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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 September 30, 2002.
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 September 30, 2002.
Common Stock 19,251,749 shares
Page 1 of 28
PART I - FINANCIAL INFORMATION
- ------------------------------
Company or group of companies for which report is filed:
RESORTQUEST INTERNATIONAL, INC. AND SUBSIDIARIES
Item 1. Financial Statements
- ----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
Dec 31, Sept 30,
2001 2002
ASSETS -------- --------
Current assets
Cash and cash equivalents $ 213 $ 1,484
Cash held in escrow 22,648 13,974
Trade and other receivables, net 10,541 5,945
Deferred income taxes 1,430 1,530
Other current assets 6,063 4,858
-------- --------
Total current assets 40,895 27,791
-------- --------
Goodwill, net 216,534 210,070
Property, equipment and software, net 39,509 41,077
Other assets 7,336 6,040
-------- --------
Total assets $304,274 $284,978
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 322 $ 56
Deferred revenue and property owner payables 52,457 28,913
Accounts payable and accrued liabilities 14,653 14,669
Other current liabilities 3,861 1,704
-------- --------
Total current liabilities 71,293 45,342
-------- --------
Long-term debt, net of current maturities 78,644 80,909
Deferred income taxes 9,459 9,424
Other long-term obligations 4,964 5,366
-------- --------
Total liabilities 164,360 141,041
-------- --------
Stockholders' equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
19,243,249 and 19,251,749 shares outstanding, respectively 192 193
Additional paid-in capital 153,884 153,933
Accumulated other comprehensive loss (64) (72)
Excess distributions (29,500) (29,500)
Retained earnings 15,402 19,383
-------- --------
Total stockholders' equity 139,914 143,937
-------- --------
Total liabilities and stockholders' equity $304,274 $284,978
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 2 of 28
RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2002 2001 2002
------- ------- ------- -------
Revenues
Property management fees $28,821 $27,609 $ 78,952 $72,862
Service fees 13,850 13,367 39,902 36,065
Real estate and other 6,011 7,420 18,667 19,858
------- ------- -------- -------
48,682 48,396 137,521 128,785
Other revenue from managed entities 8,914 9,589 24,632 27,072
------- ------- -------- -------
Total revenues 57,596 57,985 162,153 155,857
Operating expenses
Direct operating 24,015 22,996 66,419 64,220
General and administrative 16,078 13,304 42,555 38,963
Depreciation 1,376 1,770 3,855 4,732
Goodwill amortization 1,443 - 4,227 -
------- ------- -------- -------
42,912 38,070 117,056 107,915
Other expenses from managed entities 8,914 9,589 24,632 27,072
------- ------- -------- -------
Total operating expenses 51,826 47,659 141,688 134,987
------- ------- -------- -------
Operating income 5,770 10,326 20,465 20,870
Interest and other expense, net 1,044 1,622 3,067 4,453
------- ------- -------- -------
Income before income taxes 4,726 8,704 17,398 16,417
Provision for income taxes 4,260 3,264 9,582 6,156
------- ------- -------- -------
Income before the cumulative effect of a change
in accounting principle 466 5,440 7,816 10,261
Cumulative effect of a change in accounting principle,
net of a $1.9 million income tax benefit - - - (6,280)
------- ------- -------- -------
Net income $ 466 $ 5,440 $ 7,816 $ 3,981
======= ======= ======== =======
Earnings per share
Basic
Before cumulative effect of a change
in accounting principle $ 0.02 $ 0.28 $ 0.41 $ 0.53
Cumulative effect of a change in accounting principle - - - (0.32)
------- ------- ------- -------
Net income $ 0.02 $ 0.28 $ 0.41 $ 0.21
======= ======= ======= =======
Diluted
Before cumulative effect of a change
in accounting principle $ 0.02 $ 0.28 $ 0.40 $ 0.53
Cumulative effect of a change in accounting principle - - - (0.32)
------- ------- ------- -------
Net income $ 0.02 $ 0.28 $ 0.40 $ 0.21
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 28
RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(In thousands, except share amounts)
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Excess Retained Comprehensive
Shares Amount Capital Loss Distributions Earnings Total Income
---------- ------ ---------- ------------- ------------- -------- -------- -------------
Balance, December 31, 2001 19,243,249 $192 $153,884 $ (64) $(29,500) $15,402 $139,914
Net income - - - - - 3,981 3,981 $ 3,981
Foreign currency translation
loss - - - (8) - - (8) (8)
Exercise of employee stock
options 8,500 1 49 - - - 50 -
---------- ---- -------- ------------- -------- ------- -------- -------
Comprehensive income $ 3,973
Balance, September 30, 2002 19,251,749 $193 $153,933 $ (72) $(29,500) $19,383 $143,937 =======
========== ==== ======== ============= ======== ======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 28
RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
Sept 30, Sept 30,
2001 2002
-------- --------
Cash flows from operating activities:
Net income $ 7,816 $ 3,981
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in accounting
principle (Note 2) - 6,280
Non-cash unusual expenses and other charges (Note 4) 2,886 -
Depreciation and goodwill amortization (Note 2) 8,082 4,732
Changes in operating assets and liabilities:
Cash held in escrow 12,095 8,674
Trade and other receivables 830 4,596
Accounts payable and accrued liabilities 2,853 371
Deferred revenue and property owner payables (32,245) (23,544)
Deferred income taxes and other 5,073 2,811
-------- --------
Net cash provided by operating activities 7,390 7,901
-------- --------
Cash flows from investing activities:
Cash portion of acquisitions, net (25,835) (2,963)
Purchases of property, equipment and software (14,291) (5,716)
-------- --------
Net cash used in investing activities (40,126) (8,679)
-------- --------
Cash flows from financing activities:
Credit facility borrowings 76,000 85,800
Credit facility repayments (46,500) (83,500)
Payments of capital lease and other obligations, net (1,264) (301)
Exercise of employee stock options 258 50
-------- --------
Net cash provided by financing activities 28,494 2,049
-------- --------
Net change in cash and cash equivalents (4,242) 1,271
Cash and cash equivalents, beginning of period 4,283 213
-------- --------
Cash and cash equivalents, end of period $ 41 $ 1,484
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 28
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
In these footnotes, the words "Company," "ResortQuest," "we," "our" and
"us" refer to ResortQuest International, Inc., a Delaware corporation, and its
wholly-owned subsidiaries, unless otherwise stated or the context requires
otherwise.
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
Overview
- --------
ResortQuest is one of the world's leading providers of vacation
condominium and home rental property management services in premier destination
resorts located in the United States and Canada. We have developed the first and
only branded international network of vacation rental properties, and currently
offer management services to over 20,000 rental properties. Our operations are
in more than 50 premier resort locations in the Beach, Hawaii, Mountain and
Desert geographical regions.
The Condensed Consolidated Financial Statements included herein are
unaudited and have been prepared by the Company pursuant to the rules and
regulations of the United States Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of management,
all adjustments (which include normal recurring adjustments) necessary for a
fair presentation of results for the interim periods have been made. The results
for the interim periods are not necessarily indicative of results to be expected
for the full fiscal year. These Condensed Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto included in our annual report on Form 10-K for the year ended
December 31, 2001.
Acquisition Costs
- -----------------
Costs incurred in the course of our evaluation of acquisition candidates
and the ultimate consummation of acquisitions consist primarily of attorneys'
fees, accounting fees and other costs incurred by us in identifying and closing
transactions. These costs incurred are deferred on the balance sheet as other
assets until the related transaction is either consummated or terminated. We had
no deferred acquisition costs as of December 31, 2001 and September 30, 2002.
Similar treatment and classification is followed in recording costs incurred by
us in the course of generating additional debt or equity financing. Deferred
financing costs, net of accumulated amortization, were $1.6 million and $1.1
million as of December 31, 2001 and September 30, 2002. Transaction costs and
the excess of the purchase price over the fair value of identified net assets
acquired represent goodwill (see Note 2). Goodwill is calculated based on a
preliminary estimate that is adjusted to its final balance within one year of
the close of the acquisition. Additionally, certain of our acquisitions have
"earn-up" provisions that require additional consideration to be paid if certain
operating results are achieved over periods of up to three years. This
additional consideration is recorded as goodwill when the amount is fixed and
determinable.
During the nine-month period ended September 30, 2002, we made net cash
payments approximating $3.0 million for earn-up payments related to 2001
acquisitions and other purchase accounting adjustments related to certain 2001
acquisitions. The total cost during the same period in 2001 for 2001
acquisitions and earn-up payments related to 1999 acquisitions was $27.5
million, with 6.2% of the net consideration paid in the form of common stock
with an aggregate value of $1.7 million, net of retired escrow shares, and the
remaining $25.8 million of consideration paid in cash.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
During the quarter ended March 31, 2002, we changed our method of
accounting for reimbursable costs to conform to the Financial Accounting
Standards Board's Emerging Issues Task Force Consensus No. 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred," ("EITF No. 01-14") issued earlier this year and effective
for us on January 1, 2002. As a result, reimbursements received are recorded as
revenue and the costs incurred on behalf of managed associations and properties
are recorded as expenses. These costs, which relate primarily to payroll costs
at managed properties and associations where we are the employer, are reflected
in Other revenue and expenses from managed entities in the Condensed
Consolidated Statements of Income. Revenues and expenses for the prior
Page 6 of 28
periods have been reclassified to conform with the current period presentation.
As the reimbursements are made based upon the costs incurred with no added
margin resulting in the expenses and related revenues being identical, the
adoption of EITF No. 01-14 did not have any effect on our operating income,
total or per share net income, cash flows or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 eliminates the
poolings-of-interests method of accounting for business combinations and
requires all transactions initiated after June 30, 2001, to be accounted for
using the purchase method. Under Statement No. 142, goodwill related to our
future acquisitions is not subject to amortization, and goodwill related to our
historical acquisitions is no longer amortized as of January 1, 2002. Goodwill
is subject to reviews for impairment annually and upon the occurrence of certain
events, and if impaired, a write-down will be recorded. Upon our adoption of
Statement No. 142, each of our geographical resort regions with assigned
goodwill was valued as a reporting unit. If the fair value of the reporting unit
was greater than the book value, including assigned goodwill, no further
analysis was required. However, if the book value, including goodwill, was
greater than the fair value of the reporting unit, the assets and liabilities of
the reporting unit needed to be valued. The difference between the fair value of
the reporting unit and the fair value of the assets is the implied fair value of
goodwill. To the extent that the implied fair value of goodwill was less than
the book value of goodwill, an impairment charge was recognized as a cumulative
effect of a change in accounting principle. Based on this test, we recorded a
non-cash $8.1 million write-down of our goodwill related to our Desert resort
operations that was partially off-set by a $1.9 million income tax benefit. The
Desert resort operations are expected to continue to experience declining cash
flows as a result of the economics of these markets. The following table
presents adjusted net income and earnings per share excluding goodwill
amortization:
Three Months Ended Sept 30, Nine Months Ended Sept 30,
2001 2002 2001 2002
------- ------- ------- -------
Reported income before cumulative effect of a
change in accounting principle $ 466 $ 5,440 $ 7,816 $10,261
Add back goodwill amortization 1,443 - 4,227 -
------- ------- ------- -------
Adjusted income before cumulative effect of a
change in accounting principle 1,909 5,440 12,043 10,261
Cumulative effect of a change in accounting principle - - - (6,280)
------- ------- ------- -------
Adjusted net income $ 1,909 $ 5,440 $12,043 $ 3,981
======= ======= ======= =======
Earnings per share
Basic
Before cumulative effect of a change in
accounting principle $ 0.02 $ 0.28 $ 0.41 $ 0.53
Add back goodwill amortization 0.08 - 0.22 -
------- ------- ------ -------
Adjusted income before cumulative effect of a
change in accounting principle 0.10 0.28 0.63 0.53
Cumulative effect of a change in accounting principle - - - (0.32)
------- ------- ------ -------
Adjusted net income $ 0.10 $ 0.28 $ 0.63 $ 0.21
======= ======= ====== =======
Diluted
Before cumulative effect of a change in
accounting principle $ 0.02 $ 0.28 $ 0.40 $ 0.53
Add back goodwill amortization 0.08 - 0.22 -
------- ------- ------ -------
Adjusted income before cumulative effect of a
change in accounting principle 0.10 0.28 0.62 0.53
Cumulative effect of a change in accounting principle - - - (0.32)
------- ------- ------ -------
Adjusted net income $ 0.10 $ 0.28 $ 0.62 $ 0.21
======= ======= ====== =======
We have completed the process of evaluating the impact of Statement No.
143, "Accounting for Asset Retirement Obligations," and we do not expect this
statement to have a material impact on our financial position or results of
operations upon its adoption in 2003. Effective January 1, 2002, we adopted
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"; the adoption of this statement did not have a material impact on our
financial position or results of operations. During the quarter ended June 30,
2002, Statement No. 145, "Rescission of Statements No. 4, 44, and 64, Amendment
of Statement No. 13, and Technical Corrections," was issued and has been
adopted. This adoption had no material impact on our financial position or
results of operations. Also during the quarter ended June 30, 2002, Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was
issued and is effective for activities initiated after December 31, 2002. We do
not expect this statement to have a material impact on our financial position or
results of operations upon its adoption in 2003.
NOTE 3 - NOTE RECEIVABLE
- ------------------------
In connection with the initial public offering, we formalized a $4.0
million promissory note resulting from cash advances to a primary stockholder
(see Note 6) of a predecessor company. On February 16, 2000, this note was
restructured in order to provide for additional collateral representing real
estate held by the former stockholder. This note bears interest at 1/2% below
the prime rate of interest, but not less than 6% and not more than 10%. Interest
payments under this note are due every January and July 1st. The principal is
recorded in Other assets in the accompanying Condensed Consolidated Balance
Page 7 of 28
Sheets and is due in full on May 25, 2008. To date, all interest payments due
under the restructured terms of the note have been received.
NOTE 4 - UNUSUAL ITEMS AND OTHER CHARGES
- ----------------------------------------
During the nine-months ended September 30, 2002, general and administrative
expenses include $1.1 million of items that management considers as unusual
items and other charges. During the quarter ended September 30, 2002, $625,000
of the $1.1 million was incurred for professional fees and expenses related to
an offer to acquire the Company that was determined by our Board, after
appropriate review, not to be in the best interests of the Company and its
shareholders. The remaining $500,000 was incurred during the quarter ended March
31, 2002, for professional fees resulting from employee-related matters and a
study to explore financing and strategic growth alternatives.
During the quarter ended September 30, 2001, general and administrative
expenses include $3.8 million of items that management considers as unusual
expenses and other charges. These charges include a $1.5 million non-cash
write-down of certain previously issued First Resort Software versions, a $1.1
million non-cash write-off of deferred acquisition costs related to acquisition
candidates that will no longer be pursued, a $303,000 non-cash write-off of
miscellaneous receivables, and $958,000 in employee-related charges.
NOTE 5 - EARNINGS PER SHARE
- ---------------------------
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if outstanding options to purchase our securities are exercised. The
following table reflects our weighted average common shares outstanding and the
impact of outstanding dilutive stock options:
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2002 2001 2002
---------- ---------- ---------- ----------
Basic weighted average common shares outstanding 19,241,909 19,251,749 19,140,743 19,247,834
Effect of dilutive securities - stock options 157,744 3,610 187,099 82,839
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding 19,399,653 19,255,359 19,327,842 19,330,673
========== ========== ========== ==========
NOTE 6 - LITIGATION
- -------------------
On May 26, 2000, Hotel Corp. of the Pacific, Inc., a subsidiary of
ResortQuest International doing business as Aston Hotels & Resorts, instituted
legal proceedings in the Circuit Court for the First Circuit of Hawaii against
Andre S. Tatibouet, the president of Hotel Corp. This action arose out of a
document styled "Cooperation Agreement" that was signed by Andre S. Tatibouet,
purporting to act on behalf of Hotel Corp., on the one hand, with Cendant Global
Services B.V. and Aston Hotels & Resorts International, Inc., on the other hand.
The Cooperation Agreement contains several provisions that are detrimental to
Hotel Corp., including provisions purporting to transfer certain intellectual
property and limit certain intellectual property rights held by Hotel Corp.
Monetary damages for breach of fiduciary duty, fraud, and negligent
misrepresentation were sought by Hotel Corp. By order of the Circuit Court, the
claims asserted by Hotel Corp. in the lawsuit were consolidated with an
arbitration demand, filed with the American Arbitration Association by Mr.
Tatibouet, in which he alleged various breaches of his employment agreement with
Hotel Corp.
The arbitration hearing took place in September 2001, where Mr. Tatibouet
claimed damages of approximately $17.5 million and ResortQuest claimed damages
of approximately $4.7 million. On March 14, 2002, the arbitration panel issued
its Reasoned Opinion and Final Award. The panel concluded that Mr. Tatibouet had
breached his fiduciary duty to Hotel Corp. and awarded Hotel Corp. $55,559
related to the reimbursement of certain legal expenses. The panel denied all of
Mr. Tatibouet's claims and requests for damages as well as declaratory and other
relief.
On May 26, 2000, ResortQuest International and Hotel Corp. brought an
action in the Circuit Court for the First Circuit of Hawaii against Cendant
Corporation, Aston Hotels & Resort International Inc. and Cendant Global
Services B.V ("Defendants") seeking damages for breach of contract against
Cendant, and the equitable remedies or rescission and replevin. This action
arose out of Mr. Andre S. Tatibouet's purported negotiation on behalf of Hotel
Corp. of the Pacific, Inc., a subsidiary of ResortQuest International, of a
document styled Cooperation Agreement.
Page 8 of 28
ResortQuest and Cendant entered into an amended Cooperation Agreement on
July 15, 2002. As a result of the execution of that agreement, on July 15, 2002,
ResortQuest moved to dismiss its court action against Defendants by filing a
stipulation for complete dismissal with prejudice as to all claims and parties.
We are also involved in various legal actions arising in the ordinary
course of our business. We do not believe that any of the remaining actions will
have a material adverse effect on our business, financial condition or results
of operations.
NOTE 7 - LONG-TERM DEBT
- -----------------------
Included in long-term debt on the accompanying September 30, 2002 Condensed
Consolidated Balance Sheet is approximately $30.9 million of borrowings under
our Credit Facility. At September 30, 2002, the Company was in compliance with
all covenants of our borrowing agreements. Based on current forecasts that
include estimated severance charges (see note 9), management is anticipating
that the Company will not be in compliance with certain debt covenants of our
Credit Facility and $50.0 million Senior Secured Notes at December 31, 2002.
Management and the lenders are currently in discussion to amend the borrowing
agreements. Significant changes to the current terms of the agreements may
result from any amendment. These changes may include certain restrictive
covenants and higher interest rates.
NOTE 8 - SEGMENT REPORTING
- --------------------------
We have one operating segment, property management, which is managed as one
business unit. The All other segment includes ResortQuest Technologies and
corporate. At December 31, 2001 and September 30, 2002, approximately 47% and
51%, respectively, of the All other segment assets represents goodwill recorded
for ResortQuest Technologies and corporate. The following table presents the
revenues, operating income and assets of our reportable segment:
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 2001 2002 2001 2002
------- ------- -------- --------
Revenues
Property management $56,685 $57,296 $159,549 $153,596
All other 911 689 2,604 2,261
------- ------- -------- --------
$57,596 $57,985 $162,153 $155,857
======= ======= ======== ========
Operating income
Property management $12,790 $14,718 $ 34,807 $ 33,244
All other (7,020) (4,392) (14,342) (12,374)
------- ------- -------- --------
$ 5,770 $10,326 $ 20,465 $ 20,870
======= ======= ======== ========
December 31, Sept 30,
(in thousands) 2001 2002
----------- --------
Assets
Property management $245,482 $230,948
All other 58,792 54,029
-------- --------
$304,274 $284,977
======== ========
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------
On October 7, 2002, the Company announced a series of senior management
changes that resulted in approximately $2.5 million in severance charges. The
severance and related benefits were accrued in October 2002, and will be paid
out over several years.
Page 9 of 28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
OVERVIEW
- --------
ResortQuest is one of the world's leading providers of vacation condominium
and home rental property management services in premier destination resorts
located in the United States and Canada. We have developed the first and only
branded international network of vacation rental properties, and currently offer
management services to over 20,000 rental properties. Our operations are in more
than 50 premier resort locations in the Beach, Hawaii, Mountain and Desert
geographical regions.
Our rental properties are generally second homes or investment properties
owned by individuals who assign us the responsibility of managing, marketing and
renting their properties. We earn management fees as a percentage of the rental
income from each property, but have no ownership interest in the properties. In
addition to the vacation property management business, we offer real estate
brokerage services and other rental and property owner services. We also have
developed an industry leading proprietary vacation rental management software,
First Resort Software, with over 900 licenses sold to vacation property
management companies.
We provide value-added services to both vacationers and property owners.
For vacationers, we offer the value, convenience and features of a condominium
or home while providing many of the amenities and services of a hotel. For
property owners, we offer a comprehensive package of marketing, management and
rental services designed to enhance rental income and profitability while
providing services to maintain the property. Property owners also benefit from
our QuestPerks program, which offers benefits such as discounts on lodging, air
travel and car rentals. To manage guests' expectations, we have developed and
implemented a five-tier rating system that segments our property portfolio into
five categories: Quest Home, Platinum, Gold, Silver and Bronze.
Utilizing our marketing database, we market our properties through national
cable television ad campaigns and various other media channels. We have
significant distribution through ResortQuest.com, our proprietary website
offering "real-time" reservations, and our inventory distribution partnerships
that include Expedia, Travelocity, Condosaver.com, retail travel agents, travel
wholesalers and others. We have an alliance with Online Travel Corporation,
PLC., to exclusively develop the ResortQuest brand in Europe by using our
technology and expertise in this industry.
We are constantly enhancing our website to improve the booking experience
for leisure travelers. In addition to detailed property descriptions, virtual
tours, interior and exterior photos, floor plans, and local information,
vacationers can search for properties by date, activity, event or location;
comparison shop among similar vacation rental units; check for special discounts
and promotions; and obtain maps and driving directions. The site also allows
foreign travelers to obtain currency conversion rates.
RESULTS OF OPERATIONS
- ---------------------
Our operating results are highly seasonal due to the geographical
dispersion of the resort locations in which we operate. The results of
operations are 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 financial results are discussed on a consolidated basis,
but due to the seasonal nature of our operations, our results are also discussed
by geographic region with Other representing our corporate and ResortQuest
Technologies operations. For better analysis, the nine-months ended September
30, 2002 discussions include "same-store" comparisons. Same-store comparisons
exclude the impact of the two acquisitions completed since the first day of the
earliest period being discussed. One of these acquisitions is located in our
Mountain operations in Gatlinburg, Tennessee, effective April 1, 2001, and the
other in our Beach operations in the Outer Banks of North Carolina, effective
April 1, 2001.
Due to the recent challenges facing leisure travel companies presented by
the softening economy and the impact of the tragic events of September 11, 2001,
our revenues are down over prior year as leisure travel demand has softened. In
order to maintain occupancy levels, we charged lower room rates, which resulted
in lower overall revenues. Despite these industry-wide challenges, we are proud
of how we have been able to reduce costs, maintain occupancy and continue to
position ResortQuest to realize significant growth in the future.
Page 10 of 28
Consolidated
- ------------
The following table sets forth the condensed consolidated results of
operations for the three and nine months ended September 30, 2001 and 2002.
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
(in thousands) 2001 2002 2001 2002
--------------- --------------- ---------------- ----------------
Revenues $57,596 100.0% $57,985 100.0% $162,153 100.0% $155,857 100.0%
Direct operating expenses 24,015 41.7 22,996 39.7 66,419 41.0 64,220 41.2
General and administrative expenses 16,078 27.9 13,304 22.9 42,555 26.2 38,963 25.0
Other expenses from managed entities 8,914 15.5 9,589 16.5 24,632 15.2 27,072 17.4
------- ----- ------- ----- ------- ----- -------- -----
Operating income before depreciation
and goodwill amortization 8,589 14.9 12,096 20.9 28,547 17.6 25,602 16.4
Depreciation 1,376 2.4 1,770 3.1 3,855 2.4 4,732 3.0
Goodwill amortization 1,443 2.5 - - 4,227 2.6 - -
------- ----- ------- ----- ------- ----- ------- -----
Operating income 5,770 10.0 10,326 17.8 20,465 12.6 20,870 13.4
Interest and other expense, net 1,044 1.8 1,622 2.8 3,067 1.9 4,453 2.9
Provision for income taxes 4,260 7.4 3,264 5.6 9,582 5.9 6,156 3.9
------- ----- ------- ----- ------- ----- ------- -----
Income before the cumulative effect of a
change in accounting principle $ 466 0.8% $ 5,440 9.4% $ 7,816 4.8% $10,261 6.6%
======= ===== ======= ===== ======== ===== ======= =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - Consolidated
Revenues. Revenues increased slightly by $389,000, or 0.7%, from $57.6
million in 2001 to $58.0 million in 2002. Excluding Other revenues from managed
entities, revenues decreased $286,000, or 0.6%, from $48.7 million in 2001 to
$48.4 million in 2002, due to a 4.2% decrease in gross lodging revenues
primarily driven by a lower Average Daily Rate ("ADR").
Direct operating expenses. Direct operating expenses decreased $1.0
million, or 4.2%, from $24.0 million in 2001 to $23.0 million in 2002, primarily
due to cost reduction initiatives announced during 2001 that have been focusing
on more efficient staffing. As a percentage of revenues, direct operating
expenses decreased 2.0 points due to the decrease in same-store revenues.
General and administrative expenses. General and administrative expenses
decreased $2.8 million, or 17.3%, from $16.0 million in 2001 to $13.3 million in
2002, primarily due to the $3.8 million in items recorded in September 2001 that
management considers as unusual items and other charges (see Note 4). Excluding
the $625,000 in unusual items and other charges recorded in 2002 and the $3.8
million recorded in 2001, general and administrative expenses increased
$450,000, or 3.7%, from $12.2 million in 2001 to $12.7 million in 2002,
primarily due to increased staffing at the new technology office that opened
last fall and an increase in bad debt expense due to the write off of certain
receivables. As a percentage of revenues, general and administrative expenses
decreased 5.0 points due to the decrease in expenses while revenues remained
relatively flat.
Other expenses from managed entities. Other expenses from managed entities
increased $675,000, or 7.6%, from $8.9 million in 2001 to $9.6 million in 2002,
due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by our entities under our management (see Note 2). The
reimbursements for these amounts are reflected in revenues. As a percentage of
revenues, other expenses from managed entities increased 1.0 points due to
decrease in same-store revenues.
Depreciation. Depreciation increased $394,000, or 28.6%, from $1.4 million
in 2001 to $1.8 million in 2002, primarily due to increased technology capital
expenditures related to enhancements to our website and the release of the new
version of First Resort Software. As a percentage of revenues, depreciation
increased 0.7 points due to the increase in technology capital expenditures.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Interest and other expense, net. Interest expense, net of interest income,
increased $578,000, or 55.4%, from $1.0 million in 2001 to $1.6 million in 2002,
primarily due to increased debt levels and an increased weighted average
borrowing rate. As a percentage of revenues, interest increased 1.0 point due to
the increase in borrowing costs.
Page 11 of 28
Provision for income taxes. Provision for income taxes decreased $996,000,
or 23.4%, from $4.3 million in 2001 to $3.3 million in 2002, primarily due to
the $2.3 million cumulative income tax expense adjustment recorded in September
2001, related to the projected decline in earnings for the remainder of 2001.
Excluding this adjustment, provision for income taxes increased $1.3 million, or
65.8%, from $2.0 million in 2001 to $3.3 million in 2002, due to an increase in
taxable income.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001 - Consolidated
Revenues. Revenues decreased $6.3 million, or 3.9%, from $162.2 million in
2001 to $155.9 million in 2002. Excluding Other revenue from managed entities,
revenues decreased $8.7 million, or 6.4%, from $137.5 million in 2001 to $128.8
million in 2002, primarily due to a 7.3% decrease in gross lodging revenues
primarily driven by lower ADR and a slight decline in occupancy.
Direct operating expenses. Direct operating expenses decreased $2.2
million, or 3.3%, from $66.4 million in 2001 to $64.2 million in 2002, primarily
due to cost reduction initiatives and a slight decline in occupancy. As a
percentage of revenues, direct operating expenses increased 0.2 points primarily
due to the decrease in same-store revenues.
General and administrative expenses. General and administrative expenses
decreased $3.6 million, or 8.4%, from $42.6 million in 2001 to $39.0 million in
2002, primarily due to the $3.8 million in items recorded in September 2001 that
management considers as unusual items and other charges (see Note 4). Excluding
the $1.1 million in unusual items and other charges recorded in 2002 and the
$3.8 million recorded in 2001, general and administrative expenses decreased
$870,000, or 2.2%, from $38.7 million in 2001 to $37.8 million in 2002,
primarily due to significant decreases at our Mountain and Beach operations
related to cost reduction initiatives, partially off-set by increases at our
Hawaiian operations driven by professional fees for a favorable mediation
settlement and increased staffing at the new technology office that opened last
fall in Colorado. As a percentage of revenues, general and administrative
expenses decreased 1.2 points, primarily due to the decrease in expenses.
Other expenses from managed entities. Other expenses from managed entities
increased $2.4 million, or 9.9%, from $24.6 million in 2001 to $27.0 million in
2002, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by our entities under our management (see Note 2). The
reimbursements for these amounts are reflected in revenues. As a percentage of
revenues, other expenses from managed entities increased 2.2 points due to the
decrease in same-store revenues.
Depreciation. Depreciation increased $877,000, or 22.8%, from $3.9 million
in 2001 to $4.7 million in 2002, primarily due to increased technology capital
expenditures related to enhancements to our website and the release of the new
version of First Resort Software. As a percentage of revenues, depreciation
increased 0.6 points due to the increase in technology capital expenditures and
the decrease in same store revenues.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets", goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Interest and other expense, net. Interest expense, net of interest income,
increased $1.4 million, or 45.2%, from $3.1 million in 2001 to $4.5 million in
2002, primarily due to increased debt levels and an increased weighted average
borrowing rate. As a percentage of revenues, interest increased 1.0 point due to
the increase in borrowing costs and a decrease in same-store revenues.
Provision for income taxes. Provision for income taxes decreased $3.4
million, or 35.8%, from $9.6 million in 2001 to $6.2 million in 2002, primarily
due to a decline in taxable income.
Page 12 of 28
Beach
- -----
The following table sets forth the condensed consolidated results of
operations for the three and nine months ended September 30, 2001 and 2002 for
our Beach operations in Gulf Shores, Alabama; Bethany Beach, Delaware; Anna
Maria Island, Beaches of South Walton, Bonita Springs, Bradenton, Captiva
Island, Destin, Fort Myers, Fort Myers Beach, Fort Walton Beach, Lido Key,
Longboat Key, Marco Island, Naples, Navarre Beach, New Port Richey, Okaloosa
Island, Orlando, Panama City, Pensacola, Perdido Key, Sanibel Island, Sarasota,
Siesta Key, Vanderbilt Beach and Venice, Florida; St. Simons Island, Georgia;
Nantucket, Massachusetts; Outer Banks, North Carolina; Lake Erie Islands, Ohio;
and Hilton Head Island, South Carolina.
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2001 2002 2001 2002
---------------- --------------- --------------- ---------------
Revenues $36,129 100.0% $36,588 100.0% $85,501 100.0% $83,114 100.0%
Direct operating expenses 15,659 43.3 15,207 41.6 38,883 45.5 38,704 46.6
General and administrative expenses 5,063 14.0 5,359 14.7 16,123 18.8 15,079 18.1
Other expenses from managed entities 1,607 4.5 1,954 5.3 3,763 4.4 4,699 5.7
------- ----- ------- ----- ------- ----- ------- -----
Operating income before depreciation
and goodwill amortization 13,800 38.2 14,068 38.4 26,732 31.3 24,632 29.6
Depreciation 450 1.2 488 1.3 1,199 1.4 1,447 1.7
Goodwill amortization 822 2.3 - - 2,364 2.8 - -
------- ----- ------- ----- ------- ----- ------- -----
Operating income $12,528 34.7% $13,580 37.1% $23,169 27.1% $23,185 27.9%
======= ===== ======= ===== ======= ===== ======= =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - Beach
Revenues. Revenues increased $458,000, or 1.3%, from $36.1 million in 2001
to $36.6 million in 2002. Excluding Other revenue from managed entities,
revenues increased $112,000, or 0.3%, from $34.5 million in 2001 to $34.6
million in 2002, primarily due to an increase in real estate commissions in our
Northwest Florida operations. This increase was partially offset by a 5.8%
decline in gross lodging revenues primarily driven by a 1.0% decline in managed
units.
Direct operating expenses. Direct operating expenses decreased $452,000, or
2.9%, from $15.7 million in 2001 to $15.2 million in 2002, primarily due to cost
reduction intiatives. As a percentage of revenues, direct operating expenses
decreased 1.7 points due to the cost reduction initiatives.
General and administrative expenses. General and administrative expenses
increased $296,000, or 5.8%, from $5.1 million in 2001 to $5.4 million in 2002,
primarily due to an increase in bad debt expense resulting from the write-off of
certain receivables related to our Nantucket operations. As a percentage of
revenues, general and administrative expenses increased 0.7 points due to the
increase in expenses.
Other expenses from managed entities. Other expenses from managed entities
increased $347,000, or 21.5%, from $1.6 million in 2001 to $2.0 million in 2002,
due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by our entities under our management (see Note 2). The
reimbursements for these amounts are reflected in revenues. As a percentage of
revenues, other expenses from managed entities increased 0.8 points primarily
due to an increase in these expenses.
Depreciation. Depreciation increased $38,000, or 8.4%, from $450,000 in
2001 to $488,000 in 2002, primarily due to the increase in technology capital
expenditures for our Beach operations. As a percentage of revenues, depreciation
remained flat.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001 - Beach
Revenues. Revenues decreased $2.4 million, or 2.8%, from $85.5 million in
2001 to $83.1 million in 2002. Excluding Other revenues from managed entities,
revenues decreased $3.3 million, or 4.1%, from $81.7 million in 2001 to $78.4
million in 2002, primarily due to a 7.5 percent decrease in gross lodging
revenues driven by lower ADR and a 1.0% decline in managed units.
Direct operating expenses. Direct operating expenses decreased $179,000, or
0.5%, from $38.9 million in 2001 to $38.7 million in 2002, primarily due a 0.7
point decline in occupancy. As a percentage of revenues, direct operating
expenses increased 1.1 points due to the decrease in same-store revenues.
Page 13 of 28
General and administrative expenses. General and administrative expenses
decreased $1.0 million, or 6.5%, from $16.1 million in 2001 to $15.1 million in
2002, primarily due to cost reduction initiatives. As a percentage of revenues,
general and administrative expenses decreased 0.7 points due to the cost
reduction initiatives.
Other expenses from managed entities. Other expenses from managed entities
increased $936,000, or 24.9%, from $3.8 million in 2001 to $4.7 million in 2002,
due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by entities under our management (see Note 2). The
reimbursements for these amounts are reflected in revenues. As a percentage of
revenues, other expenses from managed entities increased 1.3 points driven by
the decrease in same-store revenues.
Depreciation. Depreciation increased $248,000, or 20.7%, from $1.2 million
in 2001 to $1.4 million in 2002, primarily due to the increase in technology
capital expenditures. As a percentage of revenues, depreciation increased 0.3
points due to the increase in technology capital expenditures.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Hawaii
- ------
The following table sets forth the condensed consolidated results of
operations for the three and nine months ended September 30, 2001 and 2002 for
our Hawaiian operations on the islands of Hawaii, Kauai, Maui and Oahu.
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2001 2002 2001 2002
----------------- --------------- --------------- ---------------
Revenues $13,343 100.0% $13,950 100.0% $40,657 100.0% $39,777 100.0%
Direct operating expenses 2,169 16.3 1,891 13.6 6,708 16.5 5,467 13.7
General and administrative expenses 1,817 13.6 2,046 14.7 5,356 13.2 6,247 15.7
Other expenses from managed entities 7,164 53.7 7,463 53.5 20,287 49.9 21,794 54.8
------- ----- ------- ----- ------- ----- ------- -----
Operating income before depreciation
and goodwill amortization 2,193 16.4 2,550 18.3 8,306 20.4 6,269 15.8
Depreciation 125 0.9 117 0.9 375 0.9 353 0.9
Goodwill amortization 18 0.1 - - 54 0.1 - -
------- ----- ------- ----- ------- ----- ------- -----
Operating income $ 2,050 15.4% $ 2,433 17.4% $ 7,877 19.4% $ 5,916 14.9%
======= ===== ======= ===== ======= ===== ======= =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - Hawaii
Revenues. Revenues increased $607,000, or 4.5%, from $13.3 million in 2001
to $14.0 million in 2002. Excluding Other revenue from managed entities,
revenues increased $308,000, or 5.0%, from $6.2 million in 2001 to $6.5 million
in 2002, primarily due to an increase in service fees and food and beverage
sales.
Direct operating expenses. Direct operating expenses decreased $278,000, or
12.8%, from $2.2 million in 2001 to $1.9 million in 2002, primarily due to cost
reduction initiatives. As a percentage of revenues, direct operating expenses
decreased 2.8 points primarily due to an increase in revenues.
General and administrative expenses. General and administrative expenses
increased $229,000, or 12.6%, from $1.8 million in 2001 to $2.0 million in 2002,
primarily due to an increase in professional fees related to a favorable
mediation settlement. As a percentage of revenues, general and administrative
expenses increased 1.1 points due to the increase in general and administrative
expenses.
Other expenses from managed entities. Other expenses from managed entities
increased $299,000, or 4.2%, from $7.2 million in 2001 to $7.5 million in 2002,
due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by entities under our management (see Note 2). The
reimbursements for these amounts are reflected in revenues. As a percentage of
revenues, other expenses from managed entities decreased 0.2 points primarily
due to the increase in revenues.
Depreciation. Depreciation decreased $8,000, or 6.4%, from $125,000 in 2001
to $117,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation remained relatively flat.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Page 14 of 28
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001 - Hawaii
Revenues. Revenues decreased $880,000, or 2.2%, from $40.7 million in 2001
to $39.8 million in 2002. Excluding Other revenues from managed entities,
revenues decreased $2.4 million, or 11.7%, from $20.4 million in 2001 to $18.0
million in 2002, primarily due to a 7.4% decrease in lodging revenues driven by
a 8.1% decrease in ADR and a 2.2 point decrease in occupancy.
Direct operating expenses. Direct operating expenses decreased $1.2
million, or 18.5%, from $6.7 million in 2001 to $5.5 million in 2002, primarily
due to a 2.2 point decrease in occupancy. As a percentage of revenues, direct
operating expenses decreased 2.8 points, primarily due to the decrease in
occupancy.
General and administrative expenses. General and administrative expenses
increased $891,000, or 16.6%, from $5.4 million in 2001 to $6.2 million in 2002,
primarily due to the incremental costs related to the 4.1% increase in managed
units and an increase in professional fees related to a favorable mediation
settlement. As a percentage of revenues, general and administrative expenses
increased 2.5 points due to the increase in general and administrative expenses
and the decrease in revenues.
Other expenses from managed entities. Other expenses from managed entities
increased $1.5 million, or 7.4%, from $20.3 million in 2001 to $21.8 million in
2002, due to an increase in payroll for managed entities. These expenses are
reimbursed at our cost by entities under our management (see Note 2). The
reimbursements for these amounts are reflected in revenues. As a percentage of
revenues, other expenses from managed entities increased 4.9 points due to the
increase in other expenses from managed entities and the decrease in revenues.
Depreciation. Depreciation decreased $22,000, or 5.9%, from $375,000 in
2001 to $353,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation remained relatively flat.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Mountain
- --------
The following table sets forth the condensed consolidated results of
operations for the three and nine months ended September 30, 2001 and 2002 for
our Mountain operations in Whistler, British Columbia; Aspen, Breckenridge,
Crested Butte, Dillon, Keystone, Snowmass Village, Steamboat Springs and
Telluride, Colorado; Sun Valley, Idaho; Big Sky, Montana; Mt. Bachelor and
Sunriver, Oregon; Gatlinburg and Pigeon Forge, Tennessee; and The Canyons, Deer
Valley and Park City, Utah.
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2001 2002 2001 2002
----------------- --------------- --------------- ---------------
Revenues $ 6,905 100.0% $ 6,507 100.0% $30,670 100.0% $28,564 100.0%
Direct operating expenses 5,360 77.6 5,083 78.1 18,080 59.0 17,459 61.1
General and administrative expenses 2,323 33.6 1,956 30.1 7,119 23.2 5,795 20.3
Other expenses from managed entities 143 2.1 172 2.6 582 1.9 579 2.0
------- ----- ------- ----- ------- ----- ------- -----
Operating (loss) income before depreciation
and goodwill amortization (921) (13.3) (704) (10.8) 4,889 15.9 4,731 16.6
Depreciation 277 4.0 233 3.6 854 2.7 750 2.6
Goodwill amortization 294 4.3 - - 882 2.9 - -
------- ----- ------- ----- ------- ----- ------- -----
Operating (loss) income $(1,492) (21.6)% $ (937) (14.4)% $ 3,153 10.3% $ 3,981 14.0%
======= ===== ======= ===== ======= ===== ======= =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - Mountain
Revenues. Revenues decreased $398,000, or 5.8%, from $6.9 million in 2001
to $6.5 million in 2002. Excluding Other revenue from managed entities, revenues
decreased $427,000, or 6.3%, from $6.8 million in 2001 to $6.3 million in 2002,
primarily due to an 8.1% decrease in gross lodging revenues driven by a 3.6
point decline in occupancy.
Direct operating expenses. Direct operating expenses decreased $277,000, or
5.2%, from $5.4 million in 2001 to $5.0 million in 2002, primarily due to the
decline in occupancy. As a percentage of revenues, direct operating expenses
increased 0.5 points, primarily due to the decrease in revenues.
Page 15 of 28
General and administrative expenses. General and administrative expenses
decreased $367,000, or 15.8%, from $2.3 million in 2001 to $2.0 million in 2002,
primarily due to cost control initiatives. As a percentage of revenues, general
and administrative expenses decreased 3.5 points, primarily due to the cost
control initiatives.
Other expenses from managed entities. Other expenses from managed entities
increased $29,000, or 20.3%, from $143,000 in 2001 to $172,000 in 2002, due to
an increase in payroll for managed entities. These expenses are reimbursed at
our cost by entities under our management (see Note 2). The reimbursements for
these amounts are reflected in revenues. As a percentage of revenues, other
expenses from managed entities increased 0.5 points due to the increase in
payroll for managed entities.
Depreciation. Depreciation decreased $44,000, or 15.9%, from $277,000 in
2001 to $233,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation remained relatively flat.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001 - Mountain
Revenues. Revenues decreased $2.1 million, or 6.9%, from $30.7 million in
2001 to $28.6 million in 2002. Excluding Other revenue from managed entities,
revenues decreased $2.1 million, or 7.0%, from $30.1 million in 2001 to $28.0
million in 2002, primarily due to the 5.2% decrease in same-store lodging
revenues primarily driven by lower occupancy.
Direct operating expenses. Direct operating expenses decreased $621,000, or
3.4%, from $18.1 million in 2001 to $17.5 million in 2002, primarily due to the
2.1 point decrease in occupancy and cost reduction initiatives. As a percentage
of revenues, direct operating expenses increased 2.1 points, primarily due to
the decrease in same-store lodging revenues.
General and administrative expenses. General and administrative expenses
decreased $1.3 million, or 18.6%, from $7.1 million in 2001 to $5.8 million in
2002, primarily due to cost reduction initiatives. As a percentage of revenues,
general and administrative expenses decreased 2.9 points due to cost reduction
initiatives.
Other expenses from managed entities. Other expenses from managed entities
decreased $3,000, or 0.5%, from $582,000 in 2001 to $579,000 in 2002, due to a
decrease in payroll for managed entities. These expenses are reimbursed at our
cost by entities under our management (see Note 2). The reimbursements for these
amounts are reflected in revenues. As a percentage of revenues, other expenses
from managed entities remained relatively flat.
Depreciation. Depreciation decreased $104,000, or 12.2%, from $854,000 in
2001 to $750,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation remained relatively flat.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Page 16 of 28
Desert
- ------
The following table sets forth the condensed consolidated results of
operations for the three and nine months ended September 30, 2001 and 2002 for
our Desert operations in Phoenix, Scottsdale and Tucson, Arizona; and Palm
Desert and Palm Springs, California.
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2001 2002 2001 2002
---------------- --------------- --------------- ---------------
Revenues $ 308 100.0% $ 251 100.0% $ 2,721 100.0% $ 2 141 100.0%
Direct operating expenses 298 96.8 334 133.1 1,253 46.1 1,184 55.3
General and administrative expenses 231 75.0 262 104.4 627 23.0 754 35.3
Other expenses from managed entities - - - - - - - -
------ ----- ------- ----- ------- ----- ------- -----
Operating (loss) income before depreciation
and goodwill amortization (221) (71.8) (345) N/M 841 30.9 203 9.4
Depreciation 21 6.8 13 5.2 71 2.6 41 1.9
Goodwill amortization 54 17.5 - - 162 6.0 - -
------ ----- ------- ----- ------- ----- ------- -----
Operating (loss) income $ (296) (96.1)% $ (358) N/M $ 608 22.3% $ 162 7.5%
====== ===== ======= ===== ======= ===== ======= =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - Desert
Revenues. Revenues decreased $57,000, or 18.5%, from $308,000 in 2001 to
$251,000 in 2002 primarily due to the 26.6% decrease in lodging revenues
primarily driven by a decline in managed units and a decline in occupancy.
Direct operating expenses. Direct operating expenses increased $36,000, or
12.1%, from $298,000 in 2001 to $334,000 in 2002, primarily due to increased
marketing expenditures by our Arizona operations. As a percentage of revenues,
direct operating expenses increased 36.3 points due these increased
expenditures.
General and administrative expenses. General and administrative expenses
increased $31,000, or 13.4%, from $231,000 in 2001 to $262,000 in 2002,
primarily due to increased payroll related to certain managerial changes and an
increase in insurance costs. As a percentage of revenues, general and
administrative expenses increased 29.4 points due to the increase in general and
administrative expenses and the decrease in lodging revenues.
Other expenses from managed entities. These operations do not have any
arrangements with managed entities to receive reimbursements for any payroll
related costs.
Depreciation. Depreciation decreased $8,000, or 38.1%, from $21,000 in 2001
to $13,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation decreased 1.6 points due
to the decrease in depreciation expense.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002. The goodwill balances related
to our Desert operations were considered impaired upon the January 1, 2002
adoption of this standard. As a result, we recorded a non-cash $8.1 million
write-down of goodwill, partially off-set by a $1.9 million income tax benefit
(see Note 2).
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001 - Desert
Revenues. Revenues decreased $580,000, or 21.3%, from $2.7 million in 2001
to $2.1 million in 2002, primarily due to the 22.4% decrease in lodging revenues
primarily driven by a 1.7 point decline in occupancy and a 17.5% decline in
managed units.
Direct operating expenses. Direct operating expenses decreased $69,000, or
5.5%, from $1.3 million in 2001 to $1.2 million in 2002, primarily due to the
decrease in units under management. As a percentage of revenues, direct
operating expenses increased 9.2 points, primarily due to the decrease in
lodging revenues.
General and administrative expenses. General and administrative expenses
increased $127,000, or 20.3%, from $627,000 in 2001 to $754,000 in 2002,
primarily due to the opening of a new office and an increase in insurance costs.
As a percentage of revenues, general and administrative expenses increased 12.3
points, primarily due to the increase in general and administrative expenses and
the decrease in lodging revenues.
Page 17 of 28
Other expenses from managed entities. These operations do not have any
arrangements with managed entities to receive reimbursements for any payroll
related costs.
Depreciation. Depreciation decreased $30,000, or 42.3%, from $71,000 in
2001 to $41,000 in 2002, primarily due to certain in-service assets being fully
depreciated. As a percentage of revenues, depreciation decreased 0.7 points due
the decrease in depreciation.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002. The goodwill balances related
to our Desert operations were considered impaired upon the January 1, 2002
adoption of this standard. As a result, we recorded a non-cash $8.1 million
write-down of goodwill, partially off-set by a $1.9 million income tax benefit
(see Note 2).
Other
- -----
The following table sets forth the condensed consolidated results of
operations for the three and nine months ended September 30, 2002 and 2001 for
our Other operations comprised of ResortQuest Technologies and corporate.
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2001 2002 2001 2002
--------------- --------------- ---------------- ----------------
Revenues $ 911 100.0% $ 689 100.0% $ 2,604 100.0% $ 2,261 100.0%
Direct operating expenses 529 58.1 481 69.8 1,495 57.4 1,406 62.2
General and administrative expenses 6,644 729.3 3,681 534.3 13,330 511.9 11,088 490.4
Other expenses from managed entities - - - - - - - -
------- ------ ------- ----- -------- ----- -------- -----
Operating (loss) income before depreciation
and goodwill amortization (6,262) N/M (3,473) N/M (12,221) N/M (10,233) N/M
Depreciation 503 55.2 919 133.4 1,356 52.1 2,141 94.7
Goodwill amortization 255 28.0 - - 765 29.4 - -
------- ----- ------- ----- -------- ----- -------- -----
Operating (loss) income $(7,020) N/M $(4,392) N/M $(14,342) N/M $(12,374) N/M
======= ===== ======= ===== ======== ===== ======== =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - Other
Revenues. Revenues decreased $222,000, or 24.4%, from $911,000 in 2001 to
$689,000 in 2002, primarily due to a decline in software activities and a
$90,000 decline in revenues from our European alliance partner.
Direct operating expenses. Direct operating expenses decreased $48,000, or
9.1%, from $529,000 in 2001 to $481,000 in 2002, primarily due to a decline in
software activities. As a percentage of revenues, direct operating expenses
increased 11.7 points, primarily due to the decrease in revenues.
General and administrative expenses. General and administrative expenses
decreased $2.9 million, or 44.6%, from $6.6 million in 2001 to $3.7 million in
2002. Excluding the $3.8 million and $625,000 in items management considers as
unusual items and other charges (see Note 4) recorded in 2001 and 2002,
respectively, general and administrative expenses increased $261,000, or 9.3%,
from $2.8 million to $3.1 million, primarily due to the regional accounting
center and new technology office that opened last fall.
Other expenses from managed entities. These operations do not have any
arrangements with managed entities to receive reimbursements for any payroll
related costs.
Depreciation. Depreciation increased $416,000, or 82.7%, from $503,000 in
2001 to $919,000 in 2002, primarily due to increased technology capital
expenditures related to enhancements to our website and the release of the new
version of First Resort Software. As a percentage of revenues, depreciation
increased 78.2 points due primarily to the increase in technology capital
expenditures.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001 - Other
Revenues. Revenues decreased $343,000, or 13.2%, from $2.6 million in
2001 to $2.3 million in 2002, primarily due to a decline in software activities.
Page 18 of 28
Direct operating expenses. Direct operating expenses decreased $89,000, or
6%, from $1.5 million in 2001 to $1.4 million in 2002, primarily due to a
decline in software activities. As a percentage of revenues, direct operating
expenses increased 4.8 points primarily due to the decrease in revenues.
General and administrative expenses. General and administrative expenses
decreased $2.2 million, or 16.8%, from $13.3 million in 2001 to $11.1 million in
2002. Excluding the $3.8 million and $1.1 million in items management considers
as unusual items and other charges (see Note 4) recorded in 2001 and 2002,
respectfully, general and administrative expenses increased $480,000, or 5.1%,
primarily due to increased staffing at the new technology office that was opened
last fall.
Other expenses from managed entities. These operations do not have any
arrangements with managed entities to receive reimbursements for any payroll
related costs.
Depreciation. Depreciation increased $785,000, or 57.9%, from $1.4 million
in 2001 to $2.1 million in 2002, primarily due to increased technology capital
expenditures related to enhancements to our website and the release of the new
version of First Resort Software. As a percentage of revenues, depreciation
increased 42.6 points due to the increase in technology capital expenditures.
Goodwill amortization. Upon the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," goodwill is
no longer being amortized as of January 1, 2002 (see Note 2).
Liquidity and Capital Resources
- -------------------------------
ResortQuest conducts all of its operations through its subsidiaries
operating in over 50 premier resort locations. Accordingly, the primary internal
source of our liquidity is through the cash flows realized from our subsidiaries
and our long-term borrowings. We utilize a consolidated daily cash management
system that allows us to fully utilize all unrestricted cash to repay
outstanding debt in order to reduce our net interest expense.
We generated $7.9 million of cash in operating activities for the nine
months ended September 30, 2002 primarily due to decreases in cash held in
escrow and trade and other receivables. Cash used in investing activities was
approximately $8.7 million for the nine months ended September 30, 2002, due to
$3.0 million in net acquisition related payments and $5.7 million in purchases
of property, equipment and software. The majority of these costs represent our
continued investment in the new release of our First Resort Software product
launched in July 2002. For the nine months ended September 30, 2002, cash used
in financing activities totaled $2.0 million, primarily due to net borrowings
under our Credit Facility.
At September 30, 2002, we had approximately $15.5 million in cash, of which
$14.0 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, in the case of real estate sales deposits, when the
property is sold. At September 30, 2002, we had a working capital deficit of
$17.5 million and up to $9.1 million remaining, subject to certain restrictions,
available under our Credit Facility. We anticipate that our cash flows from
operations will provide cash in excess of our normal working capital needs, debt
service requirements and planned capital expenditures over the next year.
Long-Term Borrowings
- --------------------
As of September 30, 2002, our long-term debt, including current maturities,
was comprised of $50.0 million in Senior Notes due June 2004, $30.9 million in
borrowings under our Credit Facility that expires in January 2004 and $65,000 in
capital lease obligations and other borrowings assumed in connection with
certain acquisitions that have varying maturities through 2004. At September 30,
2002 the Company was in compliance with all covenants of our borrowing
agreements. Based on current forecasts that include estimated severance charges
(see Note 9), management is anticipating that the Company will not be in
compliance with certain debt covenants of our Credit Facility and $50.0 million
Senior Secured Notes at December 31, 2002. Management and the lenders are
currently in discussion to amend the borrowing agreements. Significant changes
to the current terms of the agreements may result from any amendment. These
changes may include certain restrictive covenants and higher interest rates.
Registration and Equity Offerings
- ---------------------------------
We have registered 8.0 million shares of common stock through various shelf
registration statement filings. As of September 30, 2002, we had issued
3,289,487 shares under these shelf registration
Page 19 of 28
statements in connection with acquisitions, with the remaining 4,710,513 shares
available for future acquisitions.
Acquisition Strategy
- --------------------
Although our strategy is to focus on internal growth, we intend to continue
to pursue, subject to our debt agreements, selected acquisition opportunities in
strategic and existing markets. There can be no assurance that we will be able
to identify, acquire or profitably manage additional businesses or successfully
integrate acquired businesses into our operations 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 us, as well as higher acquisition prices.
Furthermore, acquisitions involve a number of 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 these 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 flows from operations,
borrowings under our Credit Facility, other debt fundings and the issuance of
common stock. Our ability to fund future acquisitions through borrowings under
the Credit Facility may be limited by certain restrictive covenants of the
facility, the satisfaction of which may be dependent upon our ability to raise
additional equity through either offerings for cash or the issuance of stock as
consideration for acquisitions.
Non-Compete and Employment Agreements
- -------------------------------------
We have entered into non-compete agreements with many of the former owners
of the companies that now comprise ResortQuest. These non-compete agreements are
generally three to five years in length effective the day the operations are
merged with ResortQuest. Additionally, we have entered into employment
agreements with many of these former owners, all senior corporate officers and
several key employees. Among other things, these agreements allow for severance
payments and some include acceleration of stock option awards upon a change in
control of ResortQuest, as defined under the agreements. At September 30, 2002,
the maximum amount of compensation that would be payable under all agreements if
a change in control occurred without prior written notice would have been
approximately $16.0 million.
Seasonality and Quarterly Fluctuations
- --------------------------------------
Our business is highly seasonal. Our results of operations are 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.
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We continually evaluate our estimates and
assumptions, including those related to bad debts, trade and other receivables,
valuation of property, equipment and software, goodwill, self-insurance
reserves, contingencies and litigation. Our estimates and assumptions are based
on historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying amounts of assets and liabilities that are
not readily apparent from other sources. We believe the following critical
accounting policies affect our more significant estimates and assumptions used
in preparing our condensed consolidated financial statements. Actual results
could differ from our estimates.
Page 20 of 28
Trade and other receivables are reflected net of an estimated allowance for
doubtful accounts. This estimate is based primarily on historical experience and
assumptions with respect to future payment trends.
Property, equipment and software are stated at cost, or in the case of
equipment acquired under capital lease, the present value of future lease
payments, less accumulated depreciation. Certain costs for developing,
customizing and installing software for internal use and for sale to third
parties are capitalized. Revenues related to the sale of software to third
parties are recognized when the systems are installed. Depreciation is computed
using the straight-line method over the estimated useful lives of the recorded
assets or the lease terms. We periodically, or upon the occurrence of certain
events, review the balances of these long-lived assets for possible impairment.
The assessment of long-lived assets for impairment requires us to make certain
judgments and estimates, including the estimate of cash flows from the
respective assets.
In accordance with Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," as of January 1, 2002, the goodwill
balance recorded by the Company is no longer being amortized, but is reviewed
annually, and upon the occurrence of certain events, for impairment. The
calculation of the impairment charge recorded on January 1, 2002 requires us to
make estimates of future cash flows with respect to the identified net assets
acquired. Prior to January 1, 2002, goodwill had been amortized on a
straight-line basis over 40 years, other than that associated with the
acquisition of First Resort Software, Inc., which had been amortized over 15
years.
We are self-insured for various levels of workers' compensation and
employee medical and dental insurance coverage. Insurance reserves include the
present values of projected settlements for claims. Projected settlements are
estimated based on historical trends and actuarial data.
We are involved with various legal actions arising in the course of our
business. Legal reserves are established for actions where the outcomes of the
cases are probable and monetary damages are reasonably estimable as determined
by in-house and external legal counsel. We do not believe that any of the
remaining actions will have a material adverse effect on our business, financial
condition or results of operations.
Revenues are primarily derived through property management fees, service
fees and real estate commissions. Property management fees are recognized as
services are provided. Real estate commissions are recognized for real estate
brokerage commissions at time of closing.
New Accounting Pronouncements
- -----------------------------
During the quarter ended March 31, 2002, we changed our method of
accounting for reimbursable costs to conform to the Financial Accounting
Standards Board's Emerging Issues Task Force Consensus No. 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred" ("EITF No. 01-14"), issued earlier this year and effective
for us on January 1, 2002. As a result, reimbursements received are recorded as
revenue and the costs incurred on behalf of managed associations and properties
are recorded as expenses. These costs, which relate primarily to payroll costs
at managed properties and associations where we are the employer, are reflected
in other revenue and expenses, from managed entities in the condensed
consolidated statements of income. Revenues and expenses for the prior periods
have been reclassified to conform with the current year presentation. As the
reimbursements are made based upon the costs incurred with no added margin
resulting in the expenses and related revenues being identical, the adoption of
EITF No. 01-14 did not have any effect on our operating income, total or per
share net income, cash flows or financial position.
In June 2001, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standard No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 eliminated the
poolings-of-interest method of accounting for business combinations and requires
all transactions initiated after June 30, 2001, to be accounted for using the
purchase method. Under Statement No. 142, goodwill related to our future
acquisitions is not subject to amortization, and goodwill related to our
historical acquisitions is no longer amortized as of January 1, 2002. Goodwill
is subject to reviews for impairment annually and upon the occurrence of certain
events, and if impaired, a write-down will be recorded. Upon our adoption of
Statement No. 142, each of our geographical resort regions with assigned
goodwill was valued as a reporting unit. If the fair value of the reporting unit
was greater than the book value, including assigned goodwill, no further testing
was required. However, if the book value, including goodwill, was greater than
the fair value of the reporting unit, the assets and liabilities of the
reporting unit and the fair value of the assets is the implied fair value of
goodwill. To the extent that the implied fair value of goodwill was less than
the book value of goodwill, an impairment charge was recognized as a cumulative
effect of a change in accounting principle. Based on this test, we recorded a
non-cash $8.1 million write-down of our goodwill related to our Desert resort
operations, partially off-set by a $1.9 million income tax benefit. The Desert
resort operations are expected to continue to experience declining cash flows as
a result of the economics of the Desert
Page 21 of 28
markets. See Note 2 for the table presenting the adjusted net income and
earnings per share excluding goodwill amortization.
We have completed the process of evaluating the impact of Statement No.
143, "Accounting for Asset Retirement Obligations," and we do not expect this
statement to have a material impact on our financial position or results of
operations upon its adoption in 2003. Effective January 1, 2002 we adopted
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"; the adoption of this statement did not have a material impact to our
financial position or results of operations. Also during the quarter ended June
30, 2002, Statement No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued and is effective for activities initiated after
December 31, 2002. We do not expect Statement No. 146 to have a material impact
on our financial position or results of operation upon its adoption in 2003.
Risks Associated With Forward Looking Statements
- ------------------------------------------------
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1993, as amended, 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 acquisitions,
factors affecting internal growth and management of growth, our acquisition
strategy and availability of financing, the travel and tourism industry,
seasonality, quarterly fluctuations and general economic conditions, and our
dependence on technology, e-commerce and travel providers. Important factors
that could cause actual results to differ materially include, but are not
limited to, those listed in our previous filings with the Securities and
Exchange Commission.
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 us or any other person that the objectives and plans will be
achieved.
Page 22 of 28
ResortQuest International, Inc.
Performance Statistics
Total System (2)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2002 VAR 2001 2002 VAR
-------- -------- ----- ------- ------- -----
Beach
Gross Lodging Revenues(1) $ 92,650 $ 87,258 (5.8)% $195,256 $180,696 (7.5)%
Occupancy 55.1% 55.3% 0.2 pts 53.6% 53.0% (0.7)pts
ADR $ 215.47 $ 217.27 0.8 % $ 165.92 $ 164.22 (1.0)%
RevPAU $ 118.66 $ 120.26 1.3 % $ 89.00 $ 86.97 (2.3)%
Total Rental Units 9,452 9,361 (1.0)% 9,452 9,361 (1.0)%
Hawaii
Gross Lodging Revenues(1) $ 37,532 $ 37,952 1.1 % $116,673 $108,013 (7.4)%
Occupancy 70.5% 70.6% 0.1 pts 74.7% 72.5% (2.2)pts
ADR $ 118.67 $ 113.57 (4.3)% $ 117.90 $ 108.40 (8.1)%
RevPAU $ 83.64 $ 80.13 (4.2)% $ 88.08 $ 78.55 (10.8)%
Total Rental Units 5,292 5,508 4.1 % 5,292 5,508 4.1 %
Mountain
Gross Lodging Revenues(1) $ 10,361 $ 9,523 (8.1)% $ 49,556 $ 47,247 (4.7)%
Occupancy 37.1% 33.5% (3.6)pts 38.2% 35.4% (2.8)pts
ADR $ 115.55 $ 117.30 1.5 % $ 173.48 $ 178.13 2.7 %
RevPAU $ 42.88 $ 39.24 (8.5)% $ 66.26 $ 63.09 (4.8)%
Total Rental Units 3,173 3,230 1.8 % 3,173 3,230 1.8 %
Desert
Gross Lodging Revenues(1) $ 715 $ 525 (26.6)% $ 6,752 $ 5,238 (22.4)%
Occupancy 31.4% 24.7% (6.7)pts 43.5% 41.8% (1.7)pts
ADR $ 51.68 $ 57.18 10.6 % $ 110.48 $ 111.55 1.0 %
RevPAU $ 16.22 $ 14.11 (13.0)% $ 48.09 $ 46.68 (2.9)%
Total Rental Units 526 434 (17.5)% 526 434 (17.5)%
Total
Gross Lodging Revenues(1) $141,258 $135,258 (4.2)% $368,237 $341,194 (7.3)%
Occupancy 56.1% 55.9% (0.2)pts 57.0% 55.8% (1.1)pts
ADR $ 166.23 $ 163.72 (1.5)% $ 146.52 $ 141.64 (3.3)%
RevPAU $ 93.22 $ 91.45 (1.9)% $ 83.56 $ 79.09 (5.3)%
Total Rental Units 18,443 18,533 0.5 % 18,443 18,533 0.5 %
(1) Lodging revenues are in thousands and represent the total rental charged
to property rental customers. Our revenue represents from 3 percent to
over 40 percent of the lodging revenues based on the services provided
by us.
(2) Total system statistics include all non-exclusive management contracts
from the period under management through September 30, 2001 and
September 30, 2002. Excluded from these statistics are non-exclusive
management contracts which approximated 1,400 units as of September 30,
2001 and 1,500 as of September 30, 2002. Also excluded from these
statistics are owner use nights and renovation nights which were
approximately 12.6 percent of gross available nights in the three months
ended September 30, 2001, and 12.8 percent of gross available nights in
the three months ended September 30, 2002, 13.2 percent of gross
available nights in the nine months ended September 30, 2001, and 13.5
percent of gross available nights in the nine months ended September 30,
2002.
Page 23 of 28
ResortQuest International, Inc.
Performance Statistics
Same-Store (2)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2002 VAR 2001 2002 VAR
------- ------- ----- ------- ------- -----
Beach
Gross Lodging Revenues(1) $ 92,650 $ 87,258 (5.8)% $147,514 $140,987 (4.4)%
Occupancy 55.1% 55.3% 0.2 pts 53.7% 53.8% 0.1pts
ADR $ 215.47 $ 217.27 0.8 % $ 142.87 $ 142.46 (0.3)%
RevPAU $ 118.66 $ 120.26 1.3 % $ 76.76 $ 76.71 (0.1)%
Total Rental Units 9,452 9,361 (1.0)% 8,080 8,206 1.6 %
Hawaii
Gross Lodging Revenues(1) $ 37,532 $ 37,952 1.1 % $116,673 $108,013 (7.4)%
Occupancy 70.5% 70.6% 0.1 pts 74.7% 72.5% (2.2)pts
ADR $ 118.67 $ 113.57 (4.3)% $ 117.90 $ 108.40 (8.1)%
RevPAU $ 83.64 $ 80.13 (4.2)% $ 88.08 $ 78.55 (10.8)%
Total Rental Units 5,292 5,508 4.1 % 5,292 5,508 4.1 %
Mountain
Gross Lodging Revenues(1) $ 10,361 $ 9,523 (8.1)% $ 46,674 $ 44,233 (5.2)%
Occupancy 37.1% 33.5% (3.6)pts 37.0% 34.9% (2.1)pts
ADR $ 115.55 $ 117.30 1.5 % $ 176.09 $ 180.82 2.7 %
RevPAU $ 42.88 $ 39.24 (8.5)% $ 65.10 $ 63.02 (3.2)%
Total Rental Units 3,173 3,230 1.8 % 2,983 3,057 2.5 %
Desert
Gross Lodging Revenues(1) $ 715 $ 525 (26.6)% $ 6,752 $ 5,238 (22.4)%
Occupancy 31.4% 24.7% (6.7)pts 43.5% 41.8% (1.7)pts
ADR $ 51.68 $ 57.18 10.6 % $ 110.48 $ 111.55 1.0 %
RevPAU $ 16.22 $ 14.11 (13.0)% $ 48.09 $ 46.68 (2.9)%
Total Rental Units 526 434 (17.5)% 526 434 (17.5)%
Total
Gross Lodging Revenues(1) $141,258 $135,258 (4.2)% $317,613 $298,471 (6.0)%
Occupancy 56.1% 55.9% (0.2)pts 57.2% 56.6% (0.7)pts
ADR $ 166.23 $ 163.72 (1.5)% $ 135.25 $ 131.04 (3.1)%
RevPAU $ 93.22 $ 91.45 (1.9)% $ 77.39 $ 74.12 (4.2)%
Total Rental Units 18,443 18,533 0.5 % 16,881 17,205 1.9 %
(1) Lodging revenues are in thousands and represent the total rental charged
to property rental customers. Our revenue represents from 3 percent to
over 40 percent of the lodging revenues based on the services provided
by us.
(2) For better comparability, the three months ended September 30 statistics
exclude all non-exclusive management contracts, which approximated 1,500
units as of September 30, 2002. The nine months ended September 30
excluded all non-exclusive management contracts as well as properties
that were not acquired by ResortQuest prior to the third quarter of
2001, which approximated 1,500 units as of September 30, 2002. Also
excluded from these statistics are owner use nights and renovation
nights which were approximately 12.6 percent of gross available nights
in the three months ended September 30, 2001, and 12.8 percent of gross
available nights in the three months ended September 30, 2002, 12.8
percent of gross available nights in the nine months ended September 30,
2001, and 13.0 percent of gross available nights in the nine months
ended September 30, 2002.
Page 24 of 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
We do not have significant market risk with respect to interest rates,
foreign currency exchanges or other market rate or price risks, and we do not
hold any financial instruments for trading purposes. At September 30, 2002,
$30.9 million of our long-term borrowings accrue interest at variable interest
rates. Based on this debt level, annual interest expense would increase by
approximately $173,000, if interest rates were to increase by 56 basis points,
or 10%, over the current weighted average interest rate of these variable rate
borrowings.
Item 4. Controls and Procedures
- --------------------------------
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision of the Company's Chief Executive
Officer and Chief Financial Officer and with the participation of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's periodic Securities and Exchange Commission
filings. No significant changes were made in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
On May 26, 2000, Hotel Corp. of the Pacific, Inc., a subsidiary of
ResortQuest International doing business as Aston Hotels & Resorts, instituted
legal proceedings in the Circuit Court for the First Circuit of Hawaii against
Andre S. Tatibouet, the president of Hotel Corp. This action arose out of a
document styled "Cooperation Agreement" that was signed by Andre S. Tatibouet,
purporting to act on behalf of Hotel Corp., on the one hand, with Cendant Global
Services B.V. and Aston Hotels & Resorts International, Inc., on the other hand.
The Cooperation Agreement contains several provisions that are detrimental to
Hotel Corp., including provisions purporting to transfer certain intellectual
property and limit certain intellectual property rights held by Hotel Corp.
Monetary damages for breach of fiduciary duty, fraud, and negligent
misrepresentation were sought by Hotel Corp. By order of the Circuit Court, the
claims asserted by Hotel Corp. in the lawsuit were consolidated with an
arbitration demand, filed with the American Arbitration Association by Mr.
Tatibouet, in which he alleged various breaches of his employment agreement with
Hotel Corp.
The arbitration hearing took place in September 2001, where Mr. Tatibouet
claimed damages of approximately $17.5 million and ResortQuest claimed damages
of approximately $4.7 million. On March 14, 2002, the arbitration panel issued
its Reasoned Opinion and Final Award. The panel concluded that Mr. Tatibouet had
breached his fiduciary duty to Hotel Corp. and awarded Hotel Corp. $55,559
related to the reimbursement of certain legal expenses. The panel denied all of
Mr. Tatibouet's claims and requests for damages as well as declaratory and other
relief.
On May 26, 2000, ResortQuest International and Hotel Corp. bought and
action in the Circuit Court for the First Circuit of Hawaii against Cendant
Corporation, Aston Hotels & Resort International Inc. and Cendant Global
Services B.V ("Defendants") seeking damages for breach of contract against
Cendant, and the equitable remedies or rescission and replevin. This action
arose out of Mr. Andre S. Tatibouet's purported negotiation on behalf of Hotel
Corp. of the Pacific, Inc., a subsidiary of ResortQuest International, of a
document styled Cooperation Agreement.
ResortQuest and Cendant entered into an amended Cooperation Agreement on
July 15, 2002. As a result of the execution of that agreement, on July 15, 2002
ResortQuest moved to dismiss its court action against Defendants by filing a
stipulation for complete dismissal with prejudice as to all claims and parties.
We are also involved in various legal actions arising in the ordinary
course of our business. We do not believe that any of the remaining actions will
have a material adverse effect on our business, financial condition or results
of operations.
Page 25 of 28
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits filed herewith
10.1 - Form of Consulting Agreement between the Company and
Joseph V. Vittoria dated October 6, 2002
10.2 - Form of Employment Agreement between the Company and
James S. Olin dated October 6, 2002
10.3 - Form of Employment Agreement between the Company and
J. Mitchell Collins dated October 6, 2002
10.4 - Form of Employment Agreement between the Company and
L. Park Brady dated October 9, 2002
10.5 - Form of Employment Agreement between the Company and
Stephen D. Caron dated October 9, 2002
10.6 - Form of Employment Agreement between the Company and
Robert J. Adams dated October 9, 2002
99.1 - Certification of Chief Executive Officer
99.2 - Certification of Chief Financial Officer
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
2002.
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 by the
undersigned thereunto duly authorized.
RESORTQUEST INTERNATIONAL, INC.
November 14, 2002 By: /s/ J. Mitchell Collins
---------------------------
J. Mitchell Collins
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer,
Chief Accounting Officer
and Duly Authorized Officer)
Page 26 of 28
Certification of Chief Executive Officer ResortQuest International, Inc.
- ------------------------------------------------------------------------
I, James S. Olin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ResortQuest
International, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ James S. Olin
-----------------------------
Name: James S. Olin
President and
Chief Executive Officer
Subscribed and sworn to before me
This 14th day of November, 2002.
/s/ Karen M. Ray
- ---------------------------------
Name: Karen Ray
Title: Notary Public
My Commission Expires: January 11, 2006.
Page 27 of 28
Certification of Chief Financial Officer ResortQuest International, Inc.
- ------------------------------------------------------------------------
I, J. Mitchell Collins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ResortQuest
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ J. Mitchell Collins
----------------------------------
Name: J. Mitchell Collins
Executive Vice President and
Chief Financial Officer
Subscribed and sworn to before me
This 14th day of November, 2002.
/s/ Karen M. Ray
- ---------------------------------
Name: Karen Ray
Title: Notary Public
My commission expires: January 11, 2006.
Page 28 of 28