-----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, UF+qa98uRFUo+yyevY7/x4soUTHY42sKh0KQHyDlyhB5CXXTPje56pnmUUya7/sg 3aZAPeI4gmgqd5DEolm7Aw== 0000928385-99-003334.txt : 19991115 0000928385-99-003334.hdr.sgml : 19991115 ACCESSION NUMBER: 0000928385-99-003334 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747856 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 SEPTEMBER 30, 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 SEPTEMBER 30, 1999 ------ --------------------- Common Stock, $0.01 par value per share 18,757,000 ---------- ================================================================================ 1 SUNBURST HOSPITALITY CORPORATION INDEX -----
PAGE NO. ------- PART I. FINANCIAL INFORMATION: Condensed Consolidated Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998 3 Condensed Consolidated Statements of Income - Three and nine months ended September 30, 1999 and September 30, 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and September 30, 1998 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Management's Discussion and Analysis of Operations and Financial Condition 9 PART II. OTHER INFORMATION 14
2 SUNBURST HOSPITALITY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
As of ----------------------------- September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) ASSETS Real estate, net $381,719 $363,023 Real estate held for sale 10,113 37,122 Receivables (net of allowance for doubtful accounts of $647 and $611, respectively) 10,015 7,271 Other assets 8,233 10,982 Cash and cash equivalents 4,387 4,113 ------------ ------------- Total assets $414,467 $422,511 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Debt $269,487 $281,189 Accounts payable, accrued expenses and other liabilities 38,488 38,685 ------------ ------------- Total liabilities 307,975 319,874 Total stockholders' equity 106,492 102,637 ------------ ------------- Total liabilities and stockholders' equity $414,467 $422,511 ============ =============
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) (Unaudited)
For the three months ended For the nine month ended September 30, September 30, -------------------------- ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- REVENUES Rooms $50,689 $50,404 $144,081 $138,077 Food and beverage 3,965 3,947 12,465 12,487 Other 2,117 1,969 6,202 6,335 --------- --------- --------- --------- Total revenues 56,771 56,320 162,748 156,899 --------- --------- --------- --------- OPERATING EXPENSES Departmental expenses 18,318 18,284 52,653 51,131 Undistributed operating expenses 18,089 17,973 51,639 49,146 Depreciation and amortization 6,756 6,768 19,572 20,474 Corporate 2,512 3,344 7,641 10,836 Provision for asset impairment/ (net gains on property dispositions) (1,546) 3,714 (1,546) 3,714 --------- --------- --------- --------- Total operating expenses 44,129 50,083 129,959 135,301 --------- --------- --------- --------- OPERATING INCOME 12,642 6,237 32,789 21,598 --------- --------- --------- --------- Interest expense 6,064 4,951 18,298 15,126 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 6,578 1,286 14,491 6,472 Income taxes 2,727 530 5,908 2,650 --------- --------- --------- --------- INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 3,851 756 8,583 3,822 Extraordinary loss from early debt redemption, net of $221 and $476 tax benefit, respectively 339 308 772 308 Cumulative effect of a change in accounting principle, net of $421 tax benefit - - 599 - --------- --------- --------- --------- NET INCOME $ 3,512 $ 448 $ 7,212 $ 3,514 ========= ========= ========= ========= Basic earnings per share - ------------------------ Income before extraordinary loss and change in accounting principle $ 0.20 $ 0.04 $ 0.44 $ 0.19 Extraordinary loss (0.01) (0.02) (0.04) (0.01) Cumulative effect of a change in accounting principle - - (0.03) - --------- --------- --------- --------- Net income $ 0.19 $ 0.02 $ 0.37 $ 0.18 ========= ========= ========= ========= Diluted earnings per share - -------------------------- Income before extraordinary loss and change in accounting principle $ 0.20 $ 0.04 $ 0.44 $ 0.19 Extraordinary loss (0.02) (0.02) (0.04) (0.02) Cumulative effect of a change in accounting principle - - (0.03) - --------- --------- --------- --------- Net income $ 0.18 $ 0.02 $ 0.37 $ 0.17 ========= ========= ========= =========
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) (Unaudited)
For the nine months ended September 30, -------------------------- 1999 1998 ----------- ----------- Cash Flows From Operating Activities Income before extraordinary loss and cumulative effect of a change in accounting principle $ 8,583 $ 3,822 Adjustments to reconcile income before extraordinary loss and cumulative effect of a change in accounting principle to net cash provided by operating activities: Depreciation and Amortization 19,572 20,474 Other non-cash items 9,468 12,242 Changes in assets and liabilities (510) (9,497) ----------- ----------- Net cash provided by operating activities 37,113 27,041 ----------- ----------- Cash Flows From Investing Activities Investment in property and equipment (42,363) (45,185) Proceeds from sale of property and equipment 32,650 2,260 ----------- ----------- Net cash utilized in investing activities (9,713) (42,925) ----------- ----------- Cash Flows From Financing Activities (Repayment of) proceeds from debt (22,710) 15,030 Proceeds from issuance of stock 79 52 Purchases of treasury stock (4,495) - ----------- ----------- Net cash (utilized in) provided by financing activities (27,126) 15,082 ----------- ----------- Net change in cash and cash equivalents 274 (802) Cash and cash equivalents at beginning of period 4,113 5,908 ----------- ----------- Cash and cash equivalents at end of period $ 4,387 $ 5,106 =========== ===========
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 SEPTEMBER 30, 1999 (Unaudited) The accompanying condensed consolidated financial statements of Sunburst Hospitality Corporation (the "Company") have been prepared 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 condensed 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. 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 September 30, 1999, the results of operations for the three and nine months ended September 30, 1999 and 1998, respectively, and cash flows for the nine months ended September 30, 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. 6 The following table illustrates the reconciliation of net income and number of shares used in the basic and diluted earnings per share calculations.
For the three months ended For the nine months ended -------------------------- ------------------------- (in thousands, except per share amounts) September 30, September 30, -------------------------- ------------------------- 1999 1998 1999 1998 --------- --------- -------- -------- Computation of basic earnings per share Income before income taxes, extraordinary loss and cumulative effect of a change in accounting principle $ 3,851 $ 756 $ 8,583 $ 3,822 Weighted average shares outstanding 18,929 19,973 19,346 19,966 --------- --------- -------- -------- Basic earnings per share from continuing operations $ 0.20 $ 0.04 $ 0.44 $ 0.19 ========= ========= ======== ======== Computation of diluted earnings per share Income before income taxes, extraordinary loss and cumulative effect of a change in accounting principle $ 3,851 $ 756 $ 8,583 $ 3,822 Weighted average shares outstanding 18,929 19,973 19,346 19,966 Effect of dilutive earnings per share Employee stock option plan 261 213 207 383 --------- --------- -------- -------- Shares for diluted earnings per share 19,190 20,186 19,553 20,349 --------- --------- -------- -------- Diluted earnings per share from continuing operations $ 0.20 $ 0.04 $ 0.44 $ 0.19 ========= ========= ======== ========
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.
September 30, ------------------------------ 1999 1998 ---------- ----------- Number of shares 1,606,281 1,667,271 Weighted average exercise price $ 7.30 $ 7.14
As of September 30, 1999, the Company owned and managed 82 hotels with 11,340 rooms in 26 states under the following brand names: Comfort, Clarion, Sleep, Quality and MainStay. At September 30, 1999, the Company has three hotels that are currently being marketed for sale with a carrying value of $10.1 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 hotels held for sale reported total revenues of $1.2 million and $3.6 million for the three and nine months ended September 30, 1999 and September 30, 1998, respectively. Income from operations before interest, taxes, depreciation and amortization and allocations for corporate expenses of the three hotels was $312,000 and $844,000 for the three and nine months ended September 30, 1999, and $263,000 and $957,000 for the three and nine months ended September 30, 1998, respectively. 7 The Company recognized an extraordinary loss of $339,000 and $772,000, net of taxes, in the three and nine months ended September 30, 1999, respectively. The extraordinary loss relates to the early extinguishment of a portion of the Company's multi-class mortgage pass-through certificates (collectively, the "CMBS debt") associated with the sale of five 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 and liabilities between the two companies, favorable modification to liquidated damage provisions on all franchising agreements and elimination of various inter-company service agreements. In February 1999, the Company entered into a release agreement with Manor Care which effectively terminated all inter-company service, consulting and lease agreements. 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 nine months ended September 30, 1999. Also, effective January 1, 1999, new hotel pre-opening costs, amounting to $270,000 and $905,000 during the three and nine months ended September 30, 1999, were expensed as incurred. 8 SUNBURST HOSPITALITY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION September 30, 1999 The Company is a national owner and operator of hotel properties with a portfolio at September 30, 1999 of 82 hotels (11,340 rooms) in a total of 26 states. The Company operates its hotels under the following brands: MainStay, Comfort, Quality, Clarion and Sleep. The Company's continuing business consists primarily of guest room revenue, meeting room revenue, and food and beverage revenue from owned and operated hotels. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 and 1998: - ----------------------------------------------------------------------------- Total revenues for the three months ended September 30, 1999 increased less than 1% to $56.8 million, compared to $56.3 million in the prior year. Revenue per available room for the extended-stay segment increased a full 23.9%, as the Company has 18 mid-priced, extended-stay hotels open and operating at September 30, 1999, compared to 13 in the prior year that have ramped up over the last year. For the extended-stay segment, occupancy increased from 68.5% in the third quarter of the prior year to 81.1% in the third quarter of 1999 and average daily rates increased from $55.67 to $58.32, or 4.8%. Total extended- stay revenue increased from $4.4 million in the third quarter of 1998 to $7.6 million in the third quarter of 1999. This increase in revenue was largely offset by the sale of 12 lower-margin hotels since the end of the third quarter of 1998. During the third quarter of 1999, hotel operating profit increased $300,000 or 1.5% to $20.4 million, compared to $20.1 million in the prior year. Operating margins benefit as the Company opens and ramps up newly developed, mid-priced, extended-stay hotels, which operate at higher margins than the traditional hotels. Corporate expense amounted to $2.5 million, a decrease of approximately $832,000 or 24.9% from the prior year's third quarter. Corporate expense amounted to 4.4% of total revenues during the third quarter of 1999 as compared to 5.9% during the third 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. Total operating expenses decreased $6.0 million or 11.9% for the three months ended September 30, 1999 compared to the same period of 1998. Operating expenses for the third quarter 1999 and 1998 include a $1.5 million net gain on the sale of six properties and 1998 third quarter results included $3.7 million of asset impairment and other restructuring charges, respectively. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 6.8%, to $17.9 million in the third quarter of 1999 from $16.7 million in the third quarter of the prior 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 22.5% to $6.1 million in the third quarter of the current year from $5.0 million in the third quarter of the prior 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. The Choice note's effective rate is 10.6% if outstanding through maturity in 2002. During the third quarter of 1999, depreciation expense was level with prior year. The increased depreciation expense associated with newly developed hotels was offset by a decline in depreciation expense as a result of the 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. The three hotels held for sale at September 30, 1999, have been reported at the lower of the carrying amount or fair value less cost of sale. The three hotels held for sale have a combined book value of $10.1 million at September 30, 1999. Income before income taxes, extraordinary loss and cumulative effect of a change in accounting principle increased $5.3 million to $6.6 million in the third quarter of 1999 from $1.3 million in the third quarter of 1998. The increase results from the gain on the sale of assets and the provision for asset impairment and other non recurring charges during the third quarter of 1999 and 1998, respectively. After the effect of an extraordinary loss from early debt 9 redemption and cumulative effect of a change in accounting principle, the Company reported an increase of $3.1 million in net income to $3.5 million for the third quarter of 1999 from $448,000 during the prior year's third quarter. The extraordinary loss from early debt redemption during the quarter of $339,000 (net of $221,000 tax benefit) related to the early redemption of debt collateralized by two properties sold during the third quarter. In accordance with the AICPA Accounting Standards Executive Committee's Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP 98-5"), pre-opening costs associated with properties under construction are expensed as incurred. Pre-opening costs incurred and expensed during the three months ended September 30, 1999, amounting to $270,000, are included in hotel operating expenses. COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998: - ---------------------------------------------------------------------------- Total revenues for the nine months ended September 30, 1999 increased 3.7% to $162.7 million, compared to $156.9 million in the prior year. The increase results primarily due to a 26.5% increase in revenue per available room for the extended-stay segment. For those properties opened at least one year, average daily rates increased from $65.62 to $67.19, or 2.4%. For the nine months ended September 30, 1999 facility level operating profit increased 3.2% from the same period in the prior year. Favorably impacting undistributed operating expenses were $1.9 million of credits against franchise fees pursuant to an agreement with Choice. Corporate expense amounted to $7.6 million, a decrease of approximately $3.2 million or 29.5% from the prior year. Corporate expense amounted to 4.7% of total revenues for the nine months ended September 30, 1999 as compared to 6.9% during the prior year. Depreciation expense decreased $902,000 or 4.4%, to $19.6 million in the current year from $20.5 million in the third quarter of the prior year. The decline in depreciation expense is primarily a result of discontinuance of depreciation on the hotels that were held for sale during the nine month period offset by the additional depreciation expense associated with the newly developed hotels. Total operating expenses decreased $5.3 million or 3.9% for the nine months ended September 30, 1999 compared to the same period of 1998. Operating expenses for the nine months ended September 30, 1999 and 1998 include a $1.5 million net gain on the sale of six properties and $3.7 million of asset impairment and other restructuring charges, respectively. EBITDA increased 11.0%, to $50.8 million for the nine months ended September 30, 1999 from $45.8 million for the same period in the prior year. Interest expense increased $3.2 million or 21.0% to $18.3 million as a result of increased borrowings associated with the Company's development and construction of new hotels and an increase in the effective rate utilized to accrue interest on the subordinated note payable to Choice. Income before income taxes, extraordinary loss and cumulative effect of a change in accounting principle increased $8.0 million to $14.5 million for the nine months ended September 30, 1999 from $6.5 million for the same period of 1998. The increase results from the gain on the sale of assets and the provision for asset impairment and other non recurring charges during the nine months ended September 30, 1999 and 1998, respectively. After the effect of an extraordinary loss from early debt redemption and cumulative effect of a change in accounting principle, the Company reported an increase of $3.7 million in net income to $7.2 million for the nine months ended September 30, 1999 versus $3.5 million for the nine months ended September 30, 1998. The extraordinary loss from early debt redemption during the quarter of $772,000 (net of $476,000 tax benefit) related to the early redemption of debt collateralized by five properties sold during 1999. On January 1, 1999, the Company adopted 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 during the nine months ended September 30, 1999, amounting to $905,000, are included in hotel operating expenses. Liquidity and Capital Resources: - ------------------------------- Borrowing capacity under the Company's committed credit facility with a group of banks amounted to $80 million 10 during the quarter ended September 30, 1999. Borrowings under the credit facility amounted to $41 million at December 31, 1998 and $30 million at September 30, 1999. The Company utilizes its credit facility to fulfill its seasonal requirements and to fund construction and development. At September 30, 1999, the Company has $269.5 million of long-term debt outstanding, none of which matures in the next twelve months. The credit facility expires in October 2000 and $138.4 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 mid-priced, extended-stay hotels. At September 30, 1999, eighteen MainStay Suites were open and operating with another six hotels under development. The cost of developing a MainStay Suites approximates $6.0 million. At September 30, 1999, costs incurred to date on the six hotels under development amounted to $16.9 million. Accordingly, the estimated cost to complete is approximately $25.6 million. In order for the Company to continue on a long-term basis the 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 three such properties that as of September 30, 1999, are being marketed for sale in 1999. During the quarter ended September 30, 1999, the Company sold six hotels for total proceeds of $22.0 million. Proceeds from asset sales were used to reduce senior debt. Pursuant to a share repurchase program announced on September 25, 1998, the Company has purchased a total of 1,394,391 shares at a total cost of $6.6 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 September 30, 1999, the Company's debt to book capitalization amounted to 71.7% while debt to market cap was 69.9%. 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. 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 system's upgrade was completed during the second quarter of 1999 and 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 employee workstations have been 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. 11 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 contacted manufacturers to determine the readiness of the systems for the Year 2000. Based on the responses received, the Company believes that the critical systems are or will be Year 2000 compliant. Any systems that are Year 2000 sensitive and non-compliant will be replaced or modified as necessary or addressed in the contingency plan. 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. The contingency manual will be completed by October 31, 1999. 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 contacted 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 compliant, 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 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. 12 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. 13 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 September 30, 1999 (b) The following reports were filed pertaining to the quarter ended September 30, 1999. None 14 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: November 11, 1999 /s/ James A. MacCutcheon ----------------- -------------------------- By: James A. MacCutcheon Executive Vice President, Chief Financial Officer and Treasurer 15 EX-27 2 EXHIBIT 27
5 This schedule contains summary financial information extracted from the condensed consolidated balance sheets, the condensed consolidated statements of income and the condensed consolidated statements of cash flows and is qualified in its entirety by reference to such financial statements and the notes thereto. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 4,387 0 10,662 647 0 0 495,586 103,754 414,467 0 269,487 0 0 244 106,248 106,492 0 162,748 0 129,959 0 0 18,298 14,491 5,908 8,583 0 772 599 7,212 .37 .37
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