SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 01-14115
RESORTQUEST INTERNATIONAL, INC.
(Exact name of registrant in its charter)
Delaware I.R.S. No. 62-1750352
(State of Incorporation) (I.R.S. Employer Identification No.)
530 Oak Court Drive, Suite 360
Memphis, Tennessee 38117
(Address of principal executive offices)(Zip Code)
(901) 762-0600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of September 30, 1998.
Common Stock .......................... 16,873,265 shares
Page 1 of 41
Exhibit Index Page 31
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
-----------------------------
On May 26, 1998, ResortQuest International, Inc. ("ResortQuest" or the
"Company"), formerly known as Vacation Properties International, Inc.,
consummated its initial public offering (the "IPO") and the combination (the
"Combinations") of 12 vacation rental and property management companies and one
leading vacation rental and property management software company. The following
unaudited consolidated condensed financial statements give effect to the
acquisitions by ResortQuest, of the outstanding capital stock of Hotel
Corporation of the Pacific, Inc. ("Aston Hotels & Resorts"), Brindley & Brindley
Realty, Inc. and B&B On The Beach, Inc. (collectively "Brindley and Brindley"),
Coastal Resorts Management, Inc. and Coastal Resorts Realty, L.L.C.
(collectively "Coastal Resorts"), Collection of Fine Properties, Inc. ("CFP"),
First Resort Software, Inc. ("FRS"), Houston and O'Leary Company ("H&O"), Maui
Condo & Home Realty, Inc. ("Maui"), The Maury People, Inc. ("Maury"), Howey
Acquisition, Inc. and Priscilla Murphy Realty, Inc. (collectively "PMR"), Resort
Property Management, Inc. ("RPM"), Telluride Resort Accommodations, Inc.
("TRA"), Trupp-Hodnett Enterprises, Inc. and THE Management Company
(collectively "THE"), and Whistler Chalets Limited ("Whistler"), (collectively
the "Founding Companies").
Aston Hotels & Resorts, one of the Founding Companies, was designated as
the accounting acquiror (for financial statement presentation purposes) in the
Combinations in accordance with Securities and Exchange Commission (the "SEC")
Staff Accounting Bulletin No. 97 ("SAB 97"), which states that the combining
Company which receives the largest portion of voting rights in the combined
corporation is presumed to be the acquiror for accounting purposes unless other
evidence clearly indicates that another company is the acquiror. Management has
analyzed the factors as set forth in SAB 97 that may indicate Aston Hotels &
Resorts should not be deemed to be accounting acquiror, including (1) the
existing conversion rights of the Restricted Common Stock, (2) Aston Hotels &
Resorts' level of representation on the Board and in the holding company
management team and (3) voting percentage of the shares held by Aston Hotels &
Resorts and the existing shareholder group. Management has concluded that none
of these factors, either individually, or in the aggregate, is sufficient to
rebut the presumption that the shareholders of Aston Hotels & Resorts should be
deemed the accounting acquiror. The unaudited consolidated condensed statements
of pro forma income give effect to the Combinations and the IPO as if such
transactions had occurred on January 1, 1997.
The accompanying unaudited consolidated condensed financial statements of
ResortQuest have been prepared in accordance with the instructions to Form 10-Q,
and therefore do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited, but reflect all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of operating results. Operating
results for interim periods are not necessarily indicative of the results for
full years. The financial statements included herein should be read in
conjunction with the ResortQuest unaudited pro forma combined financial
statements and the individual financial statements of ResortQuest, Abbott
Resorts, Brindley & Brindley, Coastal Resorts, CFP, FRS, H & O, Maury, PMR, RPM,
TRA, THE and ResortQuest (Pre-IPO Company), and related notes thereto, and
management's discussion and analysis of financial condition and results of
operations related thereto, all of which are included in the Company's
Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (No.
333-10623), as amended, filed with the SEC.
2
RESORTQUEST INTERNATIONAL,INC
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
December 31, Sept 30,
(in thousands, except share amounts) 1997 1998
----------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 1,632 $ 10,769
Cash held in escrow -- 6,011
Trade and other receivables, net of allowance 1,195 3,145
Note receivable from stockholder (Note 2) -- 4,264
Deferred income taxes (Note 7) -- 658
Other current assets 129 2,582
--------- ---------
Total current assets 2,956 27,429
Property and equipment, net 1,776 14,269
Goodwill (Notes 1 and 3) -- 126,157
Deferred income taxes (Note 7) -- 1,692
Other assets 9,830 1,979
--------- ---------
$ 14,562 $ 171,526
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 597 $ 1,534
Customer deposits, deferred revenues and payable to
property owners -- 12,239
Accounts payable and accrued liabilities 6,538 11,095
Other current liabilities 409 978
--------- ---------
Total current liabilities 7,544 25,846
Long-term debt, net of current maturities (Note 3) 2,804 37,150
Other long-term obligations 3,206 714
Net liabilities of discontinued operations 1,403 --
--------- ---------
14,957 63,710
--------- ---------
Commitments and contingencies (Note 5)
Stockholders' equity (Notes 1 and 4)
Common stock, $0.01 par value, 50,000,000 shares authorized,
1,708,333 and 16,873,265 shares outstanding, respectively 17 169
Additional paid-in capital 88 135,634
Excess distributions -- (29,500)
Retained earnings (accumulated deficit) (500) 1,513
--------- ---------
Total stockholders' equity (395) 107,816
--------- ---------
Total liabilities and stockholders' equity $ 14,562 $ 171,526
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands, except share amounts) 1997 1998 1997 1998
------- ------- ------- -------
Revenues
Property management fees $ 2,234 $ 9,610 $ 6,710 $ 15,631
Service fees 2,186 3,701 6,295 9,065
Other 750 3,638 2,243 6,189
-------- -------- -------- --------
Total revenues 5,170 16,949 15,248 30,885
-------- -------- -------- --------
Operating expenses
Direct operating expenses 2,613 8,499 7,860 15,666
General and administrative
expenses 623 4,309 2,886 7,902
Depreciation and amortization 88 1,016 264 1,584
-------- -------- -------- --------
Total operating expenses 3,324 13,824 11,010 25,152
-------- -------- -------- --------
Operating income 1,846 3,125 4,238 5,733
Interest and other income (expense) (202) 166 (535) 136
-------- -------- -------- --------
Income before income taxes 1,644 3,291 3,703 5,869
Provision for income taxes (Note 7) -- (1,576) -- (1,880)
-------- -------- -------- --------
Income from continuing operations 1,644 1,715 3,703 3,989
Income (loss) from discontinued
operations (Note 6) (471) -- (700) 1,347
-------- -------- -------- --------
Net income $ 1,173 $ 1,715 $ 3,003 $ 5,336
======== ======== ======== ========
Earnings per share (Note 8)
Basic
Continuing operations $ 0.96 $ 0.11 $ 2.17 $ 0.48
Discontinued operations (0.27) -- (0.41) 0.16
-------- -------- -------- --------
Net income $ 0.69 $ 0.11 $ 1.76 $ 0.64
======== ======== ======== ========
Diluted
Continuing operations $ 0.96 $ 0.11 $ 2.17 $ 0.46
Discontinued operations (0.27) -- (0.41) 0.16
-------- -------- -------- --------
Net income $ 0.69 $ 0.11 $ 1.76 $ 0.62
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF PRO FORMA INCOME
(UNAUDITED) (Note 1)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands, except share amounts) 1997 1998 1997 1998
-------- --------- -------- --------
Revenues
Property management fees $ 8,064 $ 9,610 $ 26,209 $ 28,090
Service fees 3,175 3,701 9,292 11,319
Other 2,689 3,638 9,397 11,399
-------- -------- -------- --------
Total revenues 13,928 16,949 44,898 50,808
-------- -------- -------- --------
Operating expenses
Direct operating expenses 7,526 8,499 21,890 23,963
General and administrative
expenses 2,432 4,309 7,956 10,815
Depreciation and amortization 1,009 1,016 3,057 3,076
-------- -------- -------- --------
Total operating expenses 10,967 13,824 32,903 37,854
-------- -------- -------- --------
Operating income 2,961 3,125 11,995 12,954
Interest and other income (expense) 44 166 (70) 461
-------- -------- -------- --------
Income before income taxes 3,005 3,291 11,925 13,415
Provision for income taxes (1,462) (1,576) (5,550) (6,142)
-------- -------- -------- --------
Net income $ 1,543 $ 1,715 $ 6,375 $ 7,273
======== ======== ======== ========
Earnings per share - basic and diluted $ 0.10 $ 0.11 $ 0.40 $ 0.45
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated condensed pro
forma financial statements.
5
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Retained
Additional Earnings
Common Stock Paid-in Excess (Accumulated
(in thousands, except share amounts) Shares Amount Capital Distributions Deficit) Total
---------- ---------- ---------- ------------- ---------- ----------
Balance, December 31, 1997 1,708,333 $ 17 $ 88 $ -- $ (500) $ (395)
Net income -- -- -- -- 5,336 5,336
Initial public offering (Note 4) 6,670,000 67 59,954 -- -- 60,021
Distributions to Aston stockholders -- -- -- (29,500) (3,198) (32,698)
Stock issued in connection with
Combinations (Note 4) 7,545,953 75 68,620 -- -- 68,695
Post-IPO acquisitions (Note 4) 948,979 10 6,972 -- (125) 6,857
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1998 16,873,265 $ 169 $ 135,634 $ (29,500) $ 1,513 $ 107,816
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Sept 30, Sept 30,
(in thousands) 1997 1998
-------- --------
Cash flows from operating activities
Net income $ 3,003 $ 5,336
Loss (income) from discontinued operations 700 (1,347)
-------- --------
Income from continuing operations 3,703 3,989
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Depreciation and amortization 264 1,584
Changes in operating assets and liabilities
Cash held in escrow -- 1,629
Trade and other receivable, net of allowance 126 2,220
Deferred income taxes -- (164)
Customer deposits, deferred revenues and payable to owners (9) (1,644)
Accounts payable and accrued liabilities 603 (3,867)
Other (125) 320
-------- --------
Cash provided by continuing operations 4,562 4,067
Cash flows provided by (used in) discontinued operations 939 (56)
-------- --------
Net cash provided by operating activities 5,501 4,011
-------- --------
Cash flows from investing activities
Cash portion of acquisitions -- (42,482)
Purchase of property and equipment (590) (1,144)
Proceeds from sale of property and equipment 50 --
-------- --------
Net cash used in investing activities (540) (43,626)
-------- --------
Cash flows from financing activities
Net proceeds from public stock issuance -- 60,889
Distributions to stockholders (3,003) (33,198)
Net credit facility borrowings -- 28,403
Payment of other long-term obligations (1,477) (5,934)
(Decrease) increase in advances to stockholders (1,004) 1,703
Net increase (decrease) in capital lease obligations 320 (2,625)
Increase in advances to affiliates (1,801) (486)
-------- --------
Net cash (used in) provided by financing activities (6,965) 48,752
-------- --------
Net (decrease) increase in cash and cash equivalents (2,004) 9,137
Cash and cash equivalents, beginning of period 2,118 1,632
-------- --------
Cash and cash equivalents, end of period $ 114 $ 10,769
======== ========
Supplemental disclosure of non-cash investing activities
Common stock portion of Combinations $ -- $ 68,695
======== ========
Common stock portion of post-IPO acquisitions $ -- $ 6,982
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - Basis of Presentation
- ------------------------------
Formation
---------
ResortQuest International, Inc. (the "Company" or "ResortQuest"), formerly
known as Vacation Properties International, Inc., was formed to create the
leading provider of vacation condominium and home rentals and management in
premier destination resorts. Effective with the closing of ResortQuest's IPO on
May 26, 1998 (the "IPO"), the Company acquired 12 vacation rental and property
management companies and one leading vacation rental and property management
software company. However, for accounting and reporting purposes, Aston Hotels &
Resorts was identified as the accounting acquiror and the remaining Founding
Companies along with ResortQuest were accounted for under the purchase method of
accounting.
Accordingly, the historical unaudited consolidated condensed financial
statements for the three- and nine-month periods ended September 30, 1997 and
1998 includes the financial results of Aston Hotels & Resorts prior to the
Combinations and the IPO and the combined balances and transactions of
ResortQuest and the Founding Companies only since May 26, 1998. Comparability of
actual results for the quarter, year to date and prior periods may be misleading
and is not indicative of the results of the combined operations.
Pro Forma Financial Information
-------------------------------
To provide better comparability, the unaudited consolidated condensed
statements of pro forma income for the three- and nine-month periods ended
September 30, 1997 and 1998, include the financial results of ResortQuest and
the Founding Companies as if the Combinations and acquisition had occurred at
the beginning of each respective period. The unaudited consolidated condensed
statements of pro forma income include the effects of: (i) the Combinations;
(ii) the proceeds from the issuance of 6,670,000 shares of ResortQuest Common
Stock, a portion of which was used to pay the cash portion of the purchase price
for the Founding Companies, to pay IPO expenses, and to repay debt assumed in
the Combinations; (iii) certain adjustments to salaries, bonuses, and benefits
to former owners and key management of the Founding Companies effective with the
IPO; (iv) reversal of compensation expense in the three months ended March 31,
1998, relating to the non-recurring, non-cash compensation charge of $5.6
million related to Common Stock issued to management; (v) provision for income
taxes as if pro forma income was subject to federal, state or provincial income
taxes during the periods and that goodwill was not deductible for income tax
purposes; (vi) amortization of goodwill resulting from the Combinations and
(vii) excludes income (loss) from discontinued operations.
Post-IPO Acquisitions
---------------------
Since the IPO, ResortQuest has completed three acquisitions: Plantation
Resort Management, Inc., ("Plantation Resort") located in Gulf Shores, Alabama,
effective August 31, 1998; Whistler Exclusive Properties, Ltd. ("Whistler
Exclusive") located in Whistler, British Columbia, Canada, effective September
3, 1998; and Abbott Realty Services, Inc. ("Abbott Resorts") located in Destin,
8
Florida, effective September 30, 1998 (collectively "Post-IPO Acquisitions").
Whistler Exclusive and Abbott Resorts were accounted for under the purchase
method of accounting. The acquisition of Plantation Resort was accounted for as
a pooling of interests; however, due to the fact that the impact of the
acquisition of Plantation Resort is not deemed material to the financial
statements of ResortQuest taken as a whole, the historical financial statements
of ResortQuest have not been restated to include the effect of Plantation
Resort.
Nonrecurring acquisition costs incurred for the Plantation Resort
transaction totaled approximately $134,000 and, in accordance with Accounting
Principles Bulletin Opinion No. 16, have been included in expense in the current
period.
The acquisition of Abbott Resorts is considered significant to ResortQuest
for financial reporting purposes. The unaudited consolidated results of
operations on a pro forma basis as though Abbott Resorts had been acquired on
January 1, 1997, including the pro forma impacts of the Founding Companies and
the IPO, are presented below. The pro forma information presented below includes
reductions in salaries that owners of Abbott Resorts agreed to in conjunction
with the acquisitions discussed above. The remaining Post-IPO Acquisitions are
not considered significant to ResortQuest for financial reporting purposes and,
therefore, have not been included in the following pro forma presentation.
Management believes this information reflects all adjustments necessary for a
fair presentation of results for the interim periods. The pro forma results of
operations for the three- and nine-month periods ended September 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(amounts in thousands, except share amounts) 1997 1998 1997 1998
------- ------- ------- -------
Revenue $24,805 $28,408 $68,214 $76,307
======= ======= ======= =======
Net income $ 3,442 $ 3,500 $ 8,207 $ 8,875
======= ======= ======= =======
Earnings per share
Basic $ 0.20 $ 0.21 $ 0.49 $ 0.53
======= ======= ======= =======
Diluted $ 0.20 $ 0.21 $ 0.49 $ 0.52
======= ======= ======= =======
Reclassifications
-----------------
Certain amounts for prior year and current year have been reclassified to
conform with current presentation.
NOTE 2 - Note Receivable From Stockholder
- -----------------------------------------
In connection with the Combinations, Aston Hotels & Resorts formalized its
receivable resulting from cash advances to its primary stockholder with a $4.0
million promissory note (the "Note"). The Note bears interest at one-half of one
percent below prime rate of interest, but not less than six percent and not more
than 10 percent. Payments under the Note are interest only, due and payable
every January and July 1st. The Note is due on demand with 180 days notice at
any time through May 26, 1999. If payment is not requested within the notice
periods, the Note becomes due and payable on May 25, 2008.
9
NOTE 3 - Long-Term Debt
- -----------------------
ResortQuest Credit Facility
---------------------------
ResortQuest entered into a credit agreement (the "Credit Facility") as of
May 26, 1998 with NationsBank, N.A. and First Tennessee Bank National
Association, as amended on September 30, 1998, with respect to a $30 million
revolving line of credit. The Credit Facility may be used for letters of credit
not to exceed $2.5 million, acquisitions, capital expenditures, and for general
corporate purposes. The Credit Facility requires the Company 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. At November 11,
1998, the Company was in compliance with applicable loan covenants. Interest on
outstanding balances of the Credit Facility is computed at the Company's
election, on the basis of either the Prime Rate or the Eurodollar Rate plus a
margin ranging from 1.25% to 2.00%, depending on certain financial ratios.
Availability fees ranging from 0.25% to 0.50% per annum depending on certain
financial ratios are payable on the unused portion of the Credit Facility. The
Credit Facility has a three-year term and is secured by substantially all the
assets of the Company and its subsidiaries, including the stock in the Founding
Companies and any future material subsidiaries, as defined. The Company, each
Founding Company and all other current and future material subsidiaries are
required to guarantee repayment of all amounts due under the Credit Facility. As
of September 30, 1998, outstanding borrowings under the Credit Facility totaled
$29.0 million, principally as a result of the Abbott Resorts acquisition.
On September 30, 1998, the Company executed a promissory note (the "Note
Agreement") maturing on January 31, 1999 in favor of NationsBank, N.A., with
respect to an additional $5.0 million revolving line of credit. The interest
rate on outstanding balances, the interest payment dates and the terms of
default under the Note Agreement are the same as those provided for in the
Credit Facility. The Note Agreement is secured by the same terms as the Credit
Facility. As of September 30, 1998, there were no borrowings under the Note
Agreement. ResortQuest also has entered into discussions with NationsBank, N.A.
and certain other lenders to increase the size of the Credit Facility to provide
cash for future acquisitions.
In November 1998, ResortQuest received commitments to increase its $30
million Credit Facility to $55 million. The Credit Facility will be extended
under its existing terms and conditions to include SG Cowen Securities
Corporation and Union Planters Bank.
Other Debt
----------
In connection with the Combinations, ResortQuest agreed to assume $5.7
million of existing debt of the Founding Companies. As of September 30, 1998,
all of this debt was paid off. In addition, the Founding Companies collectively
had $1.8 million available to borrow under nine separate lines of credit, which
included personal guarantees of the Founding Companies owners. ResortQuest has
terminated these lines of credit and removed the personal guarantees of the
Founding Companies' previous owners. In connection with the acquisition of
Abbott Resorts, ResortQuest agreed to assume $6.9 million of existing debt and
capital leases of Abbott Resorts. As of September 30, 1998, all of this debt is
still outstanding and included in the accompanying balance sheet.
10
NOTE 4 - 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 IPO expenses) were
approximately $60.0 million. Subsequent to the IPO, the Company issued 948,979
shares of Common Stock in connection with the Post-IPO Acquisitions (191,939
shares to Plantation Resort stockholders and 757,040 shares to Abbott Resorts
stockholders). As of September 30, 1998, ResortQuest had 16,873,265 shares of
Common Stock issued and outstanding (12,990,272 shares of Common Stock and
3,882,993 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
with the Securities and Exchange Commission pursuant to a shelf registration
statement. As of September 30, 1998, 948,979 of the shares covered by this shelf
registration statement have been issued in connection with the Post-IPO
Acquisitions. Subsequent to September 30, 1998, ResortQuest has filed a
post-effective amendment no. 1 to the shelf registration statement with the
Securities and Exchange Commission. The remaining shares covered by the
post-effective amendment are available to be used for future acquisitions.
Long-Term Incentive Plan
------------------------
ResortQuest has on reserve 2,024,791 shares of Common Stock for use in
connection with the 1998 Long-Term 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, 42,000
non-qualified stock options have been granted to new employees at the then
ResortQuest common stock market value (ranging from $9.9375 to $16.8125).
Preferred Stock
---------------
ResortQuest's authorized capital includes 10.0 million shares of
undesignated preferred stock with a $0.01 par value.
NOTE 5 - Commitments and Contingencies
- --------------------------------------
Aston Hotels & Resorts Guarantees
---------------------------------
Prior to the Combinations, Aston Hotels & Resorts had guaranteed or
co-signed debts of its former principal stockholder, which primarily relates to
mortgage loans on two hotels managed by Aston Hotels & Resorts. These guarantees
were fully collateralized with real estate, cash or cash equivalents, including
shares of Common Stock, pledged either to the lenders of such debt or Aston
Hotels & Resorts to secure such debt. As of September 30, 1998, all guarantees
have been removed by the former principal stockholder of Aston Hotels & Resorts.
11
Certain of Aston Hotels & Resorts' management agreements 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.
Abbott Resorts Guarantee
------------------------
Abbott Resorts is a partial guarantor on a $26.0 million construction loan
pertaining to the condominium development which Abbott Resorts has a 10% limited
partnership interest. Abbott Resort's guarantee under this arrangement is not to
exceed approximately $1.7 million.
Acquisition Indemnification
---------------------------
Subject to certain limitations, pursuant to the Agreement and Plan Of
Organization entered into by and between each of the Founding Companies and
ResortQuest (each an "Agreement"), the stockholders of the Founding Companies
have indemnified ResortQuest against losses, claims, damages, actions, suits,
proceedings, demands, assessments, adjustments, costs and expenses as a result
of or arising from (i) any breach of the representations and warranties in the
Agreement and its schedules and certificates by the stockholders of the Founding
Companies, (ii) any breach of any agreement on the part of the stockholders set
forth in the Agreement, (iii) any liability under the 1933 Act, the 1934 Act or
other federal or state law or regulation arising out of or based upon any untrue
statement of a material fact relating solely to the Founding Company or the
stockholders and (iv) certain other identified claims or litigation. In
addition, pursuant to each Agreement and subject to certain limitations,
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 (i) any
breach by ResortQuest or of its representations and warranties in the Agreement
and its schedules and certificates, (ii) any breach of any agreement on the part
of ResortQuest under this Agreement, (iii) any liability under the 1933 Act, the
1934 Act or other federal or state law or regulation, at common law or
otherwise, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact relating to ResortQuest or any of the other
Founding Companies contained in certain filings with the Securities and Exchange
Commission, or (v) 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 such indemnification under any of the Agreements during the periods
presented in the accompanying consolidated condensed financial statements.
Litigation
----------
ResortQuest and its subsidiaries are involved in various legal actions
arising in the ordinary course of business. While any proceeding or litigation
has an element of uncertainty, management believes that the final outcome of
these matters will not have a materially adverse effect upon ResortQuest's
consolidated financial position or results of operations.
Insurance
---------
ResortQuest carries a broad range of insurance coverage, including
directors and officers, prospectus liability, errors and omissions, general
liability, auto
12
liability, and workers' compensation. ResortQuest has not incurred significant
claims or losses on any of its insurance policies during the periods presented
in the accompanying consolidated condensed financial statements.
Employment Agreements
---------------------
Effective with the Combinations, ResortQuest entered into employment
agreements with all senior corporate officers and several subsidiary level key
employees. Among other things, these agreements allow for severance payments and
acceleration of stock option awards upon a change in control of ResortQuest, as
defined under the agreements. The maximum amount of compensation that would be
payable under all agreements if a change in control occurred without prior
written notice as of September 30, 1998, would be approximately $22.0 million.
NOTE 6 - Discontinued Operations
- --------------------------------
ResortQuest has decided that they will no longer continue or enter into
leasing arrangements for lodging facilities. Accordingly, for all periods
presented in the accompanying financial statements, the financial position,
results of operations and cash flows of the leased assets are reflected as
discontinued operations. Concurrent with the Combinations, Aston Hotels &
Resorts assigned such leases to AST Holdings, Inc., a corporation owned by Aston
Hotels & Resorts principal stockholder. On May 27, 1998, ResortQuest entered
into a contract with AST Holdings to manage these facilities for a fee.
Summarized financial information of the discontinued operations is presented in
the following table.
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 1997 1998 1997 1998
------- ------- ------- -------
Revenues $ 6,796 $ - $22,847 $14,304
Operating expenses 6,025 - 18,166 10,120
General and administrative expenses 1,232 - 5,350 2,839
------- ------- ------- -------
Operating income (loss) (461) - (669) 1,345
Other expense (income) 10 - 31 (2)
------- ------- ------- -------
Income (loss) from discontinued operations $ (471) $ - $ (700) $ 1,347
======= ======= ======= =======
NOTE 7 - Income Taxes
- ---------------------
ResortQuest intends to file a consolidated federal income tax return, which
will include the operations of the Founding Companies commencing with the
Combinations and the Post-IPO Acquisitions from their acquisition dates. The
Founding Companies and the Post-IPO Acquisitions previous owners are
individually responsible for filing federal, state and provincial income tax
returns for operations prior to the Combinations and Post-IPO Acquisitions. The
ResortQuest provision for income taxes and effective tax rate for the periods
ended September 30, 1998, are impacted by: (i) Aston Hotels & Resorts book
earnings prior to May 26, 1998 which will not be included in ResortQuest's
consolidated income tax returns; (ii) book amortization of goodwill which is not
deductible for income tax purposes; and (iii) the recording a one-time deferred
income tax catch-up entry for Aston Hotels & Resorts who was previously taxed
under S corporation status.
13
NOTE 8 - Earnings Per Share
- ---------------------------
Actual Results
--------------
Earnings per share included in the consolidated condensed statements of
income for the historical periods ended September 30, 1997, includes Aston
Hotels & Resorts' results of operations under its historical capital and income
tax structure. Accordingly, the 1,708,333 shares of Common Stock issued to the
former stockholders of Aston Hotels & Resorts in connection with the
Combinations are utilized to calculate weighted average common shares for all
1997 periods.
Earnings per share included in the consolidated condensed statements of
income for the historical periods ended September 30, 1998, includes Aston
Hotels & Resorts' results of operations under its historical capital and income
tax structure through May 26, 1998, and the combined balances and transactions
of ResortQuest and the Founding Companies from May 27, 1998 through September
30, 1998, Plantation Resort from July 1, 1998 through September 30, 1998, and
Whistler Exclusive from September 3, 1998 through September 30, 1998. The shares
outstanding for Aston Hotels & Resorts through May 26, 1998, and the shares
outstanding for ResortQuest from May 27, 1998 through September 30, 1998, were
used to calculate weighted average common shares for all 1998 periods.
The following table reflects ResortQuest's weighted average common shares
outstanding and the impact of its primary common share equivalents.
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1998 1997 1998
--------- ---------- --------- ---------
Basic weighted average common
shares outstanding 1,708,333 16,116,225 1,708,333 8,386,298
Effect of dilutive
securities - stock options - 188,361 - 220,620
--------- ---------- --------- ---------
Diluted weighted average common
shares outstanding 1,708,333 16,304,586 1,708,333 8,606,918
========= ========== ========= =========
Pro Forma Results
-----------------
Pro forma earnings per share included in the consolidated condensed
statement of pro forma income is based on pro forma net income after considering
the adjustments described in Note 1-Pro Forma Financial Information above. The
pro forma weighted average common shares for all periods reflect the issuance of
Common Stock in connection with the Combinations, the IPO and issued to
ResortQuest shareholders and management as though such shares were outstanding
for the entire periods. In addition, the 1998 periods include the impact of
Common Stock issued in connection with the Post-IPO Acquisitions only from their
effective acquisition dates. However, the 1998 calculations also include the
dilutive impact of options outstanding from May 27, 1998 through September 30,
1998.
14
The following table reflects ResortQuest's pro forma weighted average
common shares outstanding and the impact of its dilutive common share
equivalents.
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Basic weighted average common
shares outstanding 15,924,286 16,116,225 15,924,286 15,988,969
Effect of dilutive
securities - stock options - 188,361 - 220,621
---------- ---------- ---------- ----------
Diluted weighted average common
shares outstanding 15,924,286 16,304,586 15,924,286 16,209,590
========== ========== ========== ==========
15
Item 2. Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Introduction
- ------------
ResortQuest was formed to create the leading provider of vacation
condominium and home rentals and management in premier destination resorts.
Effective with the closing of ResortQuest's initial public offering on May 26,
1998, the Company acquired 12 vacation rental and property management companies
and one leading vacation rental and property management software company. With
three Post-IPO Acquisitions closing during the quarter ended September 30, 1998,
ResortQuest expanded its number of resort locations from 14 to 18, and increased
its total rental units by 33.7%, from approximately 9,500 to approximately
13,000.
Results of Operations - Historical
- ----------------------------------
For accounting and reporting purposes, Aston Hotels & Resorts was
identified as the accounting acquiror and the remaining Founding Companies along
with ResortQuest were accounted for under the purchase method of accounting.
Accordingly, the ResortQuest historical consolidated financial information for
the three- and nine-month periods ended September 30, 1997 and 1998 includes the
results of Aston Hotels & Resorts prior to the Combinations and the IPO, and
includes the combined balances and transactions of ResortQuest and the Founding
Companies only since May 26, 1998, includes the combined balances and
transactions of Plantation Resort since July 1, 1998, and includes the combined
balances and transactions of Whistler Exclusive since September 3, 1998.
Comparability of actual results for the quarter, year to date and prior years
may be misleading and are not necessarily indicative of the results of the
combined operations.
The following table sets forth the historical consolidated results of
operations for the three- and nine-month periods ended September 30, 1997 and
1998.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
------------- -------------- -------------- --------------
Revenues $5,170 100.0% $16,949 100.0% $15,248 100.0% $30,885 100.0%
Operating expenses 3,324 64.3% 13,824 81.6% 11,010 72.2% 25,152 81.4%
Operating income $1,846 35.7% $ 3,125 18.4% $ 4,238 27.8% $ 5,733 18.6%
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1998 - Actual
Revenues. Revenues increased $11.8 million, or 227.8%, from $5.2 million in
1997 to $16.9 million in 1998, primarily due to the Combinations and the
Post-IPO Acquisitions. The 1997 and 1998 results of operations include Aston
Hotels &
16
Resorts for the entire periods, the remaining Founding Companies for the period
from May 27, 1998 through September 30, 1998, Plantation Resort for the period
from July 1, 1998, through September 30, 1998, and Whistler Exclusive for the
period from September 3, 1998, through September 30, 1998.
Operating expenses. Operating expenses increased $10.5 million, or 315.9%,
from $3.3 million in 1997 to $13.8 million in 1998, which is primarily due to
the Combinations and the Post-IPO Acquisitions. As a percentage of revenues,
operating expenses increased from 64.3% in 1997 to 81.6% in 1998. In addition to
the same timing described in the preceding paragraph, the 1998 operating
expenses include costs associated with being a public company and corporate
overhead, which did not exist prior to the IPO, and the write off of
nonrecurring acquisition costs incurred in connection with the Plantation Resort
acquisition which totaled approximately $134,000 which contributed to the lower
year over year margin percentage.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1998 - Actual
Revenues. Revenues increased $15.6 million, or 102.6%, from $15.2 million
in 1997 to $30.9 million in 1998, primarily due to the Combinations and the
Post-IPO Acquisitions. The 1997 and 1998 results of operations include Aston
Hotels & Resorts for the entire periods, the results of operations for the
remaining Founding Companies for the period from May 27, 1998 through September
30, 1998, the results of operations for Plantation Resort for the period from
July 1, 1998, through September 30, 1998, and the results of operations from
Whistler Exclusive for the period from September 3, 1998, through September 30,
1998.
Operating expenses. Operating expenses increased $14.1 million, or 128.4%,
from $11.0 million in 1997 to $25.2 million in 1998, which is primarily due to
the Combinations and the Post-IPO Acquisitions. As a percentage of revenues,
operating expenses increased from 72.2% in 1997 to 81.4% in 1998. In addition to
the same timing described above, the 1998 operating expenses include costs
associated with being a public company and corporate overhead, which did not
exist prior to the IPO, and the write off of nonrecurring acquisition costs
incurred in connection with the Plantation Resort acquisition which totaled
approximately $134,000 which contributed to the lower year over year margin
percentages.
Other
-----
The following table sets forth other historical items affecting
consolidated net income for the three- and nine-month periods ended September
30, 1997 and 1998.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
----- ---- ----- ------
Interest and other income
(expense) $(202) $166 $(535) $ 136
Income (loss) from
discontinued operations (471) - (700) 1,347
Effective tax rate n/a 48.3% n/a 32.3%
17
Aston Hotels & Resorts' operations were primarily financed through working
capital and long-term financing resulting in higher levels of interest expense
prior to the Combinations. Concurrent with the Combinations, ResortQuest did not
assume any of Aston Hotels & Resorts' previous debt. However, ResortQuest did
assume approximately $5.4 million of debt from the other Founding Companies,
which was subsequently paid off by the Company after the IPO. The assumption of
debt by Aston Hotels & Resorts' primary stockholder and the proceeds from the
IPO on May 26, 1998, resulted in lower levels of interest expense and higher
levels of interest income during the periods ended September 30, 1998.
ResortQuest has decided that they will no longer continue or enter into
leasing arrangements for lodging facilities. Accordingly, for all periods
presented, the results of operations for the leased operations 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' principal stockholder. On May 27, 1998, ResortQuest entered
into a contract with AST Holdings to manage these facilities for a fee.
ResortQuest's effective tax rate for the periods ended September 30, 1998,
are impacted by: (i) Aston Hotels & Resorts earnings prior to May 26, 1998 which
will not be included in ResortQuest's consolidated income tax returns; (ii)
amortization of goodwill which is not deductible for income tax purposes; and
(iii) recording a one-time deferred income tax catch-up entry for Aston Hotels &
Resorts who was previously taxed under S Corporation status. The effective tax
rate for the periods ended September 30, 1997, are not applicable since Aston
Hotels & Resorts qualified and filed with an S corporation status.
Results of Operations - Pro Forma
- ---------------------------------
To provide better comparability, the combined pro forma results of
operations for the three- and nine-month periods ended September 30, 1997 and
1998 include the results of ResortQuest and the Founding Companies as if the
Combinations had occurred at the beginning of each respective period. The
combined pro forma results of operations include the effects of: (i) the
Combinations; (ii) the proceeds from the issuance of 6,670,000 shares of
ResortQuest Common Stock, which was used to pay the cash portion of the purchase
price for the Founding Companies, to repay debt assumed in the Combinations, and
to pay IPO expenses; (iii) certain adjustments to salaries, bonuses, and
benefits to former owners and key management of the Founding Companies effective
with the IPO; (iv) reversal of compensation expense in the three months ended
March 31, 1998, relating to the non-recurring, non-cash compensation charge of
$5.1 million related to Common Stock issued to management; (v) provision for
income taxes as if pro forma income was subject to federal, state or provincial
income taxes during the periods and that goodwill was not deductible for income
tax purposes; (vi) amortization of goodwill resulting from the Combinations and
(vii) excludes income (loss) from discontinued operations.
Goodwill Allocation
-------------------
The following table summarizes goodwill amortization by entities in which
it relates, and is reflected in the combined pro forma results of operations
discussed below.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
---- ---- ------ ------
Hawaiian islands $ 18 $ 18 $ 54 $ 54
Mountain 129 130 385 390
Beach 269 269 807 807
Other 269 269 807 807
---- ---- ------ ------
Total $685 $686 $2,053 $2,058
==== ==== ====== ======
18
Hawaiian Islands
----------------
The following table sets forth the Hawaiian island resorts' combined pro
forma results of operations for the three- and nine-month periods ended
September 30, 1997 and 1998.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
------------- ------------- -------------- --------------
Revenues $5,712 100.0% $5,041 100.0% $17,075 100.0% $17,163 100.0%
Operating expenses 3,322 58.2% 3,605 71.5% 11,354 66.5% 11,859 69.1%
Operating income $2,390 41.8% $1,436 28.5% $ 5,721 33.5% $ 5,304 30.9%
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1998 - Hawaii
Revenues. Revenues decreased $671,000, or 11.7%, from $5.7 million in 1997
to $5.0 million in 1998, primarily due to a lower number of units under
management contract in 1998 and lower average occupancy percentages resulting
primarily from the Northwest Airlines strike during third quarter 1998.
Northwest Airlines accounts for approximately 15% of the lift into the Hawaiian
islands. Average daily rate in Hawaii was up slightly, despite the continued
pressures from the Asian economic crisis.
Operating expenses. Operating expenses increased $283,000, or 8.5%, from
$3.3 million in 1997 to $3.6 million in 1998. As a percentage of revenues,
operating expenses increased from 58.2% in 1997 to 71.5% in 1998. This again,
was primarily caused by the Northwest Airlines strike.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1998 - Hawaii
Revenues. Revenues were relatively flat for the year to date period.
Operating expenses. Operating expenses increased $505,000, or 4.4%, from
$11.4 million in 1997 to $11.9 million in 1998. As a percentage of revenues,
operating expenses increased from 66.5% in 1997 to 69.1% in 1998.
Mountain
--------
The mountain resorts' combined pro forma results of operations for the
third quarter reflect the end of the off-peak summer season, which can impact
margins on a quarterly basis. The following table sets forth the mountain
resorts combined pro forma results of operations for the three- and nine-month
periods ended September 30, 1997 and 1998, which includes: Aspen, Breckenridge
and Telluride, Colorado; Park City, Utah; and Whistler, British Columbia.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
-------------- ------------- -------------- --------------
Revenues $ 1,638 100.0% $2,053 100.0% $11,663 100.0% $11,801 100.0%
Operating expenses 2,679 n/m 2,769 n/m 9,317 79.9% 9,397 79.6%
Operating income (loss) $(1,041) n/m $ (716) n/m $ 2,346 20.1% $ 2,404 20.4%
19
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1998 - Mountain
Revenues. Revenues increased $415,000, or 25.3%, from $1.6 million in 1997
to $2.1 million in 1998, primarily due to an increase in real estate sales
commission revenue. The mountain resorts also experienced an increase in revenue
per available unit ("RevPAU") of 5.7% and increased their units under management
contract by 8.7%.
Operating expenses. Operating expenses were relatively flat with prior
year.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1998 - Mountain
Revenues. Revenues were relatively flat with prior year. However, the
mountain resorts increased their units under management contract by 8.7%.
Operating expenses. Operating expenses were relatively flat with prior
year.
Beach
-----
The beach resorts' combined pro forma results of operations for the third
quarter reflect the peak summer vacation season, which can impact margins on a
quarterly basis. The following table sets forth the beach resorts (excluding
Hawaii) combined pro forma results of operations for the three- and nine-month
periods ended September 30, 1997 and 1998, which includes: Bethany Beach,
Delaware; Gulf Shores, Alabama; Nantucket, Massachusetts; Outer Banks, North
Carolina; Sanibel and Captiva Islands, Florida; and St. Simons Island, Georgia.
Since ResortQuest acquired Abbott Resorts effective September 30, 1998, there is
no impact from their Florida Panhandle operations in Destin, Okaloosa Island and
Seagrove Beach, Florida areas included in the third quarter pro forma results.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
------------- ------------- ------------- --------------
Revenues $5,816 100.0% $9,076 100.0% $14,056 100.0% $19,437 100.0%
Operating expenses 4,157 71.5% 6,075 66.9% 9,921 70.6% 13,175 67.8%
Operating income $1,659 28.5% $3,001 33.1% $ 4,135 29.4% $ 6,262 32.2%
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1998 - Beach
Revenues. Revenues increased $3.3 million, or 56.1%, from $5.8 million in
1997 to $9.1 million in 1998, due to a 16.6% increase in RevPAU, a higher number
of units under management contract, and $1.5 million in revenues for Plantation
Resort for the period from July 1 through September 30, 1998.
Operating expenses. Operating expenses increased $1.9 million, or 46.1%,
from $4.2 million in 1997 to $6.1 million in 1998. This increase was primarily
attributable to increased salaries and wages to service increased demand and
units and $1.1 million in expenses for Plantation Resort for the period from
July 1 through September 30, 1998. As a percentage of revenues, operating
expenses decreased from 71.5% in 1997 to 66.9% in 1998, resulting primarily from
higher revenues and Plantation Resort's higher margin operation.
20
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1998 - Beach
Revenues. Revenues increased $5.4 million, or 38.3%, from $14.1 million in
1997 to $19.4 million in 1998, due to increased RevPAU of 17.6%, a higher number
of units under management contract, a $1.7 million increase in real estate sales
commission revenue, and $1.5 million in revenues for Plantation Resort for the
period from July 1 through September 30, 1998. Both the average sales price and
the number of real estate sales closed in 1998 were higher.
Operating expenses. Operating expenses increased $3.3 million, or 32.8%,
from $9.9 million in 1997 to $13.2 million in 1998. As a percentage of revenues,
operating expenses decreased from 70.6% in 1997 to 67.8% in 1998. This decrease
was primarily attributable to higher real estate sales commission revenues, off
set by increased salaries and wages to service the anticipated increased summer
demand, and Plantation Resort's higher margin operation.
Other Operations
----------------
The following table sets forth the other combined pro forma results of
operations for the three- and nine-month periods ended September 30, 1997 and
1998, which includes: First Resort and corporate.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
(amounts in thousands) 1997 1998 1997 1998
----------- ------------- ------------- -------------
Revenues $762 100.0% $ 779 100.0% $2,104 100.0% $ 2,407 100.0%
Operating expenses 809 n/m 1,375 n/m 2,308 n/m 3,423 n/m
Operating loss $(47) n/m $ (596) n/m $ (204) n/m $(1,016) n/m
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1998 - Other
Revenues. Revenues were relatively flat as compared to prior year.
Operating expenses. Operating expenses increased by $566,000, or 70.0%,
from $809,000 in 1997 to $1.4 million in 1998. This increase primarily results
from expenses associated with being a public company and corporate overhead,
which did not exist prior to the IPO, and the write off of nonrecurring
acquisition costs incurred in connection with the Plantation Resort acquisition
which totaled approximately $134,000.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1998 - Other
Revenues. Revenues increased $303,000, or 14.4%, from $2.1 million in 1997
to $2.4 million in 1998, due to both the increased sales of software and
software service fees.
Operating expenses. Operating expenses increased by $1.1 million, or 48.3%,
from $2.3 million in 1997 to $3.4 million in 1998. This increase primarily
results from expenses associated with being a public company and corporate
overhead, which did not exist prior to the IPO, and the write off of
nonrecurring acquisition costs incurred in connection with the Plantation Resort
acquisition which totaled approximately $134,000.
21
Liquidity and Capital Resources
- -------------------------------
ResortQuest is a holding company that conducts all of its operations
through its operating companies. One of the Company's strategies is to grow
through continued acquisitions of resort condominium and home management
companies in new or existing resort markets. Accordingly, the primary internal
source of ResortQuest's liquidity is through cash flows from operations, two
credit facilities, and ResortQuest Common Stock. At September 30, 1998,
ResortQuest had approximately $6.0 million available under its two credit
facilities, $10.8 million of cash and cash equivalents, and $6.0 million of cash
held in escrow. Cash held in escrow is forwarded to the condominium or
homeowners, and is released as corporate funds at varying times in accordance
with applicable state or provincial regulations. ResortQuest also has entered
into discussions with NationsBank, N.A. and certain other lenders to increase
the size of the Credit Facility to provide cash for future acquisitions. In
November 1998, ResortQuest received commitments to increase its $30 million
Credit Facility to $55 million.
Post-IPO Acquisitions
- ---------------------
Since the IPO, ResortQuest has completed three Post-IPO Acquisitions:
Plantation Resort Management, Inc., ("Plantation Resort") located in Gulf
Shores, Alabama, effective August 31, 1998; Whistler Exclusive Properties, Ltd.
("Whistler Exclusive") located in Whistler, British Columbia, Canada, effective
September 3, 1998; and Abbott Realty Services, Inc. ("Abbott Resorts") located
in Destin, Florida, effective September 30, 1998. Whistler Exclusive and Abbott
Resorts were accounted for under the purchase method of accounting. The
acquisitions of Plantation Resort was accounted for as a pooling of interests;
however, due to the fact that the impact of the acquisition of Plantation Resort
is not deemed material to the financial statements of ResortQuest taken as a
whole the historical financial statements of ResortQuest include the effect of
Plantation Resort only since July 1, 1998.
ResortQuest intends to pursue attractive acquisition opportunities. There
can be no assurance that the Company will be able to identify, acquire or
profitably manage additional businesses or successfully integrate acquired
businesses into ResortQuest 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 the Company, as well as higher acquisition prices.
Further, acquisitions involve a number of special risks, including the failure
of acquired companies to achieve anticipated results, diversion of management's
attention, failure to retain key personnel, risks associated with unanticipated
events or liabilities and amortization of acquired intangible assets. Some or
all of which could have a material adverse effect on ResortQuest's business,
financial condition and results of operations.
The timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable. ResortQuest expects to fund
future acquisitions primarily through a combination of cash flow from
operations, borrowings under the Credit Facilities and issuance of Common Stock.
22
Cash Flows
----------
During the nine months ended September 30, 1998, ResortQuest generated cash
flows from continuing operating activities of $4.1 million. Cash flows used in
investing activities by the Company was $43.6 million during the nine months
ended September 30, 1998, which included $21.3 million payments to acquire the
Founding Companies and $21.0 million payments for the Post-IPO Acquisitions.
ResortQuest generated cash flows from financing activities of $48.8 million
during the nine months ended September 30, 1998, including the net proceeds of
$60.9 million from the IPO, offset by distributions to stockholders of $33.2
million and the repayment of $5.9 million in debt, and the borrowing of $29.0
million under the Credit Facility.
Note Receivable
---------------
In connection with the Combinations, Aston Hotels & Resorts formalized
their receivable resulting from cash advances to its primary stockholder with a
$4.0 million promissory note (the "Note"). The Note bears interest at one-half
of one percent below prime rate of interest, but not less than six percent and
not more than 10 percent. Payments under the Note are interest only, due and
payable every January and July 1st. The Note is due on demand with 180 days
notice for any time through May 26, 1999. If payment is not requested within the
notice periods, the Note becomes due and payable on May 25, 2008.
IPO and Combinations
--------------------
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 IPO expenses) were
approximately $60.0 million. Pursuant to the Combinations, ResortQuest
consummated the acquisitions of the Founding Companies for an aggregate of
approximately $54.9 million in cash, 6,119,656 shares of Common Stock and the
assumption of $5.7 million in debt. As of June 30, 1998, the net proceeds have
been used as follows: (i) $54.9 million to pay the cash portion of the
consideration for the Combinations, and (ii) $5.1 million to pay off assumed
indebtedness. As of September 30, 1998, ResortQuest had 16,873,265 shares of
Common Stock issued and outstanding.
Shelf Registration
------------------
On June 25, 1998, ResortQuest registered 3.0 million shares of Common Stock
with the SEC pursuant to a shelf registration statement. As of September 30,
1998, 948,979 of the shares covered by this shelf registration statement have
been issued in connection with the acquisition of Plantation Resort and Abbott
Resorts. Subsequent to September 30, 1998, ResortQuest filed a post-effective
amendment no. 1 to the shelf registration statement with the SEC. The remaining
shares covered by the post-effective amendment are available to be used in
future acquisitions.
23
Credit Facilities and Loan Guarantees
-------------------------------------
ResortQuest entered into a credit agreement (the "Credit Facility") as of
May 26, 1998, with NationsBank, N.A. and First Tennessee Bank National
Association, as amended on September 30, 1998, with respect to a $30 million
revolving line of credit. The Credit Facility may be used for letters of credit
not to exceed $2.5 million, acquisitions, capital expenditures, and for general
corporate purposes. The Credit Facility requires the Company 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. At October 9,
1998, the Company was in compliance with applicable loan covenants. Interest on
outstanding balances of the Credit Facility is computed at the Company's
election, on the basis of either the Prime Rate or the Eurodollar Rate plus a
margin ranging from 1.25% to 2.00%, depending on certain financial ratios.
Availability fees ranging from 0.25% to 0.50% per annum depending on certain
financial ratios are payable on the unused portion of the Credit Facility. The
Credit Facility has a three-year term and is secured by substantially all the
assets of the Company and its subsidiaries, including the stock in the Founding
Companies and any future material subsidiaries, as defined. The Company, each
Founding Company and all other current and future material subsidiaries are
required to guarantee repayment of all amounts due under the Credit Facility. As
of September 30, 1998, outstanding borrowings under the Credit Facility totaled
$29.0 million principally as a result of the acquisition of Abbott Resorts.
On September 30, 1998, the Company executed a promissory note (the "Note
Agreement") maturing on January 31, 1999, in favor of NationsBank, N.A., with
respect to an additional $5.0 million revolving line of credit. The interest
rate on outstanding balances, the interest payment dates and the terms of
default under the Note Agreement are the same as those provided for in the
Credit Facility. The Note Agreement is secured by the same terms as the Credit
Facility. As of September 30, 1998, there were no borrowings under the Note
Agreement. ResortQuest also has entered into discussions with NationsBank, N.A.
and certain other lenders to increase the size of the Credit Facility to provide
cash for future acquisitions.
In November 1998, ResortQuest received commitments to increase its $30
million Credit Facility to $55 million. The Credit Facility will be extended
under its existing terms and conditions to include SG Cowen Securities
Corporation and Union Planters Bank.
In connection with the Combinations, ResortQuest agreed to assume $5.7
million of existing debt of the Founding Companies. As of September 30, 1998,
all of this debt was paid off. In addition, the Founding Companies collectively
had $1.8 million available to borrow under nine separate lines of credit, which
included personal guarantees of the Founding Companies owners. ResortQuest has
terminated these lines of credit and removed the personal guarantees of the
Founding Companies previous owners.
In connection with the acquisition of Abbott Resorts, ResortQuest agreed to
assume $6.9 million of existing debt and capital leases of Abbott Resorts. As of
September 30, 1998, all of this debt is still outstanding and included in the
accompanying balance sheet.
Prior to the Combinations, Aston Hotels & Resorts had guaranteed or
co-signed debts of its former principal stockholder, which primarily relates to
mortgage loans on two hotels managed by Aston Hotels & Resorts. These guarantees
were fully collateralized with real estate, cash or cash equivalents, including
shares of Common Stock, pledged either to the lenders of such debt or Aston
Hotels & Resorts to secure such debt. As of September 30, 1998, all of these
guarantees had been removed by the former principal stockholder of Aston Hotels
& Resorts.
24
Abbott Resorts is a partial guarantor on a $26.0 million construction loan
pertaining to the condominium development which Abbott Resorts has a 10% limited
partnership interest. Abbott Resorts' guarantee under this arrangement is not to
exceed approximately $1.7 million.
Certain of Aston Hotels & Resorts' management agreements 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.
Capital Spending
----------------
It is anticipated that cash flows from operations will provide sufficient
flows to satisfy working capital needs, debt service requirements and normal
capital expenditure needs. ResortQuest made capital expenditures of
approximately $1.1 million during the nine months ended September 30, 1998.
Total pro forma 1998 capital expenditures for ResortQuest and the Founding
Companies are anticipated to be approximately $2.0 million, of which
approximately $200,000 will be for software development, with the balance for
furniture, fixtures and equipment.
Year 2000 Compliance
- --------------------
The vacation property management industry uses a complex suite of software.
The areas of some risk of software failure due to the Year 2000 problem are:
Property Management Systems (guest services and back-office accounting);
Reservation/Inventory Management; Hardware BIOS (the software that runs
"beneath" the operating system); Analysis and/or management reporting tools; and
Imbedded Control Systems (HVAC, elevator controls, etc.).
ResortQuest is in the process of evaluating the various components of its
operating environment (personal computer workstations and related equipment,
Network servers, telephone and data communication equipment, point of sale
devices, software applications (both third party and internally developed
software)), and embedded technology such as microcontrollers. The Company
expects to complete the analysis, and implement any corrective measures in early
1999. The Year 2000 project is not expected to delay or supercede other planned
technology projects.
Based upon the information gathered to date, ResortQuest estimates the
upper range of the cost of the analysis and subsequent replacement or upgrade of
system components which are not Year 2000 compliant is approximately $600,000. A
significant portion of the total potential expense estimate relates to the cost
of replacement of personal computer hardware, servers, and telecommunications
equipment. Funding of Year 2000 costs is expected to be provided by cash flow
from operations.
The impact upon ResortQuest by Year 2000 issues is primarily in the areas
of property management systems, telecommunications, and financial
accounting/reporting. The Company believes that the consequences of Year 2000
issues with the respect to adverse impact upon ResortQuest results of operations
will not be material.
The Company expects to have contingency plans in place designed to mitigate
the impact of Year 2000 issues. The contingency plan will include items such as
offsite and/or manual reservations/inventory management, property management
(guest services, back office functions, work order administration), financial
accounting and reporting, and management reporting. All contingency plans are
expected to be developed, tested and implemented by the end of 1999.
25
Seasonality and Quarterly Fluctuations
- --------------------------------------
The ResortQuest business is highly seasonal. The pro forma results of
operations have been 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. ResortQuest's quarterly results of operations may also be
subject to fluctuations as a result of the timing and cost of acquisitions, the
timing of real estate sales, changes in relationships with travel providers,
extreme weather conditions or other factors affecting leisure travel and the
vacation rental and property management industry.
Risks Associated With Forward Looking Statements
- ------------------------------------------------
This filing contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended, which are intended to be covered by the safe harbors
created thereby. Investors are cautioned that all forward-looking statements
involve risks and uncertainties, including but not limited to the risks
associated with; successful integration of the Founding Companies and additional
required companies factors affecting internal growth and management of growth,
ResortQuest's acquisition strategy and availability of financing, the tour and
travel industry, seasonality, quarterly fluctuations and general economic
conditions, dependence on technology and travel providers, and other factors
discussed in the Registration Statement. Although the Company believes 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 ResortQuest or any
other person that the objectives and plans of the Company will be achieved.
26
Performance Statistics
- ----------------------
Three Months Ended Nine Months Ended
------------------------------------------------ --------------------------------------------
Sept 30, Sept 30, Inc./ Sept 30, Sept 30, Inc./
1997 1998 Dec. 1997 1998 Dec.
-------- -------- ----- -------- -------- -----
Hawaii
Occupancy 73.9% 71.2% (2.7)pts 73.8% 72.7% (1.1)pts
ADR $ 106.68 $ 106.79 0.1 % $ 106.37 $ 106.71 0.3 %
RevPAU $ 78.79 $ 76.07 (3.5)% $ 78.45 $ 77.54 (1.2)%
Total Units 5,366 5,104 (4.9)% 5,366 5,104 (4.9)%
Mountain
Occupancy 34.9% 35.0% 0.1pts 39.6% 39.9% 0.3pts
ADR $ 84.01 $ 88.44 5.3% $ 160.55 $ 157.01 (2.2)%
RevPAU $ 29.28 $ 30.94 5.7% $ 63.50 $ 62.66 (1.3)%
Total Units 1,469 1,597 8.7% 1,469 1,597 8.7 %
Beach
Occupancy 65.3% 69.0% 3.7pts 59.6% 63.4% 3.8pts
ADR $ 165.86 $ 183.02 10.3% $ 137.69 $ 152.46 10.7%
RevPAU $ 108.32 $ 126.26 16.6% $ 82.13 $ 96.60 17.6%
Total Units 2,145 2,304 7.4% 2,145 2,304 7.4%
Total
Occupancy 66.0% 65.1% (0.9)pts 65.4% 65.3% (0.1)pts
ADR $ 117.44 $ 123.83 5.4% $ 117.32 $ 120.80 3.0%
RevPAU $ 77.53 $ 80.65 4.0% $ 76.73 $ 78.82 2.7%
Total Units 8,980 9,005 0.3% 8,980 9,005 0.3%
The above statistics exclude H&O, Maury, Plantation Resort and Abbott
Resorts units of approximately 130, 1,200, 369 and 2,332, respectively. Also
excluded from these statistics are owner use nights and renovation nights which
were approximately 11.7% of gross available nights in the nine months ended
September 30, 1998 and 9.8% of gross available nights in the nine months ended
September 30, 1997. For the three months ended September 30, 1998 and 1997,
owner use nights and renovation nights were 11.1% and 8.8%, respectively.
27
PART II - OTHER INFORMATION
------------------------------
Item 2. Changes in Securities and Use of Proceeds
-------------------------------------------------
Initial Public Offering
- -----------------------
In connection with the IPO, the ResortQuest's Registration Statement on
Form S-1 (File No. 333-47867) was declared effective by the Securities and
Exchange Commission on May 18, 1998. The managing underwriters of the IPO were
Salomon Smith Barney, NationsBanc Montgomery Securities LLC and Furman Selz. The
IPO commenced on May 20, 1998, all securities registered and sold in the IPO
consisted of 5,800,000 shares, plus an underwriter overallotment of 870,000
shares totaling 6,670,000 shares (the "Offered Shares") of Common Stock, $.01
par value per share, all of which were sold for the account of the Company.
The Offered Shares were sold at a price to the public of $11.00 per share,
for aggregate gross proceeds of $73.4 million. The total expenses incurred in
connection with the IPO, including underwriting discounts and commissions, are
estimated to be approximately $13.4 million. Such expenses did not include any
direct or indirect payments to directors, officers, 10% stockholders or
affiliates of the Company. As of September 30, 1998, the net proceeds have been
used as follows: (i) $54.9 million to pay the cash portion of the consideration
for the Combinations, and (ii) $5.1 million to pay off assumed indebtedness.
Cash consideration paid in connection with the Combinations include payments
made directly or indirectly to individuals that are either directors, officers
or 10% stockholders of the Company.
Also in connection with the consummation of the Combinations, the Company
issued an aggregate of 6,119,656 shares of Common Stock as the stock portion of
the consideration. Such shares were not registered under the Securities Act of
1933, as amended, and were issued in reliance on the exemption provided by
Section 4(2) of such act.
Shelf Registration
- ------------------
On June 25, 1998, the Securities and Exchange Commission declared effective
3.0 million shares of Common Stock registered by ResortQuest through a shelf
registration statement. These shares are available and could be used for future
acquisitions. On November 6, 1998, the SEC again declared effective the
post-effective amendment no. 1 to the shelf registration statement.
Credit Facility
- ---------------
The ResortQuest Credit Facility and Note Agreement require the Company to
maintain certain specific financial covenants. Although the payment of dividends
is not prohibited by either agreement, the covenants are structured such that
ResortQuest's ability to pay dividends is limited. On September 30, 1998,
ResortQuest received an amendment to this Credit Facility to allow for the
Abbott Resorts acquisition.
In November 1998, ResortQuest received commitments to increase its $30
million Credit Facility to $55 million. The Credit Facility will be extended
under its existing terms and conditions to include SG Cowen Securities
Corporation and Union Planters Bank.
28
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
EX-10.1 Amendment Letter to Credit Facility, dated September 30, 1998 (1)
EX-10.2 Promissory Note, dated September 30, 1998, in the amount of $5.0
million, among ResortQuest International, Inc. and NationsBank,
N.A. (1)
EX-27 Financial Data Schedule (1)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
- ----------
Footnotes
(1) Filed herewith
29
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
RESORTQUEST INTERNATIONAL, INC.
November 16, 1998 By: /s/ JEFFERY M. JARVIS
----------------------------
Jeffery M. Jarvis
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer,
Chief Accounting Officer
and Duly Authorized Officer)
30
EXHIBIT INDEX
-------------
Sequential
Exhibit No. Description Page No.
- ----------- ---------------------------------------------- ----------
EX-10.1 Amendment Letter to Credit Facility,
dated September 30, 1998 (1) 32
EX-10.2 Promissory Note, dated September 30, 1998, in
the amount of $5.0 million, among ResortQuest
International, Inc., and NationsBank, N.A. (1) 38
EX-27 Financial Data Schedule (1) 41
- ---------
Footnotes
(1) Filed herewith
31