<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 01-14115
RESORTQUEST INTERNATIONAL, INC.
(Exact name of registrant in its charter)
Delaware I.R.S. No. 62-1750352
(State of Incorporation) (I.R.S. Employer Identification No.)
530 Oak Court Drive, Suite 360
Memphis, Tennessee 38117
(Address of principal executive offices)(Zip Code)
(901) 762-0600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of JUNE 30, 1999.
<TABLE>
<S> <C>
Common Stock . . . . . . . . . . . . . . 18,134,785 shares
</TABLE>
Page 1 of 29
Exhibit Index Page 29
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------------
On May 26, 1998, ResortQuest International, Inc. consummated its initial
public offering (the "IPO") and the combination (the "Combinations") of 12
vacation rental and property management companies and one leading vacation
rental and property management software company (collectively the "Founding
Companies"). Since the IPO, we have completed 17 acquisitions, five in 1998 and
twelve in 1999 (the "Post-IPO acquisitions").
Aston Hotels & Resorts ("Aston"), one of the Founding Companies, was
designated as the accounting acquiror (for financial statement presentation
purposes) in the Combinations in accordance with Securities and Exchange
Commission (the "SEC") Staff Accounting Bulletin No. 97 ("SAB 97"), which
states that the combining company which receives the largest portion of
voting rights in the combined corporation is presumed to be the acquiror for
accounting purposes unless other evidence clearly indicates that another
company is the acquiror. We have analyzed the factors as set forth in SAB 97
that may indicate Aston should not be deemed to be accounting acquiror,
including
- the existing conversion rights of the Restricted Common Stock,
- Aston's level of representation on the Board and in the holding company
management team, and
- voting percentage of the shares held by Aston and the existing
shareholder group.
We have concluded that none of these factors, either individually, or in the
aggregate, is sufficient to rebut the presumption that the shareholders of Aston
should be deemed the accounting acquiror. Our unaudited consolidated condensed
statements of pro forma income give effect to the Combinations, the IPO, and the
acquisition of Abbott Resorts as if such transactions had occurred on January 1,
1998. In addition, to provide further comparability of the periods presented in
our unaudited consolidated condensed statements of pro forma income, corporate
overhead in an amount comparable to the current year is reflected in the prior
year.
Our accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q, and therefore do
not include all information and notes necessary for complete financial
statements in conformity with generally accepted accounting principles. Our
results for the periods indicated are unaudited, but reflect all adjustments
(consisting only of normal recurring adjustments) which we consider necessary
for a fair presentation of operating results. Operating results for interim
periods are not necessarily indicative of the results for full years. Our
unaudited consolidated condensed financial statements should be read in
conjunction with our consolidated financial statements and notes thereto
included in our 1998 Annual Report to Stockholders and our Post-Effective
Amendment No. 2 to Registration Statement on Form S-1 (No.
333-10623), as amended, filed with the SEC.
2
<PAGE>
RESORTQUEST INTERNATIONAL,INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
(in thousands, except share amounts) 1998 1999
----------- --------
ASSETS (Restated)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 26,247 $ 33,987
Trade and other receivables, net 3,929 6,387
Receivables from stockholders 5,209 1,662
Deferred income taxes 1,297 1,297
Other current assets 2,276 3,402
-------- --------
Total current assets 38,958 46,735
Goodwill, net 130,214 162,433
Property and equipment, net 16,649 18,114
Deferred income taxes 211 211
Other assets 2,187 8,213
-------- --------
Total assets $188,219 $235,706
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,234 $ 892
Customer deposits, deferred revenues and payable
to property owners 24,639 42,047
Accounts payable and accrued liabilities 13,210 11,957
Payables to stockholders 1,632 512
Other current liabilities 323 175
-------- --------
Total current liabilities 41,038 55,583
Long-term debt, net of current maturities 38,098 56,428
Other long-term obligations 2,228 1,820
-------- --------
Total liabilities 81,364 113,831
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
17,092,768 and 18,134,785 shares outstanding, respectively 171 181
Additional paid-in capital 136,026 146,696
Excess distributions (29,500) (29,500)
Retained earnings 158 4,498
-------- --------
Total stockholders' equity 106,855 121,875
-------- --------
Total liabilities and stockholders' equity $188,219 $235,706
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in thousands, except share amounts) 1998 1999 1998 1999
------- ------- ------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues
Property management fees $4,160 $15,163 $ 9,132 $33,575
Service fees 3,546 9,972 6,654 17,689
Other 2,015 5,854 2,601 11,382
------ ------- ------- -------
Total revenues 9,721 30,989 18,387 62,646
------ ------- ------- -------
Operating expenses
Direct operating expenses 5,843 15,787 10,254 30,256
General and administrative
expenses 2,584 9,510 4,198 18,948
Depreciation and amortization 475 1,672 590 3,230
------ ------- ------- -------
Total operating expenses 8,902 26,969 15,042 52,434
------ ------- ------- -------
Operating income 819 4,020 3,345 10,212
Interest and other income (expense) 101 (887) (132) (1,534)
------ ------- ------- -------
Income before income taxes 920 3,133 3,213 8,678
Provision for income taxes 332 1,441 360 3,946
------ ------- ------- -------
Income from continuing operations 588 1,692 2,853 4,732
(Loss) income from discontinued
operations (Note 2) (210) - 1,347 -
------ ------- ------- -------
Net income $ 378 $ 1,692 $ 4,200 $ 4,732
====== ======= ======= =======
Earnings per share (Note 6)
Basic
Continuing operations $ 0.08 $ 0.10 $ 0.59 $ 0.27
Discontinued operations (0.03) - 0.28 -
------ ------- ------- -------
Net income $ 0.05 $ 0.10 $ 0.87 $ 0.27
====== ======= ======= =======
Diluted
Continuing operations $ 0.08 $ 0.10 $ 0.58 $ 0.27
Discontinued operations (0.03) - 0.28 -
------ ------ ------- -------
Net income $ 0.05 $ 0.10 $ 0.86 $ 0.27
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF PRO FORMA INCOME
(UNAUDITED) (Note 1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in thousands, except share amounts) 1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Property management fees $12,004 $15,163 $28,440 $33,528
Service fees 7,350 9,972 13,449 17,689
Other 6,138 5,854 10,430 11,382
------- ------- ------- -------
Total revenues 25,492 30,989 52,319 62,599
------- ------- ------- -------
Operating expenses
Direct operating expenses 13,594 15,787 26,030 30,214
General and administrative
expenses 7,216 8,997 14,498 17,964
Depreciation and amortization 1,411 1,672 2,812 3,230
------- ------- ------- -------
Total operating expenses 22,221 26,456 43,340 51,408
------- ------- ------- -------
Operating income 3,271 4,533 8,979 11,191
Interest and other expense, net (661) (887) (1,253) (1,534)
------- ------- ------- -------
Income before income taxes 2,610 3,646 7,726 9,657
Provision for income taxes 1,325 1,677 3,603 4,359
------- ------- ------- -------
Net income $ 1,285 $ 1,969 $ 4,123 $ 5,298
====== ======= ======= =======
Earnings per share - basic $ 0.08 $ 0.11 $ 0.24 $ 0.30
====== ======= ======= =======
Earnings per share - diluted $ 0.07 $ 0.11 $ 0.24 $ 0.30
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed pro
forma financial statements.
5
<PAGE>
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Excess Retained
(in thousands, except share amounts) Shares Amount Capital Distributions Earnings Total
---------- ------ ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 (Restated) 17,092,768 $171 $136,026 $(29,500) $ 158 $106,855
Net income - - - - 4,732 4,732
Distributions of pooled
companies prior to acquisition - - - - (392) (392)
Stock issued in connection with
1999 purchase acquisitions 1,042,017 10 10,670 - - 10,680
---------- ---- -------- -------- ------- --------
Balance, June 30, 1999 18,134,785 $181 $146,696 $(29,500) $ 4,498 $121,875
========== ==== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
<PAGE>
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
(in thousands) 1998 1999
-------- --------
(Restated)
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,200 $ 4,732
Income from discontinued operations 1,347 -
------- -------
Income from continuing operations 2,853 4,732
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Depreciation and amortization 590 3,230
Changes in operating assets and liabilities
Trade and other receivables 1,325 (1,843)
Accounts payable and accrued liabilities (3,177) (2,686)
Customer deposits, deferred revenues and
payable to property owners 2,216 9,619
Other (1,161) (4,437)
------- -------
Net cash provided by operating activities 2,646 8,615
------- -------
Cash flows from investing activities
Cash portion of acquisitions, net (15,277) (14,397)
Purchase of property and equipment (243) (1,923)
Other 528 -
------- -------
Net cash used in investing activities (14,992) (16,320)
------- -------
Cash flows from financing activities
Net credit facility repayments - (38,475)
Net proceeds from issuance of senior notes - 48,986
Proceeds from issuance of secured mortgage notes - 5,734
Net Proceeds from public stock issuance 60,889 -
Distribution to stockholders (33,343) (392)
Payment of other long-term obligations (5,833) (408)
Other (461) -
------- -------
Net cash provided by financing activities 21,252 15,445
------- -------
Net increase in cash and cash equivalents 8,906 7,740
Cash and cash equivalents, beginning of period 4,638 26,247
------- -------
Cash and cash equivalents, end of period $13,544 $33,987
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
<PAGE>
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
FORMATION
---------
ResortQuest International, Inc. (a Delaware corporation) ("ResortQuest") is
the first company to offer vacation condominium and home rentals, sales and
management under a national brand name and is a leading provider of vacation
rentals in premier destination resorts located in the continental United States,
Hawaii and Canada. Effective with the closing of our initial public offering on
May 26, 1998 (the "IPO"), we acquired 12 vacation rental and property management
companies and one leading vacation rental and property management software
company (collectively the "Founding Companies") (the "Combinations"). However,
for accounting and reporting purposes, Hotel Corporation of the Pacific, Inc.
("Aston") was identified as the accounting acquiror and the remaining Founding
Companies along with ResortQuest were accounted for under the purchase method of
accounting.
Subsequent to the IPO, we executed five acquisitions through the end of
1998. During the six months ended June 30, 1999, we executed an additional ten
acquisitions, two of which were accounted for under the pooling-of-interests
method of accounting; the remaining eight acquisitions were accounted for under
the purchase method of accounting.
POOLING RESTATEMENTS
--------------------
We have retroactively restated our historical financial statements for the
pooling-of-interest acquisitions. Our results of operations for the separate
companies and the restated combined results presented in the accompanying
consolidated condensed financial statements are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in thousands) 1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
ResortQuest, as previously reported $7,858 $30,989 $13,936 $ 62,646
Pooled companies 1,863 - 4,451 -
------ ------- ------- --------
Combined Revenues, as restated $9,721 $30,989 $18,387 $ 62,646
====== ======= ======= =======
Net Income
ResortQuest, as previously reported $ 367 $ 1,692 $ 3,621 $ 4,732
Pooled companies 11 - 579 -
------ ------- ------- -------
Combined Net Income, as restated $ 378 $ 1,692 $ 4,200 $ 4,732
====== ======= ======= =======
</TABLE>
In connection with the 1999 pooling-of-interests transactions, we recorded
total expense of $298,000 and $716,000 in the three- and six-month periods ended
June 30, 1999 related to transaction costs of the acquisitions. Transaction
costs consisted primarily of attorneys, accountants, and other related costs
incurred both by us and by the companies acquired.
8
<PAGE>
Accordingly, the restated historical consolidated financial statements
include the financial results of Aston and the three poolings for all periods
presented, ResortQuest and the Founding Companies only since May 26, 1998, and
the remaining Post-IPO acquisitions from their respective effective dates of
acquisition. Comparability of actual results for all actual periods presented
may be misleading and are not necessarily indicative of the results of the
combined operations.
PRO FORMA FINANCIAL INFORMATION
-------------------------------
To provide better comparability, our consolidated condensed statements of
pro forma income include the financial results of ResortQuest and the Founding
Companies as if the Combinations had occurred on January 1, 1998. Our
consolidated condensed statements of pro forma income also include the effects
of:
- - the Combinations and the three pooling acquisitions;
- - the proceeds from the issuance of 6,670,000 shares of our Common Stock,
a portion of which was used to pay the cash portion of the purchase
price for the Founding Companies, to pay IPO expenses, and to repay
debt assumed in the Combinations;
- - certain adjustments to salaries, bonuses, and benefits to former owners
and key management of the Founding Companies, Abbott Resorts and the
three pooling acquisitions;
- - reversal of compensation expense in the three months ended March 31,
1998, relating to the non-recurring, non-cash compensation charge of
$5.6 million related to Common Stock issued to management;
- - provision for income taxes as if pro forma income was subject to
federal, state or provincial income taxes during the periods and that
goodwill was principally not deductible for income tax purposes;
- - amortization of goodwill resulting from the Combinations; corporate
overhead in the prior year first quarter in an amount comparable to the
expense recorded in the current year; the financial results of Abbott
Resorts as if the Abbott Resorts acquisition had occurred on January 1,
1998;
- - excludes income (loss) from discontinued operations; and
- - the acquisitions using purchase accounting since their respective
effective date of acquisition.
In addition, the 1999 Acquisitions accounted for under the purchase method of
accounting, we noted the following pro forma results assuming these combinations
occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in thousands) 1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
ResortQuest, as restated $ 9,721 $30,989 $18,387 $62,645
Combinations 4,123 2,221 9,838 5,163
------ ------- ------ -------
Pro forma combined revenues $13,844 $33,210 $28,225 $67,808
====== ======= ====== =======
Net Income
ResortQuest, as restated $ 378 $ 1,692 $ 4,200 $ 4,732
Combinations 925 466 2,144 1,394
------ ------- ------ -------
Pro forma combined net income $ 1,303 $ 2,158 $ 6,344 $ 6,126
====== ======= ====== =======
</TABLE>
9
<PAGE>
RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2 - DISCONTINUED OPERATIONS
- --------------------------------
In 1998, we decided that we would no longer enter into leasing arrangements
for lodging facilities. Accordingly, for all periods presented in the
accompanying financial statements, the financial position, results of operations
and cash flows of the leased assets are reflected as discontinued operations.
Concurrent with the Combinations, Aston assigned such leases to AST Holdings,
Inc., a corporation owned by Aston's principal stockholder. On May 27, 1998, we
entered into a contract with AST Holdings to manage these facilities for a fee.
Summarized financial information of our discontinued operations for the three
and six months ended June 30 1998, is provided in the following table.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
(in thousands) 1998 1998
------ -------
<S> <C> <C>
Revenues $4,187 $14,304
Operating expenses 3,651 10,120
General and administrative expenses 749 2,839
------ -------
Operating (loss) income (213) 1,345
Other income 3 2
------ -------
(Loss) income from discontinued operations $ (210) $ 1,347
====== =======
</TABLE>
NOTE 3 - NOTE RECEIVABLE FROM STOCKHOLDER
- -----------------------------------------
In connection with the Combinations, Aston formalized their receivable
resulting from cash advances to its primary stockholder with a $4.0 million
promissory note (the "Note"). The Note bears interest at one-half of one percent
below prime rate of interest, but not less than six percent and not more than 10
percent. Payments under the Note are interest only, due and payable every
January and July 1st. The Note was due on demand with 180 days notice for any
time through May 26, 1999. If payment is not requested within the notice
periods, the Note becomes due and payable on May 25, 2008. The demand feature of
the Note was not exercised, and the Note is now due and payable on May 25, 2008.
Accordingly, the note receivable is now classified as a long-term asset.
NOTE 4 - LONG-TERM DEBT
- -----------------------
On June 16, 1999, we issued $50 million of 9.06% senior secured notes, due
June 2004, in connection with a note purchase agreement. The senior notes are
secured pari passu to the credit agreement. The senior note purchase agreement
contains loan covenants similar to the credit agreement and has prepayment
restrictions in the form of make hole provisions. Interest is payable
semiannually.
10
<PAGE>
On June 1, 1999, we executed amendment no. 4 to the credit agreement to
allow for the sharing of credit with the senior notes and reduce the
availability under the credit agreement to $50 million. On April 16, 1999, we
executed amendment no. 3 to the credit agreement to allow for the refinancing of
existing loans of a subsidiary. The Credit Facility may be used for letters of
credit not to exceed $2.5 million, acquisitions, capital expenditures, and for
general corporate purposes. The Credit Agreement requires ResortQuest to comply
with various loan covenants, which include maintenance of certain financial
ratios, restrictions on additional indebtedness and restrictions on liens,
guarantees, advances, capital expenditures, sale of assets and dividends.
Interest on outstanding balances of the Credit Facility is computed at our
election, on the basis of either the Prime Rate or the Eurodollar Rate plus a
margin ranging from 1.25% to 2.00%, depending on certain financial ratios.
Availability fees range from 0.25% to 0.50% per annum depending on certain
financial ratios and are payable on the unused portion of the Credit Facility.
At June 30, 1999, there were no borrowings under the Credit Facility. The Credit
Facility has a three-year term and is secured pari passu to the senior notes, by
substantially all or our assets, including the stock in the Founding Companies
and any future material subsidiaries, as defined. At June 30, 1999, we were in
compliance with applicable credit agreement and senior note purchase agreement
loan covenants.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
GUARANTEES
----------
Certain of Aston's management agreements contain provisions for guaranteed
levels of returns to owners. These agreements also contain force majeure clauses
to protect us from forces or occurrences beyond the control of management.
ACQUISITION INDEMNIFICATION
---------------------------
Subject to certain limitations, pursuant to the Agreement and Plan Of
Organization entered into by and between each of the Founding Companies and
ResortQuest (each an "Agreement"), the stockholders of the Founding Companies
have indemnified ResortQuest against losses, claims, damages, actions, suits,
proceedings, demands, assessments, adjustments, costs and expenses as a result
of or arising from
(i) any breach of the representations and warranties in the Agreement and
its schedules and certificates by the stockholders of the Founding
Companies,
(ii) any breach of any agreement on the part of the stockholders set forth
in the Agreement,
(iii) any liability under the 1933 Act, the 1934 Act or other federal or
state law or regulation arising out of or based upon any untrue
statement of a material fact relating solely to the Founding Company or
the stockholders, and
(iv) certain other identified claims or litigation.
In addition, pursuant to each Agreement and subject to certain limitations, we
agreed to indemnify the stockholders against losses, claims, damages, actions,
suits, proceedings, demands, assessments, adjustments, costs and expenses
incurred by the stockholders as a result of or arising from
(i) any breach by us or of its representations and warranties in the
Agreement and its schedules and certificates,
(ii) any breach of any agreement on the part of us under this Agreement,
(iii) any liability under the 1933 Act, the 1934 Act or other federal or
state law or regulation, at common law or otherwise, arising out of or
based upon any untrue statement or alleged untrue statement of a
material fact relating to us or any of the other Founding Companies
contained in certain filings with the SEC, or
(iv) the matters described in the schedules to the Agreement relating to
guarantees.
11
<PAGE>
We are not aware of any events that have or could have caused any such
indemnification under any of the Agreements during the periods presented in the
accompanying consolidated condensed financial statements.
LITIGATION
----------
We are involved in various legal actions arising in the ordinary course of
business. We do not believe that the outcome of such legal actions will have a
materially adverse effect on our financial position or results of operations.
INSURANCE
---------
We carry a broad range of insurance coverage, including general and
business auto liability, commercial property, workers' compensation and a
general umbrella policy. We have not incurred significant claims or losses on
any of its insurance policies during the periods presented in the accompanying
financial statements.
BENEFIT PLANS
-------------
As of June 30, 1999, we had twelve 401(k) profit sharing plans, which
existed prior to the IPO and the acquisition of the Founding Companies or the
Post-IPO Acquisitions. Under the plans currently in place, employees may defer
from 1% to 18% of eligible earnings, company matching contributions range from
0% to 50% of the first 4% to 6% of employee contributions, and employee vesting
in company matching contributions varies from immediate vesting in some plans to
seven or more years in other plans. On April 1, 1999, we established a new
401(k) profit sharing plan, which will cover all domestic employees. We are in
the process of merging existing plans into the new 401(k) profit sharing plan.
EMPLOYMENT AGREEMENTS
---------------------
Effective with the Combinations and certain Post-IPO acquisitions, we
entered into employment agreements with all senior corporate officers and
several subsidiary level key employees. Among other things, these agreements
allow for severance payments and acceleration of stock option awards upon a
change in control, as defined under the agreements. If a change in control
occurred without prior written notice on June 30, 1999, As of June 30, 1999, the
maximum amount of severance payments that could potentially have been payable
under all agreements, excluding any applicable gross-up for excise taxes, was
approximately $14.9 million.
NOTE 6 - EARNINGS PER SHARE
- ---------------------------
ACTUAL RESULTS
--------------
Earnings per share included in the consolidated condensed statements of
income for the historical periods ended June 30, 1998, include Aston's results
of operations under its historical capital and income tax structure, the results
of operations of the three post-IPO acquisitions accounted for under the
pooling-of-interests method of accounting, and the remaining founding companies
since the IPO. Accordingly, the 1,708,333 shares of Common Stock issued to the
former stockholders of Aston in connection with the Combinations, the 392,780
shares issued in connection with the three pooling acquisitions, and the
14,215,953 shares issued in connection with the IPO are utilized to calculate
weighted average common shares for the three and six months ended June 30, 1998.
The following table reflects our weighted average common shares outstanding and
the impact of its primary common share equivalents:
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Basic weighted average common
shares outstanding 7,568,787 17,486,882 4,850,054 17,421,508
Effect of dilutive
securities - stock options 113,728 255,328 57,178 442,518
--------- ---------- --------- ----------
Diluted weighted average common
shares outstanding 7,682,515 17,742,210 4,907,232 17,864,026
========= ========== ========= ==========
</TABLE>
PRO FORMA RESULTS
-----------------
Pro forma earnings per share included in the consolidated condensed
statement of pro forma income is based on pro forma net income after considering
the adjustments described in Note 1-Pro Forma Financial Information above. The
pro forma weighted average common shares for all periods reflect the issuance of
Common Stock in connection with the Combinations, the IPO, the acquisition of
Abbott Resorts, the three pooling acquisitions, and shares issued to ResortQuest
shareholders and management as though such shares were outstanding for the
entire periods. In addition, the 1999 period includes the impact of Common Stock
issued in connection with the remaining Post-IPO Acquisitions only from their
effective acquisition dates. The following table reflects our pro forma weighted
average common shares outstanding and the impact of its dilutive common share
equivalents.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic weighted average common
shares outstanding 17,074,106 17,486,882 17,074,106 17,421,508
Effect of dilutive
securities - stock options 113,728 255,328 57,178 442,518
---------- ---------- ---------- ----------
Diluted weighted average common
shares outstanding 17,187,834 17,742,210 17,131,284 17,864,026
========== ========== ========== ==========
</TABLE>
13
<PAGE>
NOTE 7 - SEGMENT REPORTING
- --------------------------
On January 1, 1998, we adopted the provisions of SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Under SFAS No. 131, we
have one operating segment, property management, which is managed as one
business unit. The all other caption includes First Resort Software and
corporate. Approximately 74% of the all other segment assets represents goodwill
recorded for First Resort Software and corporate. The following table presents
the revenues, operating income and assets of our reportable segment.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in thousands) 1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Property Management $ 9,466 $30,041 $18,132 $60,831
All other 255 948 255 1,815
------- ------- ------- -------
$ 9,721 $30,989 $18,387 $62,646
======= ======= ======= =======
Operating Income
Property Management $ 1,254 $ 5,880 $ 3,780 $14,350
All other (435) (1,860) (435) (4,138)
------- ------- ------- -------
$ 819 $ 4,020 $ 3,345 $10,212
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- --------
<S> <C> <C>
Assets
Property Management $149,883 $195,379
All other 38,336 40,327
-------- --------
$188,219 $235,706
======== ========
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OVERVIEW
- --------
ResortQuest International, Inc. ("ResortQuest") is the leading provider
of vacation condominium and home rental property management services in
premier destination resorts located in the continental United States, Hawaii
and Canada. We have developed the first and only branded nationwide network
of vacation rental properties, and currently offer approximately 16,000
rental properties in 34 premier beach, island, mountain and desert
destination locations.
Our rental properties are generally second homes or investment properties
owned by individuals who assign us the responsibility of managing, marketing and
renting their properties. We earn management fees as a percentage of the rental
income from each property, but have no ownership interest in the properties. In
addition to the vacation property management business, we offer real estate
brokerage services, and other rental and property owner services and have
developed a proprietary vacation rental software package which we utilize
internally and offer to over 600 vacation property management companies together
with related services.
We provide value-added services to both vacationers and property owners.
For vacationers, we offer the value, convenience and features of a condominium
or home while providing many of the amenities and services of a hotel. For
property owners, we offer a comprehensive package of marketing, management and
rental services designed to enhance rental income and profitability while
providing services to maintain the property. To increase customer satisfaction,
we have developed and are implementing a five-tier rating system that segments
our property portfolio into one of five categories: Bronze, Silver, Gold,
Platinum, and Quest Home.
We completed our initial public offering on May 26, 1998 and simultaneously
acquired 12 vacation rental and property management companies and one vacation
property management software company, First Resort Software ("FRS") (together
the "Founding Companies") (the "Combinations"). Since our initial public
offering, we have acquired an additional 17 vacation rental and property
management companies, increasing properties under management by approximately
50%, expanding our presence into eleven new resort markets and further enhancing
our unique national platform.
RESULTS OF OPERATIONS - ACTUAL
- ----------------------------------
For accounting and reporting purposes, Aston Hotels & Resorts ("Aston"),
one of our founding companies, was identified as the accounting acquiror and
the remaining founding companies along with ResortQuest were accounted for
under the purchase method of accounting. Since the IPO and the Combinations,
we made three acquisitions which have been accounted for under the
pooling-of-interests method of accounting and for which the historical
financial statements have been restated. Accordingly, our actual consolidated
financial information for the three- and six-month periods ended June 30,
1998 and 1999 includes the results of Aston and the pooling acquisitions for
the entire periods presented, includes ResortQuest and the founding companies
only since May 26, 1998, and includes the remaining Post-IPO acquisitions
since their respective effective dates of acquisition. Comparability of
actual results for the quarter, year to date and prior years may be
misleading and are not necessarily indicative of the results of the combined
operations.
15
<PAGE>
The following table sets forth the historical consolidated results of
operations for the three- and six-month periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1998 1999 1998 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $9,721 100.0% $30,989 100.0% $18,387 100.0% $62,646 100.0%
Direct operating expenses 5,843 60.1% 15,787 50.9% 10,254 55.8% 30,256 48.3%
General and administrative
expenses 2,584 26.6% 9,510 30.7% 4,198 22.8% 18,948 30.2%
Depreciation and amortization 475 4.9% 1,672 5.4% 590 3.2% 3,230 5.2%
Operating income $ 819 8.4% $ 4,020 13.0% $ 3,345 18.2% 10,212 16.3%
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 -
Actual
Revenues. Revenues increased $21.3 million, or 218.8%, from $9.7 million in
1998 to $31.0 million in 1999, primarily due to the revenue impact of the
companies acquired in the Combinations and the Post-IPO Acquisitions accounted
for as purchases. Revenues from the 1998 Acquisitions and 1999 Acquisitions for
the Hawaii, Mountain, Beach, Desert and Other segments were $330,000, $3.5
million, $19.6 million, $626,000 and $948,000, respectively.
Direct operating expenses. Direct operating expenses increased $9.9
million, or 170.2%, from $5.8 million in 1998 to $15.8 million in 1999, which is
primarily due to the expense impact of the companies acquired in the
Combinations and the Post-IPO Acquisitions accounted for as purchases. As a
percentage of revenues, direct operating expenses decreased from 60.1% in 1998
to 50.9% in 1999. Direct operating expenses from the 1998 Acquisitions and the
1999 Acquisitions for the Hawaii, Mountain, Beach, Desert and Other segments
were $165,000, $3.0 million, $8.7 million, $316,000 and $431,000, respectively.
General and administrative expenses. General and administrative expenses
increased $6.9 million, or 268.0%, from $2.6 million in 1998 to $9.5 million
in 1999, which is primarily due to the expense impact of the companies
acquired in the Combinations, the Post-IPO Acquisitions accounted for as
purchases and incremental public-company expenses. Depreciation and
amortization expense increased due to the goodwill impact of acquisitions
recorded using the purchase method of accounting. As a percentage of
revenues, general and administrative expenses increased from 26.6% in 1998 to
30.7% in 1999. General and administrative expenses, including depreciation
and goodwill amortization, from the 1998 Acquisitions and the 1999
Acquisitions for the Hawaii, Mountain, Beach, Desert and Other segments were
$146,000, $1.7 million, $4.7 million, $263,000 and $2.4 million, respectively.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 -
Actual
Revenues. Revenues increased $44.3 million, or 240.2%, from $18.4 million
in 1998 to $62.6 million in 1999, primarily due to the revenue impact of the
companies acquired in the Combinations and the Post-IPO Acquisitions accounted
for as purchases. Revenues from the 1998 Acquisitions and 1999 Acquisitions for
the Hawaii, Mountain, Beach, Desert, and Other segments were $819,000, $13.9
million, $29.4 million, $1.9 million and $1.8 million, respectively.
Direct operating expenses. Direct operating expenses increased $20.0
million, or 194.2%, from $10.3 million in 1998 to $30.3 million in 1999, which
is primarily due to the expense impact of the companies acquired in the
Combinations and the Post-IPO Acquisitions accounted for as purchases. As a
percentage of revenues, direct operating expenses decreased from 55.8% in 1998
to 48.3% in 1999. Direct operating expenses from the 1998 Acquisitions and the
1999 Acquisitions for the Hawaii, Mountain, Beach, Desert and Other segments
were $327,000, $7.2 million, $14.6 million, $379,000 and $897,000, respectively.
General and administrative expenses. General and administrative expenses
increased $14.8 million, or 352.4%, from $4.2 million in 1998 to $18.9
million in 1999, which is primarily due to the expense impact of the
companies acquired in the Combinations, the Post-IPO Acquisitions accounted
16
<PAGE>
for as purchases and incremental public-company expenses. Depreciation and
amortization expense increased due to the goodwill impact of acquisitions
recorded using the purchase method of accounting. As a percentage of
revenues, general and administrative expenses increased from 22.8% in 1998 to
30.2% in 1999. General and administrative expenses, including depreciation
and goodwill amortization, from the 1998 Acquisitions and the 1999
Acquisitions for the Hawaii, Mountain, Beach, Desert and Other segments were
$247,000, $3.1 million, $9.1 million, $726,000 and $5.1 million, respectively.
OTHER
-----
The following table sets forth other historical items affecting
consolidated net income for the three- and six-month periods ended June 30, 1999
and 1998.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1998 1999 1998 1999
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest and other
(expense) income, net $ 101 $(887) $(132) $(1,534)
Other - - - 242
(Loss) income from
discontinued operations (210) - 1,347 -
Effective tax rate 36.0% 46.0% 11.2% 45.5%
</TABLE>
The interest expense for the six months ended June 30, 1998 is from
Aston's operations, which were primarily financed through working capital and
long-term financing. Concurrent with the Combinations, we did not assume any
of Aston's previous debt. In the current year, interest expense is primarily
related to the credit facility, which has been used to finance the cash
portion of the Post-IPO acquisitions.
In 1998, we decided that we would no longer enter into leasing arrangements
for lodging facilities. Accordingly, for all periods presented in the
accompanying financial statements, the financial position, results of operations
and cash flows of the leased assets are reflected as discontinued operations.
Concurrent with the Combinations, Aston assigned such leases to AST Holdings,
Inc., a corporation owned by Aston's principal stockholder. On May 27, 1998, we
entered into a contract with AST Holdings to manage these facilities for a fee.
Our effective tax rate for the three- and six-month periods ended June 30,
1999, is impacted by the amortization of goodwill, most of which is not
deductible for income tax purposes. The effective tax rate for the three- and
six-month periods ended June 30, 1998, is impacted by the fact that prior to May
27, 1998 Aston qualified and filed with an S corporation status.
RESULTS OF OPERATIONS - PRO FORMA
- ---------------------------------
To provide better comparability, the consolidated condensed pro forma
results of operations for the three and six-month periods ended June 30, 1998
and 1999 include the results of ResortQuest, the Founding Companies as if the
Combinations had occurred on January 1, 1998, the acquisition of Abbott
Resorts and the three pooling acquisitions as if they had occurred on January
1, 1998, corporate expense in the prior period comparable to the amount of
corporate
17
<PAGE>
expense in current period, and the remaining Post-IPO acquisitions since their
effective dates of acquisition. The combined pro forma results of operations
include the effects of: (i) the Combinations and the poolings; (ii) the proceeds
from the issuance of 6,670,000 shares of Our Common Stock, which was used to pay
the cash portion of the purchase price for the Founding Companies, to repay debt
assumed in the Combinations, and to pay IPO expenses; (iii) certain adjustments
to salaries, bonuses, and benefits to former owners and key management of the
Founding Companies, Abbott Resorts and the poolings effective with the IPO; (iv)
reversal of compensation expense in the six months ended June 30, 1998, relating
to the non-recurring, non-cash compensation charge of $5.1 million related to
Common Stock issued to management; (v) provision for income taxes as if pro
forma income was subject to federal, state or provincial income taxes during the
periods and that goodwill was not deductible for income tax purposes; (vi)
amortization of goodwill resulting from the Combinations and the Abbott
acquisition and (vii) excludes income (loss) from discontinued operations.
HAWAIIAN ISLANDS
----------------
The following table sets forth the Hawaiian resorts' consolidated condensed
pro forma results of operations for the three- and six-month periods ended June
30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1998 1999 1998 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $4,847 100.0% $4,922 100.0% $12,104 100.0% $11,347 100.0%
Operating expenses 4,158 85.8% 3,914 79.5% 8,234 68.0% 7,734 68.2%
Operating income $ 689 14.2% $1,008 20.5% $ 3,870 32.0% $ 3,613 31.8%
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 -
Hawaii
Revenues. Revenues increased $75,000, or 1.5%, from $4.8 million in 1998 to
$4.9 million in 1999, primarily due to a 1.0 percent increase in revenue per
available unit ("RevPAU") and a 2.2 point increase in occupancy. Units under
management contract decreased by 2.7% in 1999 due to normal turnover in
properties under management contract driven by real estate changing hands in the
market. Average daily rate in Hawaii was down slightly due to the continued
pressures from the Asian economic crisis.
Operating expenses. Operating expenses decreased $244,000, or 5.9%, from
$4.2 million in 1998 to $3.9 million in 1999. As a percentage of revenues,
operating expenses decreased from 85.8% in 1998 to 79.5% in 1999.
This decrease primarily resulted from prudent cost control measures.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 -
Hawaii
Revenues. Revenues decreased $757,000, or 6.3%, from $12.1 million in 1998
to $11.3 million in 1999, primarily due to a lower number of units under
management contract in 1999 due to normal turnover in properties under
management contract driven by real estate changing hands in the market. Average
daily rate in Hawaii was down 4.0% due to the continued pressures from the Asian
economic crisis, but occupancy was up 3.6 points.
Operating expenses. Operating expenses decreased $500,000, or 6.1%, from
$8.2 million in 1998 to $7.7 million in 1999. As a percentage of revenues,
operating expenses were relatively flat over the prior year.
18
<PAGE>
MOUNTAIN
--------
The mountain resorts' consolidated condensed pro forma results of
operations for the second quarter reflect the off-peak season, which can impact
margins on a quarterly basis. The following table sets forth the mountain
resorts combined pro forma results of operations for the three- and six-month
periods ended June 30, 1999 and 1998, which includes: Aspen, Breckenridge,
Crested Butte, Dillon, Snowmass and Telluride, Colorado; Big Sky, Montana;
Sunriver, Oregon; Park City, Utah; and Whistler, British Columbia.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1998 1999 1998 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,166 100.0% $ 3,623 100.0% $11,825 100.0% $16,021 100.0%
Operating expenses 3,340 154.2% 5,117 141.2% 8,285 70.1% 11,580 72.3%
Operating (loss) income $(1,174) nm $(1,494) nm $ 3,540 29.9% $ 4,441 28.7%
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 -
Mountain
Revenues. Revenues increased $1.5 million, or 67.3%, from $2.2 million
in 1998 to $3.6 million in 1999, primarily due to $1.0 million in revenues
from current year acquisitions. The mountain resorts on a comparable basis
also experienced an increase in lodging revenues of 8.4%, primarily due to
increased average daily revenue ("ADR") of 14.8%.
Operating expenses. Operating expenses were up $1.8 million, or 53.2%,
from $3.3 million in 1998 to $5.1 million in 1999, primarily due to $1.1
million in operating expenses related to the current year acquisitions. The
remaining increase is attributable to the cost of managing additional units
and the expense impact of acquisitions in the current year.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 -
Mountain
Revenues. Revenues increased $4.2 million, or 35.5%, from $11.8 million
in 1998 to $16.0 million in 1999, primarily due to $2.6 million in revenues
from current year acquisitions. Also favorably impacting revenues was an
increase in units under management in Whistler, B.C. and a strong ski season
in Whistler and in Park City, Utah, which offset the snow drought in
Colorado. The mountain resorts also experienced an increase in lodging
revenues of 10.8%, primarily due to an increase in occupancy of 4.0 points
and increased ADR of 1.6%.
Operating expenses. Operating expenses were up $3.3 million, or 39.3%,
from $8.3 million in 1998 to $11.5 million in 1999, primarily due to $2.3
million in operating expenses related to the current year acquisitions. The
remaining increase is attributable to expense related to the increase in
occupancy.
BEACH
-----
The beach resorts' consolidated condensed pro forma results of operations
for the second quarter reflect the beginning of the peak summer season, which
can impact margins on a quarterly basis. The following table sets forth the
beach resorts (excluding Hawaii) combined pro forma results of operations for
the three- and six-month periods ended June 30, 1999 and 1998, which includes:
Bethany Beach, Delaware; Gulf Shores, Alabama; Nantucket, Massachusetts; Outer
Banks, North Carolina; Sanibel and Captiva Islands, and Destin, Florida; St.
Simons Island, Georgia; Port Clinton, Ohio; and Hilton Head Island, South
Carolina.
19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1998 1999 1998 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $17,678 100.0% $20,870 100.0% $26,762 100.0% $31,531 100.0%
Operating expenses 12,586 71.2% 14,553 67.7% 22,058 82.4% 25,753 81.7%
Operating income $ 5,092 28.8% $ 6,317 30.3% $ 4,704 17.6% $ 5,778 18.3%
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 -
Beach
Revenues. Revenues increased $3.2 million, or 18.1%, from $17.7 million in
1998 to $20.9 million in 1999, due to a higher number of units under management
contract and the acquisition in the current year of Worthy Rentals.
Operating expenses. Operating expenses increased $2.0 million, or 15.7%,
from $12.6 million in 1998 to $14.6 million in 1999. This increase was primarily
attributable to increased expenses related to servicing increased units and
expenses for Worthy Rentals.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 -
Beach
Revenues. Revenues increased $4.8 million, or 17.8%, from $26.8 million in
1998 to $31.5 million in 1999, due to a higher number of units under management
contract and the acquisition in the current year of Worthy Rentals which was
effective February 1, 1999.
Operating expenses. Operating expenses increased $3.7 million, or 16.8%,
from $22.1 million in 1998 to $25.8 million in 1999. This increase was primarily
attributable to increased expenses related to servicing increased units and
expenses for Worthy Rentals for the period.
DESERT
------
The desert resort segment represents a new addition to our geographic
diversity and portfolio of vacation opportunities in 1999. With the addition of
Sunrise Vacation Rentals in Palm Desert, California, Scottsdale Resort
Accommodations in Scottsdale, Arizona and Fischer Villa in Tucson, Arizona, we
added another winter vacation segment. The combined condensed results of
operations of the three desert properties are included in the current year but
are not reflected in the prior year.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(dollars in thousands) 1999 1999
--------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 626 100.0% $ 1,885 100.0%
Operating expenses 579 92.5% 1,105 58.6%
Operating income $ 47 7.5% $ 780 41.4%
</TABLE>
OTHER OPERATIONS
----------------
The following table sets forth the other combined condensed pro forma
results of operations for the threeand six-month periods ended June 30, 1999 and
1998, which includes: First Resort Software and corporate.
20
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1998 1999 1998 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 801 100.0% $ 948 100.0% $ 1,629 100.0% $ 1,815 100.0%
Operating expenses 2,137 nm 2,293 nm 4,761 nm 5,236 nm
Operating loss $(1,336) nm $(1,345) nm $(3,132) nm $(3,421) nm
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 -
Other
Revenues and operating expenses were relatively flat as compared to prior
year.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 -
Other
Revenues and operating expenses were relatively flat as compared to prior
year.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
We conduct all of our operations through our operating companies.
Accordingly, the primary internal source of our liquidity is through the cash
flows realized from our subsidiaries, borrowings under our amended $50 million
Credit Facility and our $50 million senior secured notes, and the issuance of
common stock.
We generated cash flows from operating activities of $8.6 million in the
six months ended June 30, 1999 primarily due to income from continuing
operations and an increase in reservation and escrow deposits. Cash used in
investing activities was approximately $16.3 million in the six months ended
June 30, 1999, due primarily to the cash portions of the 1999 Acquisitions. In
the six months ended June 30, 1999, cash provided by financing activities
totaled $15.4 million, which included $49.0 million in net proceeds from the
senior secured notes, and $32.7 million in net repayments under the Credit
Facility.
At June 30, 1999, we had approximately $34.0 million in cash and cash
equivalents, of which $25.1 million represents cash held in escrow. The cash
held in escrow is released at varying times in accordance with state
regulations, generally based upon the guest stay or, in the case of real estate
sales deposits, when the property is sold. At June 30, 1999, we had a working
capital deficit of $8.8 million and $50.0 million available under our Credit
Facility. We anticipate that our cash flow from operations will provide cash in
excess of our normal working capital needs, debt service requirements and
planned capital expenditures for the foreseeable future.
Total capital expenditures for 1999 are anticipated to be between $3.5
million and $4.0 million, of which approximately $600,000 will be for software
development, with the balance going to furniture, fixtures and equipment.
In connection with the IPO, common stock held by the founding companies'
previous owners, the sponsor group partners and senior management became subject
to certain transfer restrictions. These restrictions expired between May 20 and
May 27, 1999. On May 24, 1999, we announced an anticipated earnings shortfall to
street analysts' expectations for the second quarter and we withdrew a planned
common stock offering. Had this offering been completed, the transfer
restrictions would have been extended. In the proposed offering, we would have
offered for sale shares of common stock held by the founding stockholders, as
well as additional shares offered for
21
<PAGE>
sale by us. The withdrawn offering and the expiration of the transfer
restrictions resulted in a significant increase in the number of shares of
common stock now publicly tradable and has limited our ability to sell shares of
our common stock through a public offering. Although this offering was
withdrawn, we continue to consider various financial alternatives that we may
pursue to generate additional equity.
NOTE RECEIVABLE
---------------
In connection with the Combinations, Aston formalized their receivable
resulting from cash advances to its primary stockholder with a $4.0 million
promissory note (the "Note"). The Note bears interest at one-half of one percent
below prime rate of interest, but not less than six percent and not more than 10
percent. Payments under the Note are interest only, due and payable every
January and July 1st. The Note was due on demand with 180 days notice for any
time through May 26, 1999. If payment was not requested within the notice
periods, the Note becomes due and payable on May 25, 2008. The demand feature of
the Note was not exercised, and the Note is now due and payable on May 25, 2008.
Accordingly, the note receivable is now classified as a long-term asset.
POST-IPO ACQUISITIONS
---------------------
Since the IPO, we have completed seventeen Post-IPO Acquisitions:
Plantation Resort Management, Inc., ("Plantation Resort") located in Gulf
Shores, Alabama, effective August 31, 1998; Whistler Exclusive Properties,
Ltd. ("Whistler Exclusive") located in Whistler, British Columbia, Canada,
effective September 3, 1998; Abbott Realty Services, Inc. ("Abbott Resorts")
located in Destin, Florida, effective September 30, 1998; Columbine
Management, Inc. ("Columbine") located in Dillon, Colorado, effective
December 1, 1998; Ridgepine Vacation Rentals, Inc. ("Ridgepine") in Sunriver
Oregon, effective January 1, 1999; Cove Realty Management Services, Inc.
("Cove") in Palm Desert, California, effective January 1, 1999; Ryan's Golden
Eagle Management Services, Inc. ("Golden Eagle") in Big Sky, Montana,
effective January 5, 1999; Scottsdale Resort Accommodations Inc.
("Scottsdale") in Scottsdale, Arizona, effective February 1, 1999; Worthy
Rentals, Inc. ("Worthy") in Hilton Head Island, South Carolina, effective
February 1, 1999; High Country Management, Inc. ("High Country") in Crested
Butte, Colorado, effective March 31, 1999; Mountain High Management
("Mountain High") in Whistler, British Columbia, Canada, effective March 31,
1999; Fischer Villa Management ("Fischer Villa") in Tucson, Arizona,
effective June 20, 1999; Shoreline Properties, Inc. ("Shoreline Properties")
in Port Clinton, Ohio, effective June 15, 1999; Coates, Reid & Waldron,
("Coates Reid") in Aspen, Colorado, effective June 29, 1999; Shoreline
Rentals, Inc. ("Shoreline Rentals") in Hilton Head, South Carolina, effective
July 18, 1999; Advantage Vacation Homes by Styles, Inc. and Styles Estates,
Ltd. ("Styles") in Orlando, Florida, effective August 6, 1999. The
acquisitions of Plantation Resort, Mountain High, and High Country were
accounted for under the pooling of interests method of accounting; the
remaining Post-IPO acquisitions were accounted for under the purchase method
of accounting.
We intend to pursue attractive acquisition opportunities. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or successfully integrate acquired businesses into our
operations without substantial costs, delays or other operational or financial
problems. Increased competition for acquisition candidates may develop, in which
event there may be fewer acquisition opportunities available to us, as well as
higher acquisition prices. Further, acquisitions involve a number of special
risks, including the failure of acquired companies to achieve anticipated
results, diversion of management's attention, failure to retain key personnel,
risks associated with unanticipated events or liabilities and amortization of
acquired intangible assets. Some or all of these could have a material adverse
effect on our business, financial condition and results of operations.
22
<PAGE>
The timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable. We expect to fund future
acquisitions primarily through a combination of cash flow from operations,
borrowings under the Credit Facility, other debt fundings, and the issuance of
common stock.
SHELF REGISTRATION
------------------
On June 25, 1998, we registered 3.0 million shares of Common Stock with the
SEC pursuant to a shelf registration statement. As of June 30, 1999, 2,210,499
of the shares covered by this shelf registration statement have been issued in
connection with Post-IPO Acquisitions. On October 16, 1998, we filed
post-effective amendment no. 1 to the shelf registration statement with the SEC
and on April 13, 1999, we filed post-effective amendment no. 2 to the shelf
registration statement with the SEC. On May 28, 1999, we filed post-effective
amendment no. 3 to the shelf registration statement with the SEC. The remaining
shares covered by the post-effective amendments are available to be used in
future acquisitions.
On July 16, 1999, we registered an additional 5.0 million shares of Common
Stock with the SEC pursuant to a shelf registration statement. On July 29, 1999,
we filed post-effective amendment no. 1 to this shelf registration statement. As
with our initial shelf registration statement, the shares covered by this
statement are available to be used in future acquisitions.
CREDIT FACILITIES AND LOAN GUARANTEES
-------------------------------------
On June 16, 1999, we issued $50 million of 9.06% senior secured notes, due
June 2004, in connection with a note purchase agreement. The senior notes are
secured pari passu to the credit agreement. The senior note purchase agreement
contains loan covenants substantially similar to the credit agreement and has
prepayment restrictions in the form of make-whole provisions. Interest is
payable semiannually.
On June 1, 1999, we executed amendment no. 4 to the credit agreement to
allow for the sharing of credit with the senior notes and reduce the
availability under the credit agreement to $50 million. On April 16, 1999, we
executed amendment no. 3 to the credit agreement to allow for the refinancing of
existing loans of a subsidiary. The Credit Facility may be used for letters of
credit not to exceed $2.5 million, acquisitions, capital expenditures, and for
general corporate purposes. The Credit Agreement requires us to comply with
various loan covenants, which include maintenance of certain financial ratios,
restrictions on additional indebtedness and restrictions on liens, guarantees,
advances, capital expenditures, sale of assets and dividends. Interest on
outstanding balances of the Credit Facility is computed at our election, on the
basis of either the Prime Rate or the Eurodollar Rate plus a margin ranging from
1.25% to 2.00%, depending on certain financial ratios. Availability fees range
from 0.25% to 0.50% per annum depending on certain financial ratios and are
payable on the unused portion of the Credit Facility. At June 30, 1999, there
were no borrowings under the Credit Facility. The Credit Facility has a
three-year term and is secured pari passu to the senior notes, by substantially
all of our assets, including the stock in the Founding Companies and any future
material subsidiaries, as defined. At June 30, 1999, we were in compliance with
applicable credit agreement and senior note purchase agreement loan covenants.
Certain of Aston's management agreements contain provisions for guaranteed
levels of returns to owners. These agreements also contain force majeure clauses
to protect us from forces or occurrences beyond the control of management.
23
<PAGE>
YEAR 2000 COMPLIANCE
--------------------
The vacation property management industry uses a complex suite of software
and relies heavily on information technology ("IT") systems. Many systems
internally record dates using a two-digit field (for example, the year 1999
would be recorded simply as "99"). When these systems attempt to record dates
after December 31, 1999, the potential exists for systems and programs to
malfunction or cease to operate altogether. The areas of some risk of software
failure due to the Year 2000 problem are: IT systems such as Property Management
systems (guest services and back-office accounting); Reservation/Inventory
Management systems; Hardware BIOS (software encoded into hardware components
that runs "beneath" the operating system); Analysis and/or management reporting
tools; and various non-IT components Embedded Control Systems (HVAC, elevator
controls, etc.). In addition to the potential impact to our business from our IT
and non-IT systems' potential failure due to Year 2000 issues, we may be
impacted by the lack of preparedness of third parties ("Business Partners"),
such as vendors, financial institutions, communications and utility providers,
and third party technology suppliers.
State of Readiness
Our activities to ensure our Year 2000 readiness have been focused on the
following: evaluating the various IT components of our operating environment
(personal computer workstations and related equipment, network servers,
telephone and data communication equipment, point of sale devices, internally
developed software, and non-IT embedded technology such as microcontrollers. In
addition we have obtained from our key Business Partners their status of Year
2000 readiness. We expect to complete the analysis and implementation of any
necessary corrective measures for our current operations by the end of the
fourth quarter 1999, However, as we continue to acquire additional operating
companies over the remainder of 1999 the potential exists for us to reach the
turn of the century without addressing all potential non-Year 2000-compliant
components of the operating environments of newly-acquired companies.
Consequently, we have structured our Year 2000 project plan to prioritize Year
2000 activities based on the potential impact of a particular component's lack
of compliance. Our Year 2000-readiness project has not delayed or superceded
other planned technology projects.
Our Year 2000 project is structured in several phases, namely
Identification (the development of our Year 2000 project plan), Assessment
(inventory of IT and non-IT system components and identification of areas of
potential exposure, prioritization, and development of routines necessary to
address problems), Remediation (implementation of corrective measures,
developing contingency plans), Testing, and Certification. These steps must be
undertaken at both the operating company level and at our corporate
headquarters.
As of June 30, 1999, we had completed the Identification, and Assessment
phases of the project for our operating companies and our corporate offices and
we had made considerable headway in the Remediation, Testing, and Certification
phases of the project, again with our efforts focused on the areas of greatest
potential impact. As of June 30, 1999, approximately 75% of our total inventory
of IT and non-IT systems had either been deemed compliant or had been corrected.
Estimated Costs
Based upon the information gathered to date, we estimate the upper range of
the cost of the Year 2000 project is approximately $600,000. A significant
portion of the total potential expense estimate relates to the cost of
replacement of personal computer hardware, servers, and telecommunications
equipment, and approximately $250,000 of this amount was planned prior to
24
<PAGE>
the advent of the Year 2000 project. Funding of Year 2000 costs is being
provided by cash flow from operations.
Risks
The impact upon our business by Year 2000 issues is primarily in the
areas of property management systems, telecommunications, and financial
accounting/reporting. We believe that the consequences of Year 2000 issues
with respect to the adverse impact upon our results of operations will not be
material, however we will have contingency plans in place designed to
mitigate the impact of Year 2000 issues.
Contingency Plans
Our contingency plans include items such as offsite and/or manual
reservations/inventory management, property management (guest services, back-
office functions, work order administration), financial accounting and
reporting, and management reporting. The remaining contingency plans not yet
finalized will be developed, tested and functional by the end of 1999.
SEASONALITY AND QUARTERLY FLUCTUATIONS
--------------------------------------
Our business is highly seasonal. The pro forma results of operations are
subject to quarterly fluctuations caused primarily by the seasonal variations in
the vacation rental and property management industry, with peak seasons
dependent on whether the resort is primarily a summer or winter destination. Our
quarterly results of operations may also be subject to fluctuations as a result
of the timing and cost of acquisitions, the timing of real estate sales, changes
in relationships with travel providers, extreme weather conditions or other
factors affecting leisure travel and the vacation rental and property management
industry.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
------------------------------------------------
This filing contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended, which are intended to be covered by the safe harbors
created thereby. Investors are cautioned that all forward-looking statements
involve risks and uncertainties, including but not limited to the risks
associated with; successful integration of the Founding Companies and additional
acquired companies, factors affecting internal growth and management of growth,
our acquisition strategy and availability of financing, the travel and tourism
industry, seasonality, quarterly fluctuations and general economic conditions,
dependence on technology and travel providers, and other factors discussed in
the Registration Statement. Although we believe that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and, therefore, there can be no assurance that
the forward-looking statements included in this filing will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that the
objectives and plans will be achieved.
25
<PAGE>
PERFORMANCE STATISTICS
- ----------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, Inc./ June 30, June 30, Inc./
1998 1999 Dec. 1998 1999 Dec.
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Hawaii
Lodging Revenues(1) $31,403 $30,578 (2.6)% $71,517 $69,327 (3.1)%
Occupancy 68.2% 70.4% 2.2 pts 73.4% 77.0% 3.6 pts
ADR $ 99.12 $ 97.04 (2.1)% $106.67 $102.35 (4.0)%
RevPAU $67.63 $68.34 1.0 % $78.29 $78.77 0.6 %
Total Units 5,145 5,008 (2.7)% 5,145 5,008 (2.7)%
Mountain
Lodging Revenues(1) $ 3,337 $ 3,617 8.4 % $23,381 $25,908 10.8 %
Occupancy 20.2% 19.5% (0.7)pts 41.6% 45.6% 4.0 pts
ADR $102.47 $117.61 14.8 % $174.02 $176.76 1.6 %
RevPAU $20.72 $22.94 10.7 % $72.39 $80.65 11.4 %
Total Units 1,969 1,935 (1.7)% 1,969 1,935 (1.7)%
Beach
Lodging Revenues(1) $32,787 $36,113 10.1 % $48,216 $52,604 9.1 %
Occupancy 59.5% 56.4% (3.1)pts 60.8% 56.9% (3.9)pts
ADR $157.48 $161.38 2.5% $114.87 $119.82 4.3 %
RevPAU $ 93.67 $ 91.05 (2.8)% $69.89 $68.19 (2.4)%
Total Units 4,953 5,270 6.4% 4,953 5,270 6.4 %
Total
Lodging Revenues(1) $67,527 $70,308 4.1 % $143,114 $147,839 3.3 %
Occupancy 57.2% 56.9% (0.3)pts 63.6% 64.0% 0.4 pts
ADR $121.11 $123.43 1.9% $116.87 $117.06 0.2 %
RevPAU $69.23 $70.19 1.4% $74.29 $74.94 0.9 %
Total Units 12,067 12,213 1.2% 12,067 12,213 1.2 %
</TABLE>
(1) Lodging revenues are in thousands and represent the total rental charged to
property rental customers. Our revenue represents from 3% to over 40% of the
lodging revenues based on the services provided by us.
The above statistics exclude Houston & O'Leary, The Maury People,
Columbine, Ridgepine, Golden Eagle, Cove, Worthy, Scottsdale Resort
Accommodations, Shoreline Properties, and Coates Reid & Waldron units of
approximately 3,200. Also excluded from these statistics are owner use nights
and renovation nights which were approximately 10.4% of gross available nights
in the three months ended June 30, 1999 and 11.1% of gross available nights in
the three months ended June 30, 1998. For the six months ended June 30, 1999 and
1998, owner use nights and renovation nights were 11.2% and 11.6% of gross
available nights, respectively.
26
<PAGE>
PART 2--OTHER INFORMATION
-------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
An annual meeting of the stockholders of ResortQuest International was held
on Thursday, May 13, 1999. At the meeting, the stockholders considered and voted
upon three proposals: (1) the election of eleven members (William W. Abbott,
Jr., Elan J. Blutinger, D. Fraser Bullock, Joshua M. Freeman, Heidi O'Leary
Houston, David L. Levine, Michael D. Rose, David C. Sullivan, Andre S.
Tatibouet, Joseph V. Vittoria, and Theodore L. Weise) to the board of directors
of the Company; (2) the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the 1999 fiscal year; and (3) the approval of
the Company's Amended and Restated Long-Term Incentive Plan, providing for,
among other things, an amendment to the Company's prior plan to authorize an
increase in the total number of shares that may be subject to awards under the
plan to 15% of the aggregate number of shares of common stock outstanding.
The stockholders approved each of the proposals. Voting results were as follows:
<TABLE>
<CAPTION>
Proposal #1 Proposal #2 Proposal #3
----------- ----------- -----------
<S> <C> <C> <C>
For 12,655,352 12,853,387 8,711,236
Against - 515 2,437,476
Abstentions & Broker
Non-Votes - 506 1,705,696
Withheld 199,056 - -
All director nominees received the same number of votes for, against,
withheld and abstentions or broker non-votes, with the exception of D. Fraser
Bullock, who received 12,655,352 votes for and 199,056 votes withheld while
the other ten nominees each received 12,654,852 votes for and 199,556 votes
withheld.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
EX-27 Financial Data Schedule (1)
(b) Reports on Form 8-K:
14(a)(1) FINANCIAL STATEMENTS
We filed a report on Form 8-K during first quarter 1999, dated May 21,
1999, related to the restatement of our historical financial statements to
reflect the acquisitions accounted for under the pooling of interests method.
- ----------
Footnotes
(1) Filed herewith
27
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
RESORTQUEST INTERNATIONAL, INC.
August 13, 1999 By: /s/ JEFFERY M. JARVIS
----------------------------
Jeffery M. Jarvis
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer,
Chief Accounting Officer
and Duly Authorized Officer)
28
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- ----------- ---------------------------------------------- ----------
<S> <C> <C>
EX-27 Financial Data Schedule (1) 30
</TABLE>
- ---------
Footnotes
(1) Filed herewith
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001057507
<NAME> RESORTQUEST INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 33,987
<SECURITIES> 0
<RECEIVABLES> 6,387
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,735
<PP&E> 18,114
<DEPRECIATION> 1,242
<TOTAL-ASSETS> 235,706
<CURRENT-LIABILITIES> 55,583
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 121,694
<TOTAL-LIABILITY-AND-EQUITY> 235,706
<SALES> 0
<TOTAL-REVENUES> 62,645
<CGS> 0
<TOTAL-COSTS> 30,256
<OTHER-EXPENSES> 18,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,534
<INCOME-PRETAX> 8,678
<INCOME-TAX> 3,946
<INCOME-CONTINUING> 4,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,732
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
</TABLE>
