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As filed with the Securities and Exchange Commission on September 19, 2013

Registration No. 333-190699

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

RE/MAX Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   6531   80-0937145

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

5075 South Syracuse Street

Denver, Colorado 80237

(303) 770-5531

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Geoffrey D. Lewis

Executive Vice President and Chief Legal and Compliance Officer

5075 South Syracuse Street

Denver, Colorado 80237

(303) 770-5531

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gavin B. Grover, Esq.

David B. Strong, Esq.

John M. Rafferty, Esq.

Morrison & Foerster LLP

425 Market Street

San Francisco, CA 94105

Tel: (415) 268-7000

Fax: (415) 268-7522

 

Deanna L. Kirkpatrick, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

Tel: (212) 450-4000

Fax: (212) 701-5800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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 the 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   ¨

 

 

 

 

Title of Each Class

of Securities to be Registered

 

Amount

To Be

Registered(1)

 

Proposed Maximum

Offering

Price Per Share(2)

 

Proposed Maximum

Aggregate Offering

Price(2)

 

Amount of

Registration Fee(3)

Common Stock, $0.0001 par value

  11,500,000   $21.00   $241,500,000   $32,940.60

 

 

(1) Includes 1,500,000 shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) This Amendment No. 2 increases the maximum aggregate offering price from $100,000,000 to $241,500,000. The registrant previously paid $13,640 pursuant to Rule 457(o) under the Securities Act of 1933, as amended, in connection with the registration of $100,000,000 worth of Class A Common Stock in the initial filing of this registration statement on August 16, 2013. The previously paid registration fee is offset against the registration fee otherwise due for this registration statement.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     25   

Special Note Regarding Forward-Looking Statements

     49   

Organizational Structure and Reorganization

     52   

Use of Proceeds

     62   

Dividend Policy

     63   

Capitalization

     64   

Dilution

     65   

Unaudited Pro Forma Condensed Consolidated Financial Information

     67   

Selected Historical Consolidated Financial and Operating Data

     79   

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

     82   

Business

     116   

Management

     135   

Executive Compensation

     142   

Certain Relationships and Related Party Transactions

     151   

Principal Stockholders

     155   

Description of Certain Indebtedness

     158   

Description of Capital Stock

     159   

Shares Eligible for Future Sale

     163   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     166   

Underwriters

     170   

Legal Matters

     178   

Experts

     178   

Where You Can Find Additional Information

     178   

Index to Consolidated Financial Statements

     F-1   

 

 

Through and including                 , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters have done anything that would permit a public offering of the shares of our common stock or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the U.S.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. Before making an investment decision, you should read the entire prospectus carefully, including the section entitled “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Unless we state otherwise, the terms “we,” “us,” “our,” “RE/MAX,” and the “Company,” refer to RE/MAX Holdings, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries after giving effect to the reorganization transactions to be completed in connection with the consummation of this offering (the “Reorganization Transactions”) as described in “Organizational Structure and Reorganization.” Prior to the Reorganization Transactions, these terms refer to RMCO, LLC (“RMCO”), a Delaware limited liability company, and its consolidated subsidiaries. We refer to RIHI, Inc., a Delaware corporation (“RIHI”), and to Weston Presidio V, L.P. (“Weston Presidio”), in their capacities as the current owners of RMCO prior to the Reorganization Transactions, collectively, as our “existing owners.” RIHI is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and by Gail Liniger, our Vice Chair and Co-Founder. Margaret Kelly, our Chief Executive Officer and a director, and Vincent Tracey, our President and a director, hold minority ownership interests in RIHI. Unless we state otherwise, the information in this prospectus gives effect to the Reorganization Transactions described in “Organizational Structure and Reorganization.”

In this prospectus, when we refer to our activities relating to the franchising of real estate brokerage services, this includes franchising of both residential and commercial real estate brokerage services. When we refer to a “transaction side” in this prospectus, we mean acting as the buying agent or the selling agent on a real estate sales transaction; if the agent acted as both the buyer’s agent and the seller’s agent on a particular real estate sales transaction, then that agent would have served on two transaction sides for such sale. Additionally, we use the terms “franchisee,” “broker” and “broker-owner” interchangeably to refer to the owner of the right to operate a RE/MAX-branded brokerage office.

Our Company

We are one of the world’s leading franchisors of real estate brokerage services. Our business strategy is to recruit and retain agents and sell franchises. Our franchisees operate under the RE/MAX brand name, which has held the number one market share in the U.S. and Canada since 1999 as measured by total residential transaction sides completed by our agents. Accordingly, our company slogan is “Nobody sells more real estate than RE/MAX.” The RE/MAX brand has the highest level of unaided brand awareness in real estate in the U.S. and Canada according to a 2013 survey by MMR Strategy Group, and our iconic red, white and blue RE/MAX hot air balloon is one of the most recognized real estate logos in the world.

The RE/MAX brand is built on the strength of our global franchise network which is designed to attract and retain the best-performing and most experienced agents by maximizing their opportunity to retain a larger portion of their commissions in exchange for fixed fees and a share of the offices’ overhead expense. As a result of this agent-centric approach, we believe that our agents are substantially more productive than the industry average. We consider agent count and agent productivity to be key measures of our business performance as the majority of our revenue is derived from fixed, contractual fees and dues paid to us based on the number of agents in our franchise network.

RE/MAX was founded in 1973 by David and Gail Liniger with an innovative, entrepreneurial culture affording our agents and franchisees the flexibility to operate their businesses with great independence. This business strategy led to a 33-year period of uninterrupted growth, highlighted in the charts below, as RE/MAX added large numbers of franchises and agents in the U.S., Canada and around the world. Today, the RE/MAX brand operates in more countries than any other real estate brokerage brand in the world.

 

 

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Over 90,000 Agents    Over 6,300 Offices    Over 90 Countries
Number of Agents    Number of Offices    Number of Countries
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* Through August 31, 2013

We grew our total agent count at a compound annual growth rate (“CAGR”) of 30% from our founding to a peak of approximately 120,000 agents in 2006. Our agent count declined approximately 26.8% from 2006 through 2011 as real estate transaction activity declined during the U.S. real estate downturn and economic recession, but we have returned to growth with a net gain of 1,532 agents during 2012 (of which 651 agents were in the U.S.), as the U.S. housing recovery took hold and real estate transaction activity began to rebound. We have accelerated our growth in 2013 with a net gain of 3,466 agents through August 31, 2013 (of which 2,110 agents were in the U.S.), as the upturn has gained momentum.

With approximately 74% of our 2012 revenue coming from the U.S., we believe that we are well positioned to benefit from a continuing recovery in the U.S. housing market. Further, with approximately 17% of our 2012 revenue coming from Canada, where RE/MAX has the leading market share among residential brokerage firms, we also expect to benefit from a continuation of generally stable Canadian housing market trends.

As a franchisor, we maintain a low fixed-cost structure, which enables us to generate high margins and helps us drive significant operating leverage through incremental revenue growth.

 

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(1) Adjusted EBITDA includes adjustments to EBITDA for (gain) loss on sale of assets and sublease, loss on extinguishment of debt, stock based compensation, deferred rent adjustments, salaries paid to David and Gail Liniger that we will not continue to pay following the consummation of this offering, and acquisition transaction costs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of Adjusted EBITDA and a reconciliation of the differences between Adjusted EBITDA and net income (loss).

 

 

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(2) Net loss in the year ended December 31, 2010 was primarily attributable to (i) a loss on the early extinguishment of debt resulting from the repayment of our prior senior debt facility stemming from issuance costs and the unamortized debt discount related to such facility and (ii) a loss incurred in the sale of our corporate headquarters office building. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Year Ended December 31, 2010 vs. Year Ended December 31, 2011.”

Market Opportunity

We operate in the real estate brokerage franchise industry in more than 90 countries, including the U.S. and Canada.

U.S. and Canadian Real Estate Brokerage Industry Overview. Based upon U.S. Census and Federal Reserve data and existing home sales information from the National Association of Realtors (“NAR”), the U.S. residential real estate industry is an approximately $1.15 trillion market based on 2012 sales volume and represents the largest single asset class in the U.S. with a value of approximately $18 trillion. The U.S. housing market has entered a period of recovery in 2012 which has accelerated during 2013.

Following a brief downturn in 2008, the real estate industry in Canada has remained relatively steady over the last four years, which is a trend we expect will continue.

Cyclical Nature. The residential real estate industry is cyclical in nature but has shown strong long-term growth. From the second half of 2005 through 2011, the U.S. real estate industry experienced a significant downturn, with existing home sale transactions declining by 40% and the median home sale price declining by 24%.

NAR is forecasting that (i) in 2013, existing home sales will increase by 8.3% to 5.0 million units and median existing home sale prices will increase by 10.6%, each as compared to 2012; and (ii) in 2014, existing home sales will increase by 2.5% to 5.2 million units and median existing home sale prices will increase by 5.7%, each as compared to 2013.

 

 

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We believe we are well-positioned to benefit from an increase in our agent count as a result of the current U.S. economic recovery and the rebound in the U.S. housing sector which appears to be gaining momentum. As illustrated below, the number of existing home sale transactions in the U.S. has generally increased during periods of economic recovery:

U.S. Existing Home Sales

(in thousands)

Existing Home Sales

 

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Source: National Association of Realtors

Favorable Long-term Demand. We believe that long-term demand for housing in the U.S. is primarily driven by the economic health of the domestic economy, low interest rates, and local factors such as demand relative to supply, and that the residential real estate market in the U.S. will also benefit over the long term from the following fundamental factors:

 

   

a return to levels of historical norms in home sales;

 

   

improved home affordability;

 

   

increasing household formations, including as a result of immigration and population growth;

 

   

an increase in home values; and

 

   

generational housing shifts related to retirement and adult children moving out of parents’ homes.

 

 

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Our Franchise Structure

Franchise Organizational Model. We function under the following franchise organizational model, with nearly all of the RE/MAX branded brokerage office locations being operated by franchisees:

 

Franchise Tier

  

Description

RE/MAX    Owns the right to the RE/MAX brand and sells franchises and franchising rights.
   

Regional

Franchise Owner

   Owns rights to sell brokerage franchises in a specified region. Current network of 162 regions globally. In the U.S. and Canada, RE/MAX owns 10 of 32 regional franchises, representing 46% of our U.S. and Canada agent count (each a “Company-owned Region”). The remaining 22 regional franchises, representing 54% of our U.S. and Canada agent count, are regions where regional franchise rights are held by independent owners (each an “Independent Region”). We intend to use a portion of the proceeds of this offering to reacquire regional RE/MAX franchise rights in the Central Atlantic and Southwest regions, increasing Company-owned Regions to approximately 54% of our U.S. and Canada agent count.
   

Franchisee

(or Broker-Owner)

   Owns the right to operate a RE/MAX-branded brokerage office, list properties and recruit agents. Over 6,300 offices globally.
   

Agent

(or Sales Associate)

   Branded independent contractors who operate out of local franchise brokerage offices. Approximately 90,000 agents globally.

Our Market Position. We attribute our success to our ability to recruit and retain experienced and productive agents and sell franchises. Our approach to sustained agent recruiting and retention and franchise sales is dependent upon two key elements of our unique business model: (i) creating and maintaining a premier market presence in the real estate brokerage industry worldwide, and (ii) creating and maintaining RE/MAX’s unique “growth engine.”

Premier Market Presence. We believe that we offer agents and franchisees a compelling market presence in the real estate brokerage industry through the combination of the following six attributes:

 

   

leading unaided brand awareness;

 

   

highly experienced and productive agents;

 

   

leading market share;

 

   

world-class web presence;

 

   

high level of customer satisfaction; and

 

   

strong community citizenship.

 

 

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RE/MAX “Growth Engine.” The RE/MAX Growth Engine is a virtuous circle whereby all of the key stakeholders in our franchise network—our franchisees, agents and RE/MAX—benefit from mutual investment and participation in the RE/MAX network or, as we say in RE/MAX, “Everybody wins.” By building our leading brand around an agent-centric model, we believe we are able to attract and retain highly productive agents and motivated franchisees. As a result, our agents and franchisees help to further enhance our brand and market share, expand our franchise network, and ultimately grow our revenue, as illustrated below:

 

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The RE/MAX Growth Engine leads to the following unique benefits for our franchisees and agents and RE/MAX:

 

RE/MAX Franchisee and Agent Benefits

  

RE/MAX Benefits

•    Affiliation with the best brand in the real estate industry

 

•    Entrepreneurial culture

 

•    High agent commission split and low franchise fees

 

•    Access to our lead referral system which is supported by our high traffic websites

 

•    Comprehensive, award-winning training programs

  

•    Network effect drives brand awareness

 

•    Franchise fee structure provides recurring revenue streams

 

•    Franchise model—highly profitable with low capital requirements—leads to strong cash flow generation and high margins

 

 

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Our Revenue Model

The majority of our revenue is derived from a stable set of fees paid by our agents, franchisees and regional franchise owners.

Our revenue streams are illustrated in the following chart:

Revenue Streams as Percentage of 2012 Total Revenue

 

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Continuing Franchise Fees. In the U.S. and Canada, continuing franchise fees are fixed contractual fees paid monthly by regional franchise owners in Independent Regions or franchisees in Company-owned Regions to RE/MAX based on the number of agents in the franchise region or the franchisee’s office.

Annual Dues. Annual dues are the membership fees which agents pay to be a part of the RE/MAX network and brand. Annual dues are a flat fee of US$390 for U.S. agents and C$390 for Canadian agents, paid directly to RE/MAX. Annual dues revenue is driven by the number of agents in our network.

Broker Fees. Broker fees are assessed to the broker against real estate commissions paid by customers when an agent sells a home. Agents pay a negotiated percentage of these earned commissions to the broker in whose office they work. Broker fees vary based upon the overall health of the real estate industry and the volume of existing home sales in particular. While this revenue stream is more variable than our continuing franchise fees and annual agent dues, it provides us with incremental upside during a real estate market recovery.

Franchise Sales and Other Franchise Revenue. Franchise sales and other franchise revenue is primarily comprised of:

 

   

Franchise Sales. Franchise sales consists of revenue from sales and renewals of individual franchises from Company-owned Regions and Independent Regions, as well as regional master franchises in the U.S. and Canada and in international markets. We receive only a portion of the revenue from the sales and renewals of individual franchises from Independent Regions.

 

   

Other Franchise Revenue. Other franchise revenue includes revenue from preferred marketing arrangements and approved supplier programs with third parties, including mortgage lenders and other real estate service providers, as well as event-based revenue from training and other programs, including our annual convention in the U.S.

Brokerage Revenue. Brokerage revenue principally represents fees assessed by our owned brokerages for services provided to their affiliated real estate agents. We have owned brokerage offices solely in the U.S. that represent less than 1% of the over 3,300 real estate brokerage offices that operate under the RE/MAX brand name in the U.S.

 

 

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International Revenue. Outside the U.S. and Canada, revenue earned from all the aforementioned revenue streams is substantially lower.

Revenue Per Agent in U.S. and Canada Owned and Independent Regions. We receive a higher amount of revenue per agent in our Company-owned Regions than in our Independent Regions. In 2012, the annual revenue per agent in our Company-owned Regions in the U.S. and Canada was approximately $2,288, whereas the average annual revenue per agent in our Independent Regions was approximately $803.

 

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* Based on actual revenue per agent for the year ended December 31, 2012 and does not take into account the acquisition of certain assets of RE/MAX of Texas.

Our Agent-Centric Approach

We believe that our agent-centric approach enables us to attract and retain highly effective agents and motivated franchisees to our network and drive growth in our business and profitability.

 

   

High Value Proposition to Agents and Franchisees. We have built a franchise model designed to provide the following unique combination of benefits to our franchisees and agents:

 

   

Affiliation with the Best Brand in Residential Real Estate. The RE/MAX brand has held number one market share as measured by total residential transaction sides completed by our agents in both the U.S. and Canada since 1999.

 

   

Entrepreneurial, High Performance Culture. We provide our franchisees and agents with a vast array of industry leading tools, resources and support, but allow them autonomy to run their businesses independently. Our approach gives them the freedom generally to set commission rates and oversee local advertising in order to best meet the needs of their particular markets and circumstances. As we say to our agents, they are “in business for themselves, but not by themselves.”

 

   

High Agent Commission Fee Split and Low Franchise Fees. In the RE/MAX franchise network, the agent generally retains a high percentage of commissions in exchange for paying a pre-agreed sum to share in overhead and other fixed costs of the brokerage, a model that is highly attractive to high-producing agents.

 

 

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Lead Referral Systems Supported by High Traffic Websites. We provide an attractive lead referral system to our agents free of referral fees and believe this is a major competitive advantage in that no other national real estate brand provides their agents with comparable access to free leads. Our lead referral system, LeadStreet® is supported by our award winning high-traffic websites, including remax.com, global.remax.com, theremaxcollection.com and remaxcommercial.com, which collectively attracted over 52 million visits in 2012 according to Experian Marketing Services Hitwise data and have generated over 12.4 million free leads for our agents since 2006.

 

   

RE/MAX University® Training Programs. RE/MAX is an industry leader in providing comprehensive education programs for franchisees and agents that are aimed at helping our global network of agents deliver the best service possible to their existing and potential new customers.

 

   

Highly Productive and Experienced Agents. Our franchise model is designed to attract and retain the most productive and experienced network of agents in real estate. The productivity of our agents is a key driver in the success of our franchisees. This dynamic reinforces itself as high performing agents benefit from being associated with successful brokerage offices in their local markets.

 

   

High Performing Agents. The RE/MAX network has sold more real estate than any other brand every year since 1999. We have achieved this level of productivity with fewer agents and offices than some major competitors. Closely-tracked surveys of large brokerages, such as the Real Trends 500 survey and the Real Trends Canadian 250 survey have for several years demonstrated that RE/MAX agents average more transactions per agent than any other national brand in both the U.S. and Canada.

 

2013 Real Trends U.S. 500 Survey:

Transactions Per Agent

  

2013 Real Trends Canadian 250 Survey:

Transactions Per Agent

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Source: 2013 Real Trends 500 Survey of the largest brokerages, containing 2012 data    Source: 2013 Real Trends Canadian 250 Survey of the largest brokerages, containing 2012 data

 

   

Agent Experience. Our agents average nearly 13 years of real estate experience and seven and a half years as a RE/MAX agent.

 

   

Agent Expertise. RE/MAX agents lead the industry in many key professional designations, and RE/MAX University further enhances our agent expertise by equipping agents with advanced training in specialty areas of real estate. Across our agent base, professional designations correlate with higher median agent commissions.

 

 

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High-earning agents. We believe RE/MAX agents earn among the highest median gross incomes in the industry.

 

   

In 2012, the median annual commission income for U.S. RE/MAX agents was $63,482, which was 46% higher than the median annual income for U.S. realtors according to NAR.

 

   

In Canada, the median annual commission income for RE/MAX agents in 2012 was C$92,271.

Our Competitive Strengths

We attribute our success to the following competitive strengths:

Premier Market Presence. We believe we have the best brand worldwide in the real estate brokerage industry, which allows us to attract the most experienced and productive agents and to grow our market presence both in the U.S. and worldwide. We further believe that we offer agents and franchisees a compelling Premier Market Presence in the real estate brokerage industry through the combination of:

 

   

leading brand name awareness;

 

   

highly experienced and productive agents;

 

   

leading market share;

 

   

high-traffic web presence;

 

   

high level of customer satisfaction; and

 

   

strong community citizenship.

Premier Global Brand. Our presence in over 90 countries provides a unique competitive advantage, as no other real estate network matches our global footprint. We believe we have established the leading global brand in residential real estate and that our scale and market penetration create top of mind awareness with consumers and potential agents throughout the world. Our international scale provides opportunities for us to grow agent counts in fast growing markets around the globe. In addition, our network of agents and listings around the world benefits our franchise network in the U.S. and Canada through access to international listings and lead generation. Our website global.remax.com allows sellers around the world to promote their properties to potential buyers using local language and currency conversion to enhance a listing’s effectiveness.

Growing Agent and Franchise Presence. We believe that our history of sustained agent and franchise growth coupled with our position as the leading residential real estate brand in the U.S. enables us to capitalize on the continuing recovery in the U.S. housing market.

Sustained Increases in Agent Count. From our founding in 1973, we grew our total agent count at a CAGR of 30% to approximately 120,000 agents at the peak of the most recent housing cycle in 2006. We have recently returned to a period of agent growth in the U.S. in 2012 and 2013. We believe this trend will continue as the U.S. housing recovery gains momentum.

Franchise Growth. We have a successful record of long term growth in the number of our franchises globally, with more than 6,300 offices and a presence in more than 90 countries. We increase our franchises through the sale of both individual offices and regional master franchises. In 2012, we sold 739 franchises globally, and we expect to sell an equal or greater number of franchises in 2013.

Benefits of Our Franchise Financial Model. The majority of our revenue is derived from fixed contractual fees and dues paid by our agents, franchisees and regional franchise owners. As a franchisor, we maintain a low fixed cost structure which requires little additional investment as we add franchisees and agents. Accordingly, incremental

 

 

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increases in agents and franchisees drive additional revenue and Adjusted EBITDA. This also allows us to deliver consistently high margins over market cycles and in 2012, our Adjusted EBITDA and net income margins were 46% and 23%, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of Adjusted EBITDA and a reconciliation of the differences between Adjusted EBITDA and net income (loss). Further, given that our franchise model requires little capital investment, we are able to generate strong cash flow as well.

Committed, Experienced and Passionate Leadership Team. Our senior management leadership team has an average of 18 years of experience working together as a team while building RE/MAX into the global organization it is today. Margaret Kelly, who has served as our Chief Executive Officer since 2005, started with the company in 1987, and Vincent Tracey, who has served as our President since 2005, started with the company in 1977. David Metzger, Executive Vice President, Chief Operating Officer and Chief Financial Officer joined RE/MAX in 2007. Our senior management leadership team also includes Mike Ryan, our Executive Vice President, Global Communications and Branding, who joined us in 1994, and Geoff Lewis, our Executive Vice President, Chief Legal and Compliance Officer, who joined us in 2004. We believe our senior management team and our founders, David and Gail Liniger, have been key drivers of our success and position us well for continued long-term growth.

Our Growth Strategy

We intend to leverage our market leadership in the residential real estate brokerage industry in the U.S. and Canada through various growth initiatives. The key elements of our growth strategy include:

Capitalize on the Recovery in the U.S. Residential Real Estate Market and Increase Our Agent Count. The number of agents in the residential real estate industry is highly correlated to overall transaction activity. Since 2006, the residential real estate industry across the globe, and especially in the U.S., experienced a historic downturn, including a significant decline in the number of agents in the business. Based on our experience, we believe strengthening market conditions in the U.S. will enable us to sell more franchises and recruit and retain higher numbers of productive agents, increasing our revenue and profitability. We experienced agent losses during the downturn, but we returned to a period of net agent growth in 2012 and our growth in agent count has accelerated in 2013.

Drive Continuing Franchise Sales Growth and Agent Recruitment and Retention. Our business strategy is to continue to sell franchises and recruit and retain agents:

 

   

We sold 739 franchises in 2012 and intend to continue adding franchises in new and existing markets, and as a result, increase our global market share and brand awareness. In the U.S., we believe we will increase the sales of our franchises as the U.S. housing recovery continues. We believe we are also well-positioned to further grow the number of our franchises outside the U.S. and Canada, where the growth potential for the RE/MAX brand is substantial, particularly in faster growing international markets. In 2012 and 2013, we expanded into several new markets outside of the U.S. and Canada, including China and Hong Kong in 2012 and South Korea in July 2013.

 

   

We intend to continue to focus on recruitment and retention of agents, as each incremental agent leverages our existing infrastructure allowing us to drive additional revenue at little incremental cost.

 

 

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Reacquire Independent RE/MAX Regional Franchises. We intend to continue to pursue reacquisitions of the regional RE/MAX franchise rights in a number of Independent Regions in the U.S. and Canada. The reacquisition of a regional franchise substantially increases our revenue per agent and provides an opportunity for us to drive enhanced profitability, as we receive a higher amount of revenue per agent in our Company-owned Regions than in our Independent Regions. For example, we can establish operational efficiencies and improvements in financial performance of a reacquired region by leveraging our existing infrastructure and experience.

 

LOGO

We currently franchise directly in Company-owned Regions representing 46% of our agents in the U.S. and Canada combined, while the remaining 54% of our U.S. and Canada combined agent count operate in 22 Independent Regions. We intend to use a portion of the proceeds of this offering to acquire the Central Atlantic and Southwest regional franchises in the U.S., which had an aggregate of 5,885 agents as of August 31, 2013. These acquisitions will increase our Company-owned Regions to approximately 54% of our U.S. and Canada agent count and 12 out of 32 regions in the U.S. and Canada.

Franchise and Agent Fee Increases. Given the low fixed infrastructure cost of our franchise model, modest increases in aggregate fees per agent have a significant impact on our profitability. We are pursuing opportunities to increase our aggregate fees per agent over time in order to improve our results of operations.

Summary of Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider the following risks, including the risks discussed in “Risk Factors,” before buying shares of our Class A common stock.

 

   

The residential real estate market is cyclical and we are negatively impacted by downturns in this market and general global economic conditions.

 

   

The lack of financing for homebuyers in the U.S. residential real estate market at favorable rates and on favorable terms could have a material adverse effect on our financial performance and results of operations.

 

   

We may fail to successfully execute our strategies to grow our business, including growing our agent count.

 

 

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Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to grow our business, particularly in new markets where we have limited brand recognition.

 

   

Loss or attrition among our senior management, including our Chief Executive Officer and our Chairman and Co-Founder, could adversely affect our operations.

 

   

Competition in the residential real estate business is intense and may adversely affect our financial performance.

 

   

The failure to attract and retain highly qualified franchisees could compromise our ability to pursue our growth strategy.

 

   

Our financial results are affected directly by the operating results of franchisees and agents, over whom we may not have direct control.

 

   

Our franchisees and agents could take actions that could harm our business.

 

   

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.

Corporate Information

RE/MAX Holdings, Inc., the issuer of Class A common stock in this offering, is a Delaware corporation. Our principal executive offices are located at 5075 South Syracuse Street, Denver, Colorado 80237. Our telephone number is (303) 770-5531. Our website is www.remax.com. Our website is provided as an inactive textual reference. The contents of our website are not incorporated by reference herein or otherwise a part of this prospectus.

Organizational Structure and Reorganization

Immediately following this offering and the related Reorganization Transactions, the holders of our Class A common stock will collectively own 100% of the economic interests in RE/MAX Holdings, Inc. and have 20.50% of the voting power of RE/MAX Holdings, Inc. RIHI will have the remaining 79.50% of the voting power of RE/MAX Holdings, Inc. through ownership of 100% of the outstanding shares of our Class B common stock.

We will be a holding company and our sole asset will be approximately 34.02% of the common units in RMCO. One of our existing owners, RIHI, will own the remaining 65.98% of the common units in RMCO, each of which will be redeemable at the holder’s election for, at our option, newly issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to the market price of one share of our common stock. Our only business will be acting as the sole manager of RMCO and, in that capacity, we will operate and control all of the business and affairs of RMCO and we will consolidate the financial results of RMCO and its subsidiaries.

We intend to use approximately $27.3 million of the net proceeds of this offering to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisition of the business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”). See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Managed Region Acquisitions.” Following our acquisition of the business assets of HBN and Tails, we will contribute such assets to RMCO in exchange for a number of newly issued common units of RMCO worth approximately $27.3 million. We intend to use the remainder of the net proceeds of this offering to purchase newly issued common units of RMCO from RMCO.

 

 

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RMCO will use a portion of the net proceeds it receives from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio and to satisfy a $49.8 million liquidation preference associated with those preferred membership units. Following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO will use the remaining net proceeds of this offering to redeem common units of RMCO from our existing owners, RIHI and Weston Presidio. RMCO will use $70.5 million to fully redeem those common units held by Weston Presidio, and approximately $29.4 million to redeem common units held by RIHI.

The diagram below depicts our organizational structure immediately after this offering and the related Reorganization Transactions.

 

LOGO

 

(1) RIHI is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder. Margaret Kelly, our Chief Executive Officer and a director, Vincent Tracey, our President and a director, and Daryl Jesperson, a director, hold minority ownership interests in RIHI.
(2)

RIHI will have 79.50% of the voting power of RE/MAX Holdings, Inc. through its ownership of one share of Class B common stock of RE/MAX Holdings, Inc. (or 75.73% if the underwriters exercise their over-allotment option in full).

 

 

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(3) Public investors holding 98.83% of the shares of Class A common stock of RE/MAX Holdings, Inc. will collectively own 98.83% of the initial economic interests in RE/MAX Holdings, Inc. (or 98.98% if the underwriters exercise their over-allotment option in full) and have 20.25% of the voting power of RE/MAX Holdings, Inc. (or 24.02% of the voting power if the underwriters exercise their over-allotment option in full). Recipients of grants made in connection with this offering will collectively own 1.17% of the remaining shares of Class A common stock (or 1.02% if the underwriters exercise their over-allotment in full) and have 0.25% of the voting power of RE/MAX Holdings, Inc. (which will remain at approximately 0.25% if the underwriters exercise their over-allotment option in full). Immediately following the offering, shares of Class A common stock will be reserved for issuance to our employees, directors and consultants and to employees, directors and consultants of any affiliated entity, including RMCO, in an amount equal to five percent of our fully diluted capitalization after this offering, under the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “2013 Stock Incentive Plan”), a stock incentive plan that we intend to adopt in connection with this offering. In addition, we have reserved 787,500 shares issuable upon the exercise of vested stock options that we will grant in substitution of options that were granted by RMCO.
(4) RE/MAX Holdings, Inc. is a Delaware corporation.
(5) RIHI will hold 19,626,330 common units in RMCO, representing 65.98% of the total number of common units in RMCO that will be outstanding immediately after the offering (or 18,126,330 common units in RMCO, representing 60.94% if the underwriters exercise their over-allotment option in full). Each common unit held by RIHI will be redeemable, at the election of RIHI, for, at RE/MAX Holdings, Inc.’s option, newly issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the market price of one share of Class A common stock (subject to customary adjustments, including conversion rate adjustments, underwriting discounts, commissions and adjustments for stock splits, stock dividends and reclassifications). If, immediately after this offering, RIHI had all of its common units in RMCO redeemed for newly issued shares of Class A common stock, RIHI would own approximately 65.98% shares of our Class A common stock (or 60.94% if the underwriters exercise their over-allotment option in full).
(6) RE/MAX Holdings, Inc. will be the managing member of RMCO and will hold 10,118,750 common units in RMCO, representing 34.02% of the total number of common units in RMCO that will be outstanding immediately after the offering (or 11,618,750 common units in RMCO, representing 39.06% if the underwriters exercise their over-allotment option in full). If, immediately after this offering, RIHI had all of its common units in RMCO redeemed for newly issued shares of Class A common stock, RE/MAX Holdings, Inc. would own 100.00% of the common units in RMCO.
(7) RMCO is a Delaware limited liability company.
(8) RE/MAX conducts its business activities through its various domestic and international operating subsidiaries.

For more information regarding our historical organizational structure and the Reorganization Transactions that will occur in connection with the completion of this offering, see “Organizational Structure and Reorganization.”

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

 

   

the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;

 

 

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the last day of the fiscal year following the fifth anniversary of the completion of this offering;

 

   

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and

 

   

the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in market value of outstanding common equity held by our non-affiliates, as measured on the last day of our second fiscal quarter of the previous fiscal year, (ii) been public for at least 12 months and (iii) filed at least one annual report under the Exchange Act).

The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”), for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

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THE OFFERING

 

Class A common stock offered by us

10,000,000 shares.

 

Option to purchase additional shares

If the underwriters sell more shares than the total number set forth above, the underwriters have an option to buy up to an additional 1,500,000 shares from us to cover such sales. They may exercise that option for 30 days.

 

Class A common stock to be outstanding after this offering

10,118,750 shares (or 29,745,080 shares if all outstanding RMCO common units held by our existing owners were redeemed for newly issued shares of Class A common stock on a one-for-one basis).

 

Class B common stock to be outstanding after this offering

One share.

 

Voting power held by holders of Class A common stock after giving effect to this offering

20.50% (or 100% if all outstanding RMCO common units held by our existing owners were redeemed for newly issued shares of Class A common stock on a one-for-one basis).

 

Voting power held by holders of Class B common stock after giving effect to this offering

79.50% (or 0% if all outstanding RMCO common units held by our existing owners were redeemed for newly issued shares of Class A common stock on a one-for-one basis).

 

Use of proceeds

The net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $177.0 million (or $205.2 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), assuming an initial public offering price of $20.00 per share of Class A common stock (the midpoint of the price range set forth on the cover of this prospectus).

 

  We intend to use approximately $27.3 million of the proceeds of this offering to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisition of the business assets of HBN and Tails. Following our acquisition of the business assets of HBN and Tails, we will contribute such assets to RMCO in exchange for a number of newly issued common units of RMCO worth approximately $27.3 million, at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Managed Region Acquisitions.”

We intend to use approximately $160.7 million of the proceeds of this offering (and any net proceeds received if the underwriters exercise

 

 

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their option to purchase additional shares of Class A common stock) to purchase newly issued common units of RMCO from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. RMCO will use a portion of the proceeds it receives from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio and to satisfy the $49.8 million liquidation preference associated with those preferred membership units. Following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO will use $99.9 million (or $128.1 million if the underwriters exercise in full their option to purchase additional shares of our Class A common stock) to redeem common units of RMCO from our existing owners, RIHI and Weston Presidio. RMCO will use $70.5 million to fully redeem those common units held by Weston Presidio, and $29.4 million to redeem common units held by RIHI. The price per common unit of RMCO paid by RMCO to our existing owners will equal the public offering price per share of our Class A common stock, less underwriting discounts. See “Organizational Structure and Reorganization—Reorganization Transactions” and “Use of Proceeds.”

 

Principal stockholders

Upon completion of this offering, RIHI will own one share, or 100%, of our outstanding Class B common stock, representing 79.50% of the voting power of our common stock.

 

Voting rights

Each share of our 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 RE/MAX Holdings, Inc. that is equal to two times the aggregate number of common units of RMCO held by such holder. See “Description of Capital Stock—Common Stock—Class B Common Stock.”

 

  Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

 

Dividend policy

We currently intend to declare quarterly dividends of approximately $0.0625 per share of Class A common stock after the completion of this offering. We currently expect the first quarterly dividend will be paid after completion of the fourth quarter of 2013. We expect that any dividends we declare will be funded by proportionate distributions by RMCO to us and RIHI in accordance with respective ownership percentages of common units. Whether we will declare such dividends, however, and their timing and amount, will be

 

 

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subject to approval and declaration by our board of directors and will depend on a variety of factors, including our financial results, cash requirements and financial condition, our ability to pay dividends under our debt financing agreements and any other applicable contracts, and other factors deemed relevant by our board of directors.

 

  Because we are a holding company, our cash flow and ability to pay dividends are dependent upon the financial results and cash flows of our operating subsidiaries and the distribution or other payment of cash to us in the form of dividends or otherwise.

 

Redemption rights of holders of common units

Following this offering, each remaining common unit in RMCO held by RIHI may be redeemed at RIHI’s election in exchange for, at our option, newly issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to the market price of one share of our Class A common stock (subject to customary adjustments, including conversion rate adjustments, underwriting discounts, commissions and adjustments for stock splits, stock dividends and reclassifications). In connection with this offering, all of Weston Presidio’s preferred units and common units will be redeemed in exchange for cash and Weston Presidio will cease to be a member of RMCO. If, immediately following this offering, RIHI had all of its remaining common units in RMCO redeemed in exchange for newly issued shares of our Class A common stock, RIHI would own an aggregate of approximately 65.98% of all outstanding shares of our Class A common stock (or 60.94% if the underwriters exercise their over-allotment option in full).

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in our Class A common stock.

 

Proposed NYSE trading symbol

“RMAX.”

Unless otherwise indicated, the information in this prospectus assumes that:

 

   

the Reorganization Transactions have occurred;

 

   

our amended and restated certificate of incorporation and amended and restated bylaws were adopted in connection with the completion of this offering, pursuant to which our board of directors will be divided into three classes, and other provisions described under “Description of Capital Stock” will become operative; and

 

   

the 118,750 restricted stock units to be granted to certain employees under the 2013 Stock Incentive Plan (assuming the initial offering price is $20.00 per share, which is the midpoint of the price range listed on the cover of this prospectus) in connection with this offering that shall be vested upon grant, but which underlying shares will not be issued until May 20, 2014, are included in the outstanding shares of our Class A common stock after this offering.

 

 

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In this prospectus, unless otherwise indicated, the number of shares of our Class A common stock to be outstanding after this offering and other information based thereon excludes:

 

   

1,500,000 shares of our Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares;

 

   

787,500 shares of our Class A common stock issuable upon the exercise of currently exercisable options (upon substitution of options to acquire our Class A common stock for currently outstanding RMCO unit options), at a weighted average exercise price of $3.60 per share (see “Executive Compensation—Equity Grants in Conjunction with this Offering”);

 

   

147,250 shares of our Class A common stock that will underlie awards of unvested restricted stock units we expect to grant under the 2013 Stock Incentive Plan upon the completion of this offering. See “Executive Compensation—Equity Grants in Conjunction with this Offering”;

 

   

shares of our Class A common stock reserved for future grants under the 2013 Stock Incentive Plan, which will equal five percent of our fully diluted capitalization after this offering, less the vested restricted stock units with respect to 118,750 shares of our Class A common stock issued to certain employees and the 147,250 unvested restricted stock units to be granted in connection with this offering to certain employees and directors. The total number of shares of Class A common stock to be available for grant under the 2013 Stock Incentive Plan, after giving effect to the expected grants in connection with this offering and assuming an initial public offering price of $20.00 per share, will be 1,334,728 shares. See “Executive Compensation—Employee Benefit and Stock Plans—2013 Stock Incentive Plan”; or

 

   

19,626,330 shares of our Class A common stock issuable upon redemption of 19,626,330 common units of RMCO (or, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, 18,126,330 shares of Class A common stock issuable upon redemption of 18,126,330 common units of RMCO) that will be held by RIHI immediately following this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table presents our summary historical consolidated financial data and operating statistics. The consolidated statement of operations data for the years ended December 31, 2010, 2011, and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 have been prepared on the same basis as the audited consolidated financial statements and have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations as of the dates and for the periods indicated.

The summary historical consolidated financial data and operating statistics presented below should be read in conjunction with “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes thereto included elsewhere in this prospectus. Historical results are not necessarily indicative of results that may be expected for any future period. RMCO will be considered the predecessor of RE/MAX Holdings, Inc. for accounting purposes and the consolidated financial statements of RMCO will be the historical financial statements of RE/MAX Holdings, Inc. following this offering.

The summarized unaudited pro forma condensed consolidated financial data as of June 30, 2013 and for the year ended December 31, 2012 and six months ended June 30, 2013 have been prepared to give pro forma effect to the Reorganization Transactions described in “Organizational Structure and Reorganization,” the acquisition of certain assets of RE/MAX of Texas, the sale of shares in this offering, the reacquisition of regional franchise rights in the Southwest and Central Atlantic regions in the U.S. and the application of the net proceeds from this offering, as if they had been completed as of January 1, 2012 with respect to the pro forma consolidated statement of operations data and June 30, 2013 with respect to the pro forma balance sheet data. This data is subject, and gives effect, to the assumptions and adjustments described in the notes accompanying the unaudited pro forma condensed consolidated financial information included elsewhere in this prospectus. The summary unaudited pro forma condensed consolidated financial data is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Reorganization Transactions, the acquisition of certain assets of RE/MAX of Texas, the reacquisition of regional franchise rights in the Southwest and Central Atlantic regions in the U.S. and this offering been consummated on the dates indicated, and do not purport to be indicative of statements of financial condition data or results of operations as of any future date or for any future period.

 

 

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    Years Ended December 31,     Pro Forma     Six Months Ended
June 30,
    Pro Forma  
      Year Ended
December 31,
2012
      Six
Months
Ended
June 30,
2013
 
    2010     2011     2012       2012     2013    
                      (unaudited)     (unaudited)     (unaudited)     (unaudited)  
    (in thousands, except agent data)  

Consolidated Statement of Operations Data:

             

Revenue:

             

Continuing franchise fees

  $ 60,865      $ 57,200      $ 56,350      $ 66,777      $ 27,875      $ 30,944      $ 33,690   

Annual dues

    30,472        28,922        28,909        28,909        14,168        14,597        14,597   

Broker fees

    16,021        16,764        19,579        23,196        9,116        11,500        12,412   

Franchise sales and other franchise revenue

    15,709        19,354        22,629        23,903        11,000        12,747        13,024   

Brokerage revenue

    17,150        16,062        16,210        16,210        8,009        8,528        8,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 140,217      $ 138,302      $ 143,677      $ 158,995      $ 70,168      $ 78,316      $ 82,251   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Selling, operating and administrative expenses

    81,353        85,291        84,337        94,399        43,214        47,983        49,627   

Depreciation and amortization

    16,735        14,473        12,090        17,466        6,443        7,432        8,285   

Loss (gain) on sale of assets, net

    3,719        67        1,704        1,704        (18     44        44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    101,807        99,831        98,131        113,569        49,639        55,459        57,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    38,410        38,471        45,546        45,426        20,529        22,857        24,295   

Other income (expenses):

             

Interest expense

    (22,295     (12,203     (11,686     (14,393     (5,861     (6,925     (6,925

Interest income

    538        372        286        340        129        142        149   

Foreign currency transaction gains (losses) net

    167        (266     208        208        (36     (416     (416

Loss on early extinguishment of debt

    (18,161     (384     (136     (136     (136     (134     (134

Equity in earnings of investees

    643        431        1,244        1,244        314        462        462   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses), net

    (39,108     (12,050     (10,084     (12,737     (5,590     (6,871     (6,864
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss (income) before provision for income taxes

    (698     26,421        35,462        32,689        14,939        15,986        17,431   

Provision for income taxes

    (2,049     (2,172     (2,138     (4,226     (1,104     (1,031     (2,253
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (2,747     24,249        33,324        28,463        13,835        14,955        15,178   

Net (loss) income attributable to noncontrolling interests

    (10,059     —          —          21,568        —          —          11,501   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to controlling interests

    7,312        24,249        33,324        6,895        13,835        14,955        3,677   

Accretion of Class A Preferred Units to estimated redemption amounts

    23,453        10,307        15,288        —          6,831        79,672        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income related to common stockholders/unitholders

  $ (16,141   $ 13,942      $ 18,036      $ 6,895      $ 7,004      $ (64,717   $ 3,677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

             

Basic

        $ 0.68          $ 0.36   

Diluted

        $ 0.64          $ 0.34   

Weighted average shares outstanding:

             

Basic

          10,118,750            10,118,750   

Diluted

          10,758,879            10,746,849   

Other data:

             

Adjusted EBITDA(1)

  $ 62,368      $ 59,281      $ 66,744        74,903      $ 29,405      $ 36,700        39,087   

Agent count at period end

    89,628        87,476        89,008        89,008        88,487        91,809        91,809   

 

 

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     As of June 30, 2013  
     Actual     Pro Forma(2)  
     (unaudited)     (unaudited)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 58,582      $ 58,582   

Franchise agreements, net

     72,406        95,920   

Goodwill

     70,817        73,303   

Total assets

     238,070        328,747   

Long-term debt, including current portion

     223,230        223,230   

Redeemable preferred units

     145,400        —     

Total members’ deficit/stockholders’ equity attributable to RE/MAX Holdings, Inc.

     —          218,324   

Non-controlling interest

     —          (189,938

Total members’ deficit/stockholders’ equity

     (169,094     28,386   

 

(1) A reconciliation of Adjusted EBITDA to net income (loss) under accounting principles generally accepted in the U.S. (“GAAP”) is set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

We define Adjusted EBITDA as consolidated net income (loss) before depreciation and amortization, interest expense and provision for income taxes, adjusted for the impact of certain items that we do not consider representative of our ongoing operating performance. Because Adjusted EBITDA omits certain non-cash items and other infrequent cash charges, we believe that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and other infrequent cash charges and is more reflective of other factors that affect our operating performance. We present Adjusted EBITDA because we believe it is useful as a supplemental measure in evaluating the performance of our operating businesses and provide greater transparency into our results of operations. Our management uses Adjusted EBITDA as a factor in evaluating the performance of our business. Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) or other statement of operations data prepared in accordance with GAAP.

Adjusted EBITDA includes adjustments to consolidated net income (loss) before depreciation and amortization, interest expense and provision for income taxes, for (gain) loss on sale of assets and sublease, loss on extinguishment of debt, stock based compensation, deferred rent adjustments, salaries paid to David and Gail Liniger that we will not continue to pay following the consummation of this offering, expenses incurred in connection with this offering and acquisition transaction costs.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider Adjusted EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:

 

   

this measure does not reflect changes in, or cash requirement for, our working capital needs;

 

   

this measure does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

   

this measure does not reflect our income tax expense or the cash requirements to pay our taxes;

 

   

this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures do not reflect any cash requirements for such replacements; and

 

   

other companies may calculate this measure differently so they may not be comparable.

 

 

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(2) Pro Forma amounts give effect to: (i) the Reorganization Transactions, including the substitution of outstanding options under the 2011 Unit Option Plan; (ii) this offering and the use of a portion of the proceeds as described in “Use of Proceeds,” including the reacquisition of regional franchise rights in the Southwest and Central Atlantic regions in the U.S.; (iii) the tax receivable agreements we will enter into with the existing owners; and (iv) the shares of our Class A common stock we expect to grant under the 2013 Stock Incentive Plan at the time of this offering.

 

 

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RISK FACTORS

The purchase of our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with the risks described elsewhere in this prospectus, including our consolidated financial statements and the related notes, before making a decision to invest in our Class A common stock. If any of these risks actually occur, our business, financial condition, operating results, cash flow and prospects may be materially and adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose some or all of your investment.

Risks Related to Our Business and Industry

The residential real estate market is cyclical and we are negatively impacted by downturns in this market and general global economic conditions.

The residential real estate market tends to be cyclical and typically is affected by changes in general economic conditions which are beyond our control. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, levels of unemployment, consumer confidence and the general condition of the U.S. and the global economy. The residential real estate market also depends upon the strength of financial institutions, which are sensitive to changes in the general macroeconomic environment. Lack of available credit or lack of confidence in the financial sector could impact the residential real estate market, which in turn could materially and adversely affect our business, financial condition and results of operations.

For example, the U.S. residential real estate market has only recently shown signs of recovery after having been in a significant and prolonged downturn, which began in the second half of 2005. Due to the cyclicality of the real estate market, we cannot predict whether the recovery will continue or if and when the market and related economic forces will return the U.S. residential real estate industry to a period of sustained growth. If the residential real estate market or the economy as a whole does not improve, we may experience adverse effects on our business, financial condition and liquidity, including our ability to access capital and grow our business.

Any of the following could be associated with cyclicality in the housing market by halting or limiting a recovery in the housing market, and have a material adverse effect on our business by causing periods of lower growth or a decline in the number of home sales and/or home prices which, in turn, could adversely affect our revenue and profitability:

 

   

continued high unemployment;

 

   

a period of slow economic growth or recessionary conditions;

 

   

weak credit markets;

 

   

a low level of consumer confidence in the economy and/or the residential real estate market;

 

   

instability of financial institutions;

 

   

legislative, tax or regulatory changes that would adversely impact the residential real estate market, including but not limited to potential reform relating to Fannie Mae, Freddie Mac and other government sponsored entities (“GSEs”) that provide liquidity to the U.S. housing and mortgage markets;

 

   

increasing mortgage rates and down payment requirements and/or constraints on the availability of mortgage financing, including but not limited to the potential impact of various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) or other legislation and regulations that may be promulgated thereunder relating to mortgage financing, including restrictions imposed on mortgage originators as well as retention levels required to be maintained by sponsors to securitize certain mortgages;

 

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excessive or insufficient regional home inventory levels;

 

   

renewed high levels of foreclosure activity, including but not limited to the release of homes already held for sale by financial institutions;

 

   

adverse changes in local or regional economic conditions;

 

   

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

 

   

a decrease in the affordability of homes;

 

   

local, state and federal government laws or regulations that burden residential real estate transactions or ownership, including but not limited to changes in the tax laws, such as potential limits on, or elimination of, the deductibility of certain mortgage interest expense, the application of the alternative minimum tax, and real property taxes and employee relocation expense;

 

   

decreasing home ownership rates, declining demand for real estate and changing social attitudes toward home ownership; and/or

 

   

acts of God, such as hurricanes, earthquakes and other natural disasters that disrupt local or regional real estate markets.

The failure of the U.S. residential real estate market recovery to be sustained or a prolonged decline in the number of home sales and/or home sale prices could adversely affect our revenue and profitability.

The U.S. residential real estate market has recently shown signs of recovery after having been in a significant and prolonged downturn, which began in the second half of 2005. However, we do not know if this recovery will continue in the future or if and when the market and related economic forces will return the U.S. residential real estate industry to a period of sustained growth. A lack of a continued recovery or a prolonged decline in existing home sales, a decline in home sale prices or a decline in commission rates charged by our franchisees/brokers could adversely affect our results of operations by reducing the ongoing monthly fees we receive from our franchisees and our company owned brokerages and reduce the management fees charged by our company owned brokerages.

The lack of financing for homebuyers in the U.S. residential real estate market at favorable rates and on favorable terms could have a material adverse effect on our financial performance and results of operations.

Our business is significantly impacted by the availability of financing at favorable rates or on favorable terms for homebuyers, which may be affected by government regulations and policies. Certain potential reforms such as the U.S. federal government’s conservatorship of Fannie Mae and Freddie Mac, proposals to reform the U.S. housing market, attempts to increase loan modifications for homeowners with negative equity, monetary policy of the U.S. government, any rising interest rate environment and the Dodd-Frank Act may adversely impact the housing industry, including homebuyers’ ability to finance and purchase homes.

The monetary policy of the U.S. government, and particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S., significantly affects the availability of financing at favorable rates and on favorable terms, which in turn affects the domestic real estate market. Policies of the Federal Reserve Board can affect interest rates available to potential homebuyers. Further, we are affected by any rising interest rate environment. Changes in the Federal Reserve Board’s policies, the interest rate environment and mortgage market are beyond our control, are difficult to predict and could restrict the availability of financing on reasonable terms for homebuyers, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, the possibility of the elimination of the mortgage interest deduction could have an adverse effect on the housing market by reducing incentives for buying or refinancing homes and negatively affecting property values.

 

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In addition, the reduction in government support for housing finance, including the winding down of Fannie Mae and Freddie Mac, further reduces the availability of financing for homebuyers in the U.S. residential real estate market. In connection with the U.S. federal government’s conservatorship of Fannie Mae and Freddie Mac, it has provided billions of dollars of funding to these entities in the form of preferred stock investments to backstop shortfalls in their capital requirements. The U.S. Treasury announced that it would accelerate the winding down of these entities, but no consensus has emerged in Congress concerning a successor, if any. Given the current uncertainty with respect to the current and further potential reforms relating to Fannie Mae and Freddie Mac, we cannot predict either the short or long term effects of such regulation and its impact on homebuyers’ ability to finance and purchase homes. In an effort to assist recovery of the housing market, the U.S. government has also attempted to increase loan modifications for homeowners with negative equity, but there can be no assurance that such measures will be effective.

Furthermore, during the past several years, many lenders have significantly tightened their underwriting standards, and many subprime and other alternative mortgage products are no longer being made available in the marketplace. If these trends continue and mortgage loans continue to be difficult to obtain, including in the jumbo mortgage markets, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes will be adversely affected, which will adversely affect our operating results.

The Dodd-Frank Act, which was passed to more closely regulate the financial services industry, created an independent federal bureau of consumer financial protection, which enforces consumer protection laws, including mortgage finance. The Dodd-Frank Act also established new standards and practices for mortgage originators, including determining a prospective borrower’s ability to repay their mortgage, removing incentives for higher cost mortgages, prohibiting prepayment penalties for non-qualified mortgages, prohibiting mandatory arbitration clauses, requiring additional disclosures to potential borrowers and restricting the fees that mortgage originators may collect. In addition, the Dodd-Frank Act contained provisions that require GSEs, including Fannie Mae and Freddie Mac, to retain an interest in the credit risk arising from the assets they securitize. This may serve to reduce GSEs’ interest in or demand for mortgage loans, which could have a material adverse effect on the mortgage industry, which may reduce the availability of mortgages to certain borrowers.

While we are continuing to evaluate all aspects of the current state of legislation, regulations and policies affecting the domestic real estate market, we cannot predict whether or not such legislation, regulation and policies may result in increased down payment requirements, increased mortgage costs, and result in increased costs and potential litigation for housing market participants, any of which could have a material adverse effect on our financial condition and results of operations.

We may fail to successfully execute our strategies to grow our business, including increasing our agent count, expanding our network of franchises and agents, pursuing reacquisitions of the regional franchise rights in a number of RE/MAX regions in the U.S. and Canada and increasing franchise and agent fees, or we may fail to manage our growth effectively, which could have a material adverse effect on our brand, our financial performance and results of operations.

We intend to pursue a number of different strategies to grow our revenue and earnings. However, we may not be able to successfully execute these strategies. We intend to pursue a strategy of increasing our agent count in correlation to overall transaction activity. Based on our experience, we believe strengthening market conditions in the U.S. will enable us to sell more franchises and recruit and retain higher numbers of agents, increasing our revenue and profitability. As the housing market recovery continues, we expect the growth in our agent count to continue. However, competition for qualified and effective agents is intense, and we may be unable to recruit and retain enough qualified and effective agents to satisfy our growth strategies.

An additional key growth strategy is to expand our network of franchises and agents in the U.S., Canada and globally. However, we may face many challenges in adding franchises and attracting agents in new markets, such as:

 

   

selection and availability of suitable markets;

 

   

finding franchisees in these markets that are interested in opening franchises on terms that are favorable to us;

 

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significant competition in new markets;

 

   

increasing our local brand awareness in new markets;

 

   

employment and training of qualified local agents;

 

   

impact of inclement weather, natural disasters and other acts of nature; and

 

   

general economic and business conditions.

We are also pursuing a key growth strategy of reacquiring select RE/MAX regional franchises in the U.S. and Canada. The reacquisition of a regional franchise increases our revenue and provides an opportunity for us to drive enhanced profitability. This growth strategy depends on our ability to find regional franchisees willing to sell the franchise rights in their regions on favorable terms and to finance and complete these transactions. In addition, we may encounter higher than expected integration costs associated with the reacquisitions of Independent Regions.

Integrating acquired regions involves complex operational and personnel-related challenges. Future acquisitions may present similar challenges and difficulties, including:

 

   

the possible departure of a significant number of key employees;

 

   

the possible defection of franchisees and agents to other brands or independent real estate companies;

 

   

the disruption of our respective ongoing business;

 

   

possible inconsistencies in standards, controls, procedures and policies, including accounting controls and procedures;

 

   

the failure to maintain important business relationships and contracts of the selling region;

 

   

impairment of acquired assets;

 

   

unanticipated expenses related to integration; and

 

   

potential unknown liabilities associated with acquired businesses.

A prolonged diversion of management’s attention and any delays or difficulties encountered in connection with the integration of any acquired region or region that we may acquire in the future could prevent us from realizing the anticipated cost savings and revenue growth from our acquisitions.

An additional key growth strategy is to pursue opportunities to increase our aggregate fees per agent over time. We may fail to pursue any such opportunities effectively or in a timely manner. If that occurs, we may not be able to realize any improved profitability from any increases in aggregate fees per agent.

With the anticipated recovery of the U.S. housing market, it is our objective to enter into another period of renewed growth in our business. If we do not effectively manage our growth, the maintenance of our brand equity could suffer. In order to successfully expand our business, we must effectively recruit, develop and motivate new franchisees, and we must maintain the beneficial aspects of our corporate culture. We may not be able to hire new employees and our franchisees may not be able to recruit new agents necessary to manage our growth quickly enough to meet our needs. If we fail to effectively manage our hiring needs and successfully develop our franchisees, our franchisee and employee morale, productivity and retention could suffer, and our brand and results of operations could be harmed. We also need to continue to improve our existing systems for operational and financial management, including our reporting systems, procedures and controls. See “—We plan to implement a new information technology infrastructure for certain key aspects of our operations, which may be more costly than anticipated or take more time to complete and integrate than we expect, which could distract our management from our business and have an adverse impact on our results of operations.” These improvements could require significant capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully manage these processes, our brand and results of operations could be adversely affected.

 

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The failure to attract and retain highly qualified franchisees could compromise our ability to pursue our growth strategy.

Our most important asset is our people, and the success of our franchisees depends largely on the efforts and abilities of franchisees and their agents, which are subject to numerous factors, including the fees or sales commissions they receive, as applicable, and their perception of our brand value. If our franchisees do not continue to recognize or believe in the value proposition we offer with our brand, believe that our franchise fees are too high, or decide not to renew their franchise agreements with us for any other reason, our business may be materially adversely affected. Additionally, if our franchisees fail to attract and retain agents, they may fail to generate the revenue necessary to pay the contractual fees and dues owed to us.

Our financial results are affected by the ability of our franchisees to attract and retain agents.

Our financial results are heavily dependent upon the number of agents in our global network. The majority of our revenue is derived from recurring, contractual fees and dues paid by our agents and by our franchisees or regional franchise owners based on the number of agents within the franchisee’s or regional franchise owner’s network. If our franchisees are not able to attract and retain agents, our revenue may decline. In addition, our competitors may attempt to recruit the agents of our franchisees.

Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to grow our business, particularly in new markets where we have limited brand recognition.

We have developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining, protecting and enhancing the “RE/MAX” brand is critical to growing our business, particularly in new markets where we have limited brand recognition. If we do not successfully build and maintain a strong brand, our business could be materially harmed. Maintaining and enhancing the quality of our brand may require us to make substantial investments in areas such as marketing, community relations, outreach and employee training. We actively engage in print and online advertisements, targeted promotional mailings and email communications, and engage on a regular basis in public relations and sponsorship activities. These investments may be substantial and may not ultimately be successful.

Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to the way we manage our relationship with our franchisees, our growth strategies or the ordinary course of our business or our franchisees’ business. Other incidents may arise from events that are or may be beyond our ability to control and may damage our brand, such as actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare or other matters; litigation and claims; failure to maintain high ethical and social standards for all of our operations and activities; failure to comply with local laws and regulations; and illegal activity targeted at us or others. Our brand value could diminish significantly if any such incidents or other matters erode consumer confidence in us, which may result in a decrease in our total agent count and, ultimately, lower continuing franchise fees and annual dues, which in turn would materially and adversely affect our business and operating results.

Competition in the residential real estate franchising business is intense and may adversely affect our financial performance.

We generally face strong competition in the residential real estate services business. As a real estate brokerage franchisor, one of our primary assets is our brand name. Upon the expiration of a franchise agreement, a franchisee may choose to renew their franchise with us, operate as an independent broker or to franchise with one of our competitors. Competing franchisors may offer franchises monthly ongoing fees that are lower than those we charge, or that are more attractive in particular market environments.

Further, our largest competitors in this industry in the U.S. and Canada include Realogy Holdings, Corp., which franchises the Coldwell Banker and Century 21 brands, among others, Berkshire Hathaway Home

 

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Services, which acquired Prudential Real Estate and Relocation Services in 2012, and operates the brand Real Living, Keller Williams Realty, Inc. and Royal LePage. Some of these companies may have greater financial resources and larger budgets than we do. To remain competitive in the sale of franchises and to retain our existing franchisees at the time of the renewal of their franchise agreements, we may have to reduce the cost of renewals and/or the ongoing monthly fees we charge our franchisees. Further, in certain areas, regional and local franchisors provide additional competitive pressure.

Our company owned brokerage business operates in the real estate brokerage business, which is highly competitive.

Our company owned brokerage business, like that of our franchisees, is generally subject to intense competition. We compete with other national and independent real estate organizations including our franchisees and those of other national real estate franchisors, franchisees of local and regional real estate franchisors, regional independent real estate organizations, discount brokerages, Internet-based brokerages and smaller niche companies competing in local areas. Competition is particularly intense in the densely populated metropolitan areas in which we operate. In addition, in the real estate brokerage industry, new participants face minimal barriers to entry into the market. We also compete for the services of qualified licensed agents as well as franchisees, as discussed further below. The ability of our company owned brokerage offices to retain agents is generally subject to numerous factors, including the sales commissions they receive and their perception of brand value.

Our franchisees or agents may become dissatisfied with their relationship with us.

Although we believe our relationship with our franchisees and agents is open and strong, the nature of such relationships can give rise to conflict. For example, franchisees or agents may become dissatisfied with the amount of contractual fees and dues owed under franchise or other applicable arrangements, particularly in the event that we decide to further increase fees and dues. They may disagree with certain network-wide policies and procedures, including policies such as those dictating brand standards, affecting their marketing efforts, or they may be disappointed with any national marketing campaigns designed to develop our brand. There are a variety of reasons why our franchisor franchisee relationship can give rise to conflict. If we experience any conflicts with our franchisees on a large scale, our franchisees may file lawsuits against us or they may seek to disaffiliate with us, which could also result in litigation. These events may, in turn, materially and adversely affect our business and operating results.

Regional master and broker franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under our franchise and other agreements. This may lead to disputes and we expect such disputes to occur from time to time in the future as we continue to offer franchises. To the extent we have such disputes, the attention of our management, regional master franchisees and broker franchisees will be diverted, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our financial results are affected directly by the operating results of franchisees and agents, over whom we do not have direct control.

Our real estate franchises generate revenue in the form of monthly ongoing fees, including monthly management fees and broker service fees (which are tied to gross commissions) charged by our franchisees. Our agents pay us dues out of their income from real estate transactions. Accordingly, our financial results depend upon the operational and financial success of our franchisees and their agents, whom we do not control, particularly in Independent Regions where we exercise less control over franchisees than in Company-owned Regions. If industry trends or economic conditions are not sustained or do not continue to improve, our franchisees’ financial results may worsen and our revenue may decline. We may also have to terminate franchisees more frequently in the future due to non-reporting and non-payment. Further, if franchisees fail to renew their franchise agreements, or if we decide to restructure franchise agreements in order to induce

 

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franchisees to renew these agreements, then our revenue from ongoing monthly fees may decrease, and profitability from new franchisees may be lower than in the past due to reduced ongoing monthly fees and other non-standard incentives we may need to provide.

Our franchisees and agents could take actions that could harm our business.

Our regional franchisees and brokerages are independent businesses and the agents who work with our company owned brokerage operations are independent contractors, and, as such, neither are our employees, and we do not exercise control over their day-to-day operations. Broker franchisees may not operate real estate brokerage businesses in a manner consistent with industry standards, or may not attract and retain qualified independent contractor agents. If broker franchisees and agents were to provide diminished quality of service to customers, our image and reputation may suffer materially and adversely affect our results of operations.

Additionally, broker franchisees and agents may engage or be accused of engaging in unlawful or tortious acts such as violating the anti-discrimination requirements of the Fair Housing Act. Such acts or the accusation of such acts could harm our business and our brand, reputation and goodwill.

The failure of Independent Region owners to successfully develop or expand within their respective regions could adversely impact our revenue.

We have sold and continue to sell regional master franchises in certain regions in the U.S. and Canada as well as in our international locations outside of Canada. While in recent years, we have pursued a strategy to reacquire the regional franchise rights in a number of regions in the U.S., we still rely on independent regional master franchises in Independent Regions, and in all regions located outside the U.S. and Canada (except for Central America and the Caribbean). We derive only a limited portion of our revenue directly from master franchises. However, Independent Regions have the right to grant franchises within a particular region. The failure of any of these Independent Region owners to successfully develop or expand within their respective regions could result in the delay of the development of a particular region or an interruption in the operation of our brand in a particular market or markets. Any such delay or interruption would result in a delay in, or loss of, fee income to us, which would adversely impact our revenue, business and results of operations.

In addition, the termination of an agreement with a regional master franchisee could also result in the delay of the development of a franchised area, or an interruption in the operation of our brand in a particular market or markets, while we seek alternative methods to develop our franchises in the area. Such an event could result in lower revenue for us, which would adversely impact our business and results of operations.

We are subject to a variety of additional risks associated with our franchisees.

Our franchise system subjects us to a number of risks, any one of which may impact our ability to collect recurring, contractual fees and dues from our franchisees, may harm the goodwill associated with our brand, and/or may materially and adversely impact our business and results of operations.

Bankruptcy of U.S. Franchisees. A franchisee bankruptcy could have a substantial negative impact on our ability to collect fees and dues owed under such franchisee’s franchise arrangements. In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise arrangements pursuant to Section 365 under the U.S. bankruptcy code, in which case there would be no further payments for fees and dues from such franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.

Franchisee Insurance. The franchise arrangements require each franchisee to maintain certain insurance types and levels. Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits or the franchisee could lack the required insurance at the time the

 

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claim arises, in breach of the insurance requirement, and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material and adverse effect on a franchisee’s ability to satisfy its obligations under its franchise arrangement, including its ability to make payments for contractual fees and dues or to indemnify us.

Franchise Arrangement Termination; Nonrenewal. Each franchise arrangement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although under certain circumstances a franchise arrangement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise arrangements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten the licensed intellectual property.

In addition, each franchise agreement has an expiration date. Upon the expiration of the franchise arrangement, we or the franchisee may or may not elect to renew the franchise arrangement. If the franchisee arrangement is renewed, such renewal is generally contingent on the franchisee’s execution of the then-current form of franchise arrangement (which may include terms the franchisee deems to be more onerous than the prior franchise agreement), the satisfaction of certain conditions and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, the expiring franchise arrangement will terminate upon expiration of the term of the franchise arrangement.

We may experience significant claims relating to our operations and losses resulting from fraud, defalcation, misconduct or negligence of our franchisees or agents.

Fraud, defalcation, misconduct and negligence by employees are risks inherent in our business. We may also from time to time be subject to liability claims based upon the fraud, misconduct or negligence of our franchisees and agents. To the extent that any loss or theft of funds substantially exceeds our insurance coverage, our business could be materially adversely affected.

In addition, we rely on the collection and use of personally identifiable information from consumers to conduct our business. We disclose our information collection and dissemination practices in a published privacy statement on our websites, which we may modify from time to time. We may be subject to legal claims, government action and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, consumer expectations, or the law. In the event we or the vendors with which we contract to provide services on behalf of our customers were to suffer a breach of personally identifiable information, our customers could terminate their business with us. Further, we may be subject to claims to the extent individual employees or independent contractors breach or fail to adhere to company policies and practices and such actions jeopardize any personally identifiable information.

The real estate brokerage business is highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.

Our company owned real estate brokerage business and the businesses of our franchisees are highly regulated and must comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the jurisdictions in which we and they do business. These laws and regulations contain general standards for and prohibitions on the conduct of real estate brokers and agents, including those relating to licensing of brokers and agents, fiduciary and agency duties, administration of trust funds, collection of commissions, advertising and consumer disclosures. Under state law, the franchisees and our real estate brokers have certain duties to supervise and are responsible for the conduct of their brokerage business.

Our company owned real estate brokerage business and the businesses of our franchisees (excluding commercial brokerage transactions) must comply with the Real Estate Settlement Procedures Act (“RESPA”). RESPA and comparable state statutes, among other things, restrict payments which real estate brokers, agents and other settlement service providers may receive for the referral of business to other settlement service

 

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providers in connection with the closing of real estate transactions. Such laws may to some extent restrict preferred vendor arrangements involving our franchisees and our company owned brokerage business. RESPA and similar state laws also require timely disclosure of certain relationships or financial interests that a broker has with providers of real estate settlement services. Pursuant to the Dodd-Frank Act, administration of RESPA has been moved from the Department of Housing and Urban Development (“HUD”) to the new Consumer Financial Protection Bureau (the “CFPB”) and it is possible that the practice of HUD taking very expansive readings of RESPA will continue or accelerate at the CFPB, which creates an increased regulatory risk.

There is a risk that we could be adversely affected by current laws, regulations or interpretations or that more restrictive laws, regulations or interpretations will be adopted in the future that could make compliance more difficult or expensive. There is also a risk that a change in current laws could adversely affect our business or our franchisees’ business.

Regulatory authorities also have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend our company owned brokerages or our franchisees from carrying on some or all of our activities or otherwise penalize them if their financial condition or our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. Our failure to comply with any of these requirements or interpretations could limit our ability to renew current franchisees or sign new franchisees or otherwise have a material adverse effect on our operations.

We are also, to a lesser extent, subject to various other rules and regulations such as:

 

   

the Gramm-Leach-Bliley Act which governs the disclosure and safeguarding of consumer financial information;

 

   

various state and federal privacy laws protecting consumer data;

 

   

the USA PATRIOT Act;

 

   

restrictions on transactions with persons on the Specially Designated Nationals and Blocked Persons list promulgated by the Office of Foreign Assets Control of the Department of the Treasury;

 

   

federal and state “Do Not Call,” “Do Not Fax,” and “Do Not E-Mail” laws;

 

   

the Fair Housing Act;

 

   

laws and regulations, including the Foreign Corrupt Practices Act, that impose sanctions on improper payments;

 

   

laws and regulations in jurisdictions outside the U.S. in which we do business;

 

   

state and federal employment laws and regulations, including any changes that would require classification of independent contractors to employee status, and wage and hour regulations;

 

   

increases in state, local or federal taxes that could diminish profitability or liquidity; and

 

   

consumer fraud statutes that are broadly written.

Our failure to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations.

Our internal control over financial reporting may not be effective and, if required, our management and our independent registered public accounting firm may not be able to certify as to its effectiveness, which could have a significant and adverse effect on our business and reputation.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs

 

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to be re-evaluated frequently. Following the completion of this offering, we will be required to comply with Section 404 of the Sarbanes-Oxley Act and related rules and regulations. Pursuant to Section 404, beginning with our Annual Report on Form 10-K for the year ending December 31, 2014, our management will be required to report on, and, if we cease to be an “emerging growth company,” our independent registered public accounting firm will have to attest to the effectiveness of, our internal control over financial reporting.

We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may need additional finance and accounting personnel with certain skill sets to assist us with the reporting requirements we will encounter as a public company and to support our anticipated growth. Additionally, we may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting, including but not limited to problems or delays resulting from our acquisitions. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. Implementing changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes and take significant time to complete.

Under rules of the Securities and Exchange Commission (the “SEC”), a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We cannot assure you that material weaknesses will not be identified in the future.

If material weaknesses or other deficiencies occur in the future, or if we fail to fully maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could require a restatement, cause investors to lose confidence in our financial information or cause our stock price to decline.

Our franchising activities are subject to a variety of state and federal laws and regulations regarding franchises, and any failure to comply with such existing or future laws and regulations could adversely affect our business.

The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (the “FTC”). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. We believe that our franchising procedures, as well as any applicable state-specific procedures, comply in all material respects with both the FTC guidelines and all applicable state laws regulating franchising in those states in which we offer new franchise arrangements. However, noncompliance could reduce anticipated revenue, which in turn may materially and adversely affect our business and operating results.

Most of our domestic and international regional franchisees self-report their agent counts, agent commissions and fees due to us, and we have limited tools to validate or verify these reports and a few of our domestic and international master franchise agreements do not contain audit rights. If a material number of our regional master franchisees were to under report or erroneously report their agent counts, agent commissions or fees due to us, it could have a material adverse effect on our financial performance and results of operations.

Under our regional franchise agreements, our Independent Regions owners report the number of agents, monthly management fees and broker service fees received by the brokers from the agents and the monthly ongoing fees (continuing franchise fees and broker fees) payable to us by the brokers. Generally, our regional agreements provide that the regional franchisee provide us with certain financial reports, including reports that

 

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we may reasonably request from time to time. Additionally, most of these agreements also provide us with audit rights. For those agreements that do not, we may have limited methods of validating the monthly ongoing fees due to us from these regions and must rely on reports submitted by such regional franchisees and our internal protocols for verifying agent counts. If such regional franchisees were to under report or erroneously report these amounts payable, even if unintentionally, we may not receive all of the annual agent dues or monthly ongoing fees due to us. In addition, to the extent that we were underpaid, we may not have a definitive method for determining such underpayment. If a material number of our regional franchisees were to under report or erroneously report their agent counts, agent commissions or fees due to us, it could have a material adverse effect on our financial performance and results of operations.

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.

We cannot predict with certainty the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation and other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation and other proceedings may harm our business and financial condition.

Such litigation and other proceedings may include, but are not limited to, complaints from or litigation by franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements, actions relating to intellectual property, commercial arrangements, franchising arrangements, negligence and fiduciary duty claims arising from franchising arrangements or company owned brokerage operations, breaches of fiduciary duty by our licensed brokers, standard brokerage disputes like the failure to disclose hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including franchisees and agents, antitrust claims, false advertising claims, general fraud claims and employment law claims, including claims challenging the classification of our agents as independent contractors, violations of state laws relating to business practices or consumer disclosures, and claims alleging violations of RESPA or state consumer fraud statutes. We may also be subject to employee claims based on, among other things, discrimination, harassment or wrongful termination.

Franchisees are subject to a variety of litigation risks, including, but not limited to, customer claims, personal injury claims, environmental claims, agent allegations of improper termination and discrimination, claims related to violations of the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and intellectual property claims. Litigation against a franchisee or its affiliates by third parties, whether in the ordinary course of business or otherwise, may include claims against us by virtue of the franchise relationship. In addition to increasing costs and limiting the funds available to pay contractual fees and dues and reducing the execution of new franchise arrangements, such claims divert our management resources and could cause adverse publicity which may materially and adversely affect us and our brand, regardless of whether such allegations are valid or whether we are liable.

Our international operations may be subject to additional risks related to litigation, including difficulties in enforcement of contractual obligations governed by foreign law due to differing interpretations of rights and obligations, compliance with multiple and potentially conflicting laws, new and potentially untested laws and judicial systems and reduced or diminished protection of intellectual property. A substantial unsatisfied judgment against us or one of our subsidiaries could result in bankruptcy, which would materially and adversely affect our business and operating results.

On July 30, 2013, we filed a Complaint for Declaratory Judgment in the United States District Court for the District of Colorado against Realogy Holdings Corp. and Realogy Group, LLC, seeking a judgment of non-violation of the Lanham Act (the federal law governing false advertising) with respect to our marketing statements in a July 25, 2013 press release. The case was precipitated by a July 26, 2013 letter from counsel for Realogy Holdings Corp. and its brands, Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, and Better Homes and Gardens Real Estate, asserting that various claims in our July 25, 2013 press release are deceptive, misleading and unsubstantiated. In our July 25, 2013 press release, we made claims that RE/MAX agents sell more homes in the U.S. and Canada than any other competitor, and cited our substantiation for these

 

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claims. We believe these claims are accurate and substantiated. We may face counterclaims in connection with this matter as well as actions for interim relief or equitable remedies. Litigation is subject to inherent uncertainties including with respect to costs, timing and outcome and it is therefore possible that this litigation could have an adverse effect on our results of operation.

Our international operations, including Canada, are subject to risks not generally experienced by our U.S. operations.

We have international regional franchisees and master franchisees. For the year ended December 31, 2012, revenue from these operations represented approximately 26.0% of our total revenue. Our international operations are subject to risks not generally experienced by our U.S. operations. The risks involved in our international operations and relationships that could result in losses against which we are not insured and therefore affect our profitability include:

 

   

fluctuations in foreign currency exchange rates and foreign exchange restrictions;

 

   

exposure to local economic conditions and local laws and regulations, including those relating to the agents of our franchisees;

 

   

economic and/or credit conditions abroad;

 

   

potential adverse changes in the political stability of foreign countries or in their diplomatic relations with the U.S.;

 

   

restrictions on the withdrawal of foreign investment and earnings;

 

   

government policies against businesses owned by foreigners;

 

   

investment restrictions or requirements;

 

   

diminished ability to legally enforce our contractual rights in foreign countries;

 

   

difficulties in registering, protecting or preserving trade names and trademarks in foreign countries;

 

   

restrictions on the ability to obtain or retain licenses required for operation;

 

   

withholding and other taxes on remittances and other payments by subsidiaries; and

 

   

changes in foreign tax laws.

Our international operations outside Canada generally generate substantially lower average revenue per agent and therefore lower margins than our U.S. and Canadian operations.

Loss or attrition among our senior management or other key employees or the inability to hire additional qualified personnel could adversely affect our operations, our brand and our financial performance.

Our future success is largely dependent on the efforts and abilities of our Chief Executive Officer, Margaret Kelly, our Chairman and Co-Founder, David Liniger, our senior management and other key employees. The loss of the services of these two individuals and our other key employees could make it more difficult to successfully operate our business and achieve our business goals. In addition, we do not maintain key employee life insurance policies on either of these two individuals or our other key employees. As a result, we may not be able to cover the financial loss we may incur in losing the services of any of these individuals.

Our ability to retain our employees is generally subject to numerous factors, including the compensation and benefits we pay, the mix between the fixed and variable compensation we pay our employees and prevailing compensation rates. As such, we could suffer significant attrition among our current key employees. Competition for qualified employees in the real estate franchising industry is intense. We may be unable to retain existing employees that are important to our business or hire additional qualified employees. The process of locating employees with the combination of skills and attributes required to carry out our goals is often lengthy. We cannot assure you that we will be successful in attracting and retaining qualified employees.

 

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If we were to lose key employees and not promptly fill their positions with comparably qualified individuals, our business may be materially adversely affected.

We only have one primary facility, which serves as our corporate headquarters, and are in the process of implementing disaster recovery procedures. If we encounter difficulties associated with this facility, we could face management issues that could have a material adverse effect on our business operations.

We only have one primary facility, in Denver, Colorado, which serves as our corporate headquarters where most of our employees are located. A significant portion of our computer equipment and senior management, including critical resources dedicated to financial and administrative functions, is also located at our corporate headquarters. Our management and employees would need to find an alternative location if we were to encounter difficulties at our corporate headquarters, including by fire or other natural disaster, which would cause disruption and expense to our business and operations.

We recognize the need for, and are in the process of, developing disaster recovery, business continuity and document retention plans that would allow us to be operational despite casualties or unforeseen events impacting our corporate headquarters. If we encounter difficulties or disasters at our corporate headquarters without disaster recovery, business continuity and document retention plans in place, our critical systems, operations and information may not be restored in a timely manner, or at all, and this would have a material adverse effect on our business.

Infringement, misappropriation or dilution of our intellectual property could harm our business.

We regard our RE/MAX® trademark, balloon logo and sign design trademarks as having significant value and as being an important factor in the marketing of our brand. We believe that this and other intellectual property are valuable assets that are critical to our success. We rely on a combination of protections provided by contracts, as well as copyright, trademark, and other laws, to protect our intellectual property from infringement, misappropriation or dilution. We have registered certain trademarks and service marks and have other trademark and service mark registration applications pending in the U.S. and foreign jurisdictions. However, not all of the trademarks or service marks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of those countries. Although we monitor trademark portfolios both internally and through external search agents and impose an obligation on franchisees to notify us upon learning of potential infringement, there can be no assurance that we will be able to adequately maintain, enforce and protect our trademarks or other intellectual property rights.

We are not aware of any challenges to our right to use any of our brand names or trademarks. We are commonly involved in numerous proceedings, generally on a small scale, to enforce our intellectual property and protect our brand. Unauthorized uses or other infringement of our trademarks or service marks, including ones that are currently unknown to us, could diminish the value of our brand and may adversely affect our business. Effective intellectual property protection may not be available in every market in which we have franchised or intend to franchise. Failure to adequately protect our intellectual property rights could damage our brand and impair our ability to compete effectively. Even where we have effectively secured statutory protection for our trademarks and other intellectual property, our competitors may misappropriate our intellectual property. Defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking an injunction and/or compensation for misappropriation of confidential information, could result in the expenditure of significant resources and divert the attention of management, which in turn may materially and adversely affect our business and operating results.

Although we monitor and restrict our franchisees’ activities through our franchise agreements, franchisees may refer to our brand improperly in writings or conversations, resulting in the dilution of our intellectual property. Franchisee noncompliance with the terms and conditions of our franchise agreements and our brand standards may reduce the overall goodwill of our brand, whether through the failure to meet the FTC guidelines or applicable state laws, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of our brand, resulting in

 

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consumer confusion or dilution. Any reduction of our brand’s goodwill, consumer confusion, or dilution is likely to impact sales, and could materially and adversely impact our business and operating results.

We plan to implement a new information technology infrastructure for certain key aspects of our operations, which may be more costly than anticipated or take more time to complete and integrate than we expect, which could distract our management from our business and have an adverse impact on our results of operations.

We plan to implement a new information technology infrastructure for certain key aspects of our operations. In the process of designing, developing and integrating such infrastructure, we may experience cost overages, delays or other factors that may distract our management from our business, which could have an adverse impact on our results of operations.

Further, we may not be able to obtain such new technologies and systems, or to replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner. Also, we may not achieve the benefits anticipated or required from any new technology or system, and we may not be able to devote financial resources to new technologies and systems in the future.

We rely on traffic to our websites, including our flagship website, remax.com, directed from search engines like Google, Yahoo! and Bing. If these websites fail to rank prominently in unpaid search results, traffic to these websites could decline and our business would be adversely affected.

Our success depends in part on our ability to attract users through unpaid Internet search results on search engines like Google, Yahoo! and Bing. The number of users we attract to our websites, including our flagship website remax.com, from search engines is due in large part to how and where our websites rank in unpaid search results. These rankings can be affected by a number of factors, many of which are not under our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies or design layouts. As a result, links to our websites may not be prominent enough to drive traffic to our websites, and we may not know how or otherwise be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing services or the services of one or more of our competitors. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. Any reduction in the number of users directed to our websites could adversely impact our business and results of operations.

A failure of our websites or website-based technology, including our lead referral system LeadStreet®, which are subject to factors beyond our control, could significantly disrupt our business and lead to reduced revenue and reputational damage.

We operate LeadStreet® which is a lead referral system that provides leads to our agents free of referral fees. LeadStreet® is supported by our websites, including remax.com, global.remax.com, theremaxcollection.com and remaxcommercial.com, which collectively attracted over 52 million visits in 2012 according to Experian Marketing Services Hitwise data. When a prospective buyer views a property listed on our websites by a specific RE/MAX agent, the agent gets this lead through LeadStreet® without a referral fee. However, we are vulnerable to certain additional risks and uncertainties associated with websites, including changes in required technology interfaces, website downtime and other technical failures, security breaches and consumer privacy concerns. Our failure to successfully address these risks and uncertainties could reduce our Internet exposure, generate less leads for our agents and damage our brand.

Many of the risks relating to our website operations, such as governmental regulation of the Internet, increased competition from websites that facilitate private sales and online security breaches, are beyond our control.

We may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our platform is accessible.

It is important to our success that users in all geographies be able to access our website at all times. We may experience, in the future, service disruptions, outages and other performance problems due to a variety of factors,

 

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including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, and denial of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. If our website is unavailable when users attempt to access it or it does not load as quickly as they expect, users may seek other services to obtain the information for which they are looking, and may not return to our website as often in the future, or at all. This would negatively impact our ability to attract customers and decrease the frequency with which they use our website. We expect to continue to make ongoing investments to maintain and improve the availability of our website and to enable rapid releases of new features. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be harmed.

Any disruption or reduction in our information technology capabilities or other threats to our cybersecurity could harm our business.

Our information technologies and systems and those of our suppliers are vulnerable to breach, damage or interruption from various causes, including: (i) natural disasters, war and acts of terrorism, (ii) power losses, computer systems failure, Internet and telecommunications or data network failures, operator error, losses and corruption of data, and similar events and (iii) computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other physical or electronic breaches of security. We may not be able to successfully prevent a disruption to or material adverse effect on our business or operations in the event of a disaster, theft of data or other business interruption. Any extended interruption in our technologies or systems or significant breach could significantly curtail our ability to conduct our business and generate revenue. Additionally, our business interruption insurance may be insufficient to compensate us for losses that may occur.

A significant increase in private sales of residential property, including through the internet, could have a material adverse effect on our business, prospects and results of operations.

As of 2012, NAR estimated that 12% of existing home sales, and 11% of home purchases transactions in the U.S. are completed without the involvement of a real estate agent. Although the NAR survey indicates that the percentage of sales using agents has increased in recent years, a significant increase in the volume of private sales due to, for example, increased access to the internet and the proliferation of websites that facilitate such sales, and a corresponding decrease in the volume of sales through real estate agents could have a material adverse effect on our business, prospects and results of operations.

The terms of RE/MAX, LLC’s senior secured credit facility restrict the current and future operations of RMCO, RE/MAX, LLC and their subsidiaries, which could adversely affect their ability to respond to changes in business and to manage operations.

RE/MAX, LLC’s senior secured credit facility includes a number of customary restrictive covenants. These covenants could impair the financing and operational flexibility of RMCO, RE/MAX, LLC and their subsidiaries and make it difficult for them to react to market conditions and satisfy their ongoing capital needs and unanticipated cash requirements. Specifically, such covenants may restrict their ability to, among other things:

 

   

incur additional debt;

 

   

make certain investments, acquisitions and joint ventures;

 

   

enter into certain types of transactions with affiliates;

 

   

pay dividends or make distributions or other payments to us;

 

   

use assets as security in certain transactions;

 

   

repurchase their equity interests;

 

   

sell certain assets or merge with or into other companies;

 

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guarantee the debts of others;

 

   

enter into new lines of business; and

 

   

make certain payments on subordinated debt.

In addition, so long as any revolving loans are outstanding under the senior secured credit facility, RE/MAX, LLC is required to maintain specified financial ratios. As of August 31, 2013, there were no outstanding revolving loans.

The ability to comply with the covenants and other terms of the senior secured credit facility will depend on future operating performance of RE/MAX, LLC and its subsidiaries. If RE/MAX, LLC fails to comply with such covenants and terms, it would be required to obtain waivers from the lenders or agree with the lenders to an amendment of the facility’s terms to maintain compliance under the facility. If RE/MAX, LLC is unable to obtain any necessary waivers or amendments and the debt under our senior secured credit facility is accelerated or the lenders bring other remedies, it would likely have a material adverse effect on our financial condition and future operating performance.

We have significant debt service obligations and may incur additional indebtedness in the future which could adversely affect our financial health and our ability to react to changes to our business.

We have significant debt service obligations. Our currently existing indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. In 2011 and 2012, we had total debt service obligations of $16.5 million and $8.4 million, respectively. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue additional equity to obtain necessary funds. We do not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all. Our level of indebtedness has important consequences to you and your investment in our Class A common stock.

For example, our level of indebtedness may:

 

   

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, capital expenditures and other general corporate purposes;

 

   

limit our ability to pay future dividends;

 

   

limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;

 

   

heighten our vulnerability to downturns in our business, the housing industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the housing industry; or

 

   

prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our store base and product offerings.

We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations.

As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs.

Future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities. Our ability to make payments to fund working capital, capital expenditures, debt service, and

 

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strategic acquisitions will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.

Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

At June 30, 2013, $223.2 million in term loans were outstanding under our senior secured credit facility net of unamortized discount, which was at variable rates of interest, thereby exposing us to interest rate risk. We currently do not engage in any interest rate hedging activity and we have no intention to do so in the foreseeable future. As such, if interest rates increase, our debt service obligations on our outstanding indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease.

Our operating results are subject to quarterly fluctuations, and results for any quarter may not necessarily be indicative of the results that may be achieved for the full fiscal year.

Historically, we have realized, and expect to continue to realize, lower Adjusted EBITDA margins in the first and fourth quarters due primarily to the impact of lower broker fees and other revenue as a result of lower overall transaction volume, and higher selling, operating and administrative expenses in the first quarter for expenses incurred in connection with our annual convention. Accordingly, our results of operations may fluctuate on a quarterly basis, which would cause period to period comparisons of our operating results to not be necessarily meaningful and cannot be relied upon as indicators of future annual performance.

Changes in accounting standards, subjective assumptions and estimates used by management related to complex accounting matters could have a material adverse effect on our financial performance and results of operations.

Generally accepted accounting principles in the U.S. and related accounting pronouncements, implementation guidance and interpretations with regard to a wide range of matters, such as revenue recognition, accounting for leases, stock-based compensation, asset impairments, valuation reserves, income taxes and fair value accounting, are highly complex and involve many subjective assumptions, estimates and judgments made by management. Changes in these rules or their interpretations or changes in underlying assumptions, estimates or judgments made by management could significantly change our reported results.

We will incur new costs as a result of becoming a public company, and such costs will likely increase when we are no longer an “emerging growth company.”

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect compliance with these public reporting requirements and associated rules and regulations to increase our legal and financial costs, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act, which reduces certain disclosure requirements for “emerging growth companies,” thereby decreasing related regulatory compliance costs, and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Further, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and, potentially, civil litigation.

Risks Related to Our Organizational Structure

RIHI will continue to have substantial control over us after this offering including over decisions that require the approval of stockholders, and its interest in our business may conflict with yours.

Immediately after the consummation of this offering, RIHI, an entity controlled by David and Gail Liniger, our Chairman and Co-Founder and Vice-Chair and Co-Founder, respectively, (with Margaret Kelly, our Chief

 

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Executive Officer and a director, Vincent Tracey, our President and a director, and Daryl Jesperson, a director, who hold minority ownership interests in RIHI), will hold a majority of the combined voting power of the different classes of our capital stock through its ownership of 100% of our outstanding Class B common stock. Additionally, the shares of Class B common stock 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 RE/MAX Holdings, Inc. that is equal to two times the aggregate number of common units of RMCO held by such holder.

Accordingly, RIHI, acting alone, will have the ability to approve or disapprove substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors. These voting and class approval rights may enable RIHI to consummate transactions that may not be in the best interests of holders of our Class A common stock or, conversely, prevent the consummation of transactions that may be in the best interests of holders of our Class A common stock. In addition, although RIHI will have voting control of us, RIHI’s entire economic interest in us will be in the form of its direct interest in RMCO through the ownership of RMCO common units, the payments it may receive from us under its tax receivable agreement and the proceeds it may receive upon any redemption of its RMCO common units, including issuance of shares of our Class A common stock upon any such redemption and any subsequent sale of such Class A common stock. As a result, RIHI’s interests may conflict with the interests of our Class A common stockholders. For example, our existing owners, including RIHI, may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreements that we will enter in connection with this offering, and whether and when we should terminate the tax receivable agreements and accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration our existing owners’ tax or other considerations, even in situations where no similar considerations are relevant to us. See “Organizational Structure and Reorganization—Tax Receivable Agreements.”

We are a “controlled company” within the meaning of the NYSE listing requirements and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

Because of the voting power over our Company held by RIHI, we are considered a “controlled company” for the purposes of the New York Stock Exchange (“NYSE”) listing requirements. As such, we are exempt from certain corporate governance requirements, including:

 

   

the requirement that the majority of directors on our board be independent;

 

   

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

The corporate governance requirements and specifically the independence standards are intended to ensure that directors who are considered independent are free of any conflicting interest that could influence their actions as directors. Following this offering, we intend to utilize these exemptions afforded to a “controlled company.” As a result, the majority of directors on our board will not be independent nor will our nominating/corporate governance and compensation committees consist entirely of independent directors. We also will not be required to conduct an annual performance evaluation of the nominating/corporate governance and compensation committees. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

 

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We will depend on distributions from RMCO to pay taxes and expenses, including payments under the tax receivable agreements, but RMCO’s ability to make such distributions may be subject to various limitations and restrictions.

We intend to use approximately $27.3 million of the proceeds of this offering to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisition of the business assets of HBN and Tails. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Managed Region Acquisitions.” Following our acquisition of the business assets of HBN and Tails, we will contribute such assets to RMCO in exchange for a number of newly issued common units of RMCO worth approximately $27.3 million. Following our acquisition of the business assets of HBN and Tails, we intend to use approximately $160.7 million of the proceeds of this offering to purchase newly issued common units of RMCO from RMCO.

RMCO will use a portion of the proceeds it receives from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio and to satisfy a $49.8 million liquidation preference associated with those preferred membership units. Following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO will use approximately $99.9 million of the proceeds of this offering to redeem common units of RMCO from our existing owners. Accordingly, upon the consummation of this offering, we will have no material assets other than our ownership of common units of RMCO and will have no independent means of generating revenue.

RMCO will be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to holders of its common units, including us. As a result, we will incur income taxes on our allocable share of any net taxable income of RMCO. Under the terms of RMCO’s fourth amended and restated limited liability company operating agreement, which will become effective upon the completion of this offering (the “restated RMCO, LLC agreement”), RMCO will be obligated to make tax distributions to holders of its units, including us. In addition to tax expenses, we will also incur expenses related to our operations, including expenses under the tax receivable agreements, which we expect will be significant. See “Organizational Structure and Reorganization—Tax Receivable Agreements.” We intend, as its managing member, to cause RMCO to make distributions in an amount sufficient to allow us to pay our taxes and operating expenses, including any payments due under the tax receivable agreements. However, RMCO’s ability to make such distributions may be subject to various limitations and restrictions including, but not limited to, restrictions on distributions that would either violate any contract or agreement to which RMCO is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering RMCO insolvent. If RMCO does not have sufficient funds to pay tax or other liabilities to fund our operations, we may have to borrow funds, which could adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the tax receivable agreements for any reason, such payments will be deferred and will accrue interest until paid. If RMCO does not have sufficient funds to make distributions, our ability to declare and pay cash dividends may also be restricted or impaired. See “—Risks Related to This Offering and Ownership of Our Class A Common Stock.”

Our tax receivable agreements with our existing owners requires us to make cash payments to them in respect of future tax benefits to which we may become entitled, and the amounts that we may be required to pay could be significant.

In connection with the consummation of this offering, we will enter into tax receivable agreements with our existing owners (RIHI and Weston Presidio). Pursuant to the tax receivable agreements, we will be required to make cash payments to our existing owners equal to 85% of the applicable cash savings, if any, in U.S. federal, state and local tax that we actually realize, or in some circumstances are deemed to realize, as a result of certain future tax benefits to which we may become entitled. The amount of the cash payments that we may be required to make under the tax receivable agreements could be significant and will depend, in part, upon facts and circumstances that are beyond our control. Any payments made by us to our existing owners under the tax receivable agreements will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make timely payments under the tax receivable agreements for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Furthermore, our future

 

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obligation to make payments under the tax receivable agreements could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that may be deemed realized under the tax receivable agreements. The payments under the tax receivable agreements are also not necessarily conditioned upon one or more of our existing owners maintaining a continued ownership interest in either RMCO or us. See “Organizational Structure and Reorganization—Tax Receivable Agreements.”

The amounts that we may be required to pay to our existing owners under the tax receivable agreements may be accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we ultimately realize.

The tax receivable agreements provide that if certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, or that if, at any time, we elect an early termination of the tax receivable agreements, then our obligations, or our successor’s obligations, to make payments under the tax receivable agreements would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the tax receivable agreements.

As a result, (i) we could be required to make cash payments to our existing owners that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the tax receivable agreements, and (ii) if we elect to terminate the tax receivable agreements early, we 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 tax receivable agreements, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the tax receivable agreements could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the tax receivable agreements.

We will also not be reimbursed for any cash payments previously made to our existing owners pursuant to the tax receivable agreements if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to an existing owner will be netted against any future cash payments that we might otherwise be required to make under the terms of the tax receivable agreements. However, we might not determine that we have effectively made an excess cash payment to our existing owners for a number of years following the initial time of such payment. As a result, it is possible that we could make cash payments under the tax receivable agreements that are substantially greater than our actual cash tax savings. See “Organizational Structure and Reorganization—Tax Receivable Agreements.”

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”) as a result of our ownership of RMCO, applicable restrictions could make it impractical for us to continue our business as contemplated and could have an adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As the sole managing member of RMCO, we will control and operate RMCO. On that basis, we believe that our interest in RMCO is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of RMCO, our interest in RMCO could be deemed an “investment security” for purposes of the 1940 Act.

 

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We and RMCO intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Risks Related to this Offering and Ownership of Our Class A Common Stock

Immediately following the consummation of this offering, RIHI will directly (through Class B common stock) and indirectly (through ownership of RMCO common units) own interests in us, and RIHI will have the right to redeem and cause us to redeem, as applicable, such interests pursuant to the terms of the restated RMCO, LLC agreement.

After this offering we will have an aggregate of more than 169,881,250 shares of Class A common stock authorized but unissued, including approximately 19,626,330 shares of Class A common stock issuable upon redemption of RMCO common units that will be held by RIHI. RMCO will enter into the restated RMCO, LLC agreement, and subject to certain restrictions set forth therein and as described elsewhere in this prospectus, RIHI will be entitled to potentially redeem its common units for an aggregate of up to 19,626,330 shares of our Class A common stock, subject to customary adjustments. We also intend to enter into a registration rights agreement pursuant to which the shares of Class A common stock issued upon such redemption will be eligible for resale, subject to certain limitations set forth therein. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

The price you pay for shares of our Class A common stock sold in this offering is substantially higher than our net tangible book value per share, after giving effect to this offering. Based on the initial public offering price for our Class A common stock of $20.00 per share (the midpoint of the price range set forth on the cover of this prospectus), you will incur immediate dilution in net tangible book value per share of $15.40. Dilution is the difference between the offering price per share and the net tangible book value per share of our Class A common stock immediately after the offering. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the full purchase price that they paid for the stock purchased in this offering in the event of liquidation. See “Dilution.”

The dual class structure of our common stock will have the effect of concentrating voting control with our Chairman and Founder.

The Class B common stock has no economic rights but entitles 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 RE/MAX Holdings, Inc. that is equal to two times the aggregate number of common units of RMCO held by such holder. See “Description of Capital Stock—Common Stock—Class B Common Stock.” Our Class A common stock, which is the stock we are offering in our initial public offering, has one vote per share.

Based on the voting rights associated with our Class B common stock, and the number of common units of RMCO that RIHI will own following the offering, RIHI will hold approximately 79.50% of the voting power of our outstanding capital stock following the offering (or approximately 75.73% if the underwriters exercise their over-allotment option). As a result, RIHI will control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval following our initial public offering. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

 

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RIHI is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder. Margaret Kelly, our Chief Executive Officer and a director, Vincent Tracey, our President and a director, and Daryl Jesperson, a director, hold minority ownership interests in RIHI.

For a description of the various rights and privileges associated with our Class A and Class B common stock, see “Description of Capital Stock—Common Stock.”

You may be diluted by future issuances of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.

Our certificate of incorporation authorizes us to issue these shares of Class A common stock and options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under our 2013 Stock Incentive Plan in an amount equal to five percent of our fully diluted capitalization after this offering. In addition, we have reserved 787,500 shares issuable upon the exercise of vested stock options that we will grant in substitution of options that were granted by RMCO. Any Class A common stock that we issue, including under our 2013 Stock Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

Our Class A common stock price may be volatile or may decline regardless of our operating performance and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained, which could make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price of our common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the consummation of this offering.

Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and this prospectus, as well as the following:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industry compared to market expectations;

 

   

conditions that impact demand for our services, including the condition of the U.S. residential housing market unrelated to our performance;

 

   

future announcements concerning our business or our competitors’ businesses;

 

   

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

   

the size of our public float;

 

   

coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

changes in government and environmental regulation;

 

   

housing and mortgage finance markets;

 

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changes in accounting standards, policies, guidance, interpretations or principles;

 

   

changes in senior management or key personnel;

 

   

issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;

 

   

adverse resolution of new or pending litigation against us;

 

   

changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events; and

 

   

material weakness in our internal control over financial reporting.

Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment.

We cannot assure you that we will declare dividends or have the available cash to make dividend payments.

Because we are a holding company with no material assets other than our ownership of common units of RMCO, we will have no independent means of generating revenue or cash flow, and our ability to pay dividends will be dependent upon the financial results and cash flows of RMCO and its subsidiaries and distributions we receive from RMCO. We expect to cause RMCO to make distributions to fund our expected dividend payments, subject to applicable law and any restrictions contained in RMCO’s or its subsidiaries’ current or future debt agreements.

We intend to pay quarterly cash dividends initially in an amount equal to $0.0625 per share of Class A common stock following the completion of this offering. Whether we will do so, however, and the timing and amount of those dividends, will be subject to approval and declaration by our board of directors and will depend upon on a variety of factors, including our financial results, cash requirements and financial condition, our ability to pay dividends under our senior secured credit facility and any other applicable contracts, and other factors deemed relevant by our board of directors. Any dividends declared and paid will not be cumulative.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our certificate of incorporation and bylaws, as each will be in effect upon completion of this offering, will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend or other rights or preferences superior to the rights of the holders of common stock;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

delegate the sole power to a majority of the board of directors to fix the number of directors;

 

   

provide the power of our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

   

eliminate the ability of stockholders to call special meetings of stockholders; and

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

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Our certificate of incorporation will also contain a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law (“DGCL”), and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock unless board or stockholder approval is obtained prior to the acquisition, except that David and Gail Liniger will be deemed to have been approved by our board of directors, and thereby not subject to these restrictions. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our Company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. See “Description of Capital Stock.

Our business and stock price may suffer as a result of our lack of public company operating experience.

We have been a privately-held company since we began operations in 1973. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our prospects, financial condition and results of operations may be harmed and our stock price may decline from our public offering price.

As an “emerging growth company,” we cannot be certain whether taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things, be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

We currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We cannot predict whether investors will find our Class A common stock less attractive if we rely on these exemptions, or whether taking advantage of these exemptions would result in less active trading or more volatility in the price of our Class A common stock. Also, we intend to take advantage of some of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as an “emerging growth company.”

The historical and pro forma financial information in this prospectus may make it difficult to accurately predict our costs of operations in the future.

The historical financial information in this prospectus does not reflect the added costs we expect to incur as a public company or the resulting changes that will occur in our capital structure and operations. In preparing our pro forma financial information we have given effect to, among other items, our recent acquisition of certain assets of RE/MAX of Texas and the Reorganization Transactions. The estimates we used in our pro forma financial information may not be similar to our actual experience as a public company. For more information on our historical financial information and pro forma financial information, see “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, forward-looking statements include statements we make relating to:

 

   

our expectations regarding consumer trends in residential real estate transactions;

 

   

our expectations regarding overall economic and demographic trends, including the continued recovery of the U.S. residential real estate market;

 

   

our expectations regarding our performance during future downturns in the housing sector;

 

   

our growth strategy of increasing our agent count;

 

   

our ability to expand our network of franchises at higher than average rates in both new and existing but underpenetrated markets;

 

   

our expectations regarding agent productivity;

 

   

our growth strategy of increasing our number of closed transaction sides and transaction sides per agent;

 

   

our expectations of the effects of the reacquisition of the Texas region on our results of operations;

 

   

the continued strength of our brand both in the U.S. and Canada and in the rest of the world;

 

   

the pursuit of future reacquisitions of Independent Regions, including the assets of HBN and Tails;

 

   

our intention to pay dividends;

 

   

the benefits to our business resulting from the effects of the Reorganization Transactions;

 

   

our future financial performance;

 

   

the effects of laws applying to our business;

 

   

our ability to retain our senior management and other key employees;

 

   

our intention to pursue additional intellectual property protections;

 

   

our future compliance with U.S. or state franchise regulations; and

 

   

other plans and objectives for future operations, growth, initiatives or strategies.

These and other forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements in this prospectus.

 

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We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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TRADEMARKS AND SERVICE MARKS

We protect the RE/MAX brand through a combination of trademarks and copyrights.

We own the principal trademarks, service marks and trade names that we use in conjunction with operating our business. We have registered “RE/MAX” as a trademark in the U.S., Canada, and over 150 other countries and territories, and have registered various versions of the RE/MAX balloon logo and real estate sign design in numerous countries and territories as well. Other marks registered in the U.S. and Canada, and in certain other jurisdictions, include the “RE/MAX Commercial” logo and our luxury brand, “The RE/MAX Collection.” We have filed other trademark applications in the U.S. and certain other jurisdictions, and will pursue additional trademark registrations and other intellectual property protection to the extent we believe it would be beneficial and cost effective.

We also are the registered holder of a variety of domain names that include “remax” and similar variations.

Each trademark, trade name or service mark of any other company appearing in this prospectus is owned by such company.

MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes data, forecasts and information obtained from independent trade associations, industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. As noted in this prospectus, NAR is the primary source for third-party industry data. In addition, we have used third-party industry data from Real Trends, MMR Strategy Group, the Canadian Real Estate Association, CoreLogic, Inc. and certain other sources, as well as general demographic, economic and real estate data from the U.S. Census Bureau and the Federal Reserve. While data provided by NAR is one indicator of the direction of the residential housing market, we believe that home sale statistics will continue to vary between us and NAR because they use survey data in their historical reports and forecasting models whereas we use data based on actual reported results. In addition to the differences in calculation methodologies, there are geographical differences and concentrations in the markets in which we operate versus the national market. For instance, comparability is impaired due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period over period changes and NAR’s use of median price for its forecasts compared to our average price. Additionally, NAR data and data from certain other sources used herein are subject to periodic review and revision. While we believe that the industry data presented herein is derived from the most widely recognized sources for reporting U.S. residential housing market statistical data, we do not endorse or suggest reliance on this data alone.

Forecasts regarding mean and median sales price, volume of home sales, and other metrics included in this prospectus to describe the housing industry are inherently uncertain or speculative in nature and actual results for any period may materially differ. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding industry data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors, including those discussed under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

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ORGANIZATIONAL STRUCTURE AND REORGANIZATION

Our Existing Owners

RIHI

RIHI (formerly named RE/MAX International Holdings, Inc.) is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder. Margaret Kelly, our Chief Executive Officer and a director, Vincent Tracey, our President and a director, and Daryl Jesperson, a director, hold minority ownership interests in RIHI. RIHI’s primary business activity relates to the management of its ownership interest in RMCO.

Weston Presidio

Weston Presidio is a private equity firm that provides growth capital to companies in the consumer, business services and industrial growth sectors. Since its founding in 1991, the firm has managed five investment funds aggregating over $3.3 billion in total commitments. Investments by Weston Presidio typically range in size from $10.0 million to $50.0 million. The firm focuses its investment activities on lower middle market growth companies, including growth financings, recapitalizations and management-led buyouts. The firm has particular expertise in closely-held and family-controlled businesses and in investing in minority, non-controlling positions. Weston Presidio holds its interest in RMCO through its fifth investment fund, Weston Presidio V, L.P., a Delaware limited partnership.

Organizational Structure Prior to the Offering

Prior to the completion of this offering, Weston Presidio holds 150,000 Class A preferred units in RMCO, which represents all of the currently authorized, issued and outstanding Class A preferred units of RMCO. Prior to the completion of this offering, RIHI holds 847,500 Class B common units of RMCO, which represents all of the currently issued and outstanding Class B common units of RMCO (out of a total of 900,000 authorized Class B common units). The remaining 52,500 authorized but unissued Class B common units of RMCO are reserved for issuance under RMCO’s existing Amended RMCO, LLC, 2011 Unit Option Plan (the “2011 Unit Option Plan”). Prior to the completion of this offering, RMCO issued compensatory options to employees to purchase an aggregate of up to 31,500 Class B common units of RMCO. In connection with the completion of this offering, and as a result of the Reorganization Transactions, any outstanding compensatory options that have been issued in respect of the Class B common units of RMCO and that remain unexercised will be substituted with options granted under our 2013 Stock Incentive Plan in respect of shares of our Class A common stock. See “Executive Compensation—Employee Benefit and Stock Plans—2013 Stock Incentive Plan—Substitution of RMCO Unit Options.”

Our current organizational structure was created in connection with Weston Presidio’s investment in RMCO in April 2010. In connection with Weston Presidio’s investment, RIHI transferred all of its assets to RMCO in exchange for 847,500 Class B common units and 37,500 Class A preferred units. RMCO then issued 112,500 Class A preferred units to Weston Presidio for an aggregate purchase price of $30.0 million and RIHI sold 37,500 Class A preferred units of RMCO to Weston Presidio for an aggregate purchase price of $10.0 million. See “Certain Relationships and Related Party Transactions—Transactions With Our Existing Owners.”

The relative rights and privileges currently associated with the Class A preferred units and Class B common units of RMCO are defined by and subject to the terms of RMCO’s Third Amended and Restated Limited Liability Company Agreement, dated February 1, 2013. The Class A preferred units currently held by Weston Presidio have a liquidation preference of approximately $49.8 million. Following the satisfaction of Weston Presidio’s liquidation preference, the Class A preferred units and Class B common units of RMCO have a right to share distributions made in respect of the common units of RMCO on a pro-rata basis including in connection with an initial public offering.

For additional information regarding the April 2010 transactions among RIHI, RMCO and Weston Presidio and the current relative rights and privileges associated with the Class A preferred units and Class B common units of RMCO, see Note 10 to our audited consolidated financial statements included elsewhere in this prospectus.

 

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The diagram below depicts our organizational structure prior to the consummation of the Reorganization Transactions in connection with the completion of this offering.

 

 

LOGO

 

(1) Weston Presidio V, L.P. is a Delaware limited partnership.
(2) RIHI is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and by Gail Liniger, our Vice Chair and Co-Founder. Margaret Kelly, our Chief Executive Officer and a director, Vincent Tracey, our President and a director, and Daryl Jesperson, a director, hold minority ownership interests in RIHI.
(3) Prior to the completion of this offering, Weston Presidio holds 150,000 Class A preferred units in RMCO, which represents all of the currently authorized, issued, and outstanding Class A preferred units of RMCO.
(4) Prior to the completion of this offering, RIHI holds 847,500 Class B common units of RMCO, which represents all of the currently issued and outstanding Class B common units of RMCO (out of a total of 900,000 authorized Class B common units). The remaining 52,500 authorized but unissued Class B common units of RMCO are reserved for issuance under RMCO’s existing 2011 Unit Option Plan. Prior to the completion of this offering, RMCO issued compensatory options to employees to purchase an aggregate of up to 31,500 Class B common units of RMCO. These RMCO unit options will be replaced by substitution with options to purchase 787,500 shares of our Class A common stock under the 2013 Stock Incentive Plan.
(5) RMCO is a Delaware limited liability company.
(6) RE/MAX conducts its business activities through its various domestic and international operating subsidiaries.

Reorganization Transactions

The following transactions, which we refer to collectively as the Reorganization Transactions, will occur in connection with the completion of this offering:

 

   

RMCO’s Third Amended and Restated Limited Liability Company Agreement, dated as of February 1, 2013 will be amended and restated as described below under “—RMCO Operating Agreement—Agreement in Effect After the Offering”;

 

   

RMCO will recapitalize so that Weston Presidio’s existing Class A preferred membership interest is converted into (i) a new preferred membership interest that reflects Weston Presidio’s current liquidation preference of approximately $49.8 million and (ii) a common interest that reflects Weston Presidio’s current pro-rata share of the residual equity value of RMCO;

 

   

RMCO will split the current number of outstanding common units so that one common unit can be acquired with the net proceeds received in the initial offering from the sale of one share of our Class A common stock, after the deduction of underwriting discounts and commissions;

 

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RE/MAX Holdings, Inc. will become a member and the sole manager of RMCO following (i) its acquisition of the business assets of HBN and Tails and the contribution of such assets to RMCO in exchange for 1,452,128 newly issued common units of RMCO worth approximately $27.3 million and (ii) its purchase from RMCO of 8,547,872 newly issued common units for approximately $160.7 million, which represents all of the remaining proceeds we will receive in this offering from the sale of 10 million shares of our Class A common stock, after the deduction of underwriting discounts and commissions and the approximately $27.3 million of proceeds used to acquire the business assets of HBN and Tails, but prior to the payment of estimated offering expenses;

 

   

RMCO will use approximately $49.8 million from the proceeds received from RE/MAX Holdings, Inc. to first completely redeem the preferred membership interest held by Weston Presidio and to eliminate Weston Presidio’s liquidation preference;

 

   

RMCO will then redeem 1,561,170 common units from RIHI for approximately $29.4 million and 3,750,000 common units from Weston Presidio for $70.5 million (which is a complete redemption of those common units held by Weston Presidio) which will equal, in the aggregate, approximately $99.9 million, and constitute the remaining amount of proceeds received from RE/MAX Holdings, Inc. after the complete redemption of Weston Presidio’s preferred membership interest in RMCO, but prior to the payment of estimated offering expenses; and

 

   

options to acquire shares of our Class A common stock will be substituted for any such unexercised compensatory options to acquire common units in RMCO.

Immediately following the Reorganization Transactions, we will own 34.02% of the outstanding common units in RMCO. If the underwriters exercise their over-allotment option to purchase additional shares of our Class A common stock in full, we will promptly issue 1.5 million additional shares of our Class A common stock pursuant to the over-allotment option and use all of the net proceeds to purchase newly issued common units of RMCO for $28.2 million, and our aggregate ownership of RMCO will increase to 39.06%. RMCO will then use all of the net proceeds received in respect of the over-allotment option to redeem 1,500,000 common units from RIHI for $28.2 million.

Organizational Structure Following the Offering

Immediately following this offering and the related Reorganization Transactions, the holders of shares of our Class A common stock will collectively own 100% of the economic interests in RE/MAX Holdings, Inc. and have 20.50% of the voting power of RE/MAX Holdings, Inc. RIHI will have the remaining 79.50% of the voting power of RE/MAX Holdings, Inc.

We will be a holding company and our sole asset will be approximately 34.02% of the common units in RMCO. RIHI will own the remaining 65.98% of the common units in RMCO, each of which will be redeemable at RIHI’s election for, at our option, shares of our newly issued Class A common stock on a one-for-one basis or a cash payment equal to the market price of one share of our common stock. Our only business will be acting as the sole manager of RMCO and, in that capacity, we will operate and control all of the business and affairs of RMCO and we will consolidate the financial results of RMCO and its subsidiaries. Our only source of cash flow from operations will be distributions from RMCO and management fees pursuant to a management services agreement between us and RMCO.

 

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The diagram below depicts our organizational structure immediately after this offering and the related Reorganization Transactions.

 

LOGO

 

(1) RIHI is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder. Margaret Kelly, our Chief Executive Officer and a director, Vincent Tracey, our President and a director and Daryl Jesperson, a director, hold minority ownership interests in RIHI.
(2) RIHI will have 79.50% of the voting power of RE/MAX Holdings, Inc. through its ownership of one share of Class B common stock of RE/MAX Holdings, Inc. (or 75.73% if the underwriters exercise their over-allotment option in full).
(3) Public investors holding 98.83% of the shares of Class A common stock of RE/MAX Holdings, Inc. will collectively own 98.83% of the initial economic interests in RE/MAX Holdings, Inc. (or 98.98% if the underwriters exercise their overallotment option in full) and have 20.25% of the voting power of RE/MAX Holdings, Inc. (or 24.02% of the voting power if the underwriters exercise their over-allotment option in full). Recipients of grants made in connection with this offering will collectively own 1.17% of the remaining shares of Class A common stock (or 1.02% if the underwriters exercise their over-allotment in full) and have 0.25% of the voting power of RE/MAX Holdings, Inc. (which will remain at approximately 0.25% if the underwriters exercise their over-allotment option in full). Immediately following the offering, shares of Class A common stock will be reserved for issuance to our employees, directors and consultants and to employees, directors and consultants of any affiliated entity, including RMCO, under the 2013 Stock Incentive Plan in an amount equal to five percent of our fully diluted capitalization after this offering.
(4) RE/MAX Holdings, Inc. is a Delaware corporation.

 

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(5) RIHI will hold 19,626,330 common units in RMCO, representing 65.98% of the total number of common units in RMCO that will be outstanding immediately after the offering (or 18,126,330 common units in RMCO, representing 60.94% if the underwriters exercise their over-allotment option in full). Each common unit held by RIHI will be redeemable, at the election of RIHI, for, at RE/MAX Holdings, Inc.’s option, newly issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the market price of one share of Class A common stock (subject to customary adjustments, including conversion rate adjustments, underwriting discounts, commissions and adjustments for stock splits, stock dividends and reclassifications). If, immediately after this offering, RIHI had all of its common units in RMCO redeemed in exchange for newly issued shares of Class A common stock, RIHI would own approximately 65.98% shares of our Class A common stock (or 60.94% if the underwriters exercise their over-allotment option in full).
(6) RE/MAX Holdings, Inc. will be the managing member of RMCO and will hold 10,118,750 common units in RMCO, representing 34.02% of the total number of common units in RMCO that will be outstanding immediately after the offering (or 11,618,750 common units in RMCO, representing 39.06% if the underwriters exercise their over-allotment option in full). If, immediately after this offering, RIHI had all of its common units in RMCO redeemed, RE/MAX Holdings, Inc. would own 100.00% of the common units in RMCO.
(7) RMCO is a Delaware limited liability company.
(8) RE/MAX conducts its business activities through its various domestic and international operating subsidiaries.

RMCO Operating Agreement

Agreement in Effect Before the Completion of the Offering

Our existing owners are parties to a Third Amended and Restated Limited Liability Company Agreement dated as of February 1, 2013, which governs the business operations of RMCO and defines the relative rights and privileges associated with the existing Class A preferred units and Class B common units of RMCO held by Weston Presidio and RIHI, respectively. We refer to this agreement as the current RMCO, LLC agreement. The day-to-day business operations of RMCO are overseen and implemented by officers of RMCO, subject to limitations imposed by the Board of Managers. Under the current RMCO, LLC agreement, RMCO is governed by a thirteen-member Board of Managers, who qualify as “managers” for purposes of the Delaware limited liability company statute. RIHI is entitled to appoint eleven managers and Weston Presidio is entitled to appoint two managers. Each existing owner’s rights under the current RMCO, LLC agreement continue for as long as that member owns membership units in RMCO. Each member of the Board of Managers has one vote on all matters submitted to the board, and board actions require a vote of the majority of managers.

Agreement in Effect After the Offering

In connection with the completion of this offering, we and our existing owners will enter into RMCO’s fourth amended and restated LLC agreement. We refer to this agreement as the restated RMCO, LLC agreement. As a result of the Reorganization Transactions, all of Weston Presidio’s preferred units and common units in RMCO will be redeemed for cash and Weston Presidio will cease to be a member of RMCO. Following the Reorganization Transactions, RIHI will continue as a holder of RMCO common units and a member of RMCO.

Appointment as Manager. Under the restated RMCO, LLC agreement, we will become a member and the sole manager of RMCO. As the sole manager, we will control all of the day-to-day business affairs and decision-making of RMCO without the approval of any other member. As such, we, through our officers and directors, will be responsible for all operational and administrative decisions of RMCO and the day-to-day management of RMCO’s business. Pursuant to the terms of the restated RMCO, LLC agreement, we also cannot, under any circumstances, be removed as the sole manager of RMCO. Except as necessary to avoid being classified as an investment company or with the approval of RIHI, as long as we are the sole manager of RMCO, our business will be limited to owning and dealing with our common units of RMCO, managing the business of RMCO, and fulfilling our obligations under the Exchange Act and activities incidental to the foregoing.

 

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Compensation. We will not be entitled to compensation for our services as manager except as provided in the management services agreement described below under “—Management Services Agreement,” or as otherwise approved by a vote of the members holding a majority of the outstanding common units. We will be entitled to reimbursement by RMCO pursuant to the Management Services Agreement for our reasonable out-of-pocket expenses incurred on its behalf.

Distributions. The restated RMCO, LLC agreement will require “tax distributions” to be made by RMCO to its members, as that term is defined in the agreement. Tax distributions will be made pro rata on a quarterly basis to each member of RMCO, including us, such that each member will receive a tax distribution that is proportionate to its percentage interest in RMCO (based on the number of common units in RMCO that it holds relative to the total number of outstanding common units of RMCO) and that is sufficient to satisfy its tax liability based on such member’s allocable share of the taxable income of RMCO and an assumed tax rate that will be determined by us. For this purpose, the taxable income of RMCO, and RE/MAX Holdings, Inc.’s allocable share of such taxable income, shall be determined without regard to any current or future amortization deductions attributable to (i) tax basis adjustments that RE/MAX Holdings, Inc. may receive under Section 743(b) of the Code and (ii) RE/MAX Holdings, Inc.’s proportionate share of RMCO’s existing tax basis in previously acquired assets that result, in each case, from RE/MAX Holdings, Inc.’s deemed or actual purchase of an equity interest in RMCO from our existing owners (as described below under “—Tax Receivable Agreements”). The assumed tax rate that we expect to use for purposes of determining tax distributions from RMCO to its members will approximate our reasonable estimate of the highest combined federal, state, and local tax rate that may potentially apply to any one of RMCO’s members, regardless of the actual final tax liability of any such member. Tax distributions will also be made only to the extent all distributions from RMCO for the relevant period were otherwise insufficient to enable each member to cover its tax liabilities as calculated in the manner described above. The restated RMCO, LLC agreement will also allow for distributions to be made by RMCO to its members out of “distributable cash,” as that term is defined in the agreement. We expect that distributions out of distributable cash will be made pro rata on a quarterly basis to the extent necessary to enable RE/MAX Holdings, Inc. to cover its operating expenses and other obligations, including any obligations that RE/MAX Holdings, Inc. may have under the tax receivable agreements that it will enter into with the existing owners (as described below under “—Tax Receivable Agreements”), and to make anticipated dividend payments to the holders of its Class A common stock.

Transfer Restrictions. The restated RMCO, LLC agreement generally restricts transfers of common units of RMCO, subject to limited exceptions. Any transferee of common units must assume, by operation of law or written agreement, all of the obligations of a transferring member with respect to the transferred units, even if the transferee is not admitted as a member of RMCO. Additionally, in the event that any common units of RMCO are validly transferred in accordance with the terms of the restated RMCO, LLC agreement, the voting rights of the corresponding shares of Class B common stock to be transferred shall be reduced to one times the aggregate number of RMCO common units held by such transferee, unless the transferee is David Liniger.

Recapitalization and Preferred Unit Redemption Right. The restated RMCO, LLC agreement recapitalizes the existing Class A preferred units currently held by Weston Presidio in RMCO into new preferred units and new common units of RMCO. The preferred units are entitled to a distribution and liquidation preference of approximately $49.8 million, which we intend to cause RMCO to satisfy through RMCO’s redemption of such preferred units in connection with this offering and as described above under “—Reorganization Transactions.” Upon the redemption of the preferred units held by Weston Presidio, each preferred unit will be cancelled and Weston Presidio will cease to have any rights as a member of RMCO with respect to its preferred units. The restated RMCO, LLC agreement will also reflect a reclassification and split of the existing Class B common units of RMCO held by RIHI, and a related issuance of new RMCO common units to Weston Presidio, such that one common unit can be acquired with the net proceeds received in the initial offering from the sale of one share of our Class A common stock, after the deduction of underwriting discounts and commissions.

Common Unit Redemption Right. The restated RMCO, LLC agreement provides a redemption right to RIHI which entitles RIHI to have its common units of RMCO redeemed for our newly issued shares of Class A

 

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common stock on a one-for-one basis (subject to customary adjustments, including conversion rate adjustments, underwriting discounts, commissions and adjustments for stock splits, stock dividends, and reclassifications), or at our option, a cash payment equal to the market price of one share of our common stock. If we decide to make a cash payment, RIHI has the option to rescind its redemption request within a specified time period. If we decide to make a cash payment and RIHI has not rescinded, we are obligated to sell to a third party a number of shares of our Class A common stock equal to the number of redeemed common units, so as to ensure that the number of common units in RMCO that we own will equal the number of our outstanding shares of Class A common stock. Upon the exercise of its redemption right, RIHI will surrender common units to RMCO for cancellation. Pursuant to our amended and restated certificate of incorporation, we will then contribute cash or shares of our Class A common stock to RMCO in exchange for an amount of newly issued common units in RMCO equal to the number of common units redeemed by RIHI. RMCO will then distribute the cash or shares of our Class A common stock to RIHI to complete the redemption. In connection with RIHI’s exercise of its redemption right, RE/MAX Holdings, Inc. may also, in its sole discretion, elect to acquire RIHI’s common units in RMCO from RIHI. In the event of such an election, and as an alternative to RIHI engaging in a redemption transaction with RMCO, RE/MAX Holdings, Inc. would instead directly acquire RIHI’s RMCO common units on the same terms as if RIHI had engaged in a redemption transaction with RMCO as previously described above.

Issuance of Common Units Upon Exercise of Options or Issuance of Other Equity Compensation. Upon the exercise of options we have issued or the issuance of other types of equity compensation (such as the issuance of restricted or non-restricted stock, payment of bonuses in stock or settlement of stock appreciation rights in stock), we will have the right to acquire from RMCO a number of common units equal to the number of our shares of Class A common stock being issued in connection with the exercise of options or issuance of other types of equity compensation. We will contribute to RMCO the amount of any consideration we receive for the exercise of options or for shares issued pursuant to other types of equity compensation.

Dissolution. The restated RMCO, LLC agreement will provide that the unanimous consent of all members holding common units will be required to voluntarily dissolve RMCO. In addition to a voluntary dissolution, RMCO will be dissolved upon the entry of a decree of judicial dissolution in accordance with Delaware law. Upon a dissolution event, the proceeds of a liquidation will be distributed in the following order: (i) first, to pay the expenses of winding up RMCO; (ii) second, to pay debts and liabilities owed to creditors of RMCO; and (iii) third, to the members pro-rata in accordance with their respective percentage ownership interests in RMCO (as determined based on the number of common units held by a member relative to the aggregate number of all outstanding common units).

Confidentiality. Each member will agree to maintain the confidentiality of RMCO’s intellectual property and other confidential information.

Indemnification. The restated RMCO, LLC agreement provides for indemnification of the manager, members and officers of RMCO and their respective subsidiaries or affiliates.

Tax Receivable Agreements

The following transactions are expected to have the effect of reducing the amounts that RE/MAX Holdings, Inc. would otherwise pay in the future to various tax authorities as a result of increasing its share of tax basis in RMCO’s tangible and intangible assets:

 

   

as described above under “—Reorganization Transactions” and in “Use of Proceeds,” RE/MAX Holdings, Inc.’s purchase of common units from RMCO and RMCO’s related redemption of all outstanding preferred units from Weston Presidio (which we intend to treat as RE/MAX Holdings, Inc.’s direct purchase of preferred units from Weston Presidio for U.S. federal income and other applicable tax purposes, and for which RE/MAX Holdings, Inc. will obtain an upward tax basis adjustment or “step-up” under Section 743(b) of the Code as a result of RMCO’s tax election under Section 754 of the Code);

 

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as described above under “—Reorganization Transactions” and in “Use of Proceeds,” RE/MAX Holdings, Inc.’s purchase of common units from RMCO and RMCO’s related redemption of common units from RIHI and Weston Presidio, including in connection with the underwriters’ potential exercise of their over-allotment option (which we intend to treat as RE/MAX Holdings, Inc.’s direct purchase of common units from RIHI and Weston Presidio for U.S. federal income and other applicable tax purposes, and for which RE/MAX Holdings, Inc. will obtain an upward tax basis adjustment or “step-up” under Section 743(b) of the Code as a result of RMCO’s tax election under Section 754 of the Code);

 

   

as described above under “—RMCO Operating Agreement—Agreement in Effect After the Offering—Common Unit Redemption Right,” the receipt of shares of our Class A common stock or cash at our election by RIHI in connection with an exercise of its right to redeem common units in RMCO held by RIHI (which we intend to treat as RE/MAX Holdings, Inc.’s direct purchase of common units from RIHI for U.S. federal income and other applicable tax purposes, regardless of whether such common units are surrendered by RIHI to RMCO for redemption or sold to RE/MAX Holdings, Inc. upon the exercise of its election to acquire such common units directly, and for which RE/MAX Holdings, Inc. may obtain an upward tax basis adjustment or “step-up” under Section 743(b) of the Code as a result of RMCO’s tax election under Section 754 of the Code); and

 

   

as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions and Divestitures,” our historical acquisitions of regional franchise rights that were treated as taxable asset acquisitions for U.S. federal income and other applicable tax purposes, including our recent acquisition of certain assets of RE/MAX of Colorado, Inc. and RE/MAX of Texas (for which RE/MAX Holdings, Inc. will obtain a proportionate share of RMCO’s existing tax basis in such acquired assets).

In connection with the transactions described above, RE/MAX Holdings, Inc. will enter into a separate tax receivable agreement with each of our existing owners that will provide for the payment by RE/MAX Holdings, Inc. to the existing owners of 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax or franchise tax that RE/MAX Holdings, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of an expected increase in its share of tax basis in RMCO’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreements, and deductions attributable to imputed and actual interest that accrues in respect of such payments. These tax benefit payments are not necessarily conditioned upon one or more of the existing owners maintaining a continued ownership interest in either RMCO or RE/MAX Holdings, Inc. RE/MAX Holdings, Inc. expects to benefit from the remaining 15% of cash savings, if any, that it may actually realize. The substantive provisions of the separate tax receivable agreements that we will enter into with each of our existing owners will be substantially identical.

Initially, any amounts that may be paid to our existing owners under the tax receivable agreements will be attributable to the first, second, and fourth transactions described above and such amounts will be allocated in accordance with each existing owner’s share of the tax benefits that arise from such transactions. Over time, any amounts that may be paid to RIHI under its tax receivable agreement may also be attributable to the third transaction described above, and the allocation of such amounts will depend, among other things, upon whether and to what extent RIHI has participated in the third transaction described above.

With respect to the fourth transaction described above, we will be obligated to make payments under the tax receivable agreements only with respect to RE/MAX Holdings Inc.’s proportionate share of RMCO’s existing tax basis in previously acquired assets that results from RE/MAX Holdings Inc.’s deemed or actual purchase of an equity interest in RMCO from our existing owners (as described in the first, second and third transactions described above). We will not be obligated to make payments under the tax receivable agreements with respect to RE/MAX Holdings Inc.’s proportionate share of RMCO’s existing tax basis in previously acquired assets that results from RE/MAX Holdings Inc.’s contribution of cash or property to RMCO in exchange for an equity interest in RMCO (including, initially, with respect to RE/MAX Holdings Inc.’s expected contribution of the

 

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business assets of HBN and Tails to RMCO in exchange for approximately $27.3 million of additional common units in RMCO, as described under “Certain Relationships and Related Party Transactions—Managed Region Acquisitions”).

For purposes of the tax receivable agreements, cash savings in income and franchise tax will be computed by comparing RE/MAX Holdings, Inc.’s actual income and franchise tax liability to the amount of such taxes that RE/MAX Holdings, Inc. would have been required to pay had there been no increase in RE/MAX Holdings, Inc.’s share of tax basis in RMCO’s tangible and intangible assets and had the tax receivable agreements not been entered into. The tax receivable agreements will generally apply to each of RE/MAX Holdings, Inc.’s taxable years, beginning with the first taxable year ending after the consummation of the offering. There is no maximum term for the tax receivable agreements; however, the tax receivable agreements may be terminated by us pursuant to an early termination procedure that requires us to pay the existing owners an agreed upon amount equal to the estimated present value of the remaining payments to be made under the agreement.

Although the actual timing and amount of any payments that may be made under the tax receivable agreements will vary depending upon a number of facts and circumstances that are beyond our control (including the timing and amount of any redemption of common units by RIHI, the trading price of our shares of Class A common stock at the time of any such redemptions, and the amount and timing of our taxable income and the applicable tax rate), we expect that the payments that we may be required to make to our existing owners could be substantial. Any payments made by us to our existing owners under the tax receivable agreements will generally reduce the amount of overall cash flow that might have otherwise been available to us or to RMCO and, to the extent that we are unable to make payments under the tax receivable agreements for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us.

The tax receivable agreements provide that if certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, or that if, at any time, we elect an early termination of the tax receivable agreements, then our obligations, or our successor’s obligations, under the tax receivable agreements would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the tax receivable agreements.

As a result, (i) we could be required to make cash payments to our existing owners that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the tax receivable agreements, and (ii) if we elect to terminate the tax receivable agreements early, we 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 tax receivable agreements, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the tax receivable agreements could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the tax receivable agreements.

The tax receivable agreements provide that we may, at our option, make one or more estimated payments to our existing owners in respect of any anticipated payments required under the tax receivable agreements. Any estimated payments made under the terms of the tax receivable agreements are subject to adjustment pending a final determination of the actual payments required under the tax receivable agreements.

We will also not be reimbursed for any cash payments previously made to our existing owners pursuant to the tax receivable agreements if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to an existing owner will be netted against any future cash payments that we might otherwise be required to make under the terms of the tax receivable agreements. However, we might not determine that we have effectively made an excess cash payment to our existing owners for a number of years following the initial time of such payment. As a result, it is

 

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possible that we could make cash payments under the tax receivable agreements that are substantially greater than our actual cash tax savings. Although we are not currently aware of any reason why any tax basis increases or other tax benefits would be challenged by a taxing authority, if we determine that any tax basis increases or other tax benefits may be subjected to a reasonable challenge or are being challenged by a taxing authority, we may withhold some or all of the payments otherwise due to our existing owners under the tax receivable agreements in an interest-bearing escrow account until such a challenge is no longer possible or is otherwise resolved.

We will have full responsibility for, and sole discretion over, all RE/MAX Holdings, Inc. tax matters, including the filing and amendment of all tax returns and claims for refund and defense of all tax contests, subject to certain participation rights held by the existing owners.

Payments are generally due under the tax receivable agreements within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Any late payments that may be made under the tax receivable agreements will continue to accrue interest at LIBOR plus 300 basis points until such payments are made, including any late payments that we may subsequently make because we did not have enough available cash to satisfy our payment obligations at the time at which they originally arose.

Management Services Agreement

We will enter into a management services agreement with RMCO pursuant to which we will agree to provide certain specific management services to RMCO, including those services typically provided for by the individuals serving in the positions of president, chief executive officer, chief financial officer, and general counsel. In exchange for the services we will provide, RMCO will reimburse us for compensation and other expenses of our officers and employees and for certain out-of-pocket costs. RMCO will also provide administrative and support services to us, such as office facilities, equipment, supplies, payroll and accounting and financial reporting. The management services agreement also provides that our employees may participate in RMCO’s benefit plans, and that RMCO employees may participate in our 2013 Stock Incentive Plan. RMCO will indemnify us for any losses arising from our performance under the management services agreement, except that we will indemnify RMCO for any losses caused by our willful misconduct or gross negligence.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering will be $177.0 million, or $205.2 million if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $20.00 per share, which is the midpoint of the price range listed on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the net proceeds from this offering by approximately $9.4 million, assuming no exercise of the underwriters’ over-allotment option and that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately $27.3 million of the proceeds of this offering to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisition of the business assets of HBN and Tails. Following our acquisition of the business assets of HBN and Tails, we will contribute such assets to RMCO in exchange for a number of newly issued common units of RMCO worth approximately $27.3 million, at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. Certain of our directors and executive officers (and their family members), including David Liniger, Gail Liniger, Margaret Kelly, Vincent Tracey and Daryl Jesperson, own shares of HBN and Tails. We engaged a third-party valuation firm to assist in the evaluation of the fair market value of 100% of the equity of each of HBN and Tails and used this firm’s analysis as the basis for determining the purchase price for these acquisitions. These transactions are described in greater detail in “Certain Relationships and Related Party Transactions—Managed Region Acquisitions.”

We intend to use approximately $160.7 million of the proceeds of this offering (including net proceeds received if the underwriters exercise their option to purchase additional shares of Class A common stock) to purchase newly issued common units from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts, as described under “Organizational Structure and Reorganization—Reorganization Transactions.” RMCO will use a portion of the proceeds it receives from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio and to satisfy the liquidation preference of approximately $49.8 million associated with those preferred membership units. Following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO will use approximately $99.9 million of the remaining proceeds of this offering (or $128.1 million if the underwriters exercise their over-allotment option in full) to redeem common units of RMCO from our existing owners, RIHI and Weston Presidio. The price per common unit of RMCO paid by RMCO to our existing owners will equal the public offering price per share of our Class A common stock, less underwriting discounts.

 

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DIVIDEND POLICY

We currently intend to declare quarterly dividends of approximately $0.0625 per share on all outstanding shares of Class A common stock. We determined this dividend rate in an effort to provide our stockholders with an attractive annual return on their investment and after taking into consideration our projected free cash flow. We generally consider our free cash flow for any particular period to be our net earnings plus any non-cash charges and expenses incurred in such period after subtracting our capital expenditures and mandatory debt repayments for that period.

We currently expect the first quarterly dividend will be paid after the fourth quarter of 2013. The declaration of this and any other dividends, and, if declared, the amount of any such dividend, will be subject to our actual future earnings and capital requirements and to the discretion of our board of directors. Our board of directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions and such other factors as our board of directors may deem relevant. For example, our ability to pay cash dividends on our common stock will be subject to our continued compliance with the terms of our senior secured credit facility. Because any future payment of dividends will be at the discretion of our board of directors, we do not expect that any such dividend payments will have an adverse impact on our liquidity or otherwise limit our ability to fund capital expenditures or otherwise pursue our business strategy over the long-term. We intend to fund any future dividends out of our projected free cash flow and, as a result, we do not expect to incur any indebtedness to fund such payments.

Because we are a holding company with no material assets other than our ownership of common units of RMCO and no independent means of generating revenue or cash flow and ability to pay dividends will be dependent upon the financial results and cash flows of RMCO and its subsidiaries and distributions we receive from RMCO. We expect to cause RMCO to make distributions to fund our expected dividend payments. Any distributions by RMCO will be funded by proportionate distributions by RMCO to us and RIHI in accordance with respective ownership percentages of common units. However, RMCO’s ability to pay dividends, including making distributions to us, is limited by the terms of our senior secured credit facility, which may in turn limit our ability to pay dividends on our common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement, debt or preferred securities issued by us, RMCO’s or its subsidiaries in the future.

RMCO paid tax-related distributions and other cash distributions to our existing owners during the years ended December 31, 2011 and 2012 and the six month period ended June 30, 2013. Tax-related distributions paid, in the aggregate, were $6.6 million, $3.5 million and $12.7 million during the years ended December 31, 2011 and 2012 and the six month period ended June 30, 2013, respectively. Other cash distributions paid, in the aggregate, were $8.7 million, $6.1 million and $8.0 million during the years ended December 31, 2011 and 2012 and the six month period ended June 30, 2013, respectively.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2013:

 

   

on an actual basis for RMCO;

 

   

on a pro forma basis for RE/MAX Holdings, Inc., giving effect to the Reorganization Transactions, including the substitution of outstanding options under the 2011 Unit Option Plan, the grant of shares of Class A common stock we expect to make under the 2013 Stock Incentive Plan in connection with the completion of this offering, the issuance and sale by us of 10,000,000 shares of Class A common stock in this offering at an assumed initial public offering price of $20.00 per share (the midpoint of the price range set forth on the cover of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with “Organizational Structure and Reorganization,” “Selected Historical Consolidated Financial and Operating Data,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

     Actual
RMCO
    Pro Forma 
RE/MAX
Holdings, Inc.
 
     (unaudited)     (unaudited)  
     (in thousands, except share
data)
 

Cash and cash equivalents

   $ 58,582      $ 58,582   
  

 

 

   

 

 

 

Debt, including current portion:

    

Senior secured credit facility

   $ 223,230      $ 223,230   

Redeemable preferred units:

    

Class A Preferred Units, no par value per unit, 150,000 units authorized, 150,000 units issued and outstanding, actual

     145,400        —     

Members’ capital/Stockholders’ equity:

    

RMCO Class B Common Units, no par value per unit, 900,000 units authorized, 847,500 units issued and outstanding, actual

     (170,543     —     

Class A common stock, $0.0001 par value per share, none authorized, issued or outstanding, actual; 180,000,000 shares authorized, 10,118,750 shares issued and outstanding, pro forma

     —          1   

Class B common stock, $0.0001 par value per share, none authorized, issued or outstanding, actual; 1,000 shares authorized, one share issued and outstanding, pro forma

     —          —     

Additional paid-in capital

     —          219,403   

Retained earnings

     —          (2,529

Accumulated other comprehensive income

     1,449        1,449   
  

 

 

   

 

 

 

Total members’ capital/stockholders’ equity attributable to RE/MAX Holdings, Inc.

     (169,094     218,324   

Non-controlling interest

     —          (189,938

Total members’ capital/stockholders’ equity

     (169,094     28,386   
  

 

 

   

 

 

 

Total capitalization

   $ 199,536      $ 251,616   
  

 

 

   

 

 

 

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the amount per share paid by new investors in our shares of our Class A common stock in this offering and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after completion of this offering.

As of June 30, 2013, the net tangible book value (deficit) of RMCO was approximately $(218.8 million), or $(8.77) per share of RMCO Class B common units. Net tangible book value per share represents the amount of our tangible assets less our liabilities and the amount of Weston Presidio’s estimated liquidity preference at June 30, 2013 divided by the shares of Class A common stock equivalents outstanding as of June 30, 2013. Our pro forma as adjusted net tangible book value includes the effect of the Reorganization Transactions, the impact of our sale of 10,000,000 shares of Class A common stock in this offering at an assumed initial public offering price of $20.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, the acquisition of the business assets of HBN and Tails for approximately $27.3 million, the redemption of Weston Presidio’s preferred and common membership interest, and assuming the redemption of all RMCO common units held by our existing owners in exchange for an aggregate of 8,547,872 shares of Class A common stock. Our pro forma as adjusted net tangible book value as of June 30, 2013, would have been $46.6 million, or $4.60 per share of Class A common stock. This represents an immediate increase in pro forma net tangible book value of $13.37 per share to our existing stockholders and an immediate dilution of $15.40 per share to new investors.

The following table illustrates this dilution to new investors on a per share basis assuming the underwriters do not exercise their option to purchase additional shares:

 

Assumed initial public offering price per share

     $ 20.00   

Net tangible book value (deficit) per share as of June 30, 2013, before giving effect to this offering

   $ (8.77  

Increase in net tangible book value (deficit) per share attributable to new investors purchasing shares from us in this offering

   $ 13.37     
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

     $ 4.60   
    

 

 

 

Dilution per share to new investors

     $ 15.40   
    

 

 

 

The following table summarizes, on a pro forma basis, as June 30, 2013:

 

   

the total number of shares of common stock purchased from us by existing stockholders assuming the redemption of all RMCO common units held by our existing owners in exchange for shares of Class A common stock and by the new investors purchasing shares in this offering;

 

   

the total consideration paid to us by existing stockholders and to be paid to us by the new investors purchasing shares in this offering, assuming an initial public offering price of $20.00 per share (before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering); and

 

   

the average price per share paid by existing stockholders and by the new investors purchasing shares in this offering.

 

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Options are not included in the following calculations.

 

     Shares Purchased     Total
Consideration
    Average
Price
Per

Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     24,937,500         71.4   $ 231,229,000         53.6   $ 9.27   

New investors

     10,000,000         28.6     200,000,000         46.4     20.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     34,937,500         100.0   $ 431,229,000         100.0   $ 12.34   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the total consideration paid to us by new investors by $10.0 million and increase or decrease the percent of total consideration paid to us by new investors by approximately 2.32% assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares and no exercise of any outstanding options to purchase our common stock.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

We derived the unaudited pro forma condensed consolidated financial information set forth below by the application of pro forma adjustments to the audited and unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2012 and the six month period ended June 30, 2013 and the unaudited pro forma condensed consolidated balance sheet as of June 30, 2013 present our consolidated results of operations and financial position to give pro forma effect to the Reorganization Transactions described in “Organizational Structure and Reorganization” and the sale of shares in this offering (excluding shares issuable upon exercise of the underwriters’ option to purchase additional shares), and the application of the net proceeds from this offering, including the acquisitions of the business assets of HBN and Tails, as if all such transactions had been completed as of January 1, 2012 with respect to the unaudited combined condensed consolidated pro forma statements of income and as of June 30, 2013 with respect to the unaudited pro forma condensed consolidated balance sheet. The unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2012 also gives effect to our acquisition of certain assets of RE/MAX of Texas as if the acquisition had occurred on January 1, 2012. The unaudited pro forma condensed consolidated financial information reflects pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the unaudited pro forma condensed consolidated financial information.

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

 

   

the acquisition of certain assets of RE/MAX/KEMCO Partnership L.P. (d/b/a RE/MAX of Texas and for purposes of the unaudited pro forma condensed consolidated financial information, referred to as the RE/MAX of Texas Transaction) which include the regional franchise rights that permit the sale of RE/MAX franchises in the state of Texas. The acquisition of RE/MAX of Texas was deemed significant as defined in Rule 3-05 of Regulation S-X and separate financial statements for RE/MAX of Texas are included elsewhere in this prospectus;

 

   

this offering and the use of a portion of the proceeds as described in “Use of Proceeds” including the acquisitions of the business assets of HBN and Tails (collectively referred to for purposes of the unaudited pro forma condensed consolidated financial information as the “Managed Region Acquisitions”), which will be completed in connection with this offering. The Managed Region Acquisitions are not deemed significant as defined in Rule 3-05 of Regulation S-X;

 

   

the Reorganization Transactions described in “Organizational Structure and Reorganization,” including the substitution of outstanding options under the 2011 Unit Option Plan;

 

   

the tax receivable agreements we will enter into with the existing owners as described in “Organizational Structure and Reorganization—Tax Receivable Agreements.” In the case of the unaudited pro forma condensed consolidated statements of income, a provision for corporate income taxes on the income of RE/MAX Holdings, Inc. at an effective rate of 38% which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction; and

 

   

the issuance of vested restricted stock units with respect to 118,750 shares of our Class A common stock to our officers and employees on the effective date of the offering.

The unaudited pro forma condensed consolidated financial information is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Reorganization Transactions and this offering been consummated on the dates indicated, and do not purport to be indicative of the financial condition or results of operations as of any future date or for any future period. You should read our unaudited pro forma condensed consolidated financial information and the accompanying notes in conjunction with the consolidated historical financial statements and related notes

 

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included elsewhere in this prospectus and the financial and other information appearing elsewhere in this prospectus, including information contained in “Risk Factors,” “Selected Historical Consolidated Financial and Operating Data,” “Use of Proceeds,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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RE/MAX Holdings, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Income

Year Ended December 31, 2012

(Amounts in thousands)

 

    Historical
RMCO,
LLC(1)
    Historical
RE/MAX
of Texas
(1)
    Pro Forma
Adjustments
for
RE/MAX of
Texas
Transaction
(2)
    Notes   Pro Forma
RMCO,
LLC
    Historical
HBN and
Tails
    Pro Forma
Adjustments
for HBN

and Tails
Transactions(3)
    Notes     Pro Forma
Adjustments
for Pro
Forma
Offering(4)
    Notes     Pro Forma
RE/MAX
Holdings, Inc.
 

Revenue:

                     

Continuing franchise fees

  $ 56,350      $ 5,879      $ (872     $ 61,357      $ 7,856        (2,436       —          $ 66,777   

Annual dues

    28,909        —          —            28,909        —          —            —            28,909   

Broker fees

    19,579        2,508        (446       21,641        2,221        (666       —            23,196   

Franchise sales and other franchise revenue

    22,629        692        (154       23,167        998        (262       —            23,903   

Brokerage revenue

    16,210        —          —            16,210        —          —            —            16,210   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total revenue

    143,677        9,079        (1,472   2(a)     151,284        11,075        (3,364     3 (a)      —            158,995   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Operating expenses:

                     

Selling, operating and administrative expenses

    84,337        4,613        (1,696   2(a)(b)     87,254        7,606        (3,364     3 (a)      2,903        4 (a)      94,399   

Depreciation and amortization

    12,090        416        3,255      2(c)     15,761        —          1,705        3 (b)      —            17,466   

Loss on sale of assets, net

    1,704        —          —            1,704        —          —            —            1,704   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total operating expenses

    98,131        5,029        1,559          104,719        7,606        (1,659       2,903          113,569   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Operating income

    45,546        4,050        (3,031       46,565        3,469        (1,705       (2,903       45,426   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Other income (expenses):

                     

Interest expense

    (11,686     (20     (2,687   2(d)     (14,393     —          —            —            (14,393

Interest income

    286        38        —            324        16        —            —            340   

Foreign currency transaction gains, net

    208        —          —            208        —          —            —            208   

Loss on early extinguishment of debt

    (136       —            (136     —          —            —            (136

Equity in earnings of investees

    1,244        —          —            1,244        —          —            —            1,244   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total other income (expenses), net

    (10,084     18        (2,687       (12,753     16        —            —            (12,737
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income before provision for income taxes

    35,462        4,068        (5,718       33,812        3,485        (1,705       (2,903       32,689   

Provision for income taxes

    (2,138     —          —            (2,138     —          —            (2,088     4 (b)      (4,226
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income from continuing operations

    33,324        4,068        (5,718       31,674        3,485        (1,705       (4,991       28,463   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Loss from discontinued operations

    —          (38     38      2(e)     —          —          —            —            —     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income

  $ 33,324      $ 4,030      $ (5,680     $ 31,674      $ 3,485      $ (1,705     $ (4,991     $ 28,463   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

         

Less: Net income attributable to non-controlling interest

                    21,568        4 (c)      21,568   
                     

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

                      $ 6,895   
                     

 

 

 

Net income attributable to RE/MAX Holdings, Inc. per Class A common share 4(d)

                     

Basic

                      $ 0.68   

Diluted

                      $ 0.64   

Weighted average shares of Class A common stock outstanding 4(d)

                     

Basic

                        10,118,750   

Diluted

                        10,758,879   

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

 

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RE/MAX Holdings, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Income

Six months ended June 30, 2013

(Amounts in thousands)

 

     Historical
RMCO,
LLC(1)
    Historical
HBN and
Tails(1)
     Pro Forma
Adjustments
for HBN and
Tails
Acquisitions(3)
    Notes     Pro Forma
Offering
Adjustments(4)
    Notes     Pro Forma
RE/MAX
Holdings, Inc.
 

Revenue:

               

Continuing franchise fees

   $ 30,944      $ 3,968       $ (1,222       —          $ 33,690   

Annual dues

     14,597        —           —            —            14,597   

Broker fees

     11,500        1,319         (407       —            12,412   

Franchise sales and other franchise revenue

     12,747        384         (107       —            13,024   

Brokerage revenue

     8,528        —           —            —            8,528   
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Total revenue

     78,316        5,671         (1,736     3 (c)      —            82,251   
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Operating expenses:

               

Selling, operating and administrative expenses

     47,983        3,476         (1,832     3 (c)(d)      —            49,627   

Depreciation and amortization

     7,432        —           853        3 (e)      —            8,285   

Loss on sale of assets, net

     44        —           —            —            44   
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Total operating expenses

     55,459        3,476         (979       —            57,956   
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Operating income

     22,857        2,195         (757       —            24,295   
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Other income (expenses):

               

Interest expense

     (6,925     —           —            —            (6,925

Interest income

     142        7         —            —            149   

Foreign currency transaction gains, net

     (416     —           —            —            (416

Loss on early extinguishment of debt

     (134     —           —            —            (134

Equity in earnings of investees

     462        —           —            —            462   
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Total other income (expenses), net

     (6,871     7         —            —            (6,864
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Income before provision for income taxes

     15,986        2,202         (757       —            17,431   

Provision for income taxes

     (1,031     —           —            (1,222     4 (e)      (2,253
  

 

 

   

 

 

    

 

 

     

 

 

     

 

 

 

Net income

     14,955        2,202         (757       (1,222       15,178   
  

 

 

   

 

 

    

 

 

         

 

 

 

Less: Net income attributable to non-controlling interest

              11,501        4 (f)      11,501   
               

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

                $ 3,677   
               

 

 

 

Net income attributable to RE/MAX Holdings, Inc. per Class A common share 4(g)

               

Basic

                $ 0.36   

Diluted

                $ 0.34   

Weighted average shares of Class A common stock outstanding 4(g)

               

Basic

                  10,118,750   

Diluted

                  10,746,849   

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

 

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RE/MAX Holdings, Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of June 30, 2013

(Amounts in thousands, except units)

 

     Historical
RMCO,
LLC(1)
     Pro  Forma
Adjustments
for HBN
and Tails
Acquisitions(3)
    Notes     Pro Forma
Adjustments

for
Pro Forma
Offering(4)
    Notes   Pro Forma
RE/MAX
Holdings, Inc.
 

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 58,582         (27,305)        3 (aa)    $ 27,305        $ 58,582   

Escrow cash—restricted

     1,224         —            —            1,224   

Accounts and notes receivable, current portion, less allowances

     17,121         1,454        3 (aa)      —            18,575   

Accounts receivable from affiliates

     10         —            —            10   

Other current assets

     2,202         11        3 (aa)      785      4(aa)     2,998   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total current assets

     79,139         (25,840)          28,090          81,389   

Property and equipment, net

     2,645         —            —            2,645   

Franchise agreements, net

     72,406         23,514        3 (aa)      —            95,920   

Other intangible assets, net

     2,533         —            —            2,533   

Goodwill

     70,817         2,486        3 (aa)      —            73,303   

Deferred tax assets

     —           —            64,908      4(aa),4(bb)     64,908   

Investments in equity method investees

     3,698         —            —            3,698   

Debt issuance costs, net

     2,430         —            —            2,430   

Other assets

     4,402         30        3 (aa)      (2,511)      4(cc)     1,921   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total assets

   $ 238,070         190          90,487        $ 328,747   
  

 

 

    

 

 

     

 

 

     

 

 

 

Liabilities, Redeemable Preferred Units and Members’ Deficit/Stockholders’ Equity

             

Current liabilities:

             

Accounts payable

   $ 690         —            —            690   

Accounts payable to affiliates

     2,473         —            —            2,473   

Escrow liabilities

     1,224         —            —            1,224   

Accrued liabilities

     9,378         190        3 (aa)      528      4(a)     10,096   

Income taxes payable

     314         —            (374)      4(a)     (60)   

Deferred revenue and deposits

     16,200         —            —            16,200   

Current portion of debt

     17,300        
—  
  
      —            17,300   

Current portion of payable to related parties pursuant to tax receivable agreements

     —           —            755      4(bb)     755   

Other current liabilities

     87         —            —            87   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total current liabilities

     47,666         190          909          48,765   

Debt, net of current portion

     205,930         —            —            205,930   

Payable to related parties pursuant to tax receivable agreements, net of current portion

     —           —            37,498      4(bb)     37,498   

Deferred revenue, net of current portion

     457         —            —            457   

Other liabilities, net of current portion

     7,711         —            —            7,711   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total liabilities

     261,764         190          38,407          300,361   

Redeemable preferred units:

             

Class A preferred units, at estimated redemption value (no par value, 150,000 units authorized, issued and outstanding as of June 30, 2013; liquidation preference of $49,300)

     145,400         —            (145,400)      4(dd)     —     
  

 

 

    

 

 

     

 

 

     

 

 

 

Members’ deficit/Stockholders’ equity:

             

Class B common units (no par value, 900,000 units authorized, 847,500 units issued and outstanding as of June 30, 2013; none outstanding on a pro forma basis)

     (170,543)         —            170,543      4(ee)     —     

Accumulated other comprehensive income

     1,449         —            —            1,449   

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 10,118,750 shares issued and outstanding on a pro forma basis

     —           —            1          1   

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding on a pro forma basis

     —           —            —            —     

Additional paid-in capital

     —           —            219,403      4(ff)     219,403   

Retained earnings

     —           —            (2,529)      4(a)     (2,529)   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total members’ deficit/stockholders’ equity attributable to RE/MAX Holdings, Inc. 

     (169,094)         —            387,418          218,324   

Non-controlling interest

     —               (189,938)      4(ee)     (189,938)   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total members’ deficit/stockholders’ equity

     (169,094)         —            197,480          28,386   
  

 

 

    

 

 

     

 

 

     

 

 

 

Total liabilities, redeemable preferred units and members’ deficit/stockholders’ equity

   $ 238,070       $ 190        $ 90,487        $ 328,747   
  

 

 

    

 

 

     

 

 

     

 

 

 

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

 

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RE/MAX Holdings, Inc.

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

Basis of Presentation and Description of Transactions

Effective December 31, 2012, we acquired certain assets of RE/MAX/KEMCO Partnership L.P. d/b/a RE/MAX of Texas (RE/MAX of Texas), including its rights under 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 provided from borrowings. For further information about the RE/MAX of Texas Transaction, see Note 6 to our audited consolidated financial statements included elsewhere in this prospectus. For purposes of the unaudited pro forma condensed consolidated financial information, the acquisition of RE/MAX of Texas is referred to as the RE/MAX of Texas Transaction.

We intend to use approximately $27.3 million of the net proceeds of this offering to reacquire regional RE/MAX franchise rights in the Southwest and Central Atlantic regions of the U.S. through the Managed Region Acquisitions. Following our acquisition of the business assets of the Managed Regions, we will contribute such assets to RMCO in exchange for a number of newly issued common units of RMCO worth approximately $27.3 million, at a price per share equal to the public offering price per share of our Class A common stock, less underwriting discounts.

We intend to use all of the remaining net proceeds of this offering (including net proceeds received if the underwriters exercise their option to purchase additional shares of Class A common stock) to purchase newly issued common units from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts. RMCO will use a portion of the net proceeds it receives from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio and to satisfy the $49.8 million liquidation preference associated with those preferred membership units. Following RMCO’s redemption of all of the outstanding preferred membership units in RMCO from Weston Presidio, RMCO will then redeem all common units held by Weston Presidio and use the remaining net proceeds of this offering to redeem common units of RMCO from RIHI.

1. Historical Results of Operations and Financial Position

The historical RMCO, LLC results of operations for the year ended December 31, 2012 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Condensed consolidated statement of income data for the six-month period ended June 30, 3013 and consolidated balance sheet data as of June 30, 2013 for RMCO are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The historical RE/MAX of Texas results of operations for the year ended December 31, 2012 were derived from the RE/MAX of Texas audited consolidated financial statements included elsewhere in this prospectus. The historical HBN and Tails results of operations for the year ended December 31, 2012 and for the six-month period ended June 30, 2013 and the historical financial position of HBN and Tails as of June 30, 2013 were derived from the HBN and Tails financial statements.

2. Pro Forma Adjustments for RE\MAX of Texas Transaction

The historical results of operations of RE/MAX of Texas have been adjusted to give pro forma effect to events that are (i) directly attributable to the RE/MAX of Texas Transaction; (ii) factually supportable and (iii) expected to have a continuing impact on the combined results, as if the RE/MAX of Texas Transaction occurred on January 1, 2012 (referred to as “Pro Forma Adjustments for RE/MAX of Texas Transaction”) and are combined with the historical results of RMCO, LLC to present Pro Forma RMCO, LLC. Due to the fact that the RE/MAX of Texas Transaction occurred on December 31, 2012, the results of operations of RE/MAX of Texas are included in the consolidated statement of income for RMCO for the six-month period ended June 30, 2013.

 

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Unaudited Pro Forma Condensed Consolidated Statement of Income—Year Ended December 31, 2012

Pro forma Adjustments for the RE/MAX of Texas Transaction consist of the following:

 

  (a) The pro forma adjustment to total revenue reflects the elimination of continuing franchise fees, broker fees and franchise fees of $1,360 paid by RE/MAX of Texas to RMCO during 2012. As a result, also reflected is a reduction in RE/MAX of Texas’ selling, operating and administrative expenses for the same amount. Also reflected in the pro forma adjustment to total revenue is a decrease to franchise sales and other franchise revenue of $112 related to rental income recognized by RE/MAX of Texas on an asset not acquired by RMCO.

 

  (b) The pro forma adjustment to selling, operating and administrative expenses reflects a reduction of $336 relating to direct acquisition costs incurred during 2012 related to the acquisition of RE/MAX of Texas.

 

  (c) The pro forma adjustment to depreciation and amortization reflects an increase of $3,648 in amortization expense related to the regional franchise agreement intangible asset acquired, which was determined to have an acquisition date fair value of $15,200. The regional franchise agreement is being amortized over a period of 50 months. This amount is offset by a reduction of $351 related to amortization expense recognized by RE/MAX of Texas during 2012 on historical intangible assets and $42 of depreciation expense recognized by RE/MAX of Texas in 2012 related to an asset of RE/MAX of Texas not acquired by RMCO, LLC.

 

  (d)

The components of the pro forma adjustment to interest expense include an increase to interest expense of $2,475 related to additional borrowings of $45,000 used to finance the RE/MAX of Texas acquisition, based on the borrowing rate in effect at the time of the acquisition, and $212 related to the amortization of additional deferred financing costs incurred in connection with the aforementioned additional borrowings. The interest rate on our senior secured credit facility is currently subject to a floor of 4.0%, based on current LIBOR rates. A hypothetical increase of  1/8% on existing LIBOR rates would not currently result in an increase in the Company’s effective interest rate and therefore would not have an impact on our pro forma interest expense.

 

  (e) Reflects pro forma adjustment to eliminate the loss from discontinued operations of RE/MAX of Texas as these operations were not acquired by RMCO.

3. Pro Forma Adjustments for HBN and Tails Transactions

The historical results of operations of HBN and Tails have been adjusted to give pro forma effect to events that are (i) directly attributable to the Managed Region Acquisitions; (ii) factually supportable and (iii) expected to have a continuing impact on the combined results, as if the Managed Region Acquisitions occurred on January 1, 2012 (referred to as “Pro Forma Adjustments for HBN and Tails Transactions”).

Unaudited Pro Forma Condensed Consolidated Statement of Income—Year Ended December 31, 2012

Pro forma Adjustments for HBN and Tails consist of the following:

 

  (a) The pro forma adjustment to total revenue reflects the elimination of continuing franchise fees, broker fees and franchise fees of $3,364 paid by HBN and Tails to RMCO during 2012. As a result, also reflected is a reduction in HBN and Tails’ selling, operating and administrative expenses for the same amount.

 

  (b) The pro forma adjustment to depreciation and amortization reflects an increase of $1,705 in amortization expense related to the regional franchise agreement intangible assets acquired, which were determined to have an acquisition date fair value of $23,514 and have a remaining contractual term of approximately 14 years.

 

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

Pro forma Adjustments for HBN and Tails consist of the following:

 

  (c) The pro forma adjustment to total revenue reflects the elimination of continuing franchise fees, broker fees and franchise fees of $1,736 paid by HBN and Tails to RMCO during the six month period ended June 30, 2013. As a result, also reflected is a reduction in HBN and Tails’ selling, operating and administrative expenses for the same amount.

 

  (d) The pro forma adjustment to selling, operating and administrative expenses also reflects a reduction of $96 relating to direct acquisition costs incurred related to the Managed Region Acquisitions.

 

  (e) The pro forma adjustment to depreciation and amortization reflects an increase of $853 in amortization expense related to the regional franchise agreement intangible assets acquired, which were determined to have an acquisition date fair value of $23,514 and have a remaining contractual term of approximately 14 years.

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

 

  (aa) Pro forma adjustments reflect the acquisition of the business assets of HBN and Tails, including the re-acquired rights under the regional franchise agreements issued by us permitting the sale of RE/MAX franchises in the Southwest and Central Atlantic regions of the U.S. The purchase price has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values. The following table summarizes the preliminary allocation of the purchase price related to the Managed Region Acquisitions as reflected in the unaudited pro forma condensed consolidated balance sheet as of June 30, 2013:

 

Accounts and notes receivable

   $ 1,454   

Other current assets

     11   

Franchise agreements

     23,514   

Goodwill

     2,486   

Other assets

     30   

Accrued liabilities

     (190
  

 

 

 
   $ 27,305   
  

 

 

 

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

4. Pro Forma Offering Adjustments

The Pro Forma RE/MAX Holdings, Inc. condensed consolidated financial information includes Pro Forma RMCO, LLC, the Pro Forma Adjustments for the Managed Region Acquisitions and gives further effect to the following (referred to as “Pro Forma Offering Adjustments”): (i) the use of all of the remaining net proceeds of this offering, after deducting underwriting discounts to purchase newly issued common units of RMCO from RMCO at a price per common unit equal to the public offering price per share of our Class A common stock, less underwriting discounts; (ii) RMCO’s subsequent use of $49.8 million of the net proceeds it receives from us to first redeem all of the outstanding preferred membership units in RMCO held by Weston Presidio, which represent Weston Presidio’s liquidation preference associated with those preferred membership units and the complete redemption of Weston Presidio’s remaining equity interest. The proceeds used to redeem Weston Presidio’s common membership units are expected to be approximately $70.5 million; (iii) subsequent to RMCO’s redemption of all of the outstanding preferred and common membership units in RMCO from Weston Presidio, RMCO will use the remaining net proceeds of this offering to redeem common units of RMCO from

 

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RIHI; (iv) the substitution of outstanding options under the 2011 Unit Option Plan; and (v) compensation expense related to stock awards granted to our officers and employees that will vest immediately on the effective date of this offering.

Unaudited Pro Forma Condensed Consolidated Statement of Income – Year Ended December 31, 2012

 

  (a) In connection with the completion of this offering, we expect to grant vested restricted stock units with respect to 118,750 shares of our Class A common stock to our officers and employees. Assuming an initial public offering price of $20.00 per share of our Class A common stock (the midpoint of the price range set forth on the cover of this prospectus), total compensation expense incurred assuming that these vested restricted stock units were issued on January 1, 2012 would be $2,375. In addition, on the effective date of this offering, we expect to pay $528 to our employees related to a cash bonus plan that is tied to the successful completion of the offering. The effect on income taxes payable for the vested restricted stock units and cash bonus plan is $374. In addition, on the effective date of this offering, we expect to grant 127,250 restricted stock units to our officers and employees, which will vest over a three year period and 20,000 restricted stock units to our directors, which will vest over a one year period. As a result of the vesting requirements associated with the restricted stock units, we will recognize the following recurring non-cash compensation charges from the closing date of this transaction through 2016, which are not included in the unaudited pro forma condensed consolidated statements of income:

 

2013 (partial year, from close of offering)

   $ 264   

2014

     1,029   

2015

     754   

2016

     691   
  

 

 

 

Total

   $ 2,738   
  

 

 

 

 

  (b) RE/MAX Holdings, Inc. will be subject to U.S. federal income taxes, in addition to state, local and international taxes, with respect to our allocable share of any net taxable income of RMCO, which will result in higher income taxes. As a result, the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an estimated effective rate of 38.0%, which includes provisions for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction.

The provision for income taxes from operations differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate to income before provision for income taxes as follows:

 

Federal statutory rate

     35.0

State and local rate

     3.0

Rate benefit from flow-through entity

     (25.1 )% 
  

 

 

 

Effective tax rate

     12.9
  

 

 

 

Our effective tax rate includes a rate benefit attributable to the fact that, after this offering, approximately 65.98% of RE/MAX Holdings Inc.’s earnings will not be subject to corporate level taxes as the applicable income tax expense will be incurred by, and the obligation of, our non-controlling shareholders. Thus, the pro forma effective tax rate on the portion of income attributable to RE/MAX Holdings, Inc. is expected to be 38%.

 

  (c)

As described in “Organizational Structure and Reorganization,” RE/MAX Holdings, Inc. will become the sole managing member of RMCO. RE/MAX Holdings, Inc. and will initially have a minority economic interest in RMCO but will have 100% of the voting power and control the management of RMCO. Immediately following this offering, the non-controlling interest will be 65.98%. Net income attributable to the non-controlling interest represents 65.98% of income before provision for income

 

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  taxes. These amounts have been determined based on an offering price of $20.00 per share and the assumption that the underwriters’ option to purchase additional shares is not exercised.

 

  (d) The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income available per share. The pro forma basic net income per share calculation includes 10,000,000 shares assumed to be sold in this offering. In addition, we will grant vested restricted stock units with respect to 118,750 shares of our Class A common stock to our officers and employees, all of which are included in the shares used to calculate pro forma basic and diluted earnings per share.

The pro forma diluted net income per share calculation includes the basic weighted average shares of Class A common stock outstanding plus the dilutive impact of 787,500 outstanding options issued upon substitution of RMCO Class B common unit options calculated using the treasury stock method.

Unaudited Pro Forma Condensed Consolidated Statement of Income – Six months ended June 30, 2013

 

  (e) RE/MAX Holdings, Inc. will be subject to U.S. federal income taxes, in addition to state, local and international taxes, with respect to our allocable share of any net taxable income of RMCO. As a result, the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an estimated effective rate of 38.0%, which includes provisions for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction.

The provision for income taxes from operations differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate to income before provision for income taxes as follows:

 

Federal statutory rate

     35.0

State and local rate

     3.0

Rate benefit from flow-through entity

     (25.1 )% 
  

 

 

 

Effective tax rate

     12.9
  

 

 

 

 

  (f) As described in “Organizational Structure and Reorganization,” RE/MAX Holdings, Inc. will become the sole managing member of RMCO. RE/MAX Holdings, Inc. and will initially have a minority economic interest in RMCO but will have 100% of the voting power and control the management of RMCO. Immediately following this offering, the non-controlling interest will be 65.98%. Net income attributable to the non-controlling interest represents 65.98% of income before provision for income taxes. These amounts have been determined based on an offering price of $20.00 per share and the assumption that the underwriters’ option to purchase additional shares is not exercised.

 

  (g) The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income available per share. The pro forma basic net income per share calculation includes 10,000,000 shares assumed to be sold in this offering. In addition, we will grant vested restricted stock units with respect to 118,750 shares of our Class A common stock to our officers and employees, all of which are included in the shares used to calculate pro forma basic and diluted earnings per share.

The pro forma diluted net income per share calculation includes the basic weighted average shares of Class A common stock outstanding plus the dilutive impact of 787,500 outstanding options issued upon substitution of RMCO Class B common unit options calculated using the treasury stock method.

 

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

 

  (aa) RE/MAX Holdings, Inc. will be subject to U.S. federal income taxes, in addition to state, local and international taxes, with respect to our allocable share of any net taxable income of RMCO. As a result, the pro forma condensed consolidated balance sheet reflects our proportionate share of existing temporary differences between the book basis and tax basis related to assets (primarily intangible assets and fixed assets) and liabilities as of June 30, 2013 of approximately $11,490, comprised of $785 of current deferred tax assets and $10,705 of long-term deferred tax assets. The net deferred tax asset is shown as an increase to additional paid-in capital within the pro forma condensed consolidated balance sheet.

 

  (bb) Pro forma adjustments reflect the effects of the tax receivable agreements on our consolidated balance sheet as a result of RE/MAX Holdings, Inc.’s purchase of common units from RMCO and RMCO’s related redemption of preferred units from Weston Presidio and common units from Weston Presidio and RIHI with the net proceeds from this offering. Pursuant to the tax receivable agreements, RE/MAX Holdings, Inc. will be required to make cash payments to our existing owners equal to 85% of the amount of cash savings, if any, in U.S. federal, state and local tax that RE/MAX Holdings, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of certain future tax benefits to which RE/MAX Holdings, Inc. may become entitled. These tax benefit payments are not necessarily conditioned upon one or more of the existing owners maintaining a continued ownership interest in either RMCO or RE/MAX Holdings, Inc. RE/MAX Holdings, Inc. expects to benefit from the remaining 15% of cash savings, if any, that it may actually realize.

As a result, as of the date of the purchase of the Class A common stock, on a cumulative basis, the net effect of accounting for income taxes and the tax receivable agreements on our financial statements will be a net increase in stockholders’ equity of $15.9 million. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the tax receivable agreements have been estimated. A summary of the adjustments recorded is as follows:

 

   

we will record an increase of $54.2 million in deferred tax assets for estimated income tax effects of the increase in the tax basis of the purchased interests, based on an effective income tax rate of 38.0% (which includes a provision for U.S. federal, state, local and/or foreign income taxes);

 

   

we will record $38.3 million which is discounted at our incremental borrowing rate, and represents 85% of the estimated realizable tax benefit resulting from (i) the increase in tax basis in the intangible assets of RMCO on the date of the offering and (ii) certain other tax benefits related to entering into the tax receivable agreements, including tax benefits attributable to payments under the tax receivable agreements as an increase to the liability due to existing owners under the tax receivable agreements; and

 

   

we will record an increase to additional paid-in capital of $15.9 million, which is an amount equal to the difference between the increase in deferred tax assets and the increase in liability due to existing owners under the tax receivable agreements.

 

  (cc) Represents $2.5 million of costs related to this offering, which were incurred and deferred as of June 30, 2013 and have been reflected as a reduction to the net proceeds received in connection with this offering on a pro forma basis.

 

  (dd) Represents the use of the net proceeds received in this offering to completely redeem the preferred membership interest held by Weston Presidio.

 

  (ee)

As described in “Organizational Structure and Reorganization,” RE/MAX Holdings, Inc. will become a member and the sole manager of RMCO. As the sole manager, RE/MAX Holdings, Inc. will control all

 

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  of the day-to-day business affairs and decision-making of RMCO without the approval of any other member. As such, RE/MAX Holdings, Inc., through its officers and directors, will be responsible for all operational and administrative decisions of RMCO and the day-to-day management of RMCO’s business. As a result, we will consolidate the financial results of RMCO and will record an amount as non-controlling interest on our consolidated balance sheet. The balance of the non-controlling interest as of June 30, 2013 on a pro-forma basis is as follows:

 

RMCO equity held by the non-controlling interest holders prior to the completion of this offering

   $ (170,543

RMCO’s use of the remaining net proceeds from this offering to redeem common units in RMCO from the non-controlling interest holders on a pro forma basis

     (19,395
  

 

 

 
   $ (189,938
  

 

 

 

 

  (ff) In connection with this offering, the following adjustments were recorded to additional paid-in-capital.

 

Net proceeds received by RE/MAX Holdings, Inc. from this offering

   $ 192,100   

Offering costs deferred as of June 30, 2013, which reduce the net proceeds

     (2,511

Value related to RE/MAX Holdings, Inc.’s proportionate share of future tax benefits associated with the deferred tax assets in existence as of the offering date

     11,490  4(aa) 

Increase to additional paid-in capital of $15.9 million, which is an amount equal to the difference between the increase in deferred tax assets and the increase in liability due to existing owners under the tax receivable agreements

     15,949  4(bb) 

Increase in additional paid-in-capital for shares of restricted stock granted to our employees, officers and directors that vested immediately

     2,375  4(a) 
  

 

 

 
   $ 219,403   
  

 

 

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table presents our selected historical consolidated financial data and certain operating data. The consolidated statement of operations data for the years ended December 31, 2010, 2011, and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008, 2009 and 2010 have been derived from our consolidated financial statements not included in this prospectus.

The consolidated statement of operations data for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations as of the dates and for the periods indicated.

The selected historical consolidated financial data and operating data presented below should be read in conjunction with “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes thereto included elsewhere in this prospectus. Historical results are not necessarily indicative of results that may be expected for any future period.

 

 

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Table of Contents
    Year Ended December 31,     Six Months Ended
June 30,
 
    2008     2009     2010     2011     2012     2012     2013  
                                 

(unaudited)

    (unaudited)  
    (in thousands, except for agent data)  

Consolidated Statements of Operations Data:

             

Total revenue:

             

Continuing franchise fees

  $ 75,706      $ 62,623      $ 60,865      $ 57,200      $ 56,350      $ 27,875      $ 30,944   

Annual dues

    37,888        31,627        30,472        28,922        28,909        14,168        14,597   

Broker fees

    16,401        16,010        16,021        16,764        19,579        9,116        11,500   

Franchise sales and other franchise revenue

    18,025        17,841        15,709        19,354        22,629        11,000        12,747   

Brokerage revenue

    29,280        21,569        17,150        16,062        16,210        8,009        8,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 177,300      $ 149,670      $ 140,217      $ 138,302      $ 143,677      $ 70,168      $ 78,316   

Operating expenses:

             

Selling, operating and administrative expenses

    112,583        78,882        81,353        85,291        84,337        43,214        47,983   

Depreciation and amortization

    23,437        20,861        16,735        14,473        12,090        6,443        7,432   

Impairment of goodwill

    79,654        17,137        —          —          —         

Loss on sale of assets, net

    110        2,686        3,719        67        1,704        (18     44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    215,784        119,566        101,807        99,831        98,131        49,639        55,459   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (38,484     30,104        38,410        38,471        45,546        20,529        22,857   

Other income (expenses):

             

Interest expense

    (35,683     (29,805     (22,295     (12,203     (11,686     (5,861     (6,925

Interest income

    958        770        538        372        286        129        142   

Foreign currency transaction gains (losses) net

    (1,422     1,163        167        (266     208        (36     (416

Loss on early extinguishment of debt

    (313     (2,833     (18,161     (384     (136     (136     (134

Equity in earnings of investees

    669        1,428        643        431        1,244        314        462