EXHIBIT 99.2
HOWEY ACQUISITION, INC.
(DBA PRICILLA MURPHY REALTY, 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 Howey Acquisition, Inc.:
We have audited the accompanying consolidated balance sheets of Howey
Acquisition, Inc., (a Florida corporation) as of December 31, 1997 and May 26,
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the period from January 3, 1997
(inception) through December 31, 1997 and the period from January 1, 1998
through May 26, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Howey
Acquisition, Inc., as of December 31, 1997 and May 26, 1998, and the results of
their operations and their cash flows for the period from January 3, 1997
(inception) through 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
HOWEY ACQUISITION, INC. DBA PRISCILLA MURPHY REALTY, INC.
CONSOLIDATED 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 $ 904 $ 130
Cash held in trust 4,036 2,734
Advances to property owners 39 26
Prepaid expenses and other current assets 60 9
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Total current assets 5,039 2,899
PROPERTY AND EQUIPMENT, net 102 100
GOODWILL, net 5,436 5,379
OTHER ASSETS, net 187 183
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Total assets $10,764 $8,561
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Current maturities of long-term debt $ 803 $ 803
Customer deposits and deferred revenue 4,036 2,734
Accounts payable and accrued liabilities 305 314
Payable to stockholders - 78
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Total current liabilities 5,144 3,929
LONG-TERM DEBT, net of current maturities (including
note payable to an affiliate of $0 and $2,000, respectively) 3,862 3,862
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common stock, $.50 par value 40,000 shares
authorized and outstanding 20 20
Class B Common stock, non-voting, $.50 par value,
160,000 shares authorized and outstanding 80 80
Additional paid-in capital 150 150
Retained earnings 1,508 520
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Total stockholders' equity 1,758 770
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Total liabilities and stockholders' equity $10,764 $8,561
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The accompanying notes are an integral part of these financial statements.
HOWEY ACQUISITION, INC. DBA PRISCILLA MURPHY REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
January 3,
1997 January 1,
Through Through
December 31, May 26,
1997 1998
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REVENUES:
Property rental fees $2,514 $1,815
Real estate commissions, net 1,473 836
Service fees 753 497
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Total revenues 4,740 3,148
OPERATING EXPENSES 1,184 482
GENERAL AND ADMINISTRATIVE EXPENSES 1,866 949
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Income from operations 1,690 1,717
INTEREST EXPENSE, net (182) (17)
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NET INCOME $1,508 $1,700
The accompanying notes are an integral part of these financial statements.
HOWEY ACQUISITION, INC. DBA PRISCILLA MURPHY REALTY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Class A Class B
Common Stock Common Stock Additional
--------------------- -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
BALANCE, January 3, 1997 - $- - $ - $ - $ - $ -
Capitalization Company (Note 1) 40,000 20 160,000 80 150 - 250
Net income - - - - - 1,508 1,508
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BALANCE, December 31, 1997 40,000 20 160,000 80 150 1,508 1,758
Net income - - - - - 1,700 1,700
Distributions - - - - - (2,688) (2,688)
------ -- ------- -- --- ------ -----
BALANCE, May 26, 1998 40,000 $20 160,000 $ 80 $150 $ 520 $770
The accompanying notes are an integral part of these financial statements.
HOWEY ACQUISITION, INC. DBA PRISCILLA MURPHY REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
January 3, 1997 January 1,
Through Through
December 31, May 26,
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,508 $ 1,700
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 203 75
Changes in operating assets and liabilities-
Cash held in trust (300) 1,302
Advances to property owners (39) 13
Prepaid expenses and other assets (60) 55
Customer deposits and deferred revenue 300 (1,302)
Accounts payable and accrued liabilities 305 9
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Net cash provided by operating activities 1,917 1,852
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net assets acquired (excluding cash) (225) -
Purchase of property and equipment - (16)
Excess of purchase price over net assets acquired (5,575) -
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Net cash used in investing activities (5,800) (16)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 5,750 -
Payments on long-term debt (1,213) -
Distributions to stockholders - (2,610)
Net proceeds from stock issuance 250 -
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Net cash provided by (used in) financing activities 4,787 (2,610)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 904 (774)
CASH AND CASH EQUIVALENTS, beginning of period - 904
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CASH AND CASH EQUIVALENTS, end of period $ 904 $ 130
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 211 $ 60
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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITES:
Accrued distribution to stockholders $ - $ 78
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The accompanying notes are an integral part of these financial statements.
HOWEY ACQUISITION, INC.
DBA PRISCILLA MURPHY REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Howey Acquisition, Inc. ("HAI") dba, Priscilla Murphy Realty, Inc. and its
wholly-owned subsidiaries, Priscilla Murphy Realty, Inc. ("PMR") and Realty
Consultants, Inc., (collectively the "Company"), are Florida corporations. The
Company provides vacation property rentals and sales on the Florida Islands of
Sanibel and Captiva for approximately 900 rental units. The Company provides its
management services to property owners pursuant to management contracts which
are generally 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 a peak during
the first quarter of the year.
On January 3, 1997, HAI entered into an agreement to purchase the assets and
assume certain liabilities of PMR. HAI borrowed $5,800,000 from a bank and a
stockholder to finance the purchase transaction. The fair value of the net
assets purchased totaled $225,000, resulting in the recognition of goodwill of
$5,575,000. The goodwill is being amortized using a 40-year estimated life.
Additionally, the Company executed a non-compete agreement with the former
shareholder valued at $200,000. The non-compete agreement is for a period of ten
years and is payable in installments of approximately $3,000 per month for 5
years.
On May 26, 1998, ResortQuest International, Inc. ("ResortQuest") consummated its
initial public offering and acquired all of the outstanding stock of the Company
in exchange for cash and shares of ResortQuest common stock (the "Combination").
In connection with the Combination, stockholders agreed to reductions in salary
and benefits which would have reduced general and administrative expenses by
approximately $250,000 and $0 for 1997 and the period from January 1, 1998
through May 26, 1998, respectively. In addition, the purchase price for the
Company was adjusted for certain working capital adjustments of approximately
$78,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Combination and Financial Statement Presentation
The consolidated financial statements include the accounts of HAI and its
wholly-owned subsidiary, PMR (collectively, the "Company"). All intercompany
items and transactions have been eliminated.
The consolidated statements of operations of the Company for the period from
January 1, 1997 to January 3, 1997 (inception), has not been presented due to
the nominal level of operations.
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 100% of the rental fee 45 days prior to the expected arrival date.
These deposits are non-refundable and are recorded as customer deposits and
deferred revenue in the accompanying financial statements until the guest stay
commences. 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 cleaning income, repair and maintenance and
service charges.
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 $5,440,000 and $3,090,000 for period ending December 31, 1997 and
the period from January 1, 1998 through May 26, 1998, respectively, and
commission expense of approximately $3,967,000 and $2,254,000 for the period
ending December 31, 1997 and the period from January 1, 1998 through May 26,
1998, respectively.
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 statement of operations.
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Income Taxes
The Company 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 shares of the Company'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 Company's operations are exclusively in the Fort Myers/Sanibel and Captiva
Islands, Florida area and are subject to significant changes due to weather
conditions.
3. OTHER ASSETS:
Other assets consist of a non-compete agreement between the Company and the
prior owner. The total consideration for the agreement was $200,000 and is being
amortized over the term of the agreement, 10 years. The Company signed a five
year note payable for this agreement.
4. DEBT:
Long-term debt consist of the following (in thousands):
December 31, May 26,
1997 1998
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Note payable to a bank, bearing interest at 7.50%;
monthly payments of $58 through maturity in
January 2002. Secured by assets of the Company
and guaranteed by stockholder. $2,350 $2,350
Note payable to an affiliate, bearing interest at 7.95%;
subordinate to bank note payable; no payment may
be made until bank note is paid in full 2,000 2,013
Note payable to a stockholder, bearing interest at 7.95%;
subordinate to bank note payable; no payment may
be made until bank note is paid in full. 155 155
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December 31, May 26,
1997 1998
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Note payable, monthly payments of $3 through maturity
in January 2002; interest imputed at 7.50% unsecured $ 160 $ 147
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4,665 4,665
Less current maturities (803) (803)
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$3,862 $3,862
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In conjunction with the Combination, all outstanding debt was retired.
5. 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 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, error and
omission, 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
The Company's 401(k) retirement plan is available to substantially all of the
Company's employees. The Company's contribution to the plan is based upon a
percentage of employee contributions. The cost of this plan was approximately
$9,000 for the year ended December 31, 1997 and $4,000 for the period from
January 1, 1998 through May 26, 1998.
6. RELATED PARTIES:
The Company has leased office space under three separate agreements since August
1997 from trusts affiliated with an owner. In aggregate, rents paid to these
affiliated trusts were approximately $45,000. During 1998, the Company entered a
fourth lease for an additional $12,000 per year.
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