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 March 31, 2015.

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  x    No  ¨

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

 

x

Non-accelerated filer

 

¨ (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 May 1, 2015 was 12,233,041 and 1, respectively.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page No.

 

 

PART I. – FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2015 and March 31, 2014

4

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and March 31, 2014

5

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ (Deficit) Equity for the Three Months Ended March 31, 2015

6

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and March 31, 2014

7

 

 

 

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

8

 

 

 

 

Item 2.

 

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

22

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

35

 

 

 

 

Item 4.

 

Controls and Procedures

35

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

36

 

 

 

 

Item 1A.

 

Risk Factors

36

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

Item 3.

 

Defaults upon Senior Securities

36

 

 

 

 

Item 4.

 

Mine Safety Disclosures

36

 

 

 

 

Item 5.

 

Other Information

36

 

 

 

 

Item 6.

 

Exhibits

37

 

 

 

 

 

 

SIGNATURES

38

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

RE/MAX HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

March 31, 2015

 

 

December 31, 2014

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

114,546

 

 

$

107,199

 

Escrow cash - restricted

 

75

 

 

 

693

 

Accounts and notes receivable, current portion, less allowances of $4,831 and $4,495, respectively

 

18,259

 

 

 

16,641

 

Accounts receivable from affiliates

 

-

 

 

 

231

 

Income taxes receivable

 

1,214

 

 

 

765

 

Assets held for sale

 

1,179

 

 

 

-

 

Other current assets

 

3,674

 

 

 

5,237

 

Total current assets

 

138,947

 

 

 

130,766

 

Property and equipment, net of accumulated depreciation of $19,495 and $19,993, respectively

 

2,788

 

 

 

2,661

 

Franchise agreements, net of accumulated amortization of $90,721 and $87,330, respectively

 

72,114

 

 

 

75,505

 

Other intangible assets, net of accumulated amortization of $8,705 and $8,550, respectively

 

2,859

 

 

 

2,725

 

Goodwill

 

72,169

 

 

 

72,463

 

Deferred tax assets, net

 

66,392

 

 

 

66,903

 

Investments in equity method investees

 

3,698

 

 

 

3,693

 

Debt issuance costs, net

 

1,756

 

 

 

1,896

 

Other assets

 

1,779

 

 

 

1,715

 

Total assets

$

362,502

 

 

$

358,327

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,052

 

 

$

561

 

Accounts payable to affiliates

 

1,186

 

 

 

1,114

 

Escrow liabilities

 

75

 

 

 

693

 

Accrued liabilities

 

8,218

 

 

 

9,380

 

Income taxes and tax distributions payable

 

92

 

 

 

189

 

Dividends and other distributions payable

 

50,213

 

 

 

-

 

Deferred revenue and deposits

 

18,401

 

 

 

17,142

 

Current portion of debt

 

12,725

 

 

 

9,460

 

Current portion of payable pursuant to tax receivable agreements

 

3,914

 

 

 

3,914

 

Liabilities held for sale

 

1,743

 

 

 

-

 

Other current liabilities

 

340

 

 

 

211

 

Total current liabilities

 

97,959

 

 

 

42,664

 

Debt, net of current portion

 

190,605

 

 

 

202,213

 

Payable pursuant to tax receivable agreements, net of current portion

 

63,504

 

 

 

63,504

 

Deferred tax liabilities, net

 

178

 

 

 

190

 

Other liabilities, net of current portion

 

10,458

 

 

 

10,473

 

Total liabilities

 

362,704

 

 

 

319,044

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' (deficit) equity:

 

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 12,031,609 shares issued and

   outstanding as of March 31, 2015; 11,768,041 shares issued and outstanding as of December 31, 2014

 

1

 

 

 

1

 

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of March

   31, 2015 and December 31, 2014

 

-

 

 

 

-

 

Additional paid-in capital

 

244,078

 

 

 

241,882

 

(Accumulated deficit) retained earnings

 

(4,591

)

 

 

12,041

 

Accumulated other comprehensive income

 

353

 

 

 

886

 

Total stockholders' equity attributable to RE/MAX Holdings, Inc.

 

239,841

 

 

 

254,810

 

Non-controlling interest

 

(240,043

)

 

 

(215,527

)

Total stockholders' (deficit) equity

 

(202

)

 

 

39,283

 

Total liabilities and stockholders' equity

$

362,502

 

 

$

358,327

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

3


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

Continuing franchise fees

$

17,660

 

 

$

17,704

 

Annual dues

 

7,802

 

 

 

7,506

 

Broker fees

 

6,420

 

 

 

5,558

 

Franchise sales and other franchise revenue

 

8,426

 

 

 

7,909

 

Brokerage revenue

 

3,899

 

 

 

3,203

 

Total revenue

 

44,207

 

 

 

41,880

 

Operating expenses:

 

 

 

 

 

 

 

Selling, operating and administrative expenses

 

25,071

 

 

 

25,287

 

Depreciation and amortization

 

3,811

 

 

 

3,938

 

Loss (gain) on sale or disposition of assets, net

 

2

 

 

 

(1

)

Total operating expenses

 

28,884

 

 

 

29,224

 

Operating income

 

15,323

 

 

 

12,656

 

Other expenses, net:

 

 

 

 

 

 

 

Interest expense

 

(2,809

)

 

 

(2,466

)

Interest income

 

67

 

 

 

81

 

Foreign currency transaction losses

 

(1,421

)

 

 

(529

)

Loss on early extinguishment of debt

 

(94

)

 

 

-

 

Equity in earnings (losses) of investees

 

212

 

 

 

(59

)

Total other expenses, net

 

(4,045

)

 

 

(2,973

)

Income before provision for income taxes

 

11,278

 

 

 

9,683

 

Provision for income taxes

 

(2,148

)

 

 

(1,885

)

Net income

$

9,130

 

 

$

7,798

 

Less: net income attributable to non-controlling interest

 

6,379

 

 

 

5,390

 

Net income attributable to RE/MAX Holdings, Inc.

$

2,751

 

 

$

2,408

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic

$

0.23

 

 

$

0.21

 

Diluted

$

0.22

 

 

$

0.20

 

Weighted average shares of Class A common stock outstanding

 

 

 

 

 

 

 

Basic

 

11,817,605

 

 

 

11,607,971

 

Diluted

 

12,293,505

 

 

 

12,254,474

 

Cash dividends declared per share of Class A common stock

$

1.6250

 

 

$

0.0625

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

4


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

Net income

$

9,130

 

 

$

7,798

 

Change in cumulative translation adjustment

 

(533

)

 

 

(177

)

Other comprehensive loss

 

(533

)

 

 

(177

)

Comprehensive income

 

8,597

 

 

 

7,621

 

Less: comprehensive income attributable to non-controlling interest

 

6,059

 

 

 

5,283

 

Comprehensive income attributable to RE/MAX Holdings, Inc.

$

2,538

 

 

$

2,338

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

5


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statement of Stockholders’ (Deficit) Equity

(In thousands, except share amounts)

(Unaudited)

 

 

Class A common stock

 

 

Class B common stock

 

 

Additional paid-in

capital

 

 

(Accumulated deficit)

retained earnings

 

 

Accumulated other

comprehensive

income

 

 

Non-controlling

interest

 

 

Total stockholders'

(deficit) equity

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2015

 

11,768,041

 

 

$

1

 

 

 

1

 

 

$

-

 

 

$

241,882

 

 

$

12,041

 

 

$

886

 

 

$

(215,527

)

 

$

39,283

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,751

 

 

 

-

 

 

 

6,379

 

 

 

9,130

 

Distributions paid and payable to non-controlling unitholders

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(30,895

)

 

 

(30,895

)

Equity-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

142

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

142

 

Dividends payable to Class A common stockholders

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,383

)

 

 

-

 

 

 

-

 

 

 

(19,383

)

Change in accumulated other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(533

)

 

 

-

 

 

 

(533

)

Exercise of stock options

 

263,568

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

949

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

949

 

Excess tax benefit realized on exercise of stock options

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,105

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,105

 

Balances, March 31, 2015

 

12,031,609

 

 

$

1

 

 

 

1

 

 

$

-

 

 

$

244,078

 

 

$

(4,591

)

 

$

353

 

 

$

(240,043

)

 

$

(202

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

9,130

 

 

$

7,798

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

3,811

 

 

 

3,938

 

Bad debt expense

 

205

 

 

 

201

 

Loss on early extinguishment of debt

 

94

 

 

 

-

 

Equity-based compensation

 

142

 

 

 

258

 

Non-cash interest expense

 

97

 

 

 

89

 

Other

 

683

 

 

 

650

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and notes receivable, current portion

 

(2,121

)

 

 

(1,898

)

Advances from/to affiliates

 

326

 

 

 

72

 

Other current and noncurrent assets

 

1,128

 

 

 

1,304

 

Other current and noncurrent liabilities

 

(626

)

 

 

(333

)

Deferred revenue and deposits

 

1,550

 

 

 

416

 

Net cash provided by operating activities

 

14,419

 

 

 

12,495

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, equipment and software

 

(335

)

 

 

(452

)

Proceeds from sale of property and equipment

 

10

 

 

 

-

 

Capitalization of trademark costs

 

(23

)

 

 

(25

)

Net cash used in investing activities

 

(348

)

 

 

(477

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on debt

 

(7,840

)

 

 

(575

)

Debt amendment costs

 

(555

)

 

 

-

 

Distributions to non-controlling unitholders

 

(65

)

 

 

(2,552

)

Payments on capital lease obligations

 

(71

)

 

 

(54

)

Proceeds from exercise of stock options

 

937

 

 

 

-

 

Excess tax benefit realized on exercise of stock options

 

1,105

 

 

 

-

 

Net cash used in financing activities

 

(6,489

)

 

 

(3,181

)

Effect of exchange rate changes on cash

 

(235

)

 

 

(43

)

Net increase in cash and cash equivalents

 

7,347

 

 

 

8,794

 

Cash and cash equivalents, beginning of year

 

107,199

 

 

 

88,375

 

Cash and cash equivalents, end of period

$

114,546

 

 

$

97,169

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest and for debt amendment costs

$

2,712

 

 

$

2,324

 

Cash paid for income taxes

 

846

 

 

 

1,097

 

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Capital leases for property and equipment

$

412

 

 

$

18

 

Increase in accounts payable for capitalization of trademark costs and purchases of property and equipment

 

148

 

 

 

60

 

Distributions payable to non-controlling unitholders

 

30,830

 

 

 

6,100

 

Dividends payable to Class A common stockholders

 

19,383

 

 

 

725

 

Increase in accounts and notes receivables from exercise of stock options

 

12

 

 

 

-

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

7


 

RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Business and Organization

RE/MAX Holdings, Inc. (“RE/MAX Holdings”) was formed as a Delaware corporation on June 25, 2013 and was capitalized on July 8, 2013. On October 7, 2013, RE/MAX Holdings 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. A portion of the proceeds received by RE/MAX Holdings from the IPO was used to acquire the net business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”) in the Southwest and Central Atlantic regions of the United States (“U.S.”), respectively, which were subsequently contributed to RMCO, LLC and subsidiaries (“RMCO”), and the remaining proceeds were used to purchase common membership units in RMCO. After completion of the IPO, RE/MAX Holdings owned 39.56% of the common membership units in RMCO. As of March 31, 2015, RE/MAX Holdings owns 40.42% of the common membership units in RMCO. RE/MAX Holdings’ only business is to act as the sole manager of RMCO and, in that capacity, RE/MAX Holdings operates and controls all of the business and affairs of RMCO.  As a result, RE/MAX Holdings consolidates the financial position and results of operations of RMCO. RE/MAX Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as the “Company.”

The Company is one of the world’s leading franchisors of residential and commercial real estate brokerage services throughout the U.S. and globally. The Company also operates a small number of real estate brokerages 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 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 by the Company’s owned brokerages for services provided to their affiliated real estate agents). The Company, as a franchisor, grants the broker-owner a license to use the RE/MAX brand, trademark, promotional and operating materials and concepts.

 

2. Summary of Significant Accounting Policies

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 RE/MAX Holdings and its consolidated 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 March 31, 2015 and December 31, 2014, the results of its operations for the three months ended March 31, 2015 and 2014, changes in its stockholders’ equity for the three months ended March 31, 2015 and results of its cash flows for the three months ended March 31, 2015 and 2014. Interim results may not be indicative of full year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Use of Estimates

The preparation of condensed consolidated 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 allowance for doubtful trade accounts and notes receivable, the determination of the estimated lives of intangible assets, the estimates for amounts accrued for litigation matters, equity-based compensation, the estimates of the fair value of reporting units used in the annual assessment of goodwill, the fair value of assets acquired and the amounts payable pursuant to the terms of the Tax Receivable Agreements (“TRAs”) discussed in more detail in Note 3, Non-controlling Interest. Actual results could differ from those estimates.

 

 

 

8


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Principles of Consolidation

RE/MAX Holdings holds an approximate 40% economic interest in RMCO, but as its managing member, RE/MAX Holdings controls RMCO’s operations, management and activities. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed Consolidated Balance Sheets and records net income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company has 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 April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest, which requires an entity to present debt issuance costs related to a debt liability as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective retrospectively for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015. The adoption of this standard is expected to impact the presentation of certain financial statement line items within the Company’s consolidated balance sheets and related disclosures, but will not affect the Company’s consolidated results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. As currently proposed, the new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements and related disclosures.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also provides guidance on the financial statement presentation and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2014. The Company adopted this standard effective January 1, 2015 and a disposal group classified as held for sale as of March 31, 2015 did not qualify as a discontinued operation. See Note 5, Dispositions, for additional information.

Critical Accounting Judgments and Estimates

There have been no changes in the Company’s critical accounting judgments and estimates from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Company believes that the disclosures herein are adequate so that the information presented is not misleading.  

9


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3. Non-controlling Interest

RE/MAX Holdings is the sole managing member of RMCO and subsequent to the IPO, began to operate and control all of the business affairs of RMCO. As a result, RE/MAX Holdings began to consolidate RMCO on October 7, 2013. RE/MAX Holdings owns a 40.42% and 39.89% minority economic interest in RMCO as of March 31, 2015 and December 31, 2014, respectively, and records a non-controlling interest for the remaining 59.58% and 60.11% economic interest in RMCO held by RIHI, Inc. (“RIHI”) as of March 31, 2015 and December 31, 2014, respectively. RE/MAX Holdings’ minority economic interest in RMCO increased due to the increase in common units from the issuance of shares of Class A common stock upon the exercise of 263,568 stock options during the three months ended March 31, 2015, as discussed in Note 10, Equity-Based Compensation. RE/MAX Holdings’ only sources of cash flow from operations are distributions from RMCO and management fees received pursuant to the management services agreement between RE/MAX Holdings and RMCO. Net income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income represents the portion of earnings attributable to the economic interest in RMCO held by the non-controlling unitholders. As of October 7, 2013, the non-controlling interest in the accompanying Condensed Consolidated Balance Sheets represented the carryover basis of RIHI’s capital account in RMCO. Prospectively, the non-controlling interest has been adjusted to reflect tax and other cash distributions made to, and the income allocated to, the non-controlling unitholders. The ownership of the common units in RMCO is summarized as follows:

 

 

March 31, 2015

 

 

December 31, 2014

 

 

Shares

 

 

Ownership %

 

 

Shares

 

 

Ownership %

 

Non-controlling unitholders ownership of common units

   in RMCO

 

17,734,600

 

 

 

59.58

%

 

 

17,734,600

 

 

 

60.11

%

RE/MAX Holdings, Inc. outstanding Class A common

   stock (equal to RE/MAX Holdings, Inc. common units

   in RMCO)

 

12,031,609

 

 

 

40.42

%

 

 

11,768,041

 

 

 

39.89

%

 

 

29,766,209

 

 

 

100.00

%

 

 

29,502,641

 

 

 

100.00

%

  

 

The aforementioned ownership percentages are used to calculate the net income attributable to RE/MAX Holdings. A reconciliation from “Income before provision for income taxes” to “Net income attributable to RE/MAX Holdings, Inc.” for the periods indicated is detailed as follows (in thousands, except percentages):

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

Income before provision for income taxes

$

11,278

 

 

$

9,683

 

Weighted average ownership percentage of controlling interest

 

39.99

%

 

 

39.56

%

Income before provision for income taxes attributable to

   RE/MAX Holdings, Inc.

 

4,510

 

 

 

3,831

 

Provision for income taxes attributable to

   RE/MAX Holdings, Inc.

 

(1,759

)

 

 

(1,423

)

Net income attributable to RE/MAX Holdings, Inc.

$

2,751

 

 

$

2,408

 

  

 

A reconciliation of the “Provision for income taxes” for the periods indicated is detailed as follows (in thousands):

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

Provision for income taxes attributable to

   RE/MAX Holdings, Inc. (a)

$

(1,759

)

 

$

(1,423

)

Provision for income taxes attributable to entities other than

   RE/MAX Holdings, Inc. (b)

 

(389

)

 

 

(462

)

Provision for income taxes

$

(2,148

)

 

$

(1,885

)

10


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(a)

The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes as well as RE/MAX Holdings’ approximate 40% share of the taxes imposed directly on RE/MAX, LLC, a wholly-owned subsidiary of RMCO, related to tax liabilities in certain foreign jurisdictions of approximately $262,000 and $303,000 for the three months ended March 31, 2015 and 2014, respectively.

(b)

The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RE/MAX, LLC related to tax liabilities in certain foreign jurisdictions that are allocated to the non-controlling interest.

Distributions and Other Payments to Non-controlling Unitholders

Distributions for Taxes

As a limited liability company (treated as a partnership for income tax purposes), RMCO does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the Fourth Amended and Restated RMCO Limited Liability Company Agreement (the “RMCO, LLC Agreement”), RMCO is generally required to distribute cash on a pro rata basis to its members to the extent necessary to cover each member’s estimated tax liabilities, if any, with respect to their allocable share of RMCO earnings, but only to the extent that any other discretionary distributions from RMCO for the relevant period were otherwise insufficient to enable each member to cover its estimated tax liabilities. RMCO makes such tax distributions to its members based on an estimated tax rate in accordance with the terms of the RMCO, LLC Agreement. Upon completion of its tax returns with respect to the prior year, RMCO may make other discretionary true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year. Distributions for taxes paid to or on behalf of non-controlling unitholders under the RMCO, LLC Agreement were $65,000 and $2,552,000 during the three months ended March 31, 2015 and 2014, respectively, and are recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity.

Other Distributions

Discretionary cash distributions may also be made to non-controlling unitholders based on their ownership percentage in RMCO as determined in accordance with the RMCO, LLC Agreement.  The Company expects that future cash distributions will be made to non-controlling unitholders pro rata on a quarterly basis equal to the anticipated dividend payments to the stockholders of the Company’s Class A common stock, or otherwise on a discretionary basis as determined to be necessary or appropriate by the Company. The Company made other distributions of $30,830,000 to non-controlling unitholders in April 2015, which is recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity. On May 7, 2015, the Company declared a distribution to non-controlling unitholders of $2,217,000, which is payable on June 4, 2015. No other distributions were paid to non-controlling unitholders during the three months ended March 31, 2015 and 2014.    

Payments Pursuant to the Tax Receivable Agreements

As of March 31, 2015, the Company reflected a liability of $67,418,000, representing the payments due to RMCO’s historical owners, RIHI and Weston Presidio V., L.P. (“Weston Presidio”), under the terms of the TRAs (see current and non-current portion of “Payable pursuant to tax receivable agreements” in the accompanying Condensed Consolidated Balance Sheets).  

As of March 31, 2015, the Company estimates that amounts payable pursuant to the TRAs within the next 12 month period will be approximately $3,914,000. To determine the current amount of the payments due to the Historical Owners, the Company estimated the amount of taxable income that RE/MAX Holdings generated during 2014 and the amount of the specified deductions subject to the TRAs which are expected to be realized by RE/MAX Holdings in its 2014 tax return. This amount was then used as a basis for determining the Company’s increase in estimated tax cash savings as a result of such deductions on which a current TRA obligation became due (i.e. payable within 12 months of the Company’s year-end). These calculations are performed pursuant to the terms of the TRAs. No amounts were paid pursuant to the terms of the TRAs during the three months ended March 31, 2015 or 2014.

The timing and amount of the payments to be made under the TRAs are subject to certain contingencies, including RE/MAX Holdings having sufficient taxable income to utilize all of the tax benefits defined in the TRAs. If the Company elects to terminate the TRAs early, the Company would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRAs, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.

11


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Obligations pursuant to the TRAs are obligations of RE/MAX Holdings. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the provision for income taxes in the accompanying Condensed Consolidated Statements of Income. In general, items of income, gain, loss and deduction are allocated on the basis of the members’ ownership interests pursuant to the RMCO, LLC Agreement after taking into consideration all relevant sections of the Internal Revenue Code.

 

4. Earnings Per Share and Dividends

Earnings Per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options and restricted stock units.

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except share and per share information):

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

Numerator

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

$

2,751

 

 

$

2,408

 

Denominator for basic net income per share of Class A

   common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

11,817,605

 

 

 

11,607,971

 

Denominator for diluted net income per share of Class A

   common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

11,817,605

 

 

 

11,607,971

 

Add dilutive effect of the following:

 

 

 

 

 

 

 

     Stock options

 

458,992

 

 

 

602,217

 

     Restricted stock units

 

16,908

 

 

 

44,286

 

Weighted average shares of Class A common stock

   outstanding, diluted

 

12,293,505

 

 

 

12,254,474

 

Earnings per share of Class A common stock

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

   per share of Class A common stock, basic

$

0.23

 

 

$

0.21

 

Net income attributable to RE/MAX Holdings, Inc.

   per share of Class A common stock, diluted

$

0.22

 

 

$

0.20

 

 

The one share of Class B common stock outstanding does not share in the earnings of RE/MAX Holdings and is therefore not a participating security. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.

Dividends

During the three months ended March 31, 2015, the Company’s Board of Directors declared a quarterly dividend of $0.125 per share on all outstanding shares of Class A common stock, or $1,500,000 in total dividends, which along with a corresponding distribution to non-controlling unitholders of $2,217,000, was paid on April 8, 2015. Additionally, during the three months ended March 31, 2015, the Company’s Board of Directors declared a special dividend of $1.50 per share on all outstanding shares of Class A common stock, or $17,883,000 in total dividends, which along with a corresponding distribution to non-controlling unitholders of $26,602,000, was paid on April 8, 2015. During the three months ended March 31, 2014, the Company’s Board of Directors declared a quarterly dividend of $0.0625 per share on all outstanding shares of Class A common stock, or $725,000, which was paid on April 18, 2014. On May 7, 2015, the Company’s Board of Directors declared a quarterly dividend of $0.125 per share on all outstanding shares of Class A common stock, which is payable on June 4, 2015 to shareholders of record at the close of business on May 21, 2015.

12


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

5. Dispositions

Disposition of RE/MAX Caribbean Islands, Inc.

On December 31, 2014, the Company sold substantially all of the assets of its owned and operated regional franchising operations located in the Caribbean and Central America for a net purchase price of approximately $100,000. In connection with the sale of the assets, the Company entered into separate regional franchise agreements effective January 1, 2015 with a term of 20 years with the purchasers, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

Subsequent Events

On April 10, 2015, the Company sold certain operating assets and liabilities, including six owned brokerage offices located in the U.S., of RB2B, LLC d/b/a RE/MAX 100 (“RE/MAX 100”), a wholly owned subsidiary of the Company, for a net sales price of $450,000. The Company expects to recognize a gain on the sale of the assets of approximately $700,000 during the second quarter of 2015, which will be reflected in “Gain on sale or disposition of assets, net” in the Company’s Consolidated Statements of Income. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue. The financial position and results of operations of RE/MAX 100 are entirely attributable to the Company’s Brokerages reportable segment.

As of March 31, 2015, the sale of the assets and liabilities of RE/MAX 100 met the criteria to be classified as held for sale. The Company presented the assets included in the sale of RE/MAX 100 and the liabilities directly associated with those assets separately in the accompanying Condensed Consolidated Balance Sheets (see “Assets held for sale” and “Liabilities held for sale”). The following table provides the major classes of assets and liabilities held for sale for the period indicated (in thousands):

 

 

March 31, 2015

 

Assets held for sale

 

 

 

Escrow cash - restricted

$

797

 

Accounts and notes receivable, current portion

 

236

 

Other current assets

 

50

 

Property and equipment, net of accumulated depreciation

 

96

 

Total assets held for sale

$

1,179

 

Liabilities held for sale

 

 

 

Accounts payable

$

270

 

Escrow liabilities

 

797

 

Accrued liabilities

 

209

 

Deferred revenue

 

191

 

Other liabilities

 

276

 

Total liabilities held for sale

$

1,743

 

  

6.  Intangible Assets and Goodwill

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

 

 

Initial Weighted

Average

Amortization

 

 

March 31, 2015

 

 

December 31, 2014

 

 

Period

(in years)

 

 

Initial Cost

 

 

Accumulated Amortization

 

 

Net Balance

 

 

Initial Cost

 

 

Accumulated Amortization

 

 

Net Balance

 

Franchise agreements

 

12.0

 

 

$

162,835

 

 

$

(90,721

)

 

$

72,114

 

 

$

162,835

 

 

$

(87,330

)

 

$

75,505

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

4.3

 

 

$

8,633

 

 

$

(7,236

)

 

$

1,397

 

 

$

8,356

 

 

$

(7,126

)

 

$

1,230

 

Trademarks

 

14.6

 

 

 

2,931

 

 

 

(1,469

)

 

 

1,462

 

 

 

2,919

 

 

 

(1,424

)

 

 

1,495

 

Total other intangible assets

6.9

 

 

$

11,564

 

 

$

(8,705

)

 

$

2,859

 

 

$

11,275

 

 

$

(8,550

)

 

$

2,725

 

13


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Amortization expense for the three months ended March 31, 2015 and 2014 was $3,549,000 and $3,576,000, respectively.

The estimated future amortization of intangible assets, other than goodwill, is as follows (in thousands):

 

Year ending December 31:

 

 

 

Remainder of 2015

$

10,551

 

2016

 

14,031

 

2017

 

10,113

 

2018

 

6,497

 

2019

 

6,487

 

Thereafter

 

27,294

 

 

$

74,973

 

  

Amounts recorded as goodwill in the accompanying Condensed Consolidated Balance Sheets are attributable to the Company’s Real Estate Franchise Services reportable segment. During 2014, the Company performed its annual assessment of goodwill and the fair values of the Company’s reporting units significantly exceeded their respective carrying values. No interim indicators of impairment have been identified. The following table presents changes to goodwill for the three months ended March 31, 2015 (in thousands):

 

Balance, January 1, 2015

$

72,463

 

Effect of changes in foreign currency exchange rates

 

(294

)

Balance, March 31, 2015

$

72,169

 

 

7. Accrued Liabilities

Accrued liabilities, excluding accrued liabilities of $209,000 classified as held for sale as of March 31, 2015 and presented in “Liabilities held for sale” in the accompanying Condensed Consolidated Balance Sheets, consist of the following (in thousands):

 

 

March 31, 2015

 

 

December 31, 2014

 

Accrued payroll and related employee costs

$

3,758

 

 

$

4,519

 

Accrued property taxes

 

1,260

 

 

 

1,622

 

Accrued professional fees

 

1,190

 

 

 

947

 

Lease-related accruals

 

629

 

 

 

773

 

Other

 

1,381

 

 

 

1,519

 

 

$

8,218

 

 

$

9,380

 

 

 

8. Debt

Debt consists of the following (in thousands):

 

 

March 31, 2015

 

 

December 31, 2014

 

2013 Senior Secured Credit Facility, principal of $520

   payable quarterly, matures in July 2020, net of

   unamortized discount of $864 and $360 as of

   March 31, 2015 and December 31, 2014,

   respectively

$

203,330

 

 

$

211,673

 

Less current portion

 

(12,725

)

 

 

(9,460

)

 

$

190,605

 

 

$

202,213

 

 

14


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Maturities of debt are as follows (in thousands):

 

As of March 31:

 

 

 

Remainder of 2015

$

1,560

 

2016

 

2,080

 

2017

 

2,080

 

2018

 

2,080

 

2019

 

2,080

 

Thereafter

 

194,314

 

 

$

204,194

 

 

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.” 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 the term loan facility were used to refinance and repay existing indebtedness and for working capital, capital expenditures and general corporate purposes.

On March 11, 2015, the 2013 Senior Secured Credit Facility was amended, providing for an increase to the maximum applicable margin for both London Interbank Offered Rate (“LIBOR”) and Alternate Base Rate (“ABR”) loans by 0.25%, and a modification of certain liquidity covenants in order to increase the amounts the Company may distribute in the form of dividends to its non-controlling unitholders and stockholders of its Class A common stock, referred to herein as the “First Amendment.” Interest rates with respect to the amended term loan facility and revolving loan facility 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 3.25% 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 for a one month interest period plus 1%, plus a maximum applicable margin of 2.25%.  The applicable margin is subject to quarterly adjustments based on the Company’s total leverage ratio as defined in the 2013 Senior Secured Credit Facility. In connection with the First Amendment, the Company incurred costs of $1,086,000, of which $555,000 was recorded as an unamortized debt discount and are being amortized over the remaining term of the 2013 Senior Secured Credit Facility and the remaining $531,000 was expensed as incurred.

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. The Company made an excess cash flow prepayment of $7,320,000 on March 26, 2015. The Company accounted for the mandatory principal excess cash flow prepayment as an early extinguishment of debt and recorded a loss during the three months ended March 31, 2015 of $94,000 related to unamortized debt discount and issuance costs. As of March 31, 2015, mandatory principal payments of approximately $520,000 are due quarterly until the facility matures on July 31, 2020 and will be reduced pro rata by the amount of any excess cash flow principal payments made. The Company did not make a mandatory principal excess cash flow prepayment during the three months ended March 31, 2014. The Company may make optional prepayments on the term loan facility at any time; however, no such optional prepayments were made during the three months ended March 31, 2015 or 2014.

The estimated fair value of the Company’s debt as of March 31, 2015 and December 31, 2014 represents the amount that would be paid to transfer or redeem the debt in an orderly transaction between market participants at those dates 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 2013 Senior Secured Credit Facility are included in the accompanying Condensed Consolidated Balance Sheets in “Current portion of debt” and “Debt, net of current portion.” The following table summarizes the carrying value and fair value of the 2013 Senior Secured Credit Facility as of March 31, 2015 and December 31, 2014 (in thousands):

 

 

March 31, 2015

 

 

December 31, 2014

 

 

Carrying amounts

 

 

Estimated fair value

 

 

Carrying amounts

 

 

Estimated fair value

 

2013 Senior Secured Credit Facility

$

203,330

 

 

$

202,152

 

 

$

211,673

 

 

$

208,853

 

 

15


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company had no borrowings drawn on the revolving loan facility during the three months ended March 31, 2015 or 2014 and had $10,000,000 available under the revolving loan facility as of March 31, 2015. 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.

 

9. Income Taxes

RE/MAX Holdings is subject to U.S. federal and state income taxation on its allocable portion of the income of RMCO.  The “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 is based on an estimate of the Company’s annualized effective income tax rate. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as a series of limited liability companies which are not themselves subject to federal income tax. Accordingly, the portion of the Company’s subsidiaries earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income. The “Provision for income taxes” is comprised of a provision for income taxes attributable to RE/MAX Holdings and to entities other than RE/MAX Holdings. The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes and RE/MAX Holdings’ approximate 40% share of taxes imposed directly on RE/MAX, LLC related to tax liabilities in certain foreign jurisdictions. The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RE/MAX, LLC that are allocated to the non-controlling interest.

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 March 31, 2015, the Company does not believe it has any significant uncertain tax positions.

 

10. Equity-Based Compensation

On September 30, 2013, the Company’s Board of Directors adopted the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “2013 Incentive Plan”) that provides for the grant of incentive stock options to the Company’s employees, and for the grant of shares of RE/MAX Holdings’ Class A common stock, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to employees, directors and consultants of RE/MAX Holdings and RMCO.

On March 11, 2015, RE/MAX Holdings granted 74,893 restricted stock units at a value of $32.45 per unit to certain employees, which vest over a three-year period beginning on April 1, 2016, and 10,787 restricted stock units at a value of $32.45 per unit to its directors, which vest on April 1, 2016. The grant-date fair value of $32.45 per unit equaled the closing price of RE/MAX Holdings’ Class A common stock on March 11, 2015.   

For the three months ended March 31, 2015 and 2014, the Company recognized equity-based compensation expense of $142,000 and $258,000, respectively, in the accompanying Condensed Consolidated Statements of Income resulting from restricted stock units that were granted on March 11, 2015 and October 7, 2013.   

16


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes equity-based compensation activity for the three months ended March 31, 2015:  

 

 

Restricted Stock Units

 

 

Options

 

Balance as of January 1, 2015

 

40,472

 

 

 

652,500

 

Granted

 

85,680

 

 

 

-

 

Exercised (a)

 

-

 

 

 

(263,568

)

Forfeited

 

(2,904

)

 

 

-

 

Cancelled

 

-

 

 

 

-

 

Balance as of March 31, 2015

 

123,248

 

 

 

388,932

 

 

 

 

 

 

 

 

 

Vested

 

-

 

 

 

388,932

 

Unvested

 

123,248

 

 

 

-

 

(a)

Cash received from stock option exercises for the three months ended March 31, 2015 was $937,000. The Company recorded a corporate income tax benefit relating to the options exercised during the three months ended March 31, 2015 of $1,105,000 in “Additional paid-in capital” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity.

 

At March 31, 2015, there were 1,926,599 additional shares available for the Company to grant under the 2013 Incentive Plan.

 

11. Leadership Changes and Restructuring Activities

The Company’s former Chief Executive Officer retired on December 31, 2014 and pursuant to the terms of the Separation and Release of Claims Agreement (the “Separation Agreement”), the Company is required to provide severance and other related benefits over a 36 month period, beginning on December 31, 2014. The Company recorded a liability, measured at its estimated fair value, for payments that will be made under the Separation Agreement, with a corresponding charge of $3,545,000 recorded in 2014. As of March 31, 2015 and December 31, 2014, the short-term portion of the liability was $453,000 and $500,000, respectively, and is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. As of March 31, 2015 and December 31, 2014, the long-term portion of the liability was $1,321,000 and $1,488,000, respectively, and is included in “Other liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.

As a result of realignment of Company resources subsequent to the retirement of the Company’s former Chief Executive Officer, the Company incurred severance and other related expenses of $451,000 during the three months ended March 31, 2015, which was included in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income.

In addition, management of the Company approved and implemented a restructuring plan during the fourth quarter of 2014 designed to improve operating efficiencies, which reduced the Company’s overall headcount at its corporate headquarters (the “Restructuring Plan”). In connection with the Restructuring Plan, the Company incurred $1,303,000 of expenses in 2014 related to severance and outplacement services provided to certain former employees of the Company.  

The following table presents a rollforward of the estimated fair value liability established for the aforementioned severance and other related costs, which are entirely attributable to the Company’s Real Estate Franchise Services reportable segment, from January 1, 2015 to March 31, 2015 (in thousands):

 

Balance, January 1, 2015

$

2,408

 

Additional severance and other related expenses

 

451

 

Accretion

 

17

 

Cash payments

 

(744

)

Balance, March 31, 2015

$

2,132

 

 

17


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

12. Commitments and Contingencies

Commitments

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

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 and for related legal costs as incurred.

In connection with the Company’s acquisition of the net assets of HBN on October 7, 2013, several shareholders of HBN dissented from the transaction alleging the Company purchased the net assets of HBN below fair value and demanded payment for their shares in excess of consideration paid. Pursuant to the dissenters’ rights statute in the State of Colorado, on February 11, 2014, HBN petitioned the District Court of Denver County, Colorado (the “Court”) to determine the fair value of HBN. Based on both the plaintiff’s and the defendants’ expert valuation reports, the Company believes that the potential impact to its financial position and results of operations could range from $26,000 to approximately $2,656,000. HBN vigorously defended its position that the consideration paid for the net assets of HBN approximated fair value.  Discovery continued during the three months ended March 31, 2015 and a trial to hear the case before the Court occurred between April 14, 2015 and April 17, 2015.  At the conclusion thereof, a decision had not been rendered and post-trial briefs have been mandated by the Court.  As a result, the Company has determined that no amount within the range of potential impact is a better estimate than any other amount and therefore, no changes to the previously recorded accrual of $26,000 occurred during the three months ended March 31, 2015.   

Except for the ongoing litigation concerning the acquisition of the net assets of HBN, management of the Company believes other such litigation matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows.

 

13. Guarantees

In May 2014, 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, a residential mortgage operation in which the Company has a 50% interest. The term of the line-of-credit agreement is 12 months and the total amount of advances requested and unpaid principal balance cannot exceed $15,000,000. The line of credit bears interest at 0.5% over the financial institution’s base rate with a floor of 3.75%. The Company had entered into a similar guarantee during May 2013, which expired as of May 2014. The outstanding balance on the line of credit was approximately $6,895,000 and $4,548,000 as of March 31, 2015 and December 31, 2014, respectively. The Company did not incur any payments under this guarantee during the three months ended March 31, 2015, or in any prior periods, and does not anticipate that it will incur any payments through the duration of the guarantee.

 

14.  Related-Party Transactions

The Company’s real estate brokerage operations pay advertising fees to regional and national advertising funds, which promote the RE/MAX brand. These advertising funds are corporations owned by a majority stockholder of RIHI, who is also the Company’s Chief Executive Officer and Co-Founder, as trustee for RE/MAX agents, who 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 March 31, 2015 and 2014, the Company’s real estate brokerage operations paid $282,000 and $283,000, respectively, to these advertising funds. These payments are included in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income.

18


RE/MAX HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Prior to October 7, 2013, the Company’s real estate brokerage operations in the Washington, D.C. area paid regional continuing franchise fees, broker fees and franchise sales revenue, as do all other RE/MAX franchisees in the Central Atlantic region, to Tails. Several of the Company’s officers and stockholders of RIHI were also stockholders and officers of Tails, and as such, prior to October 7, 2013, Tails was a related party to the Company. As described in Note 1, Business and Organization, a portion of the proceeds raised during the IPO was used to purchase certain assets of Tails. In addition, the Company’s owned real estate brokerage operations in the Washington, D.C. area recorded a payable to Tails and its affiliated regional advertising fund. As of March 31, 2015 and December 31, 2014, the amount of the payable was $1,093,000 and $1,031,000, respectively, and is included in “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets.

The majority stockholders of RIHI, including the Company’s current Chief Executive Officer, have made and continue to make a golf course they own available to the Company for business purposes. During the three months ended March 31, 2015 and 2014, the Company used the golf course for business purposes at no charge.

The Company also provides services to certain affiliated entities such as accounting, legal, marketing, technology, human resources and public relations services as it allows these companies to share its leased office space. During the three months ended March 31, 2015 and 2014, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $416,000 and $562,000, respectively. Such amounts are generally paid within 30 days and no such amounts were outstanding at March 31, 2015 or December 31, 2014.

The activity in the Company’s “Accounts receivable from affiliates” and “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets consists of the following (in thousands):

 

 

March 31, 2015

 

 

December 31, 2014

 

Accounts receivable from affiliates:

 

 

 

 

 

 

 

RE/MAX of Texas Advertising Fund

$

-

 

 

$

246

 

Other

 

-

 

 

 

(15

)

Total accounts receivable from affiliates

 

-