Exhibit 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Abbott Realty Services, Inc.:
We have audited the accompanying consolidated balance sheet of Abbott
Realty Services, Inc. (a Florida corporation) and Subsidiaries (collectively the
"Company") as of July 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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
Abbott Realty Services, Inc. and Subsidiaries, as of July 31, 1998, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
September 18, 1998
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $14,580
Cash held in escrow ............................................................ 392
Trade and other receivables .................................................... 726
Deferred income taxes .......................................................... 116
Other current assets ........................................................... 899
-------
Total current assets .......................................................... 16,713
PROPERTY AND EQUIPMENT, net ..................................................... 9,501
DEFERRED INCOME TAXES ........................................................... 72
OTHER ASSETS .................................................................... 1,381
-------
Total assets ................................................................. $27,667
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ........................................... $ 806
Customer deposits, deferred revenue and payable to property owners ............. 12,055
Accounts payable and accrued liabilities ....................................... 3,818
Other current liabilities ...................................................... 308
-------
Total current liabilities ..................................................... 16,987
LONG-TERM DEBT, net of current maturities ....................................... 6,039
OTHER LONG-TERM OBLIGATIONS ..................................................... 732
MINORITY INTEREST ............................................................... 438
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized, issued and outstanding..... 1
Additional paid in capital ..................................................... 7
Retained earnings .............................................................. 3,463
-------
Total stockholders' equity .................................................... 3,471
-------
Total liabilities and stockholders' equity .................................... $27,667
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The accompanying notes are an integral part of this consolidated balance sheet.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1998
(IN THOUSANDS)
REVENUES:
Property management fees ............................................................ $13,572
Service fees and other .............................................................. 11,376
Real estate commissions, net including related party commissions of approximately
of $590,000 ....................................................................... 3,484
-------
Total revenues ..................................................................... 28,432
OPERATING EXPENSES ................................................................... 15,612
GENERAL AND ADMINISTRATIVE EXPENSES .................................................. 11,770
-------
Income from Operations ............................................................ 1,050
OTHER INCOME (EXPENSE):
Interest Expense, net ............................................................. (208)
-------
Income before provision for income taxes and minority interest .................... 842
PROVISION FOR INCOME TAXES ........................................................... 337
MINORITY INTEREST .................................................................... 132
-------
NET INCOME ........................................................................... $ 373
=======
The accompanying notes are an integral part of this consolidated statement.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JULY 31, 1998
(IN THOUSANDS EXCEPT SHARE DATA)
COMMON STOCK
-------------------
ADDITIONAL RETAINED
SHARES AMOUNT PAID IN CAPITAL EARNINGS TOTAL
-------- -------- ----------------- ---------- ---------
BALANCE, July 31, 1997 ......... 1,000 $ 1 $ 7 $3,090 $3,098
Net income ..................... -- -- -- 373 373
----- --- --- ------ ------
BALANCE, July 31, 1998 ......... 1,000 $ 1 $ 7 $3,463 $3,471
===== === === ====== ======
The accompanying notes are an integral part of this consolidated statement.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1998
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 373
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 645
Changes in operating assets and liabilities:
Cash held in escrow ........................................................... 322
Trade and other receivables ................................................... 484
Deferred income taxes ......................................................... 66
Other assets .................................................................. (249)
Customer deposits, deferred revenue and payable to property owners ............ 781
Accounts payable and accrued liabilities ...................................... 944
Other liabilities ............................................................. (3)
-------
Net cash provided by operating activities .................................... 3,363
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (1,757)
Proceeds from sale of property and equipment .................................... 59
-------
Net cash used in investing activities ...................................... (1,698)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .................................................... 1,224
Principal payments on long-term debt ............................................ (900)
Repayment of loan from shareholders ............................................. (88)
Change in minority interest payable ............................................. 132
-------
Net cash provided by financing activities .................................. 368
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NET INCREASE IN CASH AND CASH EQUIVALENTS ........................................ 2,033
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 12,547
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $14,580
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .......................................................... $ 550
=======
The accompanying notes are an integral part of this consolidated statement.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
1. BUSINESS AND ORGANIZATION:
Abbott Realty Services, Inc. is a Florida corporation comprised of Abbott
Resorts, Inc. and an 80% ownership in Abbott and Andrews Realty, Inc. ("Abbott
and Andrews"), which owns Tops'l Club of NW Florida, Inc., Tops'l Group, Inc.,
and SIIK, Inc. (collectively the "Company" or "Abbott"). The Company's two
principal operations include providing property management services to owners
of vacation properties and providing real estate services for sales of new and
previously owned vacation properties in the Destin, Fort Walton and South
Walton areas of Florida.
The Company provides management services to property owners pursuant to
management contracts, which are generally one-year in length. The majority of
such contracts allow property owners to terminate the contract at any time. At
July 31, 1998, the Company had approximately 2,400 rental homes and condominiums
under management. Abbott's operations are seasonal, with primary customer
concentration during May through August of each year.
In conjunction with providing property management services, the Company
realizes certain revenues related to food and beverage, housekeeping,
maintenance, laundry, etc. Revenues realized related to these activities are
classified as service fees and other in the accompanying consolidated statement
of income.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purpose of the statement of cash flows, the Company considers all
investments with original maturities of three months or less to be cash
equivalents.
Cash Held in Escrow
Cash held in escrow represents customer deposits related to real estate
sales that have been placed in escrow accounts until such sales are finalized.
Other Current Assets
Other current assets consist of prepaid advertising, prepaid insurance
premiums and inventories.
Advertising and insurance costs are expensed ratably over the expected
benefit period. At July 31, 1998, the Company maintained a prepaid balance of
approximately $718,000 related to these items.
Inventories are carried at weighted average cost and consist primarily of
linens, food and beverage. At July 31, 1998, the Company maintained an inventory
balance of approximately $180,000 related to these items.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Other Assets
Other assets primarily consist of a note receivable and certain
investments.
On June 1, 1995, in conjunction with purchasing certain property, Abbott
agreed to accept a note receivable for a portion of the property that was
previously sold. The note receivable represents a 50-month note for $700,000,
which bears interest at 8.7% per annum. Principal and interest payments
approximating $7,000 are due monthly with a final balloon payment of
approximately $593,000 due on August 1, 1999. At July 31, 1998, the note
receivable approximated $664,000.
The Company maintains a common stock investment in a local financial
institution. The Company accounts for this stock using the cost method, and the
investment balance approximated $90,000 at July 31, 1998. Subsequent to July 31,
1998, the Company recorded shareholder receivables for this balance as the
common stock was transferred to Abbott stockholders.
The Company has an ultimate 10% limited partnership interest in a
condominium development located in Destin, Florida. Due to the nature of this
investment, the Company accounts for this investment under the cost method. At
July 31, 1998, the investment balance approximated $600,000.
Minority Interest
As the Company owns 80% of Abbott and Andrews, the accompanying
consolidated financial statements reflect minority interest for 20% of the
current year net income of Abbott and Andrews and a minority interest payable to
shareholder for 20% of the retained earnings of Abbott and Andrews.
Revenue Recognition
The Company records property rental fees on the accrual basis of
accounting, ratably over the term of guest stays, as earned. The Company
requires a minimum deposit of $50 when the reservation is booked. These deposits
are non-refundable and are recorded as a component of customer deposits,
deferred revenue and payable to property owner in the accompanying consolidated
balance sheet. The Company records revenue for cancellations upon occurrence.
Service fees are recorded for a variety of services and are recognized as
the service is provided.
Commissions on real estate sales are recognized at closing and are recorded
net of the related commission expense to agents. The Company recognized gross
commission revenues of approximately $10,077,000 and commission expenses of
approximately $6,593,000 for the year ended July 31, 1998.
Operating Expenses
Operating expenses include travel agent commissions, salaries, marketing
expense and other costs associated with property management and real estate
sales.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
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 statement of operations. The gross amount of assets
recorded under capital leases totaled $692,649 and accumulated amortization
related to those assets totaled $352,382.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
The company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, the current provision for income taxes represents
actual or estimated amounts payable or refundable on tax returns filed or to be
filed for each year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the tax bases
of assets and liabilities and amounts reported in the consolidated balance
sheets, and (b) operating loss and tax credit carryforwards. The overall change
in deferred tax assets and liabilities for the period measures the deferred tax
expense for the period. Effects of changes in enacted tax laws on deferred tax
assets and liabilities are reflected as adjustments to tax expense in the period
of enactment. The measurement of deferred tax assets may be reduced by a
valuation allowance based on judgemental assessment of available evidence if
deemed more likely than not that some or all of the deferred tax assets will not
be realized.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses and the disclosure of contingent assets and liabilities. While
management endeavors to make accurate estimates, actual results could differ
from these estimates.
Concentration of Risk
The Company's operations are exclusively in the Destin, Fort Walton and
South Walton, Florida area and are subject to significant changes due to weather
conditions.
3. PROPERTY AND EQUIPMENT:
At July 31, 1998, property and equipment consisted of the following (in
thousands):
ESTIMATED
USEFUL LIFE
IN YEARS AMOUNT
------------ -----------
Leasehold improvements .................... 5 - 15 $ 904
Building .................................. 15 - 40 5,248
Furniture, fixtures and equipment ......... 3 - 10 4,259
Vehicles .................................. 3 - 7 479
Land ...................................... 1,581
--------
12,471
Less: Accumulated Depreciation ............ (2,969)
--------
$ 9,502
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ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. LONG TERM DEBT:
Long-term debt consisted of the following at July 31, 1998 (in thousands):
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------------ ----------
Various notes secured by certain assets held with Regions Bank. At July 31, 1998 the
interest rates on these obligations ranged from 7.5% to 9% and mature at various
dates between December, 1998 through December 2002. ............................... $ 5,058
Two notes secured by certain assets held with SunTrust Bank. At July 31, 1998 the
interest rates on these obligations were 8.5% and Prime+1% and mature in August
and September 2001. ............................................................... 598
Two notes secured by buildings held with First City Bank. At July 31, 1998 the
variable interest rates on these obligations were 7.5% and mature in February
2013. ............................................................................. 404
Various notes secured by certain assets and a line of credit held with AmSouth Bank.
At July 31, 1998 the interest rates on these obligations ranged from Prime to 8.75%
and mature at various dates between December, 1998 through December 2002. ......... 356
Other secured and unsecured notes held with various entities. At July 31, 1998 the
interest rates on these obligations were 7.3% and Prime+.5% and mature in
December 1998 and May 1999. ....................................................... 31
Various capital leases with IBM Credit for computer hardware. At July 31, 1998 the
interest rates on these obligations ranged from 8.1% to 10.3% and expire in
January 2000 and April 2002. ...................................................... 398
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Less current maturities .......................................................... (806)
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$ 6,039
=======
At July 31, 1998, the estimated future maturities of long-term debt were as
follows (in thousands):
YEAR
ENDED
JULY 31 AMOUNT
--------------------------------- ------
1999 .......................... $ 806
2000 .......................... 538
2001 .......................... 3,463
2002 .......................... 771
2003 .......................... 305
Thereafter..................... 962
------
$6,845
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5. INCOME TAXES:
Abbott recorded the following income tax provision for the year ended July
31, 1998 (in thousands):
AMOUNT
-------
Current ............................... $271
Deferred .............................. 66
----
$337
====
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
At July 31, 1998, the Company recorded the following deferred tax assets
and liabilities:
DESCRIPTION AMOUNT
- ------------------------------------------------- ---------
Deferred tax assets
Vacation liability ...................... $ 116
Workers' compensation liability ......... 178
------
Total deferred tax assets .............. 294
Deferred tax liability
Property and equipment .................. (106)
------
$ 188
======
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate of 34% for the following reasons (in
thousands):
DESCRIPTION AMOUNT
- -------------------------------------------------------------- -------
Income tax expense at federal statutory rate .......... $286
State taxes, net of federal tax benefit ............... 30
Other ................................................. 21
----
$337
====
6. COMMITMENTS AND CONTINGENCIES:
Guaranty
The Company is a partial guarantor on a $26,000,000 construction loan
pertaining to the condominium development which the Company has a 10% limited
partnership interest as discussed in Note 2. The Company's guarantee under this
arrangement is not to exceed approximately $1,700,000.
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Benefit Plans
The Company has a 401(k) profit-sharing plan for all employees who have
completed 1,000 hours of service in a 12-month period and are 21 or older.
Eligible employees may elect to make pre-tax contributions to the plan subject
to statutory limits. The Company matches 25 percent of employee contributions on
the first four percent of base compensation. All contributions to the plan are
invested in one or more investment funds at each participant's option. The
Company's contributions were $50,105 for the year ended July 31, 1998.
Future Minimum Lease Payments
The Company rents office space, automobiles, and equipment under operating
leases. Rental expense related to these leases was approximately $550,000 for
the year ended July 31, 1998. Rental expense related to leases with related
parties was approximately $109,860 for the year ended July 31, 1998.
ABBOTT REALTY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Minimum future lease payments under these noncancelable operating leases in
effect at July 31, 1998 are as follows (in thousands):
YEAR AMOUNT
-------------------------- ---------
1999 ................... $ 462
2000 ................... 326
2001 ................... 204
2002 ................... 174
2003 ................... 92
------
Total .................. $1,258
======
7. RELATED PARTY TRANSACTIONS:
The Company manages at favorable rental commission rates approximately 100
rental units owned by stockholders and employees of the Company. For the year
ended July 31, 1998, property management fee revenue and service fee revenue
approximated $417,000 and $776,000, respectively, related to the management of
these properties.
All stockholders are employed by the Company. For the year ended July 31,
1998, the shareholders received approximately $2,203,000 in salaries and
benefits. Additionally, the Company paid approximately $590,000 in real estate
commissions to certain stockholders for the year ended July 31, 1998.
At July 31, 1998, trade and other accounts receivable includes unsecured,
non-interest bearing receivables from certain stockholders approximating
$104,000.
The Company processes payroll for certain non-consolidated affiliates and
is reimbursed by these affiliates in the subsequent month. These receivables are
unsecured, non-interest bearing and approximated $90,000 at July 31, 1998.
8. SUBSEQUENT EVENT:
On September 30, 1998, ResortQuest International, Inc. ("ResortQuest")
acquired all of the outstanding common stock of Abbott in exchange for cash and
shares of ResortQuest common stock (the "Acquisition"). In connection with the
Acquisition, the owners and certain key employees have agreed to reductions and
or terminations of salary and benefits.