EXHIBIT 99.4
COASTAL RESORTS MANAGEMENT, INC. AND
COASTAL RESORTS REALTY L.L.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND MAY 26, 1998
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Coastal Resorts Management, Inc. and
the Members of Coastal Resorts Realty L.L.C.:
We have audited the accompanying combined balance sheets of Coastal Resorts
Management, Inc. (a Delaware corporation) and Coastal Resorts Realty L.L.C. (a
Delaware limited liability company) (collectively, the "Company") as of December
31, 1997 and May 26, 1998, and the related combined statements of operations,
changes in stockholders' and members' equity and cash flows for the year ended
December 31, 1997 and for 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 Coastal
Resorts Management, Inc., and Coastal Resorts Realty L.L.C. as of December 31,
1997 and May 26, 1998, and the results of their combined operations and cash
flows for the year ended December 31, 1997 and for the period from January 1,
1998 through May 26, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 15, 1998
COASTAL RESORTS MANAGEMENT, INC. AND
COASTAL RESORTS REALTY L.L.C.
COMBINED BALANCE SHEETS
(In thousands, except share data)
December 31, May 26,
1997 1998
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ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 203 $ 711
Cash held in escrow 442 638
Accounts receivable 117 535
Receivables from related parties 1,130 40
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Total current assets 1,892 1,924
PROPERTY AND EQUIPMENT, net 278 317
GOODWILL AND OTHER INTANGIBLE ASSETS, net 718 699
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Total assets $2,888 $2,940
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LIABILITIES AND STOCKHOLDERS' AND MEMBERS' EQUITY
-------------------------------------------------
CURRENT LIABILITIES:
Customer deposits and deferred revenue $ 212 $1,000
Payable to property owners 258 330
Accounts payable and accrued liabilities 395 6
Accounts payable and accrued liabilities-related parties 47 474
Accrued shareholder distribution - 113
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Total current liabilities 912 1,923
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NOTE PAYABLE TO RELATED PARTY 715 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' AND MEMBERS' EQUITY:
Common stock, $0.01 par; 100,000 shares authorized;
25,000 issued and outstanding - -
Capital in excess of par value 25 25
Members' equity 100 100
Retained earnings 1,136 892
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Total stockholders' and members' equity 1,261 1,017
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Total liabilities and stockholders' and members' equity $2,888 $2,940
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The accompanying notes are an integral part of these
financial statements.
COASTAL RESORTS MANAGEMENT, INC. AND
COASTAL RESORTS REALTY L.L.C.
COMBINED STATEMENTS OF OPERATIONS
(In thousands, except share data)
January 1,
1998
Year Ended through
December 31, May 26,
1997 1998
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REVENUES:
Property rental fees $1,415 $ 380
Real estate commissions, net including related party
commissions of $1,244 and $375, respectively 1,268 763
Water plant 462 -
Service fees 470 106
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Total revenues 3,615 1,249
OPERATING EXPENSES 1,788 742
GENERAL AND ADMINISTRATIVE
EXPENSES 644 278
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Income from operations 1,183 229
INTEREST INCOME (EXPENSE) (47) 8
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NET INCOME $1,136 $ 237
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The accompanying notes are an integral part of these
financial statements.
COASTAL RESORTS MANAGEMENT, INC. AND
COASTAL RESORTS REALTY L.L.C.
STATEMENTS OF CHANGES IN STOCKHOLDERS' AND MEMBERS' EQUITY
(In thousands, except share data)
Common Stock Additional
----------------------- Paid-in Members' Retained
Shares Amount Capital Equity Earnings Total
------ ------ ------- ------ -------- -----
BALANCE, December 31,1996 25,000 $ - $25 $100 $ - $ 125
Net Income - - - - 1,136 1,136
------ ------ --- ---- ----- -----
BALANCE, December 31, 1997 25,000 - 25 100 1,136 1,261
Net income - - - - 237 237
Contributions - - - - 762 762
Distributions - - - - (1,243) (1,243)
------ ------ --- --- ----- -----
BALANCE, May 26, 1998 25,000 $ - $25 $100 $ 892 $ 1,017
------ ------ --- --- ----- -----
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The accompanying notes are an integral part of these financial statements.
COASTAL RESORTS MANAGEMENT, INC. AND
COASTAL RESORTS REALTY L.L.C.
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
January 1
Year Ended Through
December 31, May 26,
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,136 $ 237
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 85 38
Gain on sale of assets (8) -
Changes in operating assets and liabilities-
Escrow accounts (244) (196)
Accounts receivable 26 (418)
Customer deposits and deferred revenue 49 788
Payable to property owners 95 72
Accounts payable and accrued liabilities 199 (389)
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Net cash provided by operating activities 1,338 132
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (261) (58)
Proceeds from sale of assets 115 -
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Net cash used in investing activities (146) (58)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Receivables from related parties (1,082) 1,090
Accounts payable and accrued liabilities-related parties 47 427
Proceeds from note payable to related party 200 -
Payments on note payable to related party (160) (715)
Capital contributions (distributions), net - (368)
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Net cash provided by (used in) financing activities (995) 434
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NET INCREASE IN CASH AND CASH EQUIVALENTS 197 508
CASH AND CASH EQUIVALENTS, beginning of period 6 203
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CASH AND CASH EQUIVALENTS, end of period $ 203 $ 711
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SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING INFORMATION:
Accrued distribution to stockholders $ - $ 113
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The accompanying notes are an integral part of these financial statements.
COASTAL RESORTS MANAGEMENT, INC. AND
COASTAL RESORTS REALTY L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Coastal Resorts Management, Inc. ("CRM"), incorporated on September 26, 1996,
and Coastal Resorts Realty L.L.C. ("CRR"), formed on August 28, 1996,
(collectively the "Companies" or the "Company") are a Delaware corporation and a
Delaware limited liability company, respectively. CRM provides property
management services to homeowner associations as well as other related service
companies. CRR provides property rental services to owners of vacation
properties and acts as an agent for sales of new and used vacation properties.
The Company manages approximately 550 rental units in Bethany Beach, Delaware.
The Company provides its management services to property owners pursuant to
management contracts, which range in length from one to five years. The majority
of such contracts allow property owners to terminate the contract only for
cause. 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
Companies in exchange for shares of ResortQuest common stock (the
"Combination"). In addition, the stockholders and members retained goodwill and
other intangible assets that were excluded from the Combinations and the
purchase price for the Company was adjusted for certain working capital
adjustments of approximately $113,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Combination and Financial Statement Presentation
The accompanying financial statements of CRM and CRR have been prepared on a
combined basis as the Companies are under common control and will be the subject
of a consolidation with and into ResortQuest.
Revenue Recognition
The Company records property rental fees on the accrual basis of accounting,
ratably over the term of guest stays, as earned. The Company requires a deposit
equal to 33% of the rental fee 10 days after the reservation is booked. These
deposits are non-refundable and are recorded as customer
deposits and deferred revenue in the accompanying combined financial statements.
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 processing and inspection 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
approximately $2,176,000 and $1,275,000 for the year ended December 31, 1997 and
the period from January 1, 1998 through May 26, 1998, respectively, and
commission expense of approximately $908,000 and $512,000 for the year ended
December 31, 1997 and for the period from January 1, 1998 through May 26, 1998,
respectively.
Operating Expenses
Operating expenses include rental agent commissions, salaries, marketing and
advertising expense, and other costs associated with sales, rental and
management.
Cash and Cash Equivalents
For purposes of the balance sheets and statements of cash flows, the Company
considers all cash held and investments held with maturities of less than three
months as cash and 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.
Intangible Assets
On December 30, 1996, CRR entered into an agreement to purchase the assets and
assume certain liabilities of Interstate Realty Co., Inc. (a related party) for
the purchase price of $759,000. CRR borrowed 600,000 from a related party entity
to finance the purchase. The fair value of the net assets purchased totaled
$2,000, resulting in the recognition of goodwill of $642,000 and a trademark of
$115,000. The trademark was sold in 1997 (see Note 6).
On December 30, 1996, CRM entered into an agreement to purchase the common stock
of SCM (a related party) for the purchase price of $132,000. CRM borrowed
$75,000 from a related party entity to finance the purchase. The fair value of
the net assets purchased totaled $30,000, resulting in the recognition of
intangible assets, totaling $102,000.
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The goodwill is being amortized over a period of 40 years.
The intangible assets are being amortized over a period of 10-15 years.
Income Taxes
CRM has elected S Corporation status as defined by the Internal Revenue Code and
state tax statutes, whereby the Company is not subject to taxation for federal
or state tax purposes. Under S Corporation status, the stockholders report their
share of CRM's taxable earnings or losses in their personal tax returns. CRR is
a limited liability company and is taxed as a partnership. Accordingly, the
Company is not subject to taxation for federal or state purposes. The members
report their share of CRR's taxable earnings or losses in their personal tax
returns.
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 Companies' operations are exclusively in the Bethany Beach, Delaware area
and are subject to significant changes due to weather conditions.
For the year ended December 31, 1997 and the period from January 1, 1998 to May
26, 1998, approximately 26 percent, respectively, of gross revenues were
attributable to commissions on new homes sales which were built by Sea Colony
Development Corporation, Inc., a related party.
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
-------- ------------ ----------
Computer equipment 5 $ 88 $100
Furniture and fixtures 7 241 288
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Total 329 388
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Less -- Accumulated depreciation (51) (71)
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Property and equipment, net $278 $317
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4. COMMITMENTS AND CONTINGENCIES:
Litigation
The Companies 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 material adverse effect on the Companies' combined financial
position or results of operations.
Insurance
Through policies secured by a related party, the Companies are covered by a
broad range of insurance policies, including general and business auto
liability, commercial property, workers' compensation and a general umbrella.
The cost of these policies has not been allocated to the Companies in the
accompanying financial statements. The Companies expect to incur insurance
expense in future years.
Benefit Plans
A related party's 401(k) retirement plan (the "Plan") is available to
substantially all of the Company's employees. The Plan is 100% employee funded
and the Companies have no current or future obligations related to the Plan. The
Companies currently pay a fee for the related administration costs.
Future Minimum Lease Payments
The Company rents office space and equipment under operating leases. Rental
expense related to these leases was approximately $111,000 for the year ended
December 31, 1997 and $41,000 for the period from January 1, 1998 through May
26, 1998. Rental expense related to leases with related parties was
approximately $77,000 and $50,000 for the year ended December 31, 1997 and the
period from January 1, 1998 through May 26, 1998.
Minimum future lease payments under these noncancelable operating leases are as
follows (in thousands):
Year Amount
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Remainder of 1998 $ 70
1999 125
2000 129
2001 76
2002 38
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Total $438
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5. RELATED PARTIES:
Related Party Agreements
Effective June 1, 1996, an agreement with CMF Fitness, Inc., a related party
appointed the Company as the manager of, and exclusive agent for, the Sea Colony
Fitness Center located in Bethany Beach, Delaware. The agreement is effective
from June 1, 1996 until December 31 of the calendar year in which the last new
home in the Sea Colony community is sold, but in no event later than December
31, 2005. CMF Fitness, Inc. paid the Company approximately $70,000 and $29,000
for the year ended December 31, 1997 and for the period from January 1, 1998
through May 26, 1998, respectively, under this agreement.
CRM receives a management fee of approximately $6,000 per month for its
services. CRM earned approximately $70,000 and $29,000 for the year ended
December 31, 1997 and for the period from January 1, 1998 through May 26, 1998,
respectively, in relation to this management agreement.
Effective January 1, 1997, CRM entered into an agreement with Sea Colony Water
Company, L.L.C., ("SCWC"), a related party. The agreement appointed CRM as the
manager of and exclusive agent for the Sea Colony Water Plant located in Bethany
Beach, Delaware. The agreement is effective from January 1, 1997 until December
31, 2001 or the sale of the property. CRM is entitled to retain all revenue
collected by the water plant, less the following: (1) an annual payment to SCWC
of $100,000, (2) an annual payment to SCWC equal to 12.5% of the cumulative
value of capital improvements made to the water plant after January 1, 1997, and
(3) all costs and expenses associated with the operation of the property except
capital improvements and expenditures, costs of compliance with laws and
regulations, and costs of insurance. CRM earned approximately $463,000 and
$206,000 in revenue from the operation of the water plant for the year ended
December 31, 1997 and for the period from January 1, 1998 through May 26, 1998,
respectively. Operating expenses plus the additional costs described above
incurred by CRM related to the water plant were approximately $319,000 and
$137,000 for the year ended December 31, 1997 and for the period from January 1,
1998 through May 26, 1998.
Effective January 1, 1997, CRR entered into an agreement with Sea Colony
Development Corporation, Inc. ("SCDC"), a related party. The agreement requires
CRR to develop a marketing plan to promote new homes in the Sea Colony
community. The agreement also appointed CRR as the sole and exclusive agent for
sale of new homes at Sea Colony from January 1, 1997 until December 31, 1999.
The agreement states that CRR shall receive a commission of 6.5% of the full
purchase price on all new homes sold at Sea Colony. CRR earned approximately
$1,244,000 and $715,000 for the year ended December 31, 1997 and for the period
from January 1, 1998 through May 26, 1998, respectively, in new home sales
commissions under this agreement. At December 31, 1997, in connection with this
agreement the Company has a net receivable of approximately $674,000 from SCDC
consisting of a receivable of approximately $1,244,000 for commissions on new
home sales in 1997 and a related payable of approximately $570,000 for
commissions, marketing and advertising expenses paid by SCDC on behalf of CRR.
At May 26, 1998, in connection with this agreement the Company has a net
receivable of approximately $448,000 from SCDC consisting of a receivable of
approximately $404,000 for commissions on new home sales during the period from
January 1, 1998 through May 26, 1988 and a related payable of approximately
$44,000 for commissions, marketing and advertising expenses paid by SCDC on
behalf of CRR.
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Effective January 1, 1997, the Companies entered into an agreement with CMF
Paymaster, Inc., a related party, to receive administrative services relating to
payroll and other employee matters. The agreement is effective from January 1,
1997 through December 31, 1999, and requires the Companies to pay $2.00 per pay
period per employee of the Companies.
The trademark purchased on December 30, 1996 for $115,000 was sold to SCDC
pursuant to an agreement effective December 31, 1997. As of December 31, 1997,
the Company has recorded a receivable from SCDC for $115,000 related to this
sale. A gain of $4,000 was recognized on the sale and is included in other
revenues.
Note Payable to Related Party
In connection with the purchase of two subsidiaries of the Companies, the
Companies borrowed $675,000 from a related party. The loan has an effective
interest rate of 7.25% and is due December 31, 2001. During 1997 the Companies
received additional advances of $200,000 and made principal payments of
$160,000. Accrued interest payable at December 31, 1997, was $46,888. The assets
of the Company have been pledged as collateral for the note.
Related Party Leases
The Company leases office space under three separate leases with a related
party. In aggregate, the Company paid approximately $77,000 and $50,000 for the
year ended December 31, 1997 and the period from January 1, 1998 through May 26,
1998, respectively.
Capital Contribution
On January 13, 1998, the owners of the Companies made a capital contribution of
approximately $762,000. On the same day, this amount was used to repay the
Companies' related party debt of $715,000 and the related accrued interest.
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