EXHIBIT 99.5
FIRST RESORT SOFTWARE, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND MAY 26, 1998
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Resort Software, Inc.:
We have audited the accompanying balance sheets of First Resort Software, Inc.
(a Colorado corporation) as of December 31, 1997 and May 26, 1998, and the
related statements of operations, changes in stockholders' equity and cash flows
for the year ended December 31, 1997 and the period from January 1, 1998 through
May 26, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Resort Software, Inc., as
of December 31, 1997 and May 26, 1998, and the results of its operations and its
cash flows for the year ended December 31, 1997 and the period from January 1,
1998 through May 26, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 17, 1998
FIRST RESORT SOFTWARE, INC.
BALANCE SHEETS
(In thousands, except share data)
December 31, May 26,
1997 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 126 $ 108
Accounts receivable 274 381
Notes receivable 152 235
Prepaid expenses and other current assets 45 25
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Total current assets 597 749
PROPERTY AND EQUIPMENT, net 275 270
OTHER ASSETS - 8
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Total assets $ 872 $1,027
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue $ 506 $ 579
Accounts payable and accrued liabilities 130 170
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Total current liabilities 636 749
LONG-TERM OBLIGATIONS 125 125
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par; 50,000 shares authorized; 3,000 shares outstanding 3 3
Additional paid in capital 13 13
Retained earnings 95 137
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Total stockholders' equity 111 153
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Total liabilities and stockholders' equity $ 872 $1,027
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The accompanying notes are an integral part of these financial statements.
FIRST RESORT SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(In thousands)
Period from
Year Ended January 1
December 31, Through May 26,
1997 1998
-------------- ---------------
REVENUES:
Software sales $1,318 $ 626
Service contracts 1,390 685
Other 156 90
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Total revenues 2,864 1,401
OPERATING EXPENSES 1,704 679
GENERAL AND ADMINISTRATIVE EXPENSES 417 322
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Income from operations 743 400
OTHER INCOME:
Interest income 25 12
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NET INCOME $ 768 $ 412
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The accompanying notes are an integral part of these financial statements.
FIRST RESORT SOFTWARE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock Additional Retained
--------------------- Paid in Earnings
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
BALANCE, December 31, 1996 3,000 $3 $13 $(106) $ (90)
Net income 768 768
Distributions (567) (567)
----- -- --- ----- -----
BALANCE, December 31, 1997 3,000 3 13 95 111
Net income 412 412
Distributions (370) (370)
----- -- --- ----- -----
BALANCE, May 26, 1998 3,000 $3 $13 $ 137 $ 153
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The accompanying notes are an integral part of these financial statements.
FIRST RESORT SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended January 1
December 31, Through May 26,
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 768 $ 412
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation 45 66
Changes in operating assets and liabilities--
Accounts receivable (44) (107)
Notes receivable (25) (83)
Prepaid expenses and other assets 29 12
Deferred revenue 49 73
Accounts payable and accrued liabilities (17) 25
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Net cash provided by operating activities 805 398
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (183) (61)
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Net cash used in investing activities (183) (61)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (39) -
Distributions to stockholders (567) (355)
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Net cash used in financing activities (606) (355)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 16 (18)
CASH AND CASH EQUIVALENTS, beginning of period 110 126
------ ------
CASH AND CASH EQUIVALENTS, end of period $ 126 $ 108
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SUPPLEMENTAL SCHEDULE OF NON-CASH
OPERATING AND FINANCING ACTIVITIES:
Accrued distribution to stockholders $ - $ 15
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The accompanying notes are an integral part of these financial statements.
FIRST RESORT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
First Resort Software, Inc. (the "Company") is a Colorado corporation. The
Company was founded and began operations in 1985. The Company develops, markets
and distributes property management computer software applications and provides
its licensees with implementation services and ongoing support. The Company has
a client base of over 650 companies located in the United States, Canada and the
Caribbean.
On May 26, 1998, ResortQuest International, Inc. ("ResortQuest") consummated its
initial public offering and acquired all of the outstanding stock of the Company
in exchange for cash and shares of ResortQuest common stock (the "Combination").
In connection with the Combination the stockholders have agreed to increases in
salary and benefits which would have increased general and administrative
expenses by approximately $42,000 and $6,000 for the year ended December 31,
1997 and for the period from January 1, 1998 through May 26, 1998, respectively.
In addition, certain stockholders retained non-operating assets and assumed or
retired certain liabilities that were excluded from the Combination and the
purchase price for the Company was adjusted for certain working capital
adjustments of approximately $15,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
The Company records revenue from software sales when the software is
successfully installed on the client's system.
The Company's revenue recognition policies conform to accounting principles for
software revenue recognition issued by the American Institute of Certified
Public Accountants ("AICPA"). For customer arrangements that include multiple
elements (i.e., additional software products, postcontract customer support, or
services) the contract price is generally allocated to the various elements
based on Company--specific objective evidence of fair values. Revenue related to
software maintenance agreements, which are generally one year in duration, is
generally billed in advance and recognized ratably over the term of the
maintenance contract. Customer deposits received and amounts invoiced but not
yet recognized as revenue are reflected as deferred revenue in the accompanying
balance sheet. These amounts are included in revenue when the relevant
recognition criteria are met.
Revenues related to service elements are generally recognized as the services
are provided. Should the Company enter into arrangements with customers that
require significant production, modification or customization of software, the
entire arrangement will be accounted for using progress to completion accounting
methods prescribed by the AICPA.
Operating Expenses
Operating expenses include salaries, benefits, communications, marketing,
postage and shipping, and other costs associated with developing, servicing and
marketing software.
Cash and Cash Equivalents
For the purposes of the balance sheets and statements of cash flows, the Company
considers all investments with original maturities of three months or less to be
cash equivalents.
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.
Research and Development
Research and development costs, except as discussed below, are expensed as
incurred. These costs consist primarily of salaries relating to the development
of new products and technologies.
Generally accepted accounting principles provide that costs incurred to produce
software for external sale or lease should be capitalized. Costs eligible for
capitalization are those incurred after the product's technological feasibility
has been established and before the product is ready for general release. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of capitalized costs requires considerable judgment by management
with respect to certain external factors, including, but not limited to,
anticipated future product revenues, estimated economic life and changes in
software and hardware technology. The Company incurred costs which satisfy the
above criteria of approximately $149,000 and $61,000 for the year ended December
31, 1997 and for the period January 1, 1998 through May 26, 1998, and therefore
these software development costs have been capitalized by the Company.
Income Taxes
The Company has elected S Corporation status as defined by the Internal Revenue
Code, whereby the Company is not subject to taxation. Under S Corporation
status, the stockholders report their share of the Company's taxable earnings or
losses in their personal tax returns.
-2-
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
Estimated Useful December 31, May 26,
Lives in Years 1997 1998
------------------ --------------- ---------
Furniture, fixtures and equipment 5 $ 255 $ 255
Leasehold improvements 5 9 9
Computer software 5 149 210
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413 474
Less - Accumulated depreciation (138) (204)
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Property and equipment, net $ 275 $ 270
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4. LINE OF CREDIT:
The Company has a loan agreement with a bank providing a line of credit ("LOC")
credit facility of $150,000, which is subject to renewal and review on an annual
basis. The LOC bears interest at prime plus 1.75% and matured March 25, 1998.
The LOC has subsequently been renewed with interest at prime plus 1%, maturing
in March 1999. At December 31, 1997 and May 26, 1998, there was no outstanding
balance on this LOC.
The owners of the Company have guaranteed the obligations and liabilities of the
Company in connection with the LOC pursuant to a continuing guaranty dated March
25, 1994.
5. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in certain legal actions arising from 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.
-3-
Insurance
The Company carries a broad range of insurance coverage, workers' compensation
and a business liability, business personal property, loss of business income,
employee dishonesty and medical payment policy. The Company has not incurred
significant claims or losses on any of its insurance policies during the period
presented in the accompanying financial statements.
Benefit Plans
The Company's 401(k) retirement plan is available to substantially all of the
Company's employees. The Company's contribution to the plan is based upon a
percentage of employee contributions, as defined by the plan. The cost of this
plan were approximately $18,000 and $9,000 for the year ended December 31, 1997
and for the period January 1, 1998 through May 26, 1998.