<PAGE>
FORM 11-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _______________
Commission File Number 1-13393
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A. Full title of the plan and address of the plan, if different from that of
the issuer named below:
SUNBURST HOSPITALITY CORPORATION RETIREMENT SAVINGS & INVESTMENT PLAN
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(formerly Choice Hotels International, Inc. Retirement Savings & Investment Plan
B. Name of the issuer of the securities held pursuant to the plan and the
address of its principle executive office:
Sunburst Hospitality Corporation
10770 Columbia Pike, Silver Spring, Maryland 20901
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Administrator of the Sunburst Hospitality Corporation Retirement Savings
and Investment Plan:
We have audited the accompanying statement of net assets available for benefits
of the Sunburst Hospitality Corporation Retirement, Savings and Investment Plan
(the "Plan" -- see Note 1) as of December 31, 1997 and 1996, and the related
statement of changes in net assets available for benefits with fund information
for the year ended December 31, 1997. These financial statements and the
schedules referred to below are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan as of
December 31, 1997 and December 31, 1996, and the changes in net assets available
for benefits for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets
held for investment purposes and of reportable transactions are presented for
purposes of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The fund information in
the statement of changes in net assets available for benefits is presented for
purposes of additional analysis rather than to present the changes in its net
assets available for benefits of each fund. These supplemental schedules and
fund information are the responsibility of the plan management. The
supplemental schedules and fund information have been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, are fairly stated, in all material respects, in relation to the basic
financial statements taken as a whole.
Washington, D.C.
June 30, 1998
<PAGE>
SUNBURST HOSPITALITY CORPORATION
RETIREMENT, SAVINGS AND INVESTMENT PLAN
INDEX
Page
----
Statement of Net Assets Available for Benefits as of
December 31, 1997 and 1996 1
Statement of Changes in Net Assets Available for
Benefits, with Fund Information, for the Year Ended
December 31, 1997 2
Notes to Financial Statements as of December 31, 1997 3-7
Item 27(a) - Schedule of Assets Held for Investment
Purposes as of December 31, 1997 8
Item 27(d) - Schedule of Reportable Transactions for the
Year Ended December 31, 1997 9
Non-exempt Transactions for the Year Ended
December 31, 1997 *
Obligations in Default as of December 31, 1997 *
Leases in Default as of December 31, 1997 *
* Schedules omitted because there were no such transactions, obligations, or
leases in default.
<PAGE>
SUNBURST HOSPITALITY CORPORATION
RETIREMENT, SAVINGS AND INVESTMENT PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Assets:
Participant Directed Investments held by Chase Manhattan
Bank:
Janus Fund $ 8,528,097 $ 6,247,943
Vanguard U.S. Treasury Money Market Fund 2,317,911 2,321,141
T. Rowe Price Stable Value Fund 1,254,665 1,029,507
Vanguard Wellington Balanced Fund 7,736,995 5,910,367
T. Rowe Price International Stock Fund 3,319,698 3,346,994
Choice Hotels International Common Stock Fund 1,853,235 --
Manor Care Common Stock Fund 664,051 666,900
Sunburst Hospitality Common Stock Fund 379,337 --
----------- -----------
Total investments 26,053,989 19,522,852
----------- -----------
Participant loans 770,405 685,123
Receivable from Manor Care Plan (see Note 6) 53,108 471,958
Contributions receivable:
Employer, paid subsequent to year-end 1,006,310 893,090
Employee, paid subsequent to year-end 81,981 90,094
----------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $27,965,793 $21,663,117
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
Sunburst Hospitality Corporation
Retirement, Savings and Investment Plan
Statement of Changes in Net Assets Available for Benefits, with Fund
Information, for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Participant Directed
- ----------------------------------------------------------------------------------------------------------------------------
Vanguard Vanguard
T. Rowe Price T. Rowe Price US Treasury Wellington Choice Hotels
International Janus Stable Value Money Market Balanced Common
Stock Fund Fund Fund Fund Fund Stock Fund
-------------- ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Additions
Contributions:
Employer $ - $ - $ - $ - $ - $ 893,090
Employee 390,153 811,476 162,027 305,355 668,705 91,623
---------- ---------- ---------- ---------- ----------- -----------
Total 390,153 811,476 162,027 305,355 668,705 984,713
Interest and dividends, including
interest on participant loan
transactions 174,986 1,410,218 63,671 112,281 648,682 1,284
Net (depreciation) appreciation in
market value (93,046) 100,399 - - 763,449 563,109
Rollover contributions 9,870 9,571 6,028 3,900 8,433 11,081
Transfers in from Manor Care Plan 77,115 145,924 43,024 6,140 98,151 380,759
---------- ---------- ---------- ---------- ----------- -----------
Total additions 559,078 2,477,588 274,750 427,676 2,187,420 1,940,946
---------- ---------- ---------- ---------- ----------- -----------
Transfers between investment options,
including principal portions of
participant loan transactions (240,398) 17,883 83,358 (104,186) (84,719) (15,974)
---------- ---------- ---------- ---------- ----------- -----------
Deductions
Benefit payments (345,976) (215,317) (132,950) (326,720) (276,073) (71,737)
---------- ---------- ---------- ---------- ----------- -----------
Net (decrease) increase (27,296) 2,280,154 225,158 (3,230) 1,826,628 1,853,235
Net asset available for benefits,
beginning of year 3,346,994 6,247,943 1,029,507 2,321,141 5,910,367 -
---------- ---------- ---------- ---------- ----------- -----------
Net assets available for benefit,
end of year $3,319,698 $8,528,097 $1,254,665 $2,317,911 $7,736,995 $1,853,235
========== ========== ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Sunburst
Hospitality Manor Care Non-
Common Common Participant participant 1997
Stock Fund Stock Fund Loans Directed Other Total
-------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Additions
Contributions:
Employer $ - $ - $ - $ 113,220 $ 1,006,310
Employee - - - (8,113) 2,421,226
---------- ---------- ---------- ---------- -----------
Total - - - 105,107 3,427,536
Interest and dividends, including
interest on participant loan
transactions - 2,146 - - 2,413,268
Net (depreciation) appreciation in
market value 9,602 150,237 - - 1,493,750
Rollover contributions - - - - 48,883
Transfers in from Manor Care Plan - 11,326 23,579 (418,850) 367,168
---------- ---------- ---------- ---------- -----------
Total additions 9,602 163,709 23,579 (313,743) 7,750,605
---------- ---------- ---------- ---------- -----------
Transfers between investment options,
including principal portions of
participant loan transactions 369,735) (88,601) 62,902 - -
---------- ---------- ---------- ---------- -----------
Deductions
Benefit payments - (77,957) (1,199) - (1,447,929)
---------- ---------- ---------- ---------- -----------
Net (decrease) increase 379,337 (2,849) 85,282 (313,743) 6,302,676
Net asset available for benefits,
beginning of year - 666,900 685,123 1,455,142 21,663,117
---------- ---------- ---------- ---------- -----------
Net assets available for benefit,
end of year $ 379,337 $ 664,051 $ 770,405 $1,141,399 $27,965,793
========== ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
SUNBURST HOSPITALITY CORPORATION
RETIREMENT, SAVINGS AND INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
1. NATURE OF THE ORGANIZATION AND DESCRIPTION OF THE PLAN
The Sunburst Hospitality Corporation Retirement, Savings and Investment
Plan (the "Plan") is a defined contribution, salary deferral plan available to
the employees of Sunburst Hospitality Corporation ("Sunburst") and Choice
Hotels International, Inc. ("Choice"). Sunburst is a leading national hotel
company. The Company owns and operates approximately 75 hotels. Choice is
one of the largest franchisers of hotels in the world. The Company franchises
approximately 3,500 hotels operated under the following brand names: Quality
Inn, Comfort Inn, Clarion, Sleep Inn, Rodeway Inn, EconoLodge, and Mainstay
Suites.
Sunburst was formerly a subsidiary of Manor Care, Inc. ("Manor Care"). On
November 1, 1996, Manor Care separated its lodging business from its health
care business by distributing to its shareholders all of the outstanding
common stock of Sunburst, (the "Manor Care Distribution"). On October 15,
1997, Choice Hotels International, Inc. separated its franchising and European
hotel business from its owned hotel business by distributing to its
shareholders the common stock of Choice Hotels Franchising (the "Choice
Distribution"). Subsequent to the Choice Distribution, Choice Hotels
International, Inc. changed its name to Sunburst Hospitality Corporation and
Choice Hotels Franchising changed its name to Choice Hotels International,
Inc. In connection with the Choice Distribution, the name of the Choice Hotels
International, Inc. Retirement, Savings and Investment Plan was changed to the
Sunburst Hospitality Corporation Retirement, Savings and Investment Plan.
In connection with the Manor Care Distribution, Manor Care retained
sponsorship of the Manor Care Retirement, Savings and Investment Plan (the
"Manor Care Plan") and the Company adopted the Sunburst Hospitality
Corporation Retirement, Savings and Investment Plan.
The following description of the Plan provides general information only.
Participants should refer to the plan agreement for a more complete
description of the Plan's provisions.
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<PAGE>
GENERAL
The Plan, established on October 1, 1996, is a participant directed,
defined contribution, salary deferral plan subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
ELIGIBILITY AND CONTRIBUTIONS
All employees of Sunburst and Choice (collectively the "Companies") are
eligible to participate in the Plan if they are:
-- are at least 21 years of age
-- have completed one year of service
-- have worked at least 1,000 hours in the previous year
Participants may elect to contribute up to 15% of their annual compensation
to the Plan, subject to IRS limitations.
The Companies match an employee's contributions, up to a total match of 6%
of employee salary.
<TABLE>
<CAPTION>
Length of Service Percentage Match
-------------------------------- --------------------------------
<S> <C>
1-5 years 25%
6-9 years 75%
10 years or more 100%
</TABLE>
The Companies have the right to apply amounts forfeited by employees to reduce
employer contributions. In 1997, forfeitures of $12,788 were used to reduce
the employer contribution and allocated to the plan funds in conjunction with
the Companies matching contributions.
BENEFITS AND VESTING
Participants are immediately vested in all participant contributions and
earnings on such contributions. Participants vest in the Company
Contributions 20% per year beginning at the end of their third year, resulting
in full vesting at the end of their seventh year.
Participants who leave the Company with a balance of less than $3,500 are
required to roll the money over into another 401(k) or IRA account, or receive
a direct payment after withholding of applicable federal and state tax
provisions. If the participant's balance is greater than $3,500, the
participant may retain their investment in the Plan for as long as IRS
regulations allow.
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<PAGE>
INVESTMENTS
Participants may direct the investment of their contributions into their
choice of mutual funds, common collective trusts, or the common stock of
Choice or Sunburst. Participants, who previously had investments in Manor
Care common stock through the Manor Care Plan have been allowed to retain the
Manor Care stock, but not to make additional investments. These funds are as
follows:
-- Vanguard U.S. Treasury Money Market Fund
-- T. Rowe Price Stable Value Fund
-- Vanguard Wellington Balanced Fund
-- T. Rowe Price International Stock Fund
-- Janus Fund
Additionally, the Company contribution is made in Company stock.
Investments are reported at quoted market values. All income earned is
allocated monthly.
LOANS
Participant loans are made available to all participants who have a vested
account balance. The minimum loan amount is $750 and the maximum loan amount
is the lesser of $50,000 or 50% of a participant's vested account balance.
Additionally, interest rates are equal to 1% above the Prime Rate on the date
the loan is issued and there is a $35 loan-processing fee per loan.
Participants may not have more than one loan outstanding at any time.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements are presented on the accrual basis of accounting
in accordance with generally accepted accounting principles.
TRUSTEE FEES
Investment management fees are netted against investment earnings in each
fund. Trustee fees and all administrative expenses of the Plan are currently
paid by the Companies. The Companies currently have no intention to seek
reimbursement from the Plan for prior or future expenses paid by the
Companies.
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<PAGE>
3. FEDERAL INCOME TAX STATUS
The Plan has not yet received a determination letter from the Internal
Revenue Service. However, management believes that the Plan, as designed is
in compliance with the applicable requirements of Section 401(a) of the
Internal Revenue Code. Management believes that the Plan is operating as
intended and, as such, continues to comply with these requirements.
4. PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contributions at any time and to
terminate the Plan subject to the provisions of ERISA.
5. RELATED PARTY TRANSACTIONS
Certain Plan investments are shares of mutual funds and common collective
trusts managed by Chase Manhattan. Chase Manhattan is the Trustee and,
therefore, these transactions qualify as party-in-interest.
6. NON-PARTICIPANT DIRECTED OTHER
Non-participant Directed Other balances included in the financial
statements represent receivables from the Company for contributions which have
not yet been remitted to the trustee. Additionally, certain Plan investments
had not yet been transferred from the Manor Care Plan as of December 31, 1996.
These balances are also included as Non-participant Directed Other balances.
All amounts were received by the Plan subsequent to year-end.
7. MULTI-EMPLOYER STATUS
As discussed in Note 1, subsequent to the Choice Distribution, the Plan
changed its name to the Sunburst Hospitality Corporation Retirement, Savings,
and Investment Plan and the Plan became available to the employees of both
Choice and Sunburst. The administrative expenses are shared by the Companies.
8. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for Plan benefits
per the financial statements to the Form 5500 for the year ended December 31,
1997:
<TABLE>
<S> <C>
Net assets available for Plan benefits per financial statements $27,965,791
-----------
Amounts allocated to withdrawing participants (428,158)
-----------
Net assets available for Plan benefits per the Form 5500 $27,537,633
===========
</TABLE>
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<PAGE>
The following is a reconciliation of benefits paid to participants per the
financial statements to the Form 5500 for the year ended December 31, 1997:
<TABLE>
<S> <C>
Benefits paid to participants per the financial statements $1,447,929
----------
Add: Amounts allocated to withdrawing participants at December 31, 1997 428,158
----------
Less: Amounts allocated to withdrawing participants at
December 31, 1996 (122,390)
----------
Benefits paid to participants per the Form 5500 $1,752,498
----------
</TABLE>
Amounts allocated to withdrawing participants are recorded on the Form 5500
for benefit claims that have occurred but have not been paid as of
December 31.
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<PAGE>
SUNBURST HOSPITALITY CORPORATION
RETIREMENT, SAVINGS AND INVESTMENT PLAN
ITEM 27(A) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
IDENTITY OF ISSUE DESCRIPTION OF INVESTMENT COST CURRENT VALUE
- ------------------------------------------- ------------------------- -------------- -----------------
<S> <C> <C> <C>
Janus Fund Mutual Fund $ 7,537,727 $ 8,528,097
Vanguard U. S. Treasury Money Market Fund Mutual Fund 2,317,911 2,317,911
T. Rowe Price Stable Value Fund Common/Collective Trust 1,254,665 1,254,665
Vanguard Wellington Balanced Fund Mutual Fund 5,904,228 7,736,995
T. Rowe Price International Stock Fund Mutual Fund 2,872,835 3,319,698
Choice Hotels International Common Stock Fund* Common Stock 1,291,372 1,853,235
Manor Care Common Stock Fund* Common Stock 287,296 664,051
Sunburst Hospitality Common Stock Fund* Common Stock 225,368 379,337
-------------- -----------------
21,691,403 26,053,989
Participant loans 9.25 9.5% interest rate 770,403 770,403
-------------- -----------------
Total assets held for investment purposes $22,461,806 $26,824,392
============== =================
</TABLE>
* Represents party-in-interest to the Plan
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<PAGE>
SUNBURST HOSPITALITY CORPORATION
RETIREMENT, SAVINGS AND INVESTMENT PLAN
Item 27(d) - Schedule of Reportable Transactions
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
CURRENT
EXPENSE VALUE OF
IDENTITY DESCRIPTION INCURRED COST ASSET ON NET
OF OF PURCHASE SELLING LEASE WITH OF TRANSACTION GAIN/
PARTY ASSET PRICE PRICE RENTAL TRANSACTION ASSET DATE (LOSS)
- ----------------------------- ------------ ---------- --------- ------ ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vanguard U.S. Treasury
Money Market Fund Mutual Fund $ 4,585,652 $ -- $ -- $ -- $ 4,585,652 $ 4,585,652 $ --
Vanguard U.S. Treasury
Money Market Fund Mutual Fund (4,532,187) -- $ -- $ -- (4,532,187) (4,532,187)
Choice Hotels Common Stock Common Stock 1,580,204 1,580,204 1,580,204
Choice Hotels Common Stock Common Stock (99,875) (78,412) (99,875) 21,436
Janus Fund Mutual Fund 2,411,527 2,411,527 2,411,527
Janus Fund Mutual Fund (241,568) (184,500) (241,568) 57,068
T. Rowe Price International
Stock Fund Mutual Fund 567,142 567,142 567,142
T. Rowe Price International
Stock Fund Mutual Fund (516,019) (407,850) (516,019) 108,169
Vanguard Wellington Fund Mutual Fund 1,446,428 1,446,428 1,446,428
Vanguard Wellington Fund Mutual Fund (385,181) (289,265) (385,181) 95,916
</TABLE>
* These transactions qualify as party-in-interest transactions as described in
Note 5.
Retirement and Savings Plan Statement of Changes in Net Assets Available for
Benefits
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<PAGE>
EXHIBITS.
23 - Consent of Independent Public Accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
trustee (or other persons who administer the employee benefit plan) has duly
caused this annual report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: July 15, 1998 SUNBURST HOSPITALITY CORPORATION
RETIREMENT SAVINGS & INVESTMENT PLAN
By: CHASE MANHATTAN BANK, as trustee
By: /s/ Catherine Kidder Platt
----------------------------------
Asst. Vice President
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EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, included in this Form 11-K, into the Company's previously filed
Registration Statement File No. 333-17577.
ARTHUR ANDERSEN LLP
Washington, D.C.,
July 15, 1998
