**EXHIBIT 13**

 

MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

ResortQuest is the world’s largest provider ofvacation condominium and home rental property management services in premierdestination resorts located in the U.S. and Canada.  We have developed the first and only branded internationalnetwork of vacation rental properties, and currently offer management servicesto over 20,000 rental properties.  Ouroperations are in more than 50 premier resort locations in the Beach, Hawaii,Mountain and Desert geographical regions.

 

Our rental properties are generally second homes orinvestment properties owned by individuals who assign us the responsibility ofmanaging, marketing and renting their properties.  We earn management fees as a percentage of the rental income fromeach property, but have no ownership interest in the properties.  In addition to the vacation propertymanagement business, we offer real estate brokerage services and other rentaland property owner services.  We alsohave developed the industry leading proprietary vacation rental managementsoftware, First Resort Software, with over 900 licenses sold to vacationproperty management companies.

 

We provide value-added services to both vacationersand property owners.  For vacationers,we offer the value, convenience and features of a condominium or home whileproviding many of the amenities and services of a hotel.  For property owners, we offer acomprehensive package of marketing, management and rental services designed toenhance rental income and profitability while providing services to maintainthe property.  Property owners alsobenefit from our QuestPerks program, which offers benefits such as discounts onlodging, air travel and car rentals.  Tomanage guests’ expectations, we have developed and implemented a five-tierrating system that segments our property portfolio into five categories: QuestHome, Platinum, Gold, Silver and Bronze.

 

We market our properties through various media channelsand have significant internet distribution through ResortQuest.com, ourproprietary web site offering “real-time” reservations, our travel marketingagreement with America Online (AOL Keyword: ResortQuest) announced in January2001 and other major Internet sites, including Expedia.com, Travelocity.com andCondosaver.com.  In conjunction with theconsummation of our AOL agreement, we formed ResortQuest Technologies, adivision of ResortQuest focused on First Resort Software and our Internetalliances and inventory distribution. In July 2001, we announced an agreement with a large vacation exchangecompany that makes extensive vacation timeshare rental inventory available onour web site.  We also announced duringthis year a five-year strategic alliance with Online Travel Corporation, PLC,to exclusively develop the ResortQuest brand in Europe by using our technologyand expertise in this industry.  Underthe terms of the alliance with Online Travel, we will receive a royalty feebased on gross revenues related to units acquired or aggregated under thisprogram, an exclusivity fee and other cross selling fees.  We also unveiled an Alliance Program, whichenables other vacation rental management companies to list their properties onResortQuest.com and enjoy the benefits of being part of our nationaladvertising and extended Internet distribution channels.

 

During 2001, we partnered with Vacation.com, thelargest leisure travel marketing consortium, which made us the preferredprovider of vacation rental condominiums and homes to approximately 50,000travel agents, representing 10,000 travel agencies in the U.S. and Canada.  During 2001, we also partnered with one ofthe industry’s leading travel agency marketing companies, Travelsavers, as apreferred supplier.  This partnershipdrives bookings to our managed properties through Travelsavers’ network ofapproximately 2,800 travel agencies representing over 10,000 domestic andinternational travel agents.

 

In July 2001, we unveiled our third generation web sitethat enhances the booking experience for e-travelers.  In addition to being able to view 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 specialdiscounts and promotions, and obtain maps and driving directions.  The site also allows foreign travelers toobtain currency conversion rates.  Thesite utilizes AXS Technologies software to provide high speed/high resolution,scroll, pan and zoom imaging.  During2001, our web site received 45.9 million page views from approximately9.5 million visitors, representing a 53% and 54% increase over 2000.

 

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RESULTSOF OPERATIONS

 

Our revenues are derived primarily from propertyrental fees on vacation condominium and home rentals and fees from additionalservices provided to vacationers and property owners.  We receive property rental fees when the properties are rented,which are generally a percentage of the rental price of the vacation property.Rental fees range from approximately 3% to over 40% of gross lodging revenuescollected based upon the type of services provided by us to the property ownerand the type of rental units managed. Revenues are recognized ratably over therental period based on our proportionate share of the total rental price of thevacation condominium or home.  For theyear ended December 31, 2001, we recognized $88.7 million of propertymanagement fees, representing 21% of total gross lodging revenues and 55% ofour total 2001 revenues. Additional services such as reservations,housekeeping, long-distance telephone, ski lift tickets, beach equipment rentaland pool cleaning are charged separately and recorded as service fees revenue.During 2001, we recognized $47.9 million of service fees, representing 11%of total gross lodging revenues and 30% of our total 2001 revenues. Theremaining $24.3 million of 2001 revenues are derived from other sources,including the sale and service of First Resort Software, net broker commissionson real estate sales and food & beverage sales.  During 2001, we expanded our real estate operations into four newareas including Palm Desert, California and Telluride, Crested Butte, andBreckenridge, Colorado, capitalizing on the low cost of entry afforded us byour existing vacation rental operations.

 

Direct operating expenses include direct compensation,telecommunication expenses, housekeeping supplies, printing, marketing and food& beverage costs. Compensation includes salaries, wages, bonuses andbenefits for employees involved with the rental or maintenance of the rentalunits, housekeeping, marketing, reservation and food & beveragefacilities.  Telecommunication costsresult primarily from the cost of toll-free numbers.

 

General and administrative expenses consist primarilyof salaries, wages, bonuses and benefits for general managers as well as othernon-operational personnel, fees for professional services, rent and othergeneral office expenses.

 

Our operating results are highly seasonal due to thegeographical dispersion of the resort locations in which we operate.  The results of operations are subject to quarterlyfluctuations caused primarily by the seasonal variations in the vacation rentalindustry, with peak seasons dependent on whether the resort is primarily asummer or winter destination.  Ourfinancial results will be discussed on a consolidated basis, but due to theseasonal nature of our operations, our results will also be discussed bygeographic region with Other representing our corporate and ResortQuestTechnologies operations.

 

For better analysis, financial operating changes willinclude discussions with “same-store” comparisons.  Same-store comparisons exclude the impact of significantacquisitions completed since the first day of the earliest period beingdiscussed.

 

CONSOLIDATED

 

The following table sets forth the consolidatedcondensed results of operations for the years ended December 31, 1999, 2000 and2001.

 
|                                                   |   | **1999** |    | **2000** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **(dollars in thousands)**                             |   |     |    |
| Revenues                                               |   | $        | 127,912 |     | 100.0  | %        | $      | 152,014 |   | 100.0 | % | $ | 160,956 |   | 100.0 | % |
| Direct operating  expenses                             |   | 65,804   |    | 51.4     |   | 80,314   |   | 52.8 |   | 83,838 |   | 52.1 |   |
| General and  administrative expenses                   |   | 41,669   |    | 32.6     |   | 40,940   |   | 27.0 |   | 57,663 |   | 35.8 |   |
| Operating income  before depreciation and amortization |   | 20,439   |    | 16.0     |   | 30,760   |   | 20.2 |   | 19,455 |   | 12.1 |   |
| Depreciation                                           |   | 2,556    |    | 2.0      |   | 3,549    |   | 2.3 |   | 5,209 |   | 3.3 |   |
| Goodwill amortization                                  |   | 4,353    |    | 3.4      |   | 4,934    |   | 3.2 |   | 5,670 |   | 3.5 |   |
| Operating income                                       |   | $        | 13,530  |     | 10.6   | %        | $      | 22,277 |   | 14.7 | % | $ | 8,576 |   | 5.3 | % |
|                                                        |        |          |         |          |        |          |        |  |  |  |  |  |  |  |  |  |  |

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -Consolidated

 

Revenues. Revenues increased $9.0 million, or 6%, from $152.0 million in2000 to $161.0 million in 2001, primarily due to the current yearacquisitions and the annualized impact of the 2000 acquisitions.  During 2001, we completed five significantacquisitions in the resort areas of Bradenton, Longboat Key, New Port Richey,Naples and Sarasota, Florida; Steamboat Springs, Colorado; Gatlinburg andPigeon Forge, Tennessee; and the Outer Banks of North Carolina.  Excluding the impact of the 2001 acquisitionsand the annualized impact of the 2000 acquisitions, revenues decreased$7.7 million, or 5%, due to a 4% decrease in same-store gross lodgingrevenues driven by a 4.9 point decrease in occupancy.

 

Direct Operating Expenses.  Direct operating expenses increased $3.5 million, or 4%,from $80.3 million in 2000 to 

 

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$83.8 million in 2001, primarily due to the current yearacquisitions and the annualized impact of the 2000 acquisitions.  Excluding the impact of the 2000 and 2001acquisitions, direct operating expenses decreased 6% due to the decrease inhousekeeping costs related to reduced occupancy and increased operatingefficiencies.

 

General and Administrative Expenses.  General and administrative expensesincreased $16.8 million, or 41%, from $40.9 million in 2000 to$57.7 million in 2001, primarily due to our current year acquisitions, theannualized impact of our 2000 acquisitions and the $4.7 million in unusualitems and other charges recorded in 2001. These charges primarily represent a non-cash write-down of certainpreviously released First Resort Software versions, deferred costs foracquisition candidates that will no longer be pursued, one-time legal chargesand a severance accrual.  Excluding theimpact of these charges, general and administrative expenses increased$6.5 million, or 17%, due to increased insurance costs and marketingexpenditures.

 

Depreciation. Depreciation increased $1.7 million, or 47%, from $3.5 millionin 2000 to $5.2 million in 2001, primarily due to increased technologycapital expenditures and the current year impact of our 2000 and 2001acquisitions.  As a percentage ofrevenues, depreciation increased 1.0 point due to the decrease in same-storerevenues.

 

Goodwill Amortization.  Goodwill amortization increased $800,000, or 15%, from$4.9 million in 2000 to $5.7 million in 2001, primarily due to ourcurrent year acquisitions and the annualized impact of our 2000acquisitions.  As a percentage ofrevenues, goodwill amortization increased 0.3 points due to the decrease insame-store lodging revenues.

 

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -Consolidated

 

Revenues. Revenues increased $24.1 million, or 19%, from $127.9 millionin 1999 to $152.0 million in 2000, primarily due to same-store growth, our2000 acquisitions and the annualized impact of the 1999 acquisitions.  Through the acquisition of three vacationrental and property management companies during the twelve months ended December31, 2000, we entered new resort markets in Pensacola, Florida and Sun Valley,Idaho and increased our presence in the Outer Banks of North Carolina.  Excluding the impact of our 2000acquisitions and the annualized impact of our 1999 acquisitions, revenuesincreased $9.5 million, or 8%, due to a 10% increase in same-store grosslodging revenues driven by a 5% increase in the average daily rate (“ADR”) anda 1.9 point increase in occupancy.

 

Direct Operating Expenses.  Direct operating expenses increased $14.5 million, or 22%,from $65.8 million in 1999 to $80.3 million in 2000, primarily due tothe increase in same-store occupancy, our current year acquisitions and theannualized impact of our 1999 acquisitions. Excluding the impact of our 1999 and 2000 acquisitions, direct operatingexpenses increased 10% due to the increase in occupancy and an increase inlabor costs.

 

General and Administrative Expenses.  General and administrative expensesdecreased $729,000, or 2%, from $41.7 million in 1999 to $40.9 million in2000, primarily due to the $3.1 million in unusual items and other chargesrecorded in 1999.  These chargesprimarily represent deferred costs for acquisitions we no longer plan topursue, costs associated with a study to identify alternative funding sources,costs associated with acquisitions during the year that were accounted forunder the pooling-of-interests method of accounting, costs associated with acommon stock offering that was withdrawn during the year, and a severanceaccrual for certain members of management. Excluding the impact of these items, general and administrative expensesincreased $2.3 million, or 6%, due to the incremental marketing and othercosts resulting from an increase in units under management.

 

Depreciation. Depreciation increased $993,000, or 39%, from $2.6 million in 1999to $3.6 million in 2000, primarily due to increased technology capitalexpenditures.  As a percentage ofrevenues, depreciation remained relatively flat.

 

Goodwill Amortization.  Goodwill amortization increased $581,000, or 13%, from$4.4 million in 1999 to $5.0 million in 2000, primarily due to thegoodwill impact of acquisitions recorded using the purchase method ofaccounting.

 

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Beach

 

The following table sets forth the consolidatedcondensed results of operations for the years ended December 31, 1999, 2000 and2001 for our Beach operations in Gulf Shores, Alabama; Bethany Beach, Delaware;Anna Maria Island, Beaches of South Walton, Bonita Springs, Bradenton, CaptivaIsland, Destin, Fort Myers, Fort Myers Beach, Ft. Walton Beach, Lido Key,Longboat Key, Marco Island, Naples, Navarre Beach, New Port Richey, OkaloosaIsland, Orlando, Panama City, Pensacola, Perdido Key, Sanibel Island, Sarasota,Siesta Key, Vanderbilt Beach and Venice, Florida; St. Simons Island, Georgia;Nantucket, Massachusetts; Outer Banks, North Carolina; Lake Erie Islands, Ohio;and Hilton Head Island, South Carolina.

 
|                                                   |   | **1999** |   | **2000** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(dollars in thousands)**                             |   |     |   |
| Revenues                                               |   | $        | 71,077 |     | 100.0  | %        | $      | 85,318 |   | 100.0 | % | $ | 92,428 |   | 100.0 | % |
| Direct operating  expenses                             |   | 37,003   |   | 52.1     |   | 45,913   |   | 53.8 |   | 48,713 |   | 52.7 |   |
| General and  administrative expenses                   |   | 16,592   |   | 23.3     |   | 17,658   |   | 20.7 |   | 21,329 |   | 23.1 |   |
| Operating income  before depreciation and amortization |   | 17,482   |   | 24.6     |   | 21,747   |   | 25.5 |   | 22,386 |   | 24.2 |   |
| Depreciation                                           |   | 1,223    |   | 1.7      |   | 1,582    |   | 1.8 |   | 1,633 |   | 1.8 |   |
| Goodwill  amortization                                 |   | 2,305    |   | 3.3      |   | 2,632    |   | 3.1 |   | 3,186 |   | 3.4 |   |
| Operating income                                       |   | $        | 13,954 |     | 19.6   | %        | $      | 17,533 |   | 20.6 | % | $ | 17,567 |   | 19.0 | % |
|                                                        |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -Beach

 

Revenues. Revenues increased $7.1 million, or 8%, from $85.3 million in 2000to $92.4 million in 2001, primarily due to our 2000 and 2001 Beachacquisitions offset by a 1% decrease in same-store gross lodging revenuesdriven by a 3.0 point decrease in occupancy offset by a 4% increase in ADR.

 

Direct Operating Expenses.  Direct operating expenses increased $2.8 million, or 6%,from $45.9 million in 2000 to $48.7 million in 2001, primarily due toour 2000 and 2001 acquisitions.  As apercentage of revenues, direct operating expenses decreased 1.1 point due toincreased operating efficiencies and cost reduction initiatives.

 

General and Administrative Expenses.  General and administrative expensesincreased $3.6 million, or 21%, from $17.7 million in 2000 to$21.3 million in 2001, primarily due to our 2000 and 2001acquisitions.  As a percentage ofrevenues, general and administrative expenses remained relatively flat.

 

Depreciation. Depreciation increased $50,000, or 3%, from $1.58 million in 2000to $1.63 million in 2001, primarily due our 2000 and 2001acquisitions.  As a percentage ofrevenues, depreciation remained flat.

 

Goodwill Amortization.  Goodwill amortization increased $600,000, or 21%, from$2.6 million in 2000 to $3.2 million in 2001, primarily due to our2000 and 2001 acquisitions.  As apercentage of revenues, goodwill amortization increased 0.3 points due tothe decrease in same-store lodging revenues.

 

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -Beach

 

Revenues. Revenues increased $14.2 million, or 20%, from $71.1 million in1999 to $85.3 million in 2000, primarily due to our 1999 and 2000 Beachacquisitions and an 11% increase in same-store gross lodging revenues driven bya 4% increase in ADR and a 1.6 point increase in occupancy.

 

Direct Operating Expenses.  Direct operating expenses increased $8.9 million, or 24%,from $37.0 million in 1999 to $45.9 million in 2000, primarily due toour 1999 and 2000 acquisitions, the increase in occupancy and an increase inlabor costs.  As a percentage ofrevenues, direct operating expenses increased 1.7 points due to the increase inlabor costs.

 

General and Administrative Expenses.  General and administrative expensesincreased $1.1 million, or 6%, from $16.6 million in 1999 to$17.7 million in 2000, primarily due to our 1999 and 2000 acquisitions anda 2% increase in same-store units under management.  As a percentage of revenues, general and administrative expensesdecreased 2.6 points due to increased operating efficiencies.

 

Depreciation. Depreciation increased $359,000, or 29%, from $1.2 million in 1999to $1.6 million in 2000, primarily due to increased technology capitalexpenditures.  As a percentage ofrevenues, depreciation remained relatively flat.

 

Goodwill Amortization.  Goodwill amortization increased $327,000, or 14%, from$2.3 million in 1999 to $2.6 million in 2000, primarily due to our1999 and 2000 acquisitions.  As apercentage of revenues, goodwill amortization remained relatively flat.

 

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Hawaii

 

The following table sets forth the consolidatedcondensed results of operations for the years ended December 31, 1999, 2000 and2001 for our Hawaiian operations on the islands of Hawaii, Kauai, Maui, andOahu.

 
|                                                   |   | **1999** |   | **2000** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(dollars in thousands)**                             |   |     |   |
| Revenues                                               |   | $        | 22,448 |     | 100.0  | %        | $      | 26,047 |   | 100.0 | % | $ | 24,247 |   | 100.0 | % |
| Direct operating  expenses                             |   | 8,799    |   | 39.2     |   | 9,387    |   | 36.0 |   | 8,492 |   | 35.0 |   |
| General and  administrative expenses                   |   | 7,017    |   | 31.3     |   | 7,100    |   | 27.3 |   | 7,516 |   | 31.0 |   |
| Operating income  before depreciation and amortization |   | 6,632    |   | 29.5     |   | 9,560    |   | 36.7 |   | 8,239 |   | 34.0 |   |
| Depreciation                                           |   | 449      |   | 2.0      |   | 472      |   | 1.8 |   | 495 |   | 2.1 |   |
| Goodwill  amortization                                 |   | 79       |   | 0.3      |   | 76       |   | 0.3 |   | 72 |   | 0.3 |   |
| Operating income                                       |   | $        | 6,104  |     | 27.2   | %        | $      | 9,012 |   | 34.6 | % | $ | 7,672 |   | 31.6 | % |

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -Hawaii

 

Revenues. Revenues decreased $1.8 million, or 7%, from $26.0 million in 2000to $24.2 million in 2001, primarily due to an 8% decrease in same-storegross lodging revenues driven by a 7.6 point decrease in occupancy.

 

Direct Operating Expenses.  Direct operating expenses decreased $900,000,or 10%, from$9.4 million in 2000 to $8.5 million in 2001, primarily due to thedecrease in occupancy and cost reduction initiatives.  As a percentage of revenues, direct operating expenses decreased1.0 point due to increased operating efficiencies and cost reduction initiatives.

 

General and Administrative Expenses.  General and administrative expensesincreased $400,000, or 6%, from $7.1 million in 2000 to $7.5 millionin 2001, primarily due to an increase in units under management and employeeseverance charges related to fourth-quarter lay-offs.  As a percentage of revenues, general and administrative expensesincreased 3.7 points due to the severance charges and decrease in revenues.

 

Depreciation. Depreciation increased $23,000, or 5%, from $472,000 to $495,000primarily due to increased technology capital expenditures.  As a percentage of revenues, depreciationincreased 0.3 points due to the increased technology capital expenditures.

 

Goodwill Amortization.  Goodwill amortization remained relatively flat in 2001 whencompared to 2000.  As a percentage of revenues,goodwill amortization remained flat.

 

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -Hawaii

 

Revenues. Revenues increased $3.6 million, or 16%, from $22.4 million in 1999to $26.0 million in 2000, primarily due to a 14% increase in same-storegross lodging revenues driven by a 3.3 point increase in occupancy, a 7%increase in ADR, and an 8% increase in units under management.

 

Direct Operating Expenses.  Direct operating expenses increased $588,000, or 7%, from$8.8 million in 1999 to $9.4 million in 2000, primarily due to theincrease in occupancy.  As a percentageof revenues, direct operating expenses decreased 3.2 points due to increasedoperating efficiencies.

 

General and Administrative Expenses.  General and administrative expensesincreased $83,000, or 1%, from $7.0 million in 1999 to$7.1 million in 2000, primarily due to the 8% increase in units undermanagement.  As a percentage ofrevenues, general and administrative expenses decreased 4.0 points due toincreased operating efficiencies.

 

Depreciation. Depreciation increased $23,000, or 5%, from $449,000 in 1999 to $472,000in 2000, primarily due to increased technology capital expenditures.  As a percentage of revenues, depreciationremained relatively flat.

 

Goodwill Amortization.  Goodwill amortization remained relatively flat in 2000 whencompared to 1999.  As a percentage ofrevenues, goodwill amortization remained flat.

 

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Mountain

 

The following table sets forth the consolidatedcondensed results of operations for the years ended December 31, 1999, 2000 and2001 for our Mountain operations in Whistler, British Columbia; Aspen,Breckenridge, Crested Butte, Dillon, Keystone, Snowmass Village, SteamboatSprings and Telluride, Colorado; Sun Valley, Idaho; Big Sky, Montana; Mt.Bachelor and Sunriver, Oregon; Gatlinburg and Pigeon Forge, Tennessee; and TheCanyons, Deer Valley, and Park City, Utah.

 
|                                                   |   | **1999** |   | **2000** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(dollars  in thousands)**                            |   |     |   |
| Revenues                                               |   | $        | 27,971 |     | 100.0  | %        | $      | 33,727 |   | 100.0 | % | $ | 37,535 |   | 100.0 | % |
| Direct operating  expenses                             |   | 17,104   |   | 61.2     |   | 21,568   |   | 64.0 |   | 23,026 |   | 61.4 |   |
| General and  administrative expenses                   |   | 6,583    |   | 23.5     |   | 5,842    |   | 17.3 |   | 9,357 |   | 24.9 |   |
| Operating income  before depreciation and amortization |   | 4,284    |   | 15.3     |   | 6,317    |   | 18.7 |   | 5,152 |   | 13.7 |   |
| Depreciation                                           |   | 657      |   | 2.3      |   | 742      |   | 2.2 |   | 1,129 |   | 3.0 |   |
| Goodwill amortization                                  |   | 783      |   | 2.8      |   | 1,007    |   | 3.0 |   | 1,176 |   | 3.1 |   |
| Operating income                                       |   | $        | 2,844  |     | 10.2   | %        | $      | 4,568 |   | 13.5 | % | $ | 2,847 |   | 7.6 | % |

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -Mountain

 

Revenues. Revenues increased $3.8 million, or 11%, from $33.7 million in 2000to $37.5 million in 2001, primarily due to our March 2001 acquisition inSteamboat Springs, Colorado, and our April 2001 acquisition in Pigeon Forge,Tennessee.  Excluding the impact ofthese acquisitions, revenues decreased $2.6 million, or 8%, due to a 44%decrease in real estate sales and a 3% decrease in same-store gross lodgingrevenues driven by a 1.9 point decrease in occupancy and a 3% decrease in ADR.

 

Direct Operating Expenses.  Direct operating expenses increased $1.4 million, or 7%,from $21.6 million in 2000 to $23.0 million in 2001, primarily due to our2001 acquisitions.  Excluding the impactof these acquisitions, direct operating expenses decreased $1.4 million,or 7%, due to increased operating efficiencies and cost reductioninitiatives.  As a percentage ofrevenues, direct operating expenses decreased 2.6 points primarily due toincreased operating efficiencies.

 

General and Administrative Expenses.  General and administrative expensesincreased $3.6 million, or 60%, from $5.8 million in 2000 to$9.4 million in 2001, primarily due to our 2000 and 2001 acquisitions.  Excluding the impact of these acquisitions,general and administrative expenses increased $1.7 million, or 30%, due toincreased units under management and employee severance charges related tofourth quarter lay-offs.  As apercentage of revenues, general and administrative expenses increased 7.6points due to the increase in units under management and severance charges.

 

Depreciation. Depreciation increased $358,000, or 48%, from $742,000 in 2000 to$1.1 million in 2001, primarily due to our 2001 acquisitions and increasedcapital expenditures.  As a percentageof revenues, depreciation increased 0.8 points due to the decrease insame-store revenues.

 

Goodwill Amortization.  Goodwill amortization increased $200,000, or 17%, from$1.0 million in 2000 to $1.2 million in 2001, due to our 2001acquisitions.  As a percentage ofrevenues, goodwill amortization remained relatively flat.

 

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -Mountain

 

Revenues. Revenues increased $5.8 million, or 21%, from $28.0 million in 1999to $33.7 million in 2000, primarily due to the annualized impact of ourJune 1999 acquisition in Aspen, Colorado and our July 2000 acquisition in SunValley, Idaho.  Excluding the impact ofthese acquisitions, revenues decreased $268,000, or 1%, due to a 3% decrease insame-store gross lodging revenues driven by a 1.1 point decrease in occupancyprimarily resulting from the lack of snow in January 2000.

 

Direct Operating Expenses.  Direct operating expenses increased $4.5 million, or 26%,from $17.1 million in 1999 to $21.6 million in 2000, primarily due to our2000 acquisition and increased labor costs. As a percentage of revenues, direct operating expenses increased 2.8points primarily due to increased labor costs.

 

General and Administrative Expenses.  General and administrative expenses decreased$741,000, or 11%, from $6.6 million in 1999 to $5.8 million in 2000,primarily due to increased operating efficiencies that were partially offset byour July 2000 acquisition.  As apercentage of revenues, general and administrative expenses decreased 6.2points due to increased operating efficiencies.

 

Depreciation. Depreciation increased $85,000, or 13%, from $657,000 in 1999 to$742,000 in 2000, primarily due to our 1999 and 2000 Mountainacquisitions.  As a percentage ofrevenues, depreciation remained relatively flat.

 

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Goodwill Amortization.  Goodwill amortization increased $224,000, or 29%, from $783,000in 1999 to $1.0 million in 2000, primarily due to our 1999 and 2000acquisitions.  As a percentage ofrevenues, goodwill amortization remained relatively flat.

 

Desert

 

The following table sets forth the consolidatedcondensed results of operations for the years ended December 31, 1999,2000 and 2001 for our Desert operations in Phoenix, Scottsdale and Tucson,Arizona; and Palm Desert and Palm Springs, California.

 
|                                                   |   | **1999** |   | **2000** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(dollars in thousands)**                             |   |     |   |
| Revenues                                               |   | $        | 2,774  |     | 100.0  | %        | $      | 3,444 |   | 100.0 | % | $ | 3,317 |   | 100.0 | % |
| Direct operating  expenses                             |   | 1,040    |   | 37.5     |   | 1,586    |   | 46.0 |   | 1,605 |   | 48.4 |   |
| General and  administrative expenses                   |   | 1,060    |   | 38.2     |   | 836      |   | 24.3 |   | 845 |   | 25.5 |   |
| Operating income  before depreciation and amortization |   | 674      |   | 24.3     |   | 1,022    |   | 29.7 |   | 867 |   | 26.1 |   |
| Depreciation                                           |   | 49       |   | 1.7      |   | 58       |   | 1.7 |   | 93 |   | 2.8 |   |
| Goodwill  amortization                                 |   | 118      |   | 4.3      |   | 185      |   | 5.4 |   | 216 |   | 6.5 |   |
| Operating income                                       |   | $        | 507    |     | 18.3   | %        | $      | 779 |   | 22.6 | % | $ | 558 |   | 16.8 | % |

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -Desert

 

Revenues. Revenues decreased $100,000, or 4%, from $3.4 million in 2000 to$3.3 million in 2001, primarily due to an 8% decrease in same-store grosslodging revenues driven by a 1.6 point decrease in occupancy and a 5% decreasein ADR.

 

Direct Operating Expenses.  Direct operating expenses remained relatively flat in 2001 whencompared to 2000.  As a percentage ofrevenues, direct operating expenses increased 2.4 points due to the decrease inrevenues.

 

General and Administrative Expenses.  General and administrative expenses remainedrelatively flat in 2001 when compared to 2000. As a percentage of revenues, general and administrative expensesincreased 1.2 points due to the decrease in revenues.

 

Depreciation. Depreciation increased $35,000, or 60%, from $58,000 in 2000 to $93,000in 2001, primarily due to increased capital expenditures.  As a percentage of revenues, depreciationincreased 1.1 point due to the increased capital expenditures and the decreasein revenues.

 

Goodwill Amortization.  Goodwill amortization increased $31,000, or 17%, from $185,000 in2000 to $216,000 in 2001, primarily due to the full-year amortization of anearn-up payment made during 2000.  As apercentage of revenues, goodwill amortization increased 1.1 point primarily dueto the earn-up payment made during 2000.

 

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -Desert

 

Revenues. Revenues increased $670,000, or 24%, from $2.8 million in 1999 to$3.4 million in 2000, primarily due to an 18% increase in same-store grosslodging revenues driven by a 1.9 point increase in occupancy.

 

Direct Operating Expenses.  Direct operating expenses increased $546,000, or 53%, from$1.0 million in 1999 to $1.6 million in 2000, primarily due to theincrease in occupancy and increased labor costs.  As a percentage of revenues, direct operating expenses increased8.5 points due to the increased labor costs.

 

General and Administrative Expenses.  General and administrative expensesdecreased $224,000, or 21%, from $1.1 million in 1999 to $836,000 in 2000,primarily due to increased operating efficiencies.  As a percentage of revenues, general and administrative expensesdecreased 13.9 points due to increased operating efficiencies.

 

Depreciation. Depreciation increased $9,000, or 18%, from $49,000 to $58,000 in 1999, primarilydue to the annualized impact of our 1999 Desert acquisitions.  As a percentage of revenues, depreciationremained flat.

 

Goodwill Amortization.  Goodwill amortization increased $67,000, or 57%, from $118,000 in1999 to $185,000 in 2000, primarily due to the annualized impact of our 1999Desert acquisitions.  As a percentage ofrevenues, goodwill amortization increased 1.1 points due to purchaseaccounting adjustments and an earn-up payment made during 2000.

 

7

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Other

 

The following table sets forth the consolidatedcondensed results of operations for the years ended December 31, 1999, 2000 and2001 for our Other operations comprised of ResortQuest Technologies andcorporate.

 
|                                                 |   | **1999** |   | **2000** |   | **2001** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(dollars in thousands)**                           |   |     |   |
| Revenues                                             |   | $        | 3,642  |     | 100.0  | %        | $      | 3,478 |   | 100.0 | % | $ | 3,429 |   | 100.0 | % |
| Direct operating  expenses                           |   | 1,858    |   | 51.0     |   | 1,860    |   | 53.5 |   | 2,002 |   | 58.4 |   |
| General and  administrative expenses                 |   | 10,417   |   | N/M      |   | 9,504    |   | N/M |   | 18,616 |   | N/M |   |
| Operating loss  before depreciation and amortization |   | (8,633   | )      | N/M      |   | (7,886   | )      | N/M |   | (17,189 | ) | N/M |   |
| Depreciation                                         |   | 177      |   | 4.9      |   | 696      |   | 20.0 |   | 1,859 |   | 54.2 |   |
| Goodwill  amortization                               |   | 1,069    |   | 29.4     |   | 1,033    |   | 29.7 |   | 1,020 |   | 29.7 |   |
| Operating loss                                       |   | $        | (9,879 | )        | N/M    |     | $      | (9,615 | ) | N/M |   | $ | (20,068 | ) | N/M |   |

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 -Other

 

Revenues. Revenues remained relatively flat in 2001 when compared to 2000.

 

Direct Operating Expenses.  Direct operating expenses increased $100,000, or 8%, from$1.9 million in 2000 to $2.0 million in 2001, primarily due toincreased labor costs within ResortQuest Technologies.  As a percentage of revenues, directoperating expenses increased 4.9 points primarily due to these increased laborcosts.

 

General and Administrative Expenses.  General and administrative expensesincreased $9.1 million, or 96%, from $9.5 million in 2000 to$18.6 million in 2001, primarily due to the $4.4 million of unusualitems and other charges recorded by corporate in 2001.  Excluding the impact of these charges,general and administrative expenses increased $4.7 million, or 50%, due toincreased insurance costs, increased marketing expenditures and the opening ofa technology office and a regional accounting office during 2001.

 

Depreciation. Depreciation increased $1.2 million, or 167%, from $696,000 in 2000to $1.9 million in 2001, primarily due to increased technology capitalexpenditures related to enhancements to our web site, upgrades to our FirstResort Software products sold through ResortQuest Technologies and theimplementation of our new financial management technology platform.  As a percentage of revenues, depreciationincreased 34.2 points primarily due to these investments in technology.

 

Goodwill Amortization.  Goodwill amortization remained relatively flat in 2001 whencompared to 2000.  As a percentage ofrevenues, goodwill amortization remained flat.

 

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 -Other

 

Revenues. Revenues decreased $164,000, or 5%, from $3.6 million in 1999 to$3.5 million in 2000, primarily due to reduced software sales and servicefee revenues.

 

Direct Operating Expenses.  Direct operating expenses remained relatively flat from 1999 to2000.  As a percentage of revenues,direct operating expenses increased 2.5 points primarily due to fixed operatingcosts and the decrease in revenues.

 

General and Administrative Expenses.  General and administrative expensesdecreased $913,000, or 9%, from $10.4 million in 1999 to $9.5 millionin 2000.  Excluding the$3.1 million in unusual items and other charges recorded in 1999, generaland administrative expenses increased $2.2 million, or 30%, primarily dueto increased marketing expenditures and other initiatives related to increasedunits under management.

 

Depreciation. Depreciation increased $519,000, or 293%, from $177,000 in 1999 to$696,000 in 2000, primarily due to increased technology capital expendituresrelated to enhancements to our web site, upgrades to our First Resort Softwareproducts sold through ResortQuest Technologies and the partial implementationof our new financial management technology platform which was completed in2001.  As a percentage of revenues,depreciation increased 15.1 points primarily due to the investments intechnology.

 

Goodwill Amortization.  Goodwill amortization remained relatively flat in 2000 whencompared to 1999.  As a percentage ofrevenues, goodwill amortization remained relatively flat.

 

8

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Liquidity and Capital Resources

 

Overview

 

ResortQuest is a holding company that conducts all ofits operations through its subsidiaries operating in over 50 premier resortlocations.  Accordingly, the primaryinternal source of our liquidity is through the cash flows realized from oursubsidiaries and our long-term borrowings.

 

We generated cash flows from operating activities of$10.3 million in 2001 primarily due to increases in deferred income taxesand the decrease in cash held in escrow. Cash used in investing activities was approximately $41.8 millionin 2001 due primarily to the $25.6 million in net cash payments related tothe 2001 acquisitions and the earn-up payments related to 1999 and 2000acquisitions and $16.2 million in purchases of property, equipment andsoftware.  In 2001, cash provided byfinancing activities totaled $27.4 million, primarily related to increasedborrowings under our revolving Credit Facility.

 

At December 31, 2001, we had $213,000 in Cash and cashequivalents and $22.6 million in Cash held in escrow. Cash held in escrowis released at varying times in accordance with state regulations, generallybased upon the guest stay or, in the case of real estate sales deposits, whenthe property is sold. At December 31, 2001, we had a working capital deficit of$29.3 million; however, we have up to $11.4 million, subject tocertain restrictions, available under our long-term Credit Facility.  During 2000 we implemented a consolidateddaily cash management system that allows us to fully utilize all unrestrictedcash to keep our debt paid down in order to reduce our net interestexpense.  We anticipate that our cashflows from operations will provide cash in excess of our normal working capitalneeds, debt service requirements and planned capital expenditures over the nextyear. However, future acquisitions and/or other initiatives, depending on theirsize and the method of financing, may affect our liquidity and capitalrequirements during that time.

 

Total capital expenditures for 2002 are currentlyanticipated to be $6.0 million of which approximately $5.0 million isexpected to be used for software development, systems integration and othertechnology initiatives, with the balance being applied to building renovations,vehicles, furniture, fixtures and equipment.

 

Long-Term Debt

 

On January 22, 2001, we replaced our existing CreditFacility that was to expire on May 26, 2001 with a similar facility thatexpires on January 22, 2004.  Due to theevents of September 11th, on October 30, 2001, we amended the CreditFacility to modify the restrictive covenants to allow more flexibility for usunder this debt agreement through the end of 2002. The amendment also allowsfor up to a 100 basis point increase to our interest rate based on certainfinancial ratios.   Subject to certainlimitations, the Credit Facility may be used to borrow up to $40 millionand may be used for letters of credit not to exceed $2.5 million in theaggregate, acquisitions, capital expenditures and for general corporatepurposes. The credit agreement requires us to comply with various loancovenants, which include maintenance of certain financial ratios, restrictionson additional indebtedness and restrictions on liens, guarantees, advances,capital expenditures, sale of assets and dividends. Interest on outstandingbalances of the Credit Facility is computed at our election, on the basis ofeither the Prime Rate or the Eurodollar Rate, as defined, plus a margin of 2.0%to up to 3.0% based on the amendment discussed above. At December 31, 2001, theweighted average interest rate on the outstanding indebtedness was 4.61%.  Availability fees are 0.5% per annum and arepayable on the unused portion of the Credit Facility.  Interest and availability fees are payable monthly.

 

On June 16, 1999, we issued $50 million of 9.06%Senior Notes, due June 2004, in connection with a note purchase agreement.  On October 30, 2001, we also amended theSenior Notes to modify the restrictive covenants through the end of 2002 toallow more flexibility for us under this debt agreement. The amendment alsoallowed for up to a 100 basis point increase to our interest rate based oncertain financial ratios. At December 31, 2001, the interest rate on the SeniorNotes was 9.31%.  The note purchaseagreement contains loan covenants substantially similar to those of the creditagreement under the Credit Facility and has prepayment restrictions in the formof “make-whole” provisions. Interest is payable quarterly.

 

The Credit Facility is secured pari passu to theSenior Notes by substantially all of our assets, including the stock of oursignificant subsidiaries, as defined. We were in compliance with all covenants on all indebtedness at December31, 2001.

 

Registration and EquityOfferings

 

We have registered 8.0 million shares of common stockthrough various shelf registration statement filings.  As of December 

 

9

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31, 2001, we have issued 3,289,487 shares under these shelfregistration statements in connection with acquisitions, with the remaining4,710,513 shares available for future acquisitions.

 

Acquisition Strategy

 

Although our strategy for 2002 is to focus on internalgrowth, we intend to continue to pursue selected acquisition opportunities instrategic and existing markets. There can be no assurance that we will be ableto identify, acquire or profitably manage additional businesses or successfullyintegrate acquired businesses into our operations without substantial costs,delays or other operational or financial problems. Increased competition foracquisition candidates may develop, in which event there may be feweracquisition opportunities available to us, as well as higher acquisitionprices. Furthermore, acquisitions involve a number of unique risks, includingthe failure of acquired companies to achieve anticipated results, diversion ofmanagement’s attention, failure to retain key personnel, risks associated withunanticipated events or liabilities and amortization of certain acquiredintangible assets. Some or all of these could have a material adverse effect onour business, financial condition and results of operations.

 

Since January 1, 1999, we have completed the followingsignificant acquisitions:  RidgepineVacation Rentals, Inc. in Sunriver, Oregon, effective January 1, 1999; CoveRealty Management Services, Inc. in Palm Desert, California, effective January1, 1999; Ryan’s Golden Eagle Management Services, Inc. in Big Sky, Montana,effective January 5, 1999; Scottsdale Resort Accommodations, Inc. inScottsdale, Arizona, effective February 1, 1999; Worthy Rentals, Inc. in HiltonHead Island, South Carolina, effective February 1, 1999; High CountryManagement, Inc. in Crested Butte, Colorado, effective March 31, 1999; MountainHigh Management in Whistler, British Columbia, Canada, effective March 31,1999; Fischer Villa Management in Tucson, Arizona, effective June 20, 1999;Shoreline Properties, Inc. in Port Clinton (i.e., Lake Erie Islands), Ohio,effective June 15, 1999; Coates, Reid & Waldron in Aspen, Colorado,effective June 29, 1999; Shoreline Rentals, Inc. in Hilton Head, SouthCarolina, effective July 18, 1999; Advantage Vacation Homes by Styles, Inc. andStyles Estates, Ltd. in Orlando, Florida, effective August 6, 1999; BluebillVacation Properties, Inc. in Bonita Beach, Florida, effective October 1, 1999;Langford Realty, Inc. in Pensacola, Florida, effective May 26, 2000;  Sand and Sea, Inc. in the Outer Banks ofNorth Carolina, effective May 31, 2000; Base Mountain Properties, Inc. in Sun Valley, Idaho, effective July 1,2000; Florida Vacation Accommodations, Inc. in Naples, Longboat Key andSarasota, Florida, effective January 1, 2001; Steamboat Premier Properties,Ltd. in Steamboat Springs, Colorado, effective January 1, 2001; R&R ResortRental Properties, Inc. in the Outer Banks of North Carolina, effective March31, 2001; Mountain Valley Properties, Inc. in Gatlinburg and Pigeon Forge,Tennessee, effective April 1, 2001; and Universal Vacations, Inc. in Bradentonand New Port Richey, Florida, effective May 1, 2001.  The acquisitions of Mountain High and High Country were accountedfor under the pooling-of-interests method of accounting; the remainingacquisitions were accounted for under the purchase method of accounting.

 

The timing, size or success of any acquisition effortand the associated potential capital commitments are unpredictable. We expectto fund future acquisitions primarily through a combination of cash flows fromoperations, borrowings under our Credit Facility, other debt fundings and theissuance of common stock. Our ability to fund future acquisitions throughborrowings under the Credit Facility may be limited by certain restrictivecovenants of the facility, the satisfaction of which may be dependent upon ourability to raise additional equity through either offerings for cash or theissuance of stock as consideration for acquisitions.

 

Non-compete and Employment Agreements

 

We have entered into non-compete agreements with manyof the former owners of the companies that now comprise ResortQuest.  These non-compete agreements are generallythree to five years in length effective the day the operations are merged withResortQuest.  Additionally, we haveentered into employment agreements with many of these former owners, all seniorcorporate officers and several key employees. Among other things, these agreements allow for severance payments andsome include acceleration of stock option awards upon a change in control ofResortQuest, as defined under the agreements. At December 31, 2001, the maximum amount of compensation that would bepayable under all agreements if a change in control occurred without priorwritten notice would be approximately $13.5 million.

 

Seasonality and Quarterly Fluctuations

 

Our business is highly seasonal. Our results ofoperations are subject to quarterly fluctuations caused primarily by theseasonal variations in the vacation rental and property management industry,with peak seasons dependent on whether the resort is primarily a summer, winteror year round destination. Our quarterly results of operations may also besubject to fluctuations as a result of the timing and cost of acquisitions, thetiming of real estate sales, changes in relationships with travel providers, extremeweather conditions or other factors affecting leisure travel and the vacationrental and property management industry.

 

10

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Quantitative and Qualitative Disclosures about MarketRisk

 

We do not have significant market risk with respect tointerest rates, foreign currency exchanges or other market rate or price risks,and we do not hold any financial instruments for trading purposes. At December31, 2000, all of our outstanding debt was at a fixed interest rate.  At December 31, 2001, $28.6 million of ourlong-term borrowings accrue interest at variable interest rates.  Based on this debt level annual interestexpense would increase by approximately $132,000, if interest rates were toincrease by 46 basis points, or 10%, over the current weighted average interestrate of these variable rate borrowings.

 

Critical Accounting Policies andEstimates

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Wecontinually evaluate our estimates and assumptions, including those related tobad debts, trade and other receivables, valuation of property, equipment andsoftware, goodwill, self-insurance reserves, and contingencies andlitigation.  Our estimates andassumptions are based on historical experience and various other factors thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying amounts of assets andliabilities that are not readily apparent from other sources.  We believe the following critical accountingpolicies affect our more significant estimates and assumptions used inpreparing our consolidated financial statements.  Actual results could differ from our estimates.

 

Trade and other receivables are reflected net of an estimated allowancefor doubtful accounts.  This estimate isbased primarily on historical experience and assumptions with respect to futurepayment trends.

 

Property, equipment and software are stated at cost, or in the case ofequipment acquired under capital lease, the present value of future leasepayments, less accumulated depreciation. Certain costs for developing, customizing and installing software forinternal use and for sale to third parties are capitalized.  Revenues related to the sale of software tothird parties are recognized when the systems are installed.  Depreciation is computed using thestraight-line method over the estimated useful lives of the recorded assets orthe lease terms.  We periodically, orupon the occurrence of certain events, review the balances of these long-livedassets for possible impairment.  Theassessment of long-lived assets for impairment requires us to make certainjudgments, including the estimate of cash flows from the respective assets.

 

Goodwill has been amortized on a straight-line basis over 40 years,other than that associated with the acquisition of First Resort Software, Inc.,which has been amortized over 15 years, representing the approximate remaininguseful life of acquired assets.  Inaccordance with Statement of Financial Accounting Standard No. 142, “Goodwilland Other Intangible Assets,” as of January 1, 2002, the goodwill balancerecorded by the Company will no longer be amortized.  This new rule requires that intangible assets with indefinitelives not be amortized, but reviewed annually for impairment.  The annual impairment review requires us tomake estimates of future cash flows with respect to the identified net assetsacquired.

 

We are self-insured for various levels of workers’ compensation andemployee medical and dental insurance coverage.  Insurance reserves include the present values of projectedsettlements for claims.  Projectedsettlements are estimated based on historical trends and actuarial data.

 

We are involved with various legal actions arising in the course of ourbusiness.  Legal reserves areestablished for actions in which the outcomes of the cases are probable andmonetary damages are reasonably estimable as determined by in-house andexternal legal counsel.

 

11

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Performance Statistics

 

ResortQuestInternational, Inc.

Total System (2)

December 31, 2001

(Unaudited)

 
|                        |   | **Twelve  Months Ended** |    |              |   |
|-----------------------------|--------|--------------------------|---------|-------------------|--------|
|                        |   | **Dec 31,  2000**        |    | **Dec 30,  2001** |   | **VAR** |   |
| Beach                       |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 178,132 |              | $      | 210,789 |   | 18.3 | % |
| Occupancy                   |   | 51.3                     | %       | 46.2              | %      | (5.1 | )pts |
| ADR                         |   | $                        | 145.96  |              | $      | 155.77 |   | 6.7 | % |
| RevPAU                      |   | $                        | 74.94   |              | $      | 72.00 |   | (3.9 | )% |
| Total Units                 |   | 7,919                    |    | 9,460             |   | 19.5 | % |
|                        |   |                     |    |              |   |   |   |
| Hawaii                      |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 155,520 |              | $      | 143,384 |   | (7.8 | )% |
| Occupancy                   |   | 79.3                     | %       | 71.7              | %      | (7.6 | )pts |
| ADR                         |   | $                        | 109.32  |              | $      | 115.20 |   | 5.4 | % |
| RevPAU                      |   | $                        | 86.69   |              | $      | 82.57 |   | (4.8 | )% |
| Total Units                 |   | 5,324                    |    | 5,553             |   | 4.3 | % |
|                        |   |                     |    |              |   |   |   |
| Mountain                    |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 48,027  |              | $      | 58,792 |   | 22.4 | % |
| Occupancy                   |   | 33.2                     | %       | 33.2              | %      | 0.0 | pts |
| ADR                         |   | $                        | 172.64  |              | $      | 175.61 |   | 1.7 | % |
| RevPAU                      |   | $                        | 57.37   |              | $      | 58.29 |   | 1.6 | % |
| Total Units                 |   | 2,765                    |    | 3,283             |   | 18.7 | % |
|                        |   |                     |    |              |   |   |   |
| Desert                      |   |                     |    |              |   |   |   |
| Gross Lodging Revenues  (1) |   | $                        | 8,835   |              | $      | 8,092 |   | (8.4 | )% |
| Occupancy                   |   | 44.0                     | %       | 42.4              | %      | (1.6 | )pts |
| ADR                         |   | $                        | 110.54  |              | $      | 105.12 |   | (4.9 | )% |
| RevPAU                      |   | $                        | 48.62   |              | $      | 44.54 |   | (8.4 | )% |
| Total Units                 |   | 579                      |    | 522               |   | (9.8 | )% |
|                        |   |                     |    |              |   |   |   |
| Total                       |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 390,514 |              | $      | 421,057 |   | 7.8 | % |
| Occupancy                   |   | 57.8                     | %       | 51.4              | %      | (6.4 | )pts |
| ADR                         |   | $                        | 130.12  |              | $      | 139.90 |   | 7.5 | % |
| RevPAU                      |   | $                        | 75.25   |              | $      | 71.92 |   | (4.4 | )% |
| Total Units                 |   | 16,587                   |    | 18,818            |   | 13.5 | % |
|                             |        |                          |         |                   |        |  |  |  |  |  |  |  |

** **

----

**(1)   Gross lodging revenues are in thousands andrepresent the total rental charged to property rental customers.  Our revenue represents from 3% to over 40%of the lodging revenues based on the services provided by us.**

** **

**(2)   Total system statistics include all exclusivemanaged contracts from the period under management through December 31, 2000and December 31, 2001.  Excluded fromthese statistics are non-exclusive management contracts, which approximated1,300 units as of December 31, 2000, and 1,400 as of December 31, 2001.  Also excluded from these statistics areowner use nights and renovation nights which were approximately 14.3% of grossavailable nights in the twelve months ended December 31, 2001, and 12.6% ofgross available nights in the twelve months ended December 31, 2000.**

** **

**12**

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** **

Performance Statistics

 

ResortQuestInternational, Inc.

Same-Store (2)

December 31, 2001

(Unaudited)

 
|                        |   | **Twelve  Months Ended** |    |              |   |
|-----------------------------|--------|--------------------------|---------|-------------------|--------|
|                        |   | **Dec 31,  2000**        |    | **Dec 31,  2001** |   | **VAR** |   |
| Beach                       |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 147,767 |              | $      | 146,209 |   | (1.1 | )% |
| Occupancy                   |   | 51.7                     | %       | 48.7              | %      | (3.0 | )pts |
| ADR                         |   | $                        | 131.56  |              | $      | 137.40 |   | 4.4 | % |
| RevPAU                      |   | $                        | 68.00   |              | $      | 66.94 |   | (1.6 | )% |
| Total Units                 |   | 7,093                    |    | 7,069             |   | (0.3 | )% |
|                        |   |                     |    |              |   |   |   |
| Hawaii                      |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 155,520 |              | $      | 143,384 |   | (7.8 | )% |
| Occupancy                   |   | 79.3                     | %       | 71.7              | %      | (7.6 | )pts |
| ADR                         |   | $                        | 109.32  |              | $      | 115.20 |   | 5.4 | % |
| RevPAU                      |   | $                        | 86.69   |              | $      | 82.57 |   | (4.8 | )% |
| Total Units                 |   | 5,324                    |    | 5,553             |   | 4.3 | % |
|                        |   |                     |    |              |   |   |   |
| Mountain                    |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 46,544  |              | $      | 45,049 |   | (3.2 | )% |
| Occupancy                   |   | 33.1                     | %       | 31.2              | %      | (1.9 | )pts |
| ADR                         |   | $                        | 173.24  |              | $      | 168.87 |   | (2.5 | )% |
| RevPAU                      |   | $                        | 57.39   |              | $      | 52.70 |   | (8.2 | )% |
| Total Units                 |   | 2,600                    |    | 2,695             |   | 3.7 | % |
|                        |   |                     |    |              |   |   |   |
| Desert                      |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 8,835   |              | $      | 8,092 |   | (8.4 | )% |
| Occupancy                   |   | 44.0                     | %       | 42.4              | %      | (1.6 | )pts |
| ADR                         |   | $                        | 110.54  |              | $      | 105.12 |   | (4.9 | )% |
| RevPAU                      |   | $                        | 48.62   |              | $      | 44.54 |   | (8.4 | )% |
| Total Units                 |   | 579                      |    | 522               |   | (9.8 | )% |
|                        |   |                     |    |              |   |   |   |
| Total                       |   |                     |    |              |   |   |   |
| Gross Lodging  Revenues (1) |   | $                        | 358,666 |              | $      | 342,734 |   | (4.4 | )% |
| Occupancy                   |   | 58.4                     | %       | 53.5              | %      | (4.9 | )pts |
| ADR                         |   | $                        | 123.92  |              | $      | 129.21 |   | 4.3 | % |
| RevPAU                      |   | $                        | 72.31   |              | $      | 69.14 |   | (4.4 | )% |
| Total Units                 |   | 15,596                   |    | 15,839            |   | 1.6 | % |

** **

----

**(1)   Gross lodging revenues are in thousands andrepresent the total rental charged to property rental customers.  Our revenue represents from 3% to over 40%of the lodging revenues based on the services provided by us.**

** **

**(2)   For better comparability, the twelve monthsended December 31, 2001 excluded all non-exclusive management contracts as wellas all properties that were not acquired by ResortQuest prior to first quarter2000, which approximated 4,400 units as of December 31, 2001.  Also excluded from these statistics areowner use nights and renovation nights which were approximately 13.4% of grossavailable nights in the twelve months ended December 31, 2001, and 12.3% of grossavailable nights in the twelve months ended December 31, 2000.**

 

13

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Markets

 

We currently manage condominiums and homes in over 50resort locations throughout the U.S. and in Canada. The following table setsforth the aggregate number of properties managed in each of the followingstates and provinces at December 31, 2001.

 

 
| BEACH RESORTS                                                                                                                                                                                                                                                                                                                                                                |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Florida: Anna  Maria Island, Beaches of South Walton, Bonita Springs, Bradenton, Captiva  Island, Destin, Fort Myers, Fort Myers Beach, Ft. Walton Beach, Lido Key,  Longboat Key, Marco Island, Naples, Navarre Beach, New Port Richey, Okaloosa  Island, Orlando, Panama City, Pensacola, Perdido Key, Sanibel Island,  Sarasota, Siesta Key, Vanderbilt Beach and Venice. |   | 6,078  |   |
| Massachusetts:  Nantucket                                                                                                                                                                                                                                                                                                                                                    |   | 1,200  |   |
| South Carolina:  Hilton Head Island                                                                                                                                                                                                                                                                                                                                          |   | 647    |   |
| Delaware:  Bethany Beach                                                                                                                                                                                                                                                                                                                                                     |   | 595    |   |
| North Carolina:  Outer Banks                                                                                                                                                                                                                                                                                                                                                 |   | 1,171  |   |
| Georgia: St.  Simons Island                                                                                                                                                                                                                                                                                                                                                  |   | 509    |   |
| Alabama: Gulf  Shores                                                                                                                                                                                                                                                                                                                                                        |   | 319    |   |
| Ohio: Lake Erie  Islands                                                                                                                                                                                                                                                                                                                                                     |   | 141    |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| HAWAII RESORTS                                                                                                                                                                                                                                                                                                                                                               |   |   |   |
| Hawaii: Big  Island, Kauai, Maui and Oahu                                                                                                                                                                                                                                                                                                                                    |   | 5,553  |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| MOUNTAIN RESORTS                                                                                                                                                                                                                                                                                                                                                             |   |   |   |
| Colorado: Aspen,  Breckenridge, Crested Butte, Dillon, Keystone, Snowmass Village, Steamboat  Springs and Telluride                                                                                                                                                                                                                                                          |   | 1,823  |   |
| British  Columbia: Whistler                                                                                                                                                                                                                                                                                                                                                  |   | 621    |   |
| Utah: The  Canyons, Deer Valley and Park City                                                                                                                                                                                                                                                                                                                                |   | 355    |   |
| Montana: Big Sky                                                                                                                                                                                                                                                                                                                                                             |   | 216    |   |
| Oregon: Mt.  Bachelor and Sunriver                                                                                                                                                                                                                                                                                                                                           |   | 141    |   |
| Idaho:  Sun Valley                                                                                                                                                                                                                                                                                                                                                      |   | 181    |   |
| Tennessee:  Gatlinburg and Pigeon Forge                                                                                                                                                                                                                                                                                                                                      |   | 181    |   |
|                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| DESERT RESORTS                                                                                                                                                                                                                                                                                                                                                               |   |   |   |
| California: Palm  Desert and Palm Springs                                                                                                                                                                                                                                                                                                                                    |   | 199    |   |
| Arizona:  Phoenix, Scottsdale and Tucson                                                                                                                                                                                                                                                                                                                                     |   | 323    |   |
| TOTAL                                                                                                                                                                                                                                                                                                                                                                        |   | 20,253 |   |

 

Risks Associated With Forward Looking Statements

 

This report contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,which are intended to be covered by the safe harbors created thereby. Investorsare cautioned that all forward-looking statements involve risks anduncertainties, including but not limited to the risks associated with: successfulintegration of acquired entities, factors affecting internal growth andmanagement of growth, our acquisition strategy and availability of financing,the travel and tourism industry, seasonality, quarterly fluctuations, generaleconomic conditions and our dependence on technology, e-commerce and travelproviders. Important factors that could cause actual results to differmaterially include, but are not limited to, those listed in our previousfilings with the Securities and Exchange Commission.

 

Although we believe that the assumptions underlyingthe forward-looking statements contained herein are reasonable, any of theassumptions could be inaccurate, and therefore, there can be no assurance thatthe forward-looking statements included in this filing will prove to beaccurate. In light of the significant uncertainties inherent in theforward-looking statements included herein, the inclusion of such informationshould not be regarded as a representation by us or any other person that theobjectives and plans will be achieved.

 

14

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RESORTQUEST INTERNATIONAL,INC.

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                      |   | **As of  December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                      |   | **2000**                |    | **2001** |   |
| **(in  thousands, except share amounts)**                                                                                 |   |                    |    |
| ASSETS                                                                                                                    |   |                    |    |   |   |
| Current assets                                                                                                            |   |                    |    |   |   |
| Cash and cash  equivalents                                                                                                |   | $                       | 4,283   |   | $ | 213 |   |
| Cash held in  escrow                                                                                                      |   | 22,061                  |    | 22,648 |   |
| Trade and other  receivables, net                                                                                         |   | 8,243                   |    | 10,541 |   |
| Deferred income  taxes                                                                                                    |   | 1,061                   |    | 1,430 |   |
| Other current assets                                                                                                      |   | 6,602                   |    | 6,063 |   |
| Total current  assets                                                                                                     |   | 42,250                  |    | 40,895 |   |
| Goodwill, net                                                                                                             |   | 185,733                 |    | 216,534 |   |
| Property,  equipment and software, net                                                                                    |   | 28,507                  |    | 39,509 |   |
| Other assets                                                                                                              |   | 6,679                   |    | 7,336 |   |
| Total assets                                                                                                              |   | $                       | 263,169 |   | $ | 304,274 |   |
|                                                                                                                      |   |                    |    |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                |   |                    |    |   |   |
| Current  liabilities                                                                                                      |   |                    |    |   |   |
| Current maturities  of long-term debt                                                                                     |   | $                       | 483     |   | $ | 322 |   |
| Deferred revenue  and property owner payables                                                                             |   | 51,653                  |    | 52,457 |   |
| Accounts payable  and accrued liabilities                                                                                 |   | 13,774                  |    | 14,298 |   |
| Other current  liabilities                                                                                                |   | 303                     |    | 3,069 |   |
| Total current  liabilities                                                                                                |   | 66,213                  |    | 70,146 |   |
| Long-term debt,  net of current maturities                                                                                |   | 50,401                  |    | 78,644 |   |
| Deferred income taxes                                                                                                     |   | 4,041                   |    | 9,459 |   |
| Other long-term  obligations                                                                                              |   | 6,112                   |    | 6,111 |   |
| Total  liabilities                                                                                                        |   | 126,767                 |    | 164,360 |   |
|                                                                                                                      |   |                    |    |   |   |
| Commitments and  contingencies                                                                                            |   |                    |    |   |   |
|                                                                                                                      |   |                    |    |   |   |
| Stockholders’  equity                                                                                                |   |                    |    |   |   |
| Common stock,  $0.01 par value, 50,000,000 shares authorized, 18,988,246 and 19,243,249  shares outstanding, respectively |   | 190                     |    | 192 |   |
| Additional  paid-in capital                                                                                               |   | 151,960                 |    | 153,884 |   |
| Accumulated  other comprehensive income                                                                                   |   | (49                     | )       | (64 | ) |
| Excess  distributions                                                                                                     |   | (29,500                 | )       | (29,500 | ) |
| Retained  earnings                                                                                                        |   | 13,801                  |    | 15,402 |   |
| Total stockholders’  equity                                                                                          |   | 136,402                 |    | 139,914 |   |
| Total  liabilities and stockholders’ equity                                                                          |   | $                       | 263,169 |   | $ | 304,274 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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RESORTQUEST INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

 
|                                         |   | **Years  Ended December 31,** |   |
|----------------------------------------------|--------|-------------------------------|--------|
|                                         |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in thousands, except per share amounts)** |   |                          |   |
| Revenues                                     |   |                          |   |   |   |   |   |
| Property  management fees                    |   | $                             | 65,795 |   | $ | 78,543 |   | $ | 88,732 |   |
| Service fees                                 |   | 38,608                        |   | 47,080 |   | 47,889 |   |
| Real estate and  other                       |   | 23,509                        |   | 26,391 |   | 24,335 |   |
| Total revenues                               |   | 127,912                       |   | 152,014 |   | 160,956 |   |
| Operating expenses                           |   |                          |   |   |   |   |   |
| Direct operating                             |   | 65,804                        |   | 80,314 |   | 83,838 |   |
| General and  administrative                  |   | 41,669                        |   | 40,940 |   | 57,663 |   |
| Depreciation                                 |   | 2,556                         |   | 3,549 |   | 5,209 |   |
| Goodwill  amortization                       |   | 4,353                         |   | 4,934 |   | 5,670 |   |
| Total operating  expenses                    |   | 114,382                       |   | 129,737 |   | 152,380 |   |
| Operating income                             |   | 13,530                        |   | 22,277 |   | 8,576 |   |
| Interest and  other expense, net             |   | 4,228                         |   | 4,814 |   | 4,647 |   |
| Income before  income taxes                  |   | 9,302                         |   | 17,463 |   | 3,929 |   |
| Provision for  income taxes                  |   | 4,873                         |   | 7,857 |   | 2,328 |   |
| Net income                                   |   | $                             | 4,429  |   | $ | 9,606 |   | $ | 1,601 |   |
| Earnings per  share                          |   |                          |   |   |   |   |   |
| Basic                                        |   | $                             | 0.25   |   | $ | 0.51 |   | $ | 0.08 |   |
| Diluted                                      |   | $                             | 0.24   |   | $ | 0.51 |   | $ | 0.08 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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RESORTQUEST INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME

(in thousands, except share amounts)

 
|                                                                 | **Additional**    |       | **Other**   |   |              |    |       |    |
|----------------------------------------------------------------------|-------------------|------------|-------------|--------|-------------------|---------|------------|---------|
|                                                                 | **Common  Stock** |       | **Paid-in** |   | **Comprehensive** |    | **Excess** |    | **Retained** |   |   | **Comprehensive** |   |
|                                                                 | **Shares**        |       | **Amount**  |   | **Capital**       |    | **Income** |    | **Distributions** |   | **Earnings** |   | **Total** |   | ** Income** |   |
| Balance, December 31, 1998                                           |              | 17,092,768 |        | $      | 171               |    | $          | 136,045 |   | $ | (19 | ) | $ | (29,500 | ) | $ | 158 |   | $ | 106,855 |   |   |   |
|                                                                 |              |       |        |   |              |    |       |    |   |   |   |   |   |   |   |   |   |
| Net income                                                           |              | —     |        | — |              | —  |       | —  |   | — |   | 4,429 |   | 4,429 |   | $ | 4,429 |   |
| Foreign currency translation loss                                    |              | —     |        | — |              | —  |       | (14     | ) | — |   | — |   | (14 | ) | (14 | ) |
| Distributions                                                        |              | —     |        | — |              | —  |       | —  |   | — |   | (392 | ) | (392 | ) | — |   |
| Stock issued in connection with:  Exercise of employee stock options |              | 3,436      |        | — |              | 37      |       | —  |   |   |   | — |   | 37 |   | — |   |
| Acquisitions                                                         |              | 1,619,243  |        | 16     |              | 14,892  |       | —  |   | — |   | — |   | 14,908 |   | — |   |
| 1999 Comprehensive Income                                            |              |       |        |   |              |    |       |    |   |   |   |   |   |   |   | 4,415 |   |
| Balance, December 31, 1999                                           |              | 18,715,447 |        | 187    |              | 150,974 |       | (33     | ) | (29,500 | ) | 4,195 |   | 125,823 |   |   |   |
| Net income                                                           |              | —     |        | — |              | —  |       | —  |   |   |   | 9,606 |   | 9,606 |   | 9,606 |   |
| Foreign currency translation loss                                    |              | —     |        | — |              | —  |       | (16     | ) | — |   |   |   | (16 | ) | (16 | )  |
| Stock issued in connection with Acquisitions                         |              | 272,799    |        | 3      |              | 986     |       | —  |   | — |   | — |   | 989 |   | — |   |
| 2000                                                                 |              |       |        |   |              |    |       |    |   |   |   |   |   |   | 9,590 |   |
| Comprehensive

     Income                       |
| Balance, December 31, 2000                                           |              | 18,988,246 |        | 190    |              | 151,960 |       | (49     | ) | (29,500 | ) | 13,801 |   | 136,402 |   |   |   |
| Net income                                                           |              | —     |        | — |              | —  |       | —  |   | — |   | 1,601 |   | 1,601 |   | 1,601 |   |
| Foreign currency translation loss                                    |              | —     |        | — |              | —  |       | (15     | ) | — |   | — |   | (15 | ) | (15 | ) |
| Stock issued in connection with:                                     |              |       |        |   |              |    |       |    |   |   |   |   |   |   |   |   |   |
| Exercise of employee stock options                                   |              | 29,476     |        | — |              | 258     |       | —  |   | — |   | — |   | 258 |   | — |   |
| Acquisitions                                                         |              | 225,527    |        | 2      |              | 1,666   |       | —  |   | — |   | — |   | 1,668 |   | — |   |
| 2001 Comprehensive Income                                            |              |       |        |   |              |    |       |    |   |   |   |   |   |   |   | $ | 1,586 |   |
| Balance, December 31, 2001                                           |              | 19,243,249 |        | $      | 192               |    | $          | 153,884 |   | $ | (64 | ) | $ | (29,500 | ) | $ | 15,402 |   | $ | 139,914 |   |   |   |
|                                                                      |                   |            |             |        |                   |         |            |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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RESORTQUEST INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                               |   | **Years  Ended December 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in  thousands)**                                                                |   |                          |   |
| Cash flows from  operating activities                                              |   |                          |   |   |   |   |   |
| Net income                                                                         |   | $                             | 4,429  |   | $ | 9,606 |   | $ | 1,601 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                          |   |   |   |   |   |
| Non-cash unusual  items and other charges                                          |   | —                        |   | — |   | 3,111 |   |
| Depreciation and  goodwill amortization                                            |   | 6,909                         |   | 8,483 |   | 10,879 |   |
| Changes in  operating assets and liabilities                                       |   |                          |   |   |   |   |   |
| Cash held in  escrow                                                               |   | (2,781                        | )      | 8,690 |   |   |   |
| Trade and other  receivables, net                                                  |   | 468                           |   | (1,507 | ) | 791 |   |
| Deferred revenue  and property owner payables                                      |   | 3,370                         |   | 4,451 |   | (12,754 | ) |
| Accounts payable  and accrued liabilities                                          |   | (192                          | )      | 407 |   | (819 | ) |
| Deferred income  taxes                                                             |   | 667                           |   | 3,756 |   | 5,049 |   |
| Other                                                                              |   | (2,208                        | )      | (3,310 | ) | (3,936 | ) |
| Net cash  provided by operating activities                                         |   | 10,662                        |   | 30,576 |   | 10,264 |   |
| Cash flows from  investing activities                                              |   |                          |   |   |   |   |   |
| Cash portion of  acquisitions, net                                                 |   | (31,316                       | )      | (8,290 | ) | (25,585 | ) |
| Purchases of  property, equipment and software                                     |   | (5,280                        | )      | (11,057 | ) | (16,218 | ) |
| Other                                                                              |   | (769                          | )      | — |   | — |   |
| Net cash used in  investing activities                                             |   | (37,365                       | )      | (19,347 | ) | (41,803 | ) |
| Cash flows from  financing activities                                              |   |                          |   |   |   |   |   |
| Net proceeds  from issuance of Senior Notes                                        |   | 48,986                        |   | — |   | — |   |
| Credit Facility  borrowings                                                        |   | 54,250                        |   | 40,000 |   | 87,400 |   |
| Credit Facility  repayments                                                        |   | (79,063                       | )      | (52,000 | ) | (58,800 | ) |
| Payment of  capital lease and other debt obligations                               |   | (2,838                        | )      | (333 | ) | (1,389 | ) |
| Exercise of  employee stock options                                                |   | —                        |   | — |   | 258 |   |
| Proceeds  (repayments) from issuance of secured mortgage notes                     |   | 5,734                         |   | (5,734 | ) | — |   |
| Distributions to  stockholders                                                     |   | (392                          | )      | — |   | — |   |
| Net cash  provided by (used in) financing activities                               |   | 26,677                        |   | (18,067 | ) | 27,469 |   |
| Net decrease in  cash and cash equivalents                                         |   | (26                           | )      | (6,838 | ) | (4,070 | ) |
| Cash and cash  equivalents, beginning of period                                    |   | 11,147                        |   | 11,121 |   | 4,283 |   |
| Cash and cash  equivalents, end of period                                          |   | $                             | 11,121 |   | $ | 4,283 |   | $ | 213 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

18

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RESORTQUEST INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001

 

In these footnotes, the words “Company,” “ResortQuest,” “we,” “our” and“us” refer to ResortQuest International, Inc., a Delaware corporation, and itswholly-owned subsidiaries, unless otherwise stated or the context requiresotherwise.

 

NOTE 1 - BASIS OF PRESENTATION

 

Organization and Principles of Consolidation

 

ResortQuest is the world’s largest vacation rentalproperty management company with over 20,000 units under management.  We are the first company offering vacationcondominium and home rentals, sales and management under an international brandname in over 50 premier destination resorts located in the continental UnitedStates, Hawaii and Canada.  Our consolidatedfinancial statements include the accounts of ResortQuest and its subsidiariesafter elimination of all significant intercompany accounts and transactions.

 

Acquisitions

 

During 1999, we completed 13 acquisitions for a totalcost of $46.2 million, with 41.6% of the consideration paid in the form ofcommon stock with an aggregate value of $19.2 million and $27.0 million, net ofunrestricted cash acquired, two of which were accounted for under thepooling-of-interests method of accounting. During 2000, we completed threeacquisitions for a total cost of $9.2 million, including earn-up paymentsrelated to the 1999 acquisitions, with 10.7% of the net consideration paid inthe form of common stock with an aggregate value of $989,000, net of retiredescrow shares, and the remaining $8.3 million of consideration paid incash, net of unrestricted cash acquired. During 2001, we completed eight acquisitions for a total cost of$27.2 million, including earn-up payments related to previousacquisitions, with 6.1% of the net consideration paid in the form of commonstock with an aggregate value of $1.7 million, and the remaining $25.5million of consideration paid in cash, net of unrestricted cash acquired.  All acquisitions were accounted for underthe purchase method of accounting, unless otherwise noted.  The following proforma results assume the2001 acquisitions had occurred on January 1, 2000:

 
|                          |   | **Years  Ended December 31,** |    |
|-------------------------------|--------|-------------------------------|---------|
|                          |   | **2000**                      |    | **2001** |   |
| **(in thousands, unaudited)** |   |                          |    |
| Revenues                      |   |                          |    |   |   |
| ResortQuest                   |   | $                             | 152,014 |   | $ | 160,956 |   |
| Acquisitions                  |   | 17,435                        |    | 796 |   |
| Proforma Revenues             |   | $                             | 169,449 |   | $ | 161,752 |   |
| Net income                    |   |                          |    |   |   |
| ResortQuest                   |   | $                             | 9,606   |   | $ | 1,601 |   |
| Acquisitions                  |   | 395                           |    | (173 | ) |
| Proforma Combined Net  income |   | $                             | 10,001  |   | $ | 1,428 |   |
| Diluted  EPS                  |   |                          |    |   |   |
| ResortQuest                   |   | $                             | 0.51    |   | $ | 0.08 |   |
| Acquisitions                  |   | 0.02                          |    | (0.01 | ) |
| Proforma  Diluted EPS         |   | $                             | 0.53    |   | $ | 0.07 |   |

 

These unaudited proforma results are presented forcomparative purposes only.  The proformaresults are not necessarily indicative of what our actual results would havebeen had the acquisitions been completed at the beginning of these periods, orof future results.

 

19

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Acquisition Costs

 

Costs incurred in the course of our evaluation ofacquisition candidates and the ultimate consummation of acquisitions consistprimarily of attorneys’ fees, accounting fees and other costs incurred by us inidentifying and closing transactions. These costs incurred are deferred on the balance sheet until the relatedtransaction is either consummated or terminated.  Similar treatment is followed in recording costs incurred by usin the course of generating additional debt or equity financing.  In 1999, we incurred $716,000 in transactioncosts recorded in General and administrative expenses related to the 1999acquisitions accounted for under the pooling-of-interests method.  For the acquisitions accounted for under thepurchase method of accounting, all transaction costs and the excess of thepurchase price over the fair value of identified net assets acquired representgoodwill.  Goodwill has been amortizedover a life up to 40 years and is calculated based on a preliminary estimatethat is adjusted to its final balance within one year of the close of theacquisition (see Note 2).  Additionally,certain of our acquisitions have “earn-up” provisions that require additionalconsideration to be paid if certain operating results are achieved over periodsof up to three years.  This additionalconsideration is recorded as goodwill when the amount is fixed anddeterminable.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

Property Management Fees

 

We receive property rental fees when the propertiesare rented, which are generally a percentage of the rental price of thevacation property. Rental fees range from approximately 3% to over 40% of grosslodging revenues collected based upon the type of services provided by us tothe property owner and the type of rental units managed.  Revenues are recognized ratably over therental period based on our proportionate share of the total rental price of thevacation condominium or home.  Werequire certain minimum deposits when reservations are booked.  These deposits are recorded as a componentof deferred revenue and property owner payables.  Revenues from cancellations are recorded at the time ofcancellation.

 

Service Fees

 

We internally provide or arrange through third partiescertain services for property owners or guests. Service fees includereservations, housekeeping, long-distance telephone, ski rentals, lift tickets,beach equipment and pool cleaning. Internally provided services are recognizedas service fee revenue when the service is provided. Services provided by thirdparties are generally billed directly to property owners and are not includedin the accompanying consolidated financial statements.

 

Other

 

We recognize other revenues primarily related to realestate broker commissions, food & beverage sales and software andmaintenance sales. We have real estate broker sales operations in 31 resortlocations. We recognize revenues on real estate sales when the transactions arecomplete and such revenue is recorded net of the related agent commissions. Wealso manage food & beverage outlets in connection with the management oflarger condominium complexes, primarily in Hawaii and Florida. ResortQuestTechnologies sells a fully integrated software package, First Resort Software,specifically designed for the property rental business, along with ongoingservice contracts. Software and maintenance revenues are recognized when thesystems are installed and ratably over the service period, respectively.  Certain property management companies(“Alliance Partners”) market their properties through our distribution channelsand pay us a commission on reservations booked and/or an annual fee to markettheir properties through our distribution channels.  The commissions from the Alliance Partners are recorded as Realestate and other revenues when the reservations are booked (and no longersubject to cancellation) and the annual fees are recognized as Real estate andother revenues ratable over the ensuing 12 months, which corresponds with theterms of the agreements.  Real estateand other revenues were as follows:

 

20

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|                                    |   | **Years  Ended December 31,** |   |
|-----------------------------------------|--------|-------------------------------|--------|
|                                    |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in thousands)**                      |   |                          |   |
| Real estate  brokerage commissions, net |   | $                             | 13,282 |   | $ | 17,188 |   | $ | 15,260 |   |
| Food &  beverage                    |   | 4,067                         |   | 4,575 |   | 4,176 |   |
| Software sales  and service             |   | 3,448                         |   | 3,330 |   | 2,982 |   |
| Other                                   |   | 2,712                         |   | 1,298 |   | 1,917 |   |
|                                    |   | $                             | 23,509 |   | $ | 26,391 |   | $ | 24,335 |   |

 

Direct Operating Expenses

 

Direct operating expenses include expenses related tohousekeeping, maintenance, reservations, marketing and advertising, and othercosts associated with rental and management. Direct operating expenses alsoinclude the cost of sales and operating expenses for food & beverage andsoftware sales and service as follows:

 
|                           |   | **Years  Ended December 31,** |   |
|--------------------------------|--------|-------------------------------|--------|
|                           |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in thousands)**             |   |                          |   |
| Rental and  management related |   | $                             | 60,291 |   | $ | 73,989 |   | $ | 78,258 |   |
| Food &  beverage           |   | 3,655                         |   | 4,465 |   | 3,578 |   |
| Software sales  and service    |   | 1,858                         |   | 1,860 |   | 2,002 |   |
|                           |   | $                             | 65,804 |   | $ | 80,314 |   | $ | 83,838 |   |

 

Advertising and Marketing

 

In accordance with the AICPA’s Statement of Position(“SOP”) No. 93-7 “Reporting on Advertising Costs,” the Company expensesadvertising and marketing costs as incurred or as the advertising takesplace.  Internet portal agreements aretreated as advertising and are expensed ratably over the lesser of the contractperiod or the benefit period.

 

Cash and Cash Equivalents

 

For the purposes of the consolidated balance sheetsand statements of cash flows, we consider all investments with originalmaturities of three months or less to be cash equivalents.

 

Cash Held in Escrow

 

Cash held in escrow primarily represents guest advancedeposits held in escrow for lodging reservations and deposits on real estatetransactions.  Upon the occurrence ofthe guest’s stay, the lodging reservation deposits are withdrawn from escrow aswe recognize our revenue, ratably over the guest’s stay, with the remainingamounts being disbursed to the homeowners of our managed properties.  Upon the legal closing of a real estatetransaction that we broker, real estate deposits are withdrawn from escrow aswe recognize our commission revenue, net of any agent commissions.

 

Inventories

 

Inventories consist primarily of food and beverageitems that are recorded at cost as a component of Other current assets.

 

Property, Equipment and Software

 

Property, equipment and software are stated at costor, in the case of equipment acquired under capital leases, the present valueof future lease payments. Depreciation is computed using the straight-linemethod over the estimated useful lives of the assets or the lease terms.

 

21

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We account for the costs of computer softwaredeveloped or obtained for internal use in accordance with SOP No. 98-1,“Accounting for the Costs of Computer Software Developed or Obtained forInternal Use.”  In accordance with SOPNo. 98-1, during 1999, 2000 and 2001, we capitalized $597,000,$3.0 million and $6.4 million, respectively, of software developmentcosts, primarily related to outside professional fees and internal payroll andrelated benefits.  At December 31, 2000and 2001, Property, equipment and software in the accompanying consolidatedbalance sheets includes $3.4 million and $9.0 million, respectively, in capitalized software developed orobtained for internal use, net of amortization.

 

We account for the costs of computer softwaredeveloped or obtained for internal use that is also sold or otherwise marketedin accordance with the Statement of Financial Accounting Standards (“SFAS”) No.86 “Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed.”  In accordance withSFAS No. 86, during 1999, 2000 and 2001, we capitalized $335,000,$4.6 million and $6.6 million, respectively, of software developmentcosts, primarily related to outside professional fees and internal payroll andrelated benefits.  At December 31, 2000and 2001, Property, equipment and software in the accompanying consolidatedbalance sheets included $4.9 million and $9.7 million, respectively,in capitalized software developed or obtained for internal use that is alsosold or otherwise marketed, net of amortization.

 

These costs are being amortized on a straight-linebasis over the estimated useful lives of the related projects ranging fromthree to ten years.  We periodically, orupon the occurrence of certain events, review these capitalized software costbalances for impairment.  General andadministrative expenses for 2001 include a $1.5 million write-down ofcapitalized software costs, net of accumulated amortization, related to certainpreviously released versions of First Resort Software that were developed forinternal use and marketed to be sold.

 

Expenditures for repairs and maintenance are chargedto expense when incurred. Expenditures for major renewals and betterments thatextend the useful lives of existing equipment are capitalized and depreciated.Upon retirement or disposition of property, equipment and software, the costand related accumulated depreciation are removed from the accounts and anyresulting gain or loss is recognized in the consolidated statements of income.

 

Goodwill

 

Goodwill is the excess of the purchase price over fairvalue of identified net assets acquired in business combinations accounted forunder the purchase method of accounting. Goodwill has been amortized on astraight-line basis over 40 years, other than that associated with theacquisition of First Resort Software, Inc., which has been amortized over 15years, representing the approximate remaining useful life of acquired assets.  As of January 1, 2002, the goodwill balancerecorded by the Company will no longer be amortized (see “New AccountingPronouncements”).  Goodwill balances arereviewed for impairment when circumstances indicate that the carrying amountmay not be recoverable.  For the threeyears ended December 31, 2001, we have not recorded an impairment charge (see“New Account Pronouncements”).  Werecorded goodwill amortization of $4.4 million, $4.9 million and$5.7 million in 1999, 2000 and 2001, respectively.

 

New Accounting Pronouncements

 

SFAS No. 141, “Business Combinations” and No. 142,“Goodwill and Other Intangible Assets” were issued in June 2001.  SFAS No. 141 eliminated thepooling-of-interests method of accounting for business combinations and requiredall transactions initiated after June 30, 2001 to be accounted for using thepurchase method.  Under SFAS No. 142,goodwill related to our future acquisitions will not be subject to amortizationand goodwill related to our historical acquisitions will no longer be amortizedbeginning on January 1, 2002.  Uponadoption of SFAS No. 142 in January 2002, the Company recorded an$8.1 million impairment charge related to its Desert operations.  Goodwill will be subject to reviews forimpairment annually and upon the occurrence of certain events, and, ifimpaired, a write-down will be recorded.

 

SFAS No. 143, “Accounting for Asset RetirementObligations” and No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” were issued in June 2001 and August 2001, respectively.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs and will not beeffective until 2003.  SFAS No. 144addresses financial accounting and reporting for the impairment of long-livedassets and will be effective for 2002. The initial adoption of both of these statements is not expected to havea material impact on the Company’s financial position or results of operations.

 

Financial Instruments

 

As we do not have any derivatives, the carrying valuesof all financial instruments, excluding fixed-rate borrowings, approximatetheir estimated fair values.  AtDecember 31, 2000 and 2001, $50.2 million and $50.1 million, respectively, ofour long-term borrowings accrue interest at fixed rates.  Based on the borrowing rates currentlyavailable to us for bank loans with similar terms and average maturities, thefair value of these borrowings was $49.2 million and $49.8 million at December31, 2000 and 2001, respectively.

 

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Use of Estimates

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

Concentration of Risk

 

Our property management operations are concentrated inthe states of Colorado, Hawaii and Florida. For the year ended December 31,2001, Colorado, Hawaii and Florida accounted for 14%, 15% and 35%, respectively,of our consolidated revenues.

 

Reclassifications

 

Certain prior year amounts have been reclassified toconform to the current year presentation. We have historically classified Cash held in escrow as a component ofCash and cash equivalents for balance sheet and cashflow statementpresentation.  For all periodspresented, Cash held in escrow is now being classified as a separate financialstatement caption.  For the years endedDecember 31, 1999 and 2000, this reclassification resulted in a $2.8 millionreduction and an $8.7 million increase, respectively, to Net cash provided byoperating activities and an $11.2 million and $1.6 million increase,respectively, to Net cash used in investing activities in the accompanyingconsolidated statements of cash flows.

 

NOTE 3 - NOTE RECEIVABLE FROM STOCKHOLDERS

 

During 1998, we formalized a $4.0 millionpromissory note resulting from cash advances to a primary stockholder of apredecessor company who is no longer an affiliate of ResortQuest.  On February 16, 2000, this Note wasrestructured in order to provide for additional collateral.  At this time, certain management feereceivables and accrued interest of approximately $1.1 million were alsoaggregated into a separate note (collectively, the “Notes”).  The Notes are collateralized by certain realestate held by the stockholder and bear interest at 1/2% below the prime rateof interest, but not less than 6% and not more than 10%.  The remaining balance on the $1.1 millionnote plus accrued interest was paid in full during 2001.  Interest payments under the $4.0 millionnote are due every January and July 1st, with the principal balance recorded inOther assets in the accompanying consolidated balance sheets being due in fullon May 25, 2008.  To date, all interestpayments due under the restructured terms of the Notes have been received.

 

NOTE 4 - UNUSUAL ITEMS AND OTHER CHARGES

 

General and administrative expenses for 1999 include$3.1 million of items that management considers as unusual items and other charges.These charges include $906,000 related to a study to explore alternate fundingsources; $734,000 in accrued severance payments to three former members ofmanagement; $716,000 in transaction costs for two of ResortQuest’s 1999acquisitions accounted for under the pooling-of-interests method; $471,000related to an indefinitely suspended secondary offering filed during the secondquarter of 1999; and $321,000 in costs related to acquisition candidates nolonger being pursued due to management changing its acquisition strategy duringthe year.

 

General and administrative expenses for 2001 include$4.7 million of items that management considers as unusual items and othercharges.  These charges include a$1.5 million non-cash write-down of certain previously released FirstResort Software versions, a $1.3 million non-cash write-off of deferredacquisition costs related to acquisition candidates that will no longer bepursued, $1.6 million in employee-related and other cash charges and$303,000 in non-cash items primarily related to the write-off of miscellaneousreceivables.

 

23

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NOTE 5 - SUPPLEMENTAL FINANCIAL INFORMATION

 

Trade and other receivables, net consisted of the following:

 
|                                    |   | **As of  December 31,** |   |
|-----------------------------------------|--------|-------------------------|--------|
|                                    |   | **2000**                |   | **2001** |   |
| **(in thousands)**                      |   |                    |   |
| Receivables from  managed properties    |   | $                       | 3,748  |   | $ | 3,009 |   |
| Income tax  receivables                 |   | 2,286                   |   | 4,976 |   |
| All other  receivables                  |   | 2,537                   |   | 3,045 |   |
| Total                                   |   | 8,571                   |   | 11,030 |   |
| Less - allowance  for doubtful accounts |   | (328                    | )      | (489 | ) |
|                                    |   | $                       | 8,243  |   | $ | 10,541 |   |

 

Property, equipment and software, net consisted of the following:

 
|                               |   | **Estimated  Useful** |   | **As of  December 31,** |   |
|------------------------------------|--------|-----------------------|--------|-------------------------|--------|
|                               |   | **Life in  Years**    |   | **2000**                |   | **2001** |   |
| **(in thousands)**                 |   |                  |   |
| Land  and improvements             |   |                  |   | $                       | 2,164  |   | $ | 2,407 |   |
| Building and  improvements         |   | 15-30                 |   | 7,337                   |   | 7,821 |   |
| Leasehold  improvements            |   | 5-30                  |   | 3,156                   |   | 3,973 |   |
| Furniture,  fixtures and equipment |   | 3-10                  |   | 11,354                  |   | 14,780 |   |
| Vehicles                           |   | 5- 7                  |   | 2,513                   |   | 2,814 |   |
| Software and web  development      |   | 3-10                  |   | 8,495                   |   | 19,987 |   |
| Leased property                    |   | 3- 7                  |   | 1,824                   |   | 1,272 |   |
| Total                              |   |                  |   | 36,843                  |   | 53,054 |   |
| Less -  accumulated depreciation   |   |                  |   | (8,336                  | )      | (13,545 | ) |
|                               |   |                  |   | $                       | 28,507 |   | $ | 39,509 |   |

 

Accounts payable and accrued liabilities consisted of the following:

 
|                       |   | **As of  December 31,** |   |
|----------------------------|--------|-------------------------|--------|
|                       |   | **2000**                |   | **2001** |   |
| **(in thousands)**         |   |                    |   |
| Accounts  payable          |   | $                       | 5,242  |   | $ | 6,098 |   |
| Accrued payroll            |   | 5,103                   |   | 5,345 |   |
| Other accrued  liabilities |   | 3,429                   |   | 2,855 |   |
|                       |   | $                       | 13,774 |   | $ | 14,298 |   |

 

Supplemental cash flow information is as follows:

 
|                                                  |   | **Years  Ended December 31,** |   |
|-------------------------------------------------------|--------|-------------------------------|--------|
|                                                  |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in thousands)**                                    |   |                          |   |
| Supplemental  disclosure of cash flow information     |   |                          |   |   |   |   |   |
| Cash paid for  interest                               |   | $                             | 5,292  |   | $ | 6,028 |   | $ | 5,688 |   |
| Cash paid for  income taxes                           |   | $                             | 6,823  |   | $ | 5,919 |   | $ | 1,846 |   |
| Supplemental  disclosure of non-cash flow information |   |                          |   |   |   |   |   |
| Capital lease  obligations                            |   | $                             | 595    |   | $ | 674 |   | $ | 360 |   |
| Common stock  portion of acquisitions                 |   | $                             | 14,908 |   | $ | 989 |   | $ | 1,668 |   |

 

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NOTE 6 - LONG-TERM DEBT

 

On January 22, 2001, we replaced our existing Credit Facility that wasto expire on May 26, 2001 with a similar facility that expires on January 22,2004.  Due to the events of September 11th,on October 30, 2001, we amended the Credit Facility to modify the restrictivecovenants to allow more flexibility for us under this debt agreement throughthe end of 2002. The amendment also allows for up to a 100 basis point increaseto our interest rate based on certain financial ratios.  Subject to certain limitations, the CreditFacility may be used to borrow up to $40 million and may be used forletters of credit not to exceed $2.5 million in the aggregate, acquisitions,capital expenditures and for general corporate purposes. The credit agreementrequires us to comply with various loan covenants, which include maintenance ofcertain financial ratios, restrictions on additional indebtedness andrestrictions on liens, guarantees, advances, capital expenditures, sale ofassets and dividends. Interest on outstanding balances of the Credit Facilityis computed at our election, on the basis of either the Prime Rate or theEurodollar Rate, as defined, plus a margin of 2.0% to up to 3.0% based on theamendment discussed above. At December 31, 2001, the weighted average interestrate on the outstanding indebtedness was 4.61%.  Availability fees are 0.5% per annum and are payable on theunused portion of the Credit Facility. Interest and availability fees are payable monthly.

 

On June 16, 1999, we issued $50 million of 9.06%Senior Notes, due June 2004, in connection with a note purchase agreement.  On October 30, 2001, we also amended theSenior Notes to modify the restrictive covenants through the end of 2002 toallow more flexibility for us under this debt agreement. The amendment alsoallowed for up to a 100 basis point increase to our interest rate based oncertain financial ratios. At December 31, 2001, the interest rate on the SeniorNotes was 9.31%.  The note purchaseagreement contains loan covenants substantially similar to those of the creditagreement under the Credit Facility and has prepayment restrictions in the formof “make-whole” provisions. Interest is payable quarterly.

 

The Credit Facility is secured pari passu to theSenior Notes by substantially all of our assets, including the stock of oursignificant subsidiaries, as defined. We were in compliance with all covenants on all indebtedness at December31, 2001.

 

Long-term debt consisted of the following:

 
|                                                                                                                                          |   | **As of  December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                          |   | **2000**                |   | **2001** |   |
| **(in thousands)**                                                                                                                            |   |                    |   |
| Senior Notes                                                                                                                                  |   | $                       | 50,000 |   | $ | 50,000 |   |
| Credit Facility                                                                                                                               |   | —                  |   | 28,600 |   |
| Various notes  with banks, secured by certain assets, at interest rates ranging from 1.9% to  10.0%, due between March 2002 through June 2005 |   | 229                     |   | 71 |   |
| Long-term  capital lease obligations                                                                                                          |   | 655                     |   | 295 |   |
| Total                                                                                                                                         |   | 50,884                  |   | 78,966 |   |
| Less - current  maturities                                                                                                                    |   | (483                    | )      | (322 | ) |
| Long-term debt,  net of current maturities                                                                                                    |   | $                       | 50,401 |   | $ | 78,644 |   |

 

Annual maturities of long-term debt are: 2002, $322,000; 2003, $38,000;2004, $78.6 million; 2005, $3,000; and none thereafter.

 

NOTE 7 - OPERATING LEASES

 

ResortQuest has entered into non-cancelable operatingleases for equipment, operating space, office space, hotel properties andindividual condominium units within its managed properties. At December 31,2001, future minimum lease commitments under non-cancelable operating leases areas follows:

 
|                |   | **Years  Ended December 31,** |   |
|---------------------|--------|-------------------------------|--------|
| **(in  thousands)** |   |                          |   |
| 2002                |   | $                             | 6,265  |   |
| 2003                |   | 4,923                         |   |
| 2004                |   | 4,365                         |   |
| 2005                |   | 4,061                         |   |
| 2006                |   | 3,630                         |   |
| Thereafter          |   | 14,320                        |   |
|                |   | $                             | 37,564 |   |

 

Under terms of the leases, ResortQuest is generallyrequired to pay all taxes, insurance and maintenance. Rent expense for 1999,2000 and 2001 was approximately $4.8 million, $5.9 million and $7.2million, respectively.

 

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In conjunction with certain acquisitions, ResortQuestentered into several lease agreements with certain former owners for the use ofoffice space and facilities. Lease payments made to former owners, who are alsosignificant stockholders and directors, during 1999, 2000 and 2001 wereapproximately $407,000, $410,000 and $433,000, respectively.

 

As an accommodation to certain of the managedproperties, the Company assists in obtaining leases of operating equipment. Insome instances, this assistance includes entering into the leases as thetechnical lessee. The managed properties perform all obligations under theleases, including making lease payments and providing insurance coverage.ResortQuest is contingently liable under the leases until completion of thelease terms. Because ResortQuest undertakes the role of a technical lesseesimply as an accommodation to the managed properties and because the leasedequipment is used only for and by the managed properties, these leases have notbeen recorded in the Company’s financial statements.  At December 31, 2001, all remaining obligations under theseleases approximated $1.6 million.

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Guarantees

 

Certain of our management agreements in Hawaii containprovisions for guaranteed levels of returns to owners. These agreements alsocontain force majeure clauses to protect the Company from forces or occurrencesbeyond the control of management. During 1999, 2000 and 2001, ResortQuest madepayments in excess of the management fees earned on these guaranteed agreementsof $133,000, $390,000 and $704,000, respectively.

 

Acquisition Indemnification

 

Subject to certain limitations, pursuant to theAgreement and Plan of Organization entered into by and between each acquiredentity and ResortQuest (each an “Agreement”), the stockholders of each acquiredentity have indemnified ResortQuest against losses, claims, damages, actions,suits, proceedings, demands, assessments, adjustments, costs and expenses as aresult of or arising from any breach of the representations and warranties inthe Agreement, any liability under the Securities Act of 1933 (“1933 Act”), theSecurities Exchange Act of 1934 (“1934 Act”) or other federal or state law orregulation arising out of or based upon any untrue statement of a material factrelating solely to an acquired entity or the stockholders and certain otheridentified claims or litigation.

 

In addition, pursuant to each Agreement and subject tocertain limitations, ResortQuest agreed to indemnify the stockholders againstlosses, claims, damages, actions, suits, proceedings, demands, assessments,adjustments, costs and expenses incurred by the stockholders as a result of orarising from any breach by ResortQuest or of its representations and warrantiesin the Agreement, any liability under the 1933 Act, the 1934 Act or otherfederal or state law or regulation, at common law or otherwise, arising out ofor based upon any untrue statement or alleged untrue statement of a materialfact relating to ResortQuest or any of the acquired entities contained incertain filings with the Securities and Exchange Commission or the mattersdescribed in the schedules to the Agreement relating to guarantees.

 

ResortQuest is not aware of any events that have orcould have caused any party to act under such indemnification under any of theAgreements during the periods presented in the accompanying consolidatedfinancial statements.

 

Litigation

 

On May 26, 2000, Hotel Corp. of the Pacific, Inc.(“Hotel Corp.”), a subsidary of ResortQuest doing business as Aston Hotels& Resorts, instituted legal proceedings in the Circuit Court for the FirstCircuit of Hawaii against Andre S. Tatibouet, the president of Hotel Corp. Thisaction arises out of a document styled “Cooperation Agreement” that was signedby Andre S. Tatibouet, purporting to act on behalf of Hotel Corp., on the onehand, with Cendant Global Services B.V. and Aston Hotels & ResortsInternational, Inc., on the other hand. The Cooperation Agreement contains several provisions that are detrimentalto Hotel Corp., including provisions purporting to transfer certainintellectual property and limit certain intellectual property rights held byHotel Corp. Hotel Corp. seeks monetary damages for breach of fiduciary duty,fraud, and negligent misrepresentation. By order of the Circuit Court, the claims asserted by Hotel Corp. in thelawsuit have been consolidated with an arbitration demand, filed with theAmerican Arbitration Association by Mr. Tatibouet, in which he alleges variousbreaches of his employment agreement with Hotel Corp.  The abritration hearing took place in September 2001, where Mr.Tatibouet claimed damages of approximately $17.5 million and ResortQuestclaimed damages of approximately $4.7 million.  The parties are engaged in post-hearing briefings, and a decisionfrom the panel is expected in March 2002.

 

26

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Also on May 26, 2000, ResortQuest International andHotel Corp. brought action in the Ciruit Court for the First Circuit of Hawaiiagainst Cendant Corporation, Aston Hotels & Resorts International, Inc. andCendant Global Services B.V. (“Defendants”). It is the position of ResortQuestand Hotel Corp. that the Cooperation Agreement is voidable because (i) it wasentered in breach of a prior agreement between ResortQuest, and the parentcompany of Cendant Global Services B.V. and Aston Hotels & ResortsInternational, Inc., Cendant Corporation, and (ii) it was entered into by aninterested director and officer of Hotel Corp. who was engaging inself-dealing. Accordingly, ResortQuest and Hotel Corp. seek damages for breachof contract against Cendant, and the equitable remedies of rescission andreplevin.  We believe that we havemeritorious claims and will prevail in each matter.

 

We are also involved in various legal actions arisingin the ordinary course of our business. We do not believe that any of the remaining actions will have a materialadverse effect on our business, financial condition or results of operations.

 

Insurance

 

ResortQuest carries a broad range of insurance coverage,including general and business auto liability, commercial property, workers’compensation and a general umbrella policy. The Company has not incurredsignificant claims or losses on any of its insurance policies during theperiods presented in the accompanying consolidated financial statements.

 

Employee Health Insurance

 

We introduced a national healthcare plan on August 1,2000 for all domestic team members.  Theplan provides a broad spectrum of healthcare choices for all full-time teammembers to select the coverage that best suits their needs. The plan includesmedical, dental, vision, life, AD&D, LTD and voluntary life insurancecoverages.  The employee medical anddental coverages are self-insured by the Company.  All self-insurance reserves include accruals of estimatedsettlements for known claims, as well as accruals for estimates of incurred,but not reported claims.  Theseestimates are based on industry claim factors provided by a plan administrator.  Though changes in cost assumptions, as wellas changes in actual experience, could cause these estimates to changesignificantly in the near term, the Company maintains stop loss insurance tominimize the effect of large claims on its financial results.  During 2000 and 2001, the Company incurred$540,000 and $3.5 million, respectively, in expenses related to thisself-insured plan.

 

Workers’ Compensation Insurance

 

We introduced a self-insured workers’ compensationinsurance plan on December 1, 2000 for most domestic team members. Previous coveragewas provided through full premium-based policies.  Team members in certain locations remain covered under thesepremium-based policies.  Allself-insurance reserves include accruals of estimated settlements for knownclaims, as well as accruals for estimates of incurred, but not reportedclaims.  These estimates are based onindustry claim factors provided by a plan administrator.  Though changes in cost assumptions, as wellas changes in actual experience, could cause these estimates to change significantlyin the near term, the Company maintains stop loss insurance to minimize theeffect of large claims on its financial results.  During 2000 and 2001, the Company incurred $92,000 and$1.0 million, respectively, in expense related to this self-insured plan.

 

Benefit Plans

 

On April 1, 1999, we established a 401(k) profitsharing plan that covers all domestic team members and all pre-existing planswere merged into this plan.  The planpermits employees to defer from 1% to 20% of eligible earnings, the Companymatches 50% of the first 6% of employee contributions, and employee vesting inCompany matching contributions occurs over a three-year period.  During 1999, 2000 and 2001, the Companyincurred $352,000, $424,000 and $633,000, respectively, in expense related tothis plan.

 

Employment Agreements

 

We have entered into non-compete agreements with manyof the former owners of the companies that now comprise ResortQuest.  These non-compete agreements are generallythree to five years in length effective the day the operations are merged withResortQuest.  Additionally, we haveentered into employment agreements with many of these former owners, all seniorcorporate officers and several key employees. Among other things, these agreements allow for severance payments andsome include acceleration of stock option awards upon a change in control ofResortQuest, as defined under the agreements. At December 31, 2001, the maximumamount of compensation that would be payable under all agreements if a change incontrol occurred without prior written notice would be approximately $13.5million.

 

27

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NOTE 9 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

ResortQuest is authorized to issue 50.0 millionshares of common stock.  At December 31,2000, ResortQuest had 18,988,246 shares of common stock issued and outstanding(16,240,916 shares of common stock and 2,747,330 shares of restricted commonstock).  At December 31, 2001,ResortQuest had 19,243,249 shares of common stock issued and outstanding(16,938,033 shares of common stock and 2,305,216 shares of restricted commonstock).  The common stock and restrictedcommon stock are identical except that the holders of restricted common stockare only entitled to one-half of one vote for each share on all matters.

 

We have registered 8.0 million shares of commonstock through various shelf registration statement filings.  As of December 31, 2000 and 2001, we hadissued 3,063,960 and 3,289,487 shares, respectively, under these shelf registrationstatements in connection with acquisitions.

 

Preferred Stock

 

ResortQuest’s authorized capital includes 10.0 millionshares of undesignated preferred stock with a $0.01 par value.  On February 25, 1999, our Board of Directorsadopted a stockholder rights plan designed to protect our stockholders in theevent of takeover action that would deny them the full value of theirinvestment.  Under this plan, a dividenddistribution of one right for each share of common stock was declared toholders of record at the close of business on March 15, 1999.  The rights will also attach to common stockissued after March 15, 1999. The rights will become exercisable only in theevent, with certain exceptions, an acquiring party accumulates 15% or more ofour voting stock, or if a party announces an offer to acquire 15% or more ofour voting stock.  The rights willexpire on March 15, 2009. Each right will entitle the holder to buy oneone-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 willbe entitled to purchase either our stock or shares in an “acquiring entity” athalf of the then current market value of our common stock.  We generally will be entitled to redeem therights at $0.01 per right at any time until the date on which a 15% position inour voting stock is acquired by any person or group.

 

NOTE 10 - STOCK OPTIONS

 

Options granted under our Long-Term Incentive Plan(the “Incentive Plan”) vest annually and ratably over a period from three tofour years after the date of grant and expire five to ten years after the grantdate. ResortQuest has reserved 15% of outstanding authorized common stock foruse in connection with the Incentive Plan and also provides for the issuance ofstock appreciation rights, restricted or deferred stock, dividend equivalents,bonus shares and awards in lieu of our obligations to pay cash compensation,non-employee directors’ deferred shares or other awards. The value of the optionsis based in whole or in part upon the value of the common stock.

 

ResortQuest applies Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations in accounting for options granted under the IncentivePlan.  Accordingly, no compensation costhas been recognized in the consolidated statements of income for issuedoptions. In accordance with SFAS No. 123, “Accounting for Stock-BasedCompensation,” ResortQuest has estimated the fair value of each option grantusing the Black-Scholes Option-Pricing Model. Had compensation cost for awardsunder the Incentive Plan been determined based on the fair value at the grantdates, ResortQuest’s net income and earnings per share would have been reducedto the pro forma amounts indicated in the following table:

 
|                                         |   | **Years  Ended December 31,** |   |
|----------------------------------------------|--------|-------------------------------|--------|
|                                         |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in thousands, except per share amounts)** |   |                          |   |
| Net income                                   |   |                          |   |   |   |   |   |
| As reported                                  |   | $                             | 4,429  |   | $ | 9,606 |   | $ | 1,601 |   |
| Pro forma                                    |   | 3,139                         |   | 8,594 |   | 1,203 |   |
| Basic earnings  per share                    |   |                          |   |   |   |   |   |
| As reported                                  |   | $                             | 0.25   |   | $ | 0.51 |   | $ | 0.08 |   |
| Pro forma                                    |   | 0.17                          |   | 0.45 |   | 0.06 |   |
| Diluted earnings  per share                  |   |                          |   |   |   |   |   |
| As reported                                  |   | $                             | 0.24   |   | $ | 0.51 |   | $ | 0.08 |   |
| Pro forma                                    |   | 0.17                          |   | 0.45 |   | 0.06 |   |

 

28

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A summary of ResortQuest’s stock option transactions is as follows:

 
|                         |   | **Weighted  Average  Exercise  Price** |   | **Options  Outstanding** |      | **Common  Stock  Available  For Grant** |    |
|------------------------------|--------|----------------------------------------|--------|--------------------------|-----------|-----------------------------------------|---------|
| Balance -  December 31, 1998 |   | $                                      | 10.90  |                     | 1,874,351 |                                    | 152,680 |   |
| Approval of new  options     |   | n/a                                    |   | —                   |      | 780,286                                 |    |
| Granted                      |   | 8.71                                   |   | 707,102                  |      | (707,102                                | )       |
| Exercised                    |   | 10.68                                  |   | (3,436                   | )         | 3,436                                   |    |
| Cancelled                    |   | 10.83                                  |   | (168,405                 | )         | 168,405                                 |    |
| Balance -  December 31, 1999 |   | 10.26                                  |   | 2,409,612                |      | 397,705                                 |    |
| Approval of new  options     |   | n/a                                    |   | —                   |      | 40,919                                  |    |
| Granted                      |   | 5.35                                   |   | 603,900                  |      | (603,900                                | )       |
| Cancelled                    |   | 10.23                                  |   | (337,424                 | )         | 337,424                                 |    |
| Balance  - December 31, 2000 |   | 9.14                                   |   | 2,676,088                |      | 172,148                                 |    |
| Approval of new  options     |   | n/a                                    |   | —                   |      | 38,251                                  |    |
| Granted                      |   | 6.46                                   |   | 241,499                  |      | (241,499                                | )       |
| Exercised                    |   | 8.73                                   |   | (29,476                  | )         | 29,476                                  |    |
| Cancelled                    |   | 10.52                                  |   | (154,589                 | )         | 154,589                                 |    |
| Balance  - December 31, 2001 |   | $                                      | 8.88   |                     | 2,733,522 |                                    | 152,965 |   |

 

The weighted average fair value of options granted byResortQuest for 1999, 2000 and 2001 was $3.16, $2.76 and $4.05, respectively.Assumptions included an average risk-free interest rate ranging from 2.7% to6.8%; an average expected life of 2.6 to 4.0 years; a volatility factor of40.4% to 84.3%; and no dividends.  AtDecember 31, 2001, there were 1,595,957 exercisable stock options outstandingwith exercise prices that range from $4.06 to $16.88 with a weighted averageexercise price of $9.62 and a weighted average remaining contractual life of5.2 years.

 

NOTE 11 - INCOME TAXES

 

Income tax expense consisted of the following:

 
|               |   | **Years  Ended December 31,** |   |
|--------------------|--------|-------------------------------|--------|
|               |   | **1999**                      |   | **2000** |   | **2001** |   |
| **(in thousands)** |   |                          |   |
| Current            |   |                          |   |   |   |   |   |
| Federal            |   | $                             | 3,240  |   | $ | 3,136 |   | $ | (2,585 | ) |
| State              |   | 966                           |   | 965 |   | (136 | ) |
| Deferred           |   |                          |   |   |   |   |   |
| Federal            |   | 593                           |   | 3,401 |   | 4,638 |   |
| State              |   | 74                            |   | 355 |   | 411 |   |
| Total              |   | $                             | 4,873  |   | $ | 7,857 |   | $ | 2,328 |   |

 

The difference between the statutory federal incometax rate and the effective income tax rate expressed as a percentage of incomebefore income taxes was as follows:

 
|                                                    |   | **Years  Ended December 31,** |   |
|---------------------------------------------------------|--------|-------------------------------|--------|
|                                                    |   | **1999**                      |   | **2000** |   | **2001** |   |
| Federal  statutory rate                                 |   | 35.0                          | %      | 35.0 | % | 34.0 | % |
| State and foreign  income taxes, net of federal benefit |   | 4.4                           |   | 3.6 |   | 4.3 |   |
| Goodwill and  other permanent items                     |   | 20.8                          |   | 9.8 |   | 44.7 |   |
| Adjustments to  estimated income tax accruals           |   | —                        |   | (3.4 | ) | (23.8 | ) |
| Pre-acquisition  earnings not taxable                   |   | (7.8                          | )      | — |   | — |   |
| Effective income  tax rate                              |   | 52.4                          | %      | 45.0 | % | 59.2 | % |

 

29

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The tax effects of temporary differences that giverise to significant portions of our deferred tax assets and liabilities were asfollows:

 
|                                     |   | **As of  December 31,** |   |
|------------------------------------------|--------|-------------------------|--------|
|                                     |   | **2000**                |   | **2001** |   |
| **(in thousands)**                       |   |                    |   |
| Deferred tax  assets                     |   |                    |   |   |   |
| Claims and other  reserves               |   | $                       | 711    |   | $ | 731 |   |
| Section 481  adjustment: cash to accrual |   | 221                     |   | — |   |
| State net  operating losses              |   | 361                     |   | 710 |   |
| Other                                    |   | 154                     |   | 137 |   |
| Total deferred  tax assets               |   | $                       | 1,447  |   | $ | 1,578 |   |
| Deferred tax  liabilities                |   |                    |   |   |   |
| Deductible  goodwill amortization        |   | $                       | (1,696 | ) | $ | (3,127 | ) |
| Basis difference  on fixed assets        |   | (2,731                  | )      | (6,480 | ) |
| Total deferred  tax liabilities          |   | (4,427                  | )      | (9,607 | ) |
| Net deferred tax  liabilities            |   | $                       | (2,980 | ) | $ | (8,029 | ) |

 

NOTE 12 - EARNINGS PER SHARE

 

In accordance with the provisions of SFAS No. 128,“Earnings Per Share,” we compute our basic earnings per share by dividing Netincome by the number of weighted average common shares outstanding during theyear.  Our Diluted earnings per share iscomputed by dividing Net income by the number of weighted average common stockequivalents outstanding during the year. For each of the three years in the period ended December 31, 2001,common stock equivalents consisted solely of stock options outstanding underour Incentive Plan (see Note 10).

 
|                                                |   | **Years Ended December 31,** |   |
|-----------------------------------------------------|--------|------------------------------|--------|
|                                                |   | **1999**                     |   | **2000** |   | **2001** |   |
| Basic weighted  average common shares outstanding   |   | 18,005,426                   |   | 18,962,752 |   | 19,167,203 |   |
| Effect of  dilutive securities - stock options      |   | 170,337                      |   | 54,919 |   | 175,616 |   |
| Diluted  weighted average common shares outstanding |   | 18,175,763                   |   | 19,017,671 |   | 19,342,819 |   |

 

NOTE 13 - SEGMENT REPORTING

 

ResortQuest has one operating segment, propertymanagement, which is managed as one business unit.  The All other segment includes ResortQuest Technologies andcorporate.  At December 31, 1999, 2000and 2001, approximately 76%, 64% and 47%, respectively, of the All othersegment assets represent goodwill recorded for ResortQuest Technologies andcorporate.

 

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The following table presents the revenues, operatingincome and assets of ResortQuest’s reportable segment:

 
|                 |   | **Years  Ended December 31,** |    |
|----------------------|--------|-------------------------------|---------|
|                 |   | **1999**                      |    | **2000** |   | **2001** |   |
| **(in thousands)**   |   |                          |    |
| Revenues             |   |                          |    |   |   |   |   |
| Property management  |   | $                             | 124,270 |   | $ | 148,536 |   | $ | 157,527 |   |
| All other            |   | 3,642                         |    | 3,478 |   | 3,429 |   |
|                 |   | $                             | 127,912 |   | $ | 152,014 |   | $ | 160,956 |   |
| Operating income     |   |                          |    |   |   |   |   |
| Property  management |   | $                             | 23,409  |   | $ | 31,892 |   | $ | 26,976 |   |
| All other            |   | (9,879                        | )       | (9,615 | ) | (18,400 | ) |
|                 |   | $                             | 13,530  |   | $ | 22,277 |   | $ | 8,576 |   |
| Assets               |   |                          |    |   |   |   |   |
| Property  management |   | $                             | 218,742 |   | $ | 218,338 |   | $ | 245,482 |   |
| All other            |   | 38,933                        |    | 44,831 |   | 58,792 |   |
|                 |   | $                             | 257,675 |   | $ | 263,169 |   | $ | 304,274 |   |

 

NOTE 14 - RELATED-PARTY TRANSACTIONS

 

ResortQuest has consulting and management agreementswith certain current and former directors. Consulting services include assistance in operations, identifyingacquisitions and involvement in local and governmental affairs.  During 1999, 2000 and 2001, we incurred$126,000, $215,000 and $312,000, respectively, relative to these consultingagreements.

 

ResortQuest receives sales commissions for sellingproperties developed by certain companies and partnerships owned or co-owned bythese directors.  These net commissionsapproximated $2.0 million, $1.5 million and $1.4 million during 1999,2000, and 2001, respectively.

 

ResortQuest entered into numerous transactions withthe former owner of Aston Hotels & Resorts (“Former Owner”) who is a formerdirector of the Company. ResortQuest provides management and centralizedservices (cooperative sales and marketing, reservations, accounting servicesand other reimbursements) for four hotels, two of which are owned by the FormerOwner and two of which are managed for an affiliate of the Former Owner. The managementfees charged to these hotels approximated $1.3 million, $1.1 million and $1.2million in 1999, 2000 and 2001, respectively. Additionally, ResortQuest provides administrative services to ASTInternational LLC, a company that is controlled by the Former Owner. Related tothese services, we recognized $78,000, $42,000 and $29,000 of revenue during1999, 2000 and 2001, respectively.

 

ResortQuest provides consulting and managementservices to entities owned by certain former directors.  During 1999, 2000 and 2001, we received$323,000, $368,000 and $216,000, respectively, relative to these consultingagreements.  ResortQuest also managesvacation properties pursuant to its standard management agreement that areowned or co-owned by certain directors and employees of the Company.

 

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To the Stockholders of ResortQuest International, Inc.:

 

We have audited the accompanying consolidated balancesheets of ResortQuest International, Inc., (a Delaware corporation) andsubsidiaries (the “Company”), as of December 31, 2001, and 2000, and therelated consolidated statements of income, changes in stockholders’ equity andcomprehensive income and cash flows for each of the three years in the periodended December 31, 2001. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidated financialposition of ResortQuest International, Inc. and subsidiaries, as of December31, 2001, and 2000, and the results of its operations and its cash flows foreach of the three years in the period ended December 31, 2001, in conformitywith accounting principles generally accepted in the United States.

 

/s/ Arthur Andersen LLP

 

Memphis, Tennessee,

February 19, 2002.

 

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MANAGEMENT’S REPORT ON CONSOLIDATED FINANCIALSTATEMENTS

 

ResortQuest International, Inc. (“ResortQuest”) isresponsible for preparing the consolidated financial statements and relatedinformation appearing in this report. Management believes that the consolidatedfinancial statements present fairly ResortQuest’s consolidated financial position,results of operations and cash flows in conformity with accounting principlesgenerally accepted in the United States. In preparing its consolidatedfinancial statements, ResortQuest is required to include amounts based onestimates and judgements which it believes are reasonable under thecircumstances.

 

ResortQuest maintains accounting and other controlsystems designed to provide reasonable assurance that financial records arereliable for purposes of preparing consolidated financial statements and thatassets are properly accounted for and safeguarded. Limitations exist in anyinternal control system, recognizing that the system’s cost should not exceedthe benefits derived.

 

The Board of Directors pursues its responsibility forResortQuest’s consolidated financial statements through its Audit Committee,which is composed solely of directors who are not officers or employees ofResortQuest. The Audit Committee meets from time to time with the independentpublic accountants and management.

 

/s/ David L. Levine

Chairman, President and Chief Executive Officer

 

/s/ J. Mitchell Collins

Senior Vice President and Chief Financial Officer

 

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QuarterlyResults of Operations

(unaudited)

 
|                                         |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|----------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| **(in thousands, except per share amounts)** |   |               |   |
| 2001                                         |   |               |   |                |   |               |   |                |   |
| Revenues                                     |   | $                  | 45,442 |                | $      | 43,398             |   | $                   | 48,682 |   | $ | 23,434 |   |
| Operating income  (loss)                     |   | 8,253              |   | 6,443               |   | 5,770              |   | (11,890             | )      |
| Net income  (loss)                           |   | 4,331              |   | 3,019               |   | 466                |   | (6,215              | )      |
| Basic earnings  (loss) per share (a)         |   | 0.23               |   | 0.16                |   | 0.02               |   | (0.32               | )      |
| Basic weighted  average shares outstanding   |   | 19,043             |   | 19,142              |   | 19,242             |   | 19,243              |   |
| Diluted earnings  (loss) per share (a)       |   | 0.23               |   | 0.16                |   | 0.02               |   | (0.32               | )      |
| Diluted weighted  average shares outstanding |   | 19,182             |   | 19,414              |   | 19,400             |   | 19,243              |   |
|                                         |   |               |   |                |   |               |   |                |   |
| 2000                                         |   |               |   |                |   |               |   |                |   |
| Revenues                                     |   | $                  | 38,547 |                | $      | 40,840             |   | $                   | 47,014 |   | $ | 25,613 |   |
| Operating income  (loss)                     |   | 6,512              |   | 6,424               |   | 12,578             |   | (3,238              | )      |
| Net income  (loss)                           |   | 2,851              |   | 2,832               |   | 6,403              |   | (2,480              | )      |
| Basic earnings  (loss) per share (a)         |   | 0.15               |   | 0.15                |   | 0.34               |   | (0.13               | )      |
| Basic weighted  average shares oustanding    |   | 18,831             |   | 19,013              |   | 19,020             |   | 18,988              |   |
| Diluted earnings  (loss) per share (a)       |   | 0.15               |   | 0.15                |   | 0.34               |   | (0.13               | )      |
| Diluted weighted  average shares outstanding |   | 18,851             |   | 19,059              |   | 19,082             |   | 18,988              |   |
|                                         |   |               |   |                |   |               |   |                |   |
| 1999                                         |   |               |   |                |   |               |   |                |   |
| Revenues                                     |   | $                  | 31,656 |                | $      | 30,989             |   | $                   | 42,059 |   | $ | 23,207 |   |
| Operating income  (loss)                     |   | 6,192              |   | 4,020               |   | 11,749             |   | (8,431              | )      |
| Net income  (loss)                           |   | 3,040              |   | 1,692               |   | 5,663              |   | (5,966              | )      |
| Basic earnings  (loss) per share (a)         |   | 0.18               |   | 0.10                |   | 0.31               |   | (0.32               | )      |
| Basic weighted  average shares outstanding   |   | 17,354             |   | 17,487              |   | 18,462             |   | 18,680              |   |
| Diluted earnings  (loss) per share (a)       |   | 0.17               |   | 0.10                |   | 0.31               |   | (0.32               | )      |
| Diluted weighted  average shares outstanding |   | 17,786             |   | 17,472              |   | 18,479             |   | 18,680              |   |

 

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(a)   The sum ofthe quarterly amounts may not equal the annual amount reported, as per shareamounts are computed independently for each quarter while the full year isbased on the annual weighted average shares outstanding.

 

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** **
| **Stock  Price** |   |     |   |    |   |
|------------------|--------|----------|--------|---------|--------|
| 2001             |   | **High** |   | **Low** |   |
| Fourth Quarter   |   | $        | 5.66   |    | $      | 2.70 |   |
| Third  Quarter   |   | 11.32    |   | 3.00    |   |
| Second Quarter   |   | 13.00    |   | 8.30    |   |
| First Quarter    |   | 9.00     |   | 6.06    |   |
|             |   |     |   |    |   |
| 2000             |   | **High** |   | **Low** |   |
| Fourth Quarter   |   | $        | 7.44   |    | $      | 5.50 |   |
| Third  Quarter   |   | 6.69     |   | 5.00    |   |
| Second Quarter   |   | 7.13     |   | 4.69    |   |
| First Quarter    |   | 7.38     |   | 4.13    |   |
|             |   |     |   |    |   |
| 1999             |   | **High** |   | **Low** |   |
| Fourth Quarter   |   | $        | 9.25   |    | $      | 3.75 |   |
| Third Quarter    |   | 9.88     |   | 8.63    |   |
| Second Quarter   |   | 17.00    |   | 7.63    |   |
| First Quarter    |   | 22.56    |   | 13.94   |   |

 

35

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SELECTED FINANCIAL DATA

(unaudited)

 
|                                                                          |   | **Years  Ended December 31,** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                          |   | **1997**                      |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
| **(in  thousands)**                                                           |   |                          |   |   |   |   |   |   |   |   |   |
| Statements of  income data                                                    |   |                          |   |   |   |   |   |   |   |   |   |
| Revenues                                                                      |   | $                             | 26,753 |   | $ | 55,359 |   | $ | 127,912 |   | $ | 152,014 |   | $ | 160,956 |   |
| Operating  expenses                                                           |   | 13,635                        |   | 31,596 |   | 65,804 |   | 80,314 |   | 83,838 |   |
| General and  administrative expenses, including depreciation and amortization |   | 7,613                         |   | 18,273 |   | 48,578 |   | 49,423 |   | 68,542 |   |
| Income from  operations                                                       |   | 5,505                         |   | 5,490 |   | 13,530 |   | 22,277 |   | 8,576 |   |
| Interest and  other expense, net                                              |   | 86                            |   | 507 |   | 4,228 |   | 4,814 |   | 4,647 |   |
| Provision for  income taxes                                                   |   | 90                            |   | 1,518 |   | 4,873 |   | 7,857 |   | 2,328 |   |
| Income  from continuing operations                                            |   | $                             | 5,329  |   | $ | 3,465 |   | $ | 4,429 |   | $ | 9,606 |   | $ | 1,601 |   |
| Net income                                                                    |   | $                             | 3,835  |   | $ | 4,812 |   | $ | 4,429 |   | $ | 9,606 |   | $ | 1,601 |   |
| Working capital  deficit                                                      |   | $                             | (4,579 | ) | $ | (2,080 | ) | $ | (7,295 | ) | $ | (23,963 | ) | $ | (29,251 | ) |
| Total assets                                                                  |   | $                             | 19,072 |   | $ | 188,219 |   | $ | 257,675 |   | $ | 263,169 |   | $ | 304,274 |   |
| Long-term debt,  net of current maturities                                    |   | $                             | 4,122  |   | $ | 38,098 |   | $ | 68,090 |   | $ | 50,401 |   | $ | 78,644 |   |
| Stockholders’  (deficit) equity                                          |   | $                             | (397   | ) | $ | 106,855 |   | $ | 125,823 |   | $ | 136,402 |   | $ | 139,914 |   |
|                                                                               |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

36

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Stock Listing

 

The Company’s stock is traded on the New York Stock Exchange under thesymbol RZT.

 

Registrar and Stock Transfer Agent

 

American Stock Transfer & Trust Company

40 Wall Street

New York, New York 10005

 

Independent Public Accountants

 

Arthur Andersen LLP

100 Peabody Place, Suite 1100

Memphis, Tennessee  38103

 

Stockholder Inquiries

 

For information about ResortQuest International, Inc. and itssubsidiaries, including copies of its annual report on Form 10-K and quarterlyreports on Form 10-Q, please submit a written request to:

 

Investor Relations

ResortQuest International, Inc.

530 Oak Court Drive, Suite 360

Memphis, Tennessee 38117

 

Annual Meeting Date

 

ResortQuest International will hold its annual meeting of stockholderson May 9, 2002, at nine o’clock a.m. at the Peabody Hotel, 149 Union Avenue,Memphis, Tennessee, 38103.

 

Forward-Looking Statements

 

Certain statements in this annual report include “forward-lookingstatements” within the meaning of the safe harbor provisions of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934 and are qualified by cautionary statements contained herein and inResortQuest International, Inc. filings with the Securities and ExchangeCommission.

 

37

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