RESORTQUEST-Registered Trademark-
ALL YEAR LONG
2000 ANNUAL REPORT
RESORTQUEST
INTERNATIONAL-TM-
www.resortquest.com
FINANCIAL HIGHLIGHTS
STATEMENTS OF OPERATIONS (in thousands, except per share data)
- -----------------------------------------------------------------------------
1999(1) 2000
Revenues $127,912 $152,014
EBITDA 23,587 30,760
Operating income 16,678 22,277
Net income 6,475 9,606
Diluted earnings per share $0.36 $0.51
Diluted cash earnings per share (2) $0.60 $0.76
EBITDA per diluted share $1.30 $1.62
Shares outstanding for diluted EPS 18,176 19,018
BALANCE SHEET DATA (in thousands)
- -----------------------------------------------------------------------------
1999 2000
Cash and cash equivalents $ 40,239 $ 26,344
Total assets 257,675 263,169
Deferred revenue and property owner payables 43,392 51,653
Total debt 68,922 50,884
Stockholders' equity $125,823 $136,402
(1) All calculations exclude the impact of 1999 unusual items
(2) Excludes the impact of goodwill amortization
LETTER TO SHAREHOLDERS
2000
was a transition year for ResortQuest, one in which we matured from a young
company to a stable organization with solid, long-term growth potential. We now
are poised at the edge of what promises to be one of the most exciting and
dynamic periods in our history.
Among other things, 2000 will be remembered as the year our new team came
together. Jim Olin, who joined ResortQuest from one of our largest operating
companies as chief operating officer, and who became executive vice president
January 1, 2001, has moved our operations a giant step forward. Mitch Collins,
who previously directed Arthur Andersen LLP's regional real estate and
hospitality practice, was named our chief financial officer and has delivered on
his mission to implement an enterprise-wide financial system. Fred Farmer, our
chief information officer, was named president of our newly formed e-commerce
division, ResortQuest Technologies. Fred was instrumental in the creation of our
state-of-the-art web site, resortquest.com. Two other senior vice presidents
round out a solid senior management team: Michael Murphy presides over our
acquisitions and business development efforts, while Paul Manteris is
responsible for operations
support and developing homeowner programs vital to owner loyalty. Each of
these individuals has brought a great deal of value to the organization.
Perhaps more important, they share my excitement and vision about the future
we are creating together.
With a complete and talented team in place, we have begun to execute our
strategic plan and build a foundation that will take us to the next level. This
includes optimizing internal growth; continuing our conversion to a new
financial management technology platform; utilizing marketing systems that take
advantage of our size, distribution and brand awareness; realizing economies of
scale; tapping the potential of the Internet; and, for 2001, re-energizing our
acquisition program.
DAVID L. LEVINE
Chairman, President & CEO
INTERNAL GROWTH
Prior to 2000, acquisitions were our primary growth engine. Since our founding
in 1998, we've acquired 28 separate companies for $223 million. In 2000, our
focus shifted to improving our internal growth rate, which will continue to be
an integral part of our future growth. We concentrated on improving and
expanding the inventory under management at our existing resorts, increasing
revenues through rate and occupancy, and taking advantage of our size and
distribution to reduce overhead costs. Not only did we deliver what we promised,
we had a record year, even with the lack of early snow and millennium issues
during the first quarter of the year. Total revenues grew 19 percent, net income
increased 48 percent, EBITDA rose 30 percent and Cash EPS increased 28 percent.
We also met or exceeded analysts' expectations in every quarter, and by
year-end, our stock price had improved by nearly 50 percent.
We also began installation of a new centralized finance and accounting
system that represents a quantum leap forward in the management of our business.
By year end, 12 of our 28 operating companies were on the new platform. We
expect the remaining companies to migrate over by summer 2001, which will allow
us to take advantage of additional cost synergies. The new system transforms us
from a decentralized reporting environment to a fully integrated, consolidated
reporting structure. In addition to strengthening our transactional processing,
reporting, forecasting and budgeting functions, the system is expected to
produce cost savings of more than $2 million annually.
INTERNET INITIATIVES
We continued to experience phenomenal growth from our Internet distribution. In
all, we received more than 30 million page views last year, a nearly 150 percent
increase over 1999. This significant increase in page views confirms that a
growing number of leisure travelers are doing their travel research on line. We
already receive approximately 10 percent of our reservations directly from our
web site, nearly five times the hotel industry average. For these reasons, we
continue to invest in major improvements and upgrades to resortquest.com and to
seek alliances with web portals and e-commerce vendors that will increase our
exposure through other online distribution channels.
In 2000, we extended our technology leadership with the launch of our second
generation web site, featuring MapQuest driving directions, currency conversion
capabilities and the ability to search for properties by date, activity and
location and to comparison shop among similar rental units. We also added AXS
Technologies software that provides high speed/high resolution, scroll, pan and
zoom imaging. The response from visitors to the web site has been overwhelmingly
positive.
Perhaps the most exciting development in 2000 in terms of the long-term
potential for ResortQuest, was the marketing agreement we signed with America
Online (AOL), the world's leading interactive services company. Under the
program, our inventory of approximately 18,000 vacation home rentals is now
available to more than 31 million subscribers to AOL and
CompuServe. This agreement significantly widens our distribution reach and
already has generated significant volumes of new traffic on our own web site
through a direct link from AOL (AOL Keyword: ResortQuest).
We view our alliances with major travel portals where we provide industry
expertise and software as a breakthrough for ResortQuest and the vacation
rentals industry, and as a catalyst for aggregating the entire industry. In
addition to our own inventory in 42 U.S. and Canadian resort locations, we plan
to reach out to other vacation rental companies where we don't have a presence.
We will offer them the opportunity to join our system and gain access to the
same widespread distribution. We will provide all the technical support and
protocols and charge a fee for this service, creating an important new revenue
stream for ResortQuest. Our long-term goal is to provide the first
comprehensive, one-stop shopping inventory of vacation rental properties.
EXPANDING REAL
ESTATE SALES
As we learned more about the profit drivers of our company, we began to look
more closely at real estate sales. About half of the companies we acquired
already had real estate sales divisions, which last year sold more than $1
billion in real estate and generated more than $17 million in net commissions.
Recently we tested the addition of real estate sales capabilities at our Palm
Springs and Telluride resorts. Based on the positive response we received to the
new service, we plan to expand our real estate sales operations.
Real estate sales is a complementary business to our rental operations and a
low-cost entry with substantial potential. We have a built-in inventory of both
buyers and sellers from our existing rental pools. In fact, our guests are the
best buyer group for vacation rentals.
ACQUISITIONS
Acquisitions were less a factor in 2000. However, with three tuck-ins in
existing markets and the purchase of Base Mountain Properties in July, we
strengthened our position in existing locations and added legendary Sun Valley,
Idaho, to our world-class portfolio of resort destinations. We plan to
re-energize our acquisition program in 2001 as we seek to increase our
leadership and dominance within the business. This remains a highly fragmented,
$10 billion industry with more than 4,000 property management companies in the
U.S. alone. Our intent is to acquire companies whose economic models most
closely match our most successful operations.
Our pipeline is full and we have capital available, the result of a new
three-year credit facility we closed in January 2001. Improved covenants allow
us the flexibility to pursue strategic acquisitions and to complete the
enhancement of our technology infrastructure. We also have the ability to buy
back a limited number of common shares, if the financial landscape warrants that
action.
OUTLOOK
We are enthusiastic and optimistic about the future of ResortQuest, and have
moved the company beyond the traditional roll-up model in 2000 by proving our
ability to grow organically. Combined with strategic acquisitions and operating
cost synergies, we expect to grow our earnings substantially over the next three
to five years. We have our team in place and fully committed to our strategic
plan. We have multiple avenues of growth, leading edge technology capabilities
unparalleled in our industry, including the industry's most comprehensive guest
database repository, and the potential to further enhance our growth through
aggregation and by building greater awareness of the ResortQuest brand.
While there is currently some question about the continued strength of the
economy, vacation rentals historically have remained strong in times of economic
downturns, although the tendency for vacationers is to stay closer to home. With
our 42 locations in the U.S. and Canada, we think we are well positioned and
well insulated in the long-term regardless of the economic climate.
Before I conclude, I want to thank our key constituent groups for the role
they played in our achieving a record year, our more than 4,000 ResortQuest
employees who provide the outstanding service that is the basis for our
sustainable
profitability, our homeowners who place their confidence in our ability to
deliver superior returns, and our more than 650,000 families who recognize the
benefits of staying with ResortQuest each year.
DAVID L. LEVINE
Chairman, President &
Chief Executive Officer
March 30, 2001
"My homes in Hilton Head stay booked during season and are generating more
rental income than I ever could locally due to the marketing reach of
ResortQuest. With each passing year, they prove their worth as an exceptional
management company."
--Fred Watkins
Cleveland, Ohio
VACATION HOMEOWNERS
Savvy vacation homeowners invest in resort real estate to create a home away
from home experience...and to get the best possible return on their investment
by renting the property when it is not in use by family and friends.
With ResortQuest, the world's largest vacation property management company,
homeowners get much more. Approximately 18,000 owners entrust their vacation
homes, collectively valued at $6.5 billion, to ResortQuest to obtain optimum
rental income streams and gain additional benefits that only the ResortQuest
brand can provide. In addition to receiving expert management services, vacation
homeowners enjoy the benefits of a global marketing program that maximizes
exposure, rental occupancy and rate.
At the heart of its global marketing program is resortquest.com, the
company's state-of-the-art web site with "real time" online booking capabilities
that produced a record 30 million individual page views in 2000, up nearly 150
percent from 1999.
An additional benefit to homeowners who partner with ResortQuest is the new
agreement between ResortQuest and America Online, the world's leading
interactive services company. Through a specially designed vacation rental area
under AOL Travel, ResortQuest's 18,000 properties are now exposed to the more
than 31 million subscribers to AOL and CompuServe, as well as tens of millions
of additional users of AOL web brands, including Netscape.com and DigitalCity.
The AOL site also features a direct link to ResortQuest's web site (AOL Keyword:
ResortQuest) and special advertising and promotional programs, which together
can drive millions of AOL subscribers to ResortQuest and its portfolio of
vacation rental properties. And this is just the beginning... look for more
alliances/partnerships with major travel portals in the future.
The ResortQuest brand builds loyalty and retention of customers. In 2000,
approximately one in four ResortQuest guests had previously stayed at a
ResortQuest property, and many more referred the brand to friends and relatives.
With 42 locations in the U.S. and Canada, the company's strategic cross-selling
marketing programs create additional opportunities to grow market share and
build customer retention rates.
ResortQuest's real estate sales operations, which reported sales of
more than $1 billion in 2000, will be expanded to more companies in 2001, giving
more owners an easy, convenient way to buy or sell a home at one of
ResortQuest's other locations. The professional sales force of nearly 300
licensed real estate brokers knows and understands local and national markets
and can help obtain the best possible price and financing for both buyers and
sellers and make the vacation real estate process as hassle-free as possible.
Perhaps the most exciting news for vacation homeowners is ResortQuest's new
owners program. Previously known as QuestClub, the new QuestPerks program
features an exciting array of benefits and privileges, including a 50 percent
discount for units booked within 30 days of arrival at any ResortQuest property,
concierge services, car and air travel discounts, booking referral credits and
content insurance discounts where legally available. And new benefits will be
added as we learn more of what our homeowners want and need.
No other company can match the power of the ResortQuest brand, the
integrated marketing support, the technology, the management or the
understanding of local markets and homeowner needs. "This year I traveled with
my family to Breckenridge, Colorado for skiing and later to Destin, Florida for
a week at the beach. Both times we stayed in ResortQuest properties. It seems
that they are everywhere we want to go."
- --MERLE G. FLOWERS
SOUTHAVEN, MISSISSIPPI
"One of the major advantages of ResortQuest is the helpful advice they have
given us about making our vacation home appealing to renters. Together with
their marketing programs, we have been able to maximize our rental revenue."
--CHARLES A. WAGNER III
KNOXVILLE, TENNESSEE
ACCOMMODATION
CATEGORIES
ResortQuest's five-level rating system categorizes accommodations according to
specific criteria so guests will always know what to expect at every ResortQuest
location.
QUEST HOME
An exclusive group of extraordinary accommodations which are so luxurious and
unique that they are in a class of their own.
PLATINUM
Exceptional accommodations marked by unique design that offers superior quality
furnishings, luxury features, designer appointments, and top-of-the-line
kitchens, baths, and amenities.
GOLD
Upscale, well-appointed accommodations with a designer touch that includes
excellent furnishings, special features, and top-quality kitchens, baths, and
amenities.
SILVER
Inviting, pleasing accommodations that are tastefully decorated and feature
quality furnishings and contemporary kitchens and baths.
BRONZE
Comfortable, pleasant accommodations that provide many of the comforts and
conveniences of home.
VACATIONERS
Vacation travelers had more opportunities than ever to stay at a ResortQuest
property in 2000--and more are on the way. With approximately 18,000 units,
leisure travelers can vacation with ResortQuest at the beach, in the mountains,
at a desert destination or in Hawaii, at 42 of the most popular, world-class
resorts in the U.S. and Canada. Depending on their preference, guests can
participate in a variety of activities--from skiing to surfing, horseback riding
to golf, fly fishing to mountain biking-or just sit back and relax...
ResortQuest offers it all.
With its newly designed, second generation web site, ResortQuest has made it
easier than ever to research and book a vacation online. Vacation travelers can
now get driving directions from MapQuest and compare the features and benefits
of
each property at resortquest.com. And a convenient online currency converter
allows international travelers to quickly determine pricing and exchange rates.
New AXS Technologies software enhances resortquest.com's virtual tour
feature by allowing visitors to scroll, pan and zoom views of select properties
in the ResortQuest system. Web site visitors also enjoy rapid downloads of
photos and floor plans. Other site improvements include the ability to see
special events scheduled during the guest's stay, and a variety of other options
that allow visitors to quickly and easily customize a vacation to their specific
needs.
Guests have the assurance of a satisfying stay at every ResortQuest
property, thanks to ResortQuest's stringent product and service standards and
exclusive accommodations rating system-an industry first. Each vacation
residence is carefully evaluated based on quality, condition, appearance and
amenities. Then it is categorized as a Bronze, Silver, Gold, Platinum or Quest
Home (see above), which means that ResortQuest guests know exactly what to
expect when they arrive.
LOCAL OPERATING COMPANIES
In 2001 and beyond, ResortQuest plans to continue its acquisition program,
seeking companies who have a strong local market presence and who want to grow
and profit with a larger organization that is setting new industry standards.
Rapidly growing brand awareness, a multi-million dollar marketing program, and a
state-of-the-art web site and online distribution through AOL and others that
produces more than 30 million page views per year, are just some of the reasons
for joining ResortQuest.
The implementation of a new central accounting and financial Enterprise
Resource Planning adds even greater value to the ResortQuest brand. Scheduled to
be fully operational by mid-2001, the new platform provides a national,
centralized accounting system that enables local markets to better manage their
inventory pricing, marketing activities, cash management and transactional
processing, all while providing better internal controls, which helps our
operators better understand the day-to-day aspects of the business. In addition,
ResortQuest's size and geographic distribution produces substantial synergies in
purchasing, insurance, technology, credit card fees and other costs to optimize
returns.
The company's new alliance with AOL significantly expands the distribution
and reach of the ResortQuest brand. Under the agreement, local management
companies may offer their rental inventory in a specially designed vacation
rental area on AOL's Travel channel with its exposure to more than 31 million
subscribers. ResortQuest will provide the real-time online booking engine and
all the technical support and protocols for an appropriate fee.
ResortQuest continues to invest in proprietary research and has a database
of more than 1.5 million vacation rental home users who have used our product at
least once in the past two years. Information gathered about its guests helps
ResortQuest more selectively target its marketing programs to produce the
greatest possible response. Ultimately, this research will represent a
significant competitive edge for ResortQuest in targeting potential guests.
In 2001, we expect many homeowners to switch from local management companies
to ResortQuest because they see the unique benefits offered only by ResortQuest.
Developers also are assigning their new projects to ResortQuest to enhance sales
and improve owner relations.
In the years ahead, ResortQuest will seek other strong local companies to
expand the brand's reach into new markets. Interested companies can learn more
about the benefits of ResortQuest by contacting the company's senior management
team.
TEAM MEMBERS
More than 4,000 professionals in 42 resort locations team together to provide
the special kind of service that makes ResortQuest guests feel at home and
creates the most memorable vacation experiences.
As part of a young, growing company, team members have opportunities
available to them that they can find nowhere else in the industry. ResortQuest
local operating companies can post vacant positions on the company's Web site,
creating career opportunities for team members across the U.S. and Canada.
Complemented by a variety of training programs, ResortQuest team members are
among the most highly skilled in any market.
ResortQuest team members also receive one of the most comprehensive benefits
programs available in any resort market. In 2000, ResortQuest introduced a new,
national healthcare plan that includes medical, dental, vision, Life/AD&D and
LTD coverage and is believed to be without peer in the industry. Team members
also enjoy the benefits of a generous 401(k) plan to help them prepare for their
retirement needs.
Perhaps the greatest "benefit" of being part of ResortQuest are the
unparalleled opportunities to grow with a dynamic new company that has a
compelling and powerful vision for the future, a well thought-out strategic
business plan and an experienced management team committed to achieving its
goals.
"Condominiums are a great value for families or groups because of the
privacy and extra room they offer. Travel planners can select from several
thousand--and book their reservations--at ResortQuest's easy-to-use Web site,
resortquest.com."
- --KYLE McCARTHY
NATIONAL TRAVEL EXPERT
EDITOR, familytravelforum.com
2000 MILESTONES
Completed four acquisitions, including Base Mountain, ResortQuest's first
management company in legendary Sun Valley, Idaho, and three existing market
tuck-ins
Signed agreement with America Online, exposing ResortQuest's inventory of 18,000
vacation rental properties to 31 million subscribers
Launched second generation web site, adding MapQuest driving directions,
currency conversion capabilities and ability to search for properties by date,
activity and location and comparison shop among similar units
Further enhanced resortquest.com with addition of AXS Technologies software that
provides high speed/high resolution scroll, pan and zoom imaging
Combined the guest databases of 29 local operating companies into a single
database repository for an enterprise-wide guest view and deployment of
strategically targeted marketing initiatives
Expanded real estate sales operations to Telluride and Palm Springs resorts
with plans to open real estate sales offices at other ResortQuest locations
Began installation of new centralized finance and accounting systems
Implemented industry's first Snow Guarantee, which states that if the snow
conditions at the booked resort are unsatisfactory to the guest for any reason,
ResortQuest will transfer the reservation without penalties or loss of deposit
to one of ResortQuest's other ski locations, subject to availability
Launched upgraded owners program, QuestPerks, offering an unparalleled array of
benefits for owners
Closed on three-year credit facility to complete the technological upgrade of
internal systems and to pursue strategic acquisitions
CORPORATE INFORMATION
Executive Officers from left to right: P. Manteris, J. Olin, M. Murphy, D.
Levine, M. Collins and F. Farmer
EXECUTIVE OFFICERS
David L. Levine
Chairman of the Board, President and Chief Executive Officer
James S. Olin
Executive Vice President and Chief Operating Officer
Frederick L. Farmer
Executive Vice President and Chief Information Officer, President - ResortQuest
Technologies Division
J. Mitchell Collins
Senior Vice President and Chief Financial Officer
Paul N. Manteris
Senior Vice President - Operations and Homeowner Relations
W. Michael Murphy
Senior Vice President and
Chief New Business Development Officer
CORPORATE OFFICERS
Robert J. Adams
Vice President, Marketing
S. Mark Aldy
Vice President, Financial Systems and Operations Reporting
M. Ronald Halpern
Vice President, General Counsel
Gary W. Keirce
Vice President, Human Resources
J. Scott Murphy
Vice President, Controller
David K. Selberg
Vice President, Treasurer, and Investor Relations
Kelvin M. Bloom
Regional Vice President and Executive Vice President and Chief Operating Officer
- - Aston Hotels & Resorts
L. Park Brady, Jr.
Regional Vice President
Edward H. Seymour, Jr.
Regional Vice President and President - Abbott Resorts
Michael D. Shaffer
Regional Vice President
BOARD OF DIRECTORS
David L. Levine
Chairman, President, and Chief Executive Officer
William W. Abbott, Jr.
Former Vice Chairman, Abbott Realty Services, Inc.
Elan J. Blutinger
Managing Director, Alpine Consolidated, LLC
Joshua M. Freeman
Chairman, Carl M. Freeman Associates, Inc.
Colin V. Reed
Office of the President, Harrah's Entertainment, Inc.
Michael D. Rose
Former Chairman, Promus Hotel Corporation
David C. Sullivan
Former Chairman of the Board,
ResortQuest International, Inc.
Joseph V. Vittoria
Former Chairman and Chief Executive Officer,
Travel Services International, Inc.
Theodore L. Weise
Former President and Chief Executive Officer,
Federal Express Corporation
EXPERIENCE RESORTQUEST ALL YEAR LONG
RESORTQUEST
INTERNATIONAL-SM-
530 Oak Court Drive, Suite 360 Memphis, Tennessee 38117 901.762.0600
Fax 901.762.0678
(C) 2001 ResortQuest International, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
ResortQuest is the leading provider 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
nationwide network of vacation rental properties, and currently offer management
services to approximately 18,000 rental properties. Our operations are in 42
premier resort locations in the Beach, Hawaiian Islands, Mountain and Desert
geographical regions.
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 a proprietary vacation rental software package that is utilized by us
and over 800 other 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 increase customer satisfaction, we have developed and
implemented a five-tier rating system that segments our property portfolio into
five categories: Bronze, Silver, Gold, Platinum and Quest Home.
We market our properties through various media channels and have
significant internet distribution through resortquest.com, our proprietary Web
site offering "real time" reservations, and our multi-year travel marketing
agreement with America Online (AOL Keyword: ResortQuest) announced in January
2001. In conjunction with the consummation of our AOL agreement, we have formed
ResortQuest Technologies, a division of ResortQuest focused on internet
alliances and inventory distribution. In September 2000, we unveiled our second
generation Web site that enhances the booking experience for e-travelers. In
addition to detailed property descriptions, virtual tours, interior and exterior
photos and floor plans, and local information available at our original Web
site, 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. We also added AXS
Technologies software that provides high speed/high resolution, scroll, pan and
zoom imaging. During 2000, our Web site received more than 30 million page
views, a 150% increase from the prior year, and our Web-related reservations
increased to approximately 10% of total reservations.
We completed our initial public offering on May 26, 1998 (the "IPO") and
simultaneously acquired 12 vacation rental and property management companies and
one vacation property management software company, First Resort Software, Inc.
(together, the "Founding Companies") (the "Combinations"). Since our IPO, we
have acquired an additional 21 vacation rental and property management companies
(the "Post-IPO acquisitions"), thereby increasing properties under management by
approximately 70%, expanding our presence into 14 new resort markets and further
enhancing our unique national platform.
For accounting and reporting purposes, Hotel Corporation of the Pacific,
Inc. (commonly referred to as Aston Hotels & Resorts), one of our Founding
Companies, was identified as the accounting acquirer and the remaining Founding
Companies along with ResortQuest corporate were accounted for under the purchase
method of accounting. Since the IPO and the Combinations, we have made three
acquisitions that have been accounted for under the pooling-of-interests method
of accounting and for which our historical financial statements have been
restated. Accordingly, our consolidated financial information for the years
ended December 31, 1998, 1999 and 2000 includes the results of Aston Hotels &
Resorts and the pooling acquisitions for the entire periods presented,
ResortQuest corporate and the remaining Founding Companies only since May 26,
1998, and the remaining Post-IPO acquisitions since their respective effective
dates of acquisition.
1
RESULTS OF OPERATIONS
Our revenues are derived primarily from property rental fees on vacation
condominium and home rentals and service fees from additional services provided
to vacationers and property owners. We receive property rental fees, which are
generally a percentage of the rental price of the vacation properties, when the
properties are rented. Rental fees range from approximately 3% to over 40% of
rents collected based upon the type of services we provide to the property owner
and the type of rental units managed. Revenues are recognized ratably over the
rental period based on our proportionate share of the total rental price of the
vacation condominium or home. For the year ended December 31, 2000, we
recognized $78.5 million of property rental fees, representing 52% of our total
2000 revenues. Additional services such as reservations, housekeeping,
long-distance telephone, ski lift tickets, beach equipment rental and pool
cleaning are charged separately and recorded as service fees revenue. During
2000, we recognized $47.1 million of service fees, representing 31% of our total
2000 revenues. The remaining $26.4 million of our 2000 revenues were derived
from other sources, including the sale and service of vacation rental and
property management software, net broker commissions on real estate sales and
food & beverage sales.
Our direct operating expenses include direct compensation,
telecommunication expenses, housekeeping supplies, printing, marketing and food
& beverage costs. Compensation includes salaries, wages, bonuses and benefits
for employees involved with the rental or maintenance of the rental units,
housekeeping, marketing, reservation and food & beverage facilities.
Telecommunication costs result primarily from the cost of toll-free numbers, as
well as the cost of telephone service provided by us to property owners in
certain markets.
Our general and administrative expenses consist primarily of salaries,
wages, bonuses and benefits for general managers, as well as other
non-operational personnel, marketing, fees for professional services, rent and
other general office expenses.
Our operating results, including the impact of our acquisitions, are
subject to the seasonality of our resort locations. The peak season for our
Hawaiian Islands, Mountain, Desert and southern Florida operations is the first
quarter, and the Beach operations' peak season, other than for southern Florida,
is the third quarter.
For better analysis, the following discussion of year-to-year financial
changes includes "same-store" comparisons. Same-store comparisons exclude the
impact of acquisitions completed since the first day of the earliest period
being discussed.
RESULTS OF OPERATIONS -- Consolidated
The following table sets forth the consolidated condensed results of
operations for the years ended December 31, 1998, 1999 and 2000.
(dollars in thousands) 1998 1999 2000
--------------- ---------------- ----------------
Revenues $55,359 100.0% $127,912 100.0% $152,014 100.0%
Direct operating expenses 31,596 57.1 65,804 51.4 80,314 52.8
General and administrative expenses 15,125 27.3 41,669 32.6 40,940 27.0
------- ----- -------- ----- -------- -----
Operating income before depreciation
and amortization 8,638 15.6 20,439 16.0 30,760 20.2
Depreciation 1,342 2.4 2,556 2.0 3,549 2.3
Goodwill amortization 1,806 3.3 4,353 3.4 4,934 3.2
------- ----- -------- ----- -------- -----
Operating income $ 5,490 9.9% $ 13,530 10.6% $ 22,277 14.7%
======= ===== ======== ===== ======== =====
2
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -
Consolidated
Revenues. Revenues increased $24.1 million, or 19%, from $127.9 million in
1999 to $152.0 million in 2000, primarily due to same-store growth, our 2000
acquisitions, and the annualized impact of our 1999 acquisitions. Through the
acquisition of three vacation rental and property management companies during
the twelve months ended December 31, 2000, we entered new resort markets in
Pensacola, Florida and Sun Valley, Idaho and increased our presence in the Outer
Banks of North Carolina. Excluding the impact of our 2000 acquisitions and the
annualized impact of our 1999 acquisitions, revenues increased $9.5 million or
8% due to a 10% increase in same-store gross lodging revenues driven by an 8%
increase in revenue per available unit ("RevPAU") and a 1.9 point increase in
occupancy.
Direct Operating Expenses. Direct operating expenses increased $14.5
million, or 22%, from $65.8 million in 1999 to $80.3 million in 2000, primarily
due to the increase in same-store occupancy, our current year acquisitions and
the annualized impact of the 1999 acquisitions. Excluding the impact of our 1999
and 2000 acquisitions, direct operating expenses increased 10% due to the
increase in occupancy and an increase in labor costs.
General and Administrative Expenses. General and administrative expenses
decreased $729,000, or 2%, from $41.7 million in 1999 to $40.9 million in 2000,
primarily due to the $3.1 million in unusual charges recorded in 1999. The
unusual expenses primarily represented deferred costs for possible acquisitions
we determined not to pursue, costs associated with a study to identify
alternative funding sources, costs associated with acquisitions during the year
accounted for under the pooling-of-interests method of accounting, costs
associated with a withdrawn common stock offering, and a severance accrual.
Excluding the impact of these items, general and administrative expenses
increased $2.3 million, or 6%, due to incremental marketing and other costs
resulting from an increase in units under management.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $1.6 million, or 23%, from $6.9 million in 1999 to $8.5
million in 2000, primarily due to increased technology capital expenditures and
the goodwill impact of acquisitions recorded using the purchase method of
accounting. As a percentage of revenues, depreciation and goodwill amortization
remained relatively flat.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 -
Consolidated
Revenues. Revenues increased $72.5 million, or 131%, from $55.4 million in
1998 to $127.9 million in 1999, primarily due to the revenue impact of the
Combinations and our 1999 acquisitions. Revenues from our 1999 acquisitions for
the Mountain, Beach and Desert operations were $6.7 million, $7.5 million and
$2.8 million, respectively.
Direct Operating Expenses. Direct operating expenses increased $34.2
million, or 108%, from $31.6 million in 1998 to $65.8 million in 1999, primarily
due to the expense impact of the Combinations and our 1999 acquisitions. Direct
operating expenses from the Post-IPO acquisitions for the Mountain, Beach and
Desert operations were $3.3 million, $4.0 million, and $1.0 million,
respectively.
General and Administrative Expenses. General and administrative expenses
increased $26.6 million, or 176%, from $15.1 million in 1998 to $41.7 million in
1999, primarily due to the expense impact of the companies acquired in the
Combinations and Post-IPO acquisitions, incremental public-company expenses and
$3.1 million in unusual expenses. General and administrative expenses, including
depreciation and goodwill amortization, from the 1999 acquisitions for the
Mountain, Beach and Desert operations were $2.7 million, $1.4 million and $1.2
million, respectively.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $3.8 million, or 119%, from $3.1 million in 1998 to $6.9
million in 1999, primarily due to the annualized impact of the goodwill
amortization resulting from the Combinations and Post-IPO acquisitions recorded
using the purchase method of accounting. As a percentage of revenues,
depreciation and goodwill amortization remained relatively flat.
3
Results of Operations - Regional
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. Due to the seasonal nature of our operations, our financial
results will be discussed by geographic region with Other representing our
corporate and First Resort Software operations.
Beach
The following table sets forth the consolidated condensed results of
operations for the years ended December 31, 1998, 1999 and 2000 for our Beach
operations in Gulf Shores, Alabama; Bethany Beach, Delaware; Beaches of South
Walton, Bonita Springs, Captiva Island, Destin, Fort Myers, Fort Myers Beach,
Marco Island, Okaloosa Island/Fort Walton Beach, Naples, Navarre Beach, Orlando,
Pensacola, Sanibel Island and Vanderbilt Beach, Florida; St. Simons Island,
Georgia; Nantucket, Massachusetts; Outer Banks, North Carolina; Lake Erie
Islands, Ohio; and Hilton Head Island, South Carolina.
(dollars in thousands) 1998 1999 2000
-------------- -------------- --------------
Revenues $23,925 100.0% $71,077 100.0% $85,318 100.0%
Direct operating expenses 13,555 56.7 37,003 52.1 45,913 53.8
General and administrative expenses 4,898 20.4 16,592 23.3 17,658 20.7
------- ----- ------- ----- ------- -----
Operating income before depreciation
and amortization 5,472 22.9 17,482 24.6 21,747 25.5
Depreciation 402 1.7 1,223 1.7 1,582 1.8
Goodwill amortization 816 3.4 2,305 3.3 2,632 3.1
------- ----- ------- ----- ------- -----
Operating income $ 4,254 17.8% $13,954 19.6% $17,533 20.6%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 - Beach
Revenues. Revenues increased $14.2 million, or 20%, from $71.1 million in
1999 to $85.3 million in 2000, primarily due to our 1999 acquisitions, our 2000
Beach acquisitions and an 11% increase in same-store lodging revenues driven by
a 4% increase in average daily rate ("ADR") and a 1.6 point increase in
occupancy.
Direct Operating Expenses. Direct operating expenses increased $8.9
million, or 24%, from $37.0 million in 1999 to $45.9 million in 2000, primarily
due to our Post-IPO acquisitions, the increase in occupancy and an increase in
labor costs. As a percentage of revenues, direct operating expenses increased
1.7 points due to the increase in labor costs.
General and Administrative Expenses. General and administrative expenses
increased $1.1 million, or 6%, from $16.6 million in 1999 to $17.7 million in
2000, primarily due to our Post-IPO acquisitions and a 2% increase in same-store
units under management. As a percentage of revenues, general and administrative
expenses decreased 2.6 points due to operating efficiencies.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $686,000, or 19%, from $3.5 million in 1999 to $4.2
million in 2000, primarily due to increased technology capital expenditures and
the goodwill impact of acquisitions recorded using the purchase method of
accounting. As a percentage of revenues, depreciation and goodwill amortization
remained relatively flat.
4
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 - Beach
Revenues. Revenues increased $47.2 million, or 198%, from $23.9 million in
1998 to $71.1 million in 1999, primarily due to the annualized impact from the
acquisitions consummated as part of the Combinations. These acquisitions
contributed revenue of $59.5 million in 1999 compared to $19.6 million in 1998.
Also impacting revenues were the 1999 Post-IPO acquisitions that contributed
$7.5 million of revenues.
Direct Operating Expenses. Direct operating expenses increased $23.4
million, or 173%, from $13.6 million in 1998 to $37.0 million in 1999, primarily
due to the annualized expense impact of the Combinations, the expense impact of
the Post-IPO acquisitions and increased labor costs to service the increased
units under management contract. As a percentage of revenues, direct operating
expenses improved 4.6 points due to operating efficiencies.
General and Administrative Expenses. General and administrative expenses
increased $11.7 million, or 239%, from $4.9 million in 1998 to $16.6 million in
1999, primarily due to our Post-IPO acquisitions and the annualized impact of
the acquisitions consummated as a part of the Combinations. As a percentage of
revenues, general and administrative expenses increased 2.9 points due to the
incremental marketing and other costs resulting from the increase in units under
management.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $2.3 million, or 190%, from $1.2 million in 1998 to $3.5
million in 1999, primarily due to the annualized impact of the goodwill
amortization resulting from the Combinations and Post-IPO acquisitions recorded
using the purchase method of accounting. As a percentage of revenues,
depreciation and goodwill amortization remained relatively flat.
5
Hawaiian Islands
The following table sets forth the consolidated condensed results of
operations for the years ended December 31, 1998, 1999 and 2000 for our Hawaiian
operations on the islands of Hawaii, Kauai, Maui and Oahu.
(dollars in thousands) 1998 1999 2000
--------------- --------------- --------------
Revenues $20,303 100.0% $22,448 100.0% $26,047 100.0%
Direct operating expenses 9,861 48.6 8,799 39.2 9,387 36.0
General and administrative expenses 5,270 25.9 7,017 31.3 7,100 27.3
------- ----- ------- ----- ------- -----
Operating income before depreciation
and amortization 5,172 25.5 6,632 29.5 9,560 36.7
Depreciation 576 2.8 449 2.0 472 1.8
Goodwill amortization 45 0.3 79 0.3 76 0.3
------- ----- ------- ----- ------- -----
Operating income $ 4,551 22.4% $ 6,104 27.2% $ 9,012 34.6%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 - Hawaii
Revenues. Revenues increased $3.6 million, or 16%, from $22.4 million in
1999 to $26.0 million in 2000, primarily due to a 14% increase in lodging
revenues driven by a 3.3 point increase in occupancy, a 7% increase in ADR and
an 8% increase in units under management.
Direct Operating Expenses. Direct operating expenses increased $588,000 or
7%, from $8.8 million in 1999 to $9.4 million in 2000, primarily due to the
increase in occupancy. As a percentage of revenues, direct operating expenses
decreased 3.2 points due to operating efficiencies.
General and Administrative Expenses. General and administrative expenses
increased $83,000, or 1%, from $7.0 million in 1999 to $7.1 million in 2000,
primarily due to an 8% increase in units under management. As a percentage of
revenues, general and administrative expenses decreased 4.0 points due to
operating efficiencies.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $20,000, or 4%, from $528,000 in 1999 to $548,000 in
2000, primarily due to recurring capital expenditures. As a percentage of
revenues, depreciation and goodwill amortization remained relatively flat.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 - Hawaii
Revenues. Revenues increased $2.1 million, or 10%, from $20.3 million in
1998 to $22.4 million in 1999, primarily due to the acquisition consummated as
part of the Combinations. Average daily rate was down 2.6% in 1999 compared to
1998, while RevPAU was up 2.7% due to increased occupancy.
Direct Operating Expenses. Direct operating expenses decreased $1.1
million, or 11%, from $9.9 million in 1998 to $8.8 million in 1999, primarily
due to a reduction in payments made to owners of managed properties related to
guaranteed levels of return. As a percentage of revenues, direct operating
expenses decreased 9.4 points primarily due to the reduction in these guaranteed
payments.
General and Administrative Expenses. General and administrative expenses
increased $1.7 million, or 32%, from $5.3 million in 1998 to $7.0 million in
1999, primarily due to the Combinations. As a percentage of revenues, general
and administrative expenses increased 5.3 points primarily due to the
Combinations.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization decreased $93,000, or 15%, from $621,000 in 1998 to $528,000 in
1999, primarily due to the distribution of certain assets in conjunction with
the Combinations. As a percentage of revenues, depreciation and goodwill
amortization decreased 0.8 points as a result of this distribution.
6
Mountain
The following table sets forth the consolidated condensed results of
operations for the years ended December 31, 1998, 1999 and 2000 for our Mountain
operations in Whistler, British Columbia; Aspen, Breckenridge, Crested Butte,
Dillon, Snowmass Village and Telluride, Colorado; Sun Valley, Idaho; Big Sky,
Montana; Sunriver, Oregon; and The Canyons, Deer Valley and Park City, Utah.
(dollars in thousands) 1998 1999 2000
--------------- --------------- --------------
Revenues $ 9,012 100.0% $27,971 100.0% $33,727 100.0%
Direct operating expenses 7,075 78.6 17,104 61.2 21,568 64.0
General and administrative expenses 2,491 27.6 6,583 23.5 5,842 17.3
------- ----- ------- ----- ------- -----
Operating (loss) income before
depreciation and amortization (554) (6.2) 4,284 15.3 6,317 18.7
Depreciation 324 3.6 657 2.3 742 2.2
Goodwill amortization 310 3.4 783 2.8 1,007 3.0
------- ----- ------- ----- ------- -----
Operating income $(1,188) (13.2)% $ 2,844 10.2% $ 4,568 13.5%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 - Mountain
Revenues. Revenues increased $5.8 million, or 21%, from $28.0 million in
1999 to $33.7 million in 2000, primarily due to the annualized impact of our
June 1999 acquisition in Aspen, Colorado and our July 2000 acquisition in Sun
Valley, Idaho. Excluding the impact of these acquisitions, revenues decreased
$268,000, or 1%, due to a 3% decline in lodging revenues driven by a 1.1 point
decline in occupancy primarily resulting from the lack of snow in January 2000.
Direct Operating Expenses. Direct operating expenses increased $4.5
million, or 26%, from $17.1 million in 1999 to $21.6 million in 2000, primarily
due to the annualized impact of our Post-IPO acquisitions, our 2000 acquisition
and increased labor costs. As a percentage of revenues, direct operating
expenses increased 2.8 points primarily due to increased labor costs.
General and Administrative Expenses. General and administrative expenses
decreased $741,000, or 11%, from $6.6 million in 1999 to $5.8 million in 2000,
primarily due to operating efficiencies that were partially offset by our July
2000 acquisition. As a percentage of revenues, general and administrative
expenses decreased 6.2 points due to operating efficiencies.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $309,000, or 21%, from $1.4 million in 1999 to $1.7
million in 2000, primarily due to the goodwill impact of acquisitions recorded
using the purchase method of accounting. As a percentage of revenues,
depreciation and goodwill amortization remained relatively flat.
7
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 - Mountain
Revenues. Revenues increased $19.0 million, or 211%, from $9.0 million in
1998 to $28.0 million in 1999, primarily due to $6.7 million in revenues from
our Post-IPO acquisitions and the annualized impact of acquisitions consummated
as part of the Combinations.
Direct Operating Expenses. Direct operating expenses increased $10.0
million, or 142%, from $7.1 million in 1998 to $17.1 million in 1999, primarily
due to our Post-IPO acquisitions and the annualized impact of the acquisitions
consummated as part of the Combinations. As a percentage of revenues, direct
operating expenses decreased 17.4 points due to the Founding Companies in this
region being acquired after their peak season.
General and Administrative Expenses. General and administrative expenses
increased $4.1 million, or 164%, from $2.5 million in 1998 to $6.6 million in
1999, primarily due to our Post-IPO acquisitions and the annualized impact of
the acquisitions consummated as a part of the Combinations. As a percentage of
revenues, general and administrative expenses decreased 4.1 points due to the
Founding Companies in this region being acquired after their peak season.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $806,000, or 127%, from $634,000 in 1998 to $1.4 million
in 1999, primarily due to the annualized impact of depreciation and the goodwill
amortization resulting from the Combinations and Post-IPO acquisitions recorded
using the purchase method of accounting. As a percentage of revenues,
depreciation and goodwill amortization remained relatively flat.
8
Desert
Our Desert resort operations were a new addition in 1999 to the geographic
dispersion of the resort locations in which we operate. The following table sets
forth the consolidated condensed results of operations for the years ended
December 31, 1999 and 2000 for our Desert operations in Scottsdale and Tucson,
Arizona; and Palm Desert and Palm Springs, California.
(dollars in thousands) 1999 2000
-------------- -------------
Revenues $2,774 100.0% $3,444 100.0%
Direct operating expenses 1,040 37.5 1,586 46.0
General and administrative expenses 1,060 38.2 836 24.3
------ ----- ------ -----
Operating income before depreciation
and amortization 674 24.3 1,022 29.7
Depreciation 49 1.7 58 1.7
Goodwill amortization 118 4.3 185 5.4
------ ----- ------ -----
Operating income $ 507 18.3% $ 779 22.6%
====== ===== ====== =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 - Desert
Revenues. Revenues increased $670,000, or 24%, from $2.8 million in 1999
to $3.4 million in 2000, primarily due to an 18% increase in lodging revenues
driven by a 1.9 point increase in occupancy.
Direct Operating Expenses. Direct operating expenses increased $546,000,
or 53%, from $1.0 million in 1999 to $1.6 million in 2000, primarily due to an
increase in occupancy and labor costs. As a percentage of revenues, direct
operating expenses increased 8.5 points due to an increase in labor costs.
General and Administrative Expenses. General and administrative expenses
decreased $224,000, or 21%, from $1.1 million in 1999 to $836,000 in 2000,
primarily due to operating efficiencies. As a percentage of revenues, general
and administrative expenses decreased 13.9 points due to operating efficiencies.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $76,000, or 46%, from $167,000 in 1999 to $243,000 in
2000, primarily due to the goodwill impact of acquisitions recorded using the
purchase method of accounting. As a percentage of revenues, depreciation and
goodwill amortization increased 1.1 points due to one of the acquisitions being
acquired after its peak season.
9
Other
The following table sets forth the consolidated condensed results of
operations for the years ended December 31, 1998, 1999 and 2000 for our Other
operations comprised of First Resort Software and corporate.
(dollars in thousands) 1998 1999 2000
---------------- ----------------- -----------------
Revenues $ 2,119 100.0% $ 3,642 100.0% $ 3,478 100.0%
Direct operating expenses 1,105 52.2 1,858 51.0 1,860 53.5
General and administrative expenses 2,466 N/M 10,417 N/M 9,504 N/M
------- ------ ------- ------ ------- -------
Operating loss before depreciation
and amortization (1,452) N/M (8,633) N/M (7,886) N/M
Depreciation 40 1.9 177 4.9 696 20.0
Goodwill amortization 635 30.0 1,069 29.4 1,033 29.7
------- ------ ------- ------ ------- -------
Operating loss $(2,127) N/M $(9,879) N/M $(9,615) N/M
======= ====== ======= ====== ======= =======
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 - Other
Revenues. Revenues decreased $164,000, or 5%, from $3.6 million in 1999 to
$3.5 million in 2000, primarily due to reduced software sales and service fee
revenues.
Direct Operating Expenses. Direct operating expenses remained relatively
flat from 1999 to 2000. As a percentage of revenues, direct operating expenses
increased 2.5 points primarily due to fixed operating costs and the decrease in
revenues.
General and Administrative Expenses. General and administrative expenses
decreased $913,000, or 9%, from $10.4 million in 1999 to $9.5 million in 2000.
Excluding the $3.1 million in unusual items recorded in 1999, general and
administrative expenses increased $2.2 million or 30% due primarily to increased
marketing expenditures and other initiatives related to increased units under
management.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $483,000, or 39%, from $1.2 million in 1999 to $1.7
million in 2000, primarily due to increased technology capital expenditures
related to enhancements to our Web site, upgrades to our software products sold
through First Resort Software and the partial implementation of our new
financial management technology platform scheduled to be completed by mid-2001.
As a percentage of revenues, depreciation and goodwill amortization increased
15.4 points primarily due to investments in technology.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 - Other
Revenues. Revenues increased $1.5 million, or 71%, from $2.1 million in
1998 to $3.6 million in 1999, primarily due to the annualized impact of the
acquisition of First Resort Software consummated as part of the Combinations.
Direct Operating Expenses. Direct operating expense increased $753,000, or
68% from $1.1 million in 1998 to $1.9 million in 1999, primarily due to the
annualized impact of the acquisition of First Resort Software consummated as
part of the Combinations.
General and Administrative Expenses. General and administrative expenses
increased $7.9 million, or 316%, from $2.5 million in 1998 to $10.4 million in
1999, primarily due to a full year of corporate expenses, year 2000 compliance
issue costs and $3.1 million in unusual items recorded in 1999.
Depreciation and Goodwill Amortization. Depreciation and goodwill
amortization increased $571,000, or 85%, from $675,000 in 1998 to $1.2 million
in 1999, primarily due to the annualized impact of depreciation expense and
goodwill amortization resulting from the Combinations and Post-IPO acquisitions
recorded using the purchase method of accounting. As a percentage of revenues,
depreciation and goodwill amortization increased 2.4 points, due to the timing
of the Combinations.
10
Liquidity and Capital Resources
Overview
ResortQuest is a holding Company that conducts all of its operations
through its subsidiaries operating in 42 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 generated cash flows from operating activities of $21.9 million in 2000
primarily due to increases in net income, deferred income taxes and deferred
revenue and property owner payables. Cash used in investing activities was
approximately $17.7 million in 2000 due primarily to the $6.7 million in net
cash payments related to the 2000 acquisitions and the earn-out payments related
to 1999 acquisitions and $11.1 million in software development and
implementation costs and purchases of property and equipment. In 2000, cash used
in financing activities totaled $18.1 million, which represented repayments of
long-term borrowings.
At December 31, 2000, we had approximately $26.3 million in cash and cash
equivalents, of which $22.1 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 December 31, 2000, we had a
working capital deficit of $24.0 million; however, we have up to $50 million,
subject to certain restrictions, available under our long-term borrowing
vehicle. During 2000 we implemented a consolidated daily cash management system
that allows us to fully utilize all unrestricted cash to keep our debt paid down
in order to reduce our net interest expense. 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.
However, future acquisitions and/or other initiatives, depending on their size
and the method of financing, may affect our liquidity and capital requirements
during that time.
Total capital expenditures for 2001 are currently anticipated to be
between $10.0 million and $12.0 million, of which approximately $5.0 million is
expected to be used for software development and systems integration, with the
balance being applied to Web site development, building renovations, vehicles,
furniture, fixtures and equipment.
Long-Term Borrowings
As of December 31, 2000, our long-term debt was comprised of $50.0 million
in 9.06% Senior Notes due June 2004 and $884,000 in capital lease obligations
and other borrowings assumed in connection with certain acquisitions.
On January 22, 2001, we replaced our undrawn existing Credit Facility that
was to expire on May 26, 2001 with a similar facility that expires on January
22, 2004. Similar to the existing Credit Facility and subject to certain
limitations, the Credit Facility may be used to borrow up to $50 million and may
be used acquisitions, capital expenditures and general corporate purposes. The
Credit Facility may also be used for letters of credit not to exceed $2.5
million in the aggregate. The credit agreement requires us to comply with
various loan covenants, which include the 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, as
defined, plus a margin of 2.0%. Availability fees are 0.5% per annum and are
payable on the unused portion of the Credit Facility. Interest and availability
fees are payable monthly. The existing Credit Facility was undrawn at December
31, 2000 compared to $12.0 million of outstanding borrowings at December 31,
1999.
On June 16, 1999, we issued $50 million of 9.06% Senior Notes, due June
2004, in connection with a note purchase agreement. The Senior Notes are secured
pari passu to our Credit Facility. The note purchase agreement contains loan
covenants substantially similar to those of the credit agreement under the
Credit Facility and has prepayment restrictions in the form of "make-whole"
provisions. Interest is payable semi-annually.
The Credit Facility 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. We were in compliance with all
covenants on all indebtedness at December 31, 2000.
11
Registration and Equity Offerings
During 1998 and 1999, we registered 8.0 million shares of common stock
through various shelf registration statement filings. As of December 31, 2000,
we had issued 3,063,960 shares under these shelf registration statements in
connection with acquisitions, with the remaining 4,936,040 shares available for
future acquisitions.
In connection with our 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 at various times
during 1999 and 2000 resulting in a significant increase in the number of shares
of common stock now publicly tradable and may limit our ability to sell shares
of our common stock through a secondary public offering.
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. As of December 31, 2000,
all of our outstanding debt was at a fixed interest rate and our only foreign
operations were in Canada.
Proposed Accounting Announcements
The Financial Accounting Standards Board issued an Exposure Draft on
February 15, 2001 to address its revised views for accounting for business
combinations with a final standard expected to be released in June 2001. If
adopted as currently proposed, goodwill related to our future and historical
acquisitions will no longer be amortized. Goodwill will be subject to reviews
for impairment upon the occurrence of certain events, and, if impaired, a
write-down would be recorded. We recorded goodwill amortization of $1.8 million,
$4.4 million and $4.9 million in 1998, 1999 and 2000, respectively.
Acquisition Strategy
We intend to continue to pursue selected acquisition opportunities in
strategically important 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 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.
Since the IPO, we have completed 21 Post-IPO acquisitions: Goldpoint
Lodging in Breckenridge, Colorado, effective July 15, 1998; Plantation Resort
Management, Inc., in Gulf Shores, Alabama, effective August 31, 1998; Whistler
Exclusive Properties, Ltd. in Whistler, British Columbia, Canada, effective
September 3, 1998; Abbott Realty Services, Inc. (commonly referred to as "Abbott
Resorts") in Destin, Florida, effective September 30, 1998; Columbine
Management, Inc. in Dillon, Colorado, effective December 1, 1998; Ridgepine
Vacation Rentals, Inc. in Sunriver, Oregon, effective January 1, 1999; Cove
Realty Management Services, Inc. in Palm Desert, California, effective January
1, 1999; Ryan's Golden Eagle Management Services, Inc. in Big Sky, Montana,
effective January 5, 1999; Scottsdale Resort Accommodations, Inc. in Scottsdale,
Arizona, effective February 1, 1999; Worthy Rentals, Inc. in Hilton Head Island,
South Carolina, effective February 1, 1999; High Country Management, Inc. in
Crested Butte, Colorado, effective March 31, 1999; Mountain High Management in
Whistler, British Columbia, Canada, effective March 31, 1999; Fischer Villa
Management in Tucson, Arizona, effective June 20, 1999; Shoreline Properties,
Inc. in Port Clinton (i.e., Lake Erie Islands), Ohio, effective June 15, 1999;
Coates, Reid & Waldron, in Aspen, Colorado, effective June 29, 1999; Shoreline
Rentals, Inc. in Hilton Head, South Carolina, effective July 18, 1999; Advantage
Vacation Homes by Styles, Inc. and Styles Estates, Ltd. in Orlando, Florida,
effective August 6, 1999; Bluebill Vacation Properties, Inc. in Bonita Beach,
Florida, effective October 1, 1999; Langford Realty, Inc. in Ft. Myers, Florida,
effective May 26, 2000; Sand and Sea, Inc. in Outer Banks, North Carolina,
effective May 31, 2000; and Base Mountain Properties, Inc. in Sun Valley, Idaho,
effective July 1, 2000. 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.
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
12
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. Our ability to fund acquisitions through the issuance of common
stock may not be feasible at the current stock price.
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.
Markets
We currently manage condominiums and homes in 42 resort locations
throughout the United States and in Canada. The following table sets forth the
aggregate number of properties managed in each of the following states and
provinces at December 31, 2000.
BEACH RESORTS
Florida: Beaches of South Walton, Bonita Springs, Captiva Island,
Destin, Fort Myers, Fort Myers Beach, Marco Island,
Okaloosa Island/Fort Walton Beach, Orlando, Navarre Beach,
Naples, Pensacola, Sanibel Island and Vanderbilt Beach. 4,953
Massachusetts: Nantucket 1,200
South Carolina: Hilton Head Island 619
Delaware: Bethany Beach 562
North Carolina: Outer Banks 826
Georgia: St. Simons Island 460
Alabama: Gulf Shores 347
Ohio: Lake Erie Islands 152
HAWAIIAN RESORTS
Hawaii: Hawaii, Kauai, Maui and Oahu 5,352
MOUNTAIN RESORTS
Colorado: Aspen, Breckenridge, Crested Butte, Dillon,
Snowmass Village and Telluride 1,354
British Columbia: Whistler 635
Utah: The Canyons, Deer Valley and Park City 371
Montana: Big Sky 232
Oregon: Sunriver 138
Idaho: Sun Valley 165
DESERT RESORTS
California: Palm Desert and Palm Springs 245
Arizona: Scottsdale and Tucson 334
------
TOTAL 17,945
======
13
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 Report on Form
10-K for the year ended December 31, 2000, expected to be filed with the
Securities and Exchange Commission on March 30, 2001.
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.
14
Performance Statistics
Twelve Months Ended
Dec 31, Dec 31,
(Unaudited) 1999 2000 Variance
-------- -------- --------
Beach
Lodging Revenues(1) $118,685 $131,428 10.7 %
Occupancy 53.2% 54.8% 1.6 pts
ADR $ 139.31 $ 144.43 3.7 %
RevPAU $ 74.04 $ 79.15 6.9 %
Total Units 5,308 5,423 2.2 %
Hawaii
Lodging Revenues(1) $136,788 $155,520 13.7 %
Occupancy 76.0% 79.3% 3.3 pts
ADR $ 102.21 $ 109.32 7.0 %
RevPAU $ 77.71 $ 86.69 11.6 %
Total Units 4,976 5,352 7.6 %
Mountain
Lodging Revenues(1) $ 41,222 $ 40,130 (2.6)%
Occupancy 33.6% 32.5% (1.1)pts
ADR $ 158.39 $ 162.70 2.7 %
RevPAU $ 53.17 $ 52.83 (0.6)%
Total Units 2,510 2,393 (4.7)%
Desert
Lodging Revenues(1) $ 7,522 $ 8,835 17.5 %
Occupancy 42.1% 44.0% 1.9 pts
ADR $ 110.14 $ 110.54 0.4 %
RevPAU $ 46.35 $ 48.62 4.9 %
Total Units 583 579 (0.7)%
Total
Lodging Revenues(1) $304,217 $335,913 10.4 %
Occupancy 58.6% 60.5% 1.9 pts
ADR $ 120.78 $ 126.32 4.6 %
RevPAU $ 70.73 $ 76.42 8.0 %
Total Units 13,377 13,747 2.8 %
(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.
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 1999, which approximated 4,200 units as of
December 31, 2000. Also excluded from these statistics are owner use nights and
renovation nights, which were approximately 11.7% of gross available nights in
the twelve months ended December 31, 2000 and 11.6% of gross available nights in
the twelve months ended December 31, 1999.
15
RESORTQUEST INTERNATIONAL,INC.
CONSOLIDATED BALANCE SHEETS
Years Ended December 31,
(in thousands, except share amounts) 1999 2000
--------- --------
ASSETS
Current assets
Cash and cash equivalents $ 40,239 $ 26,344
Trade and other receivables, net of allowance 4,394 5,957
Deferred income taxes 1,237 1,061
Other current assets 7,676 8,888
-------- --------
Total current assets 53,546 42,250
-------- --------
Goodwill, net 175,167 185,733
Property and equipment, net 20,885 28,507
Notes receivable from stockholder 4,470 4,000
Other assets 3,607 2,679
-------- --------
Total assets $257,675 $263,169
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 832 $ 483
Deferred revenue and property owner payables 43,392 51,653
Accounts payable and accrued liabilities 15,149 13,774
Other current liabilities 1,468 303
-------- --------
Total current liabilities 60,841 66,213
-------- --------
Long-term debt, net of current maturities 68,090 50,401
Deferred income taxes 734 4,041
Other long-term obligations 2,187 6,112
-------- --------
Total liabilities 131,852 126,767
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 50,000,000
shares authorized, 18,715,447 and 18,988,246
shares outstanding, respectively. 187 190
Additional paid-in capital 150,974 151,960
Accumulated other comprehensive loss (33) (49)
Excess distributions (29,500) (29,500)
Retained earnings 4,195 13,801
-------- --------
Total stockholders' equity 125,823 136,402
-------- --------
Total liabilities and stockholders' equity $257,675 $263,169
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
16
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(in thousands, except per share amounts) 1998 1999 2000
------- -------- --------
Revenues
Property management fees $27,022 $ 65,795 $ 78,543
Service fees 15,603 38,608 47,080
Real estate and other 12,734 23,509 26,391
------- -------- --------
Total revenues 55,359 127,912 152,014
------- -------- --------
Operating expenses
Direct operating 31,596 65,804 80,314
General and administrative 15,125 41,669 40,940
Depreciation 1,342 2,556 3,549
Goodwill amortization 1,806 4,353 4,934
------- -------- --------
Total operating expenses 49,869 114,382 129,737
------- -------- --------
Operating income 5,490 13,530 22,277
Interest and other expense, net 507 4,228 4,814
------- -------- --------
Income before income taxes 4,983 9,302 17,463
Provision for income taxes 1,518 4,873 7,857
------- -------- --------
Income from continuing operations 3,465 4,429 9,606
Income from discontinued operations 1,347 - -
------- -------- --------
Net income $ 4,812 $ 4,429 $ 9,606
======= ======== ========
Earnings per share
Basic
Continuing operations $ 0.32 $ 0.25 $ 0.51
Discontinued operations 0.12 - -
------- -------- --------
Net income $ 0.44 $ 0.25 $ 0.51
======= ======== ========
Diluted
Continuing operations $ 0.32 $ 0.24 $ 0.51
Discontinued operations 0.12 - -
------- -------- --------
Net income $ 0.44 $ 0.24 $ 0.51
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
17
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
Accumalated
Common Stock Additional Other
------------ Paid-in Comprehensive Excess
(in thousands, except share amounts) Shares Amount Capital Loss Distributions
---------- ------ ---------- ------------- -------------
Balance, December 31, 1997 2,101,113 $ 21 $ 214 $ (5) $ -
Net income - - - - -
Foreign currency translation loss - - - (14) -
Initial public offering 6,670,000 67 59,954 - -
Distributions - - - - (29,500)
Stock issued in connection with:
Combinations 7,545,953 75 68,620 - -
Post-IPO acquisitions 775,702 8 7,257 - -
---------- ---- ------- ---- --------
1998 Comprehensive Income
Balance, December 31, 1998 17,092,768 171 136,045 (19) (29,500)
Net income - - - -
Foreign currency translation loss - - - (14) -
Distributions - - - - -
Stock issued in connection with:
Exercise of employee stock options 3,436 - 37 - -
Post-IPO acquisitions 1,619,243 16 14,892 - -
---------- ---- -------- ---- --------
1999 Comprehensive Income
Balance, December 31, 1999 18,715,447 187 150,974 (33) (29,500)
Net income - - - -
Foreign currency translation loss - - - (16) -
Stock issued in connection with:
Post-IPO acquisitions 272,799 3 986 - -
---------- ---- -------- ---- --------
2000 Comprehensive Income
Balance, December 31, 2000 18,988,246 $190 $151,960 $(49) $(29,500)
========== ==== ======== ==== ========
Retained
Earnings
(Accumulated Comprehensive
(in thousands, except share amounts) Deficit) Total Income
------------ -------- -------------
Balance, December 31, 1997 $ (627) $ (397)
Net income 4,812 4,812 $4,812
Foreign currency translation loss - (14) (14)
Initial public offering - 60,021 -
Distributions (4,027) (33,527) -
Stock issued in connection with:
Combinations - 68,695 -
Post-IPO acquisitions - 7,265 -
------- -------- ------
1998 Comprehensive Income 4,798
======
Balance, December 31, 1998 158 106,855
Net income 4,429 4,429 4,429
Foreign currency translation loss - (14) (14)
Distributions (392) (392) -
Stock issued in connection with:
Exercise of employee stock options - 37 -
Post-IPO acquisitions - 14,908 -
------- -------- ------
1999 Comprehensive Income 4,415
======
Balance, December 31, 1999 4,195 125,823
Net income 9,606 9,606 9,606
Foreign currency translation loss (16) (16)
Stock issued in connection with:
Post-IPO acquisitions - 989 -
------- -------- ------
2000 Comprehensive Income $9,590
======
Balance, December 31, 2000 $13,801 $136,402
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands) 1998 1999 2000
-------- -------- --------
Cash flows from operating activities
Net income $ 4,812 $ 4,429 $ 9,606
Income from discontinued operations (1,347) - -
-------- -------- --------
Income from continuing operations 3,465 4,429 9,606
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities
Depreciation and goodwill amortization 3,148 6,909 8,483
Changes in operating assets and liabilities
Trade and other receivables 1,631 468 (1,507)
Deferred revenue and property owner payables 10,471 3,370 4,451
Accounts payable and accrued liabilities (3,288) (192) 407
Deferred income taxes 503 667 3,756
Other (2,566) (2,208) (3,310)
-------- -------- --------
Net cash provided by continuing operations 13,364 13,443 21,886
Cash flows used in discontinued operations (56) - -
-------- -------- --------
Net cash provided by operating activities 13,308 13,443 21,886
-------- -------- --------
Cash flows from investing activities
Cash portion of acquisitions, net (35,518) (20,079) (6,657)
Purchases of property and equipment (4,021) (5,280) (11,057)
Other - (769) -
-------- -------- --------
Net cash used in investing activities (39,539) (26,128) (17,714)
-------- -------- --------
Cash flows from financing activities
Net proceeds from issuance of Senior Notes - 48,986 -
Net Credit Facility borrowings (repayments) 32,000 (24,813) (12,000)
Proceeds (repayments) from issuance of secured mortgage notes - 5,734 (5,734)
Payment of capital lease and other debt obligations (10,654) (2,838) (333)
Distributions to stockholders (33,527) (392) -
Net proceeds from public stock issuance 60,021 - -
-------- -------- --------
Net cash provided by (used in) financing activities 47,840 26,677 (18,067)
-------- -------- --------
Net change in cash and cash equivalents 21,609 13,992 (13,895)
Cash and cash equivalents, beginning of period 4,638 26,247 40,239
-------- -------- --------
Cash and cash equivalents, end of period $ 26,247 $ 40,239 $ 26,344
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
19
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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
Formation
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
United States 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. (commonly referred to as "Aston Hotels &
Resorts") was identified as the accounting acquiror and the remaining Founding
Companies along with ResortQuest corporate were accounted for under the purchase
method of accounting.
Pooling Restatements
Since our IPO, we have consummated 21 acquisitions (the "Post-IPO
acquisitions"), three of which were accounted for under the pooling-of-interests
method of accounting. As these acquisitions were consummated in 1998 and the
first quarter of 1999, we retroactively restated all prior historical
consolidated financial statements for these pooling-of-interests acquisitions.
The restated historical consolidated financial statements include the financial
results of Aston Hotels & Resorts and the three pooling acquisitions for all
periods presented, ResortQuest corporate and the remaining Founding Companies
only since May 26, 1998, and the remaining Post-IPO acquisitions from their
respective effective dates of acquisition.
Post-IPO Acquisitions
Subsequent to the IPO, we completed five acquisitions through the end of
1998 for a total cost of $45.8 million with 22.5% of the consideration paid in
the form of common stock with an aggregate value of $10.3 million and $35.5
million of net cash consideration, one of which was accounted for under the
pooling-of-interests method of accounting. During 1999, we completed 13
acquisitions for a total cost of $39.3 million, with 48.9% of the consideration
paid in the form of common stock with an aggregate value of $19.2 million and
$20.1 million of net cash consideration, two of which were accounted for under
the pooling-of-interests method of accounting. During 2000, we completed three
acquisitions for a total cost of $7.6 million, including earn-up payments
related to the 1999 acquisitions, with 12.9% of the net consideration paid in
the form of common stock with an aggregate value of $989,000, net of retired
escrow shares and the remaining $6.6 million of consideration paid in cash, net
of cash acquired. All acquisitions were accounted for under the purchase method
of accounting, unless otherwise noted. The aggregate impact of the 2000
acquisitions was not material to our financial statements. The 1998 and 1999
acquisitions were material to our financial statements and we noted the
following pro forma results assuming these combinations had occurred on January
1, 1998:
Years Ended December 31,
(in thousands, unaudited) 1998 1999
------- --------
Revenues
ResortQuest, as restated $55,359 $127,912
Combinations 34,938 16,865
------- --------
Pro forma combined revenues $90,297 $144,777
======= ========
Net income
ResortQuest, as restated $ 4,812 $ 4,429
Combinations 3,020 2,390
------- --------
Pro forma combined net income $ 7,832 $ 6,819
======= ========
20
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what our actual results
would have been had these acquisitions been completed on January 1, 1998, or of
future results.
Acquisition Costs
Costs incurred in the course of our evaluation of acquisition candidates
and the ultimate consummation of acquisitions consist primarily of legal fees,
accounting fees and other costs incurred by us in identifying and closing
transactions. All costs incurred are deferred on the balance sheet until the
related transaction is either consummated or abandoned. Similar treatment is
followed in recording costs incurred by us in the course of generating
additional debt or equity financing. We incurred $716,000 and $134,000 in 1999
and 1998, respectively, in transaction costs related to the acquisitions
accounted for under the pooling-of-interests method. These costs were recorded
in general and administrative expenses during 1999 and 1998. For the
acquisitions accounted for under the purchase method of accounting, all
transaction costs and the excess of the purchase price over the fair value of
identified net assets acquired represents goodwill. Goodwill is amortized over a
life up to 40 years and 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Property Management Fees
We receive property rental fees when the properties are rented, which are
generally a percentage of the rental price of the vacation property. Rental fees
range from approximately 3% to over 40% of rents collected based upon the type
of services we provide to the property owner and the type of rental units
managed. Revenues are recognized ratably over the rental period based on our
proportionate share of the total rental price of the vacation condominium or
home. We require certain minimum deposits when reservations are booked. These
deposits are recorded as a component of deferred revenue and property owner
payables. Revenues from cancellations are recorded at the time of cancellation.
Service Fees
We internally provide or arrange through third parties certain services
for property owners or guests. Service fees include reservations, housekeeping,
long-distance telephone, ski rentals, lift tickets, beach equipment rentals and
pool cleaning. Internally provided services are recognized as service fee
revenue when the service is provided. Services provided by third parties are
generally billed directly to property owners and are not included in the
accompanying consolidated financial statements.
21
Other
We recognize other revenues primarily related to real estate broker
commissions, food & beverage sales and software and maintenance sales. We have
real estate broker sales operations in 28 resort locations. We recognize
revenues on real estate sales when such transactions are complete and such
revenue is recorded net of the related agent commissions. We also manage food &
beverage outlets in connection with the management of larger condominium
complexes, primarily in Hawaii and Florida. First Resort Software, Inc. ("First
Resort") sells a fully integrated software package specifically designed for the
property rental business, along with ongoing service contracts. First Resort
recognizes software and maintenance revenues when the systems are installed and
ratably over the service period, respectively. Other revenues were as follows:
Years Ended December 31,
(in thousands) 1998 1999 2000
------- ------- -------
Real estate brokerage commissions, net $ 4,858 $13,282 $17,188
Food & beverage 2,265 4,067 4,575
Software sales and service 1,954 3,448 3,330
Other 3,657 2,712 1,298
------- ------- -------
$12,734 $23,509 $26,391
======= ======= =======
Direct Operating Expenses
Direct operating expenses include expenses related to housekeeping,
maintenance, reservations, marketing, advertising and other costs associated
with rental and management. Direct operating expenses also include food &
beverage cost of sales and operating expenses as follows:
Years Ended December 31,
(in thousands) 1998 1999 2000
------- ------- -------
Rental and management $29,362 $62,149 $75,849
Food & beverage 2,234 3,655 4,465
------- ------- -------
$31,596 $65,804 $80,314
======= ======= =======
Goodwill
Goodwill is the excess of the purchase price over fair value of identified
net assets acquired in business combinations accounted for under the purchase
method of accounting. Goodwill is being amortized on a straight-line basis over
40 years, other than that associated with the acquisition of First Resort, which
is being amortized over 15 years. We recognized goodwill amortization of $1.8
million, $4.4 million and $4.9 million in 1998, 1999 and 2000, respectively.
Income Taxes
Prior to the IPO, Aston Hotels & Resorts had elected S Corporation status
as defined by the Internal Revenue Code and state tax statutes. Under S
Corporation status, the former stockholders reported their share of our taxable
earnings or losses in their personal tax returns for the periods prior to the
Combinations. In conjunction with the Combinations, Aston Hotels & Resorts
changed from an S Corporation to a C Corporation for federal and state income
tax reporting purposes, which requires us to recognize the tax consequences of
operations in our consolidated statements of income.
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets, including net operating loss carryforwards,
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the new rate is enacted.
22
Cash and Cash Equivalents
For the purposes of the consolidated balance sheets and statements of cash
flows, we consider all investments with original maturities of three months or
less to be cash equivalents. At December 31, 1999 and 2000, cash and cash
equivalents included $29.1 million and $22.1 million, respectively, of cash held
in escrow for prepaid rentals and pending real estate sales transactions.
Inventories
Inventories consist primarily of food and beverage items and are stated at
the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are stated at cost or, in the case of equipment
acquired under capital leases, the present value of future lease payments.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or the lease terms.
In accordance with the AICPA's Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," certain costs related to the development of software for internal
use must be capitalized. We have capitalized internal development costs,
primarily related to outside professional fees and internal payroll and related
benefits, as prescribed by SOP No. 98-1. These costs are being amortized on a
straight-line basis over the estimated useful lives of the related projects
ranging from three to ten years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the consolidated statements of income.
Financial Instruments
The carrying values of all financial instruments approximate their
estimated fair value.
Proposed Accounting Announcements
The Financial Accounting Standards Board issued an Exposure Draft on
February 15, 2001 to address its revised views for accounting for business
combinations with a final standard expected to be released in June 2001. If
adopted as currently proposed, goodwill related to our future and historical
acquisitions will no longer be amortized. Goodwill will be subject to reviews
for impairment upon the occurrence of certain events, and, if impaired, a
write-down would be recorded. We recorded goodwill amortization of $1.8 million,
$4.4 million and $4.9 million in 1998, 1999 and 2000, respectively.
Use of 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 amount 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. Actual results could differ from those estimates.
Concentration of Risk
Our property management operations are concentrated in the states of
Colorado, Hawaii and Florida. For the year ended December 31, 2000, Colorado,
Hawaii and Florida accounted for 14%, 17% and 36%, respectively, of our
consolidated revenues.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
23
NOTE 3 - NOTES RECEIVABLE FROM STOCKHOLDERS
In connection with the Combinations, Aston Hotels & Resorts formalized its
receivable resulting from cash advances to its primary stockholder (see the
Litigation section of Note 9) with a $4.0 million promissory note. On February
16, 2000, this Note was restructured in order to provide for additional
collateral. At this time, certain management fee receivables and accrued
interest of approximately $1.1 million were also aggregated into a separate note
(collectively, the "Notes"). The Notes are collateralized by certain real estate
held by the stockholder and bear interest at 1/2% below the prime rate of
interest, but not less than 6% and not more than 10%. The $1.1 million note,
plus accrued interest, is due in two equal installments on December 31, 2000 and
June 30, 2001. Interest payments under the $4.0 million note are due every
January and July 1st, with the principal being due in full on May 25, 2008. All
payments due under the restructured terms of the Notes have been received.
NOTE 4 - DISCONTINUED OPERATIONS
ResortQuest decided in 1998 that it would no longer enter into leasing
arrangements for lodging facilities. Accordingly, for all periods presented in
the accompanying consolidated 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 Hotels &
Resorts assigned such leases to AST Holdings, Inc., a corporation owned by Aston
Hotels & Resorts' primary stockholder. On May 27, 1998, ResortQuest entered into
a contract with AST Holdings to manage these facilities for a fee. Income from
discontinued operations is as follows:
Year Ended
December 31,
(in thousands) 1998
-------
Revenues $14,304
Operating expenses 10,120
General and administrative expenses 2,839
-------
Operating income 1,345
Other income 2
-------
Net income from discontinued operations $ 1,347
=======
Note 5 - UNUSUAL EXPENSES AND OTHER CHARGES
During 1999, general and administrative expenses included $3.1 million of
items that management considers unusual expenses and other charges. These
charges included $906,000 related to a study to explore alternate funding
sources; $734,000 in accrued severance payments to three former members of
management; $716,000 in transaction costs for two of our 1999 acquisitions
accounted for under the pooling-of-interests method; $471,000 related to an
indefinitely suspended secondary offering filed during the second quarter of
1999; and $321,000 in costs related to abandoned acquisitions.
24
NOTE 6 - SUPPLEMENTAL FINANCIAL INFORMATION
Trade and other receivables consisted of the following:
Years Ended December 31,
(in thousands) 1999 2000
------ ------
Receivables from managed properties $1,437 $3,748
Travel agent and other 3,109 2,537
------ ------
Total 4,546 6,285
Less - allowance for doubtful accounts (152) (328)
------ ------
$4,394 $5,957
====== ======
Property and equipment consisted of the following:
Estimated Useful Years Ended December 31,
(in thousands) Life in Years 1999 2000
----------------- ----------- -------
Land and improvements $ 2,249 $ 2,274
Building and improvements 15-30 7,984 8,541
Furniture, fixtures and equipment 3-10 12,539 16,124
Software and Web development 3-10 1,496 8,071
Leased property 3- 7 1,935 1,833
------- -------
26,203 36,843
Less - accumulated depreciation (5,318) (8,336)
------- -------
$20,885 $28,507
======= =======
Accounts payable and accrued liabilities consisted of the following:
Years Ended December 31,
(in thousands) 1999 2000
------- -------
Accounts payable $ 9,387 $ 5,242
Accrued payroll 3,370 5,103
Other accrued liabilities 2,392 3,429
------- -------
$15,149 $13,774
======= =======
Supplemental cash flow information is as follows:
Years Ended December 31,
(in thousands) 1998 1999 2000
------- ------- --------
Supplemental disclosure of cash flow transactions
Cash paid for interest $ 658 $ 5,292 $ 6,028
======= ======= ========
Cash paid for income taxes $ 721 $ 6,823 $ 5,919
======= ======= ========
Supplemental disclosure of non-cash flow information
Capital lease obligations $ 83 $ 595 $ 674
======= ======= ========
Common stock portion of Combinations $68,695 $ - $ -
======= ======= ========
Common stock portion of Post-IPO acquisitions $ 7,265 $14,908 $ 989
======= ======= ========
25
NOTE 7 - LONG-TERM DEBT
On January 22, 2001, we replaced our existing Credit Facility that was to
expire on May 26, 2001 with a similar facility that expires on January 22, 2004.
Similar to the existing Credit Facility and subject to certain limitations, the
new Credit Facility may be used to borrow up to $50 million and may be used for
acquisitions, capital expenditures and general corporate purposes. The Credit
Facility may also be used for letters of credit not to exceed $2.5 million in
the aggregate. 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, as defined, plus a margin of 2.0%.
Availability fees are 0.5% per annum and are payable on the unused portion of
the Credit Facility. Interest and availability fees are payable monthly. The
Credit Facility was undrawn at December 31, 2000. There were $12.0 million of
outstanding borrowings under the Credit Facility at December 31, 1999.
On June 16, 1999, we issued $50 million of 9.06% Senior Notes, due June
2004, in connection with a note purchase agreement. The Senior Notes are secured
pari passu to our Credit Facility. The note purchase agreement contains loan
covenants substantially similar to those of the credit agreement under the
Credit Facility and has prepayment restrictions in the form of "make-whole"
provisions. Interest is payable semi-annually.
The Credit Facility 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. We were in compliance with all
covenants on all indebtedness at December 31, 2000.
At December 31, 1999 and 2000, long-term debt consisted of the following:
Years Ended December 31,
(in thousands) 1999 2000
------- -------
Senior Notes $50,000 $50,000
Credit Facility 12,000 -
Various notes with banks, secured by certain assets, at interest rates
ranging from 1.9% to 9.1%, due between June 2001 through June 2004 5,593 229
Long-term capital lease obligations 1,329 655
------- -------
Total 68,922 50,884
Less - current maturities (832) (483)
------- -------
Long-term debt, net of current maturities $68,090 $50,401
======= =======
Annual maturities of long-term debt are: 2001, $483,000; 2002, $354,000; 2003,
$40,000; 2004, $50.0 million; 2005, $3,000; and $1,000 thereafter.
NOTE 8 - OPERATING LEASES
ResortQuest has entered into non-cancelable operating leases for
equipment, facilities, office space, hotel properties and individual condominium
units within its managed properties. At December 31, 2000, future minimum lease
commitments under non-cancelable operating leases are as follows:
Year Ended December 31,
(in thousands)
-------
2001 $ 3,360
2002 2,544
2003 2,307
2004 1,974
2005 1,943
Thereafter 6,294
-------
$18,422
=======
Under terms of the leases, ResortQuest is generally required to pay all
taxes, insurance and maintenance. Rent expense for 1998, 1999 and 2000 was
approximately $5.0 million, $4.8 million and $5.9 million, respectively.
26
In conjunction with the Combinations and Post-IPO acquisitions,
ResortQuest entered into several lease agreements with certain former owners for
the use of office space and facilities. Lease payments made to former owners,
who are also significant stockholders and directors, during 1998, 1999 and 2000
were approximately $548,000, $407,000 and $410,000, respectively.
As an accommodation to certain of the managed properties, the Company
assists in obtaining leases of operating equipment. In some instances, this
assistance includes entering into the leases as the technical lessee. The
managed properties perform all obligations under the leases, including making
lease payments and providing insurance coverage. ResortQuest is contingently
liable under the leases until completion of the lease terms. Because ResortQuest
undertakes the role of a technical lessee simply as an accommodation to the
managed properties and because the leased equipment is used only for and by the
managed properties, these leases have not been recorded in the Company's
financial statements. At December 31, 2000 all remaining obligations under these
leases approximated $1.5 million.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Guarantees
Certain of our management agreements in Hawaii contain provisions for
guaranteed levels of returns to owners. These agreements also contain force
majeure clauses to protect the Company from forces or occurrences beyond the
control of management. During 1998, 1999 and 2000, ResortQuest made payments in
excess of the management fees earned on these guaranteed agreements of $840,000,
$133,000 and $390,000, respectively.
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
and Post-IPO acquisitions have indemnified ResortQuest against losses, claims,
damages, actions, suits, proceedings, demands, assessments, adjustments, costs
and expenses as a result of or arising from any breach of the representations
and warranties in the Agreement, 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,
Post-IPO acquisitions or the stockholders and certain other identified claims or
litigation.
In addition, pursuant to each Agreement and subject to certain
limitations, ResortQuest 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
any breach by ResortQuest or of its representations and warranties in the
Agreement, 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 ResortQuest or any of the other Founding Companies and Post-IPO
acquisitions contained in certain filings with the Securities and Exchange
Commission or the matters described in the schedules to the Agreement relating
to guarantees.
ResortQuest is not aware of any events that have or could have caused any
party to act under such indemnification under any of the Agreements during the
periods presented in the accompanying consolidated financial statements.
Litigation
On May 26, 2000, Hotel Corp. of the Pacific, Inc., a subsidary of
ResortQuest doing business as Aston Hotels & Resorts, instituted legal
proceedings in the Circuit Court for the First Circuit of Hawaii against Andre
S. Tatibouet, a previous director of ResortQuest, a previous beneficial owner of
more than five percent of our outstanding common stock and currently the
president of Hotel Corp. This action arises 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. Hotel Corp. seeks
monetary damages for breach of fiduciary duty, fraudq and negligent
misrepresentation. By order of the Circuit Court, the claims asserted by Hotel
Corp. in the lawsuit have been consolidated with an arbitration demand, filed
with the American Arbitration Association by Mr. Tatibouet, in which he alleges
various breaches of his employment agreement with Hotel Corp.
27
Also on May 26, 2000, ResortQuest International and Hotel Corp. brought
action in the Ciruit 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 in each matter.
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.
Insurance
ResortQuest carries a broad range of insurance coverage, including general
and business auto liability, commercial property and a general umbrella policy.
The Company has not incurred significant claims or losses on any of its
insurance policies during the periods presented in the accompanying consolidated
financial statements.
Employee Health Insurance
We introduced a national healthcare plan on August 1, 2000 for all
domestic team members. The plan provides a broad spectrum of healthcare choices
for all full time team members to select the coverage that best suits their
needs. The plan includes medical, dental, vision, life, AD&D, LTD and voluntary
life insurance coverages. The employee medical and dental coverages are
self-insured by the Company. All self-insurance reserves include accruals of
estimated settlements for known claims, as well as accruals for estimates of
incurred, but not reported claims. These estimates are based on industry claim
factors provided by a plan administrator. Though changes in cost assumptions, as
well as changes in actual experience, could cause these estimates to change
significantly in the near term, the Company maintains stop loss insurance to
minimize the effect of large claims on its financial results. During 2000, the
Company incurred $540,000 in expense related to this self-insured plan.
Workers' Compensation Insurance
We introduced a self-insured workers' compensation insurance plan on
December 1, 2000 for most domestic team members. Previous coverage was provided
through full premium-based policies. Team members in certain locations remain
covered under these premium-based policies. All self-insurance reserves include
accruals of estimated settlements for known claims, as well as accruals for
estimates of incurred, but not reported claims. These estimates are based on
industry claim factors provided by a plan administrator. Though changes in cost
assumptions, as well as changes in actual experience, could cause these
estimates to change significantly in the near term, the Company maintains stop
loss insurance to minimize the effect of large claims on its financial results.
During 2000, the Company incurred $92,000 in expense related to this
self-insured plan.
Benefit Plans
We established a new 401(k) profit sharing plan, which covers all domestic
team members. During 1999 all pre-existing plans were merged into the new plan.
Under the new plan that began on April 1, 1999, employees may defer from 1% to
20% of eligible earnings, the Company matches 50% of the first 6% of employee
contributions, and employee vesting in Company matching contributions occurs
over a three-year period. During 2000, the Company incurred $1.2 million in
expense related to this plan.
Employment Agreements
Effective with the Combinations and the Post-IPO acquisitions, ResortQuest
entered into employment agreements with 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 December 31, 2000,
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
$9.0 million.
28
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock
On May 26, 1998, ResortQuest issued an aggregate of 9,254,286 shares of
common stock in connection with the Combinations (1,708,333 shares to Aston
Hotels & Resorts' stockholders and 7,545,953 shares to the remaining
stockholders involved with the Combinations) and 6,670,000 shares of common
stock in connection with the IPO. Shares issued in the IPO were sold at a price
to the public of $11.00 per share. The net proceeds to ResortQuest from the IPO
(after deducting underwriting discounts, commissions and offering expenses) were
approximately $60.0 million. Subsequent to the IPO, ResortQuest issued 3,063,960
shares of common stock in connection with the Post-IPO acquisitions (392,780
shares in the pooling-of-interests acquisitions and 2,671,180 shares in the
purchase acquisitions). At December 31, 2000, ResortQuest had 18,988,246 shares
of common stock issued and outstanding (16,240,916 shares of common stock and
2,747,330 shares of restricted common stock). The common stock and restricted
common stock are identical except that the holders of restricted common stock
are only entitled to one-half of one vote for each share on all matters.
On June 25, 1998, ResortQuest registered 3.0 million shares of common
stock pursuant to a shelf registration statement. On July 16, 1999, ResortQuest
registered an additional 5.0 million shares of common stock pursuant to a shelf
registration statement. As with our initial shelf registration statement, the
shares covered by this statement are available to be used for future
acquisitions. At December 31, 2000, 3,063,960 of the shares covered by these
shelf registration statements have been issued in connection with Post-IPO
acquisitions.
Preferred Stock
ResortQuest's authorized capital includes 10.0 million shares of
undesignated preferred stock with a $0.01 par value. On February 25, 1999, our
Board of Directors adopted a stockholder rights plan designed to protect our
stockholders in the event of takeover action that would deny them the full value
of their investment. Under this plan, a dividend distribution of one right for
each share of common stock was declared to holders of record at the close of
business on March 15, 1999. The rights will also attach to common stock issued
after March 15, 1999. The rights will become exercisable only in the event, with
certain exceptions, an acquiring party accumulates 15% or more of our voting
stock, or if a party announces an offer to acquire 15% or more of our voting
stock. The rights will expire on March 15, 2009. Each right will entitle the
holder to buy one one-hundredth of a share of a new series of preferred stock at
a price of $87.00. In addition, upon the occurrence of certain events, holders
of the rights will be entitled to purchase either our stock or shares in an
"acquiring entity" at half of the then current market value of our common stock.
We generally will be entitled to redeem the rights at $0.01 per right at any
time until the date on which a 15% position in our voting stock is acquired by
any person or group.
29
NOTE 11 - STOCK OPTIONS
In March 1998, our Board of Directors and stockholders approved the 1998
Long-Term Incentive Plan (the "Incentive Plan"). The options granted under the
Incentive Plan vest annually and ratably over a period from three to four years
after the date of grant and expire five to ten years after the grant date. We
have reserved 2,848,236 shares of authorized common stock for use in connection
with the Incentive Plan. In connection with the IPO, options in the form of
non-qualified stock options to purchase a total of 1,695,000 shares of common
stock of the Company at $11.00 per share were granted to management of the
Founding Companies, corporate management, certain stockholders and non-employee
directors. Subsequent to the IPO, 1,490,353 non-qualified stock options have
been granted to new employees at the then ResortQuest common stock market value
(ranging from $4.06 to $16.88). The Incentive Plan also provides for the
issuance of stock appreciation rights, restricted or deferred stock, dividend
equivalents, bonus shares and awards in lieu of our obligations to pay cash
compensation, non-employee directors' deferred shares or other awards. The value
of the options is based in whole or in part upon the value of the common stock.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our stock
option plan. Accordingly, no compensation cost has been recognized in the
consolidated statements of income for the Incentive Plan. In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," we have estimated the
fair value of each option grant using the Black-Scholes Option-Pricing Model.
Had compensation cost for awards under the Incentive Plan been determined based
on the fair value at the grant dates, our net income and earnings per share
would have been reduced to the pro forma amounts indicated in the following
table:
Years Ended December 31,
(in thousands, except per share amounts) 1998 1999 2000
------ ------ -------
Net income
As reported $4,812 $4,429 $9,606
Pro forma 4,136 3,139 8,594
Basic earnings per share
As reported $ 0.44 $ 0.25 $ 0.51
Pro forma 0.38 0.17 0.45
Diluted earnings per share
As reported $ 0.44 $ 0.24 $ 0.51
Pro forma 0.38 0.17 0.45
A summary of ResortQuest's stock option transactions, from May 26, 1998, through
December 31, 2000, is as follows:
Weighted Common
Average Stock
Exercise Options Available
Price Outstanding For Grant
-------- ----------- ----------
IPO - May 26, 1998 n/a - 1,910,914
Approval of new option n/a - 116,117
Granted $10.90 1,874,351 (1,874,351)
------ --------- ----------
Balance-- December 31, 1998 $10.90 1,874,351 152,680
Approval of new options n/a - 783,722
Granted 8.71 707,102 (707,102)
Exercised 10.68 (3,436) -
Cancelled 10.83 (168,405) 168,405
------ --------- ----------
Balance - December 31, 1999 $10.26 2,409,612 397,705
Approval of new options n/a - 40,919
Granted 5.35 603,900 (603,900)
Cancelled 10.23 (337,424) 337,424
------ --------- ----------
Balance - December 31, 2000 $ 9.14 2,676,088 172,148
====== ========= ==========
The weighted average fair value of options granted by ResortQuest for
1998, 1999 and 2000 was $4.13, $3.16 and $2.76, respectively. Assumptions
included an average risk-free interest rate ranging from 4.5% to 6.8%; an
average expected life of 2.6 to 3.9 years; a volatility factor of 40.4% to
60.5%; and no dividends. At December 31, 2000, there were 1,323,914 exercisable
stock options with an exercise price that ranges from $4.06 to $16.88 with a
weighted average exercise price of $9.82 and a weighted average remaining
contractual life of 6.0 years.
30
NOTE 12 - INCOME TAXES
Income tax expense attributable to income from continuing operations consisted
of the following:
Years Ended December 31,
(in thousands) 1998 1999 2000
------ ------- ------
Current
Federal $ 909 $3,240 $3,136
State 106 966 965
Deferred
Federal 448 593 3,401
State 55 74 355
------ ------ ------
Total $1,518 $4,873 $7,857
====== ====== ======
The difference between the statutory federal income tax rate and the
effective income tax rate expressed as a percentage of income from continuing
operations before income taxes was as follows:
Years Ended December 31,
1998 1999 2000
----- ---- ----
Federal statutory rate 34.0% 35.0% 35.0%
State and foreign income taxes, net of federal benefit 4.2 4.4 3.6
Goodwill and other permanent items 44.9 20.8 6.4
Pre-acquisition earnings not taxable (52.6) (7.8) -
------ ---- ----
Effective income tax rate 30.5% 52.4% 45.0%
====== ==== ====
As a result of the Combinations and the Post-IPO acquisitions, the
allocation of the purchase price to the assets and liabilities for financial
reporting purposes significantly exceeds the tax basis carried over from the
predecessor entities. Accordingly, the acquisitions created significant
nondeductible goodwill and other temporary differences. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and liabilities are as follows:
Years Ended December 31,
(in thousands) 1999 2000
-------- -------
Deferred tax assets
Claims and other reserves $ 757 $ 711
Section 481 adjustment: cash to accrual 441 221
State net operating losses 318 361
Other 126 154
------- -------
Total deferred tax assets $ 1,642 $ 1,447
======= =======
Deferred tax liabilities
Deductible goodwill amortization $ (470) $(1,696)
Basis difference on fixed assets (219) (2,731)
Other (450) -
------- -------
Total deferred tax liabilities (1,139) (4,427)
------- -------
Net deferred tax asset (liability) $ 503 $(2,980)
======= =======
31
NOTE 13 - EARNINGS PER SHARE
Actual Results
Earnings per share included in the consolidated statements of income for
the periods presented includes the results of Aston Hotels & Resorts and the
pooling acquisitions for the entire periods presented, includes ResortQuest
corporate and the remaining Founding Companies only since May 26, 1998, and
includes the Post-IPO acquisitions since their respective effective dates of
acquisition. Accordingly, the 1,708,333 shares of common stock issued to the
former stockholders of Aston Hotels & Resorts in connection with the
Combinations and the 392,780 shares issued in connection with the three pooling
acquisitions are considered outstanding for all periods presented. Shares issued
in connection with the IPO and all other Post-IPO acquisitions are considered
outstanding at date of issuance. The following table reflects our weighted
average common shares outstanding and the impact of its primary common share
equivalents:
Years Ended December 31,
1998 1999 2000
---------- ---------- ----------
Basic weighted average common shares outstanding 10,826,000 18,005,426 18,962,752
Effect of dilutive securities - stock options 139,421 170,337 54,919
---------- ---------- ----------
Diluted weighted average common shares outstanding 10,965,421 18,175,763 19,017,671
========== ========== ==========
NOTE 14 - SEGMENT REPORTING
On January 1, 1998, ResortQuest adopted the provisions of SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." Under
SFAS No. 131, ResortQuest has one operating segment, property management, which
is managed as one business unit. The accounting policies of this segment are the
same as those described in the summary of significant accounting policies. The
All other segment includes First Resort and corporate. At December 31, 1998,
1999 and 2000, approximately 79%, 76% and 64%, respectively, of the All other
segment assets represents goodwill recorded for First Resort and corporate. The
following table presents the revenues, operating income and assets of
ResortQuest's reportable segment:
Years Ended December 31,
(in thousands) 1998 1999 2000
-------- -------- --------
Revenues
Property management $ 53,240 $124,270 $148,536
All other 2,119 3,642 3,478
-------- -------- --------
$ 55,359 $127,912 $152,014
======== ======== ========
Operating income
Property management $ 7,617 $ 23,409 $ 31,892
All other (2,127) (9,879) (9,615)
-------- -------- --------
$ 5,490 $ 13,530 $ 22,277
======== ======== ========
Assets
Property management $149,883 $218,742 $218,338
All other 38,336 38,933 44,831
-------- -------- --------
$188,219 $257,675 $263,169
======== ======== ========
32
NOTE 15 - RELATED-PARTY TRANSACTIONS
ResortQuest has consulting and management agreements with certain
directors and significant stockholders that were former owners of the Founding
Companies and Post-IPO acquisitions. Consulting services include assistance in
operations, identifying acquisitions and involvement in local and governmental
affairs. During 1998, 1999 and 2000, the Company incurred $287,000, $126,000 and
$215,000, respectively, relative to these consulting agreements.
ResortQuest receives sales commissions for selling properties developed by
certain companies and partnerships owned or co-owned by directors and
significant stockholders that were former owners of the Founding Companies and
Post-IPO acquisitions. These net commissions approximated $1.9 million, $2.0
million and $1.5 million during 1998, 1999 and 2000, respectively, and the
Company had approximately $(159,000) and $12,000 in net receivables (payables)
at December 31, 1999 and 2000, related to these commissions.
ResortQuest entered into numerous transactions with the former owner of
Aston Hotels & Resorts ("Former Owner") who is a stockholder and former director
of the Company. ResortQuest provides management and centralized services
(cooperative sales and marketing, reservations, accounting services and other
reimbursements) for four hotels, two of which are owned by the Former Owner and
two are managed for an affiliate of the Former Owner. The management fees
charged to these hotels approximated $1.5 million, $1.3 million and $1.1 million
in 1998, 1999 and 2000, respectively. Prior to the IPO, ResortQuest paid HCP,
Inc., a company that is wholly-owned by the Former Owner, $158,000 in 1998, for
sales representation and related accounting services. Beginning in 1997,
ResortQuest provides administrative services to AST International LLC, which is
controlled by the Former Owner. Related to these services, the Company
recognized $272,000, $78,000 and $42,000 of revenue during 1998, 1999 and 2000,
respectively.
ResortQuest provides various management and consulting services for
certain companies and partnerships owned or co-owned by former owners of the
Founding Companies and Post-IPO acquisitions. ResortQuest received approximately
$275,000, $323,000 and $368,000 for these services during 1998, 1999 and 2000,
respectively. ResortQuest also manages vacation properties pursuant to its
standard management agreement that are owned or co-owned by certain directors
and employees of the Company.
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of ResortQuest International, Inc.:
We have audited the accompanying consolidated balance sheets of
ResortQuest International, Inc., (a Delaware corporation) and subsidiaries (the
"Company"), as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in stockholders' equity and comprehensive income
and cash flows for each of the three years ended in the period December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ResortQuest International, Inc. and subsidiaries, as of December 31, 2000 and
1999, and the results of its operations and its cash flows for each of the three
years ended in the period December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Memphis, Tennessee,
February 6, 2001.
34
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
ResortQuest International, Inc. is responsible for preparing the
consolidated financial statements and related information appearing in this
report. Management believes that the consolidated financial statements present
fairly ResortQuest's consolidated financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the
United States. In preparing its consolidated financial statements, ResortQuest
is required to include amounts based on estimates and judgments which it
believes are reasonable under the circumstances.
ResortQuest maintains accounting and other control systems designed to
provide reasonable assurance that financial records are reliable for purposes of
preparing consolidated financial statements and that assets are properly
accounted for and safeguarded. Limitations exist in any internal control system,
recognizing that the system's cost should not exceed the benefits derived.
The Board of Directors pursues its responsibility for ResortQuest's
consolidated financial statements through its Audit Committee, which is composed
solely of directors who are not officers or employees of ResortQuest. The Audit
Committee meets from time to time with the independent public accountants and
management.
David L. Levine
Chairman, President and Chief Executive Officer
J. Mitchell Collins
Senior Vice President and Chief Financial Officer
35
Quarterly Results of Operations
(unaudited)
First Second Third Fourth
(in thousands, except share amounts) Quarter Quarter Quarter Quarter
------- ------- -------- -------
2000 ACTUAL
Revenues $38,547 $40,840 $47,014 $25,613
Operating income (loss) 6,512 6,424 12,578 (3,238)
Net income (loss) 2,851 2,832 6,403 (2,480)
Basic earnings (loss) per share (a) 0.15 0.15 0.34 (0.13)
Basic weighted average shares oustanding 18,831 19,013 19,020 18,988
Diluted earnings (loss) per share (a) 0.15 0.15 0.34 (0.13)
Diluted weighted average shares outstanding 18,851 19,059 19,082 18,988
1999 ACTUAL(b)
Revenues $31,656 $30,989 $42,059 $23,207
Operating income (loss) 6,192 4,020 11,749 (8,431)
Net income (loss) (c) 3,040 1,692 5,663 (5,966)
Basic earnings (loss) per share (a) 0.18 0.10 0.31 (0.32)
Basic weighted average shares outstanding 17,354 17,487 18,462 18,680
Diluted earnings (loss) per share (a) 0.17 0.10 0.31 (0.32)
Diluted weighted average shares outstanding 17,786 17,472 18,479 18,680
1998 ACTUAL(b)
Revenues $ 8,666 $ 9,721 $17,554 $19,418
Operating income (loss) 2,526 819 2,959 (814)
Net income (loss) (c) 2,265 588 1,546 (934)
Basic earnings (loss) per share (a) 1.08 0.08 0.10 (0.05)
Basic weighted average shares outstanding 2,101 7,569 16,194 17,081
Diluted earnings (loss) per share (a) 1.08 0.08 0.09 (0.05)
Diluted weighted average shares outstanding 2,101 7,683 16,382 17,081
(a) The sum of the quarterly amounts may not equal the annual amount reported,
as per share amounts are computed independently for each quarter while the full
year is based on the annual weighted average shares outstanding.
(b) Years have been restated to reflect acquisitions accounted for under the
pooling-of-interests method of accounting.
(c) Net income is representative of income from continuing operations and does
not include the effects of certain discontinued operations.
36
Stock Price
2000 High Low
- ---- ------ ------
Fourth Quarter $ 7.44 $ 5.50
Third Quarter 6.69 5.00
Second Quarter 7.13 4.69
First Quarter 7.38 4.13
1999 High Low
- ---- ------ ------
Fourth Quarter $ 9.25 $ 3.75
Third Quarter 9.88 8.63
Second Quarter 17.00 7.63
First Quarter 22.56 13.94
1998 High Low
- ---- ------ ------
Fourth Quarter $14.75 $ 6.56
Third Quarter 17.13 8.81
Second Quarter 17.75 14.00
First Quarter n/a n/a
37
SELECTED FINANCIAL DATA
(unaudited)
Years Ended December 31,
(in thousands) 1996 1997 1998 1999 2000
------- ------- -------- -------- --------
Statements of Income Data
Revenues $25,670 $26,753 $ 55,359 $127,912 $152,014
Operating expenses 14,860 13,635 31,596 65,804 80,314
General and administrative
expenses, including
depreciation and
amortization 6,840 7,613 18,273 48,578 49,423
------- ------- -------- -------- --------
Income from operations 3,970 5,505 5,490 13,530 22,277
Interest and other expense, net 342 86 507 4,228 4,814
Provision for income taxes 90 90 1,518 4,873 7,857
------- ------- -------- -------- --------
Income from continuing
operations $ 3,538 $ 5,329 $ 3,465 $ 4,429 $ 9,606
======= ======= ======== ======== ========
Working capital deficit $(1,940) $(4,579) $ (2,080) $ (7,295) $(23,963)
======= ======= ======== ======== ========
Total assets $16,658 $19,072 $188,219 $257,675 $263,169
======= ======= ======== ======== ========
Long-term debt,
net of current maturities $ 3,060 $ 4,122 $ 38,098 $ 68,090 $ 50,401
======= ======= ======== ======== ========
Stockholders' (deficit) equity $ (54) $ (397) $106,855 $125,823 $136,402
======= ======= ======== ======== ========
38
Registrar and Stock Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Independent Public Accountants
Arthur Andersen LLP
100 Peabody Place, Suite 1100
Memphis, Tennessee 38103
Stockholder Inquiries
For information about ResortQuest International, Inc. and its subsidiaries,
including copies of its annual report on Form 10-K and quarter reports on Form
10-Q, please submit a written request to:
Investor Relations
ResortQuest International, Inc.
530 Oak Court Drive, Suite 360
Memphis, Tennessee 38117
Annual Meeting Date
ResortQuest International will hold its annual meeting of stockholders on May
10, 2001, at nine o'clock am at The Peabody Hotel, 149 Union Avenue, Memphis,
Tennessee 38103.
Forward-Looking Statements
Certain statements in this annual report include "forward-looking statements"
within the meaning of the safe harbor provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are qualified by cautionary statements contained herein and in ResortQuest
International, Inc. filings with the Securities and Exchange Commission.
39