-----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, SujcWO97iqyIsyPq1WxVMc4Jv6OSQmfRn3umG6OMNrLmOpNx+4vCEtKQ0yjpGn1c wk87zmx/Dy9XhxFfZnfYBg== 0000928385-99-001735.txt : 19990514 0000928385-99-001735.hdr.sgml : 19990514 ACCESSION NUMBER: 0000928385-99-001735 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99619880 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 MARCH 31, 1999 COMMISSION FILE NO. 1-11915 SUNBURST HOSPITALITY CORPORATION 10770 COLUMBIA PIKE SILVER SPRING, MD. 20901 (301) 592-3000 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 MARCH 31, 1999 ----- ----------------- Common Stock, $0.01 par value per share 19,181,000 ---------- ================================================================================ 1 SUNBURST HOSPITALITY CORPORATION INDEX -----
PAGE ---- PART I. FINANCIAL INFORMATION: Condensed Consolidated Balance Sheets - March 31, 1999 (Unaudited) and December 31, 1998 3 Condensed Consolidated Statements of Income - Three months ended March 31, 1999 and March 31, 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and March 31, 1999 (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 18
2 SUNBURST HOSPITALITY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
As of ------------------------------- March 31, December 31, 1999 1998 -------------- --------------- ASSETS Real estate, net $ 406,484 $ 400,145 Receivables (net of allowance for doubtful accounts of $662 and $611, respectively) 6,499 7,271 Other assets 10,928 10,982 Cash and cash equivalents 5,606 4,113 ------------ ------------- TOTAL ASSETS ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Debt $ 295,178 $ 281,189 Accounts payable, accrued expenses and other liabilities 32,769 38,685 ------------ ------------- TOTAL LIABILITIES 327,947 319,874 TOTAL STOCKHOLDERS' EQUITY 101,570 102,637 ------------ ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 429,517 $ 422,511 ============ =============
The accompanying notes are in 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 March 31, --------------------------------------------- 1999 1998 --------------------------------------------- REVENUES Rooms $44,152 $39,982 Food and beverage 4,067 4,108 Other 2,053 2,049 ------- ------- Total revenues 50,272 46,139 ------- ------- OPERATING EXPENSES Departmental expenses 15,910 15,164 Undistributed operating expenses 16,864 14,962 Depreciation and amortization 6,295 6,382 Corporate 2,667 3,464 ------- ------- Total operating expenses 41,736 39,972 ------- ------- OPERATING INCOME 8,536 6,167 ------- ------- INTEREST EXPENSE 6,023 4,943 ------- ------- INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 2,513 1,224 INCOME TAXES 1,005 516 ------- ------- NET INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1,508 708 EXTRAORDINARY LOSS FROM EARLY DEBT REDEMPTION, NET OF $42 TAX BENEFIT 98 - CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF $421 TAX BENEFIT 599 - ------- ------- NET INCOME $ 811 $ 708 ======= ======= Basic earnings per share - ------------------------ Net income before extraordinary loss and cumulative effect of a change in accounting principle $ 0.08 $ 0.04 Extraordinary loss (0.01) - Cumulative effect of a change in accounting principle (0.03) - ------- ------- Net Income $ 0.04 $ 0.04 ======= ======= Diluted earnings per share - -------------------------- Net income before extraordinary loss and cumulative effect of a change in accounting principle $ 0.08 $ 0.03 Extraordinary loss (0.01) - Cumulative effect of a change in accounting principle (0.03) - ------- ------- Net Income $ 0.04 $ 0.03 ======= =======
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 three months ended March 31, ---------------------------------------------------- 1999 1998 ------------------------- ------------------------- Operating Cash Flows Income before extraordinary loss and cumulative effect of change in accounting principle $ 1,508 $ 708 Non-cash items 9,835 6,362 Changes in assets and liabilities (5,920) (572) -------- -------- Net cash provided by operating activities 5,423 6,498 Net cash utilized in investing activities (12,631) (23,110) Net cash provided by financing activities 8,701 12,308 -------- -------- Net change in cash and equivalents 1,493 (4,304) CASH AND EQUIVALENT AT BEGINNING OF PERIOD 4,113 5,908 -------- -------- Cash and equivalents at end of period $ 5,606 $ 1,604 ======== ========
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 MARCH 31, 1999 (UNAUDITED) 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 year ended December 31, 1998 and notes thereto included in the Company's Form 10-K, dated March 29, 1999. 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 March 31, 1999, the results of operations and cash flows for the three months ended March 31, 1999 and 1998, respectively. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations. 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. The following table illustrates the reconciliation of net income and number of shares used in the basic and diluted earnings per share ("EPS") calculations. 6
For the three months ended March 31, -------------------------------------------- (in thousands except per share data) 1999 1998 -------------------------------------------- Net income before extraordinary loss and cumulative effect of accounting change $ 1,508 $ 708 Weighted average shares 19,416 19,956 ------- ------- Basic EPS before extraordinary loss and cumulative effect of accounting change $ 0.08 $ 0.04 ======= ======= Shares for basic EPS 19,416 19,956 Effect of dilutive employee stock options 160 567 ------- ------- Shares for diluted EPS 19,576 20,523 ------- ------- Diluted EPS before extraordinary loss and cumulative effect of $ 0.08 $ 0.03 accounting change ======= =======
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 price of the options exceeded the average market price of the common shares for the period. The following table summarizes such options.
March 31, ---------------------------------------- 1999 1998 ---------------------------------------- Number of shares 2,032,064 71,268 Weighted average exercise price $ 7.01 $ 9.43
As of April 1, 1999, the Company owned and managed 87 hotels with 12,020 rooms in 26 states under the following brand names: Comfort, Clarion, Sleep, Quality, MainStay, Rodeway and Econo Lodge. At March 31, 1999, the Company has twelve hotels that are currently being marketed for sale with a carrying value of $35.7 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 has 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. As the Company began actively marketing these hotels, it became apparent, given current real estate values, that certain asset carrying values exceeded estimated fair values less costs to sell. The Company, accordingly, recognized a $4 million asset impairment provision during 1998 to reduce the carrying value of certain of the assets to the estimated fair value less costs to sell. The twelve hotels held for sale reported total revenues of $4.8 million and $5.1 million for the three months ended March 31, 1999 and 1998, respectively. Income from operations before interest, taxes, depreciation and amortization and allocations for corporate expenses of the twelve hotels was $1.7 million and $2.1 million for the three months ended March 31, 1999 and 1998, respectively. The Company recognized an extraordinary loss of $98,000, net of taxes, in the three months ended March 31, 1999. The extraordinary loss represents a yield maintenance penalty and deferred financing fees associated with the early extinguishment of a portion of the Company's multi-class mortgage pass-through certificates (collectively, "the CMBS debt"). The prepayment was made as a result of the sale of one of the properties collateralizing the CMBS debt. For purposes of providing orderly transitions after the Manor Care distribution and the Choice spin-off, the Company and Franchising entered into various agreements with Manor Care and Choice Hotels International, Inc. In December 1998, the Company and Choice Hotels International, Inc. entered into an agreement to amend certain agreements executed at the time of the Choice spin- off. The amendment effectively resolved a number of matters, including the satisfaction of the Company's liability to Choice Hotels International, Inc. resulting from the final allocation of assets, liabilities and equities between the two companies. In February, 1999, the Company entered into a release agreement with Manor Care which effectively terminated all inter-company service, consulting and lease agreements. 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 was adopted by the Company effective January 1, 1999 and required that costs related to start-up activities be expensed as incurred. Initial application of the SOP is reflected as the cumulative effect of a change in accounting principle in the condensed consolidated income statement for the three months ended March 31, 1998. Also, effective January 1, 1999, new hotel pre-opening costs, amounting to $323,000 during the three months ended March 31, 1999, were expensed as incurred. If the Company would have adopted this standard on January 1, 1998, the effect would have been to increase net income before extraordinary loss and cumulative effect of a change in accounting principle by approximately $176,000 for the three months ended March 31, 1998. Net income for the three month period would have decreased by approximately $518,000, as a result of a charge for the cumulative effect of a change in accounting principle of $694,000 (net of taxes). 8 SUNBURST HOSPITALITY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION March 31, 1999 -------------- The Company is a national owner and operator of hotel properties with a portfolio at April 1, 1999 of 87 hotels (12,020 rooms) in a total of 26 states. The Company operates its hotels under the following 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. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998: - ------------------------------------------------------------------------- Total revenues for the three months ended March 31, 1999 increased 9.1% to $50.3 million, compared to $46.1 million in the prior year. The increase in revenue is primarily due to a 4% increase in new rooms and suites within the portfolio and an increase of 2.8% in revenues per available room. Operating expenses increased $2.7 million or 8.8% during the quarter as compared to the first quarter of 1998. Notwithstanding the tight labor markets within which the Company operates, various cost control measures enabled the Company to hold operating cost increases below the rate of total revenue increases. In addition, consolidated operating margins benefit as the Company opens and ramps- up newly developed, mid-priced extended stay MainStay Suites hotels, which operate at higher margins than the Company's traditional hotels. For those properties opened at least one year, occupancies increased from 63.0% in the first quarter of the prior year to 63.6% in the first quarter of 1999 and average daily rates increased from $64.59 to $65.62, or 1.6%. This resulted in an increase in revenue per available room of 2.5% on a "same store" basis. During the first quarter of 1999, corporate expense amounted to $2.7 million, a decrease of approximately $0.8 million or 23% from the prior year's first quarter. Corporate expense amounted to 5.3% of total revenues during the first quarter of 1999 as compared to 7.5% during the first quarter of the prior year. A number of initiatives to reduce overhead resulted in the overall cost reduction. Initiatives included corporate level staffing reductions, consolidation of office space, sub-leasing of excess office space and termination of various service agreements with formerly affiliated entities. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 18.2%, from $12.5 million in the first quarter of the prior year to $14.8 million in the current year. The Company considers EBITDA to be an indicative measure of operating performance for its business. 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 defined by generally accepted accounting principles. EBITDA presented by the Company may not necessarily be comparable to EBITDA defined and presented by other companies. Interest expense increased 21.9% from $4.9 million in the first quarter of the prior year to $6.0 million in the current year. The increase is principally the result of additional borrowings associated with the Company's development of hotels as well as an increase in the effective rate utilized to accrue interest on the subordinated note payable to Choice Hotels International, Inc. The Choice note's effective rate is 10.6% if outstanding through maturity in 2002. Notwithstanding the opening of a number of newly developed hotels during the past year, depreciation expense levels were comparable to the prior year. The increased depreciation expense associated with newly developed hotels was offset by a decline in depreciation expense relative to hotels held for sale. In accordance with Statement of Financial Accounting Standards No. 121, the Company discontinued depreciating those assets while they are held for sale. This had the effect of reducing depreciation expense in the first quarter of 1999 by approximately $585,000. The twelve hotels held for sale at March 31, 1999, have been reported at the lower of the carrying amount or fair value less cost of sale. The twelve hotels held for sale have a combined book value of $35.7 million. 9 After the effect of an extraordinary loss from early debt redemption and the accumulative effect of a change in accounting principle, the Company reported net income of $811,000 during the first quarter of 1999 versus $708,000 during the prior year's first quarter. The extraordinary loss from early debt redemption during the quarter of $98,000 (net of $42,000 tax benefit) related to the early retirement of debt collateralized by a property sold. On January 1, 1999, the Company adopted the AICPA Accounting Standards Executive Committee's Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP 98-5"). In accordance with that new accounting pronouncement, the Company wrote off the unamortized balance of deferred pre-opening costs on its balance sheet at January 1, 1999 and recorded an after-tax charge of $599,000 (net of $421,000 tax benefit) for the cumulative effect of that change in accounting principle. Beginning January 1, 1999, pre-opening costs associated with properties under construction are expensed as incurred. Pre-opening costs incurred and expensed in the first quarter of 1999, amounting to $323,000, are included in hotel operating expenses. Net income before extraordinary loss and cumulative effect of a change in accounting principle more than doubled in the first quarter of 1999 to $2.5 million from $1.2 million in the first quarter of the prior year. On an after tax basis, net income before the extraordinary loss and the cumulative effect of the change in accounting principle increased 113% to $1.5 million in 1999. LIQUIDITY AND CAPITAL RESOURCES: - ------------------------------- Availability under the Company's committed credit facility with a group of banks amounted to $80 million during the quarter ended March 31, 1999. Borrowings under the credit facility amounted to $41 million at December 31, 1998 and $53 million at March 31, 1999. The Company utilizes its credit facility to fulfill its seasonal requirements and to fund construction and development. At March 31, 1999, the Company has $295.2 million of long-term debt outstanding, none of which matures in the next twelve months. The credit facility expires in October 2000 and $131.3 million of subordinated debt payable to Choice Hotels International, Inc. matures in October, 2002. The Choice note provides additional financial flexibility as interest is not payable until maturity. The Company intends to develop MainStay Suites, a mid-priced extended stay hotel product. At March 31, 1999, fifteen MainStay Suites were open and operating with another six hotels under construction. The cost of developing a MainStay suites approximates $6.0 million. At March 31, 1999, costs incurred to date on the six hotels under construction amounted to $18 million. Accordingly, the estimated cost to complete is approximately $21 million. In order for the Company to continue on a long-term basis the MainStay Suites development program, additional capital will be required. 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 that are projected to under-perform in order to redeploy capital in higher yielding assets. The Company has identified twelve such properties that as of March 31, 1999, are being marketed for sale in 1999. During the quarter ended March 31, 1999, the Company sold one hotel for total proceeds of $2.0 million. Pursuant to a share repurchase program announced on September 25, 1998, the Company has purchased a total of 946,000 shares at a total cost of $4.1 million. The Company intends to utilize cash flow from operations to fund the continuing execution of this program while maintaining availability under the credit facility to finance construction and development. At March 31, 1999, the Company's debt to book capitalization amounted to 74% while debt to market cap was 80%. While operating cash flow along with credit available under the Company's credit facility and the proceeds from the sale of hotels is expected to be adequate to fund operations and committed construction projects, accessing additional capital will be imperative in order for the Company to expand its long range development and growth plans. 10 YEAR 2000: - ----------- Many existing computer programs use two digits to identify a year. These programs were designed and developed without considering the impact of the upcoming change in the century. If the programs are not corrected, computer applications could fail or create erroneous results at the turn of the century. The Company has developed a plan to address the impact of the Year 2000 on its computer systems and other systems with embedded microprocessors that could be date sensitive (collectively, "in-house systems"), as well as issues related to third party vendors and suppliers of the Company. The Company's plan consists of four phases: 1) Assess computer systems and other systems with embedded microprocessors and determine which such systems are critical to the ongoing operations of the Company; 2) Inventory critical systems to determine manufacturers, suppliers or vendors; 3) Test or assess the readiness of systems and vendors and suppliers, and; 4) Inventory and assess the readiness of non- critical systems. Corrective actions are being taken as issues arise. The following discusses the Companies progress in addressing both in-house systems and third party vendors. The Company's financial accounting and reporting systems are scheduled to be upgraded in early 1999 to a version that has been certified to be Year 2000 compliant. Following the upgrade, the accounting and reporting systems are expected to adequately provide information and reporting needs into the next century. Non-compliant computer hardware and software at the Company's corporate headquarters and all its hotels has been identified and a schedule to upgrade affected systems by September 1999 has been established. The Company estimates that approximately 85% of its employee workstations will need to be upgraded. In order to accommodate a new property management system required by Choice Hotels International, Inc., the Company had previously planned to update these systems. Therefore, the cost of upgrading the systems, outside of previously planned upgrades, is estimated to be immaterial. The Company has inventoried systems with embedded chips used at the Company's corporate headquarters as well as building systems at the company's hotel properties (i.e., elevators, room key systems, HVAC equipment, and fire safety equipment) and has begun contacting manufacturers to determine the readiness of the systems for the Year 2000. Any systems determined to be Year 2000 sensitive and non-compliant will be replaced or modified as necessary. Although the Company does not have an estimate for the cost to bring all critical systems into compliance, it is not believed to be material. The Company is developing a contingency plan to address the possible failure of any in-house systems. As critical non-compliant systems are identified that the Company believes may not be compliant by the year 2000, contingency plans will be created. The Company relies significantly on third party systems to provide various goods and services. The Company has identified those vendors and suppliers that it believes to be critical to the ongoing operations of the Company and has begun contacting them to verify their state of readiness and evaluate their contingency plans. Based on the responses received, the Company believes that the critical third party systems are or will be Year 2000 compliant. To the extent that a third party cannot certify that their systems will be Year 2000 complaint, the Company will take actions to correct the non-compliant situation or develop contingency plans. Because the Company relies significantly on Choice Hotels International, Inc. ("Choice") for reservation and property management systems as well as overall franchisee support, their state of readiness for Year 2000 is critical to the Company. Therefore, a description of the Choice plan to address the Year 2000 issue, as set forth in its SEC filings, follows. Choice's exposure to potential Year 2000 problems exists in two general areas: technological operations in the sole control of Choice, and technological operations dependent in some way on one or more third parties. With respect to internal systems, Choice has conducted Year 2000 compliance testing on all of its proprietary software, including its reservations and reservations support systems, its franchise support system and its franchisee property management support systems. Choice has indicated that the proprietary software is Year 2000 compliant. Choice's Year 2000 Compliance Committee is currently identifying third party vendors and service providers whose non-compliant systems could have a material impact on Choice and undertaking an assessment as to such parties' compliant status. These parties include franchisees, airline global distribution systems ("GDS"), utility providers, telephone service providers, banks and data processing 11 services. The GDS companies, which provide databases through which travel agents can book hotel rooms, have assured Choice in writing that they are making the necessary changes in their system to become compliant and Choice has begun conducting tests with the GDS companies. Additional information regarding Choice's Year 2000 preparedness can be obtained from their SEC filings. Failure by the Company or one or more of its third party vendors to adequately address the Year 2000 issue could have a material adverse impact on the Company. The Company is not able to estimate the impact such failure could have due to its dependence on third parties including utility companies, airlines, hotel reservation centers, Choice, banks and credit card payment processing centers. In addition, the severity and duration of failures will greatly affect the impact of such failures on the Company. As a result of the considerable publicity surrounding, and the increased consumer awareness of, the Year 2000 issue, it is possible that travel patterns may be disrupted. The Company is unable to estimate the effect such disruptions, if any, may have on its hotel operations. 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 address the Year 2000 issue. 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, 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, and; (c) the timely resolution by the Company and its vendors and suppliers of the Year 2000 issue. 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. 12 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 - March 31, 1999 (b) The following reports were filed pertaining to the quarter ended March 31, 1999. None 13 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: May 13, 1999 /s/ James A. MacCutcheon ------------ -------------------------- By: James A. MacCutcheon Executive Vice President, Chief Financial Officer and Treasurer 14 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 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 5,606 0 6,499 596 0 0 0 0 429,517 0 0 0 0 200 101,370 429,517 0 50,272 0 41,736 0 0 6,023 2,513 1,005 1,508 0 (98) (599) 811 .08 .08
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