Resortquest International 10Q/A 2002 Q1 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A


(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 March 31, 2002.

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 March 31, 2002.

Common Stock 19,243,249 shares

Page 1 of 24

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME
	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
SECTION 906 CERTIFICATION OF THE CEO
SECTION 906 CERTIFICATION OF THE CFO

EXPLANATORY NOTE

This filing represents an amended Form 10-Q for the quarterly period ended March 31, 2002, previously filed on May 15, 2002. This Form 10-Q has been amended to reflect the adoption of the Financial Accounting Standards Board's Emerging Issues Task Force (“EITF”) Consensus No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred,” and the restatement of the cumulative effect of a change in accounting principle upon the January 1, 2002 adoption of the Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets.” The unaudited Condensed Consolidated Financial Statements, Note 2 and Management’s Discussion and Analysis have been revised to reflect these restatements as further discussed in Note 7.

Subsequent to the issuance of our unaudited Condensed Consolidated Financial Statements for the three-month period ended
March 31, 2002, we determined that EITF No. 01-14, issued earlier this year and effective January 1, 2002, does apply to ResortQuest International, Inc. This EITF requires companies to account for certain reimbursed expenses as both revenues and related expenses within the income statement. For ResortQuest, these expenses primarily relate to certain payroll expenses in our Hawaii resorts that are reimbursed with no added margin to the Company by property owners. As a result, the accompanying unaudited Condensed Consolidated Financial Statements for all periods presented have been restated to reflect reimbursements received as other revenue from managed entities and the costs incurred on behalf of managed entities as other expenses from managed entities. As the expenses and related revenue are identical, this adoption has no effect on ResortQuest’s previously reported operating income, operating cash flows, net income or earnings per share.

Also subsequent to the issuance of our unaudited Condensed Consolidated Financial Statements for the three-month period ended March 31, 2002, we determined that we had not properly considered the income tax benefit on a portion of the $8.1 million cumulative effect of a change in accounting principle related to the January 1, 2002 adoption of Statement No. 142. As a result, the accompanying unaudited Condensed Consolidated Financial Statements for the three-month period ended March 31, 2002 have also been restated from the amounts previously reported to reflect the income tax benefit of the cumulative effect of a change in accounting principle. As this change only impacted the cumulative effect of a change in accounting principle, this restatement has no effect on ResortQuest’s operating income, income before cumulative effect of a change in accounting principle, or operating cash flows, but does impact net income and earnings per share.

Page 2 of 24

PART I – FINANCIAL INFORMATION

Company or group of companies for which report is filed:
RESORTQUEST INTERNATIONAL, INC. AND SUBSIDIARIES

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)


		Dec 31,			March 31,
		2001			2002

					(As restated,
					see Note 7)
ASSETS
Current assets
	Cash and cash equivalents	$	213		$	3,178
	Cash held in escrow		22,648			24,421
	Trade and other receivables, net		10,541			10,198
	Deferred income taxes		1,430			1,621
	Other current assets		6,063			5,999

	Total current assets		40,895			45,417

Goodwill, net			216,534			208,404
Property, equipment and software, net			39,509			41,636
Other assets			7,336			7,285

	Total assets	$	304,274		$	302,742

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Current maturities of long-term debt	$	322		$	186
	Deferred revenue and property owner payables		52,457			56,748
	Accounts payable and accrued liabilities		14,298			15,022
	Other current liabilities		3,069			3,032

	Total current liabilities		70,146			74,988

Long-term debt, net of current maturities			78,644			78,479
Deferred income taxes			9,459			7,577
Other long-term obligations			6,111			5,480

	Total liabilities		164,360			166,524

Stockholders’ equity
	Common stock, $0.01 par value, 50,000,000 shares authorized, 19,243,249 and 19,243,249 shares outstanding, respectively		192			192
	Additional paid-in capital		153,884			153,884
	Accumulated other comprehensive loss		(64	)		(67	)
	Excess distributions		(29,500	)		(29,500	)
	Retained earnings		15,402			11,709

	Total stockholders’ equity		139,914			136,218

	Total liabilities and stockholders’ equity	$	304,274		$	302,742

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 3 of 24

RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
(Unaudited)


			Three Months Ended

			March 31,			March 31,
			2001			2002

			(As restated, see note 7)
Revenues
	Property management fees			$	28,042		$	25,324
	Service fees				11,756			10,300
	Real estate and other				5,644			4,889

					45,442			40,513
	Other revenue from managed entities				7,907			8,503

		Total revenues			53,349			49,016

Operating expenses
	Direct operating				20,911			20,142
	General and administrative				13,762			13,336
	Depreciation				1,169			1,430
	Goodwill amortization				1,347			—

					37,189			34,908
	Other expenses from managed entities				7,907			8,503

		Total operating expenses			45,096			43,411

Operating income					8,253			5,605
Interest and other expense, net					786			1,466

Income before income taxes					7,467			4,139
Provision for income taxes					3,136			1,552

Income before cumulative effect of a change in accounting principle					4,331			2,587
Cumulative effect of a change in accounting principle, net of a $1.9 million income tax benefit					—			(6,280	)

Net income (loss)				$	4,331		$	(3,693	)

Earnings per share
	Basic
	Income before cumulative effect of a change in accounting principle			$	0.23		$	0.13
	Cumulative effect of a change in accounting principle				—			(0.32	)

		Net income (loss)		$	0.23		$	(0.19	)

	Diluted
	Income before cumulative effect of a change in accounting principle			$	0.23		$	0.13
	Cumulative effect of a change in accounting principle				—			(0.32	)

		Net income (loss)		$	0.23		$	(0.19	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4 of 24

RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE LOSS
(In thousands, except share amounts)
(Unaudited)


								Accumulated
						Additional		Other
		Common Stock				Paid-in		Comprehensive			Excess			Retained						Comprehensive
		Shares		Amount		Capital		Loss			Distributions			Earnings			Total			Loss

Balance, December 31, 2001			19,243,249	$	192	$	153,884	$	(64	)	$	(29,500	)	$	15,402		$	139,914
	Net loss		—		—		—		—			—			(3,693	)		(3,693	)	$	(3,693	)
	Foreign currency translation loss		—		—		—		(3	)		—			—			(3	)		(3	)

Comprehensive loss																				$	(3,696	)

Balance, March 31, 2002 (As restated, see Note 7)			19,243,249	$	192	$	153,884	$	(67	)	$	(29,500	)	$	11,709		$	136,218

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5 of 24

RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


				Three Months Ended

				March 31,			March 31,
				2001			2002

							As restated,
							see Note 7)
Cash flows from operating activities:
Net income (loss)				$	4,331		$	(3,693	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Cumulative effect of a change in accounting principle (Note 2)			—			6,280
		Depreciation and goodwill amortization (Note 2)			2,516			1,430
	Changes in operating assets and liabilities:
		Cash held in escrow			554			(1,773	)
		Trade and other receivables			(1,435	)		201
		Accounts payable and accrued liabilities			3,559			724
		Deferred revenue and property owner payables			(2,639	)		4,339
		Other			4,165			27

			Net cash provided by operating activities		11,051			7,535

Cash flows from investing activities:
	Cash portion of acquisitions, net				(6,484	)		(1,296	)
	Purchases of property, equipment and software				(5,098	)		(2,973	)

			Net cash used in investing activities		(11,582	)		(4,269	)

Cash flows from financing activities:
	Credit facility borrowings				7,300			25,150
	Credit facility repayments				(5,300	)		(25,300	)
	Payments of capital lease and other obligations				(10	)		(151	)

			Net cash provided by (used in) financing activities		1,990			(301	)

Net change in cash and cash equivalents					1,459			2,965
Cash and cash equivalents, beginning of period					4,283			213

Cash and cash equivalents, end of period				$	5,742		$	3,178

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6 of 24

RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)

In these footnotes, the words “Company,” “ResortQuest,” “we,” “our” and “us” refer to ResortQuest International, Inc., a Delaware corporation, and its wholly-owned subsidiaries, unless otherwise stated or the context requires otherwise.

NOTE 1 – BASIS OF PRESENTATION

Overview

ResortQuest is one of the world’s leading providers of vacation condominium and home rental property management services in premier destination resorts located in the United States and Canada. We have developed the first and only branded international network of vacation rental properties, and currently offer management services to over 20,000 rental properties. Our operations are in more than 50 premier resort locations in the Beach, Hawaii, Mountain and Desert geographical regions.

The Condensed Consolidated Financial Statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the interim periods are not necessarily indicative of results to be expected for the full fiscal year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.

Acquisition Costs

Costs incurred in the course of our evaluation of acquisition candidates and the ultimate consummation of acquisitions consist primarily of attorneys’ fees, accounting fees and other costs incurred by us in identifying and closing transactions. These costs incurred are deferred on the balance sheet until the related transaction is either consummated or terminated. Similar treatment is followed in recording costs incurred by us in the course of generating additional debt or equity financing. Transaction costs and the excess of the purchase price over the fair value of identified net assets acquired represent goodwill (see Note 2). Goodwill is calculated based on a preliminary estimate that is adjusted to its final balance within one year of the close of the acquisition. Additionally, certain of our acquisitions have “earn-up” provisions that require additional consideration to be paid if certain operating results are achieved over periods of up to three years. This additional consideration is recorded as goodwill when the amount is fixed and determinable.

During the first quarter of 2002 we made net cash payments approximating $1.3 million for an earn-up payment related to a 2000 acquisition and other purchase accounting adjustments related to certain 2001 acquisitions. The total cost during the same period in 2001 for 2001 acquisitions and earn-up payments related to 1999 acquisitions was $7.4 million, with 12% of the net consideration paid in the form of common stock with an aggregate value of $902,000, net of retired escrow shares, and the remaining $6.5 million of consideration paid in cash.

Page 7 of 24

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

During the quarter ended March 31, 2002, we changed our method of accounting for reimbursable costs to conform to the Financial Accounting Standards Board’s Emerging Issues Task Force Consensus No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF No. 01-14”), issued earlier this year and effective for us on January 1, 2002. As a result, reimbursements received are recorded as revenue and the costs incurred on behalf of managed associations and properties are recorded as expenses. These costs, which relate primarily to payroll costs at managed properties and associations where we are the employer, are reflected in Other revenue and expenses from managed entities in the Condensed Consolidated Statements of Income. Revenue and expenses for the prior periods have been reclassified to conform with the current year presentation. Since the reimbursements are made based upon the costs incurred with no added margin, the expenses and related revenue are identical, and thus the adoption of EITF No. 01-14 did not have any effect on our operating income, total or per share net income, cash flows or financial position.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”. Statement No. 141 eliminates the poolings-of-interests method of accounting for business combinations and requires all transactions initiated after June 30, 2001, to be accounted for using the purchase method. Under Statement No. 142, goodwill related to our future acquisitions is not subject to amortization, and goodwill related to our historical acquisitions is no longer amortized as of January 1, 2002. Goodwill is subject to reviews for impairment annually and upon the occurrence of certain events, and if impaired, a write-down will be recorded. Upon our adoption of Statement No. 142, each of our geographical resort regions with assigned goodwill was valued as a reporting unit. If the fair value of the reporting unit was greater than the book value, including assigned goodwill, no further testing was required. However, if the book value, including goodwill, was greater than the fair value of the reporting unit, the assets and liabilities of the reporting unit needed to be valued. The difference between the fair value of the reporting unit and the fair value of the assets is the implied fair value of goodwill. To the extent that the implied fair value of goodwill was less than the book value of goodwill, an impairment charge was recognized as a cumulative effect of a change in accounting principle. Based on this test, we recorded a non-cash $8.1 million write-down of our goodwill related to our Desert resort operations, partially off-set by a $1.9 million income tax benefit. The Desert resort operations are expected to continue to experience declining cash flows as a result of the economics of the Desert markets. The following table presents adjusted net income and earnings per share excluding goodwill amortization:


			Three Months Ended

			March 31,			March 31,
			2001			2002

Reported income before cumulative effect of a change in accounting principle				$	4,331		$	2,587
Add back goodwill amortization					1,347			—

Adjusted income before cumulative effect of a change in accounting principle					5,678			2,587
Cumulative effect of a change in accounting principle					—			(6,280	)

Adjusted net income (loss)				$	5,678		$	(3,693	)

Earnings per share
	Basic and diluted
		Before cumulative effect of a change in accounting principle		$	0.23		$	0.13
		Add back goodwill amortization			0.07			—

		Adjusted income before cumulative effect of a change in accounting principle			0.30			0.13
		Cumulative effect of a change in accounting principle			—			(0.32	)

		Adjusted net income (loss)		$	0.30		$	(0.19	)

We have completed the process of evaluating the impact of Statement No. 143, “Accounting for Asset Retirement Obligations”, and we do not expect this statement to have a material impact on our financial position or results of operations upon its adoption in 2003. Effective January 1, 2002, we adopted Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”; the adoption of this statement did not have a material impact on our financial position or results of operations. During the quarter ended June 30, 2002, the Statement No. 145, “Rescission of Statements No. 4, 44, and 64, Amendment of Statement No. 13, and Technical Corrections,” was issued and has been adopted. This adoption had no material impact to our financial position or results of operations. Also during the quarter ended June 30, 2002, Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was issued and is effective for activities initiated after December 31, 2002. The Company has yet to evaluate the impact of this statement and is therefore unable to disclose the impact that adopting Statement No. 146 will have on its financial position and results of operations when such statement is adopted.

Page 8 of 24

NOTE 3 – NOTE RECEIVABLE

In connection with the initial public offering, we formalized a $4.0 million promissory note resulting from cash advances to a primary stockholder (see Item 1. under Part II. of this filing) of a predecessor company. On February 16, 2000, this note was restructured in order to provide for additional collateral representing real estate held by the former stockholder. This note bears interest at 1/2% below the prime rate of interest, but not less than 6% and not more than 10%. Interest payments under this note are due every January and July 1st, with the principal recorded in Other assets in the accompanying Condensed Consolidated Balance Sheets, being due in full on May 25, 2008. To date, all interest payments due under the restructured terms of the note have been received.

NOTE 4 – UNUSUAL ITEMS AND OTHER CHARGES

During the quarter ended March 31, 2002, general and administrative expenses include approximately $500,000 of items that management considers as unusual items and other charges. These items are primarily due to professional fees resulting from employee-related matters and a study to explore financing and strategic growth alternatives.

NOTE 5 – EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if outstanding options to purchase our securities are exercised. The following table reflects our weighted average common shares outstanding and the impact of outstanding dilutive stock options:


	Three Months Ended

	March 31,		March 31,
	2001		2002

Basic weighted average common shares outstanding		19,043,352		19,243,249
Effect of dilutive securities – stock options		138,425		109,238

Diluted weighted average common shares outstanding		19,181,777		19,352,487

Page 9 of 24

NOTE 6 — SEGMENT REPORTING

We have one operating segment, property management, which is managed as one business unit. The All other segment includes ResortQuest Technologies and corporate. At December 31, 2001 and March 31, 2002, approximately 47% and 50%, respectively, of the All other segment assets represents goodwill recorded for ResortQuest Technologies and corporate. The following table presents the revenues, operating income and assets of our reportable segment:


		Three Months Ended

		March 31,			March 31,
(in thousands)		2001			2002

Revenues
	Property management	$	52,564		$	48,263
	All other		785			753

		$	53,349		$	49,016

Operating income
	Property management	$	12,342		$	9,950
	All other		(4,089	)		(4,345	)

		$	8,253		$	5,605


		Dec 31,		March 31,
(in thousands)		2001		2002

Assets
	Property management	$	245,482	$	246,738
	All other		58,792		56,004

		$	304,274	$	302,742

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NOTE 7 – RESTATEMENT

Subsequent to the issuance of our unaudited Condensed Consolidated Financial Statements for the three-month period ended March 31, 2002, we determined that we had not adopted the accounting requirements under the Financial Accounting Standards Board’s Emerging Issues Task Force Consensus No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred” (“EITF No. 01-14”), which was effective for us as of January 1, 2002 (see “Note 2”). As a result, the accompanying unaudited Condensed Consolidated Income Statements for the three-month periods ended March 31, 2002 and 2001 have been restated from the amounts previously reported to reflect the reimbursements received as “Other revenue from managed entities” and the costs incurred on behalf of managed properties as “Other expenses from managed entities.” These reimbursed amounts primarily represent payroll expenses in our Hawaii resorts.

Also subsequent to the issuance of our unaudited Condensed Consolidated Financial Statements for the three-month period ended March 31, 2002, we determined that we had not properly considered the income tax benefit on a portion of the $8.1 million Cumulative effect of a change in accounting principle related to the January 1, 2002 adoption of Statement No. 142 (see “Note 2”). As a result, the accompanying unaudited Condensed Consolidated Financial Statements for the three-month period ended March 31, 2002 have also been restated from the amounts previously reported to reflect the income tax benefit related to this cumulative effect of a change in accounting principle.

The following table summarizes the significant effects of these restatements on our unaudited Condensed Consolidated Statements of Income:


	Three Months Ended March 31,

	2001		2002


Other revenue from managed entities, as previously reported	$	—	$	—
EITF No. 01-14 adjustment		7,907		8,503
Statement No. 142 adjustment		—		—

Other revenue from managed entities, as restated	$	7,907	$	8,503

Other expenses from managed entities, as previously reported	$	—	$	—
EITF No. 01-14 adjustment		7,907		8,503
Statement No. 142 adjustment		—		—

Other expenses from managed entities, as restated	$	7,907	$	8,503

Cumulative effect of a change in accounting principle, as previously reported		—	$	(8,131	)
EITF No. 01-14 adjustment		—		—
Statement No. 142 adjustment		—		1,851

Cumulative effect of a change in accounting principle, as restated			$	(6,280	)

Net income (loss), as previously reported	$	4,331	$	(5,544	)
EITF No. 01-14 adjustment		—		—
Statement No. 142 adjustment		—		1,851

Net income (loss), as restated	$	4,331	$	(3,693	)

Diluted cumulative effect of a change in accounting principle per share, as previously reported		—	$	(0.42	)
EITF No. 01-14 adjustment		—		—
Statement No. 142 adjustment		—		0.10

Diluted cumulative effect of a change in accounting principle per share, as restated		—	$	(0.32	)

Diluted earnings (loss) per share, as previously reported	$	0.23	$	(0.29	)
EITF No. 01-14 adjustment		—		—
Statement No. 142 adjustment		—		0.10

Diluted earnings (loss) per share, as restated	$	0.23	$	(0.19	)

The following table summarizes the significant effects of these restatements on our unaudited Condensed Consolidated Balance Sheet:


	March 31, 2002

Deferred income tax assets, as previously reported	$	1,495
Statement No. 142 adjustment		126

Deferred income tax assets, as restated	$	1,621

Deferred income tax liabilities, as previously reported	$	10,043
Statement No. 142 adjustment		(2,466	)

Deferred income tax liabilities, as restated	$	7,577

Other long-term obligations, as previously reported	$	4,739
Statement No. 142 adjustment		741

Other long-term obligations, as restated	$	5,480


Retained earnings, as previously reported	$	9,858
Statement No. 142 adjustment		1,851

Retained earnings, as restated	$	11,709

Page 11 of 24

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As discussed in the Explanatory Note to this filing and in Note 7 to the Condensed Consolidated Financial Statements, the Company has restated its Condensed Consolidated Income Statements for the three-month periods ended March 31, 2002 and 2001. The accompanying “Management’s Discussion and Analysis of Financial Condition and Results of Operations” gives effect to these restatements.

OVERVIEW

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. We also have developed the industry leading proprietary vacation rental management software, First Resort Software, with over 900 licenses sold to vacation property management companies.

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. Property owners also benefit from our QuestPerks program, which offers benefits such as discounts on lodging, air travel and car rentals. To manage guests’ expectations, we have developed and implemented a five-tier rating system that segments our property portfolio into five categories: Quest Home, Platinum, Gold, Silver and Bronze.

We market our properties through various media channels and have significant Internet distribution through ResortQuest.com, our proprietary website offering “real-time” reservations, and our inventory distribution partnerships including Expedia, AOL, Condosaver and others. We have Internet alliances with Interval Travel, a sister company of Interval International, that makes Interval’s extensive vacation timeshare rental inventory available on our website and with Online Travel Corporation, PLC., to exclusively develop the ResortQuest brand in Europe by using our technology and expertise in this industry. Under the terms of the alliance with Online Travel, we receive a royalty fee based on gross revenues related to units acquired or aggregated under this program, an exclusivity fee and other cross selling fees.

In March 2002, we unveiled our enhanced website that improves the booking experience for e-travelers. In addition to detailed property descriptions, virtual tours, interior and exterior photos and floor plans, and local information, vacationers can search for properties by date, activity, event or location; comparison shop among similar vacation rental units; check for special discounts and promotions; and obtain maps and driving directions. The site also allows foreign travelers to obtain currency conversion rates. The site utilizes AXS Technologies software to provide high speed/high resolution, scroll, pan and zoom imaging.

RESULTS OF OPERATIONS

Our operating results are highly seasonal due to the geographical dispersion of the resort locations in which we operate. The 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 financial results are discussed on a consolidated basis, but due to the seasonal nature of our operations, our results are also discussed by geographic region with Other representing our corporate and ResortQuest Technologies operations. For better analysis, the following discussion includes “same–store” comparisons. Same-store comparisons exclude the impact of the two acquisitions completed since the first day of the earliest period being discussed. One of these acquisitions is located in our Mountain operations in Gatlinburg, Tennessee effective April 1, 2001, and the other in our Beach operations in the Outer Banks of North Carolina effective April 1, 2001.

Due to the recent challenges facing leisure travel companies presented by the softening economy and the impact of the tragic events of September 11th, our revenues are down over prior year as leisure travel demand has softened. Despite these industry-wide challenges, we are proud of how we have been able to reduce costs, maintain occupancy and continue to position ResortQuest to realize significant growth in the future.

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Consolidated

The following table sets forth the condensed consolidated results of operations for the three months ended March 31, 2001 and 2002.


	Three Months Ended March 31,

(in thousands)	2001				2002

Revenues	$	53,349	100.0	%	$	49,016	100.0	%
Direct operating expenses		20,911	39.2			20,142	41.1
General and administrative expenses		13,762	25.8			13,336	27.2
Other expenses from managed entities		7,907	14.8			8,503	17.3

Operating income before depreciation and goodwill amortization		10,769	20.2			7,035	14.4
Depreciation		1,169	2.2			1,430	2.9
Goodwill amortization		1,347	2.5			—	—

Operating income		8,253	15.5			5,605	11.5
Interest and other expense, net		786	1.5			1,466	3.0
Provision for income taxes		3,136	5.9			1,552	3.2

Income before the cumulative effect of a change in accounting principle	$	4,331	8.1	%	$	2,587	5.3	%

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 – Consolidated

Revenues. Revenues decreased $4.3 million, or 8%, from $53.3 million in 2001 to $49.0 million in 2002. Excluding other revenue from managed entities, revenues decreased $4.9 million, or 11%, from $45.4 million in 2001 to $40.5 million in 2002 primarily due to a 9.9% decrease in gross lodging revenues driven by a 3.4 point decrease in occupancy and a 2.7% decrease in average daily rate (“ADR”) partially offset by acquisitions. Excluding the impact of our acquisitions, revenues decreased $5.5 million, or 12%, due to a 15% decrease in net real estate sales and other revenue and an 11.4% decrease in same-store gross lodging revenues driven by a 3.1 point decrease in same-store occupancy, a 2.7% decrease in same-store ADR and a 1.1% decrease in same-store units under management, primarily due to the general decline in leisure travel following the events of September 11, 2001.

Direct Operating Expenses. Direct operating expenses decreased $769,000, or 4%, from $20.9 million in 2001 to $20.1 million in 2002, primarily due to increased operating efficiencies. Excluding the impact of our acquisitions, direct operating expenses decreased $1.3 million, or 7%, due to cost reduction initiatives. As a percentage of revenues, direct operating expenses increased 1.9 points primarily due to acquisitions and the decrease in same-store revenues.

General and Administrative Expenses. General and administrative expenses decreased $426,000, or 3%, from $13.8 million in 2001 to $13.3 million in 2002, primarily due to cost reduction initiatives partially offset by our acquisitions and $500,000 in unusual expenses and other charges (see Note 4). Excluding the impact of these acquisitions and these unusual items, general and administrative expenses decreased $1.7 million, or 13%, due to cost reduction initiatives. As a percentage of revenues and excluding the unusual items, general and administrative expenses increased 1.4 points due to the decrease in same-store revenues.

Other expenses from managed entities. Other expenses from managed entities increased $596,000, from $7.9 million in 2001 to $8.5 million in 2002, due to an increase in payroll for managed entities. These expenses are reimbursed at our cost by our entities under our management (see Note 2). The reimbursements for these amounts are reflected in revenues. As a percentage of revenues, other expenses from managed entities increased 2.5 points due to acquisitions and the decrease in same-store revenues.

Depreciation. Depreciation increased $261,000, or 22%, from $1.2 million in 2001 to $1.4 million in 2002, primarily due to increased technology capital expenditures. As a percentage of revenues, depreciation increased 0.7 points due to the increase in technology capital expenditures.

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Interest and other expense, net. Interest expense, net of interest income, increased $680,000, or 87%, from $786,000 in 2001 to $1.5 million in 2002, primarily due to increased debt levels and an increased weighted average borrowing rate. As a percentage of revenues, interest increased 1.5 points due to the increase in borrowing costs and a decrease in same-store revenues.

Provision for income taxes. Provision for income taxes decreased $1.6 million, or 51%, from $3.1 million in 2001 to $1.5 million in 2002, primarily due to a decline in taxable income.

Beach

The following table sets forth the condensed consolidated results of operations for the three months ended March 31, 2001 and 2002 for our Beach operations in Gulf Shores, Alabama; Bethany Beach, Delaware; Anna Maria Island, Beaches of South Walton, Bonita Springs, Bradenton, Captiva Island, Destin, Fort Myers, Fort Myers Beach, Fort Walton Beach, Lido Key, Longboat Key, Marco Island, Naples, Navarre Beach, New Port Richey, Okaloosa Island, Orlando, Panama City, Pensacola, Perdido Key, Sanibel Island, Sarasota, Siesta Key, Vanderbilt Beach and Venice, Florida; St. Simons Island, Georgia; Nantucket, Massachusetts; Outer Banks, North Carolina; Lake Erie Islands, Ohio; and Hilton Head Island, South Carolina.


	Three Months Ended March 31,

(dollars in thousands)	2001				2002

Revenues	$	17,594	100.0	%	$	16.500		100.0	%
Direct operating expenses		10,091	57.3			10,142		61.5
General and administrative expenses		5,402	30.7			4,902		29.7
Other expenses from managed entities		908	5.2			1,091		6.6

Operating income before depreciation and goodwill amortization		1,193	6.8			365		2.2
Depreciation		344	2.0			444		2.7
Goodwill amortization		726	4.1			—		—

Operating income (loss)	$	123	0.7	%	$	(79	)	n/m

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 — Beach

Revenues. Revenues decreased $1.1 million, or 6%, from $17.6 million in 2001 to $16.5 million in 2002, Excluding other revenue from managed entities, revenues decreased $1.3 million, or 8%, from $16.7 million in 2001 to $15.4 million in 2002, primarily due to an 8.4% decrease in gross lodging revenues driven by a 3.2 point decrease in occupancy partially offset by our Beach acquisitions. Excluding the impact of these acquisitions, revenues decreased $1.5 million, or 9%, primarily due to a 10.9% decrease in same-store gross lodging revenues driven by a 3.0 point decrease in same-store occupancy and a 4.2% decrease in same-store units under management, primarily due to the general decline in leisure travel following the events of September 11, 2001.

Direct Operating Expenses. Direct operating expenses remained relatively flat in 2002 when compared to 2001. Excluding the impact of our Beach acquisitions, direct operating expenses decreased $376,000, or 4%, due to cost reduction initiatives. As a percentage of revenues, direct operating expenses increased 4.2 points due primarily to our Beach acquisitions and the decrease in same-store revenues.

General and Administrative Expenses. General and administrative expenses decreased $500,000, or 9%, from $5.4 million in 2001 to $4.9 million in 2002, primarily due to cost reduction initiatives partially offset by our Beach acquisitions. Excluding the impact of these acquisitions, general and administrative expenses decreased $628,000, or 13%, primarily due to cost reduction initiatives. As a percentage of revenues, general and administrative expenses decreased 1.0 point due to cost reduction initiatives.

Other expenses from managed entities. Other expenses from managed entities increased $183,000, or 20%, from $908,000 in 2001 to $1.1 million in 2002, due to an increase in payroll for managed entities. These expenses are reimbursed at our cost by our entities under our management (see Note 2). The reimbursements for these amounts are reflected in revenues. As a percentage of revenues, other expenses from managed entities increased 1.4 points due to acquisitions and the decrease in same-store revenues.

Depreciation. Depreciation increased $100,000, or 29%, from $344,000 in 2001 to $444,000 in 2002, primarily due to the opening of our national call center in December 2001 in Florida and other capital investments. As a percentage of revenues, depreciation increased 0.7 points due to these items.

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Hawaiian Islands

The following table sets forth the condensed consolidated results of operations for the three months ended March 31, 2001 and 2002 for our Hawaiian operations on the islands of Hawaii, Kauai, Maui and Oahu.


	Three Months Ended March 31,

(dollars in thousands)	2001				2002

Revenues	$	14,937	100.0	%	$	13,466	100.0	%
Direct operating expenses		2,270	15.2			1,732	12.9
General and administrative expenses		1,820	12.2			2,109	15.6
Other expenses from managed entities		6,718	45.0			7,138	53.0

Operating income before depreciation and goodwill amortization		4,129	27.6			2,487	18.5
Depreciation		124	0.8			119	0.9
Goodwill amortization		18	0.1			—	—

Operating income	$	3,987	26.7	%	$	2,368	17.6	%

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 — Hawaii

Revenues. Revenues decreased $1.5 million, or 10%, from $14.9 million in 2001 to $13.5 million in 2002. Excluding other revenue from managed entities, revenues decreased $1.9 million, or 23%, from $8.2 million in 2001 to $6.3 million in 2002, primarily due to a 16% decrease in gross lodging revenues driven by a 4.2 point decrease in occupancy and a 9.2% decrease in ADR, primarily due to the general decline in leisure travel following the events of September 11, 2001.

Direct Operating Expenses. Direct operating expenses decreased $538,000, or 24%, from $2.3 million in 2001 to $1.7 million in 2002, due to cost reduction initiatives. As a percentage of revenues, direct operating expenses decreased 2.3 points due to the cost reduction initiatives.

General and Administrative Expenses. General and administrative expenses increased $289,000, or 16%, from $1.8 million in 2001 to $2.1 million in 2002, primarily due to increased labor costs. As a percentage of revenues, general and administrative expenses increased 3.4 points due primarily to the decrease in revenues.

Other expenses from managed entities. Other expenses from managed entities increased $420,000, or 6%, from $6.7 million in 2001 to $7.1 million in 2002, due to an increase in payroll for managed entities. These expenses are reimbursed at our cost by our entities under our management (see Note 2). The reimbursements for these amounts are reflected in revenues. As a percentage of revenues, other expenses from managed entities increased 8.0 points due to acquisitions and the decrease in same-store revenues.

Depreciation. Depreciation remained relatively flat in 2002 as compared to 2001. As a percentage of revenues, depreciation increased 0.1 points due to the decrease in revenues.

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Mountain

The following table sets forth the condensed consolidated results of operations for the three months ended March 31, 2001 and 2002 for our Mountain operations in Whistler, British Columbia; Aspen, Breckenridge, Crested Butte, Dillon, Keystone, Snowmass Village, Steamboat Springs and Telluride, Colorado; Sun Valley, Idaho; Big Sky, Montana; Mt. Bachelor and Sunriver, Oregon; Gatlinburg and Pigeon Forge, Tennessee; and The Canyons, Deer Valley and Park City, Utah.


	Three Months Ended March 31,

(dollars in thousands)	2001				2002

Revenues	$	18,323	100.0	%	$	16,957	100.0	%
Direct operating expenses		7,563	41.3			7,342	43.3
General and administrative expenses		2,581	14.1			2,051	12.1
Other expenses from managed entities		281	1.5			274	1.6

Operating income before depreciation and goodwill amortization		7,898	43.1			7,290	43.0
Depreciation		293	1.6			261	1.5
Goodwill amortization		294	1.6			—	—

Operating income	$	7,311	39.9	%	$	7,029	41.5	%

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 — Mountain

Revenues. Revenues decreased $1.4 million, or 8%, from $18.3 million in 2001 to $17.0 million in 2002. Excluding other revenue from managed entities, revenues decreased $1.3 million, or 8%, from $18.0 million in 2001 to $16.7 million in 2002, primarily due to a 2.3% decrease in gross lodging revenues driven by a 2.7 point decrease in occupancy and a 1.3% decrease in ADR partially offset by our Mountain acquisitions. Excluding the impact of our Mountain acquisitions, revenues decreased $1.7 million, or 10%, primarily due to a 4.6% decrease in same-store gross lodging revenues driven by a 1.6 point decrease in same-store occupancy, primarily due to the general decline in leisure travel following the events of September 11, 2001.

Direct Operating Expenses. Direct operating expenses decreased $221,000, or 3%, from $7.6 million in 2001 to $7.3 million in 2002, primarily due to cost reduction initiatives partially offset by our Mountain acquisitions. Excluding the impact of these acquisitions, direct operating expenses decreased $342,000, or 5%, due to cost reduction initiatives. As a percentage of revenues, direct operating expenses increased 2.0 points, primarily due to the decrease in revenues.

General and Administrative Expenses. General and administrative expenses decreased $530,000, or 21%, from $2.6 million in 2001 to $2.1 million in 2002, primarily due to cost reduction initiatives partially offset by our Mountain acquisitions. Excluding the impact of these acquisitions, general and administrative expenses decreased $692,000, or 27%, primarily due to cost reduction initiatives. As a percentage of revenues, general and administrative expenses decreased 2.0 points due to the cost reduction initiatives.

Other expenses from managed entities. Other expenses from managed entities decreased $7,000, from $281,000 in 2001 to $274,000 in 2002, due to a decrease in payroll for managed entities. These expenses are reimbursed at our cost by our entities under our management (see Note 2). The reimbursements for these amounts are reflected in revenues. As a percentage of revenues, other expenses from managed entities increased 0.1 points due to acquisitions and the decrease in same-store revenues.

Depreciation. Depreciation decreased $32,000, or 11%, from $293,000 in 2001 to $261,000 in 2002, primarily due to certain in-service assets being fully depreciated. As a percentage of revenues, depreciation remained flat.

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Desert

The following table sets forth the condensed consolidated results of operations for the three months ended March 31, 2001 and 2002 for our Desert operations in Phoenix, Scottsdale and Tucson, Arizona; and Palm Desert and Palm Springs, California.


	Three Months Ended March 31,

(dollars in thousands)	2001				2002

Revenues	$	1,710	100.0	%	$	1,340	100.0	%
Direct operating expenses		507	29.6			473	35.3
General and administrative expenses		202	11.8			219	16.3
Other expenses from managed properties		—	—			—	—

Operating income before depreciation and goodwill amortization		1,001	58.6			648	48.4
Depreciation		26	1.5			16	1.2
Goodwill amortization		54	3.2			—	—

Operating income	$	921	53.9	%	$	632	47.2	%

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 — Desert

Revenues. Revenues decreased $370,000, or 22%, from $1.7 million in 2001 to $1.3 million in 2002, primarily due to a 19.9% decrease in gross lodging revenues driven by a 1.7 point decrease in occupancy and a 14.2% decrease in units under management, primarily due to the general decline in leisure travel following the events of September 11, 2001.

Direct Operating Expenses. Direct operating expenses decreased $34,000, or 7%, from $507,000 in 2001 to $473,000 in 2002, primarily due to cost reduction initiatives. As a percentage of revenues, direct operating expenses increased 5.7 points due to the decrease in revenues.

General and Administrative Expenses. General and administrative expenses increased $17,000, or 8%, from $202,000 in 2001 to $219,000 in 2002, primarily due to the opening of a new real estate office in Palm Desert. As a percentage of revenues, general and administrative expenses increased 4.5 points primarily due to the decrease in revenues.

Other expenses from managed entities. These operations do not have any arrangements with managed entities to receive reimbursement for any payroll related costs.

Depreciation. Depreciation decreased $10,000, or 38%, from $26,000 in 2001 to $16,000 in 2002, primarily due to certain in-service assets being fully depreciated. As a percentage of revenues, depreciation decreased 0.3 points due to the decrease in revenues.

Goodwill Amortization. Upon the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longer being amortized as of January 1, 2002. The goodwill balances related to our Desert operations were considered impaired upon the January 1, 2002 adoption of this standard. As a result, we recorded a non-cash $8.1 million write-down of goodwill, partially off-set by a $1.9 million income tax benefit (see Note 2).

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Other

The following table sets forth the condensed consolidated results of operations for the three months ended March 31, 2001 and 2002 for our Other operations comprised of ResortQuest Technologies and corporate.


	Three Months Ended March 31,

(dollars in thousands)	2001					2002

Revenues	$	785		100.0	%	$	753		100.0	%
Direct operating expenses		480		61.1			453		60.2
General and administrative expenses		3,757		n/m			4,055		n/m
Other expenses from managed entities		—		—			—		—

Operating loss before depreciation and goodwill amortization		(3,452	)	n/m			(3,755	)	n/m
Depreciation		382		48.7			590		78.4
Goodwill amortization		255		32.5			—		—

Operating loss	$	(4,089	)	n/m		$	(4,345	)	n/m

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 — Other

Revenues. Revenues decreased $32,000, or 4%, from $785,000 in 2001 to $753,000 in 2002, primarily due to decreased software sales and service fee revenues.

Direct Operating Expenses. Direct operating expenses decreased $27,000, or 6%, from $480,000 in 2001 to $453,000 in 2002, primarily due to cost reduction initiatives. As a percentage of revenues, direct operating expenses decreased 0.9 points, primarily due to the cost reduction initiatives.

General and Administrative Expenses. General and administrative expenses increased $298,000, or 8%, from $3.8 million in 2001 to $4.1 million in 2002, primarily due to $500,000 in unusual expenses and other charges (see Note 4), partially offset by cost reduction initiatives.

Other expenses from managed entities. These operations do not have any arrangements with managed entities to receive reimbursement for any payroll related costs.

Depreciation. Depreciation increased $208,000, or 54%, from $382,000 in 2001 to $590,000 in 2002, primarily due to increased technology capital expenditures related to enhancements to our website and the implementation of our new financial management technology platform. As a percentage of revenues, depreciation increased 29.7 points primarily due to these investments in technology.

Liquidity and Capital Resources

ResortQuest conducts all of its operations through its subsidiaries operating in over 50 premier resort locations. Accordingly, the primary internal source of our liquidity is through the cash flows realized from our subsidiaries and our long-term borrowings. We utilize a consolidated daily cash management system that allows us to fully utilize all unrestricted cash to repay outstanding debt in order to reduce our net interest expense.

We generated $7.5 million of cash in operating activities for the three months ended March 31, 2002 primarily due to increases in deferred revenue and property owner payables. Cash used in investing activities was approximately $4.3 million for the three months ended March 31, 2002, due to $1.3 million in net acquisition related payments and $3.0 million in software development, software implementation and purchases of property and equipment. The majority of these costs represent our continued investment in the new release of our First Resort Software product scheduled for launch in July 2002. For the three months ended March 31, 2001, cash used in financing activities totaled $301,000 related to debt and capital lease payments.

At March 31, 2002, we had approximately $27.6 million in cash, of which $24.4 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 March 31, 2002, we had a working capital deficit of $29.6 million and up to

Page 18 of 24

$11.3 million remaining, subject to certain restrictions, available under our Credit Facility. We anticipate that our cash flows from operations will provide cash in excess of our normal working capital needs, debt service requirements and planned capital expenditures over the next year.

Long-Term Borrowings

As of March 31, 2002, our long-term debt, including current maturities, was comprised of $50.0 million in 9.31% Senior Notes due June 2004, $28.5 million in borrowings under our Credit Facility that expires in January 2004 and $215,000 in capital lease obligations and other borrowings assumed in connection with certain acquisitions that have varying maturities through 2004.

Registration and Equity Offerings

We have registered 8.0 million shares of common stock through various shelf registration statement filings. As of March 31, 2002, we had issued 3,289,487 shares under these shelf registration statements in connection with acquisitions, with the remaining 4,710,513 shares available for future acquisitions.

Acquisition Strategy

Although our strategy for the next few quarters is to focus on internal growth, we intend to continue to pursue, subject to our amended debt agreements, selected acquisition opportunities in strategic and existing markets. 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. Furthermore, acquisitions involve a number of 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.

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 flows from operations, borrowings under our Credit Facility, other debt fundings and the issuance of common stock. Our ability to fund future acquisitions through borrowings under the Credit Facility may be limited by certain restrictive covenants of the facility, the satisfaction of which may be dependent upon our ability to raise additional equity through either offerings for cash or the issuance of stock as consideration for acquisitions.

Non-compete and Employment Agreements

We have entered into non-compete agreements with many of the former owners of the companies that now comprise ResortQuest. These non-compete agreements are generally three to five years in length effective the day the operations are merged with ResortQuest. Additionally, we have entered into employment agreements with many of these former owners, all senior corporate officers and several key employees. Among other things, these agreements allow for severance payments and some include acceleration of stock option awards upon a change in control of ResortQuest, as defined under the agreements. At March 31, 2002, the maximum amount of compensation that would be payable under all agreements if a change in control occurred without prior written notice would be approximately $17.4 million.

Seasonality and Quarterly Fluctuations

Our business is highly seasonal. Our 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.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and assumptions, including those related to bad debts, trade and other receivables, valuation of property, equipment and software, goodwill, self-insurance reserves, and contingencies and litigation. Our estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. We believe the following critical accounting policies affect our more significant estimates and assumptions used in preparing our consolidated financial statements. Actual results could differ from our estimates.

Trade and other receivables are reflected net of an estimated allowance for doubtful accounts. This estimate is based primarily on historical experience and assumptions with respect to future payment trends.

Property, equipment and software are stated at cost, or in the case of equipment acquired under capital lease, the present value of future lease payments, less accumulated depreciation. Certain costs for developing, customizing and installing software for internal use and for sale to third parties are capitalized. Revenues related to the sale of software to third parties are recognized when the systems are installed. Depreciation is computed using the straight-line method over the estimated useful lives of the recorded assets or the lease terms. We periodically, or upon the occurrence of certain events, review the balances of these long-lived assets for possible impairment. The assessment of long-lived assets for impairment requires us to make certain judgments, including the estimate of cash flows from the respective assets.

In accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002, the goodwill balance recorded by the Company is no longer amortized, but reviewed annually and upon the occurrence of certain events for impairment. The calculation of the impairment charge recorded on January 1, 2002 requires us to make estimates of future cash flows with respect to the identified net assets acquired. Prior to January 1, 2002, goodwill has been amortized on a straight-line basis over 40 years, other than that associated with the acquisition of First Resort Software, Inc., which has been amortized over 15 years.

We are self-insured for various levels of workers’ compensation and employee medical and dental insurance coverage. Insurance reserves include the present values of projected settlements for claims. Projected settlements are estimated based on historical trends and actuarial data.

We are involved with various legal actions arising in the course of our business. Legal reserves are established for actions where the outcomes of the cases are probable and monetary damages are reasonably estimable as determined by in-house and external legal counsel. We do not believe that any of the remaining actions will have a material adverse effect on our business, financial condition or results of operations.

Revenues are primarily derived through property management fees, service fees and real estate commissions. Property management fees are recognized ratably over the guest stay. Service fees are recognized as services are provided. Real estate commissions are recognized for real estate brokerage commissions at time of closing.

New Accounting Pronouncements

During the quarter ended March 31, 2002, we changed our method of accounting for reimbursable costs to conform to the Financial Accounting Standards Board’s Emerging Issues Task Force Consensus No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF No. 01-14”), issued earlier this year and effective for us on January 1, 2002. As a result, reimbursements received are recorded as revenue and the costs incurred on behalf of managed associations and properties are recorded as expenses. These costs, which relate primarily to payroll costs at managed properties and associations where we are the employer, are reflected in other revenue and expenses from managed entities in the condensed consolidated statements of income. Revenue and expenses for the prior periods have been reclassified to conform with the current year presentation. Since the reimbursements are made based upon the costs incurred with no added margin, the expenses and related revenue are identical, and thus the adoption of EITF No. 01-14 did not have any effect on our operating income, total or per share net income, cash flows or financial position.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”. Statement No. 141 eliminates the poolings-of-interests method of accounting for business combinations and requires all transactions initiated after June 30, 2001, to be accounted for using the purchase method. Under Statement No. 142, goodwill related to our future acquisitions is not subject to amortization, and goodwill related to our historical acquisitions is no longer amortized as of January 1, 2002. Goodwill is subject to reviews for impairment annually and upon the occurrence of certain events, and if impaired, a write-down will be recorded. Upon our adoption of Statement No. 142, each of our geographical resort regions with assigned goodwill was valued as a reporting unit. If the fair value of the reporting unit was greater than the book value, including assigned goodwill, no further testing was required. However, if the book value, including goodwill, was greater than the fair value of the reporting unit, the assets and liabilities of the reporting unit needed to be valued. The difference between the fair value of the reporting unit and the fair value of the assets is the implied fair value of goodwill. To the extent that the implied fair value of goodwill was less than the book value of goodwill, an impairment charge was recognized as a cumulative effect of a change in accounting principle. Based on this test, we recorded a non-cash $8.1 million write-down of our goodwill related to our Desert resort operations, partially off-set by a $1.9 million income tax benefit. The Desert resort operations are expected to continue to experience declining cash flows as a result of the economics of the Desert markets. See Note 2 for the table presenting the adjusted net income and earnings per share excluding goodwill amortization.

Risks Associated With Forward Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, 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 Post-IPO acquisitions, 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, and our dependence on technology, e-commerce and travel providers. Important factors that could cause actual results to differ materially include, but are not limited to, those listed in our previous filings with the Securities and Exchange Commission.

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.

Page 20 of 24

ResortQuest International, Inc.
Performance Statistics
Total System (2)
March 31, 2002


		Three Months Ended

		March 31,			March 31,
		2001			2002			VAR

Beach
	Lodging Revenues(1)	$	37,518		$	34,359			(8.4	)%
	Occupancy		59.4	%		56.2	%		(3.2	)pts
	ADR	$	92.47		$	92.66			0.2	%
	RevPAU	$	54.89		$	52.04			(5.2	)%
	Total Units		9,198			9,276			0.8	%
Hawaii
	Lodging Revenues(1)	$	44,188		$	37,123			(16.0	)%
	Occupancy		82.4	%		78.2	%		(4.2	)pts
	ADR	$	122.20		$	110.90			(9.2	)%
	RevPAU	$	100.73		$	86.70			(13.9	)%
	Total Units		5,331			5,537			3.9	%
Mountain
	Lodging Revenues(1)	$	33,352		$	32,584			(2.3	)%
	Occupancy		56.1	%		53.4	%		(2.7	)pts
	ADR	$	239.98		$	236.91			(1.3	)%
	RevPAU	$	134.52		$	126.55			(5.9	)%
	Total Units		3,125			3,331			6.6	%
Desert
	Lodging Revenues(1)	$	4,513		$	3,613			(19.9	)%
	Occupancy		66.2	%		64.5	%		(1.7	)pts
	ADR	$	140.63		$	142.74			1.5	%
	RevPAU	$	93.06		$	92.02			(1.1	)%
	Total Units		590			506			(14.2	)%
Total
	Lodging Revenues(1)	$	119,571		$	107,679			(9.9	)%
	Occupancy		66.1	%		62.7	%		(3.4	)pts
	ADR	$	127.42		$	124.00			(2.7	)%
	RevPAU	$	84.29		$	77.74			(7.8	)%
	Total Units		18,244			18,650			2.2	%

(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 to us.

(2)		Total system statistics include all exclusive managed contracts from the period under management through March 31, 2001 and March 31, 2002. Excluded from these statistics are non-exclusive management contracts which approximated 1,400 units as of March 31, 2001 and 1,440 as of March 31, 2002. Also excluded from these statistics are owner use nights and renovation nights which were approximately 13.9% of gross available nights in the three months ended March 31, 2001, and 15.6% of gross available nights in the three months ended March 31, 2002.

Page 21 of 24

ResortQuest International, Inc.
Performance Statistics
Same-Store (2)
March 31, 2002


		Three Months Ended

		March 31,			March 31,
		2001			2002			VAR

Beach
	Lodging Revenues(1)	$	37,333		$	33,262			(10.9	)%
	Occupancy		63.4	%		60.4	%		(3.0	)pts
	ADR	$	92.47		$	92.11			(0.4	)%
	RevPAU	$	58.63		$	55.63			(5.1	)%
	Total Units		8,441			8,090			(4.2	)%
Hawaii
	Lodging Revenues(1)	$	44,188		$	37,123			(16.0	)%
	Occupancy		82.4	%		78.2	%		(4.2	)pts
	ADR	$	122.20		$	110.90			(9.2	)%
	RevPAU	$	100.73		$	86.70			(13.9	)%
	Total Units		5,331			5,537			3.9	%
Mountain
	Lodging Revenues(1)	$	33,352		$	31,809			(4.6	)%
	Occupancy		56.1	%		54.5	%		(1.6	)pts
	ADR	$	239.98		$	241.26			0.5	%
	RevPAU	$	134.52		$	131.42			(2.3	)%
	Total Units		3,125			3,159			1.1	%
Desert
	Lodging Revenues(1)	$	4,513		$	3,613			(19.9	)%
	Occupancy		66.2	%		64.5	%		(1.7	)pts
	ADR	$	140.63		$	142.74			1.5	%
	RevPAU	$	93.06		$	92.02			(1.1	)%
	Total Units		590			506			(14.2	)%
Total
	Lodging Revenues(1)	$	119,386		$	105,807			(11.4)	%
	Occupancy		68.3	%		65.2	%		(3.1	)pts
	ADR	$	127.49		$	124.04			(2.7	)%
	RevPAU	$	87.02		$	80.93			(7.0	)%
	Total Units		17,487			17,292			(1.1	)%

(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 to us.

(2)		For better comparability, the above statistics exclude all non-exclusive management contracts as well as all properties that were not acquired by ResortQuest prior to first quarter 2001, which approximated 2,800 units as of March 31, 2002. Also excluded from these statistics are owner use nights and renovation nights which were approximately 13.0% of gross available nights in the three months ended March 31, 2001 and 14.1% of gross available nights in the three months ended March 31, 2002.

Page 22 of 24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not have significant market risk with respect to interest rates, foreign currency exchanges or other market rate or price risks, and we do not hold any financial instruments for trading purposes. At March 31, 2002, $28.5 million of our long-term borrowings accrue interest at variable interest rates. Based on this debt level, annual interest expense would increase by approximately $129,000, if interest rates were to increase by 45 basis points, or 10%, over the current weighted average interest rate of these variable rate borrowings.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On May 26, 2000, Hotel Corp. of the Pacific, Inc., a subsidiary of ResortQuest International doing business as Aston Hotels & Resorts, instituted legal proceedings in the Circuit Court for the First Circuit of Hawaii against Andre S. Tatibouet, the president of Hotel Corp. This action arose out of a document styled “Cooperation Agreement” that was signed by Andre S. Tatibouet, purporting to act on behalf of Hotel Corp., on the one hand, with Cendant Global Services B.V. and Aston Hotels & Resorts International, Inc., on the other hand. The Cooperation Agreement contains several provisions that are detrimental to Hotel Corp., including provisions purporting to transfer certain intellectual property and limit certain intellectual property rights held by Hotel Corp. Monetary damages for breach of fiduciary duty, fraud, and negligent misrepresentation were sought by Hotel Corp. By order of the Circuit Court, the claims asserted by Hotel Corp. in the lawsuit were consolidated with an arbitration demand, filed with the American Arbitration Association by Mr. Tatibouet, in which he alleged various breaches of his employment agreement with Hotel Corp.

The arbitration hearing took place in September 2001, where Mr. Tatibouet claimed damages of approximately $17.5 million and ResortQuest claimed damages of approximately $4.7 million. On March 14, 2002, the arbitration panel issued its Reasoned Opinion and Final Award. The panel concluded that Mr. Tatibouet had breached his fiduciary duty to Hotel Corp. and awarded Hotel Corp. $55,559 related to the reimbursement of certain legal expenses. The panel denied all of Mr. Tatibouet’s claims and requests for damages as well as declaratory and other relief.

Also on May 26, 2000, ResortQuest International and Hotel Corp. brought an action in the Circuit Court for the First Circuit of Hawaii against Cendant Corporation, Aston Hotels & Resorts International, Inc. and Cendant Global Services B.V. (“Defendants”). It is the position of ResortQuest and Hotel Corp. that the Cooperation Agreement is voidable because (i) it was entered in breach of a prior agreement between ResortQuest, and the parent company of Cendant Global Services B.V. and Aston Hotels & Resorts International, Inc., Cendant Corporation, and (ii) it was entered into by an interested director and officer of Hotel Corp. who was engaging in self-dealing. Accordingly, ResortQuest and Hotel Corp. seek damages for breach of contract against Cendant, and the equitable remedies of rescission and replevin. We believe that we have meritorious claims and will prevail in this matter. To date, no counterclaim has been filed or asserted by Cendant in this case.

We are also involved in various legal actions arising in the ordinary course of our business. We do not believe that any of the remaining actions will have a material adverse effect on our business, financial condition or results of operations.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Page 23 of 24

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits filed herewith

99.1 — Certification of Principal Executive Officer

99.2 — Certification of Principal Financial Officer

(b)

Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter ended March 31, 2002.

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 19, 2002	By:		/s/ J. Mitchell Collins

			J. Mitchell Collins Senior Vice President and Chief Financial Officer (Principal Financial Officer, Chief Accounting Officer and Duly Authorized Officer)

Page 24 of 24

Resortquest International (RZT) Inactive 10-Q/A2002 Q1 Quarterly report (amended)

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