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 MARCH 31, 1999.
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 March 31, 1999.
Common Stock .........................17,389,645 shares
Page 1 of 28
Exhibit Index Page 28
1
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. Since the IPO,
ResortQuest has completed 12 acquisitions, five in 1998 and seven in 1999 (the
"Post-IPO acquisitions"). 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"),
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"), and the Post-IPO Acquisitions from
their respective effective dates of acquisition.
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 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 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 should be deemed the accounting acquiror. The unaudited
consolidated condensed statements of pro forma income give effect to the
Combinations, the IPO, and the acquisition of Abbott Resorts as if such
transactions had occurred on January 1, 1998. In addition, to provide further
comparability of the periods presented in the unaudited consolidated condensed
statements of pro forma income, corporate overhead in an amount comparable to
the current year is reflected in the prior year.
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. These unaudited consolidated condensed financial statements should
be read in conjunction with ResortQuest's consolidated financial statements and
notes thereto included in the Company's 1998 Annual Report to Stockholders and
the Company's Post-Effective Amendment No. 2 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, March 31,
(in thousands, except share amounts) 1998 1999
--------- ---------
(Restated)
ASSETS
Current assets
Cash and cash equivalents $ 26,247 $ 30,517
Trade and other receivables, net 3,929 6,352
Receivables from stockholders 5,209 5,523
Deferred income taxes 1,297 1,297
Other current assets 2,276 2,010
--------- ---------
Total current assets 38,958 45,699
Goodwill, net 130,214 150,345
Property and equipment, net 16,649 17,217
Deferred income taxes 211 213
Other assets 2,187 2,765
--------- ---------
Total assets $ 188,219 $ 216,239
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,234 $ 906
Customer deposits, deferred revenues and payable
to property owners 24,639 31,500
Accounts payable and accrued liabilities 13,210 17,480
Payables to stockholders 1,632 517
Other current liabilities 323 164
--------- ---------
Total current liabilities 41,038 50,567
Long-term debt, net of current maturities 38,098 49,214
Other long-term obligations 2,228 2,197
--------- ---------
Total liabilities 81,364 101,978
--------- ---------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
17,092,768 and 17,389,645 shares outstanding, respectively 171 174
Additional paid-in capital 136,026 140,781
Excess distributions (29,500) (29,500)
Retained earnings 158 2,806
--------- ---------
Total stockholders' equity 106,855 114,261
--------- ---------
Total liabilities and stockholders' equity $ 188,219 $ 216,239
========= =========
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
March 31, March 31,
(in thousands, except share amounts) 1998 1999
-------- --------
(Restated)
Revenues
Property management fees $ 4,972 $ 18,412
Service fees 3,108 7,716
Other 586 5,528
-------- --------
Total revenues 8,666 31,656
-------- --------
Operating expenses
Direct operating 4,411 14,469
General and administrative 1,614 9,437
Depreciation and amortization 115 1,558
-------- --------
Total operating expenses 6,140 25,464
-------- --------
Operating income 2,526 6,192
Other income (expense)
Interest expense, net (233) (889)
Other -- 242
-------- --------
Income before income taxes 2,293 5,545
Provision for income taxes (28) (2,505)
-------- --------
Income from continuing operations 2,265 3,040
Income from discontinued operations 1,557 --
-------- --------
Net income $ 3,822 $ 3,040
======== ========
Earnings per share
Basic
Continuing operations $ 1.08 $ 0.18
Discontinued operations 0.74 --
-------- --------
Net income $ 1.82 $ 0.18
======== ========
Diluted
Continuing operations $ 1.08 $ 0.17
Discontinued operations 0.74 --
-------- --------
Net income $ 1.82 $ 0.17
======== ========
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)
Three Months Ended
March 31, March 31,
(in thousands, except share amounts) 1998 1999
-------- --------
Revenues
Property management fees $ 16,437 $ 18,364
Service fees 6,098 7,717
Other 4,292 5,528
-------- --------
Total revenues 26,827 31,609
-------- --------
Operating expenses
Direct operating 12,435 14,427
General and administrative 7,282 8,966
Depreciation and amortization 1,401 1,558
-------- --------
Total operating expenses 21,118 24,951
-------- --------
Operating income 5,709 6,658
Other income (expense)
Interest expense, net (745) (889)
Other 153 242
-------- --------
Income before income taxes 5,117 6,011
Provision for income taxes (2,278) (2,682)
-------- --------
Net income $ 2,839 $ 3,329
======== ========
Earnings per share
Basic $ 0.17 $ 0.19
======== ========
Diluted $ 0.17 $ 0.19
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Paid-in Excess Retained
(in thousands, except share amounts) Shares Amount Capital Distributions Earnings Total
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 (Restated) 17,092,768 $ 171 $ 136,026 $ (29,500) $ 158 $ 106,855
Net income -- -- -- -- 3,040 3,040
Distributions of pooled companies
prior to acquisition -- -- -- -- (392) (392)
Stock issued in connection with
1999 purchase acquisitions 296,877 3 4,755 -- -- 4,758
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1999 17,389,645 $ 174 $ 140,781 $ (29,500) $ 2,806 $ 114,261
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
RESORTQUEST INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, March 31,
(in thousands) 1998 1999
-------- --------
(Restated)
Cash flows from operating activities
Net income $ 3,822 $ 3,040
Income from discontinued operations (1,557) --
-------- --------
Income from continuing operations 2,265 3,040
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Depreciation and amortization 115 1,558
Changes in operating assets and liabilities
Trade and other receivables (981) (2,139)
Accounts payable and accrued liabilities (1,615) 3,455
Customer deposits, deferred revenues and
payable to property owners (747) 1,098
Other 1,495 (2,315)
-------- --------
Net cash provided by operating activities 532 4,697
-------- --------
Cash flows from investing activities
Cash portion of acquisitions, net -- (9,330)
Purchase of property and equipment (23) (817)
Other 517 --
-------- --------
Net cash provided by (used in) investing activities 494 (10,147)
-------- --------
Cash flows from financing activities
Net credit facility borrowings -- 10,143
Distribution to stockholders (3,571) (392)
Payment of other long-term obligations (2,050) (31)
Other 1,928 --
-------- --------
Net cash (used in) provided by financing activities (3,693) 9,720
-------- --------
Net increase (decrease) in cash and cash equivalents (2,667) 4,270
Cash and cash equivalents, beginning of period 4,638 26,247
-------- --------
Cash and cash equivalents, end of period $ 1,971 $ 30,517
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Formation
ResortQuest International, Inc. (a Delaware corporation "ResortQuest" or
the "Company"), formerly known as Vacation Properties International, Inc., was
formed to create the first national branded 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 "IPO"),
the Company acquired 12 vacation rental and property management companies and
one leading vacation rental and property management software company
(collectively the "Founding Companies") (the "Combinations"). However, for
accounting and reporting purposes, ResortsHotel Corporation of the Pacific, Inc.
("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.
Subsequent to the IPO, ResortQuest executed five acquisitions through the
end of 1998: Goldpoint, located in Breckenridge, Colorado, effective July 1998;
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; Abbott Realty Services, Inc. ("Abbott Resorts") located in
Destin, Florida, effective September 30, 1998; and Columbine Management Company,
Inc. ("Columbine") located in Dillon, Colorado, effective December 1, 1998
(collectively, the "1998 Acquisitions"). The 1998 Acquisitions added 2,956
vacation rental condominiums and homes to the total units under management, and
are located in two new markets and three existing markets ("tuck-in"). The 1998
Acquisitions cost $45.0 million and were financed through a combination of stock
and cash. The Plantation Resort acquisition was accounted for under the
pooling-of-interests method; the remaining 1998 acquisitions were accounted for
under the purchase method of accounting.
During the three months ended March 31, 1999, ResortQuest executed seven
additional acquisitions, which added 1,577 vacation rental condominiums and
homes to units under management (the "1999 Acquisitions") and are located in one
existing market and six new markets: Ridgepine Vacation Rentals, Inc. in
Sunriver Oregon, effective January 1, 1999; Cove Realty Management Services,
Inc. in Palm Desert, California, effective January 1, 1999; Ryan's Golden Eagle
Management Services, Inc. in Big Sky, Montana, effective January 5, 1999;
Scottsdale Resort Accommodations Inc. in Scottsdale, Arizona, effective February
1, 1999; Worthy Rentals, Inc. in Hilton Head Island, South Carolina, effective
February 1, 1999; High Country Management, Inc. in Crested Butte, Colorado,
effective March 31, 1999; and Mountain High Management in Whistler, British
Columbia Canada, effective March 31, 1999. The 1999 Acquisitions cost $24.2
million and were financed through a combination of stock and cash. The
acquisitions of High Country Management and Mountain High Management were
accounted for under the pooling-of-interests method of accounting; the remaining
1999 Acquisitions were accounted for under the purchase method of accounting.
8
In accordance with the Financial Accounting Standards Board (FASB)
Accounting Principles Board opinion No. 16 "Business Combinations", the
historical financial statements of ResortQuest have been restated on a combined
basis as if all three poolings-of-interests combinations (Plantation Resort,
Mountain High Management, and High Country Management, the "Poolings") had been
consummated prior to January 1, 1998. The results of operations for the separate
companies and the restated combined results presented in the accompanying
consolidated condensed financial statements are as follows:
Three Months Ended
March 31, March 31,
(in thousands) 1998 1999
------- -------
Revenues
ResortQuest, as previously reported $ 6,078 $29,857
Pooled companies 2,588 1,799
------- -------
Combined Revenues, as restated $ 8,666 $31,656
======= =======
Net Income
ResortQuest, as previously reported $ 3,254 $ 2,323
Pooled companies 568 717
------- -------
Combined Net Income, as restated $ 3,822 $ 3,040
======= =======
In connection with the 1999 poolings-of-interests transactions,
ResortQuest recorded total expense of $286,000 related to transaction costs of
the combinations. Transaction costs consist primarily of attorneys, accountants,
and other related costs. At March 31, 1999, current liabilities included
$205,000 of remaining unpaid estimated transaction costs.
Accordingly, the restated historical consolidated financial statements
include the financial results of Aston and the three poolings for all periods
presented, ResortQuest and the Founding Companies only since May 26, 1998, and
the remaining Post-IPO acquisitions from their respective effective dates of
acquisition. Comparability of actual results for all actual periods presented
may be misleading and are not necessarily indicative of the results of the
combined operations.
For the 1999 Acquisitions accounted for under the purchase method of
accounting, we noted the following pro forma results assuming these combinations
occurred on January 1, 1998:
Three Months Ended
March 31, March 31,
(in thousands) 1998 1999
-------- --------
Revenues
ResortQuest, as restated $ 8,666 $ 31,656
Combinations 3,148 275
-------- --------
Pro forma combined revenues $ 11,814 $ 31,931
======== ========
Net Income
ResortQuest, as restated $ 3,822 $ 3,040
Combinations 228 (52)
-------- --------
Pro forma combined net income $ 4,050 $ 2,988
======== ========
9
Pro Forma Financial Information
To provide better comparability, the consolidated condensed statements of
pro forma income include the financial results of ResortQuest and the Founding
Companies as if the Combinations had occurred on January 1, 1998. The
consolidated condensed statements of pro forma income include the effects of:
(i) the Combinations and the three poolings; (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, Abbott Resorts and the three poolings;
(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 principally not deductible for income
tax purposes; (vi) amortization of goodwill resulting from the Combinations;
corporate overhead in the prior year first quarter in an amount comparable to
the expense recorded in the current year; the financial results of Abbott
Resorts as if the Abbott Resorts acquisition had occurred on January 1, 1998;
(vii) excludes income (loss) from discontinued operations and (viii) the
purchased companies since their respective effective dates of acquisition.
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 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.
NOTE 3 - DISCONTINUED OPERATIONS
ResortQuest decided in 1998 that they would not continue to 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 assigned such
leases to AST Holdings, Inc., a corporation owned by Aston's 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 provided in the following table.
10
Three
Months Ended
March 31,
(in thousands) 1998
--------
Revenue $ 10,117
Operating expenses 6,469
General and administrative expense 2,090
--------
Operating income 1,558
Other expense (1)
--------
Net income from discontinued operations $ 1,557
========
NOTE 4 - LONG-TERM DEBT
On April 16, 1999 ResortQuest executed amendment no. 3 to the credit
agreement (the "Credit Agreement") to allow for the refinancing of existing
loans of a subsidiary. 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 Agreement requires ResortQuest to comply with
various loan covenants, which include maintenance of certain financial ratios,
restrictions on additional indebtedness and restrictions on liens, guarantees,
advances, capital expenditures, sale of assets and dividends. Interest on
outstanding balances of the Credit Facility is computed at ResortQuest'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 range from 0.25% to 0.50% per annum depending on certain
financial ratios are payable on the unused portion of the Credit Facility. At
March 31, 1999, borrowings under the Credit Facility totaled $48.0 million. The
Credit Facility has a three-year term and is secured by substantially all the
assets of ResortQuest and its subsidiaries, including the stock in the Founding
Companies and any future material subsidiaries, as defined. ResortQuest, each
Founding Company and all other current and future material subsidiaries are
required to guarantee repayment of all amounts due under the Credit Facility. At
March 31, 1999, ResortQuest was in compliance with applicable loan covenants.
ResortQuest is currently negotiating a $50 million private placement of
senior secured notes. Closing on these debt instruments is anticipated to occur
in late May or early June, 1999. The proceeds of these borrowings will be used
to fund future acquisitions.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Guarantees
Certain of Aston's 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.
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
11
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. Management does not believe that the
outcome of such legal actions will have a materially adverse effect on the
Company's financial position or results of operations.
Insurance
ResortQuest carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the periods presented in the
accompanying financial statements.
Benefit Plans
As of March 31, 1999, ResortQuest had twelve 401(k) profit sharing plans,
which existed prior to the IPO and the acquisition of the Founding Companies or
the Post-IPO Acquisitions. Under the plans currently in place, employees may
defer from 1% to 18% of eligible earnings, company matching contributions range
from 0% to 50% of the first 4% to 6% of employee contributions, and employee
vesting in company matching contributions varies from immediate vesting in some
plans to seven or more years in other plans.
On April 1, 1999, ResortQuest established a new 401(k) profit sharing
plan, which will cover all domestic employees. It is expected that all existing
plans will be merged into the new 401(k) plan during 1999.
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 March 31, 1999, would be approximately $20.0 million.
12
NOTE 6 - Earnings Per Share
Actual Results
Earnings per share included in the consolidated condensed statements of
income for the historical periods ended March 31, 1998, includes Aston's results
of operations under its historical capital and income tax structure, and the
results of operations of the three Post-IPO acquisitions accounted for under the
pooling-of-interests method of accounting (Plantation Resort, Mountain High
Management, and High Country Management). Accordingly, the 1,708,333 shares of
Common Stock issued to the former stockholders of Aston in connection with the
Combinations and the 392,780 shares issued in connection with the three poolings
are utilized to calculate weighted average common shares for the three months
ended March 31, 1998.
The following table reflects ResortQuest's weighted average common shares
outstanding and the impact of its primary common share equivalents:
Three Months Ended
March 31, March 31,
1998 1999
---------- ----------
Basic weighted average common
shares outstanding 2,101,113 17,353,989
Effect of dilutive
securities - stock options -- 432,222
---------- ----------
Diluted weighted average common
shares outstanding 2,101,113 17,786,211
========== ==========
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, the acquisition of
Abbott Resorts, the three poolings, and shares issued to ResortQuest
shareholders and management as though such shares were outstanding for the
entire periods. In addition, the 1999 period includes the impact of Common Stock
issued in connection with the remaining Post-IPO Acquisitions only from their
effective acquisition dates.
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
March 31, March 31,
1998 1999
---------- ----------
Basic weighted average common
shares outstanding 17,074,106 17,353,989
Effect of dilutive
securities - stock options -- 432,222
---------- ----------
Diluted weighted average common
shares outstanding 17,074,106 17,786,211
========== ==========
13
NOTE 7 - SEGMENT REPORTING
On January 1, 1998, ResortQuest adopted the provisions of SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." Under
SFAS No. 131, ResortQuest has one operating segment, property management, which
is managed as one business unit. The all other caption includes First Resort
Software and corporate. Approximately 81% of the all other segment assets
represents goodwill recorded for First Resort Software and corporate. The
following table presents the revenues, operating income and assets of
ResortQuest's reportable segment.
Three Months Ended
March 31, March 31,
(in thousands) 1998 1999
--------- ---------
Revenues
Property Management $ 8,666 $ 30,789
All other -- 867
--------- ---------
$ 8,666 $ 31,656
========= =========
Operating Income
Property Management $ 2,526 $ 8,470
All other -- (2,278)
--------- ---------
$ 2,526 $ 6,192
========= =========
Assets
Property Management 14,000 $ 178,953
All other -- 37,286
--------- ---------
$ 14,000 $ 216,239
========= =========
14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
ResortQuest International, Inc. is a leading provider of vacation
condominium and home rentals in premier destination resorts throughout the
United States and Canada. Through the consolidation of leading vacation rental
and property management companies, the development of a national brand and best
practices management systems, we offer vacationers a network of high quality,
fully furnished, privately-owned condominium and home rentals. We have developed
quality standards and segmented most of our 14,710 condominiums and homes into
five categories (Quest Home, Platinum, Gold, Silver and Bronze), developed a
single source access through a web site with on-line booking capabilities
(resortquest.com) and a toll-free central reservation center, and has
implemented a multi-faceted nation-wide marketing program. ResortQuest offers
property owners superior management services designed to enhance their rental
income and profits. The condominium and home rental properties are owned by
non-related third parties.
On May 26, 1998, we consummated our initial public offering ("IPO" or
"Offering") and the acquisition of 12 vacation rental and property management
companies and one leading vacation rental and property management software
company. We executed 12 additional vacation rental and property management
acquisitions since our IPO (together with the Founding Companies, the "Operating
Companies"). At March 31, 1999, ResortQuest managed approximately 14,710
condominiums and homes nationwide and in Canada. These rental properties are
located in beach and island resorts such as the Hawaiian Islands; Bethany Beach,
DE; Gulf Shores, AL; Nantucket, MA; the Outer Banks, NC; Destin, Fort Walton
Beach and South Walton, FL; Sanibel and Captiva Islands, FL; St. Simons Island,
GA; and Hilton Head Island, SC; mountain resorts such as Aspen, Breckenridge,
Crested Butte, Dillon and Telluride, CO; Big Sky, MT; Sunriver, OR; Park City,
UT; and Whistler, British Columbia; and desert resorts such as Scottsdale, AZ
and Palm Desert/Palm Springs, CA. Eleven of the Operating Companies also offer
real estate brokerage services. First Resort, one of the Founding Companies, is
a leading provider of integrated management services and reservations and
accounting software for the vacation rental and property management industry.
POST-IPO ACQUISITIONS
Subsequent to the IPO, ResortQuest executed five acquisitions through the
end of 1998: Goldpoint, located in Breckenridge, Colorado, effective July 1998;
Plantation Resort Management, Inc. located in Gulf Shores, Alabama, effective
August 31, 1998; Whistler Exclusive Properties, Ltd. located in Whistler,
British Columbia, Canada, effective September 3, 1998; Abbott Realty Services,
Inc. located in Destin, Florida, effective September 30, 1998; and Columbine
Management Company, Inc. located in Dillon, Colorado, effective December 1, 1998
(collectively, the "1998 Acquisitions"). The 1998 Acquisitions added 2,956
vacation rental condominiums and homes to units under management, and are
located in two new markets and three existing markets ("tuck-in"). The 1998
Acquisitions cost $45.0 million and were financed through a combination of stock
and cash.
During the three months ended March 31, 1999, ResortQuest executed seven
additional acquisitions, which added 1,577 vacation rental condominiums and
homes to total units under under management (the "1999 Acquisitions"), located
in one existing market and six new markets: Ridgepine Vacation Rentals, Inc.
located in Sunriver Oregon, effective January 1, 1999; Cove Realty Management
Services, Inc. located in Palm Desert, California, effective January 1, 1999;
Ryan's Golden Eagle Management Services, Inc. located in Big Sky, Montana,
effective January 5, 1999; Scottsdale Resort Accommodations Inc. located in
Scottsdale, Arizona, effective February 1, 1999;
15
Worthy Rentals, Inc. located in Hilton Head Island, South Carolina, effective
February 1, 1999; High Country Management, Inc. located in Crested Butte,
Colorado, effective March 31, 1999; and Mountain High Management located in
Whistler, British Columbia Canada, effective March 31, 1999. These acquisitions
cost $24.2 million and were financed through a combination of stock and cash.
Three acquisitions were accounted for under the pooling-of-interests method of
accounting; the remaining acquisitions were accounted for under the purchase
method of accounting.
Results of Operations - Actual
For accounting and reporting purposes, Aston Hotels & Resorts, one of our
founding companies, was identified as the accounting acquiror and the remaining
founding companies along with ResortQuest were accounted for under the purchase
method of accounting. Since the IPO and the Combinations, we made three
acquisitions which have been accounted for under the pooling-of-interests method
of accounting and for which the historical financial statements have been
restated. Accordingly, our actual consolidated financial information for the
three month periods ended March 31, 1998 and 1999 includes the results of Aston
and the poolings for the entire period presented, and includes ResortQuest and
the founding companies only since May 26, 1998, includes the remaining Post-IPO
acquisitions since their respective effective dates of acquisition.
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 month periods ended March 31, 1999 and 1998.
Three Months Ended March 31,
(dollars in thousands) 1998 1999
------------- ---------------
Revenues $8,666 100.0% $31,656 100.0%
Direct operating expenses 4,411 50.9% 14,469 45.7%
General and administrative expenses 1,614 18.6% 9,437 29.8%
Depreciation and amortization 115 1.3% 1,558 4.9%
Operating income $2,526 29.1% $ 6,192 19.6%
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- - Actual
Revenues. Revenues increased $23.0 million, or 265.3%, from $8.7 million
in 1998 to $31.7 million in 1999, primarily due to the revenue impact of the
companies acquired in the Combinations and the Post-IPO Acquisitions accounted
for as purchases. The 1998 and 1999 results of operations include Aston and the
three acquisitions accounted for as poolings-of-interests for the entire
periods, the remaining Founding Companies for the period from May 27, 1998
through March 31, 1999, and the remaining Post-IPO acquisitions from their
respective effective dates of acquisition. Revenues from the 1998 Acquisitions
and 1999 Acquisitions for the Hawaii, Mountain, Beach, Desert, and Other
segments were $489,000, $10.6 million, $9.7 million, $1.3 million and $867,000,
respectively.
Direct operating expenses. Direct operating expenses increased $10.1
million, or 228.0%, from $4.4 million in 1998 to $14.5 million in 1999, which is
primarily due to the expense impact of the companies acquired in the
Combinations and the Post-IPO Acquisitions accounted for as purchases. The 1998
and 1999 results of operations include Aston and the three acquisitions
accounted for as poolings-of-interests for the entire periods, the remaining
Founding Companies for the period from May 27, 1998 through March 31, 1999, and
the remaining Post-IPO acquisitions from their respective effective dates of
acquisition. As a percentage of revenues, direct operating expenses decreased
from 50.9% in 1998 to 45.7% in 1999. Direct operating expenses from
16
the 1998 Acquisitions and the 1999 Acquisitions for the Hawaii, Mountain, Beach,
Desert and Other segments were $162,000, $4.3 million, $5.9 million, $63,000 and
$466,000, respectively.
General and administrative expenses. General and administrative expenses
increased $7.8 million, or 484.7%, from $1.6 million in 1998 to $9.4 million in
1999, which is primarily due to the expense impact of the companies acquired in
the Combinations, the Post-IPO Acquisitions accounted for as purchases and
incremental public-company expenses. Depreciation and amortization expense
increased due to the goodwill impact if acquisitions recorded using the purchase
method of accounting. The 1998 and 1999 results of operations include Aston and
the three acquisitions accounted for as poolings-of-interests for the entire
periods, the remaining Founding Companies for the period from May 27, 1998
through March 31, 1999, and the remaining Post-IPO acquisitions from their
respective effective dates of acquisition. As a percentage of revenues, general
and administrative expenses increased from 18.6% in 1998 to 29.8% in 1999.
General and administrative expenses, including goodwill amortization, from the
1998 Acquisitions and the 1999 Acquisitions for the Hawaii, Mountain, Beach,
Desert and Other segments were $101,000, $1.3 million, $4.3 million, $463,000
and $2.7 million, respectively.
Other
The following table sets forth other historical items affecting
consolidated net income for the three month periods ended March 31, 1999 and
1998.
Three Months Ended March 31,
(dollars in thousands) 1998 1999
------- -------
Interest expense, net $ (233) $ (889)
Other -- $ 242
Income from discontinued operations 1,557 --
Effective tax rate n/a 45.2%
The interest expense in 1998 is from Aston's operations, which 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's previous debt. In the
current year, interest expense is primarily related to the ResortQuest credit
facility, which has been used to finance the cash portion of the Post-IPO
acquisitions.
ResortQuest decided in 1998 that they would not continue to 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 assigned such
leases to AST Holdings, Inc., a corporation owned by Aston's 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 period ended March 31, 1999, is
impacted by the amortization of goodwill, most of which is not deductible for
income tax purposes. The effective tax rate for the period ended March 31, 1997,
is not applicable since Aston Hotels & Resorts qualified and filed with an S
corporation status.
Results of Operations - Pro Forma
To provide better comparability, the consolidated condensed pro forma
results of operations for the three month periods ended March 31, 1998 and 1999
include the results of ResortQuest, the Founding Companies as if the
Combinations had occurred on January 1, 1998, and of the acquisition
17
of Abbott Resorts and the three poolings as if they had occurred on January 1,
1998, corporate expense in the prior period comparable to the amount of
corporate expense in current period, and the remaining Post-IPO acquisitions
since their effective dates of acquisition. The combined pro forma results of
operations include the effects of: (i) the Combinations and the poolings; (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, Abbott Resorts and the poolings
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 the Abbott acquisition and (vii) excludes
income (loss) from discontinued operations.
Hawaiian Islands
The following table sets forth the Hawaiian resorts' consolidated
condensed pro forma results of operations for the three month periods ended
March 31, 1999 and 1998.
Three Months Ended March 31,
(dollars in thousands) 1998 1999
------------- -------------
Revenues $7,257 100.0% $6,425 100.0%
Operating expenses 4,073 56.1% 3,820 59.5%
Operating income $3,184 43.9% $2,605 40.5%
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- - Hawaii
Revenues. Revenues decreased $832,000, or 11.5%, from $7.3 million in 1998
to $6.4 million in 1999, primarily due to a lower number of units under
management contract in 1999 due to normal turnover in properties under
management contract driven by real estate changing hands in the market. Average
daily rate in Hawaii was down slightly due to the continued pressures from the
Asian economic crisis, but occupancy was up 5.0 points.
Operating expenses. Operating expenses decreased $253,000, or 6.2%, from
$4.1 million in 1998 to $3.8 million in 1999. As a percentage of revenues,
operating expenses increased from 56.1% in 1998 to 59.5% in 1999. This increase
was primarily caused by the fact that new management contracts which were
entered into since March 31, 1998 have not completely benefited from Aston's
marketing initiatives.
Mountain
The mountain resorts' consolidated condensed pro forma results of
operations for the first quarter reflect the peak ski 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 month periods
ended March 31, 1999 and 1998, which includes: Aspen, Breckenridge, Crested
Butte, Dillon and Telluride, Colorado; Park City, Utah; and Whistler, British
Columbia.
18
Three Months Ended March 31,
(dollars in thousands) 1998 1999
------------- -------------
Revenues $9,659 100.0% $12,397 100.0%
Operating expenses 4,945 51.2% 6,678 53.9%
Operating income $4,714 48.8% $5,719 46.1%
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- - Mountain
Revenues. Revenues increased $2.7 million, or 28.3%, from $9.7 million in
1998 to $12.4 million in 1999, primarily due to $1.6 million in revenues from
acquisitions completed in the quarter. Also favorably impacting revenues was an
increase in units under management in Whistler, B.C. and a strong ski season in
Whistler and in Park City, Utah, which offset the snow drought in Colorado. The
mountain resorts also experienced an increase in revenue per available unit
("RevPAU") of 8.8% and increased comparable units under management contract by
0.8%.
Operating expenses. Operating expenses were up $1.7 million, or 35.0%,
from $4.9 million in 1998 to $6.7 million in 1999, primarily due to $827,000 in
operating expenses related to the new acquisitions. The remaining increase is
attributable to the cost of management of additional units and the expense
impact of acquisitions in the current year.
Beach
The beach resorts' consolidated condensed pro forma results of operations
for the first quarter reflect the off-peak winter 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 month
periods ended March 31, 1999 and 1998, which includes: Bethany Beach, Delaware;
Gulf Shores, Alabama; Nantucket, Massachusetts; Outer Banks, North Carolina;
Sanibel and Captiva Islands, and Destin, Florida; St. Simons Island, Georgia;
and Hilton Head Island, South Carolina.
Three Months Ended March 31,
(dollars in thousands) 1998 1999
-------------- ---------------
Revenues $9,084 100.0% $10,661 100.0%
Operating expenses 9,475 n/m 11,200 n/m
Operating income $ (391) n/m $ (539) n/m
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- - Beach
Revenues. Revenues increased $1.6 million, or 17.4%, from $9.1 million in
1998 to $10.7 million in 1999, due to a higher number of units under management
contract and the acquisition in the current year of Worthy Rentals which was
effective February 1, 1999.
Operating expenses. Operating expenses increased $1.7 million, or 18.2%,
from $9.5 million in 1998 to $11.2 million in 1999. This increase was primarily
attributable to increased salaries and wages to service increased units and
expenses for Worthy Rentals for the period from February 1 through March 31,
1999.
Desert
The desert resort segment represents a new addition to ResortQuest's
geographic diversity and portfolio of vacation opportunities in 1999. With the
addition of Sunrise Vacation Rentals in Palm Desert, California and Scottsdale
Resort Accommodations in Scottsdale, Arizona, ResortQuest adds another winter
vacation segment. The combined condensed results of operations
19
of the two desert properties are included in the current year but are not
reflected in the prior year.
Three Months Ended
(dollars in thousands) March 31, 1999
---------------
Revenues $1,259 100.0%
Operating expenses 526 41.8%
Operating income $ 733 58.2%
Other Operations
The following table sets forth the other combined condensed pro forma
results of operations for the three month periods ended March 31, 1999 and 1998,
which includes: First Resort Software and corporate.
Three Months Ended March 31,
(dollars in thousands) 1998 1999
-------------- ---------------
Revenues $ 828 100.0% $ 867 100.0%
Operating expenses 2,624 n/m 2,727 n/m
Operating loss $(1,796) n/m $(1,860) n/m
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- - Other
Revenues and operating expenses were relatively flat as compared to prior
year.
Liquidity and Capital Resources
ResortQuest is a holding company that conducts all of its operations
through its Operating Companies. Accordingly, the primary internal source of our
liquidity is through the cash flows realized from our subsidiaries and our
amended $55 million Credit Facility. We generated cash flows from operating
activities of $4.7 million in the three months ended March 31, 1999 primarily
due to income from continuing operations and an increase in reservation and
escrow deposits and an increase in accounts payable and accrued liabilities.
Cash used in investing activities was approximately $10.1 million in the three
months ended March 31, 1999, due primarily to the cash portions of the 1999
Acquisitions. In the three months ended March 31, 1999, cash provided by
financing activities totaled $9.7 million, which included $10.1 million net
borrowings under the Credit Facility. At March 31, 1999, we had approximately
$30.5 million in cash and cash equivalents, of which $18.8 million represents
cash held in escrow. The cash held in escrow is released at varying times in
accordance with state regulations, generally based upon the guest stay, or for
real estate sale deposits when the property is sold. Certain assets, including
real estate, personal property, receivables and cash, that were not used in the
operations of certain Founding Companies were excluded from the Combinations and
retained by the respective stockholders of such Founding Companies. At March 31,
1999, we had a working capital deficit of $4.9 million, $49.2 million of
outstanding long-term debt and $7.0 million available under our Credit Facility.
we anticipate that our cash flow from operations will provide cash in excess of
our normal working capital levels, debt service requirements and planned capital
expenditures for the foreseeable future. Total capital expenditures for 1999 are
anticipated to be between $3.5 million and $4.0 million, of which approximately
$600,000 will be for software development, with the balance going to furniture,
fixtures and equipment.
20
Post-IPO Acquisitions
Since the IPO, we have completed twelve 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; Abbott Realty Services, Inc. ("Abbott Resorts") located in Destin,
Florida, effective September 30, 1998; Columbine Management, Inc. ("Columbine")
located in Dillon, Colorado, effective December 1, 1998; Ridgepine Vacation
Rentals, Inc. ("Ridgepine") in Sunriver Oregon, effective January 1, 1999; Cove
Realty Management Services, Inc. ("Cove") in Palm Desert, California, effective
January 1, 1999; Ryan's Golden Eagle Management Services, Inc. ("Golden Eagle")
in Big Sky, Montana, effective January 5, 1999; Scottsdale Resort Accommodations
Inc. ("Scottsdale") in Scottsdale, Arizona, effective February 1, 1999; Worthy
Rentals, Inc. ("Worthy") in Hilton Head Island, South Carolina, effective
February 1, 1999; High Country Management, Inc. ('High Country") in Crested
Butte, Colorado, effective March 31, 1999; and Mountain High Management
("Mountain High") in Whistler, British Columbia Canada, effective March 31,
1999. The acquisitions of Plantation Resort, Mountain High, and High Country
were accounted for under the pooling of interests method of accounting; the
remaining Post-IPO acquisitions were accounted for under the purchase method of
accounting.
We intend to pursue attractive acquisition opportunities. There can be no
assurance that we 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 our business, financial condition and results of
operations.
The timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable. We expect to fund future
acquisitions primarily through a combination of cash flow from operations,
borrowings under the Credit Facility, other debt fundings, and issuance of
Common Stock.
Note Receivable
In connection with the Combinations, Aston 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.
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 March 31,
1999, 1,465,359 of the shares covered by this shelf registration statement have
been issued in connection with Post-IPO Acquisitions. On October 16, 1998, we
filed post-effective amendment no. 1 to the shelf registration statement with
the SEC and on April 13, 1999, we filed post-effective amendment no.
21
2 to the shelf registration statement with the SEC. The remaining shares covered
by the post-effective amendments are available to be used in future
acquisitions.
Credit Facilities and Loan Guarantees
On April 16, 1999 we executed amendment no. 3 to the credit agreement to
allow for the refinancing of existing loans of a subsidiary. 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 Agreement
requires us to comply with various loan covenants, which include maintenance of
certain financial ratios, restrictions on additional indebtedness and
restrictions on liens, guarantees, advances, capital expenditures, sale of
assets and dividends. Interest on outstanding balances of the Credit Facility is
computed at our election, on the basis of either the Prime Rate or the
Eurodollar Rate plus a margin ranging from 1.25% to 2.00%, depending on certain
financial ratios. Availability fees range from 0.25% to 0.50% per annum
depending on certain financial ratios are payable on the unused portion of the
Credit Facility. At March 31, 1999, borrowings under the Credit Facility totaled
$48.0 million. The Credit Facility has a three-year term and is secured by
substantially all the assets of ResortQuest and our subsidiaries, including the
stock in the Founding Companies and any future material subsidiaries, as
defined. ResortQuest, each Founding Company and all other current and future
material subsidiaries are required to guarantee repayment of all amounts due
under the Credit Facility. At March 31, 1999, we were in compliance with
applicable loan covenants.
We are currently negotiating a $50 million private placement of senior
secured notes. Closing on these debt instruments is anticipated to occur in late
May or early June, 1999. The proceeds of these borrowings will be used to fund
future acquisitions.
Certain of Aston's 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. We made capital expenditures of approximately
$817,000 during the three months ended March 31, 1999. Total capital
expenditures for 1999 are anticipated to be between $3.5 million and $4.0
million, of which approximately $600,000 will be for software development, with
the balance going to 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.).
22
We are in the process of evaluating the various components of our
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. We expect to
complete the analysis, and implement any corrective measures by mid-1999. The
Year 2000 project is not expected to delay or supercede other planned technology
projects.
Based upon the information gathered to date, we estimate 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. We believe that the consequences of Year 2000 issues with
the respect to adverse impact upon our results of operations will not be
material.
We expect 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.
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. Our quarterly results of operations may also be subject to
fluctuations as a result of the timing and cost of acquisitions, the timing of
real estate sales, changes in relationships with travel providers, extreme
weather conditions or other factors affecting leisure travel and the vacation
rental and property management industry.
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
acquired 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 we believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward-looking statements included in this filing
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by ResortQuest or any
other person that the objectives and plans will be achieved.
23
24
Performance Statistics
Three Months Ended
March 31, March 31, Inc./
1998 1999 Dec.
------- ------- ------
Hawaii
Lodging Revenues (1) $40,114 $38,749 (3.4)%
Occupancy 78.7% 83.7% 5.0 pts
ADR $113.44 $106.97 (5.7)%
RevPAU $89.32 $89.55 0.3 %
Total Units 5,090 4,966 (2.4)%
Mountain
Lodging Revenues (1) $16,921 $18,686 10.4 %
Occupancy 64.1% 70.0% 5.9 pts
ADR $206.58 $205.61 (0.5)%
RevPAU $132.35 $143.97 8.8 %
Total Units 1,572 1,585 0.8 %
Beach
Lodging Revenues (1) $14,828 $15,926 7.4 %
Occupancy 62.8% 58.0% (4.8)pts
ADR $76.15 $79.09 3.9 %
RevPAU $47.82 $45.87 (4.1)%
Total Units 4,479 4,707 5.1 %
Total
Lodging Revenues (1) $71,863 $73,361 2.1 %
Occupancy 71.0% 71.9% 0.9 pts
ADR $114.03 $112.09 (1.7)%
RevPAU $81.01 $80.65 (0.4)%
Total Units 11,141 11,258 1.1 %
(1) Lodging revenues are in thousands and represent the total rental charged to
property rental customers. Our revenue represents from 3% to over 40% of the
lodging revenues based on the services provided to us.
The above statistics exclude Houston & O'Leary, The Maury People,
Plantation Resorts, Columbine, Ridgepine, Ryan's Golden Eagle, Cove Management
Services, Worthy Rentals, Scottsdale Resorts Accommodations, High Country
Resorts, and Mountain High Management units of approximately 3,500. Also
excluded from these statistics are owner use nights and renovation nights which
were approximately 11.9% of gross available nights in the three months ended
March 31, 1999 and 11.9% of gross available nights in the three months ended
March 31, 1998.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27 Financial Data Schedule (1)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
- ----------
Footnotes
(1) Filed herewith
26
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.
May 14, 1999 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)
27
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ------------------------------------- ----------
EX-27 Financial Data Schedule (1) 30
- ---------
Footnotes
(1) Filed herewith
28