-----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, EuRMgOgasUIh754L34pZFZxxIeHZ7Es+0occg7/ytrwRpwLZnV+YI/7Hm8QHzapN 7S3yZyjTWASDd5vw3BwVcw== 0000928385-98-001582.txt : 19980807 0000928385-98-001582.hdr.sgml : 19980807 ACCESSION NUMBER: 0000928385-98-001582 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980806 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBURST HOSPITALITY CORP CENTRAL INDEX KEY: 0001018146 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521985619 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11915 FILM NUMBER: 98678494 BUSINESS ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3019795000 MAIL ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 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 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NO. 1-11915 SUNBURST HOSPITALITY CORPORATION 10770 COLUMBIA PIKE SILVER SPRING, MD. 20901 (301) 979-5000 Delaware 53-1985619 -------- ---------- (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) ------------------------------------------- (Former name, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- SHARES OUTSTANDING CLASS AT JUNE 30, 1998 ------ ---------------- Common Stock, $0.01 par value per share 19,970,510 ---------- ================================================================================ SUNBURST HOSPITALITY CORPORATION INDEX -----
PAGE NO. ------- PART I. FINANCIAL INFORMATION: Condensed Consolidated Balance Sheets - June 30, 1998 (Unaudited) and December 31, 1997 3 Condensed Consolidated Statements of Income - Three and six months ended June 30, 1998 and June 30, 1997 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and June 30, 1997 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 10 PART II. OTHER INFORMATION AND SIGNATURE 16
2 SUNBURST HOSPITALITY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
As of ----------------------------- June 30, December 31, 1998 1997 ------------- ------------- ASSETS Real estate, net $ 376,627 $ 371,305 Real estate held for sale 17,919 - Receivables (net of allowance for doubtful accounts of $582 and $616, respectively) 9,810 6,261 Other assets 11,176 17,509 Cash and cash equivalents 6,247 5,908 ------------- ------------- TOTAL ASSETS $ 421,779 $ 400,983 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Debt Mortgages and other long term debt $ 147,172 $ 133,648 Note payable to Choice Hotels International, Inc. 122,366 117,120 ------------- ------------- 269,538 250,768 Accounts payable and accrued expenses 35,942 33,415 Payable to Choice Hotels International, Inc. 19,921 25,066 Deferred income taxes ($2,714 and $1,378, respectively) and other liabilities 3,760 2,427 ------------- ------------- Total liabilities 329,161 311,676 ------------- ------------- STOCKHOLDERS' EQUITY Common stock (60,000,000 authorized, at $0.01 par value, 21,389,750 and 21,366,282 issued and 19,970,510 and 19,947,042 outstanding at June 30, 1998 and December 31, 1997, respectively) 200 200 Additional paid-in-capital 105,898 105,653 Retained earnings (13,480) (16,546) ------------- ------------- Total stockholders' equity 92,618 89,307 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 421,779 $ 400,983 ============= ============= The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets.
3 SUNBURST HOSPITALITY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the three months ended For the six months ended June 30, June 30, -------------------------- --------------------------- 1998 1997 1998 1997 ------- ------- -------- ------- REVENUES Rooms $47,691 $46,103 $ 87,673 $86,207 Food and beverage 4,432 3,892 8,540 7,035 Other 2,317 1,842 4,366 3,586 ------- ------- -------- ------- Total revenues 54,440 51,837 100,579 96,828 ------- ------- -------- ------- OPERATING EXPENSES Departmental expenses 17,683 19,447 32,847 36,484 Undistributed operating expenses 16,211 14,400 31,173 28,872 Depreciation and amortization 7,324 5,550 13,706 10,931 Corporate 4,028 1,858 7,492 3,495 ------- ------- -------- ------- Total operating expenses 45,246 41,255 85,218 79,782 ------- ------- -------- ------- OPERATING INCOME 9,194 10,582 15,361 17,046 ------- ------- -------- ------- INTEREST EXPENSE 5,232 4,831 10,175 9,165 ------- ------- -------- ------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 3,962 5,751 5,186 7,881 Income taxes 1,604 2,527 2,120 3,464 ------- ------- -------- ------- INCOME FROM CONTINUING OPERATIONS 2,358 3,224 3,066 4,417 DISCONTINUED OPERATIONS: Income from operations of discontinued franchising business (less applicable income taxes of $7,855 and $11,450, respectively) - 10,983 - 16,009 ------- ------- -------- ------- EXTRAORDINARY ITEM -- LOSS FROM EARLY EXTINGUISHMENT OF DEBT (NET OF $747 TAX BENEFIT) - 1,144 - 1,144 NET INCOME $ 2,358 $13,063 $ 3,066 $19,282 ======= ======= ======== ======= Basic earnings per share From continuing operations $ 0.12 $ 0.16 $ 0.15 $ 0.21 From discontinued operations - 0.54 - 0.78 From extraordinary item (0.05) (0.06) ------- ------- -------- ------- Earnings per share $ 0.12 $ 0.65 $ 0.15 $ 0.93 ======= ======= ======== ======= Diluted earnings per share From continuing operations $ 0.12 $ 0.16 $ 0.15 $ 0.21 From discontinued operations - 0.53 - 0.75 From extraordinary item (0.06) - (0.05) ------- ------- -------- ------- Earnings per share $ 0.12 $ 0.63 $ 0.15 $ 0.91 ======= ======= ======== ======= The accompanying notes are an integral part of these Condensed Consolidated Statements of Income.
4 SUNBURST HOSPITALITY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the six months ended June 30, ------------------------ 1998 1997 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 3,066 $ 3,273 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 13,706 10,931 Other non-cash items 6,720 4,999 Change in assets and liabilities: Change in receivables (3,686) (1,628) Change in other assets (1,332) (3,702) Change in accounts payable and accrued expenses 2,527 5,019 Change in payable to Choice Hotels International, Inc. (5,145) - Change in current taxes receivable 2,903 (695) ----------- ---------- NET CASH PROVIDED BY CONTINUING OPERATIONS 18,759 18,197 NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 33,844 ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 18,759 52,041 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property and equipment (32,403) (36,367) Acquisition of operating hotels - (5,550) Proceeds from sale of property and equipment 399 2,522 ----------- ---------- NET CASH UTILIZED BY CONTINUING OPERATIONS (32,004) (39,395) NET CASH UTILIZED BY DISCONTINUED OPERATIONS - (9,920) ----------- ---------- NET CASH UTILIZED BY INVESTING ACTIVITIES (32,004) (49,315) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgages and other long term debt 15,000 199,200 Principal payments on notes payable to Manor Care, Inc. - (110,000) Principal payments of debt (1,477) (686) Payment of financing fees - (3,959) Proceeds from issuance of common stock 61 4,352 Purchases of treasury stock - (53,150) ----------- ---------- NET CASH PROVIDED BY CONTINUING OPERATIONS 13,584 35,757 NET CASH UTILIZED BY DISCONTINUED OPERATIONS - (24,514) ----------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,584 11,243 ----------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS 339 13,969 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,908 4,170 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,247 $ 18,139 =========== ========== Cash and cash equivalents of continuing operations $ 6,247 $ 15,404 Cash and cash equivalents of discontinued operations $ - $ 2,735 The accompanying notes are an integral part of these Condensed Consolidated Statements of Cash Flows.
5 SUNBURST HOSPITALITY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. The accompanying consolidated financial statements of Sunburst Hospitality Corporation and subsidiaries (the "Company") have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the seven months ended December 31, 1997 and notes thereto included in the Company's Form 10-K, dated March 30, 1998. Certain reclassifications have been made to the prior year amounts to conform to current period presentation. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 1998, the results of operations for the three and six months ended June 30, 1998 and 1997, respectively, and cash flows for the six months ended June 30, 1998 and 1997, respectively. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations. 2. 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 via 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. for each share of Manor Care stock, and the Board set the Record Date and the Distribution Date. The Stock 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 consisted principally of the hotel franchise operations and the owned and managed hotel operations formerly conducted by Manor Care directly or through its subsidiaries. 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 ("Choice 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 business via a spin- off of the franchising business, along with the Company's European hotel and franchising operations (the "Choice Spin-Off"), to its shareholders. The Board set October 15, 1997 as the date of distribution and on that date, Company shareholders received one share in Franchising (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. In connection with the Distribution, the Company has presented the franchising business as a discontinued operation in the consolidated statement of income and consolidated statement of cash flows for the three and six months ended June 30, 1997. Although the Company's European hotel operations were distributed to shareholders along with the franchising business, generally accepted accounting principles do not permit presenting this operation as discontinued. The following schedules illustrate the impact of the European hotel operations on the operating results of the Company for the three and six months ended June 30, 1997. 6
Three months ended Domestic Hotel European Hotel Continuing June 30, 1997 Operations Operations Operations - ----------------------------------------------------------------------------- Revenues $46,982 $4,855 $51,837 Operating income 10,272 310 10,582 Pretax income 5,666 85 5,751 Net income 3,173 51 3,224
Six months ended Domestic Hotel European Hotel Continuing June 30, 1997 Operations Operations Operations - ----------------------------------------------------------------------------- Revenues $88,240 $8,588 $96,828 Operating income 17,050 (4) 17,046 Pretax income 8,348 (467) 7,881 Net income 4,700 (283) 4,417
3. The following table illustrates the reconciliation of income from continuing operations and number of shares used in the basic and diluted earnings per share calculations.
For the three months ended For the six months ended --------------------------------------------------------------- (in thousands, except per share amounts) June 30, June 30, --------------------------------------------------------------- 1998 1997 1998 1997 --------------------------------------------------------------- Computation of basic earnings per share Income from continuing operations $ 2,358 $ 3,224 $ 3,066 $ 4,417 Weighted average shares outstanding 19,967 20,222 19,962 20,626 --------------------------------------------------------------- Basic earnings per share from continuing operations $ 0.12 $ 0.16 $ 0.15 $ 0.21 =============================================================== Computation of diluted earnings per share Income from continuing operations $ 2,358 $ 3,224 $ 3,066 $ 4,417 Weighted average shares outstanding 19,967 20,222 19,962 20,626 Effect of dilutive securities: Employee stock option plan 373 493 469 507 --------------------------------------------------------------- Shares for diluted earnings per share 20,340 20,715 20,431 21,133 --------------------------------------------------------------- Diluted earnings per share from continuing operations $ 0.12 $ 0.16 $ 0.15 $ 0.21 ===============================================================
7 The effect of dilutive securities is computed using the treasury stock method and average market prices during the period. Certain options to purchase common stock were not included in the computation of diluted earnings per share because the exercise of the options exceeded the average market price of the common shares for the period. The following table summarizes such options.
June 30, ------------------------- 1998 1997 ------------------------- Number of shares 562,615 60,000 Weighted average exercise price $ 8.06 $ 7.74
The weighted average number of common shares outstanding for the three and six months ended June 30, 1997 is after giving effect to the one-for-three reverse stock split. 4. As of June 30,1998, the Company owned and managed 85 hotels with 11,754 rooms in 28 states under the following brand names: Comfort, Clarion, Sleep, Quality, MainStay, Rodeway and Econo Lodge. 5. The Company has identified six hotels that are currently being marketed for sale. At June 30, 1998, the net book value of the hotels held for sale is $17.9 million. In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company discontinued depreciating these assets while they are held for sale. In addition, SFAS No. 121 requires that assets held for sale be reported at the lower of the carrying amount or fair value less costs to sell. The Company has concluded that the assets are properly recorded and no writedown is necessary. The six hotels held for sale reported total revenues of $1.9 million and $3.2 million for the three and six months ended June 30, 1998, and $1.8 million and $3.3 million for the three and six months ended June 30, 1997, respectively. Operating income (before allocations for corporate expenses) of the six hotels was $263,000 and $150,000 for the three and six months ended June 30, 1998, respectively and $200,000 and $229,000 for the three and six months ended June 30, 1997. 6. 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, 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, and (v) guarantees that Franchising will, at the date of the Distribution have a specified minimum level of net worth. As of June 30, 1998, the Company has a $19.9 million liability to Choice related to the net worth guarantee, the estimated final allocation of liabilities and assets and for expenses incurred by Choice on behalf of the Company. 7. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities"(the "SOP"). The SOP, which is effective for fiscal years beginning after December 15, 1998, requires costs related to start-up activities to be expensed as incurred. Presently, the Company capitalizes such costs and amortizes them over a period of one year. The Company intends to adopt the standard on January 1, 1999. Initial application of the SOP will be reported as a cumulative effect of a change in accounting principle. If the Company would have adopted this standard on January 1, 1998, the effect would have been to decrease income from continuing operations by approximately $65,000 for the three months ended June 30, 1998, and to 8 increase income from continuing operations by approximately $116,000 for the six months ended June 30, 1998. Net income for the six month period would have decreased by approximately $578,000, as a result of a charge for the cumulative effect of a change in accounting principle of $694,000 (net of taxes). 8. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," on January 1, 1998. The adoption of SFAS No. 130 does not impact the operations of the Company as the Company does not have any items considered to be other comprehensive income under SFAS No. 130. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION -------------------------------------------------------------------------- The Company is a national owner and operator of hotel properties with a portfolio at June 30, 1998 of 85 hotels (11,754 rooms) in a total of 28 states. The Company operates each of its hotels under one of the Choice Brands: MainStay, Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. The Company's continuing business consists primarily of guest room revenue, meeting room revenue, and food and beverage revenue from owned and operated hotels. On October 15, 1997, the Company separated the Choice Franchising Business (which had previously been conducted primarily through Franchising) and its European owned and managed hotels from its other operations pursuant to a pro rata distribution to its shareholders of all the common stock of Franchising. At the time of the Choice Spin-Off, Franchising changed its name to "Choice Hotels International, Inc." The Company changed its name to "Sunburst Hospitality Corporation" and effected a one-for-three reverse stock split. European hotel operations, which were distributed to Choice in the Choice Spin-Off, are presented as part of continuing operations in the consolidated financial statements for all periods prior to the Choice Spin-Off in accordance with generally accepted accounting principles ("GAAP"). However, for purposes of analyzing the operations of the Company, management focuses on domestic hotel operations. Therefore, the following discussion focuses on the results of operations of the domestic hotels, which constitute the ongoing operations of the Company subsequent to October 15, 1997. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 - ----------------------------------------------------------------------- Continuing Operations - --------------------- Total revenues for the three months ended June 30, 1998 were $54.4 million, a 5.0% increase over the second quarter of 1997. Domestic revenues increased $7.5 million, or 15.9%, from $47.0 million for the three months ended June 30, 1997 to $54.4 million for the same period of 1998. Room revenues contributed $6.4 million to the growth in revenue, while food and beverage and other revenue each contributed $0.5 million. The increase in room revenue is attributable to a 15.7% increase in the number of rooms, from 10,156 at June 30, 1997 to 11,754 at June 30, 1998, and a 3.7% increase in comparable hotel average daily rates. The fires in the state of Florida negatively impacted revenues for the second quarter, as 13 of the Company's 85 hotels are located in Florida. Operating expenses increased 9.7%, or $4.0 million for the three months ended June 30, 1998 compared to the same period of 1997. Domestic operating expenses increased $8.5 million from $36.7 in 1997 to $45.2 in 1998. The increase in domestic operating expenses results from the addition of 15 hotels to the Company's portfolio and the increased expense of operating as a separate company. Domestic departmental and undistributed operating expenses increased $4.3 million or 14.4%, while depreciation and amortization expense increased $2.1 million. Corporate expense increased $2.2 million, from $1.9 million for the three months ended June 30, 1997, to $4.0 million for the same period of 1998. Included in corporate expense for the three months ended June 30, 1998 are $350,000 of non-recurring expenses associated with a public offering of common stock that was withdrawn during the second quarter. Income from continuing operations before interest, depreciation and amortization ("EBITDA") increased 2.4%, from $16.1 million for the three months ended June 30, 1997, to $16.5 for the same period of 1998. Domestic EBITDA increased 6.7% from $15.5 million for the June 1997 quarter to $16.5 million for the June 1998 quarter. The Company considers EBITDA to be an indicative measure of operating performance, particularly due to the large amount of depreciation and amortization. Such information should not be considered an alternative to net income, operating income, cash flow from operations, or any other operating or liquidity performance measure prescribed by GAAP. Gross profit from hotel operations (operating income before depreciation and amortization and corporate expense) increased 14.2% in the three months ending June 30, 1998 to $20.5 million, while the gross profit from hotel operations margin increased from 34.7% to 37.7%. Interest expense increased $401,000 to $5.2 million for the three months ended June 30, 1998 compared to the same period of 1997. Domestic interest expense increased $626,000, or 13.6%, from $4.6 million for the three months ended June 30, 1997 to $5.2 million for the same period of 1998. The increase is a result of additional 10 borrowings associated with the Company's development and construction of hotels. Income from continuing operations decreased $866,000 from $3.2 million for the three months ended June 30, 1997 to $2.4 million for the same period of 1998. Domestic income from continuing operations decreased $815,000 for three months ended June 30, 1998 compared to the same period of 1997. The decrease results from the additional expenses associated with operating the company on a stand-alone basis and the increase in depreciation and amortization and interest expenses resulting from the addition of 15 hotels to the Company's portfolio. Earnings per share from continuing operations decreased from $0.16 per share for the 1997 period to $0.12 per share for the 1998 period. In May 1997, the Company prepaid $110.0 million in notes payable to Manor Care. The prepayment of the notes resulted in a prepayment penalty of $1.1 million, net of taxes, which is presented on the statement of operations as an extraordinary item. The following table breaks-out the operating results of the Company's portfolio into four segments: extended-stay (consisting of the Company's MainStay Suites hotels), traditional all-suite, full-service, and limited- service for the three months ended June 30, 1998 and 1997.
Number of Three months ended Hotels June 30, June 30, --------------------------------- 1998/1997 1998 1997 ------------------------------------------------ Extended-Stay (1) 11 / 1 Average daily rate $55.10 $55.30 Occupancy % 59.6% 78.4% RevPAR $32.84 $43.36 Traditional All-Suite 5 / 5 Average daily rate $72.36 $69.61 Occupancy % 75.9% 75.4% RevPAR $54.92 $52.49 Full-Service 16 / 15 Average daily rate $69.61 $67.46 Occupancy % 71.1% 72.5% RevPAR $49.49 $48.91 Limited-Service 53 / 49 Average daily rate $59.63 $57.60 Occupancy % 72.5% 73.5% RevPAR $43.23 $42.34 Total Portfolio 85 / 70 Average daily rate $62.92 $61.37 Occupancy % 71.2% 73.4% RevPAR $44.80 $45.04
(1) Only one of the Company's MainStay Suites has been open during all periods presented. The decline in RevPAR and occupancy rates for the Company's MainStay Suites primarily results from the lower RevPAR and occupancy rates at the Company's eight recently opened MainStay Suites which are currently experiencing the stabilization period common to newly opened hotels. 11 Discontinued operations - ----------------------- Income from discontinued operations of $11.0 million for the three months ended June 30, 1997, represents the income, net of taxes, of the Franchising segment. The Franchising segment, along with European hotel operations, was distributed to shareholders on October 15, 1997. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - ---------------------------------------------------------------------- Continuing Operations - --------------------- Total revenues for the six months ended June 30, 1998 were $100.6 million, an increase of $3.8 million over the same period of 1997. Domestic revenues increased $12.3 million, or 14.0%, in the first six months of 1998 compared to the same period of 1997. The increase results primarily from the net addition of 15 hotels and 1,598 rooms to the Company's portfolio and a 4.6% increase in comparable hotel average daily rates. Food and beverage revenue also contributed $1.5 million to the increase in revenue for the first six months of 1998. Total operating expenses increased 6.8%, or $5.4 million, for the six months ended June 30, 1998 compared to the same period of 1997. Domestic operating expenses increased $14.0 million for the first half of 1998 compared to the same period of 1997. The increase is a result of the addition of 1,598 rooms to the Company's portfolio and the increased cost of operating as a stand- alone company. Domestic depreciation and amortization expense increased $3.5 million, while corporate expense increased $4.0 million for the six months ended June 30, 1998. Included in corporate expense for the six months ended June 30, 1998 are $350,000 of non-recurring expenses associated with a public offering of common stock that was withdrawn during the second quarter. Total EBITDA increased $1.1 million from $28.0 million for the six months ended June 30, 1997 to $29.1 million for the same period of 1998. Domestic hotel EBITDA increased $1.8 million, or 6.6%, to $29.1 million in 1998. Domestic gross profit from hotel operations (operating income before depreciation and amortization and corporate expense) increased 18.8%, from $30.8 million for the six months ended June 30, 1997, to $36.6 for the same period of 1998. Interest expense increased $1.0 million to $10.2 million. Domestic interest expense increased $1.5 million, or 16.9%, in 1998 as a result of increased borrowings associated with the development and construction of new hotels. Income from continuing operations decreased $1.4 million for the first half of 1998. Domestic income from continuing operations decreased $1.6 million from $4.7 million for the six months ended June 30, 1997 to $3.1 million for the same period of 1998. The decrease is primarily attributable to increased depreciation and amortization expense and interest expense associated with the development of new hotels and increased corporate expense associated with operating the company on a stand-alone basis. The following table breaks-out the operating results for the six months ended June 30, 1998 and 1997 of the Company's portfolio into four segments: extended-stay (consisting of the Company's MainStay Suites hotels), traditional all-suite, full-service, and limited-service. 12
Number of Six months ended Hotels June 30, June 30, ----------------------------------- 1998/1997 1998 1997 ----------------------------------------------- Extended-Stay (1) 11 / 1 Average daily rate $55.19 $55.47 Occupancy % 50.9% 72.8% RevPAR $28.09 $40.38 Traditional All-Suite 5 / 5 Average daily rate $78.53 $75.18 Occupancy % 74.6% 73.9% RevPAR $58.58 $55.56 Full-Service 16 / 15 Average daily rate $70.11 $66.69 Occupancy % 65.8% 67.2% RevPAR $46.13 $44.82 Limited-Service 53 / 49 Average daily rate $59.52 $57.36 Occupancy % 67.9% 70.1% RevPAR $40.41 $40.21 Total Portfolio 85 / 70 Average daily rate $63.52 $61.32 Occupancy % 66.4% 69.4% RevPAR $42.18 $42.56
(1) Only one of the Company's MainStay Suites has been open during all periods presented. The decline in RevPAR and occupancy rates for the Company's MainStay Suites primarily results from the lower RevPAR and occupancy rates at the Company's eight recently opened MainStay Suites which are currently experiencing the stabilization period common to newly opened hotels. Discontinued Operations - ----------------------- Income from discontinued operations of $16.0 million for the six months ended June 30, 1997, represents the income, net of taxes, of the Franchising segment. The Franchising segment, along with European hotel operations, was distributed to shareholders on October 15, 1997. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------- Net cash provided by operating activities was $18.8 million for the six months ended June 30, 1998 compared to $52.0 million for the six months ended June 30, 1997. Net cash provided by operating activities for the six months ended June 30, 1997 includes net cash provided by discontinued operations, as well as net cash provided by European hotel operations, which were distributed to shareholders pursuant to the Choice Spin-Off. Net cash provided by continuing operations was $18.8 million for the six months ended June 30, 1998, compared to net cash provided by continuing operations of $18.2 million for the six months ended June 30, 1997. At June 30, 1998, the Company had $269.5 million of long-term debt outstanding. Of this amount, $31.0 million reflects amounts outstanding under the Company's $80 million credit facility (the "Credit Facility"). The 13 Credit Facility expires in October 2000. At June 30, 1998, permitted availability under the Credit Facility amounted to $58.5 million. The Credit Facility's permitted availability will expand to certain levels as the Company's cash flow increases. At June 30, 1998, the Company owed Choice $122.4 million (including $9.0 million in accrued interest) pursuant to the Choice Note, a subordinated note which matures October 15, 2002. The Choice Note provides additional financial flexibility due to the fact that no interest is payable until maturity. The Company does, however, expect to refinance the Choice Note with a longer-term subordinated debt financing as soon as practicable. At June 30, 1998, the Company owed Choice $19.9 million representing liabilities of the Company discharged or assumed by Choice in connection with the Choice Spin-Off. The Company has reached an understanding with Choice to satisfy this obligation no later than December 31, 1998. These amounts are classified as "Payable to Choice Hotels International, Inc." on the Company's balance sheet. At June 30, 1998, the Company's debt to book capitalization amounted to 74.4%, while debt to market capitalization was 66.0%. Notwithstanding the real estate-intensive nature of the Company's business, the Company's objective is to reduce its overall leverage while continuing to grow through development. The Company continuously evaluates its existing portfolio and seeks to sell hotels that have limited upside potential or are projected to underperform in order to redeploy capital in higher-yielding assets. The Company has identified six such properties that it is marketing for sale in 1998. The Company intends to aggressively develop MainStay Suites, a mid-price extended-stay hotel product. At June 30, 1998, eleven MainStay Suites were open and operating with another eight under construction. In addition to those under construction, there were another three projects under development. A typical MainStay Suites costs approximately $5.0 to $6.9 million to develop and construct (including land cost), with an average cost per room ranging from $50,000 to $65,000. In order for the Company to continue the MainStay Suites development program on a long-term basis, additional capital will be required. The Company withdrew a proposed common stock offering in the second quarter due to unfavorable market conditions. Although the withdrawal of the offering will not cause liquidity problems in the foreseeable future, the lack of additional capital may cause the Company to modify its development plans. Excluding development, recurring capital expenditures required to maintain operating assets in the appropriate condition are estimated to be approximately $15 million per year. Planned capital expenditures for the development of MainStay Suites and Sleep Inns in 1998 are projected to be approximately $83.6 million. Planned capital expenditures for the development of MainStay Suites in calendar 1999 are projected to be $62.3 million. The Company will also continue to pursue selectively the acquisition of hotel properties in all segments of the lodging industry where the Company believes long-term value can be created from renovation and, where appropriate, the repositioning of the hotel to a different brand or service level. FORWARD-LOOKING STATEMENTS - --------------------------- The statements contained in this document that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of important factors could cause the Company's actual results for future periods to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company. Certain statements contained in this Form 10-Q, including those in the section entitled "Management's Discussion and Analysis of Operating Results and Financial Condition," contain forward-looking information that involves risk and uncertainties, including the Company's plans to raise additional equity and/or debt. Actual future results and trends may differ materially depending on a variety of factors discussed in the "Risk Factors" section included in the Company's SEC filings, including (a) the Company's success in implementing its business strategy, 14 including its success in arranging financing where required, (b) the nature and extent of future competition, and political, economic and demographic developments in regions where the Company does business or in the future may do business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements. 15 PART II OTHER INFORMATION ------------------------- ITEM 1. LEGAL PROCEEDINGS ----------------- The Company is not party to any litigation, other than routine litigation incidental to the business of the Company. None of such litigation, either individually or in the aggregate, is expected to be material to the business, financial condition or results of operations of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits Exhibit 27.01 - Financial Data Schedule June 30, 1998 (b) The following reports were filed pertaining to the quarter ended June 30, 1998. None 16 SIGNATURE Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNBURST HOSPITALITY CORPORATION Date: August 6, 1998 /s/ James A. MacCutcheon -------------- -------------------------- By: James A. MacCutcheon Executive Vice President, Chief Financial Officer and Treasurer 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets, the consolidated statements of income and the consolidated statements of cash flows and is qualified in its entirety by reference to such financial statements and the notes thereto. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 6,247 0 10,392 582 0 0 475,110 80,564 421,779 0 269,538 0 0 200 92,418 421,779 0 100,579 0 85,218 0 0 10,175 5,186 2,120 3,066 0 0 0 3,066 .15 .15
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