Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

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Acquisitions
9 Months Ended
Sep. 30, 2012
Acquisitions [Abstract]  
Acquisitions
3. Acquisitions

2012 Acquisitions

In January 2012, we acquired substantially all of the operating assets of Vigilan, Incorporated (“Vigilan”). A provider of assisted living software-as-a-service, Vigilan products allow assisted living communities to monitor and schedule detailed care, manage labor costs, provide accurate billing as well as compliance tools through its comprehensive compliance module. This asset acquisition allows us to integrate Vigilan with existing senior living software solutions to further expand the RealPage Senior Living product offerings. We acquired Vigilan for a purchase price of $5.0 million consisting of a cash payment of $4.0 million and two additional cash payments of up to $0.5 million each due 12 months and 24 months after the acquisition date. The $1.0 million withheld from the purchase consideration was subject to a downward adjustment if certain revenue targets (a level 3 input) were not met for the six months ended June 30, 2012. The fair value of the future cash payment was $1.0 million as of June 30, 2012. This acquisition was financed from proceeds from cash flows from operations. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. All direct acquisition costs were $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.

In July 2012, we acquired all of the issued and outstanding shares of Rent Mine Online, Inc. (“RMO”). The acquisition of RMO expands our resident referral capabilities into the multifamily residential rental housing market. We acquired RMO for a preliminary purchase price consisting of a cash payment of $5.5 million at closing, a deferred cash payment of up to $3.5 million and a contingent deferred earn out payment of up to 300,000 shares of our common stock, payable based on the achievement of certain revenue targets on or before December 31, 2014. In addition, the purchase agreement included a conversion option on the contingent common shares, in which the seller can elect to receive, in lieu of common shares, an amount per share equal to the lesser of the average market price or an established threshold, up to one half of the common shares earned. The $3.5 million withheld from the purchase price is subject to a downward adjustment if certain revenue targets (a level 3 input) are not met as of March 31, 2013. The preliminary fair value of the future cash payment was $0.8 million as of September 30, 2012. We recorded the preliminary fair value of the common shares and the conversion option of $0.9 million. These preliminary fair values were based on management’s estimate of the fair value of the cash, common shares and put option using a probability weighted discount model on the achievement of certain revenue targets. This acquisition was financed using cash flows from operations. Acquired intangibles were preliminarily recorded at fair value based on assumptions determined by us. The purchase price allocation is preliminary due to finalizing the valuation of intangibles and contingent consideration. We expect to finalize this during the fourth quarter. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. Direct acquisition costs were $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangible assets are not deductible for tax purposes.

We have allocated the purchase price for RMO (preliminary) and Vigilan as follows:

 

                 
    RMO     Vigilan  
    (in thousands)  

Intangible assets:

       

Developed product technologies

  $ 2,260     $ 1,430  

Customer relationships

    2,320       1,150  

Goodwill

    4,238       2,454  

Net deferred taxes

    (1,628     —    

Net other assets

    (363     (34
   

 

 

   

 

 

 

Total purchase price, net cash acquired

  $ 6,827     $ 5,000  
   

 

 

   

 

 

 

2011 Acquisitions

In May 2011, we acquired substantially all of the assets of Compliance Depot, LLC (“Compliance Depot”) for approximately $22.5 million which included a cash payment of $19.2 million at closing and three deferred payments of $1.1 million each payable six, twelve and eighteen months after the acquisition date. As of September 30, 2012, only one payment of $1.1 million remains outstanding. The acquisition of Compliance Depot expands our ability to provide vendor risk management and compliance software solutions for the rental housing industry. This acquisition was financed from proceeds from our initial public offering and cash flows from operations. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of nine years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The trade names acquired have an indefinite useful life as we do not plan to cease using the trade names in the marketplace. All direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.

In July 2011, we acquired Senior-Living.com, Inc., operating under the name SeniorLiving.net (“SLN”), pursuant to an Agreement and Plan of Merger. The acquisition of SLN expands our lead generation capabilities into the senior living rental housing market. The purchase price consisted of a cash payment of $4.0 million at closing, additional cash payments of $0.5 million, half of which is due on each of the first and second anniversaries of the acquisition date, an estimated cash payment payable (acquisition-related contingent consideration) and up to 400,000 shares of our common stock, in each case payable based on the achievement of certain revenue targets as defined in the purchase agreement. As of September 30, 2012, 100,000 shares had been issued. This acquisition was financed from proceeds from cash flows from operations. At the acquisition date, we recorded a liability for the estimated fair value of the acquisition-related contingent consideration of $0.3 million. In addition, we recorded the fair value of the common shares of $8.4 million. These fair values were based on management’s estimate of the fair value of the cash and the restricted common shares using a probability weighted discounted cash flow model on the achievement of certain revenue targets. The cash payment has a maximum value of $0.5 million. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The trade names acquired have an indefinite useful life as we do not plan to cease using the trade names in the marketplace. All direct acquisition costs were approximately $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are not deductible for tax purposes. The liability established for the acquisition-related contingent consideration will continue to be re-evaluated and recorded at an estimated fair value based on the probabilities, as determined by management, of achieving the related targets (a level 3 input). This evaluation will be performed until all of the targets have been met or terms of the agreement expire. As of September 30, 2012, our liability for the estimated cash payment was $0.5 million. During the three and nine months ended September 30, 2012, we recognized losses of less than $0.1 million and $0.1 million, respectively, due to changes in the estimated fair value of the cash acquisition-related contingent consideration.

In August 2011, we acquired Multifamily Technology Solutions, Inc. (“MTS”), which owns the Internet listing service for rental properties called MyNewPlace, pursuant to an Agreement and Plan of Merger. MTS continued as the surviving corporation of the Merger and a wholly owned subsidiary of RealPage. The acquisition of MTS adds an Internet listing service for rental properties and expands our syndication and organic lead generation capabilities. This acquisition was financed from proceeds from our initial public offering, cash flows from operations and issuance of restricted common stock. The purchase price consisted of a cash payment of $64.0 million, including amount placed in escrow, net of cash acquired, 294,770 shares of RealPage restricted common stock and the assumption of MTS stock options exercisable for 349,693 shares of RealPage common stock. In addition, the purchase agreement included a put option on the restricted common shares, in which, if the average market price of our common shares falls below an established threshold, we will pay the difference between the average market price and the established threshold in cash. We established a liability of $1.2 million for the put option which is based on its estimated fair value at the acquisition date. We also recorded the fair value of the restricted common shares and the assumed stock options of $6.3 million and $3.6 million, respectively. The fair value of the restricted common shares was based on management’s estimate of the fair value of restricted common shares using a probability weighted discounted cash flow model. The fair values of the assumed stock options and the put option was based on the Black-Scholes option pricing model using inputs consistent with those used in the valuation of our stock options. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The trade names acquired have an indefinite useful life as we do not plan to cease using the trade names in the marketplace. All direct acquisition costs were approximately $0.8 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are not deductible for tax purposes. The liability established for the put option on the restricted common shares will continue to be re-evaluated and recorded at an estimated fair value based on the changes in market prices of our common stock (a level 2 input). During the three and nine months ended September 30, 2012, we recognized gains of $0.3 million and $0.3 million, respectively, due to changes in the estimated fair value of the put option for restricted common shares. One of the minority shareholders of MTS is our customer. In connection with the distribution of the purchase price, we paid this customer for their proportionate share of the purchase price. This transaction was at arm’s length and is not related to the ongoing relationship with us.

The purchase agreement also included a portion of the cash and restricted common shares consideration to be placed into escrow. As such, we placed $14.0 million in cash and 65,873 restricted common shares into an escrow account on the date of acquisition. One half of these amounts will be released from escrow twelve months after the acquisition date. The remaining amounts will be released eighteen months after the acquisition date.

We allocated the purchase price for MTS, SLN and Compliance Depot as follows:

 

                         
    MTS     SLN     Compliance Depot  
    (in thousands)  

Intangible assets:

                       

Developed product technologies

  $ 2,280     $ 1,200     $ 382  

Customer relationships

    27,600       2,630       9,030  

Trade names

    24,800       2,560       2,230  

Goodwill

    33,795       8,356       13,349  

Deferred revenue

    (164     —         (2,380

Net deferred taxes

    (15,574     (1,347     —    

Net other assets

    2,210       (224     (110
   

 

 

   

 

 

   

 

 

 

Total purchase price, net of cash acquired

  $ 74,947     $ 13,175     $ 22,501  
   

 

 

   

 

 

   

 

 

 

Other Acquisition-Related Fair Value Adjustments

We have acquired companies in previous years for which acquisition-related contingent consideration was included in the purchase price and recorded at fair value. The liability established for the acquisition-related contingent consideration will continue to be re-evaluated and recorded at an estimated fair value based on the probabilities, as determined by management, of achieving the related targets. This evaluation will be performed until all of the targets have been met or terms of the agreement expire.

 

In July 2010, we purchased 100% of the outstanding stock of eReal Estate Integration, Inc. (“eREI”), which included an estimated cash payment payable upon the achievement of certain revenue targets (acquisition-related contingent consideration). The fair value of this acquisition-related contingent consideration was based on management’s estimate of the fair value of the cash using a probability weighted discounted cash flow model on the achievement of certain revenue targets (a level 3 input). The cash payment has a maximum value of $1.8 million. As of September 30, 2012, our liability for the estimated cash payment was $0.2 million. We recognized gains of $0.3 million and less than $0.1 million during the three months ended and a gain of $0.2 million and a loss of $0.1 million during nine months ended September 30, 2012 and 2011, respectively, due to changes in the estimated fair value of the cash acquisition-related contingent consideration.

Pro Forma Results of Acquisitions

The following table presents pro forma results of operations for the three and nine months ended September 30, 2012 and 2011 as if the RMO, Vigilan, MTS, SLN and Compliance Depot acquisitions had occurred at the beginning of the years presented. The pro forma financial information for the nine months ended September 30, 2012, respectively, includes the business combination accounting effects resulting from the RMO acquisition including: tax benefit of $0.2 million and approximately $0.5 million of amortization charges from acquired intangible assets. The pro forma financial information for the three and nine months ended September 30, 2011, respectively, includes the business combination accounting effects resulting from these acquisitions including: interest expense of $0.1 million and $0.2 million; tax benefit of $0.5 million and $2.4 million; and $0.6 million and $2.8 million of amortization charges from acquired intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had taken place at the beginning of the periods presented or of future results.

 

                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
    Actual     Pro Forma     Pro Forma     Pro Forma  
    (in thousands, except per share amounts)  

Revenue:

                               

On demand

  $ 78,973     $ 66,485     $ 225,839     $ 188,934  

On premise

    1,226       1,772       3,903       5,045  

Professional and other

    3,040       3,118       7,916       9,052  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    83,239       71,375       237,658       203,031  

Net income (loss)

  $ 2,113     $ (1,915   $ 1,214     $ (5,043

Net income (loss) per share:

                               

Basic

  $ 0.03     $ (0.03   $ 0.02     $ (0.07

Diluted

  $ 0.03     $ (0.03   $ 0.02     $ (0.07