ITEM 1. BUSINESS
I. GENERAL
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. ResortQuest is a Delaware corporation that was formed during 1998. 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. We have one operating segment, property management, which is managed as one business unit. The results of our ResortQuest Technologies and corporate are included in our other segment. Our property management 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 have also 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. 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. 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.
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 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.
We make available, free of charge, on our website, Resortquest.com, through the Investor Relations page, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to all those reports as soon as reasonably practicable after we file or (furnish) such reports to the U.S. Securities and Exchange Commission.
II. INDUSTRY OVERVIEW
U.S. VACATION RENTAL INDUSTRY. Our operations are focused in the pleasure travel area of the United States travel and tourism industry, specifically the leisure segment. The leisure segment represents all trips taken for vacation purposes other than those trips to visit family or friends. As the seasonality in many resort destinations undermines hotel economics, resort destinations often have fewer traditional hotels resulting in condominiums and homes being the predominant lodging option. These destinations, however, offer a comparatively large choice of condominiums and homes (sometimes both timeshare and privately-owned).
Vacation condominiums and homes generally provide substantial value to the customer as they offer families greater space and convenience than a resort hotel room, including separate living, sleeping and eating quarters. Furthermore, with full kitchens available in most properties, vacationers can also save substantially on dining costs.
Vacationers who wish to stay in a condominium or home in a resort location typically have three choices: (i) buy the condominium/home, (ii) rent the condominium/home, or (iii) purchase a timeshare interest in a condominium/home. The rental option is typically the least expensive and most flexible alternative for vacationers. Timeshare interests require the purchase of an ownership interest in a vacation residence and continuing annual maintenance payments. Conversely, renting a vacation condominium/home frees travelers from the commitment and expense of timeshare. The vacationer can rent a specific property for a specific time period, and suffer no ongoing obligations.
Most vacation condominiums and homes are second homes owned by individuals who cannot or do not want to manage their properties. The U.S. Census Bureau estimates that there are approximately 6 million second homes including condominiums and timeshares in the U.S., with the top five states being California, Florida, New York, Texas and Pennsylvania. Local vacation property rental and management companies also contract with homeowners to manage the properties and rent them to vacationers when the owner is not using them. The vacation rental property managers facilitate the rental process by handling most, if not all aspects of interaction with vacationers, including generating reservations, processing rental payments and security deposits, operating check-in and check-out locations, coordinating inspections and maintenance and providing housekeeping services. Vacation homeowners are drawn to the rental market by the ability to use the income received to defray the cost of ownership.
Information in this industry is highly fragmented and difficult to accumulate at a macro-level. We estimate that the U.S. vacation and rental market for homes and condominiums, excluding timeshare rentals, is over $10 billion in gross lodging revenues annually. Additionally, we estimate the market to consist of over 4,000 companies that manage over 600,000 condominiums and homes, with no company except ResortQuest managing more than 20,000 units, and virtually all of our competitors focused in single resort markets.
ON-LINE TRAVEL INDUSTRY. According to the Travel Industry Association of America ("TIA"), 39 million people in the U.S. used the Internet to make travel reservations in 2002. This is a 25% increase from 2001's 31 million. A recent study by the TIA indicated that the on-line traveler market has grown steadily from 27 million users in 1996 to 96 million users in 2002, a compounded annual growth rate of approximately 24%.
III. BUSINESS STRATEGY
Our objective is to enhance our position as a leading provider of premier condominium and home rentals in destination resorts by pursuing the following elements of our business strategy:
CONTINUE TO BUILD THE RESORTQUEST BRAND. Prior to ResortQuest, there was no national brand for vacation condominium and home rentals, no industry standards for quality and a general lack of access to reliable information regarding rental opportunities for vacationers. We have increased the information available to vacationers, established the first international and national brand in the fragmented vacation rental industry, and continue to provide vacationers with high quality condominium and home rentals. The ResortQuest brand is designed to ensure that a vacation rental meets customer expectations by providing a basic, standardized level of products and services and by consistently categorizing accommodations based on quality, appearance and amenities.
CAPITALIZE ON TECHNOLOGY. We market our properties through various media channels and have significant Internet distribution through ResortQuest.com, our proprietary web site offering "real time" on-line reservation booking capabilities, and our travel marketing agreements with global inventory distribution partners. ResortQuest Technologies, a division of ResortQuest is focused on Internet marketing and inventory distribution using our one of a kind "middleware technology" that links the inventory directly to the distribution channels. In addition to detailed property descriptions, virtual tours, interior and exterior photos and floor plans, and local information available on our web site, vacationers can search for properties by date; view
activities and events by location; comparison shop among similar vacation rental units; check for special discounts and promotions; and obtain maps and driving directions.
OFFER VACATIONERS SUPERIOR CUSTOMER SERVICE. We believe that maintaining superior levels of customer service is critical to maintaining a reputation for high quality condominiums and homes and for attracting new customers. Vacationers typically rent vacation condominiums and homes for greater space and flexibility, but these customers also frequently desire many of the amenities and services of hotel accommodations. As a result, we require all of our operations to deliver a standardized, basic level of amenities and services designed to enhance the vacationer's overall experience. We have established a detailed listing of basic standards relating to conveniently located check-in and check-out locations, efficient check-in and check-out procedures, extended front desk hours, cleanliness of units and access to emergency contacts and maintenance personnel. We also strive to offer maximum flexibility to meet the varied needs of our vacationers and in most markets can arrange for services such as golf tee times, bicycle rentals, ski lift tickets, grocery delivery or restaurant reservations. By offering the convenience and accommodations of a condominium or home while providing many of the amenities and services of a hotel, we believe we will continue to strengthen the loyalty of our existing customers and attract new vacationers into the vacation condominium and home rental market.
ENHANCE VALUE FOR PROPERTY OWNERS. We provide property owners with superior management services by combining local management expertise with the marketing power and resources of a leading international brand, which work to increase rental income through increased occupancy and rental rates. Since substantially all of the condominiums and homes managed by us are second homes with absentee owners, we offer a range of high quality vacation rental and property management services designed to meet the broad real estate needs of these owners. In most markets, we will assume broad responsibility for the condominium or home, from marketing and coordinating all aspects of renting the individual condominium or home to managing common areas and homeowners' associations. In addition, we provide owners with concise, timely and accurate monthly statements and payments for the rental and management of their condominiums and homes. Property owners also benefit from our QuestPerks program, which offers discounts on lodging, air travel and car rentals. We believe that our reputation for high quality, comprehensive management services, marketing and distribution capabilities is a key competitive advantage in increasing the number of condominiums and homes under our management within our existing markets.
CAPITALIZE ON THE EXPERIENCE OF SENIOR MANAGEMENT. Our senior management team, as discussed within item 10 of Part III. herein, has the breadth of experience necessary to execute our business plan effectively.
LEVERAGE LOCAL RELATIONSHIPS AND EXPERTISE. Our local management teams have extensive experience in their respective resort areas, and many of the individuals are very active in their local communities. The management teams have a valuable understanding of their respective markets and businesses and have developed strong local relationships. These relationships are critical in attracting additional condominiums and homes for rental and enable us to provide additional concierge-type services to our vacationers. Accordingly, our decentralized management strategy is designed to allow local managers to utilize their knowledge and expertise about the condominiums and homes available for rent, the offerings of local competitors and the desires of vacationers in their areas to provide superior customer service to both property owners and vacationers.
IV. GROWTH STRATEGY
We believe we can enhance our position as one of the world's leading provider of vacation condominium and home rentals in premier destination resorts by executing on the following:
FULLY IMPLEMENT OUR NATIONAL MARKETING STRATEGY. We have implemented a multi-faceted and fully integrated national marketing program designed to increase vacationer awareness of the ResortQuest brand, while promoting the unique characteristics of our individual resorts. This comprehensive sales and marketing
program targets past guests, potential new guests and the travel trade through high-profile targeted advertising, database marketing (e.g., our proprietary marketing database), Internet marketing, various distribution channels (both on-line and off-line), public relations, promotional programs and our own website, ResortQuest.com. In order to maximize the on-line exposure of ResortQuest.com and our over 20,000 vacation rental properties, we have agreements with certain Internet portals such as America On-line (AOL Keywords: ResortQuest and Vacation Rentals), Expedia.com, Travelocity.com and CondoSaver.com. Our marketing programs are designed to attract new customers as well as to cross-sell additional services and locations to existing guests, thereby increasing market share and building guest loyalty. The cross-sell strategy offers guests similar properties and services in our other resorts that meet the vacationer's expectations based, in part, on their previous experiences with us. We believe our international, national, regional and local integrated marketing efforts will increase customer awareness of the ResortQuest brand, lead to an increased long-term demand for our rentals and result in higher long-term occupancy and rental rates for our condominium and home owners. We also believe that the anticipated long-term increase in rental income for owners will ultimately be a competitive advantage in attracting new property owners.
USE ADDITIONAL MARKETING CHANNELS. Historically, most vacationers have located vacation condominiums and homes through referrals, word-of-mouth, limited local newspaper advertising and direct mail. We believe there are significant opportunities to continue to expand the use of additional marketing channels. We plan to capitalize on our extensive market presence by increasing the use of other marketing channels such as the Internet travel sites, retail travel agents, wholesalers and national and regional integrated marketing communication campaigns, which are difficult for local vacation rental and property management companies to use in a cost-effective manner. Given our size and presence in premier destination resorts, we believe we are an attractive partner to travel agents, tour package operators and on-line travel providers. These relationships should continue to be a significant source of new customers and, in particular, will be valuable marketing channels for off-peak seasons.
INCREASE MARKET SHARE WITHIN EXISTING MARKETS. A key element of our growth strategy is increasing our selection of condominiums and homes in order to expand our market share and strengthen the ResortQuest brand at each of our locations. We intend to continue to attract new property owners by achieving high occupancy rates through effective international, national and regional marketing, cross-selling and offering additional incentives to property owners, such as QuestPerks, our travel benefits program for owners of properties we manage. In addition, in order to capture a higher portion of the rental business from new condominiums and homes being built in our markets, we will focus on building and strengthening our relationships with both local and national resort developers as well as real estate brokerage companies.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. A significant portion of our historical growth has been through the completion of strategic acquisitions. Over the long-term and as the impact of the war on terrorism on the travel and tourism industry recedes, we will continue to selectively pursue strategic acquisitions in new markets and tuck-in acquisitions through which we can expand our selection of rental inventory in our existing markets.
V. MARKETS
We currently manage condominiums and homes in over 50 premier resort locations throughout the U.S. and in Canada. The following table sets forth the aggregate number of properties managed in each of the following states and provinces at December 31, 2002.
VI. SERVICES OFFERED
SERVICES OFFERED TO VACATIONERS. We provide services to vacationers during all stages of the rental process from the selection and reservation of a condominium or home through the vacationers' arrivals and durations of their stays. To make the selection and reservation process as simple and convenient as possible, ResortQuest.com, our on-line, single-source, interactive web site provides consumers with instant access to our inventory of over 20,000 managed vacation rental properties. Vacationers can check availability and rental rates, view extensive content information about each property, including photographs, floor plans, virtual tours of our condominium and home rental units; see activity calendars for popular events and attractions; view local weather forecasts and snowfall amounts in all of our resort locations; plus obtain value added information about special offers and promotions while making real-time on-line reservations. Vacationers can customize their searches of our rental inventory based upon either type of resort destination, including beach, mountain, Hawaii and desert, or by type of activity, including golf, skiing, tennis and fishing. Vacationers also can search for rental units in several different resort locations simultaneously.
In addition to on-line access to our rental properties, we provide vacationers with catalogs containing color photographs and descriptions of available condominiums or homes in most of our resort locations. Also, vacationers may choose to make reservations through our 24-hour toll-free reservations line staffed by agents who are familiar with the specific condominiums and homes at all of our resort locations.
Because of the variety of our resort locations and the diversity of rental prices throughout our rental portfolio, we are able to target a broad range of vacationers, including families, empty nester couples and individuals. For vacationers, we offer the convenience and accommodations of a condominium or home, while providing many of the amenities and services of a hotel. Vacation condominium and home rentals generally offer greater space and convenience than resort hotel rooms, including separate living, sleeping and eating quarters. As a result, vacationers generally have more privacy and greater flexibility in a vacation condominium or home.
Upon the vacationer's arrival, we offer conveniently located check-in and check-out facilities, many of which are located on-site at the front desk of our condominium properties. Off-site check-in facilities are typically centrally located and easily accessible in their respective resort communities. In most destination resort communities, we maintain multiple conveniently located check-in facilities. During their stay, vacationers at most locations are offered frequent cleaning and housekeeping services and access to emergency contact and maintenance personnel. In most locations, we offer more specialized concierge services such as bicycle and ski equipment rentals, ski lift ticket sales, shuttles to ski areas, golf tee times and restaurant reservations. We typically receive a fee for providing these services.
To help ensure that vacationers' expectations are met, we implemented a comprehensive quality standard program. As part of this program, each of our resort areas delivers a standardized, basic level of products and services that affect the overall experience of vacationers. We have established a detailed listing of standards relating to:
- the reservation, check-in and check-out processes;
- the provisions included in each rental unit;
- the services and amenities provided during the vacationers' stay;
- the maintenance of the grounds and facilities surrounding the rental unit; and
- the response of employees to problems raised by vacationers.
To promote consistency across all of our locations, we have evaluated, based on our proprietary rating criteria, substantially all of our vacation condominiums and homes and segmented them into the following five proprietary accommodation categories:
Quest Home: An exclusive group of extraordinary accommodations that are so luxurious and unique that they are in a class of their own;
Platinum: Exceptional accommodations marked by unique design that offers superior quality furnishings, luxury features, designer appointments, and top-of-the-line kitchens, baths and amenities;
Gold: Upscale, well-appointed accommodations with a designer touch that includes excellent furnishings, special features and top-quality kitchens, baths and amenities;
Silver: Inviting, pleasing accommodations that are tastefully decorated and feature quality furnishings and contemporary kitchens and baths; and
Bronze: Comfortable, pleasant accommodations that provide many of the comforts and conveniences of home.
We have developed specific, detailed criteria for each of our accommodation categories, based on quality, appearance and features of the rental properties including property furnishings, soft goods, flooring, kitchen/appliances, televisions and stereos, bathrooms and decor. Similarly, we have standardized the use of property location descriptions. We perform periodic on-site reviews of each of our rental properties to update our accommodation category ratings.
SERVICES OFFERED TO CONDOMINIUM AND HOME OWNERS. We provide condominium and home owners a comprehensive set of high-quality vacation rental and property management services by combining local management expertise and attention with the marketing resources of an international brand. In most markets, we will assume complete responsibility for rental management of the condominium or home, including marketing, renting and maintaining the specific property as well as managing the common areas and homeowners' associations. We currently engage in extensive marketing activities, including our interactive web site, ResortQuest.com, that is accessible through AOL Keywords: ResortQuest and Vacation Rentals, print advertising in high-profile national publications and e-mail marketing, as well as direct catalog mailings to prior and prospective vacationers and direct solicitations of travel agents and wholesalers. We also handle all interaction with vacationers, including accepting reservations, collecting rental payments and security deposits, operating check-in and check-out locations and offering linen, housekeeping and other services. Property owners are paid rental income each month for rental activity in the preceding month and are given a concise, timely and accurate monthly statement that details the rental activity and management of their condominiums and homes.
Both our employees and third party independent contractors provide property maintenance services. Services are either regularly scheduled, or provided on an "as needed" basis, depending on the service and resort location. In most markets, we perform periodic inspections and make recommendations to property owners for maintenance, refurbishments and renovations necessary to maintain the quality of their condominiums and homes. In several of our destination resort markets, we provide professional interior design and refurbishment services to property owners to assist with the upkeep and appearance of their condominiums and homes. We include routine maintenance services, such as replacing light bulbs or broken china, as part of an all-inclusive commission structure in certain locations. In other markets, we collect fees from property owners for maintenance services through service and maintenance agreements and fees for service arrangements.
For owners desiring to sell their vacation condominium or home, we offer traditional real estate brokerage services in over 30 resort locations, including listing and showing the property. Also, ResortQuest.com provides multiple location real estate listings for these resort locations. We believe that providing real estate brokerage services gives us a competitive advantage in identifying and securing properties for our rental management services and allows us to meet all of the needs of vacation property owners.
VII. MARKETING
GENERAL. The marketing efforts of traditional vacation rental and property management companies are primarily through word of mouth, including both vacationers and property owners, print advertising primarily in local newspapers and regional magazines and direct mail solicitations and catalogs sent to prior customers. Potential customers typically call as a result of a referral or in response to an advertisement or other promotion and are assisted by reservation agents in selecting the appropriate vacation property and making the reservation.
Our marketing strategy is one that is designed to be fully integrated to both on-line and off-line initiatives from an international, national, regional, and local perspective. The number one goal is driving occupancy rates, followed closely by building awareness of the ResortQuest brand name services and image, while always including a cross-sell message of our destinations and promoting ResortQuest.com. We utilize a comprehensive, national marketing campaign targeting consumers and the travel trade through various international and domestic marketing alliances, national and regional cable TV, preferred supplier agreements, Internet affiliates and on-line distribution, direct mail, e-mail marketing, public relations, promotional programs
and high-profile print advertising in publications such as Travel & Leisure, Ski, Coastal Living, Golf Magazine, Southern Living and Readers Digest. We also market to retail travel agents and wholesalers through e-mail, company intranets, advertisements in trade publications and attendance at national and regional travel industry trade shows and direct sales calls. Tour package operators typically combine transportation to a destination resort with our vacation condominiums and homes and a car rental. Tour packages are distributed almost exclusively through travel agents and tour operators.
We believe that our most important marketing resource is our proprietary past guest marketing database and web site, ResortQuest.com. For the first time, consumers can use a single source to visit resort destinations throughout the U.S. and in Canada, take virtual tours, view photographs and floor plans and make real-time reservations directly on-line for stays in vacation condos homes and villas. In order to maximize the on-line exposure of ResortQuest.com and our 20,000 plus vacation rental properties, we have many distribution deals with on-line travel sites such as Expedia, Travelocity, HRN (i.e., CondoSavers.com) and others.
We believe that international, national and regional marketing campaigns increase the marketing communications reach of our existing operations and those to be acquired in the future, and expand the universe of potential new customers for each resort location in which we operate.
We intend to capitalize on our extensive market presence and further increase our use of the Internet, retail travel agents, wholesalers, distribution partners, broadcast and print media. We believe that our extensive selection of vacation condominiums and homes make us an attractive partner and new revenue stream while airlines and others have decreased commissions to travel agents, tour package operators and other travel providers. These relationships should continue to be a significant source of new customers and, in particular, will be valuable marketing and distribution channels for off-peak seasons.
MARKETING DATABASE. Our past guest marketing database has a wealth of guest knowledge, with demographic, reservation and sales transaction data for more than 1.5 million guests across virtually all of our operations, which provides up to four full years of consumption data for over 2.1 million stays, more than 12.9 million room nights and nearly $2.0 billion in gross lodging revenue.
With a myriad of data enhancements, including demographic data appends and cross-resort stay patterns, this database supports a full range of one-to-many and one-to-one marketing activities through e-mail marketing, direct mail and outbound telemarketing. Its value was clearly demonstrated against the backdrop of the events of September 11, 2001. While leisure business at most resort properties in 2001 declined versus 2000 by 20% on average, aggressive and timely direct marketing made possible by this database held our declines at only 13% in the number of guests, and only 8% in the number of stays and room-nights.
The ability to timely launch targeted direct marketing promotions to past guests resulted in significant increases in the percentage of repeat guests - from 21% in 2000 to 31% in 2001 and to 38% by the end of 2002.
The advantage gained by the availability of this database was especially evident in our ability to drive business within booking windows that were 24% tighter in 2001 versus 2000 and continued to shrink in 2002 versus 2001 by another 2%. In light of this shortened booking lead time, continual mining of our database is ever more crucial to enable us to rapidly develop targeted offers that are individualized for selected past guests driving business that, in previous years, would have only been implemented over extended timeframes from booking to arrival date.
This database is utilized extensively for regular booking pace analyses to identify and quickly respond to soft periods at each of our resort areas. Without this information, the ability to analyze booking pace on a standardized basis across so many diverse destinations would be extremely difficult. This database is also utilized extensively in sales tracking, pre and post marketing analysis enabling us to fine-tune promotion and sales efforts for greater cost-efficiencies.
Finally, this database is the core component of our long-term direct marketing (e.g., e-marketing and postal
mail) vision as it links guest history (consumption data) to email and postal addresses for precise targeting on a truly one-to-one basis.
VIII. TECHNOLOGY
Through the sale of First Resort Software by ResortQuest Technologies, we are the leading provider of integrated management, reservations and accounting software for the vacation rental and property management industry. We combine this powerful software with a varied offering of related business services that truly enables clients to look to us as the primary provider of their resort technology needs.
In the fourth quarter of 2002, management made changes to our software operations strategy that included a redefinition of the target market for First Resort Software. Prior to this strategy shift, the latest version of First Resort Software was being designed to meet the needs of all companies in our industry. The new strategy is to focus on the needs of small to medium-sized property management companies, which make up the majority of the industry.
We currently utilize First Resort Software internally and over 900 other vacation rental and property management companies have purchased licenses of this software from us. This software program was developed to overcome problems encountered by rental property managers in attempting to use software programs developed for the hotel industry. First Resort Software allows vacation rental and property management companies to automate and computerize their reservations, billings, rental management and accounting tasks. Vacation rental and property management companies can use the software to enter current rates on individual condominiums and homes and access specific descriptions of those condominiums and homes for potential customers. The software also allows companies to manage owner escrow accounts, generate monthly revenue reports for property owners and to coordinate maintenance and housekeeping schedules. First Resort Software also offers additional modules and interfaces, including a work order management system, activities management system, credit card interface and on-line booking interface through the Internet. We have developed a next-generation JAVA browser-based graphical reservations application that allows users of its software to completely integrate their reservations systems with the Internet.
We intend to rely on the First Resort Software products and management expertise of ResortQuest Technologies to develop an enterprise solution for in-house use that will leverage the power of JAVA with the strength of our reservation call center technologies. This business system is being created in close cooperation with the user community and will significantly streamline company operations and reporting as well as provide a robust, best-of-breed environment for continued company growth. We believe that investment in technology is critical in building an internationally branded vacation rental and property management company for premier destination resorts and will provide us with a significant competitive advantage in the future.
IX. COMPETITION
The vacation rental and property management industry is highly competitive and has low barriers to entry. The industry has two distinct customer groups: vacation property renters and vacation property owners. We believe that the principal competitive factors in attracting vacation property renters are:
- market share and visibility;
- quality, cost and breadth of services and properties provided; and
- long-term customer relationships.
The principal competitive factors in attracting vacation property owners are the ability to generate higher rental income and to provide comprehensive management services at competitive prices. We compete for vacationers and property owners primarily with over 4,000 individual vacation rental and property management companies that typically operate in limited geographic areas. Some of our competitors are affiliated with the
owners or operators of resorts in which such competitors provide their services. Certain of these smaller competitors may have lower overhead cost structures and may be able to provide their services at lower rates.
We also compete for vacationers with large hotel and resort companies. Many of these competitors have greater financial resources than we have, enabling them to finance acquisition and development opportunities, to pay higher prices for the same opportunities or to develop and support their own operations. In addition, many of these companies can offer vacationers services not provided by vacation rental and property management companies, and they may have greater name recognition among vacationers. These companies might be willing to sacrifice profitability to capture a greater portion of the market for vacationers or pay higher prices than we would for the same acquisition opportunities. Consequently, we may encounter significant competition in our efforts to achieve our internal and acquisition growth objectives as well as our operating strategies focused on increasing the profitability of our existing and subsequent acquisitions.
X. EMPLOYEES
On average, we employed 5,000 full-time and temporary employees during 2002. We rely significantly on temporary employees to meet peak season demands. In the course of performing service and maintenance work, we also utilize the services of independent contractors. We believe our relationships with our employees and independent contractors are good.
XI. FACTORS THAT MAY AFFECT FUTURE RESULTS
Our disclosures and analyses in this report and in our 2002 Annual Report to Shareholders contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated services, sales efforts, expenses and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public.
Any or all of our forward-looking statements in this report, in the 2002 Annual Report to Shareholders and in any other public statements that we make, may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion above will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission ("SEC"). Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect ResortQuest. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
WE MAY NOT BE ABLE TO INTEGRATE SUCCESSFULLY ANY FUTURE ACQUISITION.
We cannot assure you that our management group will be able to continue to manage effectively the combined entities or implement effectively our operating and growth strategies. If we are unable to integrate successfully recent and future acquisitions, it could have a material adverse effect on our business and financial results.
Entities that we have acquired offer a variety of different services to property owners and vacationers, apply different sales and marketing techniques to attract new customers, use different fee structures and target different customer segments. In addition, almost all of our acquired entities operate in different geographic markets with varying levels of competition, development plans and local market dynamics. These differences increase the risk inherent in successfully completing the integration of our future acquisitions.
WE MAY NOT BE ABLE TO COMPLETE SUCCESSFULLY OUR PLANNED EXPANSION.
We intend to continue to expand the markets we serve and increase the number of properties we manage, in part, through selective strategic acquisitions of additional vacation rental and property management companies. We cannot assure you that we will be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses into our existing operations without substantial costs, delays or other operational or financial problems. It is possible that competition may increase for companies we might seek to acquire. In such event, there may be fewer acquisition opportunities available to us, as well as higher acquisition prices.
Acquisitions also involve a number of special risks that could have a material adverse effect on our business and financial results. These risks include the following:
- failure of acquired companies to achieve expected financial results;
- diversion of management's attention;
- failure to retain key personnel;
- impairment of acquired intangible assets; and
- increased potential for customer dissatisfaction or performance problems at a single acquired company to adversely affect our reputation and brand name.
We may also seek international acquisitions that may be subject to additional risks associated with doing business in such countries. We continually review various strategic acquisition opportunities and have held discussions with a number of such acquisition candidates.
WE MAY NOT BE ABLE TO FINANCE FUTURE ACQUISITIONS.
We seek to use shares of our common stock to finance a portion of the consideration for acquisitions. If our common stock does not maintain a sufficient market value, or the owners of businesses we may seek to acquire are otherwise unwilling to accept shares of common stock as part of the consideration for the sale of their businesses, we may be required to use more of our cash resources in order to implement our acquisition strategy. If we have insufficient cash resources, our ability to pursue acquisitions could be limited unless we are able to obtain additional funds through debt or equity financing. Our ability to obtain debt financing may be constrained by existing or future loan covenants, the satisfaction of which may be dependent upon our ability to raise additional equity capital through either offerings for cash or the issuance of stock as consideration for acquisitions. We cannot assure you that our cash resources will be sufficient, or that other financing will be available on terms we find acceptable. If we are unable to obtain sufficient financing, we may be unable to implement fully our acquisition strategy.
OUR BUSINESS MAY BE NEGATIVELY AFFECTED IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.
We plan to continue to grow internally and through selective acquisitions. We will expend significant time and effort in expanding our existing operations and in identifying, completing and integrating selective acquisitions. We cannot assure you that our systems, procedures and controls will be adequate to support our operations as they expand. Any future growth also will impose significant added responsibilities on members of senior management, including the need to identify, recruit and integrate new managers and executives. We cannot assure you that we will be able to identify and retain such additional management. If we are unable to
manage our growth efficiently and effectively, or we are unable to attract and retain additional qualified management, it could have a material adverse effect on our business and financial results.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.
The following factors, among others, may cause the market price of our common stock to significantly increase or decrease:
- our failure to meet financial research analysts' estimates of our earnings;
- variations in our annual or quarterly financial results or the financial results of our competitors;
- changes by financial research analysts in their estimates of our earnings;
- conditions in the general economy, or the vacation and property rental management or leisure and travel industries in particular;
- unfavorable publicity about us or our industry; and
- significant price and volume volatility in the stock market in general for reasons unrelated to us.
OUR BUSINESS AND FINANCIAL RESULTS DEPEND UPON FACTORS THAT AFFECT THE VACATION RENTAL AND PROPERTY MANAGEMENT INDUSTRY.
Our business and financial results are dependent upon various factors affecting the vacation rental and property management industry. Factors such as the following could have a negative impact on our business and financial results:
- reduction in the demand for vacation properties, particularly for Hawaii, beach, mountain and desert resort properties;
- adverse changes in travel and vacation patterns;
- adverse changes in the tax treatment of second homes;
- a downturn in the leisure and tourism industry;
- an interruption of airline service;
- increases in gasoline or airfare prices;
- terrorist attacks; and
- adverse weather conditions or natural disasters, such as hurricanes, tidal waves or tornadoes.
OUR OPERATING RESULTS ARE HIGHLY SEASONAL.
Our business is highly seasonal. The financial results of each of our operations have been subject to quarterly fluctuations caused primarily by the combination of seasonal variations and when revenue is recognized in the vacation rental and property management industry. Peak seasons for our operations depend upon whether the resort is primarily a summer or winter destination. During 2002, excluding unusual items and other charges of approximately $15.1 million, we derived approximately 26.4% of our revenues and 49.9% of our operating income in the first quarter and 31.5% of our revenues and 89.4% of our operating income in the third quarter. Although the seasonality of our financial results may be partially mitigated by the geographic diversity of our operations and any future acquisitions, we expect a significant seasonal factor with respect to our financial results to continue.
Our quarterly financial results 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. Unexpected variations in our quarterly financial results could adversely affect the price of our common stock, which in turn could adversely affect our acquisition strategy.
OUR BUSINESS DEPENDS UPON THE EFFORTS OF THIRD PARTIES TO MAINTAIN RESORT FACILITIES AND TO MARKET OUR PROPERTIES.
We manage properties that are generally located in destination resorts that depend upon third parties to maintain resort amenities such as golf courses and chair lifts. The failure of third parties to continue to maintain resort amenities could have a material adverse effect on the rental value of our properties and, consequently, on our business and financial results.
We also depend on travel agents, package tour providers and wholesalers for a portion of our revenues. Failure of travel intermediaries to continue to recommend or package our vacation properties could result in a material adverse effect on our business and financial results.
OUR BUSINESS COULD BE HARMED IF THE MARKET FOR LEISURE AND VACATION TRAVEL DOES NOT CONTINUE TO GROW.
We cannot assure you that we or the total market for vacation property rentals will continue to experience growth. Factors affecting our ability to continue to experience internal growth include our ability to:
- maintain existing relationships with property owners;
- expand the number of properties under management;
- increase rental rates and cross-sell among our resort operations; and
- sustain continued demand for our rental inventory.
OUR OPERATIONS ARE CONCENTRATED IN THREE GEOGRAPHIC AREAS.
We manage properties that are significantly concentrated in beach and island resorts located in Florida and Hawaii and mountain resorts located in Colorado. The following table sets forth consolidated revenues and percentage of total revenues derived from each region for the year ended December 31, 2002 (dollars in thousands).
Adverse events or conditions which affect these areas in particular, such as economic recession, changes in regional travel patterns, extreme weather conditions or natural disasters, would have a more significant adverse effect on our operations, than if our operations were more geographically diverse.
OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING HIGHLY CAPABLE MANAGEMENT AND EMPLOYEES.
Our business substantially depends on the efforts and relationships of James S. Olin, President and Chief Executive Officer, the other executive officers of ResortQuest and our senior management teams in each of the resort areas in which we operate. Furthermore, we will likely be dependent on the management team of
any businesses acquired in the future. If any of these persons becomes unable or unwilling to continue in his or her role, or if we are unable to attract and retain other qualified employees, it could have a material adverse effect on our business and financial results. Although we have entered into employment agreements with each of our executive officers and certain local managers, we cannot assure you that any of these individuals will continue in his or her present capacity for any particular period of time.
THE SUBSTANTIAL AMOUNT OF GOODWILL RESULTING FROM OUR ACQUISITIONS COULD ADVERSELY AFFECT OUR FINANCIAL AND OPERATING RESULTS.
Approximately $205.8 million, or 75.5%, of our total assets at December 31, 2002 is net goodwill, which represents the excess of the purchase price over fair value of identified net assets acquired in business combinations accounted for under the purchase method of accounting.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 eliminated the pooling-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 at least annually and upon the occurrence of certain events, and if impaired, a write-down will be recorded.
Upon our adoption of Statement No. 142, our software operations and each of our geographical resort regions with assigned goodwill were each 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 markets. During Fourth quarter 2002, management made changes to its software operations strategy that included a redefinition of its target market for First Resort Software. Prior to this strategy shift, the latest version of First Resort Software was being designed to meet the needs of all companies in our industry. The new strategy is to focus on the needs of small to medium-sized property management companies, which make up the majority of the industry. This change necessitated a $4.2 million write-down of our goodwill related to the software operations and a $6.4 million write-down of certain capitalized software development costs. As these write-downs were recorded after the initial adoption of Statement No. 142, a $10.6 million non-cash charge is reflected in general and administrative expenses in our 2002 consolidated statement of operations.
Amortization of our goodwill and impairment charges may not be deductible for tax purposes. A reduction in net income resulting from a goodwill impairment charge would currently affect our financial results and could have a material adverse impact upon the market price of our common stock.
IF THE NEW VERSION OF FIRST RESORT SOFTWARE FAILS TO MEET SALES EXPECTATIONS, ADDITIONAL IMPAIRMENT CHARGES MAY BE RECORDED.
The Company has $4.6 million in capitalized software development costs related to the latest version of First Resort Software. If at any time management believes that future sales of this product are not sufficient to recover this asset an additional impairment charge may be recorded.
IF VACATION RENTAL PROPERTY OWNERS DO NOT RENEW A SIGNIFICANT NUMBER OF PROPERTY MANAGEMENT CONTRACTS OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
We provide rental and property management services to property owners pursuant to management contracts, which generally have one-year terms. The majority of such contracts contain automatic renewal provisions but also allow property owners to terminate the contract at any time. If property owners do not renew a significant number of management contracts or we are unable to attract additional property owners, it would have a material adverse effect on our business and financial results. In addition, although most of our contracts are exclusive, industry standards in certain geographic markets dictate that rental services be provided on a non-exclusive basis. Less than 2% of our revenues for 2002 were derived from rental services provided on a non-exclusive basis. We are unable to determine the percentage of the national rental services market that is provided on a non-exclusive basis.
IF HOMEOWNERS' ASSOCIATIONS TERMINATE MANAGEMENT AGREEMENTS, WE COULD LOSE SOME OF OUR COMPETITIVE ADVANTAGE IN THESE MARKETS.
We currently provide management services at numerous condominium developments pursuant to contracts with the homeowners' associations. We frequently provide rental management services for a significant percentage of the condominiums within these developments. Providing management services for homeowners' associations frequently leads the associations to request that we manage and control the front desk operations, laundry facilities and other related services of the condominium developments. Controlling these services often gives us a competitive advantage over other vacation rental and property management companies in retaining the condominiums we currently manage and in attracting new homeowners.
We cannot assure you that a homeowners' association will not terminate its management agreement with us. If a homeowners' association terminates a management agreement, we could lose control or management of the front desk and related services in that condominium development, thereby eliminating our competitive advantage in that development. If terminations occur, it could have a material adverse effect on our business and financial results.
COMPETITION COULD RENDER OUR SERVICES UNCOMPETITIVE.
The vacation rental and property management industry is highly competitive and has low barriers to entry. The industry has two distinct customer groups: vacation property renters and vacation property owners. We compete for vacationers and property owners primarily with local vacation rental and property management companies located in our markets. Some of these competitors are affiliated with the owners or operators of resorts where these competitors provide their services. Certain of these competitors may have lower cost structures and may provide their services at lower rates.
We also compete for vacationers with large hotel and resort companies. Many of these competitors are large companies that have greater financial resources than we do, enabling them to finance acquisition and development opportunities, pay higher prices for the same opportunities or develop and support their own operations. In addition, many of these companies can offer vacationers services not provided by vacation rental and property management companies, and they may have greater name recognition among vacationers. If such companies chose to compete in the vacation rental and property management industry, they would constitute formidable competition for our business. Such competition could cause us to lose management contracts, increase expenses or reduce management fees, which could have a material adverse effect on our business and financial results.
ANY ADVERSE CHANGE IN THE REAL ESTATE MARKET COULD ADVERSELY AFFECT OUR FINANCIAL AND OPERATING RESULTS.
We derived approximately 9% of our consolidated revenues for 2002 from net real estate brokerage commissions. Any factors that adversely affect real estate sales, such as a downturn in general economic
conditions or changes in interest rates, the tax treatment of second homes or property values, could have a material adverse effect on our business and financial results.
WE ARE SUBJECT TO GOVERNMENTAL REGULATION OF THE VACATION RENTAL AND PROPERTY MANAGEMENT INDUSTRY.
Our operations are subject to various federal, state, local and foreign laws and regulations, including licensing requirements applicable to real estate operations and the sale of alcoholic beverages, laws and regulations relating to consumer protection and local ordinances. Many states have adopted specific laws and regulations which regulate our activities, such as:
- anti-fraud laws;
- real estate and travel services provider license requirements;
- environmental laws;
- telemarketing laws;
- labor laws; and
- the Fair Housing Act.
We believe that we are in material compliance with all federal, state, local and foreign laws and regulations to which we are currently subject. However, we cannot assure you that the cost of qualifying under applicable regulations in all jurisdictions in which we desire to conduct business will not be significant or that we are actually in compliance with all applicable federal, state, local and foreign laws and regulations. Compliance with or violation of any current or future laws or regulations could require us to make material expenditures or otherwise have a material adverse effect on our business and financial results.
TRANSACTIONS BETWEEN OUR OPERATIONS AND THEIR AFFILIATES MAY RESULT IN CONFLICTS OF INTEREST.
Several lease agreements, management contracts and other agreements with the former owners of many of the entities that we have acquired and entities controlled by them continued after the acquisitions were consummated. We have also entered into certain similar agreements that became effective upon such acquisitions. In addition, we may enter into similar agreements in the future. Other than a loan agreement with the former principal stockholder of Aston Hotels & Resorts, an entity acquired in conjunction with our initial public offering, we believe existing agreements with related persons are, and that all future agreements will be, on terms no less favorable to us than we could obtain from unrelated third parties. Conflicts of interests may arise between us and these related persons.
At December 31, 2002, the former principal stockholder of Aston Hotel & Resorts owed us approximately $4 million plus accrued interest, under a loan agreement. This amount is fully collateralized by certain real estate owned by the former principal stockholder.
DELAWARE LAW, OUR CHARTER DOCUMENTS AND STOCKHOLDER RIGHTS PLAN CONTAIN PROVISIONS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT.
We are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits us from engaging in a broad range of business combinations with an interested stockholder for a period of three years after such a person first becomes an interested stockholder. Interested stockholders include our affiliates, associates and anyone who owns 15% or more of our outstanding voting stock. The provisions of Section 203 could delay or prevent a change of control of ResortQuest.
Provisions of our Certificate of Incorporation could make it more difficult for a third party to acquire control of ResortQuest, even if such change in control would be beneficial to stockholders. The directors are allowed to issue preferred stock without stockholder approval. Such issuances could make it more difficult for a third
party to acquire ResortQuest. Our bylaws contain provisions that may have an anti-takeover effect, such as the requirement that we must receive notice of nomination of directors not less than 60 nor more than 90 days prior to the date of the annual meeting.
On February 25, 1999, our board of directors adopted a stockholder rights plan designed to protect our stockholders in the event of takeover action that would deny them the full value of their investment. Under this plan, a dividend distribution of one right for each share of common stock was declared to holders of record at the close of business on March 15, 1999. The rights will also attach to common stock issued after March 15, 1999. The rights will become exercisable only in the event, with certain exceptions, an acquiring party accumulates 15% or more of our voting stock, or if a party announces an offer to acquire 15% or more of our voting stock. The rights will expire on March 15, 2009. Each right will entitle the holder to buy one one-hundredth of a share of a new series of preferred stock at a price of $87.00. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either our stock or shares in an "acquiring entity" at half of market value. We generally will be entitled to redeem the rights at $0.01 per right at any time until the date on which a 15% position in our voting stock is acquired by any person or group.
The rights plan is designed to prevent the use of coercive and/or abusive takeover techniques and to encourage any potential acquiror to negotiate directly with our board of directors for the benefit of all stockholders. In addition, the rights plan is intended to provide increased assurance that a potential acquiror would pay an appropriate control premium in connection with any acquisition of ResortQuest. Nevertheless, the rights plan could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change of control.
THE POLITICAL AND ECONOMIC CLIMATE AND OTHER WORLD EVENTS AFFECTING SAFETY AND SECURITY COULD ADVERSELY AFFECT LEISURE TRAVEL AND LODGING DEMAND AND COULD HARM OUR FUTURE REVENUES AND PROFITABILITY.
Leisure travel and lodging demand have been, and are expected to continue to be, affected by the public's attitude towards the safety of travel and the international political climate. Events such as the terrorist attacks in the U.S. on September 11, 2001, the threat of additional terrorist attacks and the military action against Iraq, and the resulting political instability and concerns over safety and security, have had a significant adverse impact on leisure travel and lodging demand and may continue to do so in the future. Economic or political changes that reduce disposable income or consumer or business confidence may affect demand for vacation rentals, which in many cases are discretionary purchases. In order to maintain occupancy levels, we have charged lower room rates, which has resulted in lower overall revenues and profitability. Further decreases in leisure travel and lodging demand could affect our ability to comply with certain financial covenants under our revolving credit facility ("Credit Facility") and our $50 million Senior Notes ("Senior Notes") due in 2004.
OUR CREDIT FACILITY AND SENIOR NOTES CONTAIN CERTAIN FINANCIAL COVENANTS THAT WE MAY NOT MEET AND, IF VIOLATED, COULD LIMIT OUR ABILITY TO CONTINUE TO BORROW UNDER OUR CREDIT FACILITY AND, UNDER CERTAIN CIRCUMSTANCES, COULD ACCELERATE THE AMOUNT DUE UNDER OUR CREDIT FACILITY AND SENIOR NOTES.
We depend upon our Credit Facility for a portion of our operating funds. Our Credit Facility subjects us to financial covenants, including restrictions on our ability to engage in certain activities. Several factors, including the economic downturn and terrorist attacks and their aftermath, have had an adverse affect on the lodging business. Our Senior Notes Contain covenants substantially similar to those in our Credit Facility. As a result, although we have recently completed amendments to our Credit Facility and Senior Notes to allow more flexibility under these debt instruments, there is a risk that we may not meet one or more of these financial covenants. If we violate or fail to comply with any of the financial or other covenants in our Credit Facility or Senior Notes, there may be a material adverse effect on us. Most notably, we may be unable to borrow additional funds under our Credit Facility and further, our outstanding debt under our Credit Facility and Senior Notes could become immediately due. In the event that we do not satisfy a covenant, we intend to request a waiver or amendment from our bank group and the holders of our Senior Notes. However, we cannot provide assurances that the bank group or the holders of our Senior Notes would be agreeable to such a waiver or amendment.
OUR CREDIT FACILITY AND SENIOR NOTES MATURE DURING 2004. IF WE ARE UNABLE TO REFINANCE OR EXTEND THE MATURITIES OF THE CREDIT FACILITY OR SENIOR NOTES, OUR CONTINUING OPERATIONS COULD SUFFER.
Our Credit Facility, as amended in March 2003, matures on January 22, 2004. As of March 10, 2003, we had approximately $27.4 million of outstanding indebtedness under this facility. Additionally, our $50 million Senior Notes are due in June 2004.
We plan to refinance or negotiate an extension of the maturity of our Credit Facility and Senior Notes. However, our ability to complete such transactions is subject to a number of conditions, many of which are beyond our control. For example, if there were a further disruption in the financial markets because of a terrorist attack or other event, we may be unable to access the financial markets. Failure to complete a refinancing or extension of the Credit Facility or Senior Notes would have a material adverse effect on our company.
ITEM 2.
ITEM 2. PROPERTIES
We have approximately 200 properties in over 50 locations in 17 states in the U.S. and one province in Canada. These properties consist principally of offices and maintenance, laundry and storage facilities. We own approximately 40 of these facilities and lease the remaining 160 properties. We consider all of our owned and leased properties to be suitable and adequate for the conduct of its business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On May 26, 2000, Hotel Corp. of the Pacific, Inc., a wholly-owned 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 then 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.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR RESORTQUEST'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for our Common Stock is the New York Stock Exchange. The Company has never paid a dividend to shareholders and has no plan to issue dividends in the future. Additional information required by this item concerning quarterly sales price data is incorporated by reference from the table Stock Price on page 41 of the 2002 Annual Report to Shareholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Financial information required by this item is incorporated by reference from the Selected Financial Data on page 42 of the 2002 Annual Report to Shareholders.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by this item is incorporated by reference from Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 3 through 21 of the 2002 Annual Report to Shareholders.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is incorporated by reference from the discussion under the heading Quantitative and Qualitative Disclosures About Market Risk in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 16 of the 2002 Annual Report to Shareholders.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated by reference from the Independent Auditors' Report found on page 39, from the Report of Independent Public Accountants on page 40, from the consolidated financial statements and supplementary data on pages 22 through 38 of the 2002 Annual Report to Shareholders.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 29, 2002, we filed a report on Form 8-K announcing that our Board of Directors had appointed Deloitte and Touche LLP as the Company's independent auditor for 2002, replacing Arthur Andersen LLP. The decision to dismiss Arthur Andersen was recommended by the Audit Committee and approved by the Board of Directors.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RESORTQUEST
BOARD OF DIRECTORS
Employee directors receive no additional compensation for serving on the Board of Directors or its Committees. In December 2002, the Board of Directors made changes to the compensation packages for all non-employee directors. Non-employee directors will receive $1,500 for attendance at each Board meeting and $1,000 for each committee meeting.
Under ResortQuest's Amended and Restated 1998 Long-Term Incentive Plan (the "Incentive Plan"), each non-employee director will also receive an option to acquire 15,000 shares of Common Stock upon the non-employee director's initial election as a director and an annual option to acquire 10,000 shares at each annual meeting at which the non-employee director is re-elected or continues to serve. These options vest upon issuance and will have an exercise price equal to the fair market value of a share of Common Stock on the date the options are issued.
Directors are elected at the annual meeting held each year and serve until the next annual meeting or until their earlier resignation or removal. As of March 10, 2003, the following were directors of ResortQuest:
JOSEPH V. VITTORIA DIRECTOR SINCE MAY 1998 AGE 67
Mr. Vittoria is the Chairman and director of ResortQuest. Mr. Vittoria became Chairman of the Company in October 2002 and has been a director since May 1998. He has been the Chairman of Puradyn Filter Technologies, Inc. since February 2000. He was the Chairman and Chief Executive Officer of Travel Services International, Inc., a leading single source distributor of specialized leisure travel services, from July 1997 until its acquisition by Airtours PLC in March 2000. From September 1987 to February 1997, Mr. Vittoria was the Chairman and Chief Executive Officer of Avis, Inc., a multi-national auto rental company. Mr. Vittoria also serves on the Boards of Directors of Transmedia Asia Pacific, Inc. and Sirius Satellite Radio Inc.
WILLIAM W. ABBOTT, JR. DIRECTOR SINCE NOVEMBER 1998 AGE 57
Mr. Abbott is a consultant to ResortQuest. He previously served as Vice Chairman of Abbott Resorts, Inc. from March 1997 to November 1998. He served as Chairman of Abbott Resorts, Inc. from 1992 to March 1997 and Chairman and President from 1976 to March 1992. Abbott Resorts, the largest provider of beach vacation property rentals, management services and real estate sales in Florida, is a ResortQuest subsidiary.
ELAN J. BLUTINGER DIRECTOR SINCE SEPTEMBER 1997 AGE 47
Mr. Blutinger is a founding partner of Alpine Consolidated LLC, a merchant bank specializing in the consolidation of fragmented industries. He is also Managing Director of Alpine Europe LLC. He was a co-founder and director of Travel Services International, Inc. until its acquisition in 2000. From 1987 until its acquisition in 1995, Mr. Blutinger was the Chief Executive Officer of Shoppers Express, which became "OnCart" in 1997, an electronic retailing service. From 1983 until its acquisition in 1986 by IDI, Mr. Blutinger was Chief Executive Officer of DSI, a wholesale software distributor. Mr. Blutinger is also a director of On-line Travel Corp., a publicly traded company in the United Kingdom, and Hotels.com.
MICHAEL P. CASTELLANO DIRECTOR SINCE DECEMBER 2002 AGE 61
Mr. Castellano was elected to the Board of Directors of ResortQuest at the December 5, 2002 board meeting. He was also elected as chairman of the Company's Audit Committee. Mr. Castellano has had a distinguished career with executive positions in corporate accounting, finance and administration at such companies as Avis, Inc., E.F. Hutton Inc., and Fidelity Investments. Mr. Castellano is currently a member of the Board of Directors and chairman of the Audit Committee at Puradyn Filter Technologies Incorporated and a member of the Board of Trustees of Kobren Insight Funds, a Massachusetts-based mutual fund.
JAMES S. OLIN DIRECTOR SINCE OCTOBER 2002 AGE 44
Mr. Olin was appointed to the Company's Board of Directors on October 6, 2002 after the resignation of David L. Levine. Mr. Levine left the Company to pursue other opportunities. Mr. Olin was also elected Chief Executive Officer on October 6, 2002. Mr. Olin has held the position of President since April, 2002. He previously held the position of Executive Vice President and Chief Operating Officer of ResortQuest. Mr. Olin was formerly President of Abbott Resorts, Inc., one of ResortQuest's largest operations, from 1992 to January 2000. During his tenure as President, the Company grew from 900 units to over 2,500 units managed, and real estate sales went from approximately $30 million to over $250 million. Mr. Olin also served as Vice President for ResortQuest's Gulf Coast Region. He has over 15 years of experience in the travel and tourism industry.
DAVID C. SULLIVAN DIRECTOR SINCE MAY 1998 AGE 63
Mr. Sullivan was a Consultant to ResortQuest until the expiration of his consulting agreement in July 2002. He served as Chairman of ResortQuest from December 1999 to May 2000. From May 1998 to December 1999, he was the Chairman and Chief Executive Officer of ResortQuest. From April 1995 to December 1997, Mr. Sullivan was the Executive Vice President and Chief Operating Officer, and a director, of Promus Hotel Corporation, a publicly traded hotel franchisor, manager and owner of hotels whose brands include Hampton Inn, Homewood Suites and Embassy Suites. Mr. Sullivan is also a director of Winston Hotels, Inc. and John Q. Hammons Hotels, Inc.
THEODORE L. WEISE DIRECTOR SINCE MAY 1998 AGE 58
Mr. Weise served as a Director and consultant to Federal Express Corporation until 2002. From February 1998 to February 2000, Mr. Weise served as the President and Chief Executive Officer of Federal Express Corporation, the world's largest express transportation company. He was previously Executive Vice President and Chief Operating Officer of Federal Express Corporation from February 1996 to February 1998. From August 1991 to February 1996 he served as Senior Vice President of Air Operations of Federal Express Corporation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, the Compensation Committee was composed of Messrs. Blutinger, Abbott and Sullivan. Mr. Blutinger was an officer of ResortQuest prior to our initial public offering in May 1998. Mr. Abbott is not nor has been an officer or employee of ResortQuest. Mr. Abbott has served as a paid consultant since 1998. Mr. Sullivan served as Chairman of ResortQuest from December 1999 to May 2000 and as Chairman, President and CEO from May 1998 to December 2000. ResortQuest and Mr. Sullivan entered into a consulting
agreement in May 2000, which ended in July 2002.
EXECUTIVE OFFICERS
As of March 10, 2003, the following executive officers of ResortQuest hold the offices indicated:
JOSEPH V. VITTORIA: Mr. Vittoria is the Chairman and director of ResortQuest. Mr. Vittoria became Chairman of the Company in October 2002 and has been a director since May 1998. He has been the Chairman of Puradyn Filter Technologies, Inc. since February 2000. He was the Chairman and Chief Executive Officer of Travel Services International, Inc., a leading single source distributor of specialized leisure travel services, from July 1997 until its acquisition by Airtours PLC in March 2000. From September 1987 to February 1997, Mr. Vittoria was the Chairman and Chief Executive Officer of Avis, Inc., a multi-national auto rental company. Mr. Vittoria serves on the Board of Directors of Transmedia Asia Pacific, Inc. and Sirius Satellite Radio Inc.
JAMES S. OLIN: Mr. Olin is President and Chief Executive Officer of ResortQuest. Mr. Olin was named Chief Executive Officer in October 2002. Prior to this, Mr. Olin was President and Chief Operating Officer of the Company. He was formerly President of Abbott Resorts, Inc., one of ResortQuest's largest operations, from 1992 to January 2000. During his tenure as President, the Company grew from 900 units to over 2,500 units managed, and real estate sales went from approximately $30 million to over $250 million. Mr. Olin also served as Vice President for ResortQuest's Gulf Coast Region. He has over 15 years of experience in the travel and tourism industry.
J. MITCHELL COLLINS: Mr. Collins is Executive Vice President and Chief Financial Officer of ResortQuest. Mr. Collins was previously employed with Arthur Andersen LLP from July 1990 to February 2000 where he was head of real estate and hospitality services for Andersen's Mid-South practice. He also served on Andersen's global real estate and hospitality services team. Mr. Collins has in-depth expertise in the areas of real estate development and mergers and acquisitions. In addition, he has over 12 years of related finance, accounting, and systems implementation experience.
L. PARK BRADY, JR.: Mr. Brady is Senior Vice President and Chief Operating Officer of ResortQuest. He was formerly Vice President for ResortQuest's Western Region where he supervised more than 3,000 property units and 1,500 employees in the Western United States and Canada. Previously, he was the Founder, Owner and President of Telluride Resort Accommodations, one of the original founding ResortQuest companies. He has over 19 years experience in the travel industry.
STEPHEN D. CARON: Mr. Caron is Senior Vice President and Chief Information Officer of ResortQuest. He was formerly director of Information Technology of ResortQuest from 1998 to October 2002. Previously, he was the Director of Information Systems for Abbott Resorts, Inc., one of ResortQuest's largest operations, from 1993 to 1998. Mr. Caron has over 15 years experience in information systems.
ROBERT J. ADAMS: Mr. Adams is Senior Vice President and Chief Marketing Officer of ResortQuest. He was formerly Vice President of Marketing for ResortQuest from 2000 to October 2002. Prior to joining
ResortQuest, he held senior level marketing and sales positions with Boyd Gaming Corporation, Azar Hotel and Restaurant Management, Inc., Servico Hotel Management Corporation, and JCS Corporation. These companies operated Marriott, Hilton, Westin, Sheraton, Radisson, and Holiday Inn brands. Mr. Adams has over 25 years experience in marketing and sales in the hospitality and travel industry.
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
ResortQuest is a party to employment agreements with each of the Named Executive Officers. The employment agreements, as amended, for Messrs. Olin, Collins, Adams, Brady and Caron provide for annual base salaries of $320,000, $250,000, $160,000, $190,000 and $175,000, respectively. Each of the agreements are for an initial term of two years, expiring on October 1, 2004. Unless terminated or not renewed by ResortQuest or the employee, the term of each employment agreement will continue after the initial term on a year-to-year basis on the same terms and conditions existing at the time of renewal.
Each employment agreement for the Named Executive Officer contains a covenant not to compete (the "Covenant") with ResortQuest while employed and for a period of two years immediately following termination of employment. Under the Covenant, the employee generally is prohibited from:
- - engaging in any hotel management or non-commercial property management, rental or sales business in direct competition with ResortQuest (or any subsidiary) within defined geographic areas in which ResortQuest or its subsidiaries does business;
- - enticing a sales representative or managerial employee of ResortQuest (or any subsidiary) away from ResortQuest (or any subsidiary);
- - calling upon any person or entity which is, or has been, within one year prior to the date of termination, a customer of ResortQuest (or any subsidiary) within defined geographic areas and subject to certain limitations; or
- - calling upon a prospective acquisition candidate, which the employee knew was approached or analyzed by ResortQuest (or any subsidiary), for the purpose of acquiring the entity unless ResortQuest (or any subsidiary) declined to pursue such acquisition candidate or at least one year elapsed since ResortQuest (or any subsidiary) has taken any action to pursue such candidate.
The Covenant may be enforced by injunctions or restraining orders and shall be construed in accordance with the changing location of ResortQuest.
Each of these employment agreements provides that, in the event of a termination of employment by ResortQuest without cause during the term of the agreement, or in the event of a change in control of ResortQuest (as defined in the agreement) during the term of the agreement, the employee will be eligible to receive:
- - two times the employee's annual base salary plus maximum eligible annual bonus;
- - all compensation earned or accrued and benefits due through the termination date (referred to in the agreement as "accrued obligations");
- - continued participation in all health and welfare plans at ResortQuest's expense for the employee and eligible dependents for up to 24 months after the termination date; and
- - outplacement services at ResortQuest's expense for up to one year.
If the employee's employment by ResortQuest is terminated within one year after a change of control by the employee for good reason (as defined in the employment agreement) or by ResortQuest without good cause, the employee will receive the payments and benefits described immediately above.
If the employee's employment is terminated by ResortQuest without good cause during the 180 days prior to the effective date of a change of control, the employee will receive the payments and benefits described immediately above.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
I. SUMMARY OF COMPENSATION
The following table shows cash and other compensation paid or accrued during each of the three most recent fiscal years to the individuals serving as ResortQuest's Chief Executive Officer and the other most highly compensated executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
(1) As a result of their promotions to their current position effective October 2002, the new annual executive salaries are as follows: Mr. Olin - $320,000; Mr. Collins - $250,000; Mr. Brady - $190,000; Mr. Caron - $175,000 and Mr. Adams - $160,000. Prior to October 2002, Messrs. Brady, Caron and Adams were employed with the Company in non-executive positions.
(2) The employment of Messrs. Levine, Farmer and Murphy with the Company ended in October 2002. In accordance with the terms of their employment agreements, Messrs. Farmer and Murphy will continue to be paid at their current pay rate until October 2003 and Mr. Levine will continue to be paid at his current rate until August 2006. All payments made to these individuals after their employment ended are reflected in "All Other Compensation."
(3) Mr. Olin received a $250,000 signing bonus in 2002 upon being named Chief Executive Officer in October 2002.
(4) Mr. Vittoria became Chairman in October 2002. Mr. Vittoria receives no compensation other than stock options.
II. OPTION GRANTS IN FISCAL 2002 AND FISCAL YEAR-END OPTION VALUES
The table below presents additional information concerning option awards for each of the Named Executive Officers shown in the Summary Compensation table. Only one of the Named Executive Officers exercised stock options in 2002, see Note (5). The options granted in fiscal 2002 become exercisable at the rate of 33 1/3 % per year, unless otherwise noted.
OPTION GRANTS IN FISCAL 2002
(1) Options to purchase Common Stock were granted during 2002 on May 30, October 7, October 15, and December 16, under ResortQuest's Amended and Restated 1998 Long-Term Incentive Plan. These options expire 5 years from the date of the grant.
(2) The dollar amounts under these columns are the result of calculations at zero percent, five percent and ten percent rates set by the Securities and Exchange Commission and therefore are not intended to forecast possible future appreciation, if any, of our
stock price. In the above table, we did not use an alternative formula for a grant valuation, as we are not aware of any formula, which will determine with reasonable accuracy a present value based on future unknown or volatile factors.
(3) These amounts represent the appreciated value which holders of Common Stock would receive at the hypothetical zero, five and ten percent rates over the life of the options based on the weighted average exercise price of the options granted in 2002.
(4) Represents the weighted average exercise price of options granted to all optionees.
(5) Prior to becoming a Senior Vice President, Mr. Adams exercised 3,500 options during 2002 with an exercise price of $6.00. Upon exercise, the acquired shares were immediately sold (400 at $7.73 and 3,100 at $7.50) realizing a net profit for Mr. Adams of $5,342.00.
(6) Mr. Vittoria's grant of 5,000 options vested upon issuance.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of Common Stock beneficially owned by each person known to ResortQuest to beneficially own more than 5% of the Common Stock, by the directors and executive officers of ResortQuest, and by the directors and all ResortQuest executive officers as a group. Unless otherwise indicated, the persons listed have an address c/o ResortQuest's executive offices and have sole voting and investment power with respect to their shares. The table shows ownership as of March 13, 2003, unless otherwise noted.
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
* Less than 1.0%
(1) The address for the group is One Financial Center, Suite 1600, Boston, MA 02111. Information is based solely on our review of the Schedule 13G/A, as filed by the shareholder with the Securities and Exchange Commission on October 17, 2002 and on a Form 4 dated March 11, 2003 showing an acquisition of additional shares. Members of the group share both voting and dispositive power.
(2) The address of the shareholder is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. Information is based solely on our review of the Schedule 13G, as filed by the shareholder with the Securities and Exchange Commission on January 30, 2002.
(3) The address of the shareholder is 375 North Front Street, Suite 300, Columbus, OH 43215. Information is based solely on our review of the Schedule 13G, as filed by the shareholder with the Securities and Exchange Commission on February 5, 2003.
(4) Includes the following number of shares that the named individual has the right to acquire as of March 13, 2003 through the exercise of vested stock options: 131,735 shares for Mr. Olin, 72,111 shares for Mr. Collins, 16,667 shares for Mr. Brady, 10,500 shares for Mr. Caron, 8,167 shares for Mr. Adams, 5,000 shares for Mr. Sullivan, 171,667 shares for Mr. Blutinger, 30,000 shares for Mr. Vittoria, 5,000 shares for Mr. Weise and 15,000 shares for Mr. Castellano.
(5) Includes 5,000 shares owned by his spouse.
(6) Includes 15,000 shares held in trust for the benefit of his minor children.
(7) Mr. Levine's employment with the Company ended on October 6, 2002. Mr. Vittoria was elected as Chairman and Mr. Olin was elected as President and Chief Executive Officer, replacing Mr. Levine. Messrs. Murphy and Farmer's employment ended October 7, 2002. On October 9, 2002, Mr. Brady was appointed Senior Vice President and Chief Operating Officer, Mr. Caron was appointed Senior Vice President and Chief Information Officer and Mr. Adams was appointed Senior Vice President and Chief Marketing Officer. The share amounts for the former executives are based on their last Form 4 filed with the Security Exchange Commission during 2002.
(8) Includes 200 shares owned by his spouse.
(9) Includes 166,667 shares which may be acquired upon the exercise of exercisable options held by Alpine Consolidated II, LLC, of which Mr. Blutinger, as a Managing Director of Alpine Consolidated II, LLC shares beneficial ownership.
(10) Mr. Castellano was elected to the Board of Directors on December 5, 2002.
(11) Includes 2,733 shares attributed to Mr. Sullivan's account in the ResortQuest Savings and Retirement Plan. Participants have voting power over shares purchased with their own contributions.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
I. LEASES OF FACILITIES
ABBOTT RESORTS. Abbott Resorts, one of our operating subsidiaries (each, an "Operating Company"), leases 9,350 square feet of office space in Destin, Florida for the main office for its property management and real estate brokerage activities from SAVA Properties, a Florida general partnership which is 25.5% owned by William Abbott, Jr. The lease expires September 29, 2018. The aggregate annual rent paid by Abbott Resorts is $118,932. Abbott Resorts leases approximately 3,700 square feet of indoor and outdoor space in Santa Rosa, Florida for its rental property management and real estate sales activities in the Santa Rosa and Grayton Beach, Florida areas from VAGAS Properties, a Florida general partnership which is 20% owned by William Abbott, Jr. The lease expires September 29, 2018. The aggregate annual rent payment is approximately $50,000.
Abbott Resorts leased 1,665 square feet of office space in Fort Walton Beach, Florida for real estate sales activities. The lease from A&A Partnership ("AAP"), a sub S corporation which is 50% owned by William Abbott, Jr. expired on January 31, 2003. The monthly rent paid by Abbott Resorts was $1,802. As part of such lease, Abbott Resorts also leased a two-bedroom apartment at such site, which was subleased to unaffiliated third parties. This lease was not renewed by the Company upon its expiration date. Abbott Resorts also leases 2,000 square feet of office space in Destin, Florida from AAP for use as its personnel office. The lease agreement expired August 31, 2001 and Abbott Resorts is currently leasing month to month providing monthly rent of $1,943.
ASTON HOTELS & RESORTS(R) HAWAII. Approximately 950 square feet of office space, which is part of a space leased by Aston Hotels & Resorts(R) Hawaii, an Operating Company, is used by a former stockholder and the previous corporate secretary of Aston Hotels & Resorts(R) Hawaii. Previously, Andre S. Tatibouet, former president of Aston Hotels & Resorts(R) Hawaii, former member of ResortQuest's Board and former beneficial owner of greater than five percent of our Common Stock, had agreed to assume responsibility on behalf of the former stockholder for the approximately $30,000 annual rent allocable for this space. In July 2000, the former stockholder agreed to assume responsibility for payment of the monthly rent directly to Aston Hotels & Resorts(R) Hawaii.
Aston Hotels & Resorts(R) Hawaii also leases approximately 858 square feet of office space on a month-to-month basis in a hotel owned by Mr. Tatibouet. The monthly lease amount is $1,439.
II. MANAGEMENT AGREEMENTS
ABBOTT RESORTS. Abbott Resorts manages vacation condominiums owned or co-owned by Mr. Abbott pursuant to Abbott Resorts' standard management agreement. Abbott Resorts received aggregate property management fees related to these properties of approximately $574,105 in 2002.
ASTON HOTELS & RESORTS(R) HAWAII. Aston Hotels & Resorts(R) Hawaii manages two hotels owned by Mr. Tatibouet. The aggregate management and other fees charged by Aston Hotels & Resorts(R) Hawaii for the management of these properties was $757,209 in 2002. The management agreements for these hotels terminate on December 31, 2003.
Aston Hotels & Resorts(R) Hawaii also manages a resort rental program under an agreement with Aston Waikki, LLC. Aston Waikki, LLC is owned by Mr. Tatibouet and is the lessee of all units in the resort rental program under a lease with an unrelated third party owner. The aggregate management and other fees charged by Aston Hotels & Resorts(R) Hawaii for management of this resort rental program during 2002 was $51,435.
III. OTHER TRANSACTIONS
ABBOTT RESORTS. ResortQuest and Mr. Abbott entered into an agreement with respect to the payment of commissions on certain properties which were listed for sale or whose sale was pending as of the date of ResortQuest's acquisition of Abbott Resorts. Pursuant to such agreement, ResortQuest has agreed to pay upon closing of the applicable transaction to which the applicable listing and/or selling fee relates in the aggregate, up to $1,403,827 in listing and/or selling commissions on such properties. ResortQuest paid Mr. Abbott approximately $37,771 in commissions in 2002.
In connection with the acquisition of Abbott Resorts, Mr. Abbott entered into a consulting agreement with ResortQuest. For all services rendered by Mr. Abbott pursuant to the consulting agreement, ResortQuest has agreed to compensate Mr. Abbott as follows:
- to pay a consulting fee of $125,000 per year;
- to pay premiums for coverage for Mr. Abbott and his immediate family under such health, hospitalization, disability, dental, life and other insurance plans that ResortQuest may have in effect from time to time;
- to reimburse Mr. Abbott for all business travel and other out-of-pocket expenses reasonably incurred by him in the performance of his duties; and
- to pay for a full membership in the Tops'l Beach and Racquet Club (the current cost for which is $1,260 per year).
This consulting agreement was to expire on April 1, 2003, but was amended during February 2003 to extend the term through April 1, 2004 and to reduce the annual consulting fee from $125,000 to $75,000 effective immediately. The consulting agreement is terminable by ResortQuest or Mr. Abbott, with cause on ten (10) days written notice and or without cause thirty (30) days written notice.
ASTON HOTELS & RESORTS(R) HAWAII. Since July 22, 1997, Aston Hotels & Resorts(R) Hawaii has provided reservation services to AST International, LLC ("AST International") and its subsidiaries. AST International and its subsidiaries have been billed $11,181 by Aston Hotels & Resorts(R) Hawaii for its services in 2002.
At December 31, 1999, Mr. Tatibouet owed Aston Hotels & Resorts(R) Hawaii, either directly or through entities controlled by him (including properties managed by Aston Hotels & Resorts(R) Hawaii), an aggregate amount of approximately $4,120,966. Of this amount, $4.0 million represented cash advances made prior to our acquisition of Aston Hotel & Resorts(R) Hawaii that were formalized in a promissory note (the "Original Note") executed at the time of the acquisition. Interest was payable semi-annually under the Note at the prime rate less 0.5%, with a minimum of 6% and maximum of 10% with principal to be paid on May 25, 2008. The
remainder included interest due and certain fees and reimbursements payable under the management agreements described above.
On February 16, 2000, ResortQuest agreed with Mr. Tatibouet to the formation of two separate notes (the "New Notes") and a new security agreement to provide additional collateral. One note for $4 million (the "A Note") replaced the Original Note. A second note in the amount of $1,080,428 (the "B Note") represented interest due on the A Note and advances to and unpaid fees earned from entities managed for or related to Mr. Tatibouet and was executed February 20, 2000. Both the A Note and the B Note are fully collateralized by certain real estate held by Mr. Tatibouet.
The New Notes bear interest at prime rate, less 0.5%, with a minimum of 6% and a maximum of 10%. The B Note, plus accrued interest, was due and payable in two equal installments on December 31, 2000 and July 31, 2001 and has been repaid by Mr. Tatibouet. Payments under the A Note are interest only, due and payable every January and July 1st. The A Note is due and payable on May 25, 2008. At December 31, 2002, Mr. Tatibouet owed Aston Hotels & Resorts(R) Hawaii approximately $4.0 million plus accrued interest related to the A Note. On January 19, 2003, Mr. Tatibouet made payment of the accrued interest on the A Note through December 31, 2002.
ITEM 14.
ITEM 14. 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 IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
15(A)(1) FINANCIAL STATEMENTS
ResortQuest International, Inc. The following consolidated financial statements, related notes and report of independent public accountants from the 2002 Annual Report to Shareholders are incorporated by reference into Item 8 of Part II of this report.
15(A)(2) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not required or the information is given elsewhere in the financial statements. The financial statements of unconsolidated subsidiaries are omitted because they are not applicable.
15(A)(3) EXHIBITS
These exhibits are available upon request at a charge of ten cents per page. Requests should be directed to Secretary, ResortQuest International, Inc., 530 Oak Court Drive, Suite 360, Memphis, TN 38117
* Indicates management contract or compensatory plan, contract or arrangement.
15(B) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the last quarter of 2002:
(i) Form 8-K filed October 10, 2002 announcing the Company's change in senior management and a change in the Company's bylaws.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Joseph V. Vittoria --------------------------------------- Joseph V. Vittoria, Chairman
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.