-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L/cTMPx93BeyYsl0chfbAkh6LhS0Lx/WSDpVxzUIRbPHLsD92r8EOXhYWR13hra4 +KnZs7T0ehDvRjGxWm5eQQ== 0000928385-98-000206.txt : 19980217 0000928385-98-000206.hdr.sgml : 19980217 ACCESSION NUMBER: 0000928385-98-000206 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980212 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBURST HOSPITALITY CORP CENTRAL INDEX KEY: 0001018146 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 52096594 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11915 FILM NUMBER: 98533806 BUSINESS ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3019795000 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC DATE OF NAME CHANGE: 19970108 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS HOLDINGS INC DATE OF NAME CHANGE: 19960705 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) February 12, 1998 Sunburst Hospitality Corporation (Exact name of registrant as specified in its charter) Delaware 52-1985619 -------- ---------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation) 10770 Columbia Pike, Silver Spring, Maryland 20901 - -------------------------------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (301)979-5000 ------------- Item 5. - ------- The Registrant is filing restated financial statements to reflect the franchising operations of Choice Hotels International, Inc. as discontinued operations. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. - ------ ------------------------------------------------------------------ (a) Report of Independent Public Accountants (b) Consolidated Balance Sheets as of May 31, 1997 and 1996 (c) Consolidated Statements of Income, Fiscal Year Ended May 31, 1997, 1996 and 1995 (d) Consolidated Statements of Cash Flows, Fiscal Year Ended May 31, 1997, 1996 and 1995 (e) Consolidated Statement of Stockholders' Equity for the seven months ended May 31, 1997 (f) Notes to Consolidated Financial Statements SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SUNBURST HOSPITALITY CORPORATION (Registrant) By: /s/ James A. MacCutcheon ---------------------------- Name: James A. MacCutcheon Title: Chief Financial Officer Date: February 12, 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Sunburst Hospitality Corporation: We have audited the accompanying consolidated balance sheets of Sunburst Hospitality Corporation and subsidiaries (the "Company" formerly Choice Hotels International, Inc., See Note 1) as of May 31, 1997 and 1996, and the related consolidated statements of income and cash flows for each of the three fiscal years in the period ended May 31, 1997, and the statement of stockholders' equity for the seven months ended May 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sunburst Hospitality Corporation as of May 31, 1997, and 1996, and the results of its operations and its cash flows for each of the three fiscal years in the period ended May 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Washington, D.C. January 27, 1998 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MAY 31 (IN THOUSANDS)
1997 1996 ---------------------------- ASSETS Property and equipment, net $338,419 $281,214 Receivables (net of allowance for doubtful accounts of $585 and $309, respectively) 7,659 6,533 Deferred income taxes ($7,205 and $10,125) and other assets 20,982 14,526 Cash and cash equivalents 7,033 1,436 Net investment in discontinued operations 52,336 24,602 ------------ ------------ TOTAL ASSETS $426,429 $328,311 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Debt Mortgages and other long term debt 223,347 16,474 Notes payable to Manor Care, Inc. 37,022 147,023 ------------ ------------ 260,369 163,497 Accounts payable 25,605 8,724 Accrued expenses 15,968 8,531 ------------ ------------ Total liabilities 301,942 180,752 ------------ ------------ STOCKHOLDERS' EQUITY Common stock 639 - Additional paid-in-capital 167,163 - Retained earnings 17,075 - Cumulative translation adjustment (7,018) - Treasury stock, at cost (53,372) - Investments and advances from Manor Care, Inc. - 147,559 ------------ ------------ Total stockholders' equity 124,487 147,559 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $426,429 $328,311 ============ ============
The accompanying notes are an integral part of these Consolidated Balance Sheets. 4 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF INCOME FISCAL YEARS ENDED MAY 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 ------------------------------------------- REVENUES Rooms $165,239 $137,001 $101,381 Food and beverage 13,356 11,392 8,121 Other 7,158 6,232 5,012 ------------ ------------ ------------ Total revenues 185,753 154,625 114,514 ------------ ------------ ------------ OPERATING EXPENSES Departmental Expenses Rooms 58,502 51,657 43,168 Food and beverage 10,887 9,792 6,866 Other 2,674 2,570 1,476 Undistributed Operating Expenses Administrative and general 17,990 16,358 11,550 Marketing 14,545 12,152 9,008 Utility costs 8,816 7,712 5,670 Property operation and maintenance 9,428 8,118 5,891 Property taxes, rent and insurance 6,857 6,044 3,959 Depreciation and amortization 20,632 16,636 12,513 Corporate 7,691 8,026 6,038 Provision for asset impairment - 24,595 - ------------ ------------ ------------ Total operating expenses 158,022 163,660 106,139 ------------ ------------ ------------ OPERATING INCOME (LOSS) 27,731 (9,035) 8,375 ------------ ------------ ------------ INTEREST EXPENSE 15,891 12,839 9,155 ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 11,840 (21,874) (780) Income taxes 5,035 (8,523) (323) ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 6,805 (13,351) (457) DISCONTINUED OPERATIONS: Income from operations of discontinued franchising business (less applicable income taxes of $25,165, $15,923 and $13,467, respectively) 35,219 21,809 17,268 ------------ ------------ ------------ NET INCOME BEFORE EXTRAORDINARY ITEM 42,024 8,458 16,811 ------------ ------------ ------------ EXTRAORDINARY ITEM -- LOSS FROM EARLY EXTINGUISHMENT OF DEBT (NET OF $747 TAX BENEFIT) 1,144 - - ------------ ------------ ------------ NET INCOME $40,880 $ 8,458 $16,811 ============ ============ ============ Pro forma weighted average common shares outstanding 20,893 20,876 20,827 ============ ============ ============ Earnings per share from continuing operations $ 0.32 $ (0.64) $ (0.02) Earnings per share from discontinued operations 1.69 1.05 0.83 Earnings per share from extraordinary item (0.05) - - ------------ ------------ ------------ Earnings per share $ 1.96 $ 0.41 $ 0.81 ============ ============ ============
The accompanying notes are an intergral part of these Consolidated Statements of Income. 5 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED MAY 31 (IN THOUSANDS)
1997 1996 1995 --------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 40,880 $ 8,458 $ 16,811 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 29,797 26,062 21,841 Amortization of debt discount 29 34 171 Provision for bad debts, net 2,798 974 906 Increase (decrease) in deferred taxes 6,289 (12,885) 827 Loss on sale of operating hotel 220 584 - Provision for asset impairment - 28,160 - Change in assets and liabilities: Change in receivables (6,771) (7,036) (4,529) Change in other assets (13,396) (3,452) 5,343 Change in payable and accrued expenses 17,845 10,922 5,691 Change in current taxes payable 289 1,176 634 Change in other liabilities (1,831) 2,443 1,803 --------------- --------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 76,149 55,440 49,498 --------------- --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property and equipment (81,743) (53,472) (34,889) Acquisition of operating hotels (5,550) (49,617) (59,766) Proceeds from sale of operating hotels 2,522 5,479 - Purchase of minority interest (2,494) (55,269) - Investment in Friendly Hotels PLC - (17,069) - --------------- --------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (87,265) (169,948) (94,655) --------------- --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgages and other long term debt 239,108 17,296 15,567 Principal payments of debt (51,995) (810) (16,382) (Principal payments on) proceeds from notes payable to Manor Care, Inc. (110,000) 27,201 51,461 Proceeds from issuance of common stock 3,410 - - Purchases of treasury stock (53,150) - - Advances (to) from Manor Care, Inc., net (9,971) 73,272 (6,190) --------------- --------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 17,402 116,959 44,456 --------------- --------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 6,286 2,451 (701) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,539 2,088 2,789 --------------- --------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,825 $4,539 $2,088 --------------- --------------- -------------- CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS $ 3,792 $3,103 $ 427 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS $ 7,033 $1,436 $1,661 ============== ============== ==============
The accompanying notes are an integral part of these Consolidated Statements of Cash Flows. 6 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES)
Common Stock ------------------------------ Additional Translation Retained Treasury Shares Amount Paid-in-Capital Adjustment Earnings Stock ------------------------------ ------------------ -------------- -------------- -------------- DISTRIBUTION FROM MANOR CARE, INC., NOV. 1, 1996 63,081,129 $631 $162,512 $(1,750) $ - $ - Net income 40,880 Transfer of net income to Manor Care, Inc. (23,805) Exercise of stock options/grants 781,542 8 4,651 Translation adjustment (5,268) Treasury purchases (3,697,724) (53,372) -------------------------------------------------------------------------------------------------------- BALANCE, MAY 31, 1997 60,164,947 $639 $167,163 $(7,018) $ 17,075 $(53,372) ========================================================================================================
The accompanying notes are an integral part of these Consolidated Statement of Stockholders' Equity. 7 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to proceed with the separation of its lodging business from its health care business through a spin-off of its lodging business (the "Manor Care Distribution"). On September 30, 1996 the Board of Directors of Manor Care declared a special dividend to its shareholders of one share of common stock of Choice Hotels International Inc. (the "Company") for each share of Manor Care stock, and the Board of Directors set the Record Date and the Distribution Date. The Manor Care Distribution was made on November 1, 1996 to holders of record of Manor Care's common stock on October 10, 1996. The Manor Care Distribution separated the lodging and health care businesses of Manor Care into two public corporations. The operations of the Company consist principally of the hotel franchise operations and the owned and managed hotel operations formerly conducted by Manor Care directly or through its subsidiaries (the "Lodging Business"). On November 1, 1996, concurrent with the Manor Care Distribution, the Company changed its name from Choice Hotels Holdings, Inc. to Choice Hotels International, Inc. and the Company's franchising subsidiary, formerly named Choice Hotels International, Inc., changed its name to Choice Hotels Franchising, Inc. ("Franchising"). On April 29, 1997, the Company's Board of Directors announced its intention to separate the Company's franchising business from its owned hotel business. On September 16, 1997 the Board of Directors and shareholders of the Company approved the separation of the businesses through a spin-off of the franchising business, along with the Company's European hotel and franchising operations, to its shareholders (the "distribution"). The Board of Directors set October 15, 1997 as the date of distribution and on that date, Company shareholders received one share in Franchising (to be renamed "Choice Hotels International, Inc.") for every share of Company stock held on October 7, 1997 (the date of record). Concurrent with the October 15, 1997 distribution date, the Company changed its name to Sunburst Hospitality Corporation and effected a one-for-three reverse stock split of its common stock. The consolidated financial statements present the financial position, results of operations and cash flows of the Company for the period prior to November 1, 1996 as if it were formed as a separate entity of Manor Care. In connection with the spin-off of the franchising business, the Company has presented the franchising business as a discontinued operation in the consolidated financial statements. Although the Company's European hotel operations are being distributed to shareholders along with the franchising business, generally accepted accounting principles do not permit presenting this operation as discontinued. Therefore, the European hotel operations are included in continuing operations. The following tables illustrate the impact of the European hotel operations on the continuing operations of the Company (in thousands). 8 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOMESTIC EUROPEAN FISCAL YEAR ENDING HOTEL HOTEL CONTINUING MAY 31, 1997 OPERATIONS OPERATIONS OPERATIONS - ---------------------------------------------------------------------- Revenues $168,016 $17,737 $185,753 Operating expenses 140,468 17,554 158,022 --------------------------------------------- Operating income 27,548 183 27,731 --------------------------------------------- Interest expense 14,899 992 15,891 Pretax income (loss) 12,649 (809) 11,840 Income tax expense (benefit) 5,355 (320) 5,035 --------------------------------------------- Net income (loss) from continuing operations $ 7,294 $ (489) $ 6,805 =============================================
DOMESTIC EUROPEAN FISCAL YEAR ENDING HOTEL HOTEL CONTINUING MAY 31, 1996 OPERATIONS OPERATIONS OPERATIONS - ---------------------------------------------------------------------- Revenues $135,022 $ 19,603 $154,625 Operating expenses 127,722 35,938 163,660 --------------------------------------------- Operating income (loss) 7,300 (16,335) (9,035) -------------------------------------------- Interest expense 12,419 420 12,839 Pretax loss (5,119) (16,755) (21,874) Income tax benefit (1,913) (6,610) (8,523) --------------------------------------------- Net loss from continuing operations $ (3,206) $(10,145) $(13,351) ============================================
DOMESTIC EUROPEAN FISCAL YEAR ENDING HOTEL HOTEL CONTINUING MAY 31, 1995 OPERATIONS OPERATIONS OPERATIONS - ---------------------------------------------------------------------- Revenues $95,876 $18,638 $114,514 Operating expenses 85,777 20,362 106,139 --------------------------------------------- Operating income (loss) 10,099 (1,724) 8,375 --------------------------------------------- Interest expense 9,155 - 9,155 Pretax income (loss) 944 (1,724) (780) Income tax expense (benefit) 361 (684) (323) --------------------------------------------- Net income (loss) from continuing operations $ 583 $(1,040) $ (457) =============================================
9 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOMESTIC EUROPEAN HOTEL HOTEL AS OF MAY 31, 1997 OPERATIONS OPERATIONS CONSOLIDATED - ----------------------------------------------------------------------- Property and equipment, net $326,867 $11,552 $338,419 Other assets 77,648 10,362 88,010 ---------------------------------------------- Total assets $404,515 $21,914 $426,429 ============================================== Debt $246,840 $13,529 $260,369 Other liabilities 38,907 2,666 41,573 ---------------------------------------------- Total liabilities 285,747 16,195 301,942 ---------------------------------------------- Stockholders' equity 118,768 5,719 124,487 ---------------------------------------------- Total liabilities and stockholders' equity $404,515 $21,914 $426,429 ==============================================
DOMESTIC EUROPEAN HOTEL HOTEL AS OF MAY 31, 1996 OPERATIONS OPERATIONS CONSOLIDATED - ----------------------------------------------------------------------- Property and equipment, net $267,215 $13,999 $281,214 Other assets 36,336 10,761 47,097 ---------------------------------------------- Total assets $303,551 $24,760 328,311 ============================================== Long term debt $149,546 $13,951 $163,497 Other liabilities 12,376 4,879 17,255 ---------------------------------------------- Total liabilities 161,922 18,830 180,752 ---------------------------------------------- Stockholders' equity 141,629 5,930 147,559 ---------------------------------------------- Total liabilities and stockholders' equity $303,551 $24,760 $328,311 ==============================================
An analysis of the activity in the "Advances (to) from Manor Care Inc., net" account for the two years ended May 31, 1996 and the five months ended October 31, 1996 is as follows (in thousands): Balance, May 31, 1994 $ 55,208 Cash transfers to Manor Care (6,190) Net income 16,811 -------------- Balance, May 31, 1995 65,829 Cash transfers from Manor Care 73,272 Net income 8,458 -------------- Balance, May 31, 1996 147,559 Cash transfers to Manor Care (9,971) Net income through October 31, 1996 23,805 -------------- Balance, October 31, 1996 $161,393 ==============
10 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA EARNINGS PER SHARE (UNAUDITED) The pro forma earnings per common share is computed by dividing net income by the pro forma weighted average number of common shares outstanding. The pro forma weighted average number of common shares outstanding is after giving effect to the one for three reverse stock split and is based on Manor Care's weighted average number of outstanding common shares for the period prior to November 1, 1996 and the Company's own shares outstanding subsequent to November 1, 1996. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. PRE-OPENING COSTS Pre-opening costs of an operating nature incurred prior to the opening of hotel properties are deferred and amortized over two years for hotels opened prior to November 1, 1996 and one year for hotels opened after that date. Such costs, which are included in other assets, amounted to $1.6 million and $2.4 million, net of accumulated amortization, at May 31, 1997 and 1996, respectively. PROPERTY AND EQUIPMENT The components of property and equipment are as follows:
(In thousands) May 31 1997 1996 ----------------------------- Land $ 56,009 $ 48,153 Buildings 255,106 221,826 Furniture, fixtures and equipment 54,561 44,995 Hotels under construction 36,633 18,224 ----------------------------- 402,309 333,198 Less: accumulated depreciation (63,890) (51,984) ----------------------------- $338,419 $281,214 =============================
Depreciation has been computed for financial reporting purposes using the straight-line method. A summary of the ranges of estimated useful lines upon which depreciation rates have been based follows:
Building and improvements 10-40 years Furniture, fixtures and equipment 3-20 years
SELF-INSURANCE PROGRAM The Company maintains its own self-insurance program for certain levels of general and professional liability, automobile liability and workers' compensation coverage. The estimated costs of these programs are accrued at present values based on actuarial projections for known and anticipated claims. 11 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Prior to the Manor Care Distribution, the Company participated in Manor Care's self-insurance program for certain levels of general and professional liability, automobile liability and workers' compensation coverage. The estimated costs of these programs were accrued at present values based on actuarial projections for known and anticipated claims. All self-insurance liabilities through November 1, 1996, were assumed by Manor Care. IMPAIRMENT POLICY The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the net, undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value of the asset and the expected net cash flows, discounted at an appropriate interest rate. CAPITALIZATION POLICIES The Company capitalizes interest costs and property taxes incurred during the construction of capital assets. Major renovations and replacements are capitalized to appropriate property and equipment accounts. Maintenance, repairs and minor replacements are charged to expense. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. INCOME TAXES The Company was included in the consolidated federal income tax returns of Manor Care prior to the Manor Care Distribution. Subsequent to November 1, 1996, the Company is a separate taxpayer and files its own tax returns. The income tax provision included in these consolidated statements reflects the historical income tax provision and temporary differences attributable to the operations of the Company on a separate return basis. Deferred taxes are recorded for the tax effect of temporary differences between book and tax income. Income before income taxes from continuing operations for the fiscal year ended May 31, 1997, 1996 and 1995 was derived from the following (in thousands): 12 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1995 ---------------------------------------- Income before income taxes Domestic operations $12,649 $ (5,119) $ 944 Foreign operations (809) (16,755) (1,724) ---------------------------------------- Combined income (loss) before income taxes $11,840 $(21,874) $ (780) ========================================
The provision for income taxes for continuing operations follows for the fiscal year ended May 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ----------------------------------------- Current tax (benefit) expense Federal $2,583 $ 94 $ (32) Federal benefit of foreign operations (320) (315) (684) State 292 26 (126) Deferred tax (benefit) expense Federal 2,048 (1,676) 427 Federal benefit of foreign operations (6,295) State 432 (357) 92 ----------------------------------------- $5,035 $(8,523) $(323) =========================================
Deferred tax asset (liabilities) were composed of the following at May 31, 1997 and 1996 (in thousands):
1997 1996 --------------------------- Depreciation and amortization $5,672 $ 7,736 Foreign operations 1,565 1,366 Accrued expenses 626 1,692 Other (658) (669) --------------------------- Net deferred tax asset $7,205 $10,125 ===========================
A reconciliation of income tax expense at the statutory rate to income tax expense included in the accompanying consolidated statement of income for the year ended May 31, 1997, 1996 and 1995 follows:
(In thousands, except federal income tax rate) 1997 1996 1995 ----------------------------------------- Federal income tax rate 35% 35% 35% Federal taxes at statutory rate $4,144 $(7,656) $(273) dState income taxes, net of federal tax benefit 573 (982) (22) Other 318 115 (28) ----------------------------------------- Income tax expense $5,035 $(8,523) $(323) =========================================
Cash paid for state income taxes was $805,000, $165,000, and $86,000 for the year ending May 31, 1997, 1996 and 1995. Federal income taxes were paid by Manor Care for the period ending October 31, 1996 and the years ended May 31, 1996 and 1995. The Company paid federal income taxes for the consolidated group (including Franchising and its subsidiaries) of $5.5 million for the period from November 1, 1996 through May 31, 1997. 13 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company and Manor Care entered into a tax-sharing agreement for purposes of allocating pre-Manor Care Distribution tax liabilities among the Company and Manor Care and their respective subsidiaries. In general, Manor Care is responsible for (i) filing the consolidated federal income tax return that include the Company and its subsidiaries and (ii) paying the taxes relating to such tax returns to the applicable taxing authorities. The Company will reimburse Manor Care for the portion of such taxes that relates to the Company and its subsidiaries. In addition, the Company will assume liability for all taxes payable by the Company or by Manor Care in the event the Manor Care Distribution is determined not to be tax-free for federal income tax purposes. Manor Care and the Company have agreed to cooperate with each other and to share information in preparing such tax returns and in dealing with other tax matters. Following the distribution of Franchising, the Company and Franchising entered into a tax-sharing agreement to allocate pre-distribution tax liabilities among the Company and Franchising and their respective subsidiaries. In general, the Company will be responsible for (i) filing the consolidated federal income tax return for the Company's affiliated group (including Franchising and its subsidiaries through the date of the distribution) and (ii) paying the taxes related to such returns to the applicable taxing authorities. Franchising will reimburse the Company for the portion of such taxes that relates to Franchising and its subsidiaries. ACCRUED EXPENSES Accrued expenses were as follows:
(In thousands) May 31, 1997 1996 -------------------------- Payroll $ 8,479 $3,531 Taxes, other than income 4,097 3,237 Other 3,392 1,763 -------------------------- $15,968 $8,531 ==========================
LONG TERM DEBT AND NOTES PAYABLE Debt consisted of the following at May 31, 1997 and 1996:
(In thousands) 1997 1996 -------------------------- $125 million competitive advance and multi- currency revolving credit facility with an average rate of 6.28% at May 31, 1997 $ 90,500 $ - Multi-class mortgage pass-through certificates with a blended weighted average rate of 7.8% 117,294 - Notes payable to Manor Care with a rate of 9% at May 31, 1997 37,022 147,023 Capital lease obligations 15,553 16,474 -------------------------- Total indebtedness $260,369 $163,497 ==========================
14 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Maturities of debt at May 31, 1997 were as follows:
FISCAL YEAR (In thousands) 1998 $ 27,919 1999 2,929 2000 105,940 2001 3,704 2002 4,125 Thereafter 115,752 ------------- $260,369 =============
On October 30, 1996, the Company entered into a $100.0 million competitive advance and multi-currency revolving credit facility (the "October 1996 credit facility") provided by a group of seven banks. This facility provides that up to $75.0 million is available for borrowings in foreign currencies. Borrowings under the October 1996 credit facility are, at the option of the borrower, at one of several rates including LIBOR plus 30 basis points. In addition, the Company has the option to request participation at lower rates than those contractually provided by the October 1996 credit facility. This facility presently requires the Company to pay annual fees of 2/10 of 1% of the total loan commitment. On May 5, 1997, the Company increased the size of the facility from $100 million to $125 million through December 31, 1997, at which time the incremental difference of $25 million is due. The October 1996 credit facility was terminated on October 15, 1997 in conjunction with the distribution. On April 23, 1997 the Company, through its indirect subsidiary First Choice Properties Corporation, completed an offering of $117.5 million multi-class mortgage pass through certificates (collectively, "the mortgage securities"). The mortgage securities, which bear a blended weighted average interest rate of 7.8% and have a final maturity of May 5, 2012, contain customary covenants with respect to, among other things, limits on levels of indebtedness, liens, certain investments, transactions with affiliates, asset sales, mergers, and consolidations. The Company had $3.9 million in escrow at May 31, 1997 related to the mortgage securities. The escrow, which is included in other assets, is for property taxes, insurance and capital expenditures of the properties collateralizing the mortgage securities. The mortgage securities are nonrecourse and collateralized by 36 hotels owned by the Company. The offering's net proceeds of $110 million have been used to prepay a portion of a loan from Manor Care. The prepayment resulted in an extraordinary loss from early debt redemption of $1.1 million, net of taxes. In conjunction with the April 1997 issuance of the mortgage securities, the Company entered into a series of interest rate swap agreements having a total notional principal amount of $50.0 million. The agreements were terminated concurrent with the pricing of the mortgage securities, resulting in a $862,000 gain. The gain has been deferred and is being amortized over the life of the mortgage securities as an offset to interest expense. 15 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company entered into two new debt facilities in October 1997 in connection with the distribution: (i) a $80 million revolving credit facility (the "October 1997 credit facility"); and (ii) a $115.0 million pay-in-kind note payable to Franchising (the "Franchising Note"). Proceeds from the new debt were used to repay the Company's remaining portion of the loan from Manor Care and the October 1996 credit facility, and for advances previously made by Franchising to the Company. The unused portion of the October 1997 credit facility will be used by the Company for working capital, including capital expenditures and acquisitions. The October 1997 credit facility includes customary financial and other covenants that will require the maintenance of certain ratios including maximum leverage, minimum net worth and interest coverage, and will restrict the Company's ability to make certain investments, repurchase stock, incur debt, and dispose of assets. At the Company's option, the interest rate may be based on LIBOR, a certificate of deposit rate or an alternate base rate (as defined), plus a facility fee. The rate is determined based on the Company's consolidated leverage ratio at the time of borrowing. The Franchising Note has a maturity of five years, accrues interest at a rate equal to 500 basis points above the interest rate on a five-year U.S. Treasury Note and contains restrictive covenants similar to those in the October 1997 credit facility. Cash paid for interest was $14.8 million, $12.8 million and $9.1 million for fiscal years 1997, 1996 and 1995, respectively. At May 31, 1997, owned property with a net book value of $146.7 million was pledged or mortgaged as collateral. LEASES The Company operates certain property and equipment under leases that expire at various dates through 2014. Future minimum lease payments are as follows:
(In thousands) Operating Capitalized Leases Leases 1998 $ 685 $ 1,420 1999 140 1,400 2000 140 1,498 2001 140 1,498 2002 140 1,613 Thereafter 6,575 21,746 ------- --------- Total minimum lease payments $7,820 29,175 ======= Less: interest (13,622) --------- Present value of lease payments $ 15,553 =========
Rental expense under non-cancelable operating leases was $329,000, $332,000, and $321,000 in 1997, 1996 and 1995, respectively. In fiscal year 1997, the Company paid $4.5 million to Manor Care for office rent, 16 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of which Franchising reimbursed the Company $4.0 million for its portion of total space occupied. ACQUISITIONS AND DIVESTITURES During fiscal year 1997, the Company acquired two hotels containing 324 rooms valued at $10.7 million and disposed of one hotel containing 153 rooms for $2.5 million. During fiscal year 1996, the Company purchased 16 hotels containing more than 1,900 rooms for $49.6 million. During fiscal year 1995, the Company purchased 16 hotels containing more than 2,300 rooms for $59.8 million. DISCONTINUED OPERATIONS The revenues, income from discontinued operations before income taxes, and net income from discontinued operations were as follows:
Fiscal year ended May 31, 1997 1996 1995 ----------------------------------------- Revenue $249,822 $227,277 $190,441 Expenses, excluding income taxes 189,438 189,545 159,706 ----------------------------------------- Income from discontinued operations before income taxes 60,384 37,732 30,735 Income taxes 25,165 15,923 13,467 ----------------------------------------- Net income from discontinued operations $ 35,219 $ 21,809 $ 17,268 =========================================
Net investment in discontinued operations is composed of the following:
As of May 31, 1997 1996 ---------------------------- Property and equipment, net $31,825 $24,306 Goodwill, net 69,938 65,377 Franchising rights, net 50,504 53,138 Receivables 23,322 20,475 Other assets 31,880 31,270 ---------------------------- Total assets $207,469 $194,566 ============================ Debt $111,634 $131,364 Other liabilities 43,499 38,600 ---------------------------- Total liabilities 155,133 169,964 ---------------------------- Net investment and advances from parent 52,336 24,602 ---------------------------- Total liabilities and equity $207,469 $194,566 ============================
COMMITMENTS AND CONTINGENCIES The Company is a defendant in a number of lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate 17 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS outcome of such litigation will not have a material adverse effect on the Company's business, financial position, or results of operations. PENSION, PROFIT SHARING AND INCENTIVE PLANS Bonuses accrued for key executives of the Company under incentive compensation plans were $200,000, $100,000, and $300,000 in fiscal years 1997, 1996 and 1995, respectively. Employees participate in retirement plans sponsored by the Company, and prior to the Manor Care Distribution, employees participated in retirement plans sponsored by Manor Care. Costs allocated to the Company were based on the size of its payroll relative to the sponsor's payroll. Costs allocated to the Company for continuing operations were approximately $800,000, $583,000 and $424,000 in 1997, 1996 and 1995, respectively. CAPITAL STOCK During fiscal year 1997, the Company repurchased 3,697,724 shares of its common stock at a total cost of $53.4 million. The Company has stock option plans for which it is authorized to grant options to purchase up to 7.3 million shares of the Company's common stock. Stock options may be granted to officers, key employees and non-employee directors with an exercise price not less than the fair market value of the common stock on the date of grant. Options outstanding at November 1, 1996 represent options that resulted from the Manor Care Distribution. Option activity under the above plans is as follows:
Weighted Number Option of Shares Price -------------------------- Outstanding at November 1, 1996 5,920,648 $ 8.49 Granted 397,693 14.79 Exercised (1,110,164) 12.60 Cancelled (259,145) 11.02 -------------------------- Outstanding at May 31, 1997 4,949,032 $ 9.05 ==========================
In connection with the distribution, the outstanding options held by current and former employees of the Company as of October 15, 1997 were redenominated in both Company and Franchising stock, and the number and exercise prices of the options were adjusted based on the relative trading prices of shares of the common stock of the two companies to retain the intrinsic value of the options. The option prices in the table above have not been adjusted for the distribution or the reverse stock split. At May 31, 1997, the options with a weighted average remaining life of 3.4 years covering 1,614,891 shares were exercisable at $2.70 to $12.52 per share with a weighted average of $5.11 per share. 18 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATMENTS Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"), requires companies to provide additional disclosures about employee stock-based compensation plans based on a fair value based method of accounting. SFAS No. 123 is effective for fiscal years that begin after December 15, 1995. As permitted by this accounting standard, the Company continues to account for these plans under Accounting Principles Board Opinion 25, under which no compensation cost has been recognized. Compensation cost for the Company's stock option plan was determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123. The fair value of each option grant has been estimated on the date of grant using an option-pricing model with the following weighted average assumptions used for grants in 1997: risk-free interest rate of 6.4% and volatility of 30%, expected lives of 10 years and 0% dividend yield. The weighted average fair value per option granted during fiscal year 1997 was $8.35. If options had been reported as compensation expense based on their fair value pro forma, net income would have been $40.3 million for 1997, and pro forma earnings per share would have been $1.92. Since this methodology has not been applied to options granted prior to the Manor Care Distribution date, the resulting pro forma compensation cost is not likely to be representative of that to be expected in future years. RELATIONSHIP WITH MANOR CARE The Company entered into various agreements in connection with the Manor Care Distribution which provide, among other things, that (i) Manor Care is responsible for filing and paying the related taxes on consolidated federal tax returns and consolidated or combined state tax returns for itself and any of its affiliates (including the Company and Franchising) for the periods of time that the affiliates were members of the consolidated group, (ii) the Company would reimburse Manor Care for the portion of such taxes that relates to the Company and its subsidiaries, (iii) Manor Care would lease office space to the Company in Silver Spring, Maryland, (iv) the Company would enter into a loan agreement with Manor Care for $225.7 million previously advanced at an interest rate of 9% ($37.0 million of which is outstanding at May 31, 1997 as an obligation of the Company following the distribution), and (v) Manor Care would provide certain corporate services to the Company. In 1997, the Company incurred $525,000 in rent expense for office space leased from Manor Care, $12.4 million in interest expense on the loan, and $2.1 million in corporate expense for corporate services provided by Manor Care. RELATIONSHIP WITH CHOICE HOTELS INTERNATIONAL, INC. For purposes of providing an orderly transition after the distribution, the Company and Franchising entered into various agreements, including, among others, a Distribution Agreement, a Tax Sharing Agreement, a Corporate Services Agreement and an Employee Benefits Allocation Agreement. Effective as of October 15, 1997, these agreements provide, 19 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS among other things, that the Company (i) will receive and/or provide certain corporate and support services, such as accounting, tax and computer systems support, (ii) will adjust outstanding options to purchase shares of Company common stock held by Company employees, Franchising employees, and employees of Manor Care, (iii) is responsible for filing and paying the related taxes on consolidated federal tax returns and consolidated or combined state tax returns for itself and any of its affiliates (including Franchising) for the periods of time that the affiliates were members of the consolidated group, (iv) will be reimbursed by Franchising for the portion of income taxes paid that relate to Franchising and its subsidiaries, (v) will enter into a loan agreement with Franchising for $115.0 million at an interest rate of 500 basis points over the interest rate of a five-year U.S. Treasury Note, and (vi) guarantees that Franchising will, at the date of distribution, have a specified level of net worth. The Company and Franchising have entered into a strategic alliance agreement. Among other things, the agreement will provide for (i) a right of first refusal to Franchising to franchise properties to be acquired or developed by the Company, (ii) certain commitments by the Company for the development of Sleep Inns and MainStay Suites hotels, (iii) continued cooperation of both parties with respect to matters of mutual interest, such as new product and concept testing, (iv) continued cooperation with respect to third party vendor arrangements and certain limitations on competition in each others' line of business. The strategic alliance agreement extends for a term of 20 years with mutual rights of termination on the 5th, 10th and 15th anniversaries. The Company and Franchising also entered into a financial consulting agreement which provides for certain payments to the Company by Franchising. During 1997, the Company operated substantially all of its hotels pursuant to franchise agreements with Franchising. Total fees paid to Franchising included in the accompanying financial statements for franchising marketing, reservation and royalty fees are $9.5 million, $7.5 million, and $5.3 million for the years ending May 31, 1997, 1996 and 1995, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The balance sheet carrying amount of cash and cash equivalents and receivables approximate fair value due to the short term nature of these items. Mortgages and other long term debt consist of bank loans and mortgages. Interest rates on bank loans adjust frequently based on current market rates; accordingly, the carrying amount of bank loans is equivalent to fair value. The carrying amount for the notes payable to Manor Care approximates fair value. Because the mortgage securities were originated in April 1997 at market rates, the fair value at May 31, 1997, approximates the carrying value. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during 20 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS fiscal year 1997. The adoption of SFAS No. 121 did not have an impact on the Company's financial statements. The Company is required to adopt SFAS No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital Structure," no later than fiscal year 1998. The adoption of these pronouncements will not materially affect the Company's financial statements. The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," no later than fiscal year 1999. The adoption of these pronouncements will not materially affect the continuing operations of the Company. 21 -----END PRIVACY-ENHANCED MESSAGE-----