EXHIBIT 99.11
TRUPP HODNETT ENTERPRISES, 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 Trupp Hodnett Enterprises, Inc. and
THE Management Company:
We have audited the accompanying combined balance sheets of Trupp Hodnett
Company, consisting of Trupp-Hodnett Enterprises, Inc., and THE Management
Company (both Georgia corporations) (collectively "Trupp Hodnett Company" or the
"Company") as of December 31, 1997 and May 26, 1998, and the related combined
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 combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Trupp
Hodnett Company, as of December 31, 1997 and May 26, 1998, and the results of
their combined operations and their 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
TRUPP HODNETT COMPANY
COMBINED BALANCE SHEETS
(In thousands, except share data)
December 31, May 26,
ASSETS 1997 1998
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 293 $ 406
Cash held in trust 347 642
Accounts receivable 100 69
Receivables from stockholders and employees 32 15
Prepaid expenses and other current assets 31 72
-------- --------
Total current assets 803 1,204
PROPERTY AND EQUIPMENT, net 259 282
-------- --------
Total assets $1,062 $1,486
======== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term debt $ - $ -
Customer deposits and deferred revenue 331 641
Payable to property owners 16 1
Accounts payable and accrued liabilities 191 341
Payable to stockholders - 221
-------- --------
Total current liabilities 538 1,204
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par; 2,000 shares
authorized; 200 shares outstanding 17 17
Retained earnings 507 265
-------- --------
Total stockholders' equity 524 282
-------- --------
Total liabilities and stockholders' equity $1,062 $1,486
========= =======
The accompanying notes are an integral part of these financial statements.
TRUPP HODNETT COMPANY
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
January 1
Year Ended Through
December 31, May 26,
1997 1998
---- ----
REVENUES:
Property rental fees $2,809 $1,169
Real estate commissions, net 892 698
Service fees 360 102
-------- --------
Total revenues 4,061 1,969
OPERATING EXPENSES 1,838 901
GENERAL AND ADMINISTRATIVE EXPENSES 2,024 1,071
-------- --------
Income from operations 199 (3)
OTHER INCOME (EXPENSE):
Interest expense, net (5) 1
Gain on sale of assets 52 -
-------- --------
Income (loss) before income taxes 246 (2)
PROVISION FOR INCOME TAXES 60 -
-------- --------
NET INCOME (LOSS) $ 186 $ (2)
====== ========
The accompanying notes are an integral part of these financial statements.
TRUPP HODNETT COMPANY
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
----------------------- Retained
Shares Amount Earnings Total
------ ------ -------- -----
BALANCE, December 31, 1996 200 $17 $ 399 $416
Net income - - 186 186
Distributions - - (78) (78)
----- ---- ------ ------
BALANCE, December 31, 1997 200 17 507 524
Net loss - - (2) (2)
Distributions - - (240) (240)
----- ---- ------ ------
BALANCE, May 26, 1998 200 $17 $ 265 $282
===== ==== ===== ====
The accompanying notes are an integral part of these financial statements.
Page 1 of 2
TRUPP HODNETT COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
January 1,
Year Ended Through
December 31, May 26,
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 186 $ (2)
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation 85 29
Gain on sale of assets (52) -
Changes in operating assets and liabilities--
Cash held in trust (26) (295)
Accounts receivable (31) 31
Receivables from stockholder and employees 79 17
Prepaid expenses and other current assets (14) (41)
Customer deposits and deferred revenue 41 310
Payable to property owners (15) (15)
Accounts payable and accrued liabilities 61 150
----- -------
Net cash provided by operating
Activities 314 184
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (99) (52)
Purchase of other assets (80) -
Proceeds from sale of other assets 105 -
----- -------
Net cash used in investing
Activities (74) (52)
----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 84 -
Payments on short-term debt (97) -
Distributions to stockholders (78) (19)
----- -------
Net cash used in financing activities (91) (19)
----- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 149 113
CASH AND CASH EQUIVALENTS, beginning of
period 144 293
----- -------
CASH AND CASH EQUIVALENTS, end of period $293 $ 406
====== =======
The accompanying notes are an integral part of these financial statements.
Page 2 of 2
TRUPP HODNETT COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
January 1,
Year Ended Through
December 31, May 26,
1997 1998
--------------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 18 $ 2
===== ======
Cash paid for income taxes $ 1 $ -
====== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Accrued distribution to stockholders $ - $ 221
====== ====
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
In 1997, the Company sold certain fixed assets of the
Company to a third party as follows:
Net book value of assets $ 385
Debt assumed (332)
------
Net assets sold $ 53
=====
The accompanying notes are an integral part of these financial statements.
TRUPP HODNETT COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
THE Management Company ("TMC"), an S Corporation, and Trupp-Hodnett Enterprises,
Inc. ("THE"), a C Corporation, (collectively "Trupp Hodnett" or the "Company"),
both Georgia corporations, are leading providers of vacation property rentals,
management services and sales in St. Simons Island, Georgia. Trupp Hodnett
manages approximately 400 total rental units. The Company provides its
management services to property owners pursuant to management contracts, which
generally are one year in length. The majority of such contracts contain
automatic renewal provisions but also allow property owners to terminate the
contract at any time. The Company's operations are seasonal, with peaks during
the second and third quarters of the year.
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 addition, the owner and certain key employees have agreed to reductions in
salary and benefits which would have reduced general and administrative expenses
by approximately $1.1 million for the year ended December 31, 1997, and $317,000
for the period from January 1, 1998 through May 26, 1998. 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 $221,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
The Company records property rental fees on the accrual basis of accounting,
ratably over the term of guest stays, as earned. For weekly and monthly stays in
homes and cottages the Company requires a deposit equal to 50% of the rental fee
60 days prior to the expected arrival date. These deposits are refundable with
60 days notice of cancellation. Daily and weekly stays in "condo hotels" use a
credit card to guarantee arrival.
All deposits are recorded as customer deposits and deferred revenue in the
accompanying combined financial statements until the guest stay commences.
Advance deposits are recorded as payable to property owners, ratably over the
term of guest stays, as earned. The Company records revenue for cancellations as
they occur.
Service fees are recorded for a variety of services and are recognized as the
service is provided, including management fees.
Commissions on real estate sales are recognized at closing and are recorded net
of the related commission expense. The Company recognized commission revenues of
$1,621,000 and $1,208,000 for the year ended December 31, 1997 and the period
from January 1, 1998 through May 26, 1998, respectively, and commission expense
of $729,000 and $510,000 for the year ended December 31, 1997 and the period
from January 1, 1998 through May 26, 1998.
Operating Expenses
Operating expenses include travel agent commissions, salaries, communications,
advertising, credit card fees and other costs associated with managing and
selling properties.
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 combined statements of operations.
Income Taxes
TMC has elected S Corporation status as defined by the Internal Revenue Code and
state tax statutes, whereby, TMC is not subject to taxation for federal or state
tax purposes. Under S Corporation status, the stockholders report their share of
the Company's taxable earnings or losses in their personal tax returns.
THE is a regular C Corporation and as such is subject to taxation for federal
and state purposes. THE 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
2
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 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.
Concentration of Risk
The Company's operations are exclusively in the St. Simons Island area and are
subject to significant changes due to weather conditions.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Property and equipment consisted of the following (in thousands):
Estimated
Useful Lives December 31, May 26,
In Years 1997 1998
-------- ---- ----
Leasehold improvements 31 $ 40 $ 40
Office equipment and vehicles 3 - 7 635 595
------ ------
675 635
Less - Accumulated depreciation (416) (353)
------ -----
Property and equipment, net $ 259 $282
==== ===
Accounts payable and accrued liabilities consisted of the following (in
thousands):
December 31, May 26,
1997 1998
---- ----
Accrued compensation and benefits $ 36 $ 45
Accounts payable and other accrued liabilities 155 296
----- -----
Total accounts payable and accrued liabilities $191 $341
=== ===
3
4. SHORT-TERM DEBT:
As of December 31, 1997 and May 26, 1998, the Company had two outstanding
unused, unsecured lines of credit with banks. The Company's $100,000 line of
credit bears interest at the Chase Manhattan Bank prime rate plus 1.0% and
matures December 1, 1998. The Company's $30,000 line of credit bears interest at
the Wall Street Journal's bank prime rate plus 2.0% and matures June 1, 1998.
5. SALE OF OTHER ASSETS:
During 1997, the Company sold other assets (comprised of land and a building)
with a book value totaling $250,000 and the related note payable of $208,000 to
a third-party for $94,000. The Company recorded a gain of $52,000, which is
included in other income. Additionally, a sale to a related party was
consummated (see Note 8).
6. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
January 1,
December 31, Through
1997 May 26, 1998
---- ------------
Current $60 $ -
== =====
The provision for income taxes differs from the amount computed by applying the
U.S. Federal income tax statutory rate of 34% for the following reasons (in
thousands):
January 1,
December 31, Through
1997 May 26, 1998
---- ------------
U.S. corporate income tax provision
(benefit) at statutory rate $ 84 $ (1)
State income taxes 9 1
S Corporation income (33) -
---- ---
$ 60 $ -
===== =====
4
7. COMMITMENTS AND CONTINGENCIES:
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 combined financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including general and
business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company is self-insured for employee medical with a
stop-loss policy beginning at $7,500. The Company has not incurred significant
claims or losses on any of its insurance policies during the periods presented
in the accompanying combined financial statements.
Benefit Plans
The Company began a 401(k) retirement plan in April of 1997 which is available
to substantially all of the Company's employees. The Company is obligated to
match the employee's contribution up to 5%. The cost of this plan to the Company
was approximately $9,000 for the year ended December 31, 1997 and approximately
$5,000 for the period from January 1, 1998 through May 26, 1998.
8. RELATED PARTIES:
The Company's revenues include approximately $187,000 for the year ended
December 31, 1997 and $75,000 for the period from January 1, 1998 through May
26, 1998, respectively, for fees earned from properties in which the Company's
stockholders have an ownership interest. In 1997, the Company sold a building,
the related land (total book value of $135,000) and the related $124,000
mortgage note payable to the Company's stockholders for $11,000 in cash.
The Company has agreements to lease office space from the stockholders and the
minimum lease payments are as follows (in thousands):
December 31, May 26,
1997 1998
---- ----
1998 $ 112 $ 66
1999 117 117
2000 122 122
2001 126 126
2002 131 131
Thereafter 967 967
------- -------
$1,575 $1,529
======= ========
5
During the year ended December 31, 1997 and the period from January 1, 1998
through May 26, 1998, the Company recorded rental expense of $110,000 and
$47,000, respectively, relating to the above leases.
6