SECURITIES AND EXCHANGE COMMISSION
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, 2003.
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.
| Delaware | I.R.S. No. 62-1750352 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
8955 Highway 98 West, Suite 203
Destin, Florida 32550
(Address of principal executive offices)(Zip Code)
(850) 278-4000
(Registrant’s telephone number, including area code)
530 Oak Court Drive, Suite 360, Memphis, Tennessee 38117
(Former name, former address and former fiscal year, if changed since last report)
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of
September 30, 2003.
Common Stock 19,255,833 shares
Page 1 of 33
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)
| December 31, | September 30, | ||||||||||
| 2002 | 2003 | ||||||||||
ASSETS |
|||||||||||
Current assets |
|||||||||||
Cash and cash equivalents |
$ | 859 | $ | 1,287 | |||||||
Cash held in escrow |
15,468 | 14,475 | |||||||||
Trade and other receivables, net |
5,841 | 9,178 | |||||||||
Deferred income taxes |
724 | 820 | |||||||||
Prepaid expenses |
1,488 | 2,026 | |||||||||
Other current assets |
3,319 | 3,533 | |||||||||
Total current assets |
27,699 | 31,319 | |||||||||
Goodwill, net |
205,830 | 205,933 | |||||||||
Property, equipment and software, net |
34,100 | 33,208 | |||||||||
Other assets |
5,924 | 6,028 | |||||||||
Total assets |
$ | 273,553 | $ | 276,488 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
Current liabilities |
|||||||||||
Current maturities of long-term debt |
$ | 94 | $ | 83,906 | |||||||
Deferred revenue and property owner payables |
47,402 | 30,237 | |||||||||
Accounts payable and accrued liabilities |
14,628 | 13,021 | |||||||||
Other current liabilities |
2,024 | 2,499 | |||||||||
Total current liabilities |
64,148 | 129,663 | |||||||||
Long-term debt, net of current maturities |
75,045 | — | |||||||||
Deferred income taxes |
2,869 | 10,708 | |||||||||
Other long-term obligations |
5,007 | 4,572 | |||||||||
Total liabilities |
147,069 | 144,943 | |||||||||
Stockholders’ equity |
|||||||||||
Common stock, $0.01 par value, 50,000,000 shares authorized,
19,251,749 and 19,255,833 shares outstanding, respectively |
193 | 193 | |||||||||
Additional paid-in capital |
153,933 | 153,952 | |||||||||
Accumulated other comprehensive loss |
(60 | ) | (236 | ) | |||||||
Excess distributions |
(29,500 | ) | (29,500 | ) | |||||||
Retained earnings |
1,918 | 7,136 | |||||||||
Total stockholders’ equity |
126,484 | 131,545 | |||||||||
Total liabilities and stockholders’ equity |
$ | 273,553 | $ | 276,488 | |||||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
Page 2 of 33
RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||||||||
Revenues |
|||||||||||||||||||
Property management fees |
$ | 27,609 | $ | 27,506 | $ | 72,862 | $ | 70,242 | |||||||||||
Service fees |
13,367 | 13,379 | 36,065 | 36,357 | |||||||||||||||
Real estate and other |
7,420 | 7,176 | 19,858 | 18,526 | |||||||||||||||
| 48,396 | 48,061 | 128,785 | 125,125 | ||||||||||||||||
Other revenue from managed entities |
9,589 | 10,099 | 27,072 | 28,062 | |||||||||||||||
Total revenues |
57,985 | 58,160 | 155,857 | 153,187 | |||||||||||||||
Operating expenses |
|||||||||||||||||||
Direct operating |
22,996 | 22,736 | 64,220 | 64,472 | |||||||||||||||
General and administrative |
13,304 | 14,134 | 38,963 | 38,833 | |||||||||||||||
Depreciation |
1,770 | 1,697 | 4,732 | 5,030 | |||||||||||||||
| 38,070 | 38,567 | 107,915 | 108,335 | ||||||||||||||||
Other expenses from managed entities |
9,589 | 10,099 | 27,072 | 28,062 | |||||||||||||||
Total operating expenses |
47,659 | 48,666 | 134,987 | 136,397 | |||||||||||||||
Operating income |
10,326 | 9,494 | 20,870 | 16,790 | |||||||||||||||
Interest and other expense, net |
1,622 | 2,459 | 4,453 | 6,306 | |||||||||||||||
Income before income taxes |
8,704 | 7,035 | 16,417 | 10,484 | |||||||||||||||
Provision for income taxes |
3,264 | 3,847 | 6,156 | 5,266 | |||||||||||||||
Income before the cumulative effect of a change
in accounting principle |
5,440 | 3,188 | 10,261 | 5,218 | |||||||||||||||
Cumulative effect of a change in accounting principle,
net of a $1.9 million income tax benefit |
— | — | (6,280 | ) | — | ||||||||||||||
Net income |
$ | 5,440 | $ | 3,188 | $ | 3,981 | $ | 5,218 | |||||||||||
Earnings per share |
|||||||||||||||||||
Basic |
|||||||||||||||||||
Before cumulative effect of a change
in accounting principle |
$ | 0.28 | $ | 0.17 | $ | 0.53 | $ | 0.27 | |||||||||||
Cumulative effect of a change in accounting principle |
— | — | (0.32 | ) | — | ||||||||||||||
| $ | 0.28 | $ | 0.17 | $ | 0.21 | $ | 0.27 | ||||||||||||
Diluted earnings per share |
|||||||||||||||||||
Before cumulative effect of a change
in accounting principle |
$ | 0.28 | $ | 0.16 | $ | 0.53 | $ | 0.27 | |||||||||||
Cumulative effect of a change in accounting principle |
— | — | (0.32 | ) | — | ||||||||||||||
| $ | 0.28 | $ | 0.16 | $ | 0.21 | $ | 0.27 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3 of 33
RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF 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, 2002 |
19,251,749 | $ | 193 | $ | 153,933 | $ | (60 | ) | $ | (29,500 | ) | $ | 1,918 | $ | 126,484 | ||||||||||||||||||
Net income |
5,218 | 5,218 | $ | 5,218 | |||||||||||||||||||||||||||||
Foreign currency translation loss |
(176 | ) | (176 | ) | (176 | ) | |||||||||||||||||||||||||||
Exercise of employee stock options |
4,084 | — | 19 | — | — | — | 19 | ||||||||||||||||||||||||||
Comprehensive income |
$ | 5,042 | |||||||||||||||||||||||||||||||
Balance, September 30, 2003 |
19,255,833 | $ | 193 | $ | 153,952 | $ | (236 | ) | $ | (29,500 | ) | $ | 7,136 | $ | 131,545 | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4 of 33
RESORTQUEST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||||||
| 2002 | 2003 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 3,981 | $ | 5,218 | ||||||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||||||
Cumulative effect of a change in accounting principle |
6,280 | — | ||||||||||
Depreciation |
4,732 | 5,030 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Cash held in escrow |
8,674 | 993 | ||||||||||
Trade and other receivables |
4,596 | (3,337 | ) | |||||||||
Accounts payable and accrued liabilities |
371 | (1,382 | ) | |||||||||
Deferred revenue and property owner payables |
(23,544 | ) | (17,165 | ) | ||||||||
Deferred income taxes |
(135 | ) | 7,743 | |||||||||
Other |
2,946 | (991 | ) | |||||||||
Net cash provided by (used in) operating activities |
7,901 | (3,891 | ) | |||||||||
Cash flows from investing activities: |
||||||||||||
Cash portion of acquisitions, net |
(2,963 | ) | (103 | ) | ||||||||
Purchases of property, equipment and software |
(5,716 | ) | (4,364 | ) | ||||||||
Net cash used in investing activities |
(8,679 | ) | (4,467 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Credit facility borrowings |
85,800 | 73,700 | ||||||||||
Credit facility repayments |
(83,500 | ) | (64,850 | ) | ||||||||
Payments of capital lease and other obligations, net |
(301 | ) | (83 | ) | ||||||||
Exercise of employee stock options |
50 | 19 | ||||||||||
Net cash provided by financing activities |
2,049 | 8,786 | ||||||||||
Net change in cash and cash equivalents |
1,271 | 428 | ||||||||||
Cash and cash equivalents, beginning of period |
213 | 859 | ||||||||||
Cash and cash equivalents, end of period |
$ | 1,484 | $ | 1,287 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5 of 33
RESORTQUEST INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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
Organization and Principles of Consolidation
ResortQuest is one of the leading vacation rental property management companies with over 19,000 units under management. We are the first Company offering vacation condominium and home rentals, sales and management under an international brand name in over 50 premier destination resorts located in the continental United States, Hawaii and Canada. Our condensed consolidated financial statements include the accounts of ResortQuest and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions.
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 the Company’s annual report on Form 10-K for the year ended December 31, 2002.
Acquisition and Deferred Costs
Costs incurred related to Gaylord Entertainment Company’s acquisition of ResortQuest are expensed as incurred (see “NOTE 2 — MERGER AGREEMENT AND POTENTIAL LIQUIDITY ISSUES”). 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 until the related transaction is either consummated or terminated. As of December 31, 2002 and September 30, 2003, there are no deferred acquisition costs. A similar treatment is followed in recording costs incurred by us in the course of amending existing debt agreements, generating additional debt or obtaining equity financing. The Company has net deferred financing costs of approximately $900,000 and $800,000 at December 31, 2002 and September 30, 2003, respectively. Transaction costs and the excess of the purchase price over the fair value of identified net assets acquired represent goodwill. 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, 2003 and 2002, we made net cash earn-up payments approximating $100,000 and $3.0 million, respectively, related to certain 2001 acquisitions and other purchase accounting adjustments related to certain 2001 acquisitions.
Page 6 of 33
NOTE 2 — MERGER AGREEMENT AND POTENTIAL LIQUIDITY ISSUES
As announced on August 5, 2003, the Company entered into a definitive agreement to merge with Gaylord Entertainment Company (“Gaylord”) in a stock-for-stock acquisition. Under the terms of the definitive agreement, the Company’s stockholders will receive 0.275 shares of Gaylord common stock for each outstanding share of Company common stock. The Company will become a wholly-owned subsidiary of Gaylord, and the Company’s stockholders will own approximately 14% of the outstanding shares of capital stock of the combined company. Gaylord is expected to retire the outstanding indebtedness of the Company upon the completion of the merger. The transaction has received the necessary regulatory approvals, and both companies have scheduled special meetings of their shareholders for November 18, 2003 to vote on the transaction. The Company expects the transaction to close in the fourth quarter of this year.
As part of this transaction and during the period prior to closing, Gaylord has provided the Company up to $10.0 million under a non-revolving line of credit and a $5.0 million letter of credit. The non-revolving line of credit bears interest at 10.5% per annum, is unsecured and subordinated to the Company’s existing debt, and is being used for general working capital purposes. Given the Company’s liquidity needs as a result of reduced cash flow due to the seasonal slow down in guest deposits and shorter reservation lead times, the Company utilized this line of credit to maintain adequate working capital during November. As of November 12, 2003, the Company had borrowed $2.5 million under this non-revolving line of credit.
Effective September 5, 2003 the Company and the Company’s previous credit card processor agreed to terminate their relationship. The processor had required a $5.0 million reserve account be put in place in the form of a letter of credit, cash or a third party guarantee. Gaylord secured a $5.0 million letter of credit on the Company’s behalf on August 18, 2003. The Company retained Gaylord’s credit card processor on September 11, 2003 and such processor has not required a reserve account or a letter of credit.
The execution of the merger agreement constituted an event of default under the Company’s credit agreement, which default was waived by the lenders under the credit agreement. The Company is required under the senior note purchase agreement to offer to repurchase the senior notes at par on the effective date of the merger. On August 6, 2003, the Company made such offer to repurchase the senior notes. Such offer was not accepted and the Company intends to exercise its rights to pre-pay the notes, including a $2.2 million pre-payment fee. The pre-payment date of the senior notes is expected to be the closing date of the merger with Gaylord.
Our credit facility and senior notes mature during 2004. As of September 30, 2003, the Company has received a forbearance or a waiver on all financial covenants under our existing borrowing agreements other than the closing of the merger with Gaylord. The credit facility and senior notes are expected to be paid by Gaylord at the effective time of the merger. If the merger is not completed, we would seek to refinance or negotiate an extension of the maturity of our credit facility and senior notes. If the merger with Gaylord is not completed and the Company is unable to refinance or extend the maturities of the credit facility or the senior notes, it would have a material adverse effect on the Company (see “Factors That May Affect Future Results”).
Page 7 of 33
NOTE 3 — STOCK-BASED COMPENSATION
As permitted under the Financial Accounting Standards Board (“FASB”) Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of