferred revenue and deposits

   

15,524

      

   

   

15,996

      

Current portion of debt

   

17,300

      

   

   

10,600

      

Other current liabilities

   

116

      

   

   

234

      

Total current liabilities

   

54,543

      

   

   

40,322

      

   

   

   

   

   

   

   

   

Debt, net of current portion

   

211,657

      

   

   

221,726

      

Deferred revenue, net of current portion

   

292

      

   

   

514

      

Other liabilities, net of current portion

   

8,004

      

   

   

7,319

      

Total liabilities

   

274,496

      

   

   

269,881

      

   

   

   

   

   

   

   

   

Commitments and contingencies

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Redeemable preferred units:

   

   

   

   

   

   

   

Class A Preferred Units, at estimated redemption value (no par value, 150,000 units authorized, issued and outstanding as of September 30, 2013 and December 31, 2012; liquidation preference of $49,850 and $49,500 as of September 30, 2013 and December 31, 2012, respectively)

   

132,350

      

   

   

78,400

      

   

   

   

   

   

   

   

   

Members’ deficit:

   

   

   

   

   

   

   

Class B Common Units (no par value, 900,000 units authorized, 847,500 units issued and outstanding as of September 30, 2013 and December 31, 2012)

   

(156,447

   

   

(98,516

Accumulated other comprehensive income

   

1,563

      

   

   

1,747

      

Total members’ deficit

   

(154,884

   

   

(96,769

   

Total liabilities, redeemable preferred units and members’ deficit

$

251,962

      

   

$

251,512

      

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

   

 

 9 


   

RMCO, LLC

AND SUBSIDIARIES

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

(Unaudited)

(Amounts in thousands)

   

 

   

Three months ended
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenue:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Continuing franchise fees

$

16,093

      

   

$

14,418

      

   

$

47,037

      

   

$

42,293

      

Annual dues

   

7,455

      

   

   

7,208

      

   

   

22,052

      

   

   

21,376

      

Broker fees

   

7,204

      

   

   

5,685

      

   

   

18,704

      

   

   

14,801

      

Franchise sales and other franchise revenue

   

5,076

      

   

   

6,806

      

   

   

17,823

      

   

   

17,806

      

Brokerage revenue

   

4,484

      

   

   

4,312

      

   

   

13,012

      

   

   

12,321

      

Total revenue

   

40,312

      

   

   

38,429

      

   

   

118,628

      

   

   

108,597

      

Operating expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Selling, operating and administrative expenses

   

22,105

      

   

   

20,614

      

   

   

70,088

      

   

   

63,828

      

Depreciation and amortization

   

3,656

      

   

   

2,788

      

   

   

11,088

      

   

   

9,231

      

(Gain) loss on sale of assets

   

(3

)

   

   

(2

)

   

   

41

      

   

   

(20

)

Total operating expenses

   

25,758

      

   

   

23,400

      

   

   

81,217

      

   

   

73,039

      

Operating income

   

14,554

      

   

   

15,029

      

   

   

37,411

      

   

   

35,558

      

Other expenses, net:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest expense

   

(5,128

)

   

   

(2,913

)

   

   

(12,053

)

   

   

(8,774

)

Interest income

   

82

      

   

   

78

      

   

   

224

      

   

   

207

      

Foreign currency transaction gains (losses), net

   

281

      

   

   

394

      

   

   

(135

)

   

   

358

      

Loss on early extinguishment of debt

   

(1,664

)

   

   

—  

      

   

   

(1,798

)

   

   

(136

)

Equity in earnings of investees

   

274

      

   

   

398

      

   

   

736

      

   

   

712

      

Total other expenses, net

   

(6,155

)

   

   

(2,043

)

   

   

(13,026

)

   

   

(7,633

)

Income before provision for income taxes

   

8,399

      

   

   

12,986

      

   

   

24,385

      

   

   

27,925

      

Provision for income taxes

   

(702

)

   

   

(636

)

   

   

(1,733

)

   

   

(1,740

)

Net income

   

7,697

      

   

   

12,350

      

   

   

22,652

      

   

   

26,185

      

Accretion of Class A Preferred Units to estimated redemption amounts

   

(12,050

)

   

   

5,734

      

   

   

67,622

      

   

   

12,565

      

Net income (loss) related to RMCO, LLC Class B Common Unitholders

$

19,747

      

   

$

6,616

      

   

$

(44,970

)

   

$

13,620

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Other comprehensive income (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Change in cumulative translation adjustment

$

114

      

   

$

15

      

   

$

(184

)

   

$

98

      

Other comprehensive income (loss)

   

114

      

   

   

15

      

   

   

(184

)

   

   

98

      

Total comprehensive income (loss) related to RMCO, LLC Class B Common Unitholders

$

19,861

      

   

$

6,631

      

   

$

(45,154

)

   

$

13,718

      

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

       

 

 10 


   

RMCO, LLC AND SUBSIDIARIES

Condensed Consolidated Statement of Redeemable Preferred Units and Members’ Deficit

(Unaudited)

(Amounts in thousands, except units)

   

 

   

Redeemable Class A
Preferred Units

   

   

   

Class B Common
Units

   

   

Accumulated
other
comprehensive
income (loss)

   

   

Total
members’
deficit

   

   

Units

   

   

Amount

   

Units

   

   

Amount

   

   

   

Balances, January 1, 2013

   

150,000

   

   

$

78,400

   

   

   

847,500

   

   

$

(98,516

   

$

1,747

   

   

$

(96,769

Member distributions paid and payable

   

—  

   

   

   

(13,672

   

   

—  

   

   

   

(13,662

   

   

—  

   

   

   

(13,662

Equity-based compensation awards issued

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

701

   

   

   

—  

   

   

   

701

   

Accretion of Class A Preferred Units to estimated redemption amounts

   

—  

   

   

   

67,622

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

      

Net income (loss) related to RMCO, LLC Class B Common Unitholders

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(44,970

   

   

—  

   

   

   

(44,970

Change in accumulated other comprehensive income (loss)

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(184

   

   

(184

Balances, September 30, 2013

   

150,000

   

   

$

132,350

   

   

   

847,500

   

   

$

(156,447

   

$

1,563

   

   

$

(154,884

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

       

 

 11 


   

RMCO, LLC

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

   

 

   

Nine Months ended
September 30,

   

   

2013

   

   

2012

   

Cash flows from operating activities:

   

   

   

   

   

   

   

Net income

$

22,652

      

   

$

26,185

      

Adjustments to reconcile net income to net cash provided by operating activities:

   

   

   

   

   

   

   

Depreciation and amortization

   

11,088

      

   

   

9,231

      

Bad debt expense

   

289

      

   

   

479

      

Loss on early extinguishment of debt

   

1,798

      

   

   

136

      

Equity-based compensation

   

701

      

   

   

—  

      

Non-cash interest expense

   

723

      

   

   

700

      

Other

   

232

      

   

   

(267

)

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

Accounts and notes receivable

   

(1,678

)

   

   

(737

)

Advances to affiliates

   

(126

)

   

   

(86

)

Other current and noncurrent assets

   

(30

)

   

   

(458

)

Current and noncurrent liabilities

   

1,927

      

   

   

1,819

      

Deferred revenue

   

(686

)

   

   

61

      

Net cash provided by operating activities

   

36,890

      

   

   

37,063

      

Cash flows from investing activities:

   

   

   

   

   

   

   

Purchases of property, equipment and software

   

(676

)

   

   

(1,453

)

Proceeds from sale of property and equipment

   

8

      

   

   

32

      

Capitalization of trademark costs

   

(174

)

   

   

(166

)

Net cash used in investing activities

   

(842

)

   

   

(1,587

)

Cash flows from financing activities:

   

   

   

   

   

   

   

Proceeds from issuance of debt

   

230,000

      

   

   

—  

      

Payments on debt

   

(234,083

)

   

   

(7,736

)

Debt issuance costs

   

(1,301

)

   

   

—  

      

Member distributions

   

(20,684

)

   

   

(9,530

)

Deferred offering costs

   

(4,816

)

   

   

—  

      

Payments on capital lease obligations

   

(211

)

   

   

(243

)

Net cash used in financing activities

   

(31,095

)

   

   

(17,509

)

Effect of exchange rate changes on cash

   

28

      

   

   

85

      

Net increase in cash and cash equivalents

   

4,981

      

   

   

18,052

      

Cash and cash equivalents, beginning of year

   

68,501

      

   

   

38,611

      

Cash and cash equivalents, end of year

$

73,482

      

   

$

56,663

      

Supplemental disclosures of cash flow information:

   

   

   

   

   

   

   

Cash paid for interest

$

11,443

      

   

$

8,049

      

Cash paid for income taxes

   

1,632

      

   

   

1,579

      

Schedule of noncash investing and financing activities:

   

   

   

   

   

   

   

Capital leases for property and equipment

$

236

      

   

$

16

      

Member distributions payable

   

6,650

      

   

   

—  

      

   

   

   

   

See notes to unaudited condensed consolidated financial statements

   

   

   

   

 

 12 


   

RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

 

(1)

Business and Basis of Presentation

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.

 

 13 


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.

   

 

(2)

Acquisitions

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.

 

 14 


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):

   

 

Accounts and notes receivable, net

$

122

      

Franchise agreements

   

15,200

   

Goodwill

   

30,178

   

Total purchase price

$

45,500

   

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.

   

 

   

Unaudited

   

   

Nine month
period ended
September 30, 2012

   

   

(in thousands)

   

Total revenue

$

115,261

      

Net income

   

30,017

      

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.

   

 

(3)

Intangible Assets and Goodwill

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

   

 

   

September 30, 2013

   

      

December 31, 2012

   

   

Initial Cost

   

      

Accumulated
Amortization

   

   

Net
Balance

   

      

Initial Cost

   

      

Accumulated
Amortization

   

   

Net
Balance

   

Franchise agreements

$

141,834

   

      

$

(72,395

)

   

$

69,439

      

      

$

139,827

   

      

$

(61,489

)

   

$

78,338

      

Other intangibles:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

      

   

   

   

   

   

   

   

Software

$

7,222

   

      

$

(6,350

)

   

$

872

      

      

$

7,158

   

      

$

(5,942

)

   

$

1,216

      

Trademarks

   

2,875

   

      

   

(1,236

)

   

   

1,639

      

      

   

2,716

   

      

   

(1,111

)

   

   

1,605

      

Total other intangible assets

$

10,097

   

      

$

(7,586

)

   

$

2,511

      

      

$

9,874

   

      

$

(7,053

)

   

$

2,821

      

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.

 

 15 


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):

   

 

   

Real Estate
Franchise
Services

   

Balance, January 1, 2013

$

71,039

   

Effect of changes in foreign currency exchange  rates

   

(137

)

Balance, September 30, 2013

$

70,902

   

   

 

(4)

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

   

September 30,
2013

   

      

December 31,
2012

   

Accrued payroll and related employee  costs

$

5,098

      

      

$

4,542

   

Accrued taxes

   

1,197

      

      

   

1,609

   

Accrued professional fees

   

1,948

      

      

   

776

   

Lease-related accruals

   

750

      

      

   

693

   

Other

   

1,195

      

      

   

1,777

   

   

$

10,188

      

      

$

9,397

   

   

 

 16 


RMCO, LLC

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

   

 

(5)

Debt

Debt consists of the following (in thousands):

   

 

   

September 30,
2013

   

   

December 31,
2012

   

2013 Senior Secured Credit Facility, principal of $575 payable quarterly, matures in July 2020, net of unamortized discount of $468 as of September 30, 2013

$

228,957

   

   

$

—  

   

2010 Senior Secured Credit Facility, principal of $650 payable quarterly, matures in April 2016, net of unamortized discount of $1,192 as of December 31, 2012

   

—  

   

   

   

232,326

   

Less current portion

   

(17,300

)

   

   

(10,600

)

   

$

211,657

   

   

$

221,726

   

Maturities of debt are as follows (in thousands):

   

 

As of September 30, 2013:

   

   

   

Remainder of 2013

$

575

   

2014

   

17,300

   

2015

   

2,300

   

2016

   

2,300

   

2017

   

2,300

   

Thereafter

   

204,650

   

   

$

229,425

   

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.

 

 17 


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.

   

 

(6)

Redeemable Preferred Units and Members’ Deficit

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 


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.

   

 

(7)

Equity-Based Compensation Plan

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.

   

 

   

2012

Valuation assumptions:

   

   

   

Expected dividend yield

   

—  

%

Expected volatility

   

78.0

%

Expected term (years)

   

5.1

   

Risk-free interest rate

   

0.75

%

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.

   

 

(8)

Commitments and Contingencies

Commitments

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

 

 19 


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):

   

 

Accruals at January 1, 2013

$

420

      

Additional abandoned leases

   

99

   

Extinguishments

   

—  

   

Accretion and adjustments

   

180

   

Payments

   

(474

)

Accruals at September 30, 2013

$

225

   

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 


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.

   

 

(9)

Guarantees

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.

   

 

(10)

Related-Party Transactions

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 


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):

   

 

   

September 30,
2013

   

   

December 31,
2012

   

Accounts receivable from affiliates:

   

   

   

   

   

   

   

RE/MAX Southwest Region

$

—  

   

   

$

11

   

RE/MAX Central Atlantic Region, Inc.

   

5

   

   

   

21

   

RE/MAX of Texas Advertising Fund

   

106

      

   

   

—  

      

Other

   

5

   

   

   

23

   

Total accounts receivable from affiliates

   

116

   

   

   

55