<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-46579
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED +
+EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. A FINAL PROSPECTUS +
+SUPPLEMENT AND ACCOMPANYING PROSPECTUS WILL BE DELIVERED TO PURCHASERS. THIS +
+PRELIMINARY PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH +
+OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 1, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 16, 1998)
5,000,000 SHARES
[LOGO OF SUNBURST HOSPITALITY CORPORATION APPEARS HERE]
COMMON STOCK
--------
All of the 5,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Sunburst
Hospitality Corporation (the "Company").
The Common Stock is traded on the New York Stock Exchange under the symbol
"SNB." The reported last sale price of the Common Stock on the New York Stock
Exchange on April 30, 1998, was $8 1/16 per share. See "Price Range of Common
Stock."
--------
SEE "RISK FACTORS" BEGINNING ON PAGE S-12 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
--------
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------
Total(3) $ $ $
</TABLE>
================================================================================
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that delivery of the shares of
Common Stock offered hereby will be made on or about May , 1998, at the office
of Smith Barney Inc., 333 West 34th Street, New York, New York 10001, or
through the facilities of The Depository Trust Company.
--------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
NATIONSBANC MONTGOMERY
SECURITIES LLC
, 1998
<PAGE>
[ART]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS DURING AND AFTER THE OFFERING,
IN CONNECTION WITH THE OFFERING OF COMMON STOCK AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the consolidated financial
statements (including the notes thereto) appearing elsewhere in this Prospectus
Supplement, the accompanying Prospectus or incorporated by reference into this
Prospectus Supplement and the accompanying Prospectus. Unless the context
otherwise requires, references herein to the "Company" refer to Sunburst
Hospitality Corporation. Unless otherwise indicated, the information in this
Prospectus Supplement assumes the Underwriters' over-allotment option is not
exercised. Unless otherwise indicated, all statistical information and data
relating to the lodging industry in this Prospectus Supplement are derived from
information provided by Smith Travel Research. Smith Travel Research has
neither consented to the use of the lodging industry data presented herein nor
has it provided any form of consultation, advice or counsel regarding any
aspects of, nor is it in any way whatsoever associated with, the Offering.
During 1997, the Company changed its fiscal year from a May 31 year-end to a
December 31 year-end.
THE COMPANY
Sunburst Hospitality Corporation (the "Company") is a national owner and
operator of hotel properties with a portfolio at March 31, 1998 of 83 hotels
(11,554 rooms) in a total of 28 states. The Company is also an active developer
of hotel properties with eight hotels (838 rooms) under construction and 14
hotels (1,406 rooms) under development at March 31, 1998, all but three of
which are MainStay Suites. The Company believes that the development of
MainStay Suites, which are in the mid-price category of the extended-stay
segment of the lodging industry, will be its primary source of growth over the
next several years. The Company's portfolio includes hotels in each of the
extended-stay, traditional all-suite, full-service and limited-service segments
of the lodging industry and in the mid-price, economy and upscale price
categories of the lodging industry. The Company operates each of its hotels
under one of the following brands franchised by Choice Hotels International,
Inc. ("Choice"): MainStay(R), Comfort(R), Quality(R), Clarion(R), Sleep(R),
Rodeway(R) and Econo Lodge(R) (collectively, the "Choice Brands"). Prior to
October 1997, Choice was a subsidiary of the Company. See "--Recent
Developments--Recent Spin-Offs."
The Company is led by an experienced management team whose senior members
have an average of over 18 years of lodging industry experience and have worked
together as a team for over six years. The Company's management has had a
successful record of managing ahead of lodging industry cycles. Prior to the
last industry downturn in the late 1980s, the Company successfully liquidated a
substantial portion of its hotel portfolio at favorable prices. From 1992 to
1996, industry conditions were such that many lodging companies and individual
hotels faced financial hardship. The Company took advantage of this opportunity
to acquire hotels at prices well below replacement cost. The Company's strategy
was to acquire and renovate such hotels, install professional management and
marketing systems, and in some cases reposition the hotels to a different brand
or service level. Since June 1992, the Company has acquired 55 hotels (7,809
rooms) for a total purchase price of $187.7 million and to date has spent an
additional $95.6 million on capital improvements to renovate and reposition
these assets. Such amounts represent on average approximately 60% of the
estimated replacement value of the hotels at their respective acquisition
dates. The Company believes, however, that the record levels of profitability
reached in the industry since 1996 have limited opportunities to acquire hotels
at substantial discounts to replacement cost. As a result, the Company acquired
only two hotels in fiscal 1997 and has acquired no hotels since February 1997.
The Company has responded to the new industry environment by shifting the focus
of its growth strategy from opportunistically acquiring hotels to developing
and operating MainStay Suites in the underserved mid-price category of the
extended-stay segment of the lodging industry. See "Risk Factors--Inherent
Risks Associated with the Lodging Industry" and "--Uncertainty of MainStay
Expansion Program."
The Company believes that it is well positioned to generate growth in its
hotel portfolio by capitalizing on opportunities present at the current stage
of the lodging industry cycle. The Company's primary business objectives are to
maximize the value of the Company's hotel portfolio, its cash flow and its
shareholder value. The Company's strategies for accomplishing these objectives
include: (i) developing and operating MainStay
S-3
<PAGE>
Suites in the extended-stay segment of the lodging industry; (ii) actively
managing its existing portfolio of hotels; and (iii) selectively pursuing
acquisitions of hotel properties. The Company intends to finance its growth
with: (i) advances under its $80 million revolving Credit Agreement dated
October 15, 1997 (the "Credit Facility") with a syndicate of four commercial
banks; (ii) cash flow from operations; (iii) potential equity and/or debt
financings in the public and/or private markets; and (iv) selective disposition
of existing assets. See "--Recent Developments--Recent Financing Activity,"
"Risk Factors--Uncertainty of MainStay Expansion Program" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEVELOPING AND OPERATING MAINSTAY SUITES
The Company believes that extended-stay is a growing segment of the lodging
industry with favorable supply and demand characteristics. The Company defines
the extended-stay segment of the industry as hotels serving guests staying five
nights or longer with a product designed for longer stays. Extended-stay hotels
typically include kitchen facilities and separate areas for sleeping, working
and relaxation. Of the approximately 3.5 million guest rooms available in the
United States at December 31, 1997, there were only approximately 89,076 guest
rooms at approximately 793 properties in the extended-stay segment. The Company
believes, based on this and other published industry data, that the extended-
stay segment is underserved, with approximately 25% of the current extended-
stay room demand being met by the existing dedicated supply. In addition, the
Company believes that extended-stay hotels generally have higher operating
margins, higher returns on capital and lower occupancy break-even thresholds
than hotels in other industry segments, primarily as a result of lower
operating expenses, longer guest stays, lower guest turnover and greater
productivity. The Company believes that its plan to continue developing
MainStay Suites positions it to benefit from these favorable trends in the
extended-stay market.
MainStay Suites are mid-price extended-stay hotels with average weekly rates
for hotels currently open ranging from $350 to $480. Guests at MainStay Suites,
who generally rent on a weekly or longer basis, include business travelers,
professionals on temporary work assignments, people relocating or purchasing a
home, people between domestic situations, tourists and others desiring high-
quality, furnished accommodations with full kitchens. MainStay Suites are
designed and built to uniform plans and specifications developed and
periodically refined since 1996. The Company's MainStay Suites plans utilize a
versatile "building block" architecture that adapts to various site
configurations. The Company believes this standardization lowers construction
costs and enables uniform quality and operational standards. A typical MainStay
Suites ranges in size from 80 to 120 rooms and is developed on 2.0 to 3.0 acres
of land on highly visible sites in upper-to-middle income areas that are close
to corporate demand generators, restaurants and retail locations. A typical
MainStay Suites costs approximately $5.0 to $6.9 million to develop and
construct (including land cost), with an average cost per room ranging from
$50,000 to $65,000. Based on the Company's hotel development experience, the
Company believes that once a site is selected and acquired and all regulatory
permits and approvals have been obtained, the construction phase of development
generally requires approximately nine months from groundbreaking to opening.
The Company opened its first MainStay Suites in Plano, Texas in November 1996,
which achieved an unleveraged return on cost of approximately 14.3% for the
twelve months ended March 31, 1998. This return on cost represents the hotel's
earnings before interest, taxes, depreciation and amortization and an
allocation for corporate expenses for such period (which the Company believes
is after the period required for such property's operations to stabilize),
divided by its initial cost. The results achieved by this hotel may not be
indicative of results of other MainStay Suites developed and operated by the
Company. See "Risk Factors--Uncertainty of MainStay Expansion Program."
MainStay Suites feature automated registration and checkout kiosks, guest
laundry, housekeeping every five days (with optional daily light touch
housekeeping), complimentary breakfast and manager's reception and fitness and
recreation facilities. Room alternatives include one-bedroom and studio suites.
Each suite features a bedroom area, a fully furnished kitchen, a living room
area with a pull-out couch or recliner, a spacious work area, two direct-dial
phone lines, voice mail and other automated phone services. The Company
typically operates MainStay Suites with only seven to nine employees, which
helps to control operating expenses. Notwithstanding the Company's belief that
extended-stay is a growing segment of the lodging industry, the
S-4
<PAGE>
Company's site selection process requires a positive evaluation of prospective
sites for a transient hotel. The Company believes that in the event extended-
stay demand is less than anticipated in any particular market, any of its
MainStay Suites could be converted to a traditional all-suite hotel. However,
there can be no assurance that any such conversion would be successful.
The Company currently owns and operates nine MainStay Suites (866 rooms)
located in nine cities. The Company currently has under construction six
additional MainStay Suites (600 rooms), which are expected to open in 1998, in
six additional cities (two of which are new markets for the Company).
Completion of these hotels will increase the number of rooms in the Company's
extended-stay portfolio by approximately 69%. The Company has under development
an additional 13 MainStay Suites (1,283 rooms), which are expected to open by
1999, in 13 additional cities (nine of which are new markets for the Company).
Completion of these hotels will increase the number of rooms in the Company's
extended-stay portfolio by approximately 88%, assuming completion of all the
MainStay Suites currently under construction. The Company defines "hotels under
construction" as hotels for which construction contracts have been executed and
"hotels under development" as hotels for which a land purchase or land lease
agreement with respect to the hotel site has been executed. The Company has
other locations under consideration and is continually searching for other
appropriate sites. The Company plans to develop 15 to 20 new MainStay Suites
annually through the year 2000 and will require capital expenditures of
approximately $85 to $114 million annually for its development plan. There can
be no assurance that the Company will be able to complete the construction and
development of all of these facilities. See "Risk Factors--Uncertainty of
MainStay Expansion Program," "--Development and Construction Risks," and "--
Forward-Looking Statements."
ACTIVELY MANAGING EXISTING HOTEL PORTFOLIO
The Company actively manages its existing hotel portfolio to optimize
performance by: (i) applying proven operating systems and procedures in the
management of its hotels; (ii) maintaining the competitiveness of its hotels
through capital reinvestment; and (iii) selling hotels that have limited upside
potential or are projected to underperform in order to redeploy capital in
higher-yielding assets.
Property Management Systems. The Company's hotels benefit from systems and
services available to all Choice franchisees with respect to a particular
Choice Brand, including the CHOICE 2001 central reservation system, marketing
and advertising efforts and volume purchasing discounts. The Company's hotels
are subject to the quality assurance program applicable to all Choice
franchisees. The Company has also instituted a number of operating systems and
procedures that are designed to maximize performance at its hotels. These
systems, developed by the Company over time, include:
. Yield Management Program: The Company has installed an automated yield
management program at most of its hotels which allows each hotel's
management to maximize revenue per available room ("RevPAR"). The system
automatically performs calculations and suggests pricing strategies to
the local hotel management. The program continues to update information
based on the availability of room supply, guest stay patterns and
reservation volume at each hotel.
. Training: The Company has developed a training system for all guest
services representatives that teaches basic sales techniques and standard
operating procedures. The Company also utilizes a computerized guest
comment system in each hotel which provides management with immediate
guest feedback. This feedback allows the Company to more effectively
respond to consumer needs and to improve its employee training. In
addition, the Company provides training to hotel general managers and on-
site sales professionals on sales and marketing techniques.
. Accounting Systems: Each of the Company's hotels has a computerized front
desk and accounting system. This system allows management at each hotel
to gather key financial indicators (such as daily occupancy and revenue
statistics) and electronically transmit this information to the Company's
senior operating officers and managers. This instant access to
information allows management to quickly identify trends and make
operating adjustments where necessary. This system also creates cost
savings in the accounting and bookkeeping departments of each hotel. In
addition, a corporate-based financial
S-5
<PAGE>
controller group oversees operational and capital expenditures. This group
works with the hotel operations group to maintain expense standards and
operating procedures.
. Time and Attendance System: Each hotel maintains an automated time and
attendance system that is electronically linked to a central payroll
system at corporate headquarters. This computerized system for tracking
time allows management to make quick decisions on controlling labor costs
and provides immediate information on projected costs.
. Annual Business Planning Process: Each hotel prepares a zero-based annual
business plan which incorporates historical performance and market
conditions. Each plan, which is reviewed and approved by senior
management, provides detailed strategies for marketing, guest services
and food and beverage operations. The annual plan serves as a fundamental
measurement of management's performance.
Capital Reinvestment. The Company seeks to maintain its competitive advantage
in its local markets through capital spending. The Company believes a regular
program of capital improvements as well as periodic renovation and
redevelopment of certain hotels are important factors in maintaining the
competitiveness of the portfolio and maximizing cash flow growth. Each of the
Company's hotels completes a detailed capital spending budget annually. The
hotels spend an average of 5% to 7% of total revenues on capital improvements
annually.
Asset Management and Hotel Sales. The Company continuously evaluates its
existing portfolio and seeks to sell hotels that have limited upside potential
or are projected to underperform in order to redeploy capital in higher-
yielding assets. In determining which hotels to sell, the Company considers a
number of factors, including estimated market value relative to the projected
future performance, changes in market demographics, changes in the local
competitive environment and physical plant obsolescence. The Company has
identified six properties which it is marketing for sale in calendar year 1998.
SELECTIVELY PURSUING HOTEL ACQUISITIONS
Although the Company believes that currently there are limited opportunities
to acquire hotels at substantial discounts to replacement cost, the Company
will continue to pursue selectively the acquisition of hotel properties in all
segments of the lodging industry where the Company believes long-term value can
be created, including, where appropriate, from renovation and/or the
repositioning of the hotel to a different brand or service level. In
identifying potential acquisitions, the Company focuses on hotel properties
located in markets with favorable economic, demographic and supply
characteristics. Upon acquiring a hotel, the Company typically spends
significant capital on renovation. During the fiscal year ended May 31, 1995,
the Company acquired 16 hotels for an aggregate initial acquisition price of
$58.6 million and to date has spent an additional $25.8 million on capital
improvements. During the fiscal year ended May 31, 1996, the Company acquired
16 hotels for an aggregate initial acquisition price of $49.2 million and to
date has spent an additional $23.5 million on capital improvements. During the
fiscal year ended May 31, 1997, the Company acquired two hotels for an
aggregate initial acquisition price of $10.7 million and to date has spent an
additional $7.3 million on capital improvements. The Company has acquired no
hotels since February 1997.
RECENT DEVELOPMENTS
RECENT SPIN-OFFS
Prior to November 1996, the Company was a subsidiary of Manor Care, Inc.
("Manor Care") which, directly and through its subsidiaries, owned and managed
hotels domestically and internationally (the "Choice Ownership Business")
operated under the Choice Brands as well as franchised hotels worldwide under
the Choice Brands (the "Choice Franchising Business" and, together with the
Choice Ownership Business, the "Choice Lodging Business"). On November 1, 1996,
Manor Care separated the Choice Lodging Business from its health care business
pursuant to a pro rata distribution to the holders of Manor Care's common stock
of all the Company's common stock (the "Company Spin-Off"). The Company became
a separate publicly-traded company known as Choice Hotels International, Inc.
S-6
<PAGE>
On October 15, 1997, the Company separated the Choice Franchising Business
(which had previously been conducted primarily through the Company's
subsidiary, Choice Hotels Franchising, Inc. ("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 (the
"Choice Spin-Off"). At the time of the Choice Spin-Off, Franchising changed its
name to "Choice Hotels International, Inc." (referred to herein as "Choice").
The Company changed its name to "Sunburst Hospitality Corporation" and effected
a one-for-three reverse stock split. The Company currently conducts the
domestic Choice Ownership Business. See "Business and Properties."
RECENT FINANCING ACTIVITY
The Company entered into two new debt facilities in October 1997 in
connection with the Choice Spin-Off: (i) the Credit Facility and (ii) the
$115.0 million Choice Note (as defined below). In addition, in April 1997, a
wholly owned subsidiary of the Company issued a series of Multiclass Mortgage
Pass-Through Certificates in an aggregate principal amount of $117.5 million
(the "CMBS Certificates").
Credit Facility. The Company is the borrower under the Credit Facility, which
has a term of three years and provides for: (i) a revolving credit loan of up
to $80.0 million; and (ii) letters of credit supporting the Company's payment
obligations in an amount not to exceed $5.0 million. The Credit Facility, which
matures on October 15, 2000, includes customary financial and other covenants
that require the maintenance of certain financial ratios, including maximum
leverage, minimum net worth and interest coverage, and restricts the Company's
ability to make certain investments, repurchase stock, incur debt, and dispose
of assets. At March 31, 1998, after giving effect to the Offering and
application of proceeds thereof, the Company had $69.5 million of permitted
availability under the Credit Facility. At the Company's option, the interest
rate may be based on LIBOR, a certificate of deposit rate or an alternate base
rate (as defined in the Credit Facility), plus a facility fee. The rate is
determined based on the Company's consolidated leverage ratio at the time of
borrowing. The Company's obligations under the Credit Facility are guaranteed
by all direct and indirect subsidiaries of the Company other than the CMBS
Subsidiaries (as defined below) and such obligations are secured by a pledge of
all the capital stock of such guaranteeing subsidiaries. Amounts outstanding
under the Credit Facility being repaid with proceeds from the Offering will be
immediately available for re-borrowing by the Company subject to the terms of
the Credit Facility.
Choice Note. In connection with the Choice Spin-Off, the Company issued to
Choice a subordinated note due October 15, 2002 with a principal amount of
$115.0 million (the "Choice Note"). The Choice Note is subordinated to all
senior debt of the Company. The Choice Note accrues simple interest at a rate
of 11% per annum resulting in an effective annual rate of 8.8% through
maturity. Principal and all interest accrued since inception on the Choice Note
are payable in full at maturity. The Choice Note limits the ability of the
Company to merge or consolidate with any other person or entity (unless the
Company is the surviving entity), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company.
Accrued interest on the Choice Note at March 31, 1998 was $5.8 million. The
Company is also the obligor on payables to Choice totaling approximately $19.9
million at March 31, 1998. These payables primarily represent liabilities of
the Company discharged or assumed by Choice in connection with the Choice Spin-
Off. The Company has reached an understanding with Choice to satisfy these
obligations no later than December 31, 1998.
CMBS Certificates. In April 1997, QI Capital Corp., a wholly owned subsidiary
of the Company (the "CMBS Issuer"), issued the CMBS Certificates, representing
beneficial ownership interests in a trust fund holding a fixed rate non-
recourse mortgage loan (the "Mortgage Note") issued by First Choice Properties
Corp., a wholly owned subsidiary of the Company ("First Choice"). The Mortgage
Note is secured by 37 cross-defaulted and cross-collateralized mortgages
representing first priority mortgage liens on fee interests or fee and
leasehold interests in 37 hotels owned by First Choice. The terms of the
Mortgage Note provide for monthly payments of principal and interest in an
aggregate amount equal to interest accruing for such month and monthly
S-7
<PAGE>
principal payments based on a 240-month amortization schedule, computed using
an assumed weighted average interest rate equal to 7.75% per annum. The
Mortgage Note has a scheduled maturity date of May 1, 2012, on which date a
balloon payment of the then-outstanding principal balance will be due
(currently estimated to be $48.5 million). The Mortgage Note may not be
prepaid, in whole or in part, except upon payment of a premium equal to the
greater of 1% of the principal amount of the Mortgage Note being prepaid and a
treasury-based yield maintenance amount, provided that no prepayment premium
will be required in the event of a prepayment made: (i) in connection with
casualty or condemnation events; or (ii) on or after the date that is six
months prior to the scheduled maturity date. The hotel properties securing the
Mortgage Note are managed by Beltway Management Company, a wholly owned
subsidiary of the Company ("Beltway"). Beltway, First Choice and the CMBS
Issuer are sometimes referred to herein as the "CMBS Subsidiaries." At March
31, 1998, $115.2 million aggregate principal amount was outstanding under the
CMBS Certificates.
SHAREHOLDER RIGHTS PLAN
On February 23, 1998, the Board of Directors adopted a shareholder rights
plan under which a dividend of one preferred stock purchase right is being
distributed for each outstanding share of Common Stock to shareholders of
record on April 3, 1998. See "Business and Properties--Shareholder Rights
Plan."
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the
Company......................... 5,000,000 shares(1)
Common Stock to be Outstanding
after the Offering ............. 24,963,190 shares (1)(2)
Use of Proceeds.................. The net proceeds from the Offering will be
used to repay amounts outstanding under the
Credit Facility and other liabilities of
the Company. Any net proceeds in excess of
such repayment will be used to construct
and develop MainStay Suites and for general
corporate purposes. See "Use of Proceeds"
and "Business and Properties."
NYSE Symbol...................... "SNB"
</TABLE>
- --------
(1) Does not include up to 750,000 shares of Common Stock subject to an over-
allotment option granted to the Underwriters by the Company. See
"Underwriting."
(2) Does not include: (i) 1,419,240 shares of Common Stock issued and held in
treasury by the Company; (ii) 821,546 shares of Common Stock reserved for
issuance under the Company's 1996 Long Term Incentive Plan; (iii)
outstanding options to purchase 2,745,120 shares of Common Stock awarded
under the Company's 1996 Long Term Incentive Plan; (iv) 69,786 shares of
Common Stock reserved for issuance under the Company's 1996 Non-Employee
Director Stock Compensation Plan; (v) 20,617 shares of Common Stock
reserved for issuance under the Company's 1996 Non-Employee Director Stock
Option Plan; and (vi) outstanding options to purchase 29,383 shares of
Common Stock awarded under the Company's 1996 Non-Employee Director Stock
Option Plan.
S-8
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents summary historical consolidated financial data
of the Company as of and for the three-month periods ended March 31, 1998 and
1997, the seven-month period ended December 31, 1997 and the three fiscal years
ended May 31, 1997, 1996 and 1995. During September 1997, the Company changed
its fiscal year from a May 31 year-end to a December 31 year-end. The summary
historical consolidated financial data as of and for the seven-month period
ended December 31, 1997 and the three fiscal years ended May 31, 1997, 1996 and
1995 are derived from the audited consolidated financial statements of the
Company. The summary historical consolidated financial data as of and for the
three-month periods ended March 31, 1998 and 1997 are derived from the
unaudited consolidated financial statements of the Company. In the opinion of
management of the Company, the unaudited financial statements from which such
information is derived contain all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the results that
may be expected for the full fiscal year. The summary historical consolidated
financial data presented herein are presented as if the Company were a separate
entity for all periods. The Company's historical net income and cash flows as a
wholly owned subsidiary of Manor Care (all periods prior to November 1, 1996)
are not necessarily indicative of the net income and cash flows the Company
might have realized as an independent entity. The Company's historical
financial results prior to the Choice Spin-Off include the Choice Franchising
Business, which was distributed to shareholders on October 15, 1997. See "--
Recent Developments--Recent Spin-Offs" and "Basis of Presentation" in the notes
to the Company's Consolidated Financial Statements, which are incorporated
herein by reference. The Company's summary historical consolidated financial
data presented herein are not necessarily indicative of the Company's future
results of operations or financial condition. The data set forth below should
be read in conjunction with "Selected Historical Consolidated Financial Data,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein and the Company's Consolidated Financial
Statements and related notes thereto incorporated herein by reference.
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<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE SEVEN
MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, FISCAL YEAR ENDED MAY 31,
----------------------- ------------ ---------------------------------
1998 1997 1997 1997 1996 1995
----------- ----------- ------------ -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF INCOME
DATA(1):
Total revenues............. $ 46,139 $ 44,991 $114,553 $185,753 $154,625 $114,514
Total operating expenses... 39,972 38,527 104,743(2) 158,022 163,660(3) 106,139
Operating income (loss).... 6,167 6,464 9,810 27,731 (9,035) 8,375
Interest expense........... 4,943 4,334 10,138 15,891 12,839 9,155
Income taxes............... 516 937 (44) 5,035 (8,523) (323)
Income (loss) from
continuing operations..... 708 1,193 (284) 6,805 (13,351) (457)
Income from discontinued
operations(4)............. -- 5,026 16,369 35,219 21,809 17,268
Extraordinary loss, net of
tax benefit............... -- -- -- (1,144)(5) -- --
Net income................. $ 708 6,219 16,085 40,880 8,458 16,811
Basic earnings per share(6)
From continuing
operations............... $ 0.04 $ 0.06 (0.01) 0.32 (0.64) (0.02)
From discontinued
operations............... -- 0.24 0.82 1.69 1.05 0.83
From extraordinary item... -- -- -- (0.05) -- --
-------- -------- -------- -------- -------- --------
Earnings per share........ $ 0.04 0.30 0.81 1.96 0.41 0.81
OTHER DATA(1):
EBITDA (unaudited)(7)...... $ 12,549 $ 11,845 $ 24,056 $ 48,363 $ 27,001(8) $ 20,888
Net cash provided by
operating activities(9)... 6,498 25,044 42,247 87,258 55,440 49,498
Net cash utilized by
investing activities(9)... (23,110) (26,739) (183,930) (94,415) (169,948) (94,655)
Net cash provided by
financing activities(9)... 12,308 1,836 136,766 13,443 116,959 44,456
Number of hotels, end of
period (unaudited)(10).... 83 70 76 70 65 48
Number of rooms, end of
period (unaudited)(10).... 11,554 10,156 10,859 10,156 9,713 7,941
Average occupancy
percentage
(unaudited)(10)........... 61.46% 65.42% 67.41% 68.70% 66.61% 67.10%
Average daily room rate
(ADR) (unaudited)(10)..... $ 64.25 $ 61.26 $ 61.81 $ 59.62 $ 55.97 $ 51.28
RevPAR(unaudited)(10)(11).. $ 39.49 $ 40.07 $ 41.67 $ $40.96 $ 37.28 $ 34.40
BALANCE SHEET DATA(1):
Total assets(12)........... $412,578 N/A $400,983 $426,429 $328,311 $254,229
Total debt(13)............. 259,828 N/A 248,120 260,369 163,497 137,122
Shareholders' equity....... 90,023 N/A 89,307 124,487 -- --
Investment in and advances
from Manor Care........... -- N/A -- -- 147,559 65,829
</TABLE>
- --------
(1) European hotel operations, which were distributed to Choice in the Choice
Spin-Off, are presented as part of continuing operations in the
consolidated financial statements for all periods prior to the Choice
Spin-Off on October 15, 1997 in accordance with generally accepted
accounting principles. The following table presents statement of income
data (in thousands) for the Company's domestic hotels:
<TABLE>
<CAPTION>
THREE SEVEN
MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, FISCAL YEAR ENDED MAY 31,
----------------------- ------------ -------------------------
1998 1997 1997 1997 1996 1995
----------- ----------- ------------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Total revenues........ $ 46,139 $ 41,258 $107,574 $168,016 $135,022 $95,876
Total operating
expenses............. 39,972 34,480 98,169 140,468 127,722 85,777
Operating income ..... 6,167 6,778 9,405 27,548 7,300 10,099
EBITDA(unaudited)..... 12,549 11,793 23,650 46,792 24,900 20,172
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein and "Basis of
Presentation" in the notes to the Company's Consolidated Financial
Statements incorporated herein by reference.
S-10
<PAGE>
(2) Included in total operating expenses for the seven months ended December
31, 1997 are non-recurring loss provisions totaling $5.1 million (pre-
tax). These loss provisions were recorded in December 1997 in order to:
(i) reserve $2.1 million of previously capitalized costs and future
payment obligations related to a data processing services agreement and
computer system which will be replaced in 1998; (ii) accrue the estimated
cost of $1.0 million of future lease costs associated with space the
Company has vacated; and (iii) reserve $2.0 million for future obligations
related to an agreement expiring in May 1999 for services which the
Company will no longer utilize and, therefore, have no future benefits.
The service and lease agreements are with Manor Care and Choice and were
entered into in conjunction with the Choice Spin-Off and the Company Spin-
Off. See "--Recent Developments--Recent Spin-Offs."
(3) Included in total operating expenses for the fiscal year ended May 31,
1996 are non-recurring provisions for asset impairment and other non-
recurring charges totalling $24.6 million (pre-tax). During fiscal year
1996, the Company began restructuring its European hotel operations. This
restructuring effort included the purchase of an equity interest in
Friendly Hotels PLC and a re-evaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a
review of its European hotel operations and in May 1996 recognized a $16.0
million non-cash charge against earnings related to the impairment of
assets associated with certain European hotel operations. In addition, the
Company recognized a $3.4 million non-cash charge against earnings related
to the impairment of assets associated with certain domestic hotel
operations and a restructuring charge of $5.2 million in May 1996.
Restructuring costs include severance and employee benefit plan
restructuring costs and other costs directly associated with the Company
Spin-Off. The Company's European hotel operations were transferred to
Choice as part of the Choice Spin-Off.
(4) Income from discontinued operations, representing income from the
operations of the Choice Franchising Business through October 15, 1997, is
presented net of taxes for the three-month period ended March 31, 1997,
the seven-month period ended December 31, 1997 and fiscal years 1997, 1996
and 1995 of $3.6 million, $11.8 million, $25.2 million, $15.9 million and
$13.5 million, respectively.
(5) The extraordinary loss represents a loss from the early extinguishment of
a note payable to Manor Care, net of a $747,000 tax benefit.
(6) Basic earnings per share have been calculated based on the weighted
average common shares outstanding of the Company's former parent Manor
Care for fiscal years 1995 and 1996 of 20,827,000 and 20,876,000,
respectively. Basic earnings per share have been calculated for fiscal
year 1997 based on the weighted average common shares outstanding of Manor
Care from June 1, 1996 through November 1, 1996 and the weighted average
shares common shares outstanding of the Company from November 2, 1996
through May 31, 1997 of 20,893,000. Basic earnings per share have been
calculated for the seven months ended December 31, 1997 and the three
months ended March 31, 1997 and 1998 based on the weighted average common
shares outstanding of the Company of 19,979,000, 21,035,000 and
19,956,000, respectively. Figures for fiscal years 1995 through 1997, the
seven-month period ended December 31, 1997 and the three months ended
March 31, 1997 have been adjusted for the one-for-three reverse stock
split which occurred in conjunction with the Choice Spin-Off.
(7) EBITDA consists of the sum of income (loss) from continuing operations,
interest expense, income taxes, depreciation and amortization and non-cash
asset writedowns. EBITDA is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
obligations, fund capital expenditures and expand its business. The
Company considers EBITDA to be an indicative measure of operating
performance particularly due to the large amount of depreciation and
amortization. Such information should not be considered an alternative to
net income, operating income, cash flow from operations or any other
operating or liquidity performance measure prescribed by GAAP. Cash
expenditures (including nondiscretionary expenditures) for various long-
term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation and therefore
EBITDA does not represent funds available for management's discretionary
use. EBITDA presented by the Company may not be comparable to EBITDA
defined and presented by other companies.
(8) Fiscal year 1996 EBITDA includes an add-back of non-cash pretax charges
totaling $19.4 million for impairment of long-lived assets associated with
certain European and domestic hotel operations, in amounts of $16.0
million and $3.4 million, respectively.
(9) Includes cash flows from the continuing operations of the Company and the
discontinued Choice Franchising Business, which was transferred to Choice
and distributed to the Company's shareholders in the Choice Spin-Off, for
all periods except the three-month period ended March 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(10) Number of hotels, number of rooms, average occupancy percentage, average
daily room rate ("ADR") and RevPAR are presented with respect only to the
Company's domestic hotels.
(11) RevPAR is calculated by multiplying the percentage of occupied rooms by
ADR. The Company uses RevPAR as a measure of the operating performance of
its hotels.
(12) Total assets at May 31, 1997, 1996 and 1995 include the net assets of the
discontinued operation of the Choice Franchising Business of $52.2
million, $24.6 million and $12.7 million, respectively.
(13) Includes a note payable, net of discount, to Choice of $113.9 million and
$114.5 million at March 31, 1998 and December 31, 1997, respectively, and
a note payable to Manor Care of $37.0 million, $147.0 million and $119.8
million at May 31, 1997, 1996 and 1995, respectively.
S-11
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock should consider carefully, in
addition to the other information contained or incorporated by reference into
this Prospectus Supplement and the accompanying Prospectus, the following
factors before purchasing the shares of Common Stock offered hereby.
EFFECTS OF SUBSTANTIAL LEVERAGE
The Company has consolidated indebtedness that is substantial in relation to
its shareholders' equity. As of March 31, 1998, as adjusted to give effect to
the Offering and to the application of a portion of the net proceeds therefrom
to repay amounts outstanding under the Credit Facility, the Company's total
consolidated indebtedness would have been $230.8 million and total
shareholders' equity would have been $127.6 million. The Company expects to
incur substantial additional indebtedness under the Credit Facility, under
which up to $80 million, if certain terms of the Credit Facility are met, will
be available, and under the Choice Note in the form of accrued interest.
The Company's high degree of leverage will have important consequences to
the Company's operations and the holders of Common Stock, including: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures (including the development of new hotels),
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of principal and interest on its indebtedness and will not be
available to the Company for its operations or capital expenditures; (iii) the
Company may be hindered in its ability to adjust rapidly to changing market
conditions; (iv) the Company's substantial degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or
in its business and may limit its ability to withstand competitive pressures;
and (v) to the extent that the Company incurs indebtedness under the Credit
Facility, which indebtedness may be at variable rates, the Company may be
vulnerable to increases in interest rates. Moreover, future development
activities may significantly increase the leverage of the Company. The
Company's ability to meet its debt service obligations and to reduce its total
debt will be dependent upon the Company's future performance, which will be
subject to general economic conditions and to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. While the Company's operating cash flow is expected to be sufficient
to cover its expenses, including interest costs, there can be no assurance
that the Company's operating cash flow will be sufficient to meet its expenses
or to repay its indebtedness at maturity or that the Company will be able to
refinance its indebtedness at maturity.
The Company will be required to repay or refinance all principal and
interest outstanding under the Choice Note at maturity on October 15, 2002
(expected to exceed $180 million at such date). There can be no assurance that
the Company will be able to repay or refinance such indebtedness at rates and
under terms and conditions favorable to the Company. If the Company is unable
to generate sufficient cash flow from operations to service its debt and to
meet its other commitments, the Company will be required to adopt one or more
alternatives, such as restructuring its debt, selling material assets or
operations or seeking to raise additional debt or equity capital. There can be
no assurance that any of these actions could be effected on a timely basis or
on satisfactory terms or that these actions would enable the Company to
continue to satisfy its capital requirements.
UNCERTAINTY OF MAINSTAY EXPANSION PROGRAM
The Company's aggressive growth strategy of developing additional MainStay
Suites may be adversely affected by any or all of the factors outlined in this
section, as well as: (i) its inability to raise additional capital; (ii) the
MainStay brand's failure to win market acceptance; and (iii) the Company's
limited operating history in the extended-stay segment of the lodging
industry.
Significant Capital Requirements. The Company's plans to develop 15 to 20
new MainStay Suites per year through the year 2000 will require capital
expenditures of approximately $85 to $114 million annually. While the Company
believes that the proceeds of the Offering, availability under the Credit
Facility, proceeds from the sale of certain assets and cash flow from
operations will be sufficient to fund the near-term growth of these hotel
S-12
<PAGE>
properties, there can be no assurance that the Company will be able to obtain
financing to fund the continued growth of MainStay Suites beyond the near
term. The Company's failure to procure additional funds as necessary will slow
the Company's growth prospects. Any future debt financings or issuances of
preferred stock by the Company will be senior to the rights of the holders of
Common Stock, and any future issuances of shares of Common Stock will result
in the dilution of the then existing shareholders' proportionate equity
interest.
Market Acceptance. While the Company believes that demand exists for
additional hotels such as MainStay Suites in the mid-price category of the
extended-stay segment of the lodging industry, MainStay Suites will face
significant local competition from numerous other companies and hotel brands
in the same segment. Certain competitors have greater brand recognition and
financial resources than the Company, which may put the Company at a
competitive disadvantage. The ability of competitors to establish brands and
achieve a critical mass of hotels in the extended-stay segment more quickly
than the Company could adversely impact growth prospects of the MainStay
brand.
Lack of Operating History. Only one MainStay Suites has been open for more
than one year. The results achieved by this hotel to date may not be
indicative of results of future MainStay Suites. Results at that hotel may be
attributable to factors such as the hotel's location, a favorable local
economic or competitive climate or other unique characteristics of the
property.
INHERENT RISKS ASSOCIATED WITH THE LODGING INDUSTRY
Operating Risks. The Company's business is subject to all of the risks
inherent in the lodging industry. These risks include, among other things,
adverse effects of general and local economic conditions, cyclical
overbuilding in the lodging industry, competition from other hotels, the
recurring need for renovation, refurbishment and improvement of hotel
properties, changes in neighborhood characteristics and other local market
conditions, including an oversupply of hotel space or a reduction in demand
for hotel rooms, changes in travel patterns, changes in governmental
regulations that influence or determine wages, prices or constructions costs,
changes in interest rates, the availability of credit and changes in real
estate taxes and other operating expenses. Notwithstanding the Company's past
success at managing ahead of the lodging industry cycles, there can be no
assurances that the Company will be successful at managing ahead of future
cycles in the lodging industry.
Adverse Impact of External Factors. The Company's sole source of revenue is
from its hotel operations. In addition to the other factors described in this
section of the Prospectus Supplement, revenues from owned and managed hotels
can be adversely impacted by several external factors, the most important of
which is inflation. Increases in costs due to inflation may not be able to be
totally offset by increases in hotel room rates. Moreover, significant
increases in inflation could contribute to a slowing of the national economy.
Such a slowdown would likely result in reduced travel by both business and
leisure travelers, less demand for hotel rooms, a reduction in room rates and
fewer room reservations, negatively impacting the Company's revenues. A weak
economy could also reduce demand for new hotels, negatively impacting the
Company's plan to develop and construct additional hotels.
The Company's revenues may also be negatively impacted by certain other
unpredictable external factors which would have an especially significant
impact on the travel and lodging industries. These factors include airline
strikes, gasoline price increases and severe weather, which would likely
result in reduced travel by both business and leisure travelers.
Risks Associated with Owning or Leasing Real Estate. The Company owns
substantially all of its hotels. Accordingly, the Company will be subject to
varying degrees of risk generally related to owning and leasing real estate.
These risks include, among others, changes in national, regional and local
economic conditions, local real estate market conditions, changes in interest
rates and in the availability, cost and terms of financing, liability for
long-term lease obligations, the potential for uninsured casualty and other
losses, the impact of present or future environmental legislation and
compliance with environmental laws, and adverse changes in zoning laws and
other regulations, many of which are beyond the control of the Company.
S-13
<PAGE>
Due in part to the strong correlation between the lodging industry's
performance and economic conditions, the lodging industry is subject to
cyclical changes in revenues and profits. Hotel investments are relatively
illiquid. Such illiquidity will tend to limit the ability of the Company to
vary its portfolio of hotels or to otherwise respond to economic and other
changes. Furthermore, there can be no assurance that downturns or prolonged
adverse conditions in real estate or capital markets or the economy as a whole
will not have a material impact on the Company's development, acquisition,
repositioning or disposition plans.
Competition in the Lodging Industry. The lodging industry is highly
competitive. There is no single competitor or small number of competitors of
the Company that are dominant in the industry or any segment thereof in which
the Company operates. The Company's hotels generally operate in areas that
contain numerous competitors, many of which have substantially greater
resources than the Company. A number of major lodging companies have begun to,
or have announced their intentions to, aggressively develop extended-stay
lodging properties which may compete with the Company's existing and planned
lodging properties. Competitive factors in the industry include reasonableness
of room rates, quality of accommodations, brand recognition, service levels
and convenience of locations. The Company considers the location of its hotel
properties, the reasonableness of its room rates and the amenities provided by
it to be among the most important factors in its business. There can be no
assurance that demographic, economic or other changes in markets will not
adversely affect the convenience or desirability of the sites on which the
Company's hotels are located. Furthermore, there can be no assurance that new
or existing competitors in the markets in which the Company's hotels operate
will not lower rates or offer greater convenience, services or amenities or
significantly expand or improve facilities at competing hotels, thereby
adversely affecting the Company's operations.
Seasonality. The lodging industry is seasonal in nature. Generally, hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues of the Company. Quarterly earnings also may be
adversely affected by events beyond the Company's control, such as extreme
weather, economic factors and other considerations affecting travel.
DEVELOPMENT AND CONSTRUCTION RISKS
Development and construction of new hotels involve substantial risks,
including the possibility of cost overruns and delays, site acquisition cost
and availability (including the competition for suitable development sites
with competitors), uncertainties as to market potential, market deterioration
after commencement of the development and possible unavailability of financing
on favorable terms, changes in governmental rules, regulations and
interpretations (including interpretations of the requirements of the
Americans with Disabilities Act of 1990 (the "ADA")), and general economic and
business conditions. The Company plans to develop 15 to 20 new MainStay Suites
annually through the year 2000 and to continue an active development program
thereafter. There can be no assurance that the Company's expansion of its
hotel portfolio will be effected in a timely manner or within budget.
The opening of the new hotels will be contingent upon, among other things,
receipt of all required licenses, permits and authorizations. The scope of the
approvals required for a new hotel is extensive, including, without
limitation, state and local land-use permits, building and zoning permits and
health and safety permits. In addition, unexpected changes or concessions
required by local, regulatory and state authorities could involve significant
additional costs and could delay or prevent the completion of construction or
the opening of a new hotel. There can be no assurance that the necessary
permits, licenses and approvals for the construction and operation of the new
hotels will be obtained, or that such permits, licenses and approvals will be
obtained within the anticipated time frame.
As the Company opens additional hotels, such costs may adversely affect the
Company's results of operations. Newly opened hotels historically begin with
lower occupancy and room rates that improve over time. The Company's growth
strategy of developing new hotel properties will subject the Company to pre-
opening and pre-stabilization costs. There can be no assurance that newly
opened hotels will achieve desired revenue or profitability levels once
opened.
S-14
<PAGE>
HOTEL ACQUISITION RISKS
The Company has, in the past, acquired hotels at prices below their
replacement cost with the intention of increasing their value through the
investment of capital to improve the hotels and the installation of
professional management and marketing teams to operate the hotels. The Company
intends to continue evaluating acquisition opportunities and may make
additional acquisitions in the future. There can be no future assurance that
hotel acquisitions can be consummated successfully. When the Company does make
acquisitions, it encounters various associated risks, including possible
environmental and regulatory costs, diversion of management's attention,
potential inability to integrate the acquired properties with the Company's
existing operations and unanticipated problems or liabilities, some or all of
which could have a material adverse effect on the Company's operations and
financial performance.
MATURITY OF LIMITED-SERVICE SEGMENT
The majority of the open hotels in the Company's portfolio at March 31, 1998
were in the limited-service segment, which has experienced rapid supply growth
over the past several years. The recent significant growth in supply of
limited-service hotels increases the risk that occupancy rates or ADR at the
Company's hotels may decline. The Company may consider a number of
alternatives to reduce its exposure to the limited-service segment, including
the opportunistic sale or sale-leaseback of certain of the Company's hotels.
See "Prospectus Supplement Summary--Management of Existing Hotel Portfolio."
There can be no assurance, however, that the Company will be able to
consummate these transactions.
LACK OF STAND-ALONE HISTORY; LOSS OF CHOICE CASH FLOW
Prior to the Choice Spin-Off, the Company had access to the cash flow
generated by the Choice Franchising Business and the capital base associated
with the combined assets of the Company and Choice. The Company no longer has
access to the cash flow generated by the Choice Franchising Business for
expansion and development of new properties. With a diminished asset pool and
substantially higher leverage as a result of the Choice Spin-Off, the
Company's ability to access low cost capital is significantly diminished.
Additionally, the Company's lack of stand-alone history and the general
process of separate administrative functions may result in temporary
dislocation and inefficiencies to the business operations, as well as the
organization and personnel structure of the Company.
EMPLOYMENT AND OTHER GOVERNMENT REGULATION
The lodging industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale
of food and beverage (such as health and liquor license laws) and building and
zoning requirements. Also, the Company is subject to laws governing its
relationship with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. The failure to obtain or
retain liquor licenses or an increase in the minimum wage rate, employee
benefit costs or other costs associated with employees could adversely affect
the Company. Both at the federal and state levels, there are proposals under
consideration to increase the minimum wage and introduce a system of mandated
health insurance. The ADA mandates that all public accommodations meet certain
federal requirements related to access and use by disabled persons. While the
Company believes its hotels are substantially in compliance with those
requirements, a determination that the Company is not in compliance with the
ADA could result in the imposition of fines or an award of damages to private
litigants. These and other initiatives could adversely affect the Company as
well as the lodging industry in general.
ENVIRONMENTAL REGULATION
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator
S-15
<PAGE>
knew of, or was responsible for, the presence of such hazardous or toxic
substances. Certain environmental laws and common law principles could be used
to impose liability for release of asbestos-containing materials ("ACMs") into
the air, and third parties may seek recovery from owners or operators of real
properties for personal injury associated with exposure to released ACMs.
Environmental laws also may impose restrictions on the manner in which
property may be used or businesses may be operated, and these restrictions may
require expenditures. In connection with the ownership or operation of hotels,
the Company may be potentially liable for any such costs. Although the Company
is currently not aware of any material environmental claims pending or
threatened against it, no assurance can be given that a material environmental
claim will not be asserted against the Company. The cost of defending against
claims of liability or of remediating a contaminated property could have a
material adverse effect on the Company's business.
SIGNIFICANT BAINUM FAMILY INTEREST
After giving effect to the Offering, certain members of the Bainum family
(including various trusts established by members of the Bainum family) in the
aggregate will hold approximately 27.7% of the outstanding shares of Common
Stock. In addition, each of Stewart Bainum and Stewart Bainum, Jr. serves as a
director of the Company. As a result, the Bainum family is in a position to
significantly influence the Company's affairs, including the election of
directors, which may have the effect of discouraging certain types of
transactions involving an actual or potential change of control of the
Company.
DEPENDENCE ON SENIOR MANAGEMENT
The Company's success will depend largely on the efforts and abilities of
senior management. The loss of the services of one or more of the Company's
senior executive officers could have a material adverse effect on the
Company's business. The Company has entered into employment agreements with
Donald J. Landry, Chief Executive Officer and Vice Chairman, and James A.
MacCutcheon, Executive Vice President, Chief Financial Officer and Treasurer.
RISKS RELATED TO FRANCHISED HOTELS
All of the Company's hotels are franchised under one of the Choice Brands.
These marks are owned by Choice and each of the hotels licenses its brand name
from Choice. The strength of the franchise name and reservation system
associated with a particular hotel will affect the success of such hotel's
operations. Any event which adversely affects the financial condition or
quality assurance of Choice or the desirability of one or more of the Choice
Brands could adversely affect the desirability of, or financial performance
of, the Company's hotels and could have a material adverse effect on the
Company.
Additionally, the continuation of the franchise with respect to each of the
Company's hotels is subject to specified operating standards and other terms
and conditions, as set forth in the franchise agreements with Choice. Choice
periodically inspects the Company's hotels to confirm adherence to its
operating standards. The failure of a hotel to maintain such standards or
adhere to other applicable terms and conditions could result in the loss or
cancellation of the franchise. Additionally, Choice has the right to establish
new requirements and may condition the continuation of a franchise on the
completion of capital improvements or the making of certain capital
expenditures which the Company may determine are too expensive or otherwise
unwarranted in light of general economic conditions or the operating results
and prospects of the affected hotel. See "Business and Properties--Franchise
Agreements." In that event, the Company may elect to allow the franchise to
lapse. In any case, if a franchise is terminated, the Company may seek to
obtain a suitable replacement franchise. In the event of termination or lapse
of any of the franchises, there can be no assurance that a desirable
replacement relationship would be available if necessary. If not replaced, the
loss of a franchise could have a material adverse effect upon the operations
or the underlying value of the hotel covered by the franchise because of the
loss of associated name recognition, marketing support and centralized
reservation systems provided by Choice. The loss of a significant number of
the Company's franchises could have a material adverse effect on the Company.
S-16
<PAGE>
POTENTIAL CONFLICTS WITH CHOICE
The ongoing relationship between the Company and Choice resulting from the
agreements and arrangements entered into in connection with the Choice Spin-
Off may give rise to a conflict of interest between the Company and Choice.
With respect to the agreements between the parties, the potential exists for
disagreements as to the quality of the services provided by the parties and as
to contract compliance. Nevertheless, the Company believes that there will be
sufficient mutuality of interest between the two companies to result in a
continued productive relationship.
In addition, Stewart Bainum, Jr. serves as Chairman of the Boards of
Directors of both the Company and Choice. Stewart Bainum and Frederic V. Malek
each serve as a director of both the Company and Choice. As a result of the
Choice Spin-Off, Messrs. Bainum, Bainum, Jr. and Malek, as well as certain
other officers and directors of the Company and of Choice, also own shares
and/or options or other rights to acquire shares in each of the Company and
Choice. Appropriate policies and procedures are followed by the Board of
Directors of the Company and Choice to limit the involvement of the
overlapping directors (and, if appropriate, relevant officers of such
companies) in conflict situations, including requiring them to abstain from
voting as directors of either the Company or Choice on certain matters which
present a conflict between the two companies.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Credit Facility contains, and the terms of indentures governing other
indebtedness that may be issued will likely contain, certain covenants that
restrict, among other things, the Company's ability to incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company, enter into sale-leaseback
transactions, conduct business other than the ownership and operations of the
hospitality industry, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of the assets of the Company. Certain key elements of the Company's
business strategy, including the incurrence of additional debt, are prohibited
by the terms of the Credit Facility. The Company will need to obtain the
consent of the lenders under the Credit Facility before entering into these
and other prohibited or restricted transactions, limiting the Company's
flexibility in planning for, and reacting to, changes in business conditions.
The Credit Facility also requires the Company to maintain specified financial
ratios and to satisfy certain financial condition tests. The Company's ability
to meet those financial ratios and financial condition tests can be affected
by events beyond its control, and there can be no assurance that the Company
will meet those tests. A breach of any of these covenants could result in a
default under the Credit Facility or any such indenture. Upon the occurrence
of an event of default under the Credit Facility or any such indenture, the
lenders thereunder could elect to declare all amounts outstanding thereunder,
together with accrued interest, to be immediately due and payable. In the case
of the Credit Facility, if the Company were unable to repay those amounts, the
lenders thereunder could proceed against any collateral granted to them to
secure that indebtedness. If indebtedness under the Credit Facility were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness and the other indebtedness of
the Company.
LIMITATIONS ON DIVIDENDS
The Credit Facility limits, and terms of any indebtedness issued by the
Company in the future are likely to limit, the payment of dividends by the
Company.
Under Delaware law, the Company is permitted to pay dividends on its capital
stock only out of its surplus, or, in the event that it has no surplus, out of
its net profits for the year in which a dividend is declared or for the
immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par
value of its outstanding capital stock. In order to pay dividends in cash, the
Company must have surplus or net profits equal to the full amount of the cash
dividend at the time such dividend is declared. In determining the Company's
ability to pay dividends, Delaware law permits the Company's Board of
Directors to revalue the Company's assets and liabilities from time to time to
their fair market values in order
S-17
<PAGE>
to create surplus. The Company cannot predict what the value of its assets or
the amount of its liabilities will be in the future and, accordingly, there
can be no assurance that the Company will be able to pay dividends on the
Common Stock.
The Company intends to retain future earnings for use in its business and
does not currently anticipate paying dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
PRICE VOLATILITY OF THE COMMON STOCK
Because the market price of the Common Stock is subject to fluctuation, the
market value of the shares of the Common Stock may increase or decrease prior
to or following the consummation of the Offering. There can be no assurance
that at or after the consummation of the Offering that shares of the Common
Stock will trade at the prices at which such shares have traded in the past.
The prices at which the Common Stock trades after the consummation of the
Offering may be influenced by many factors, including the liquidity of the
Common Stock, investor perceptions of the Company and the hotel industry, the
operating results of the Company and its subsidiaries, the Company's dividend
policy, and general economic and market conditions.
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Bylaws each contain
provisions that will make difficult an acquisition of control of the Company
by means of a tender offer, open market purchases, proxy fight, or otherwise,
that is not approved by the Board of Directors. Such antitakeover provisions
include: (i) a staggered Board of Directors with separate classes; (ii) a
super-majority vote requirement for removal or filling of vacancies on the
Board of Directors and for amendment to the Restated Certificate of
Incorporation and Bylaws; (iii) limitations on shareholder action by written
consent; and (iv) super-majority voting requirements for approval of mergers
and other business combinations involving the Company and interested
shareholders. In addition, the Company recently adopted a shareholder rights
plan which may discourage or delay a change in control of the Company. See
"Business and Properties--Shareholder Rights Plan."
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including the
documents incorporated by reference herein and therein, contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Discussions containing
such forward-looking statements may be found in the material set forth under
"Prospectus Supplement Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties," as well as within the Prospectus Supplement and the accompanying
Prospectus generally. In addition, when used in this Prospectus Supplement or
the accompanying Prospectus, the words "believes," "anticipates," "expects"
and similar expressions are intended to identify forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance
or achievements of the Company, or industry results, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: substantial leverage; the uncertainty of the
MainStay expansion program; the inherent risks associated with the lodging
industry; risks associated with the development and construction or
acquisition of hotel properties; the maturity of the limited-service segment
of the lodging industry; competition; government regulation; conflicts of
interest; general economic and business conditions; dependence on key
personnel; terms of the Company's indebtedness; limitations on the Company's
ability to pay dividends; and other factors included or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. These
forward-looking statements speak only as of the date of this Prospectus
Supplement. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement
contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
S-18
<PAGE>
USE OF PROCEEDS
Based upon an assumed offering price of $8 1/16 per share (the reported last
sale price of the Common Stock on the New York Stock Exchange on April 29,
1998), the net proceeds to the Company from the Offering, after deducting the
underwriting discounts and commissions and estimated expenses of the Offering,
are estimated to be approximately $37.6 million (approximately $43.3 million
if the Underwriters' over-allotment option is exercised in full). The net
proceeds from the Offering will be used to repay amounts outstanding under the
Credit Facility and other liabilities of the Company. Any net proceeds in
excess of such repayment will be used to construct and develop MainStay Suites
and for general corporate purposes. Any amounts outstanding under the Credit
Facility repaid with the proceeds of the Offering will be immediately
available to the Company for re-borrowing. See "Prospectus Supplement
Summary--Recent Financing Activity" and "Business and Properties."
The Credit Facility will expire and amounts borrowed thereunder will mature
on October 15, 2000. At the Company's option, the interest rate may be based
on LIBOR, a certificate of deposit rate or an alternative base rate plus a
facilities fee. The rate is determined based on the Company's consolidated
leverage ratio at the time of borrowing. The proceeds from borrowings under
the Credit Facility have been used for the acquisition of land and the
construction and development of new hotel properties and for general corporate
purposes.
PRICE RANGE OF COMMON STOCK
Shares of Common Stock are listed and traded on the New York Stock Exchange
under the symbol "SNB." The Company's symbol prior to the Choice Spin-Off on
October 15, 1997 was "CHH." The following table sets forth, for the periods
indicated, the high and low sales prices of Common Stock since it began
trading on November 4, 1996, as reported in the NYSE Composite Transactions
Report:
<TABLE>
<CAPTION>
HIGH LOW
--------- -------
<S> <C> <C>
FISCAL YEAR ENDED MAY 31, 1997
November 4--November 30, 1996........................... $16 $13 3/4
Quarter ended February 28, 1997......................... 17 5/8 15
Quarter ended May 31, 1997.............................. 15 7/8 12 3/4
TRANSITION PERIOD ENDED DECEMBER 31, 1997(1)
Quarter ended August 30, 1997........................... 19 5/6 15 1/2
Quarter ended November 30, 1997(2)
Prior to October 15, 1997.............................. 20 3/8 18 3/4
October 15, 1997 through November 30, 1997............. 11 5/8 9 1/8
December 1, 1997--December 31, 1997..................... 10 1/4 8 5/8
FISCAL YEAR ENDED DECEMBER 31, 1998
Quarter ended March 31, 1998............................ 9 15/16 8 1/4
Quarter ended June 30, 1998 (through April 30, 1998).... 9 7 1/2
</TABLE>
- --------
(1) On September 16, 1997, the Company changed its fiscal year-end from May 31
to December 31. The Company elected to continue reporting its operations
pursuant to its historical fiscal quarters during the transition period
ended December 31, 1997.
(2) On October 15, 1997, the Company spun off the Choice Franchising Business
through a special dividend to the Company's shareholders of all of the
common stock of Choice and effected a one-for-three reverse stock split.
The stock prices for the quarter ended November 30, 1997 have not been
adjusted to give effect to the substantially simultaneous spin-off of
Choice and the reverse stock split. Accordingly, the high and low sales
prices are presented for both the period prior to and after the Choice
Spin-Off and the reverse stock split.
As of March 12, 1998, there were 5,875 record holders of Common Stock. On
April 30, 1998, the last reported sale price per share of Common Stock on the
NYSE Composite Transactions Report was $8 1/16.
S-19
<PAGE>
DIVIDEND POLICY
On October 15, 1997, pursuant to the Choice Spin-Off, the Company made a
special dividend, consisting of the distribution to holders of the Company's
Common Stock, on a share-for-share basis, of all the outstanding shares of the
common stock of Choice. This has been the only dividend paid by the Company
since November 4, 1996. The Company currently expects to retain its earnings
for the development and expansion of its business and does not currently
anticipate paying any dividends on the Common Stock in the foreseeable future.
Any future decision by the Board of Directors to pay dividends will depend
upon, among other factors, the Company's earnings, financial position and
capital requirements. The Credit Facility limits (and the terms of any
indebtedness issued by the Company in the future are likely to limit) the
payment of dividends by the Company.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1998 on an historical basis and as adjusted to give effect to
this Offering (at an assumed offering price of $8 1/16 per share) and the
application of net proceeds therefrom, as described under "Use of Proceeds,"
to repay certain amounts owed under the Credit Facility. This table should be
read in conjunction with the Selected Historical Consolidated Financial Data
contained elsewhere herein and the Consolidated Financial Statements of the
Company and the related notes thereto incorporated herein by reference.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Credit facility(1).................................... $ 29,000 --
Multi-class mortgage pass-through Certificates........ 115,162 $115,162
Note payable to Choice Hotels International, Inc.(2).. 113,904 113,904
Other................................................. 1,762 1,762
-------- --------
Total debt.......................................... 259,828 230,828
SHAREHOLDERS' EQUITY:
Common stock ($0.01 par value, 60,000,000 shares
authorized, 21,382,430 shares issued and 19,963,190
shares outstanding; 26,382,430 shares issued and
24,963,190 outstanding after giving effect to the
Offering)(3)......................................... 200 250
Additional paid-in capital............................ 105,661 143,206
Retained earnings..................................... (15,838) (15,838)
-------- --------
Total shareholders' equity.......................... 90,023 127,618
Total capitalization.................................... $349,851 $358,446
======== ========
</TABLE>
- --------
(1) Does not give effect to borrowings under the Credit Facility made after
March 31, 1998. As of April 28, 1998 the outstanding balance under the
Credit Facility was $35.0 million, all of which is being repaid with the
proceeds of the Offering.
(2) Includes a discount of $1.1 million at March 31, 1998.
(3) Shares outstanding do not include: (i) up to 750,000 shares of Common
Stock subject to an overallotment option granted to the Underwriters by
the Company; (ii) 1,419,240 shares of Common Stock issued and held in
treasury by the Company; (iii) 821,546 shares of Common Stock reserved for
issuance under the Company's 1996 Long Term Incentive Plan; (iv)
outstanding options to purchase 2,745,120 shares of Common Stock awarded
under the Company's 1996 Long Term Incentive Plan; (v) 69,786 shares of
Common Stock reserved for issuance under the Company's 1996 Non-Employee
Director Stock Compensation Plan; (vi) 20,617 shares of Common Stock
reserved for issuance under the Company's 1996 Non-Employee Director Stock
Option Plan; and (vii) outstanding options to purchase 29,383 shares of
Common Stock awarded under the Company's 1996 Non-Employee Director Stock
Option Plan.
S-20
<PAGE>
PRO FORMA FINANCIAL DATA
Proceeds of the Offering will be applied to repay outstanding amounts under
the Credit Facility and other liabilities of the Company. The net proceeds to
the Company from the Offering (at an assumed offering price of $8 1/16 per
share) after deducting underwriting discounts and commissions and estimated
expenses of the Offering, are estimated to be approximately $37.6 million. The
impact of the Offering on the Company's March 31, 1998 balance sheet would be
to decrease debt by $29.0 million and to increase cash by $8.6 million, Common
Stock by $50,000 and additional paid-in capital by $37.6 million. The impact
of the Offering and the application of the estimated proceeds therefrom on the
Company's interest expense, income from continuing operations and diluted
earnings per share for the three-month period ended March 31, 1998, the seven-
month period ended December 31, 1997 and the fiscal year 1997, assuming the
Offering occurred as of the beginning of each such period, would be to
decrease interest expense by $500,000, $1.6 million and $3.3 million
respectively, and to increase income from continuing operations by $300,000,
$938,000 and $2.0 million, respectively, and to increase diluted earnings per
share for continuing operations by $0.01, $0.04 and $0.07, respectively. This
pro forma financial information is provided for informational purposes only
and does not purport to be indicative of the results of operations and
financial position of the Company and its subsidiaries that actually would
have been obtained if the Offering had been effected on the dates indicated or
of those results that may be obtained in the future.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data
of the Company as of and for the three-month periods ended March 31, 1998 and
1997, the seven-month period ended December 31, 1997 and the five fiscal years
ended May 31, 1997, 1996, 1995, 1994 and 1993. During September 1997, the
Company changed its fiscal year from a May 31 year-end to a December 31 year-
end.
The selected historical consolidated financial data as of and for the seven-
month period ended December 31, 1997 and the four fiscal years ended May 31,
1997, 1996, 1995 and 1994 (with respect to income statement data only), are
derived from the audited consolidated financial statements of the Company. The
selected historical consolidated financial data as of and for the three-month
periods ended March 31, 1998 and 1997 and as of and for the fiscal year ended
May 31, 1993 and the selected historical consolidated balance sheet data as of
May 31, 1994 are derived from the Company's unaudited consolidated financial
statements which, in the opinion of management, include all material
adjustments necessary at such dates and for such periods. The selected
historical consolidated financial data presented herein are presented as if
the Company were a separate entity for all periods. The Company's historical
net income and cash flows as a wholly owned subsidiary of Manor Care (all
periods prior to November 1, 1996) are not necessarily indicative of the net
income and cash flows the Company might have realized as an independent
entity. The Company's historical financial results prior to the Choice Spin-
Off include the Choice Franchising Business, which was distributed to
shareholders on October 15, 1997. See "--Recent Developments--Recent Spin-
Offs" and "Basis of Presentation" in the notes to the Company's Consolidated
Financial Statements, which are incorporated herein by reference. The
Company's historical consolidated financial data presented herein are not
necessarily indicative of the Company's future results of operations or
financial condition. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere herein and the Company's Consolidated
Financial Statements and related Notes thereto which are incorporated herein
by reference.
S-21
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE SEVEN
MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, FISCAL YEAR ENDED MAY 31,
----------------------- ------------ ------------------------------------------------------
1998 1997 1997 1997 1996 1995 1994 1993
----------- ----------- ------------ -------- -------- -------- ------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF INCOME
DATA(1):
REVENUES
Rooms.................. $39,982 $40,104 $100,670 $165,239 $137,001 $101,381 $66,031 $32,835
Food and beverage...... 4,108 3,143 9,231 13,356 11,392 8,121 5,001 5,027
Other.................. 2,049 1,744 4,652 7,158 6,232 5,012 3,152 3,499
------- ------- -------- -------- -------- -------- ------- -------
Total revenues........ 46,139 44,991 114,553 185,753 154,625 114,514 74,184 41,361
------- ------- -------- -------- -------- -------- ------- -------
OPERATING EXPENSES
Departmental expenses
Rooms.................. 11,244 13,790 33,484 58,502 51,657 43,168 25,826 12,289
Food and beverage...... 3,222 2,584 7,319 10,887 9,792 6,866 4,335 4,059
Other.................. 698 663 1,530 2,674 2,570 1,476 1,012 1,272
Undistributed operating
expenses.............. 14,962 14,472 34,801 57,636 50,384 36,078 21,885 14,713
Depreciation and
amortization.......... 6,382 5,381 14,246 20,632 16,636 12,513 8,434 5,423
Corporate.............. 3,464 1,637 8,244 7,691 8,026 6,038 2,864 3,065
Provision for asset
impairment and other
non-recurring
charges............... -- -- 5,119(2) -- 24,595(3) -- -- --
------- ------- -------- -------- -------- -------- ------- -------
Total operating
expenses............. 39,972 38,527 104,743 158,022 163,660 106,139 64,356 40,821
------- ------- -------- -------- -------- -------- ------- -------
Operating income
(loss)................ 6,167 6,464 9,810 27,731 (9,035) 8,375 9,828 540
------- ------- -------- -------- -------- -------- ------- -------
Interest expense....... 4,943 4,334 10,138 15,891 12,839 9,155 3,214 2,032
------- ------- -------- -------- -------- -------- ------- -------
Income (loss) from
continuing operations
before income taxes... 1,224 2,130 (328) 11,840 (21,874) (780) 6,614 (1,492)
Income taxes........... 516 937 (44) 5,035 (8,523) (323) 3,000 (642)
------- ------- -------- -------- -------- -------- ------- -------
Income (loss) from
continuing
operations............ 708 1,193 (284) 6,805 (13,351) (457) 3,614 (850)
Income from
discontinued
operations(4)......... -- 5,026 16,369 35,219 21,809 17,268 6,045 8,504
------- ------- -------- -------- -------- -------- ------- -------
Net income before
extraordinary loss.... 708 6,219 16,085 42,024 8,458 16,811 9,659 7,654
Extraordinary loss, net
of tax benefit........ -- -- -- (1,144)(5) -- -- -- --
------- ------- -------- -------- -------- -------- ------- -------
Net income............. $ 708 $ 6,219 $ 16,085 $ 40,880 $ 8,458 $ 16,811 $ 9,659 $ 7,654
======= ======= ======== ======== ======== ======== ======= =======
Basic earnings per
share(6)
From continuing
operations............ $ 0.04 $ 0.06 $ (0.01) $ 0.32 $ (0.64) $ (0.02) $ 0.18 $ (0.04)
From discontinued
operations............ -- 0.24 0.82 1.69 1.05 0.83 0.30 0.44
From extraordinary
item.................. -- -- -- (0.05) -- -- -- --
------- ------- -------- -------- -------- -------- ------- -------
Earnings per share..... $ 0.04 $ 0.30 $ 0.81 $ 1.96 $ 0.41 $ 0.81 $ 0.48 $ 0.40
======= ======= ======== ======== ======== ======== ======= =======
Diluted earnings per
share
From continuing
operations............ $ 0.03 $ 0.06 $ (0.01) $ 0.32 $ (0.64) $ (0.02) $ 0.18 $ (0.04)
From discontinued
operations............ -- 0.23 0.82 1.66 1.05 0.83 0.30 0.44
From extraordinary
item.................. -- -- -- (0.05) -- -- -- --
------- ------- -------- -------- -------- -------- ------- -------
Earnings per share..... $ 0.03 $ 0.29 $ 0.81 $ 1.93 $ 0.41 $ 0.81 $ 0.48 $ 0.40
======= ======= ======== ======== ======== ======== ======= =======
</TABLE>
(Table continued on following page)
S-22
<PAGE>
<TABLE>
<CAPTION>
THREE SEVEN
MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, FISCAL YEAR ENDED MAY 31,
----------------------- ------------ --------------------------------------------------------
1998 1997 1997 1997 1996 1995 1994 1993
----------- ----------- ------------ -------- --------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA(1):
EBITDA (unaudited)(7).. $ 12,549 $ 11,845 $ 24,056 $ 48,363 $ 27,001(8) $ 20,888 N/A N/A
Net cash provided by
operating
activities(9)......... 6,498 25,044 42,247 87,258 55,440 49,498 N/A N/A
Net cash utilized by
investing
activities(9)......... (23,110) (26,739) (183,930) (94,415) (169,948) (94,655) N/A N/A
Net cash provided by
financing
activities(9)......... 12,308 1,836 136,766 13,443 116,959 44,456 N/A N/A
Number of hotels, end
of period
(unaudited)(10)....... 83 70 76 70 65 48 32 19
Number of rooms, end
of period
(unaudited)(10)....... 11,554 10,156 10,859 10,156 9,713 7,941 5,605 3,686
Average occupancy
percentage
(unaudited)(10)....... 61.46% 65.42% 67.41% 68.70% 66.61% 67.10% 64.18% 61.36%
Average daily room
rate (ADR)
(unaudited)(10)....... $ 64.25 $ 61.26 $ 61.81 $ 59.62 $ 55.97 $ 51.28 $ 49.15 $ 49.53
RevPAR
(unaudited)(10)(11)... $ 39.49 $ 40.07 $ 41.67 $ $40.96 $ 37.28 $ 34.40 $ 31.54 $ 30.39
BALANCE SHEET DATA(1)
Total assets(12)....... $412,578 N/A $ 400,983 $426,429 $ 328,311 $254,229 $178,652 $105,389
Total debt(13)......... 259,828 N/A 248,120 260,369 163,497 137,122 88,711 6,761
Shareholders' equity... 90,023 N/A 89,307 124,487 -- -- -- --
Investment in and
advances from Manor
Care.................. -- N/A -- -- 147,559 65,829 55,208 90,747
</TABLE>
- --------
(1) European hotel operations, which were distributed to Choice in the Choice
Spin-Off, are presented as part of continuing operations in the
consolidated financial statements for all periods prior to the Choice
Spin-Off on October 15, 1997 in accordance with generally accepted
accounting principles. The following table presents statement of income
data (in thousands) for the Company's domestic hotels:
<TABLE>
<CAPTION>
THREE SEVEN
MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, FISCAL YEAR ENDED MAY 31,
----------------------- ------------ ---------------------------------
1998 1997 1997 1997 1996 1995
----------- ----------- ------------ -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $46,139 $41,258 $107,574 $168,016 $135,022 $95,876
Total operating
expenses............... 39,972 34,480 98,169 140,468 127,722 85,777
Operating income........ 6,167 6,778 9,405 27,548 7,300 10,099
EBITDA(unaudited)....... 12,549 11,793 23,650 46,792 24,900 20,172
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein and "Basis of
Presentation" in the notes to the Company's Consolidated Financial
Statements incorporated herein by reference.
(2) Included in the provision for asset impairment and other non-recurring
charges for the seven months ended December 31, 1997 are non-recurring
loss provisions totaling $5.1 million (pre-tax). These loss provisions
were recorded in December 1997 in order to: (i) reserve $2.1 million of
previously capitalized costs and future payment obligations related to a
data processing services agreement and computer system which will be
replaced in 1998; (ii) accrue the estimated cost of $1.0 million of future
lease costs associated with space the Company has vacated; and (iii)
reserve $2.0 million for future obligations to an agreement expiring in
May 1999 for services which the Company will no longer utilize and,
therefore, have no future benefits. The service and lease agreements are
with Manor Care and Choice and were entered into in conjunction with the
Choice Spin-Off and the Company Spin-Off. See "Prospectus Supplement
Summary--Recent Developments--Recent Spin-Offs."
(3) During fiscal year 1996, the Company began restructuring its European
hotel operations. This restructuring effort included the purchase of an
equity interest in Friendly Hotels PLC and a re-evaluation of key
geographic
S-23
<PAGE>
markets in Europe. In connection with this restructuring, the Company
performed a review of its European hotel operations and in May 1996
recognized a $16.0 million non-cash charge against earnings related to the
impairment of assets associated with certain European hotel operations. In
addition, the Company recognized a $3.4 million non-cash charge against
earnings related to the impairment of assets associated with certain
domestic hotel operations and a restructuring charge of $5.2 million in May
1996. Restructuring costs include severance and employee benefit plan
restructuring costs and other costs directly associated with the Company
Spin-Off. The Company's European hotel operations were transferred to
Choice as part of the Choice Spin-Off.
(4) Income from discontinued operations, representing income from the
operations of the Choice Franchising Business through October 15, 1997, is
presented net of taxes for the three-month period ended March 31, 1997,
the seven-month period ended December 31, 1997 and fiscal years 1997,
1996, 1995, 1994 and 1993 of, $3.6 million, $11.8 million, $25.2 million,
$15.9 million, $13.5 million, $5.0 million and $6.4 million, respectively.
(5) The extraordinary loss represents a loss from the early extinguishment of
a note payable to Manor Care, net of a $747,000 tax benefit.
(6) Basic earnings per share have been calculated based on the weighted
average common shares outstanding of the Company's former parent Manor
Care for fiscal years 1993, 1994, 1995 and 1996 of 19,105,000, 20,175,000,
20,827,000 and 20,876,000, respectively. Basic earnings per share have
been calculated for fiscal year 1997 based on the weighted average common
shares outstanding of Manor Care from June 1, 1996 through November 1,
1996 and the weighted average common shares outstanding of the Company
from November 2, 1996 through May 31, 1997 of 20,893,000. Basic earnings
per share have been calculated for the seven months ended December 31,
1997 and the three months ended March 31, 1997 and 1998 based on the
weighted average common shares outstanding of the Company of 19,979,000,
21,035,000 and 19,956,000, respectively. Figures for fiscal years 1993
through 1997, the seven-month period ended December 31, 1997 and the three
months ended March 31, 1997 have been adjusted for the one-for-three
reverse stock split which occurred in conjunction with the Choice Spin-
Off.
(7) EBITDA consists of the sum of income (loss) from continuing operations,
interest expense, income taxes, depreciation and amortization and non-cash
asset writedowns. EBITDA is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
obligations, fund capital expenditures and expand its business. The
Company considers EBITDA to be an indicative measure of operating
performance particularly due to the large amount of depreciation and
amortization. Such information should not be considered an alternative to
net income, operating income, cash flow from operations or any other
operating or liquidity performance measure prescribed by GAAP. Cash
expenditures (including nondiscretionary expenditures) for various long-
term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation and therefore
EBITDA does not represent funds available for management's discretionary
use. EBITDA presented by the Company may not be comparable to EBITDA
defined and presented by other companies.
(8) Fiscal year 1996 EBITDA includes an add-back of non-cash pretax charges
totaling $19.4 million for impairment of long-lived assets associated with
certain European and domestic hotel operations, in amounts of $16.0
million and $3.4 million, respectively.
(9) Includes cash flows from the continuing operations of the Company and the
discontinued Choice Franchising Business, which was transferred to Choice
and distributed to the Company's shareholders in the Choice Spin-Off, for
all periods except the three-month period ended March 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(10) Number of hotels, number of rooms, average occupancy percentage, ADR and
RevPAR are presented with respect only to the Company's domestic hotels.
(11) RevPAR is calculated by multiplying the percentage of occupied rooms by
ADR. The Company uses RevPAR as a measure of the operating performance of
its hotels.
(12) Total assets at May 31, 1997, 1996, 1995, 1994 and 1993 included the net
assets of the discontinued operations of the Choice Franchising Business
of $52.2 million, $24.6 million, $12.7 million, $4.4 million and $25.8
million, respectively.
(13) Includes a note payable, net of discounts, to Choice of $113.9 million
and $114.5 million at March 31, 1998 and December 31, 1997, respectively,
and a note payable to Manor Care of $37.0 million, $147.0 million, $119.8
million, $68.4 million and $0 at May 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
S-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is a national owner and operator of hotel properties with a
portfolio at March 31, 1998 of 83 hotels (11,554 rooms) in a total of 28
states. The Company operates each of its hotels under one of the Choice
Brands: MainStay, Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge.
The Company's continuing business consists primarily of guest room revenue,
meeting room revenue, and food and beverage revenue from owned and operated
hotels.
On October 15, 1997, the Company separated the Choice Franchising Business
(which had previously been conducted primarily through Franchising) and its
European owned and managed hotels from its other operations pursuant to a pro
rata distribution to its shareholders of all the common stock of Franchising.
At the time of the Choice Spin-Off, Franchising changed its name to "Choice
Hotels International, Inc." The Company changed its name to "Sunburst
Hospitality Corporation" and effected a one-for-three reverse stock split. The
Company currently conducts the domestic Choice Ownership Business. See
"Business and Properties."
European hotel operations, which were distributed to Choice in the Choice
Spin-Off, are presented as part of continuing operations in the consolidated
financial statements for all periods prior to the Choice Spin-Off in
accordance with generally accepted accounting principles. However, for
purposes of analyzing the operations of the Company, management focuses on
domestic hotel operations. Therefore, the following discussion focuses on the
results of operations of the domestic hotels which constitute the ongoing
operations of the Company subsequent to October 15, 1997.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND THREE MONTHS ENDED MARCH
31, 1997 OPERATING RESULTS
Total revenues for the three months ended March 31, 1998 increased $1.1
million to $46.1 million from $45.0 million for the same period of 1997.
Revenues from European hotel operations, which were distributed to
shareholders with Choice in the Choice Spin-Off on October 15, 1997, are
included in the first quarter of 1997 but not in the first quarter of 1998.
Total domestic revenues increased $4.9 million, or 11.8%, from $41.3 million
in the first quarter of 1997 to $46.1 million for the same period of 1998. The
increase in domestic revenues is a result of the net addition of 13 hotels
from 70 hotels at March 31, 1997 to 83 hotels at March 31, 1998, as well as a
4.9% increase in the average daily room rate, from $61.26 for the three months
ended March 31, 1997 to $64.25 for the three months ended March 31, 1998.
While room revenue contributed $3.6 million to the increase in domestic
revenues, food and beverage revenues were up $1.0 million, or 30.7%, for the
first quarter of 1998 compared to the first quarter of 1997.
Operating expenses increased $1.5 million from $38.5 million for the three
months ended March 31, 1997 to $40.0 million for the same period of 1998.
Domestic operating expenses increased from $34.5 million in the first quarter
of 1997 to $40.0 million, or 15.9%, in the first quarter of 1998. The increase
in domestic operating expenses is attributable primarily to the additional
costs of operating the Company on a stand-alone basis and an increase in the
number of hotels owned and operated. Domestic depreciation and amortization
increased $1.4 million from $5.0 million for the three months ended March 31,
1997 to $6.4 million for the three months ended March 31, 1998. Corporate
expenses increased from $1.6 million in the first quarter of 1997 to $3.5
million in the first quarter of 1998.
Income from continuing operations before interest, taxes, depreciation and
amortization and non-cash asset writedowns ("EBITDA") increased $704,000 to
$12.5 million for the three months ended March 31, 1998 compared to $11.8
million for the same period of 1997. Gross profit from facility operations
(operating income before corporate expense, depreciation and amortization and
non-recurring charges) increased from $13.5 million, or 30.0% of total
revenue, in the three months ended March 31, 1997 to $16.0 million, or 34.7%
of total revenues, in three months ended March 31, 1998.
Interest expense increased 14.1%, or $609,000 to $4.9 million in the first
quarter of 1998 compared to the same period in 1997. Domestic interest expense
increased $847,000 from $4.1 million for the three months ended March 31, 1997
to $4.9 million for the same period of 1998. The increase in interest expense
is a result of the
S-25
<PAGE>
increased debt outstanding over the three months ended March 31, 1998 compared
to the same period of 1997 due to the opening of new hotels.
Income from continuing operations decreased from $1.2 million for the three
months ended March 31, 1997 to $708,000 for the same period of 1998. The
decrease is a result of increased expenses associated with operating as a
separate company and increased depreciation and amortization and interest
expense associated with the addition of hotels to the Company's portfolio.
Income from discontinued operations of $5.0 million for the three months
ended March 31, 1997 represents the income, net of taxes, of the Choice
Franchising Business.
COMPARISON OF CALENDAR YEAR 1997 AND CALENDAR YEAR 1996 DOMESTIC HOTELS
During September 1997, the Company changed its fiscal year-end from May 31
to December 31. This change in fiscal year-end, combined with the seasonality
of the lodging industry, had a significant impact on the comparability of the
seven months ended December 31, 1997 with prior fiscal years. To assist in
comparisons, the following discusses the domestic operating results of
calendar year 1996 as compared to calendar year 1997.
The following table presents full calendar year information showing the
results of operations of the Company's domestic hotels for calendar years 1996
and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
(IN THOUSANDS
EXCEPT PER SHARE
Revenues DATA, UNAUDITED)
Rooms................................................ $ 157,380 $ 137,114
Food and beverage.................................... 14,991 12,950
Other................................................ 7,681 6,877
----------- -----------
Total revenues................................... 180,052 156,941
----------- -----------
Operating Expenses
Departmental Expenses
Rooms.............................................. 45,607 39,701
Food and beverage.................................. 11,972 10,835
Other.............................................. 2,828 2,400
Undistributed Operating Expenses
Administrative and general......................... 16,662 18,520
Marketing.......................................... 14,975 13,895
Utility costs...................................... 9,399 8,423
Property operation and maintenance................. 9,815 8,922
Property taxes, rent and insurance................. 7,933 7,521
Depreciation and amortization...................... 22,142 17,335
Corporate.......................................... 11,079 6,383
Provision for asset impairment and other non-
recurring charges................................. 5,119 8,575
----------- -----------
Total operating expenses......................... 157,531 142,510
----------- -----------
Operating income....................................... 22,521 14,431
----------- -----------
Interest expense....................................... 16,461 12,726
----------- -----------
Income from continuing operations before income taxes.. 6,060 1,705
Income taxes......................................... 2,629 716
----------- -----------
Income from continuing operations...................... $ 3,431 $ 989
=========== ===========
Basic earnings per share............................... $ 0.17 $ 0.05
=========== ===========
</TABLE>
S-26
<PAGE>
Total domestic hotel revenues increased from $156.9 million in calendar year
1996 to $180.1 million in calendar year 1997, an increase of 14.8%. Gross
profit from facility operations from domestic hotels, increased from $46.7
million, or 29.8% of total domestic revenues, in 1996 to $60.9 million, or
33.8% of total domestic revenues, in 1997. Increases in revenues were due to
improved RevPAR and an increase in the number of hotels from 68 at December
31, 1996 to 76 at December 31, 1997. The Company utilizes RevPAR, which is
calculated by multiplying the percentage of occupied rooms by ADR, as a
measure of the operating performance of its hotels. RevPAR increased from
$39.34 to $41.68, an increase of 5.9%. Increases in RevPAR by service sector
were consistent with industry trends and were caused principally by aggressive
ADR increases. ADR for the Company's full-service hotels increased 6.6% to
$65.75 in calendar year 1997. Limited-service ADR of $58.27 in calendar year
1997 represented a 6.0% increase over the prior year. Consistent with past
experience, hotels recently acquired and renovated enjoyed substantial RevPAR
increases. For example, hotels acquired in fiscal year 1995 experienced a
12.0% increase in RevPAR and hotels acquired in fiscal year 1996 experienced a
19.7% increase in RevPAR. An increase in domestic corporate expense from 4.1%
of total domestic revenues in calendar year 1996 to 6.2% of total domestic
revenues in calendar year 1997 was due primarily to incremental costs
associated with the Company's emergence as a stand-alone, publicly-traded
company and other investments in infrastructure to support a growing company.
COMPARISON OF SEVEN MONTHS ENDED DECEMBER 31, 1997 AND SEVEN MONTHS ENDED
DECEMBER 31, 1996 OPERATING RESULTS
Total revenues increased from $106.5 million for the seven months ended
December 31, 1996 to $114.6 million for the same period of 1997. Total
domestic revenues during those seven-month periods increased from $95.5
million for the seven months ended December 31, 1996 to $107.6 million for the
seven months ended December 31, 1997, an increase of 12.7%. This increase in
total domestic revenue resulted primarily from the addition of rooms through
hotel acquisition and development and overall RevPAR increases. At December
31, 1996, there were 68 domestic hotels open and operating as compared to 76
domestic hotels at December 31, 1997. The additional hotels contributed $3.6
million to the domestic revenue increase. Domestic RevPAR for the comparative
periods by service level are as follows:
<TABLE>
<CAPTION>
DOMESTIC REVPAR FOR
SEVEN MONTHS ENDED
DECEMBER 31,
-------------------
1997 1996 % INCREASE
--------- --------- ----------
<S> <C> <C> <C>
Full-Service.................................. $ 42.96 $ 40.51 6.0%
Limited-Service............................... $ 40.20 $ 39.19 2.6%
Traditional All-Suite......................... $ 50.68 $ 48.98 3.5%
Extended-Stay................................. $29.95 $32.26 (7.2%)
Combined...................................... $ 41.67 $ 40.38 3.2%
</TABLE>
The Company's domestic full-service hotels enjoyed RevPAR increases higher
than overall industry averages. The Company's domestic limited-service hotels,
notwithstanding a 5.6% increase in ADR to $59.11, saw the rate of RevPAR
growth slow as occupancies declined. RevPAR in the extended-stay segment
declined because of the opening ramp-up of two MainStay Suites opened late in
1997.
Hotels recently acquired and renovated continued to lead in terms of RevPAR
growth as it typically takes several years to reach stabilized levels of
operating performance. For example, domestic hotels acquired and renovated in
fiscal year 1996 realized a 20.0% RevPAR increase.
EBITDA was $24.1 million for the seven months ended December 31, 1997. This
compared to $26.4 million for the same period in the preceding year. Gross
profit from facility operations, however, increased 19.9% from $31.2 million,
or 29.3% of total revenues, in the seven-month period ended December 31, 1996
to $37.4 million, or 32.6% of total revenues, for the same period ended
December 31, 1997. Non-recurring charges and increases in general corporate
expenses associated with the Company's emergence as a stand-alone publicly-
traded company and other investments in infrastructure to support a growing
company impacts the EBITDA comparison between these periods.
S-27
<PAGE>
Included in provision for asset impairment and other non-recurring charges
in the seven months ended December 31, 1997 are non-recurring loss provisions
totaling $5.1 million (pre-tax). These loss provisions were recorded in
December 1997 in order to: (i) reserve $2.1 million of previously capitalized
costs and future payment obligations related to a data processing services
agreement and computer system which will be replaced in 1998; (ii) accrue the
estimated cost of $1.0 million for future lease costs associated with space
the Company has vacated; and (iii) reserve $2.0 million for future obligations
related to an agreement expiring in May 1999, for services which the Company
will no longer utilize and, therefore, have no future benefits. The service
and lease agreements are with Manor Care and Choice and were entered into in
conjunction with the Company Spin-Off and the Choice Spin-Off. Recent
corporate decisions, including a consolidation of leased office space,
resulted in the recognition of these costs in this period.
Interest expense increased from $8.6 million for the seven months ended
December 31, 1996 to $10.1 million for the same period of 1997, an increase of
17.4%. The increase resulted from an increased amount of debt outstanding over
the respective periods. The Company's debt has increased over the period to
fund the acquisition and development of hotels.
The Company had a loss from continuing operations of $284,000 for the seven
months ended December 31, 1997 as compared to income from continuing
operations of $3.6 million for the same period of 1996. The loss from
continuing operations resulted primarily from the provision for asset
impairment and other non-recurring charges and the increase in interest
expense for the period ended December 31, 1997.
Income from discontinued operations amounted to $16.4 million in the seven
months ended December 31, 1997 compared to $22.5 million in the same period in
the prior year as those amounts represent the income, net of taxes, of the
Choice Franchising Business only through October 15, 1997, the date of the
Choice Spin-Off.
Included in continuing operations but also distributed in the Choice Spin-
Off at October 15, 1997 were the Company's European hotel operations which
contributed $7.0 million of revenue and $405,000 of operating income in the
seven months ended December 31, 1997 compared to $11.0 million of revenue and
$416,000 of operating income in the prior year.
COMPARISON OF FISCAL YEAR 1997 AND FISCAL YEAR 1996 OPERATING RESULTS
The Company's total revenues increased $31.2 million to $185.8 million for
fiscal year 1997 from $154.6 million in fiscal year 1996. Total domestic
revenues were $168.0 million for fiscal year 1997, an increase of 24.4% from
$135.0 million for fiscal year 1996. The increase in total domestic revenues
resulted primarily from the addition of rooms through hotel acquisitions and
the construction of new hotels. Overall ADR increased 6.5% from fiscal year
1996 to fiscal year 1997, and occupancy increased 3.1% over the prior fiscal
year. RevPAR increased to $40.96 from $37.28, an improvement of 9.9%. An
increase in food and beverage sales of $2.0 million in fiscal year 1997 over
fiscal year 1996 also contributed to revenue growth.
The Company's operating expenses decreased $5.6 million in fiscal year 1997.
Excluding the impact of the provision for asset impairment and other non-
recurring charges, operating expenses increased $19.0 million to $158.0
million in fiscal year 1997. Domestic operating expenses increased $12.7
million, or 10.0%, in fiscal year 1997 resulting primarily from the addition
of six hotels during the year and, to a lesser extent, a $1.1 million increase
in food and beverage costs.
Depreciation and amortization increased 24.0% in fiscal year 1997 as a
result of the addition of new hotels and renovation of existing hotel
properties during fiscal year 1997.
General corporate expense was 4.1% of total revenues in fiscal year 1997
compared to 5.2% of total revenues in fiscal year 1996. Gross profit from
facility operations increased from $40.2 million, or 26.0% of total revenues,
in fiscal year 1996 to $56.1 million, or 30.2% of total revenues, in fiscal
year 1997. Income from continuing operations before income taxes and non-
recurring charges amounted to $11.8 million in fiscal year 1997, an increase
from $2.7 million in fiscal year 1996.
S-28
<PAGE>
During fiscal year 1996, the Company recorded a provision for asset
impairment and other non-recurring charges amounting to $24.6 million (pre-
tax). The provision included a $16.0 million non-cash charge related to the
impairment of assets associated with certain European hotel operations, a $3.4
million non-cash charge related to the impairment of assets associated with
certain domestic hotel operations and a $5.2 million restructuring charge.
Interest expense for the Company increased $3.1 million, or 23.8%, in fiscal
year 1997 as a result of increased borrowings to support the development
program.
The discontinued franchise operations distributed in the Choice Spin-Off on
October 15, 1997 contributed $35.2 million of the Company's after-tax income
in fiscal year 1997, an increase of 61.5%, from the $21.8 million contributed
in fiscal year 1996.
The Company incurred an extraordinary loss of $1.1 million (net of tax) in
fiscal year 1997 in connection with the prepayment of a note payable to Manor
Care.
COMPARISON OF FISCAL YEAR 1996 AND FISCAL YEAR 1995 OPERATING RESULTS
The Company's total revenues increased 35.0% from $114.5 million in fiscal
year 1995 to $154.6 million in fiscal year 1996. Total domestic revenues
increased 40.8%, or $39.1 million, in fiscal year 1996 compared to fiscal year
1995. The increase in total domestic revenues was attributable primarily to
the net addition of 17 hotels to the Company's portfolio and an 8.4% increase
in RevPAR. In addition, food and beverage revenues increased 40.3% in fiscal
year 1996 as compared to fiscal year 1995, also contributing to the increase
in total revenues.
Total operating expenses, excluding the provision for asset impairment and
other non-recurring charges of $24.6 million in fiscal year 1996, increased
31.0%, or $32.9 million from fiscal year 1995 to fiscal year 1996. The
increase in operating expenses, which was consistent with the Company's
revenue growth over the period, was a result of the increase in the number of
hotels owned and operated over the period.
Overall, the Company had an operating loss for fiscal year 1996 as a result
of the provision for asset impairment and other non-recurring charges. Gross
profit from facility operations increased from $26.9 million, or 23.5% of
total revenues in fiscal year 1995 to $40.2 million, or 26.0% of total
revenues, in fiscal year 1996.
Interest expense increased 40.2% in fiscal year 1996 as compared to fiscal
year 1995. The $3.7 million increase resulted from additional funds borrowed
under a note payable to Manor Care for the acquisition of certain hotels.
Income from discontinued operations increased 26.3% in fiscal year 1996, to
$21.8 million (net of taxes).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.5 million for the three
months ended March 31, 1998 compared to $25.0 million for the three months
ended March 31, 1997 and $42.2 million for the seven months ended December 31,
1997, as compared to $87.3 million, $55.4 million, and $49.5 million for
fiscal years 1997, 1996, and 1995, respectively. Net cash provided by
operating activities for all periods other than the three months ended March
31, 1998 includes net cash provided by discontinued operations, as well as net
cash provided by European hotel operations, which were distributed to
shareholders pursuant to the Choice Spin-Off. Net cash provided by continuing
operations was $6.5 million for the three months ended March 31, 1998,
compared to net cash utilized by continuing operations of $3.0 million for the
three months ended March 31, 1997 and net cash provided by continuing
operations of $21.3 million for the seven months ended December 31, 1997,
compared to $40.5 million, $22.8 million and $8.0 million for fiscal years
1997, 1996 and 1995, respectively.
S-29
<PAGE>
At March 31, 1998, the Company had $259.8 million of long-term debt
outstanding. Of this amount, $29.0 million reflects amounts outstanding under
the Credit Facility. The Credit Facility expires in October 2000. At March 31,
1998, permitted availability under the Credit Facility amounted to $69.5
million. The Credit Facility's permitted availability will expand to certain
levels as the Company's cash flow increases.
At March 31, 1998, the Company owed Choice $115.0 million and $5.8 million
in accrued interest pursuant to the Choice Note, a subordinated note which
matures October 15, 2002. The Choice Note provides additional financial
flexibility due to the fact that no interest is payable until maturity. The
Company does, however, expect to refinance the Choice Note with a longer-term
subordinated debt financing as soon as practicable.
At March 31, 1998, the Company owed Choice $19.9 million representing
liabilities of the Company discharged or assumed by Choice in connection with
the Choice Spin-Off. The Company has reached an understanding with Choice to
satisfy this obligation no later than December 31, 1998. These amounts are
classified as "Payable to Choice Hotels International, Inc." on the Company's
balance sheet.
On April 23, 1997, QI Capital Corp., a wholly owned subsidiary of the
Company, issued the CMBS Certificates with an aggregate principal amount of
$117.5 million, representing beneficial ownership interests in a trust fund
holding the Mortgage Note issued by First Choice. The Mortgage Note is secured
by 37 cross-defaulted and cross-collateralized mortgages, representing first
priority mortgage liens on fee interests or fee and leasehold interests in 37
hotels owned by First Choice. The terms of the Mortgage Note provide for
monthly payments of principal and interest in an aggregate amount equal to
interest accruing for such month and monthly principal payments based on a
240-month amortization schedule, computed using an assumed weighted average
interest rate equal to 7.75% per annum. The Mortgage Note has a scheduled
maturity date of May 5, 2012, on which date a balloon payment of the then
outstanding principal balance will be due (currently estimated to be $48.5
million). The Mortgage Note may not be prepaid, in whole or in part, except
upon payment of a premium equal to the greater of 1% of the principal amount
of the Mortgage Note being prepaid and a treasury-based yield maintenance
amount, provided that no prepayment premium will be required in the event of a
prepayment made: (i) in connection with casualty or condemnation events; or
(ii) on or after the date that is six months prior to the scheduled maturity
date. The CMBS Certificates bear a 7.8% blended weighted average interest
rate. The 37 hotel properties so collateralized reported earnings before
interest, taxes, depreciation and amortization and an allocation for corporate
expenses of $9.0 million and $21.4 million for the three months ended March
31, 1998 and the seven months ended December 31, 1997, respectively. The
Company used the proceeds to repay debt payable to its former parent, Manor
Care. At March 31, 1998, $115.2 million aggregate principal amount was
outstanding under the CMBS Certificates.
At March 31, 1998, the Company's debt to book capitalization amounted to
74.3%, while debt to market capitalization was 59.8%.
Notwithstanding the real estate-intensive nature of the Company's business,
the Company's objective is to reduce its overall leverage while continuing to
grow through development. The Company continuously evaluates its existing
portfolio and seeks to sell hotels that have limited upside potential or are
projected to underperform in order to redeploy capital in higher-yielding
assets. The Company has identified six such properties which it is marketing
for sale in 1998.
The Company intends to aggressively develop MainStay Suites, a mid-price
extended-stay hotel product. At March 31, 1998, nine MainStay Suites were open
and operating with another six under construction. In addition to those under
construction, there were another 13 projects under development. A typical
MainStay Suites costs approximately $5.0 to $6.9 million to develop and
construct (including land cost), with an average
S-30
<PAGE>
cost per room ranging from $50,000 to $65,000. In order for the Company to
continue the MainStay Suites development program on a long-term basis,
additional capital will be required. Subject to market conditions, the Company
anticipates raising additional equity and/or debt capital in the foreseeable
future to fund its growth strategy or to satisfy its obligations. While cash
flow from operations, credit available under the Credit Facility, the proceeds
from the Offering and the sale of the six identified hotels is expected to be
adequate to fund operations and committed construction projects, accessing
additional capital is imperative in order for the Company to continue
executing its development and growth plans.
Excluding development, recurring capital expenditures required to maintain
operating assets in the appropriate condition are estimated to be
approximately $15 million per year. Planned capital expenditures for the
development of MainStay Suites and Sleep Inns in 1998 are projected to be
approximately $83.6 million. Planned capital expenditures for the development
of MainStay Suites in calendar 1999 are projected to be $93.5 million. The
Company will also continue to pursue selectively the acquisition of hotel
properties in all segments of the lodging industry where the Company believes
long-term value can be created from renovation and, where appropriate, the
repositioning of the hotel to a different brand or service level.
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 is currently evaluating the impact the year 2000 will
have on its operations. While there is currently no estimate of the cost of
addressing the issue and the full implication of the problem on the Company's
operations is not yet known, it is not, at this time, believed to be
significant.
SEASONALITY
Demand at many of the hotels is affected by recurring seasonal patterns,
depending upon the location of the hotel. Accordingly, the Company's
operations are seasonal in nature, with lower revenue and operating profit in
November through February and higher revenue and operating profit in March
through October.
INFLATION
Inflation has not had a material effect on the revenues or operating results
of the Company during the three months ended March 31, 1998, the seven months
ended December 31, 1997 or the three fiscal years ended May 31, 1997, 1996 and
1995.
S-31
<PAGE>
BUSINESS AND PROPERTIES
The Company is a national owner and operator of hotel properties with a
portfolio at March 31, 1998 of 83 hotels (11,554 rooms) in a total of 28
states. The Company is also an active developer of hotel properties with eight
hotels (838 rooms) under construction and 14 hotels (1,406 rooms) under
development at March 31, 1998, all but three of which are MainStay Suites. The
Company believes that the development of MainStay Suites, which are in the
mid-price category of the extended-stay segment of the lodging industry, will
be its primary source of growth over the next several years. The Company's
portfolio includes hotels in each of the extended-stay, traditional all-suite,
full-service and limited-service segments of the lodging industry and in the
mid-price, economy and upscale price categories of the lodging industry. The
Company operates each of its hotels under one of the brands franchised by
Choice: MainStay, Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge.
Prior to October 1997, Choice was a subsidiary of the Company. See "Prospectus
Supplement Summary--Recent Developments--Recent Spin-Offs."
The Company is led by an experienced management team whose senior members
have an average of over 18 years of lodging industry experience and have
worked together as a team for over six years. The Company's management has had
a successful record of managing ahead of lodging industry cycles. Prior to the
last industry downturn in the late 1980s, the Company successfully liquidated
a substantial portion of its hotel portfolio at favorable prices. From 1992 to
1996, industry conditions were such that many lodging companies and individual
hotels faced financial hardship. The Company took advantage of this
opportunity to acquire hotels at prices well below replacement cost. The
Company's strategy was to acquire and renovate such hotels, install
professional management and marketing systems, and in some cases reposition
the hotels to a different brand or service level. Since June 1992, the Company
has acquired 55 hotels (7,809 rooms) for a total purchase price of $187.7
million and to date has spent an additional $95.6 million on capital
improvements to renovate and reposition these assets. Such amounts represent
on average approximately 60% of the estimated replacement value of the hotels
at their respective acquisition dates. The Company believes, however, that the
record levels of profitability reached in the industry since 1996 have limited
opportunities to acquire hotels at substantial discounts to replacement cost.
As a result, the Company acquired only two hotels in fiscal 1997 and has
acquired no hotels since February 1997. The Company has responded to the new
industry environment by shifting the focus of its growth strategy from
opportunistically acquiring hotels to developing and operating MainStay Suites
in the underserved mid-price category of the extended-stay segment of the
lodging industry. See "Risk Factors--Inherent Risks Associated with the
Lodging Industry" and "--Uncertainty of MainStay Expansion Program."
The Company believes that it is well positioned to generate growth in its
hotel portfolio by capitalizing on opportunities present at the current stage
of the lodging industry cycle. The Company's primary business objectives are
to maximize the value of the Company's hotel portfolio, its cash flow and its
shareholder value. The Company's strategies for accomplishing these objectives
include: (i) developing and operating MainStay Suites in the extended-stay
segment of the lodging industry; (ii) actively managing its existing portfolio
of hotels; and (iii) selectively pursuing acquisitions of hotel properties.
The Company intends to finance its growth with: (i) advances under its $80
million Credit Facility with a syndicate of four commercial banks; (ii) cash
flow from operations; (iii) potential equity and/or debt financings in the
public and/or private markets; and (iv) selective disposition of existing
assets. See "Prospectus Supplement Summary--Recent Developments--Recent
Financing Activity," "Risk Factors--Uncertainty of MainStay Expansion Program"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
INDUSTRY OVERVIEW
The U.S. Lodging Industry
The U.S. lodging industry generated approximately $57.6 billion and $62.6
billion in room revenues in 1996 and 1997, respectively, and is estimated to
have had approximately 3.4 million and 3.5 million rooms at the end of 1996
and 1997, respectively, in hotels and motels containing twenty or more rooms.
The Company believes that overall economic performance is a key factor
affecting the strength of the lodging industry's performance. Room supply and
demand historically have been sensitive to changes in the economy, which have
resulted in cyclical changes in average daily room and occupancy rates. The
Company believes that from 1985 to 1989
S-32
<PAGE>
the industry added a significant number of newly-constructed hotel rooms to
its inventory due largely to a favorable hotel lending environment, the
deductibility of passive tax losses (which encouraged hotel development) and
the ability of hotel operators to regularly increase room rates. As a result,
the lodging industry saw an oversupply of rooms and a decrease in industry
performance.
The lodging industry in recent years has demonstrated strong performance, as
it has been recovering from the excess supply of the late 1980s, as well as
the recession and Gulf War demand disruptions in the early 1990s. This strong
performance has been based on year-to-year increases in room revenues, ADR,
RevPAR and overall lodging industry profitability. Industry profits totaled
$14.5 billion in 1997, increasing steadily from break-even in 1992 and annual
losses during the period from 1986 through 1991. Industry-wide RevPAR has
grown at a compounded annual growth rate of 6.0% from 1993 through 1997. Since
1993, the lodging industry has been able to increase ADR at a faster rate than
increases in the Consumer Price Index (the "CPI"). The following chart
demonstrates these recent trends:
THE U.S. LODGING INDUSTRY SINCE 1991
<TABLE>
<CAPTION>
INCREASES
IN ROOM INCREASE INCREASE
REVENUE IN ADR IN CPI
VERSUS OCCUPANCY VERSUS VERSUS PROFITS NEW ROOMS
YEAR PRIOR YEAR RATES ADR PRIOR YEAR PRIOR YEAR REVPAR (IN BILLIONS) ADDED
- ---- ---------- --------- ------ ---------- ---------- ------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992.................... 3.5% 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993.................... 4.6% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994.................... 7.1% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
1995.................... 6.7% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996.................... 8.9% 65.0% $70.81 7.6% 2.9% $46.06 $12.5 101,000
1997.................... 8.8% 64.5% $75.16 6.1% 1.9% $48.50 $14.5 123,000
</TABLE>
The Company also believes that break-even points in the lodging industry
have markedly decreased since 1992 due to lower interest rates, decreased debt
levels and higher ratios of equity to total capital. Additionally, operating
efficiencies, including increased employee productivity, resulting from the
increase in the number and market share of limited-service and extended-stay
hotels where employees per room and other operating expenses are lower than at
full-service hotels, have contributed to the improved financial results.
The Company believes that the lodging industry can generally be segmented by
room pricing and by the level of service provided. The Company believes that
room pricing can generally be divided into three categories: upscale, mid-
price and economy. At February 1998, the upscale category had average room
rates of $91.52 per night, the mid-price category had average room rates of
$69.93 per night and the economy category had average room rates of $51.14 per
night. The Company further believes that hotels can be divided into four
segments based on the level of service: (i) full-service (which offer food and
beverage services, meeting rooms, room service and other guest services); (ii)
limited-service (which offer some amenities such as swimming pools and
continental breakfasts or similar services); (iii) traditional all-suite
(which have typical transient guest stays of one to four nights and usually
offer guests two rooms or one room with distinct areas, sometimes including
small efficiency kitchens, but usually have limited public areas and may or
may not offer food and beverage services); and (iv) extended-stay (which
usually offer guests staying five or more nights two rooms or one room with
distinct areas including a full kitchen for cooking, but usually have limited
public areas and may or may not offer food and beverage services). The
following table presents a summary of representative brands in each of the
full-service, limited-service, traditional all-suite and extended-stay
segments of the lodging industry:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE BRANDS
----------------------------- ------------------------------------------------------------
<S> <C>
Full-Service................. Clarion, Quality Inns, Hilton, Sheraton, Marriott,
Hyatt, Radisson, Holiday Inns, Ramada
Limited-Service.............. Comfort Inns, Quality Inns, Sleep Inn, Econo Lodge, Rodeway,
Hampton Inns, Holiday Express, La Quinta Inns, Super 8
Traditional All-Suite........ Comfort Suites, Quality Suites, Embassy Suites, AmeriSuites
Extended-Stay................ MainStay, Residence Inn, Homewood, Hawthorn,
Homegate, StudioPLUS, Extended Stay America
</TABLE>
S-33
<PAGE>
The traditional all-suite segment is a relatively new segment of the lodging
industry, having developed largely over the last ten years, and has been
principally oriented toward business travelers with hotels in the upscale
price category. Traditional all-suite hotels were developed partially in
response to the increasing number of corporate relocations, transfers,
temporary work assignments, corporate outsourcing and business travelers'
needs for more than just one room and for a product geared to a longer stay.
To address those needs, certain lodging providers began to offer suites with
additional space and, in some case, kitchens, and guests were offered
discounts to daily rates when they paid on a weekly or monthly basis. The
Company believes that the extended-stay market is a further segmentation of
the traditional all-suite segment of the lodging industry, meeting growing and
changing demands.
Extended-Stay Market
The Company believes that extended-stay is a growing segment of the lodging
industry with favorable supply and demand characteristics. The Company defines
the extended-stay segment as hotels serving guests staying five nights or
longer with a product designed for longer stays. Extended-stay hotels
typically include kitchen facilities and separate areas for sleeping, working
and relaxation. Of the approximately 3.5 million guest rooms available in the
United States at December 31, 1997, there were only approximately 89,076 guest
rooms at approximately 793 properties in the extended-stay segment. The
Company believes, based on this and other published industry data, that the
extended-stay sector is underserved, with approximately 25% of the current
extended- stay room demand being met by the existing dedicated supply.
The Company believes that extended-stay hotels generally have higher
operating margins, higher returns on capital and lower occupancy break-even
thresholds than hotels in other industry segments, primarily as a result of
lower operating expenses, longer guest stays, lower guest turnover and greater
productivity. Extended-stay hotels generally have greater productivity since
the number of employees per room is typically much lower than at both limited-
service and full-service hotels.
The Company believes that the continuing significant supply/demand imbalance
and the longer length of stay have allowed occupancy rates at extended-stay
hotels to significantly exceed overall U.S. lodging industry occupancy rates.
As set forth below, average occupancy rates for extended-stay hotel chains
have significantly exceeded average occupancy rates in the overall U.S.
lodging industry for each of the last five years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average Annual Occupancy Rates:
Extended-Stay Segment(1)....................... 79.2% 80.9% 80.3% 78.5% 75.4%
Overall U.S. Lodging Industry.................. 63.5% 64.7% 65.1% 65.0% 64.5%
</TABLE>
- --------
(1) Inludes Homestead Village, Villager Lodge, StudioPLUS, Lexington Hotel
Suites, Hawthorn Suites, Homewood Suites, Residence Inn, Summerfield
Suites, Extended Stay America, Suburban Lodge, Candlewood, Sierra Suites,
Homegate, Inn Suites, MainStay Suites, TownePlace Suites and Woodfin
Suites.
The Company believes that the decline in occupancy rates for extended-stay
properties since 1995 is primarily the result of an increase in the number of
newly opened properties, which generally experience lower occupancies during
pre-stabilization periods. Available room nights for extended-stay properties
increased by 2.9 million, or 19.8%, to 17.3 million in 1996 and by 7.4
million, or 42.6%, to 24.7 million in 1997. Occupied room nights for extended-
stay properties increased by 2.0 million, or 17.2%, to 13.6 million in 1996
and by 5.0 million, or 37.0%, to 18.6 million in 1997. By comparison,
available room nights for the entire industry (excluding the extended-stay
segment) increased by 27.6 million, or 2.3%, to 1.24 billion in 1996, and by
41.8 million, or 3.4%, to 1.28 billion in 1997. Occupied room nights for the
entire industry (excluding the extended-stay segment) increased by 15.9
million, or 2.0%, to 812.0 million in 1996 and by 20.4 million, or 2.5%, to
832.4 million in 1997.
BUSINESS STRATEGY
Developing and Operating MainStay Suites
In order to capitalize on the positive fundamentals of the extended-stay
segment, the Company is currently focusing on developing and operating
MainStay Suites. MainStay Suites are mid-price extended-stay hotels with
S-34
<PAGE>
average weekly rates for hotels currently open ranging from $350 to $480.
Guests at MainStay Suites, who generally rent on a weekly or longer basis,
include business travelers, professionals on temporary work assignments,
people relocating or purchasing a home, people between domestic situations,
tourists and others desiring high-quality, furnished accommodations with full
kitchens. MainStay Suites are designed and built to uniform plans and
specifications developed and periodically refined since 1996. The Company's
MainStay plans utilize a versatile "building block" architecture that adapts
to various site configurations. The Company believes this standardization
lowers construction costs and enables uniform quality and operational
standards. A typical MainStay Suites ranges in size from 80 to 120 rooms and
is developed on 2.0 to 3.0 acres of land on highly visible sites in upper-to-
middle-income areas that are close to corporate demand generators, restaurants
and retail locations. A typical MainStay Suites costs approximately $5.0 to
$6.9 million to develop and construct (including land cost), with an average
cost per room ranging from $50,000 to $65,000. Based on the Company's hotel
development experience, the Company believes that once a site is selected and
acquired and all regulatory permits and approvals have been obtained, the
construction phase of development generally requires approximately nine months
from groundbreaking to opening. The Company opened its first MainStay Suites
in Plano, Texas in November 1996, which achieved an unleveraged return on cost
of approximately 14.3% for the twelve months ended March 31, 1998. This return
on cost represents the hotel's earnings before interest, taxes, depreciation
and amortization and an allocation for corporate expenses for such period
(which the Company believes is after the period required for such properties
operations to stabilize), divided by its initial cost. The results achieved by
this hotel may not be indicative of results of other MainStay Suites developed
and operated by the Company. See "Risk Factors--Uncertainty of MainStay
Expansion Program."
MainStay Suites feature automated registration and checkout kiosks, guest
laundry, housekeeping every five days (with optional daily light touch
housekeeping), complimentary breakfast and manager's reception and fitness and
recreation facilities. Room alternatives include one-bedroom and studio
suites. Each suite features a bedroom area, a fully furnished kitchen, a
living room area with a pull-out couch or recliner, a spacious work area, two
direct-dial phone lines, voice mail and other automated phone services. The
Company typically operates MainStay Suites with only seven to nine employees,
which helps to control operating expenses. Notwithstanding the Company's
belief that extended-stay is a growing segment of the lodging industry, the
Company's site selection process requires a positive evaluation of prospective
sites for a transient hotel. The Company believes that in the event extended-
stay demand is less than anticipated in any particular market, any of its
MainStay Suites could be converted to a traditional all-suite hotel. However,
there can be no assurance that any such conversion would be successful.
The Company currently owns and operates nine MainStay Suites (866 rooms)
located in nine cities. The Company currently has under construction six
additional MainStay Suites (600 rooms), which are expected to open in 1998, in
six additional cities (two of which are new markets for the Company).
Completion of these hotels will increase the number of rooms in the Company's
extended-stay portfolio by approximately 69%. The Company has under
development an additional 13 MainStay Suites (1,283 rooms), which are expected
to open by 1999, in 13 additional cities (nine of which are new markets for
the Company). Completion of these hotels will increase the number of rooms in
the Company's extended-stay portfolio by approximately 88%, assuming
completion of all the MainStay Suites currently under construction. The
Company has other locations under consideration and is continually searching
for other appropriate sites. The Company plans to develop 15 to 20 new
MainStay Suites annually through the year 2000 and will require capital
expenditures of approximately $85 to $114 million annually for its development
plan. There can be no assurance that the Company will be able to complete the
construction and development of all of these facilities. See "Risk Factors--
Uncertainty of MainStay Expansion Program," "--Development and Construction
Risks" and "--Forward Looking Statements."
S-35
<PAGE>
To implement its MainStay Suites development strategy, the Company maintains
an experienced Real Estate Acquisition and Development Group. This group is
led by the Senior Vice President of Real Estate and Development, who has over
15 years experience in hotel development and over three and one-half years
tenure with the Company. The Real Estate Acquisition and Development Group is
responsible for the identification of target markets, specific site
identification, negotiation, due diligence coordination, planning, zoning and
other approval requirements, and design and construction of new hotels. The
following is a list of newly constructed hotels developed and opened by the
Company since 1994 and those under construction as of March 31, 1998:
<TABLE>
<CAPTION>
CALENDAR
YEAR OF
MARKET HOTEL OPENING
- ---------------------------------------------------- ---------------------------- --------
<S> <C> <C>
Dallas, TX.......................................... Sleep Inn Plano 1994
San Antonio, TX..................................... Sleep Inn San Antonio 1995
Baton Rouge, LA..................................... Sleep Inn Baton Rouge 1996
Houston, TX......................................... Sleep Inn Intercontinental 1996
Austin, TX.......................................... Sleep Inn Round Rock 1996
Dallas, TX.......................................... MainStay Suites Plano 1996
Raleigh, NC......................................... Sleep Inn Raleigh 1997
Dallas/Fort Worth, TX............................... Sleep Inn Six Flags 1997
Kansas City, MO..................................... Sleep Inn Airport 1997
Charlotte, NC....................................... Sleep Inn University 1997
Washington, DC...................................... Sleep Inn Rockville 1997
Providence, RI...................................... MainStay Suites Warwick 1997
Cincinnati, OH...................................... MainStay Suites Blue Ash 1997
Kansas City, MO..................................... MainStay Suites Airport 1998
Indianapolis, IN.................................... MainStay Suites Northwest 1998
Louisville, KY...................................... MainStay Suites 1998
Greenville, SC...................................... MainStay Suites 1998
Denver, CO.......................................... Sleep Inn Airport 1998
Orlando, FL......................................... MainStay Suites Lake Mary 1998
Nashville, TN....................................... MainStay Suites Brentwood 1998
Denver, CO(1)....................................... MainStay Suites Tech Center 1998
Jacksonville, FL(1)................................. MainStay Suites South Pointe 1998
Miami, FL(1)........................................ MainStay Suites 1998
Miami, FL(1)........................................ Sleep Inn Miami Springs 1998
Pittsburgh, PA(1)................................... MainStay Suites 1998
Fishkill, NY(1)..................................... MainStay Suites 1998
Tempe, AZ(1)........................................ MainStay Suites 1998
Denver, CO(1)....................................... Sleep Inn Denver Tech 1998
</TABLE>
- --------
(1) Hotel under construction.
The Company had under development 13 MainStay Suites and one Sleep Inn at
March 31, 1998, all of which are expected to open by 1999.
Actively Managing Existing Hotel Portfolio
The Company actively manages its existing hotel portfolio to optimize
performance by: (i) applying proven operating systems and procedures in the
management of its hotels; (ii) maintaining the competitiveness of its hotels
through capital reinvestment; and (iii) selling hotels that have limited
upside potential or are projected to underperform in order to redeploy capital
in higher-yielding assets.
S-36
<PAGE>
Property Management Systems. The Company's hotels benefit from systems and
services available to all Choice franchisees with respect to a particular
Choice Brand, including the CHOICE 2001 central reservation system, marketing
and advertising efforts and volume purchasing discounts. The Company's hotels
are subject to the quality assurance program applicable to all Choice
franchisees. The Company has also instituted a number of operating systems and
procedures that are designed to maximize performance at its hotels. These
systems, developed by the Company over time, include:
. Yield Management Program: The Company has installed an automated yield
management program at most of its hotels which allows each hotel's
management to maximize RevPAR. The system automatically performs
calculations and suggests pricing strategies to the local hotel
management. The program continues to update information based on the
availability of room supply, guest stay patterns and reservation volume
at each hotel.
. Training: The Company has developed a training system for all guest
services representatives that teaches basic sales techniques and
standard operating procedures. The Company also utilizes a computerized
guest comment system in each hotel which provides management with
immediate guest feedback. This feedback allows the Company to respond
more effectively to consumer needs and to improve its employee training.
In addition, the Company provides training to hotel general managers and
on-site sales professionals on sales and marketing techniques.
. Accounting Systems: Each of the Company's hotels has a computerized
front desk and accounting system. This system allows management at each
hotel to gather key financial indicators (such as daily occupancy and
revenue statistics) and electronically transmit this information to the
Company's senior operating officers and managers. This instant access to
information allows management to quickly identify trends and make
operating adjustments where necessary. This system also creates cost
savings in the accounting and bookkeeping departments of each hotel. In
addition, a corporate-based financial controller group oversees
operational and capital expenditures. This group works with the hotel
operations group to maintain expense standards and operating procedures.
. Time and Attendance System: Each hotel maintains an automated time and
attendance system that is electronically linked to a central payroll
system at corporate headquarters. This computerized system for tracking
time allows management to make quick decisions on controlling labor
costs and provides immediate information on projected costs.
. Annual Business Planning Process: Each hotel prepares a zero-based
annual business plan which incorporates historical performance and
market conditions. Each plan, which is reviewed and approved by senior
management, provides detailed strategies for marketing, guest services
and food and beverage operations. The annual plan serves as a
fundamental measurement of management's performance.
Capital Reinvestment. The Company seeks to maintain its competitive
advantage in its local markets through capital spending. The Company believes
a regular program of capital improvements as well as periodic renovation and
redevelopment of certain hotels are important factors in maintaining the
competitiveness of the portfolio and maximizing cash flow growth. Each of the
Company's hotels completes a detailed capital spending budget annually. The
hotels spend an average of 5% to 7% of total revenues on capital improvements
annually.
Asset Management and Hotel Sales. The Company continuously evaluates its
existing portfolio and seeks to sell hotels that have limited upside potential
or are projected to underperform in order to redeploy capital in higher-
yielding assets. In determining which hotels to sell, the Company considers a
number of factors, including estimated market value relative to the projected
future performance, changes in market demographics, changes in the local
competitive environment and physical plant obsolescence. The Company has
identified six properties which it is marketing for sale in calendar year
1998.
S-37
<PAGE>
Selectively Pursuing Hotel Acquisitions
Although the Company believes that currently there are limited opportunities
to acquire hotels at substantial discounts to replacement cost, the Company
will continue to pursue selectively the acquisition of hotel properties in all
segments of the lodging industry where the Company believes long-term value
can be created, including, where appropriate, from renovation and/or the
repositioning of the hotel to a different brand or service level. In
identifying potential acquisitions, the Company focuses on hotel properties
located in markets with favorable economic, demographic and supply
characteristics. Upon acquiring a hotel, the Company typically spends
significant capital on renovation. During the fiscal year ended May 31, 1995,
the Company acquired 16 hotels for an aggregate initial acquisition price of
$58.6 million and to date has spent an additional $25.8 million on capital
improvements. During the fiscal year ended May 31, 1996, the Company acquired
16 hotels for an aggregate initial acquisition price of $49.2 million and to
date has spent an additional $23.5 million on capital improvements. During the
fiscal year ended May 31, 1997, the Company acquired two hotels for an
aggregate initial acquisition price of $10.7 million and to date has spent an
additional $7.3 million on capital improvements. The Company has acquired no
hotels since February 1997.
The following chart summarizes occupancy rate improvements for original
portfolio hotels and hotels acquired during the five fiscal years ended May
31, 1997. Occupancy rates for the year acquired reflect only the period during
which the properties were owned by the Company. Because certain of the
recently acquired and developed hotels have not yet reached stabilized levels
of operating performance, the Company believes that revenues and gross profit
at these hotels will continue to grow.
<TABLE>
<CAPTION>
COMPANY HOTEL OCCUPANCY
--------------------------------------
FISCAL YEAR
---------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Original Domestic Portfolio.............. 62.27% 64.16% 67.19% 68.02% 71.63%
Fiscal 1993 Acquisitions................. 56.17 64.28 73.94 76.00 74.96
Fiscal 1994 Acquisitions................. -- 63.99 70.88 73.69 73.61
Fiscal 1995 Acquisitions................. -- -- 48.96 58.49 66.27
Fiscal 1996 Acquisitions................. -- -- -- 53.23 61.16
Fiscal 1997 Acquisitions................. -- -- -- -- 54.65
</TABLE>
S-38
<PAGE>
HOTEL PROPERTIES
The Company's hotel properties are in four primary segments of the lodging
industry: extended-stay, traditional all-suite, full-service and limited-
service. Each hotel is branded with one of the Choice Brands.
Extended-Stay Hotels
The Company has nine extended-stay hotels open in nine states and has an
additional six under construction and 13 under development. The MainStay
Suites brand, which was created by the Company in conjunction with Choice, has
a unique product design and service package which enhance property level
appeal, productivity and profitability.
MainStay Suites compete in the mid-price category. MainStay Suites target
guests who generally rent on a weekly or longer basis, including business
travelers, professionals on temporary work assignments, people relocating or
purchasing a home, people between domestic situations, tourists and others
desiring high-quality, furnished accommodations with full kitchens. A typical
MainStay Suites ranges in size from 80 to 120 rooms and is developed on 2.0 to
3.0 acres of land on highly visible sites in upper-to-middle income areas that
are close to corporate demand generators, restaurants and retail locations.
MainStay Suites feature automated registration and checkout kiosks, guest
laundry, full housekeeping every five days (with optional daily light touch
housekeeping), complimentary breakfast and manager's reception and fitness and
recreation facilities. Room alternatives include one-bedroom and studio
suites. Each suite features a bedroom area, a fully furnished kitchen, a
living room area with a pull-out couch or recliner, a spacious work area, two
direct-dial phone lines, voice mail and other automatic phone services. These
features enable MainStay Suites to operate with fewer full-time equivalent
employees than a typical limited-service hotel that provides 24-hour front
desk coverage and full housekeeping daily. All of the extended-stay properties
have been newly constructed by the Company since November 1996, and all but
two have opened within the past six months.
The chart below sets forth performance information for the Company's
existing extended-stay hotels:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
--------------------- ----------------------
1998 1997 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of properties (at
period end)............... 9 1 3 1
Number of rooms (at period
end)...................... 866 96 290 96
Average daily rate......... $ 55.43 $ 55.67 $ 59.29 $62.12
Occupancy %(1)............. 35.7% 67.1% 55.3% 51.9%
RevPAR (1)................. $ 19.81 $ 37.37 $ 32.79 $ 32.26
RevPAR % change(1)......... (47.0)% 1.6%
</TABLE>
- --------
(1) Only one of the Company's MainStay Suites has been open during all periods
presented. The decline in RevPAR and occupancy rates for the Company's
MainStay Suites primarily results from the lower RevPAR and occupancy
rates at the Company's eight recently opened MainStay Suites which are
currently experiencing the stabilization period common to newly opened
hotels.
Traditional All-Suite Hotels
Three of the Company's five traditional all-suite hotels are Quality Suites
and two are Comfort Suites. The Company's traditional all-suite hotels,
located in four states, compete in the upscale and mid-price categories. The
Company's traditional all-suite hotels primarily focus on attracting transient
guests (which are defined as guests who stay four nights or less). The
Company's traditional all-suite hotels are located in suburban business areas.
Facilities typically offer separate sleeping and living areas but typically do
not include in-room kitchen facilities. Each of the Company's traditional all-
suite hotels features a swimming pool, fitness and recreation facilities,
daily maid service, complimentary breakfast and in-room coffee makers. The
Company's traditional all-suite hotels range in size from 101 to 131 suites.
S-39
<PAGE>
The chart below sets forth performance information for the Company's
existing traditional all-suite hotels:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------- ----------------------
1998 1997 1997 1996 1995
--------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties (at pe-
riod end).................. 5 5 5 5 5
Number of rooms (at period
end)....................... 577 577 577 577 577
Average daily rate.......... $ 85.02 $81.06 $72.56 $67.62 $61.38
Occupancy %................. 73.1% 72.3% 72.7% 71.9% 68.9%
RevPAR...................... $ 62.18 $ 58.63 $52.72 $48.63 42.34
RevPAR % change............. 6.1% 8.4% 14.8%
</TABLE>
Full-Service Hotels
The Company has 16 full-service hotels in 10 states. The Company's full-
service hotels include Clarion and Quality brand hotels. The Company's Clarion
brand hotels compete in the upscale price category and the Company's Quality
brand hotels compete in the upscale and mid-price categories. The Company's
full-service hotels primarily serve business and pleasure travelers and
accomodate group meetings at downtown and suburban locations, near airports
and at resort locations. The Company's full-service hotels typically include
meeting and banquet facilities, a restaurant and lounge, swimming pool, and
exercise facilities. The Clarion brand hotels range in size from 103 to 309
rooms and the Quality brand hotels range in size from 184 to 391 rooms.
The chart below sets forth performance information for the Company's
existing full-service hotels:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------- -----------------------
1998 1997 1997 1996 1995
--------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties (at
period end)............... 16 15 16 15 15
Number of rooms (at period
end)...................... 3,441 3,267 3,441 3,267 3,267
Average daily rate......... $70.71 $65.79 $65.75 $61.69 $58.08
Occupancy %................ 60.4% 62.0% 65.8% 64.7% 64.6%
RevPAR..................... $42.74 $40.76 $43.21 $39.88 $37.50
RevPAR % change............ 4.9% 8.3% 6.4%
</TABLE>
Limited-Service Hotels
The Company has 53 limited-service hotels in 24 states. The Company's
limited-service hotels are operated under the Comfort, Quality, Sleep, Econo
Lodge, and Rodeway brands. The Company's limited-service hotels compete in the
mid-price and economy categories and primarily serve pleasure travelers,
tourist groups and budget-conscious business travelers. The Company's limited-
service hotels are typically located in downtown and suburban areas, near
airports and near vacation destinations. The Company's limited-service hotels
have all been built or have undergone renovation since 1994. The Company's
limited-service hotels typically offer guests complimentary continental
breakfast, in-room coffee makers, ironing boards and electronic door locks.
The Company's limited-service hotels range in size from 67 to 250 rooms.
The chart below sets forth performance information for the Company's
existing limited-service hotels:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
--------------------- ----------------------
1998 1997 1997 1996 1995
--------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties (at
period end)............... 53 49 52 47 40
Number of rooms (at period
end)...................... 6,670 6,216 6,551 6,006 5,221
Average daily rate......... $59.40 $57.09 $58.27 $54.97 $52.33
Occupancy %................ 63.2% 66.6% 68.8% 70.2% 69.6%
RevPAR(1).................. $37.54 $38.01 $40.06 $38.59 $36.41
RevPAR % change(1)......... (1.2)% 3.8% 6.0%
</TABLE>
- --------
(1) Seven of the Company's limited-service hotels experienced significant
RevPAR declines during the first quarter of 1998 relative to the same period
in 1997 due to factors in their individual markets. RevPAR for the remaining
limited-service hotels improved 2.3% over the first quarter of 1997.
S-40
<PAGE>
The following chart lists the Company's hotels open and under construction by
market segment at March 31, 1998:
<TABLE>
<CAPTION>
YEAR
NO. OF CONSTRUCTED/LAST
HOTEL MARKET ROOMS MAJOR RENOVATION
- ----- -------------------------------- ------ ----------------
<S> <C> <C> <C>
EXTENDED-STAY
Mid-Price
HOTELS OPEN
MainStay Suites Plano.. Dallas, Texas 96 1996
MainStay Suites
Warwick............... Providence, Rhode Island 94 1997
MainStay Suites Blue
Ash................... Cincinnati, Ohio 100 1997
MainStay Suites
Airport............... Kansas City, Missouri 88 1998
MainStay Suites
Northwest............. Indianapolis, Indiana 88 1998
MainStay Suites........ Louisville, Kentucky 100 1998
MainStay Suites Lake
Mary.................. Orlando, Florida 100 1998
MainStay Suites
Brentwood............. Nashville, Tennessee 100 1998
MainStay Suites........ Greenville, South Carolina 100 1998
-----
Total............... 866
HOTELS UNDER
CONSTRUCTION
MainStay Suites Tech
Center................ Denver, Colorado 100 1998
MainStay Suites South
Pointe................ Jacksonville, Florida 100 1998
MainStay Suites........ Miami, Florida 100 1998
MainStay Suites........ Fishkill, New York 106 1998
MainStay Suites........ Pittsburgh, Pennsylvania 100 1998
MainStay Suites........ Tempe, Arizona 94 1998
-----
Total............... 600
TRADITIONAL ALL-SUITE
Upscale
Quality Suites
Deerfield............. Fort Lauderdale, Florida 107 1991/1995
Quality Suites......... Raleigh, North Carolina 114 1988/1994
Quality Suites Shady
Grove................. Rockville, Maryland 124 1978/1996
Mid-Price
Comfort Suites
Haverhill............. Boston, Massachusetts 131 1989/1997
Comfort Suites
Deerfield............. Fort Lauderdale, Florida 101 1991/1995
-----
Total............... 577
FULL-SERVICE
Upscale
Clarion Hotel
Baltimore............. Baltimore, Maryland 103 1927/1996
Clarion Hotel
Worthington........... Columbus, Ohio 232 1975/1996
Clarion Hotel
Richardson............ Dallas, Texas 296 1982/1995
Clarion on the Lake.... Hot Springs, Arkansas 151 1965/1997
Clarion Hotel Miami
Airport............... Miami, Florida 103 1970/1996
Clarion Hotel Hollywood
Beach................. Miami-Ft. Lauderdale, Florida 309 1972/1996
Clarion Hotel.......... Mobile, Alabama 250 1979/1994
Clarion Hotel Virginia
Beach................. Norfolk-Virginia Beach, Virginia 149 1985/1995
Clarion Hotel Roanoke.. Roanoke, Virginia 148 1981/1997
Clarion Hotel
Springfield........... Springfield, Missouri 199 1974/1997
Clarion Hotel.......... Charlotte, North Carolina 174 1974/1997
Mid-Price
Quality Inn South
Point................. Jacksonville, Florida 184 1988/1994
Quality Hotel Airport.. Los Angeles, California 278 1971/1994
Quality Hotel Maingate
Anaheim(1)............ Los Angeles, California 284 1970/1995
Quality Inn & Suites
Hampton............... Norfolk-Virginia Beach, Virginia 190 1972/1995
Quality Hotel
Arlington............. Washington, DC 391 1962/1997
-----
Total............... 3,441
</TABLE>
S-41
<PAGE>
<TABLE>
<CAPTION>
NO. OF YEAR CONSTRUCTED/LAST
HOTEL MARKET ROOMS MAJOR RENOVATION
- ----- --------------------------- ------ ---------------------
<S> <C> <C> <C>
LIMITED-SERVICE
HOTELS OPEN
Mid-Price
Comfort Inn
Albuquerque........... Albuquerque, New Mexico 114 1985/1996
Quality Inn Anderson... Anderson, South Carolina 121 1988/1995
Comfort Inn Norcross... Atlanta, Georgia 110 1987/1996
Comfort Inn N.W.
Pikesville(2)......... Baltimore, Maryland 186 1964/1994
Comfort Inn
University............ Baton Rouge, Louisiana 150 1972/1994
Comfort Inn Danvers.... Boston, Massachusetts 136 1972/1997
Comfort Inn Brooklyn... Brooklyn, New York 67 1926/1997
Comfort Inn Canton..... Canton, Ohio 124 1989/1994
Comfort Inn Airport.... Charleston, South Carolina 122 1986/1994
Comfort Inn Charlotte.. Charlotte, North Carolina 150 1985/1996
Quality Inn & Suites
Crown Point........... Charlotte, North Carolina 100 1988/1996
Comfort Inn............ Cincinnati, Ohio 117 1984/1996
Comfort Inn Middleburg
Heights............... Cleveland, Ohio 136 1989/1996
Comfort Inn College
Station............... College Station, Texas 114 1984/1995
Comfort Inn Columbia... Columbia, South Carolina 98 1987/1996
Comfort Inn DFW
Airport............... Dallas-Fort Worth, Texas 152 1986/1995
Quality Inn Plymouth... Detroit, Michigan 123 1989/1996
Comfort Inn Deerfield
Beach................. Fort Lauderdale, Florida 69 1975/1997
Comfort Inn Hershey.... Hershey, Pennsylvania 125 1990/1997
Comfort Inn Hilton
Head.................. Hilton Head, South Carolina 150 1988/1996
Quality Inn & Suites
Indianapolis.......... Indianapolis, Indiana 116 1982/1996
Quality Inn Lincoln.... Lincoln, Nebraska 108 1969/1996
Quality Inn & Suites
Lumberton............. Lumberton, North Carolina 120 1974/1996
Comfort Inn
Collierville.......... Memphis, Tennessee 94 1984/1996
Comfort Inn & Suites
Miami Springs......... Miami, Florida 165 1970/1996
Comfort Inn Miami
Springs............... Miami, Florida 110 1986/1996
Comfort Inn Miami
Beach................. Miami, Florida 150 1952/1997
Comfort Inn Lee Road... Orlando, Florida 145 1985/1994
Comfort Inn Turf
Paradise.............. Phoenix, Arizona 155 1981/1995
Comfort Inn North...... Phoenix, Arizona 153 1986/1997
Comfort Inn Portland... Portland, Maine 126 1984/1996
Quality Inn Richmond... Richmond, Virginia 194 1985/1997
Quality Inn Midvalley.. Salt Lake City, Utah 132 1972/1995
Comfort Inn by the
Bay(1)................ San Francisco, California 135 1971/1996
Comfort Inn Westport... St. Louis, Missouri 170 1971/1995
Comfort Inn Sturgis.... Sturgis, Michigan 83 1965/1997
Comfort Inn Traverse
City.................. Traverse City, Michigan 96 1989/1996
Comfort Inn Tyson's.... Washington, DC 250 1982/1995
Comfort Inn West Palm
Beach................. West Palm Beach, Florida 158 1974/1995
Comfort Inn Wichita.... Wichita, Kansas 114 1985/1997
Sleep Inn Round Rock... Austin, Texas 107 1996
Sleep Inn Six Flags.... Dallas-Fort Worth, Texas 124 1997
Sleep Inn Baton Rouge.. Baton Rouge, Louisiana 101 1996
Sleep Inn Plano........ Dallas, Texas 104 1994
Sleep Inn
Intercontinental...... Houston, Texas 107 1996
Sleep Inn Raleigh...... Raleigh, North Carolina 107 1996
Sleep Inn San Antonio.. San Antonio, Texas 107 1995
Sleep Inn University... Charlotte, North Carolina 121 1997
Sleep Inn Airport...... Kansas City, Missouri 107 1997
Sleep Inn Rockville.... Washington, DC 107 1997
Sleep Inn Airport...... Denver, Colorado 119 1998
Economy
Econo Lodge Tolleson... Phoenix, Arizona 120 1988/1997
Rodeway Inn Tempe...... Phoenix, Arizona 101 1989/1994
------
Total............... 6,670
HOTELS UNDER
CONSTRUCTION
Mid-Price
Sleep Inn Denver Tech.. Denver, Colorado 119 1999
Sleep Inn Miami
Springs............... Miami, Florida 119 1998
------
Total............... 238
TOTAL ROOMS OPEN....... 11,554
TOTAL ROOMS UNDER
CONSTRUCTION.......... 838
</TABLE>
- --------
(1) The Quality Hotel Maingate Anaheim and the Comfort Inn by the Bay are
leased properties.
(2) The Comfort Inn N.W. Pikesville is located on leased land.
S-42
<PAGE>
HOTEL MANAGEMENT AND OPERATIONS
The Company's hotel management structure emphasizes direct accountability to
maintain high guest service standards and to closely control operating costs.
The Company has established certain uniform productivity standards and skills
requirements for all of its hotel employees.
Each of the Company's hotels has a management staff including a general
manager. The general manager of each hotel is responsible for overseeing all
hotel operations. Each hotel general manager reports to an area manager or
directly to one of three regional vice presidents of operations. Each area
manager also reports to one of the regional vice presidents. The regional vice
presidents report to the President of the Company. The area managers and
regional vice presidents provide management support to each of the hotel's
general managers and their respective staffs, coordinate communication between
each of the hotels and the Company's corporate departments and assist in
establishing and administering corporate policies, procedures and standards.
The Company has centralized most human resources functions, other than
routine administrative tasks, at the corporate level. These services include
recruiting, training, management development, compensation, benefits
administration and employee relations. A small number of specialists develop
and administer programs and procedures that can be used effectively across the
entire system, and provide advice and support as required to general managers.
Acquisition and Development
The Company's Real Estate Acquisition and Development Group, which consists
of 18 employees, is responsible for identifying suitable external development
opportunities and for transactional execution relating to such opportunities.
The Real Estate Acquisition and Development Group is segmented into three
principal departments: acquisition, asset management and construction. The
acquisition department is responsible for market and site identification,
financial analysis, contract negotiation, due diligence coordination, zoning,
title, survey, market feasibility, franchise application process, internal
approval, entitlement approval and site acquisitions. The asset management
department is responsible for asset evaluation, opportunity evaluation, broker
listings, contract/lease negotiation, internal approval and transaction
closing. The construction department is responsible for project budget
development, external consultant management (architectural and engineering),
project building feasibility, general contractor selection, building permit
process management, owner's representative to contractor/local authorities,
furniture, fixtures and equipment purchase and installation coordination,
purchase of owner furnished items, building completion, transition to
operations staff and project close-out.
The primary objectives of the Real Estate Acquisition and Development Group
include: (i) managing external development, including site acquisition and
hotel construction for the MainStay Suites scheduled to open through the year
2000; (ii) managing the Company's assets, including performing ongoing asset
evaluation leading to the sale of excess/vacant land, leasing of vacant
restaurants, cellular phone antenna leases, real estate tax oversight and
appeals and other real estate related transactions; and (iii) evaluating and
executing hotel sales.
Central Reservations System
As Choice's largest franchisee, the Company utilizes Choice's computerized,
toll-free telephone reservations system--CHOICE 2001. For the year ended
December 31, 1997, approximately 24% of room nights at the Company's hotels
were booked through the CHOICE 2001 reservations system. The CHOICE 2001
reservations system consists of a computer reservations system, five
reservation centers in North America and several international reservation
centers run by Choice or its master franchisees. All reservation centers
worldwide are networked via a centralized system. The CHOICE 2001 system also
provides instant data links to the Amadeus, Galileo, SABRE and Worldspan
airline reservation systems that facilitate the reservation process for travel
agents. The CHOICE 2001 reservations system allows the Company to monitor
reservation patterns over time. The Company also utilizes Choice's separate
toll-free reservation numbers for each of the Choice Brands.
S-43
<PAGE>
Advertising and Marketing
The Company takes advantage of Choice's national marketing and advertising
programs, which are designed to heighten consumer awareness of the Choice
Brands. Choice marketing and advertising efforts include national television
and radio advertising, print advertising in consumer and trade media and
promotional events, including joint marketing promotions with vendors and
Choice's corporate partners. Choice also conducts numerous marketing programs
targeting specific groups, including senior citizens, motorist club members,
families, government and military employees, and meeting planners. Other
Choice marketing efforts include telemarketing and telesales campaigns, trade
show programs, publication of group and tour rate directories, direct-mail
programs, discounts to holders of preferred credit cards, centralized
commissions for travel agents, fly-drive programs in conjunction with major
airlines, and twice-yearly publication of a Travel and Vacation Directory.
In addition to utilizing Choice's national marketing and advertising
programs, the Company maintains a 20 person corporate marketing department
headed by the Company's Vice President of Marketing. The marketing department
concentrates on improving the competitive performance of the Company's hotels
through programs that include on-site direct sales in local markets, regional
and local sales blitzes, national sales to tour operators, participation in
tradeshows, administration of frequent sleeper programs to reward repeat
guests, annual business unit strategic planning and quarterly review process,
sales and reservation training for general managers, on-site sales
professionals and front office staff.
Purchasing
The Company utilizes Choice's bulk purchasing program for all hotel-related
purchases other than construction and development purchases, which are
purchased by the Company's Real Estate Acquisition and Development Group. By
utilizing the Choice purchasing program, the Company is able to take advantage
of volume discounts and economies of scale. Choice negotiates volume purchases
of various products, including furniture, fixtures, carpets and bathroom
amenities.
Food and Beverage
Recently, the Company implemented a new food and beverage concept called
"Classic Sports Food, Drink and Memories." This sports theme restaurant
concept has been developed jointly with the Classic Sports Network, a national
cable television service. This agreement allows for the use of certain
trademarks at the Company's hotels. "Classic Sports Food, Drink and Memories"
are currently open in four of the Company's hotels in Springfield, Missouri;
Charlotte, North Carolina; Richardson, Texas; and Hot Springs, Arkansas.
STRATEGIC ALLIANCE AGREEMENT
At the time of the Choice Spin-Off, the Company and Choice entered into a
Strategic Alliance Agreement pursuant to which: (i) the Company granted a
right of first refusal to Choice to franchise any lodging property that the
Company develops or acquires and intends to operate under franchise; (ii) the
Company has also agreed, barring a material change in market conditions, to
continue to develop Sleep Inns and MainStay Suites so that it will have opened
a total of fourteen Sleep Inns and fifteen MainStay Suites by October 15, 2001
(48 months after the date of the Choice Spin-Off); (iii) Choice granted to the
Company an option (exercisable only in the event that there are not 100
MainStay Suites open or under construction in the Choice franchise system by
January 1, 2000) to purchase the brand names, marks, franchise agreements and
other assets of the MainStay Suites hotel system; (iv) Choice and the Company
have agreed to continue to cooperate with respect to matters of mutual
interest, including new product and concept testing for Choice in hotels owned
by the Company; and (v) the Company has authorized Choice to negotiate with
third party vendors on the Company's behalf for the purchase of certain items.
The Strategic Alliance Agreement extends for a term of 20 years from the date
of the Choice Spin-Off with each party having the rights of termination on the
fifth, tenth and fifteenth anniversaries thereof.
FRANCHISE AGREEMENTS
Each hotel property owned by the Company is subject to a franchise agreement
between Choice and the Company, as franchisee (the "Franchise Agreements").
The material terms of such agreements are described below.
S-44
<PAGE>
Term. Each Franchise Agreement has an initial term of 20 years, except the
agreement for the Company's Rodeway Inn in Tempe, Arizona, which is a year-to-
year agreement. The Franchise Agreements have varying original dates, from
1982 through 1998. Certain Franchise Agreements allow for unilateral
termination by either party on the fifth, tenth, or fifteenth anniversary of
the Franchise Agreement.
Termination by the Company. The Company (except with respect to one property
as described below) may terminate a Franchise Agreement if Choice defaults on
its material obligations under such Franchise Agreement and fails to cure such
defaults within 30 days following written notice. The Franchise Agreement with
respect to the Company's Quality Hotel in Arlington, Virginia (the "Non-
Standard Franchise Agreement") does not allow the Company to terminate such
Franchise Agreement.
Termination by Choice. Choice (except with respect to the Non-Standard
Franchise Agreement) may suspend or terminate a Franchise Agreement at any
time, if, among other things, the Company: (i) fails to submit reports when
due; (ii) fails to pay amounts due under such Franchise Agreement; (iii) fails
to pay its debts generally as they become due; or (iv) receives two or more
notices of default for similar reasons for any 12-month period. Choice (except
with respect to the Non-Standard Franchise Agreement) may terminate a
Franchise Agreement immediately upon notice to the Company if, among other
things, (i) certain bankruptcy events occur with respect to the Company; (ii)
the Company loses possession or the right to possession of the property; (iii)
the Company breaches transfer restrictions in the related Franchise Agreement;
(iv) any action is taken to dissolve or liquidate the Company; or (v) there is
a threat or danger to the public health and safety in the continued operation
of the property. If a Franchise Agreement is terminated by Choice for any of
the reasons discussed in the immediately preceding two sentences, the Company
is required to pay special interest equal to the product of: (i) the average
monthly gross room revenue for the preceding 12 months, multiplied by (ii) the
royalty fee percentage (more fully described below), multiplied by (iii) the
number of months unexpired under the term of the related Franchise Agreement
(in no event less than between $21-$50 depending on the hotel brand multiplied
by the specified room count).
Choice may terminate the Non-Standard Franchise Agreement immediately upon
notice to the Company if, among other things, (i) certain bankruptcy events
occur with respect to the Company; (ii) certain breaches of the related
agreements are not remedied; (iii) any action is taken to dissolve or
liquidate the Company; or (iv) legal proceedings against the Company are not
dismissed within a certain period of time. Upon termination, the Franchise
Agreement for the Rodeway Inn in Tempe, Arizona calls for special interest of
the greater of: (i) $50,000 and (ii) the sum of the previous two years of fees
paid by the Company.
Fees. The Franchise Agreements require the Company to pay certain fees and
charges, including the following: (i) a royalty fee of between 1.93% to 5.0%
of monthly gross room revenues; (ii) a marketing fee of between 0.7% and 2.5%
plus $0.28 per day multiplied by the specified room count; and (iii) a
reservation fee of 0.88% to 1.75% of monthly gross room revenues (or 1% of
monthly gross room revenues plus $ 1.00 per room confirmed through Choice's
reservation system). The marketing fee and the reservation fee are subject to
reasonable increases during the term of the franchise if Choice raises such
fees uniformly among its franchisees. Late payments (i) are a breach of the
Franchise Agreement and (ii) accrue interest from the date of delinquency at a
rate of 1.5% per month or portion thereof.
Certain Covenants. The Franchise Agreements impose certain affirmative
obligations upon Choice including: (i) to lend the Company an operations
manual; (ii) to utilize money collected from marketing and reservation fees to
promote those aspects of the franchise business; and (iii) to periodically
inspect the property. The Franchise Agreements also impose affirmative
obligations upon the Company including: (i) to participate in a specified
reservation system; (ii) to keep and comply with the up-to-date version of
Choice's rules and regulations for properly running the specified franchise;
(iii) to prepare monthly financial and other records; (iv) to not interfere
with the franchised mark(s) and Choice's rights thereto; and (v) to maintain
certain specified insurance policies.
S-45
<PAGE>
Assignments. The Company is prohibited from directly or indirectly selling,
assigning, transferring, conveying, pledging or mortgaging its interest in the
Franchise Agreements, or any equity interest in such franchise interests
without the consent of Choice except that, among other things, certain
percentages of ownership interests in the Company may be transferred without
Choice's consent. Choice's consent to such transfers will not be given unless,
among other things: (i) all monetary obligations due under the Franchise
Agreements are paid to Choice; (ii) no defaults under the Franchise Agreements
remain uncured; (iii) the transferee agrees in writing to upgrade the related
property to the then-current standards; and (iv) the transferee agrees to
remain liable for all obligations under the Franchise Agreements so
transferred.
Choice is permitted to assign all or any part of its rights or obligations
under the Franchise Agreements. However, the Franchise Agreements (with the
exception of the Non-Standard Franchise Agreement) do not permit Choice to
absolve itself from the obligations that it transfers under the Franchise
Agreement. Upon the assignment of Choice's obligations under the Non-Standard
Franchise Agreement, Choice will no longer be liable with respect to the
obligations it so transfers.
SHAREHOLDER RIGHTS PLAN
On February 23, 1998, the Board of Directors adopted a shareholder rights
plan under which a dividend of one preferred stock purchase right is being
distributed for each outstanding share of Common Stock to shareholders of
record on April 3, 1998.
Each right entitles the holder to buy 1/100 of a share of a newly issued
series of junior participating preferred stock of the Company at an exercise
price of $50 per share. The rights will be exercisable, subject to certain
exceptions, after a person or group acquires beneficial ownership of 10% or
more of the outstanding Common Stock (such a person or group, an "Acquiring
Person"), or begins a tender or exchange offer that would result in a person
or group becoming an Acquiring Person. In the event that a person becomes an
Acquiring Person, holders of rights, other than the Acquiring Person, will
have the right to receive Common Stock having a value equal to two times the
exercise price of the right. If the Company is involved in a merger or certain
other business combinations not approved by the Board of Directors, or 50% or
more of the Company's assets or earning power is sold or transferred, each
right will entitle its holder, other than the Acquiring Person, to purchase
Common Stock of the acquiror having a value of twice the exercise price of the
right.
Following the occurrence of a person becoming an Acquiring Person, the Board
of Directors may exchange the rights, in whole or in part, at an exchange
ratio of one share of Common Stock (or a fraction of a share of the junior
participating preferred stock having the same market value) per right. Prior
to the expiration of ten days after the announcement of the existence of an
Acquiring Person, the Company may redeem the rights in whole, but not in part,
at a price of $.001 per right. Stewart Bainum and certain members of his
family are not considered Acquiring Persons for purposes of this plan. In
addition, Ronald Baron and certain of his affiliates (the "Baron Entities")
are not considered Acquiring Persons, provided the percentage of the
outstanding Common Stock held by the Baron Entities does not exceed 33%. In
the event of a sale of Common Stock by the Baron Entities, or an issuance of
shares by the Company, the percentage will be adjusted to the lesser of: (i)
the percentage in force immediately before the sale or issuance, or (ii) the
percentage held by the Baron Entities immediately after the sale or issuance,
plus one percentage point.
COMPETITION
Competition in the United States lodging industry is generally based on
convenience of location, price, range of services and guest amenities offered,
plus the quality of customer service and overall product. Newer, recently
constructed hotels compete effectively against older hotels if such hotels are
not refurbished on a regular basis. The effect of local economic conditions on
the Company's results is reduced by the Company's geographic diversity of its
properties as well as its range of products and room rates. See "Risk
Factors--Inherent Risks Associated with the Lodging Industry--Competition in
the Lodging Industry."
EMPLOYEES
At December 31, 1997, the Company employed approximately 3,332 employees.
Less than 5% of the Company's employees are represented by unions. All of the
Company's employees covered by unions are employed at Comfort Inn by the Bay
in San Francisco, California. The Company considers its relations with its
employees to be good.
S-46
<PAGE>
MANAGEMENT
The name, age, title, present principal occupation, business address and
other material occupations, positions, offices and employment of each of the
Company's executive officers and directors are set forth below. The business
address of each director and executive officer is 10770 Columbia Pike, Silver
Spring, Maryland 20901.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. ........ 52 Chairman of the Board of Directors
Stewart Bainum.............. 78 Director
Frederic V. Malek........... 60 Director
Paul A. Gould............... 50 Director
Carole Y. Prest............. 46 Director
Keith A. Pitts.............. 40 Director
Donald J. Landry............ 49 Chief Executive Officer and Vice Chairman
James A. MacCutcheon........ 45 Executive Vice President, Chief Financial Officer and Treasurer
Antonio DiRico.............. 44 President and Chief Operating Officer
Kevin P. Hanley............. 40 Senior Vice President, Real Estate and Development
Gregory D. Miller........... 44 Senior Vice President, Human Resources
Douglas H. Verner........... 44 Senior Vice President, General Counsel and Secretary
Charles M. Warczak, Jr. .... 50 Vice President, Accounting and Hotel Systems
Pamela M. Williams ......... 42 Vice President, Assistant General Counsel and Assistant Secretary
</TABLE>
Stewart Bainum, Jr. Chairman of the Board of the Company since November 1996
and a member of the Board of the Company's predecessors since 1982; Chairman
of the Board of Choice from March 1987 to November 1996 and since October
1997; Chairman of the Board and Chief Executive Officer of Manor Care and
ManorCare Health Services, Inc. ("MCHS") since March 1987; Chief Executive
Officer of Manor Care since March 1987 and President since June 1989; Vice
Chairman of the Board of Vitalink Pharmacy Services, Inc. ("Vitalink") since
December 1994; Vice Chairman of the Board of Manor Care and subsidiaries from
June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink
since September 1991 and of MCHS since 1976; President of MCHS from May 1990
to May 1991; Chairman of the Board and Chief Executive Officer of Vitalink
from September 1991 to February 1995 and President and Chief Executive Officer
from March 1987 to September 1991.
Stewart Bainum. A member of the Company's Board since November 1996;
Chairman of the Board of the Company's predecessors and the Company from 1972
to March 1987 and a member of the Board of the Company's predecessors since
1963; Vice Chairman of the Board of Manor Care and its subsidiaries since
March 1987; Chairman of the Board of Manor Care from August 1981 to March
1987, Chief Executive Officer from July 1985 to March 1987, President from May
1982 to July 1985; Chairman of the Board of MCHS from 1968 to March 1987 and a
Director since 1968; Director of Vitalink from September 1991 to September
1984; Chairman of the Board of Realty Investment Company, Inc. since 1965.
Frederic V. Malek. Member of the Board of the Company since November 1996.
Chairman of Thayer Capital Partners since March 1993; Co-Chairman of CB
Commercial Real Estate Group, Inc. from April 1989 to October 1996; Campaign
Manager for Bush-Quayle '92 from January 1992 to November 1992; Vice Chairman
of NWA, Inc. (airlines), July 1990 to December 1991; Director: Manor Care,
American Management Systems, Inc., Automatic Data Processing Corp., CB
Commercial Real Estate Group, Inc., FPL Group, Inc. (an affiliate of Florida
Power and Light Company), Northwest Airlines and various Paine Webber mutual
funds.
Paul A. Gould. Member of the Board of the Company since November 1996.
Managing Director of Allen & Company Incorporated (investment banking firm)
for over five years and other positions at Allen & Company Incorporated since
1973. Director: Telecommunications International, Inc.; United Video Satellite
Group, Inc.; and National Patent Development Corporation; Board of Trustees of
The New School, The Hackley School and The Holderness School.
S-47
<PAGE>
Carole Y. Prest. Member of the Board of the Company since November 1997.
Vice President, Corporate Strategic Planning of Manor Care since September
1995; Vice President and General Manager and various other positions at Gen
Rad, Inc. from May 1985 to 1994.
Keith A. Pitts. Member of the Board of the Company since November 1997.
President and Chief Executive Officer of the Paragon Health Network, Inc.
since November 1997; Consultant to Apollo from August 1997 to November 1997;
Consultant to Tenet Healthcare Corp. ("Tenet") from February 1997 to August
1997; Executive Vice President and Chief Executive Financial Officer of orNda
HealthCorp from August 1992 until its merger with Tenet in January 1997.
Donald J. Landry. Chief Executive Officer and Vice Chairman of the Company
since October 1997; President of the Company from January 1995 to October
1997; President of Manor Care Hotel Division ("MCHD") from March 1992 to
November 1996; various executive positions with Richfield Hotel Management,
Inc. ("RHM") and its predecessors for more than 16 years, including President
of MHM Corporation.
James A. MacCutcheon. Executive Vice President, Chief Financial Officer and
Treasurer of the Company since November 1996; Senior Vice President, Chief
Financial Officer and Treasurer of the Company's predecessors from September
1993 to November 1996; Senior Vice President, Chief Financial Officer and
Treasurer of Manor Care from September 1993 to November 1996; Senior Vice
President, Finance and Treasurer of Manor Care from October 1987 to September
1996; Treasurer of Vitalink from September 1992 to January 1997 and a director
of Vitalink since September 1994.
Antonio DiRico. President and Chief Operating Officer of the Company since
October 1997; Senior Vice President, Hotel Operations of the Company from
November 1996 to October 1997; Senior Vice President of MCHD from May 1992 to
November 1996; Senior Vice President of RHM and its predecessor, MHM
Corporation.
Kevin P. Hanley. Senior Vice President, Real Estate and Development of the
Company since October 1997; Vice President, Real Estate and Development of the
Company from November 1996 to October 1997; Vice President, Real Estate and
Development of MCHD from December 1994 to November 1996; Executive Vice
President of Hospitality Investment Trust from September 1994 to November
1994; Senior Vice President; Development and Acquisitions of Motel 6, L.P.
from May 1992 to September 1994; various other positions with Motel 6, L.P.
since January 1987.
Gregory D. Miller. Senior Vice President, Human Resources and Strategic
Planning of the Company since October 1997; Vice President, Marketing of MCHS
from March 1995 to October 1997; Vice President, Strategic Planning of Manor
Care from May 1992 to September 1995.
Douglas H. Verner. Senior Vice President, General Counsel and Secretary of
the Company since March 1998; Executive Vice President, General Counsel and
Secretary of Chartwell Leisure from January 1996 to March 1998; Senior Vice
President, General Counsel and Secretary of Forte Hotels, Inc. from November,
1990 to January 1996.
Charles M. Warczak, Jr. Vice President, Finance and Systems of the Company
since April 1998; Vice President, Hotel Accounting of the Company from March
1997 to April 1998; Vice President, Finance and Controller of the Company from
November 1996 to March 1997; Vice President, Finance of Manor Care from 1992
to November 1996.
Pamela M. Williams. Vice President, Assistant General Counsel and Assistant
Secretary of the Company since October 1997; Senior Attorney of the Company
from December 1996 to October 1997, Attorney from November 1996 to December
1996; Attorney of Manor Care from December 1995 to November 1996; Associate of
Hogan and Hartson, L.L.P. from August 1988 to December 1995.
S-48
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), each
Underwriter named below (the "Underwriters") has severally agreed to purchase,
and the Company has agreed to sell to such Underwriter the number of shares of
Common Stock set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Smith Barney Inc. ...........................................
Bear, Stearns & Co. Inc. ........................................
NationsBanc Montgomery Securities LLC ...........................
---------
Total.......................................................... 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered in the
Offering are subject to the approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to take and pay
for all of the Common Stock offered in the Offering (other than those covered
by the over-allotment option described below) if any such shares are taken.
The Underwriters propose to offer part of the shares directly to the public
at the public offering price set forth on the cover page of this Prospectus
and part of the shares to certain dealers at a price which represents a
concession not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the Common Stock is
released for sale to the public, the public offering price and such
concessions may be changed by the Underwriters. The Underwriters have advised
the Company that they do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to 750,000
additional shares of Common Stock at the price to the public set forth on the
cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, in connection with the Offering. To the
extent such option is exercised, each Underwriter will be obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number of shares set forth opposite such
Underwriter's name in the preceding table bears to the total number of shares
listed in such table.
Until 120 days after the closing date of the Offering, the Company, its
officers and directors, Bruce Bainum and Barbara Bainum have agreed, subject
to certain exceptions, not to sell, offer, solicit an offer to buy, contract
to sell, grant any option to purchase, pledge or otherwise dispose of, or file
(or participate in the filing of) a registration statement with the Commission
in respect of, or establish or increase a put equivalent position or liquidate
or decrease a call equivalent position within the meaning of Section 16 of the
Exchange Act and the rules of the Commission promulgated thereunder with
respect to, any shares of capital stock of the Company, or any securities
convertible into or exercisable or exchangeable for such capital stock,
without the prior written consent of Smith Barney Inc., other than shares of
Common Stock disposed of as bona fide gifts approved by Smith Barney Inc.
In connection with this Offering and in compliance with applicable law, the
Underwriters may over-allot (i.e. sell more shares of Common Stock than the
total amount shown on the list of Underwriters and participants
S-49
<PAGE>
which appears above) and may effect transactions which stabilize, maintain or
otherwise affect the market price of the Common Stock at levels above those
which might otherwise prevail in the open market. Such transactions may
include placing bids for the Common Stock or effecting purchases of the Common
Stock for the purpose of pegging, fixing or maintaining the price of the
Common Stock or for the purpose of reducing a syndicate short position created
in connection with the Offering. A syndicate short position may be covered by
exercise of the option described above in lieu of or in addition to open
market purchases. In addition, the contractual arrangements among the
Underwriters include a provision whereby, if an Underwriter purchases Common
Stock in the open market for the account of the underwriting syndicate and the
securities purchased can be traced to a particular Underwriter, the
underwriting syndicate may require the Underwriter in question to purchase the
Common Stock in question at the cost price to the syndicate or may recover
from (or decline to pay to) the Underwriter in question the selling concession
applicable to the securities in question. The Underwriters are not required to
engage in any of these activities and any such activities, if commenced, may
be discontinued at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities that may be incurred in connection with the Offering,
including liabilities under the Securities Act.
Any Underwriter may engage in stabilizing transactions in accordance with
Rule 104 of Regulation M under the Exchange Act. Rule 104 permits stabilizing
bids to purchase the underlying security so long as the stabilizing bids do
not exceed a specific maximum. The Underwriters may over-allot shares of
Common Stock in connection with an offering of Common Stock, thereby creating
a short position in the Underwriters' account. These transactions, if
commenced, may be discontinued at any time.
The Underwriters may engage in transactions with and perform services for
the Company in the ordinary course of business.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This section supersedes the first paragraph of "Information Incorporated by
Reference" in the accompanying Prospectus. The following documents, which have
been filed with the Commission under the Exchange Act, are incorporated by
reference into the accompanying Prospectus:
(a) Transition Report on Form 10-K for the transition period from June 1, 1997
to December 31, 1997;
(b) Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998;
(c) Current Report on Form 8-K filed with the Commission on February 12, 1998;
(d) Current Report on Form 8-K filed with the Commission on March 11, 1998;
(e) Proxy Statement dated March 30, 1998; and
(f) Description of the Company's Common Stock included in a Registration
Statement on Form 10 filed with the Commission on October 10, 1996.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby will be passed upon for the Company by Latham & Watkins, Washington,
D.C. and for the Underwriters by Cravath, Swaine & Moore, New York, New York.
S-50
<PAGE>
PROSPECTUS
$250,000,000
SUNBURST HOSPITALITY CORPORATION
DEBT SECURITIES, PREFERRED STOCK,
COMMON STOCK, WARRANTS, AND SUBSCRIPTION RIGHTS
---------------
Sunburst Hospitality Corporation, a Delaware corporation ("Sunburst" or the
"Company"), directly or through agents, dealers, or underwriters designated
from time to time, may offer, issue and sell, (i) debt securities of the
Company consisting of debentures, notes or other evidences of indebtedness
(the "Debt Securities"), (ii) shares of common stock of the Company, par value
$.01 per share (the "Common Stock"), (iii) shares of preferred stock of the
Company, par value $.01 per share (the "Preferred Stock"), (iv) warrants to
purchase Common Stock, Preferred Stock or Debt Securities (the "Warrants"),
and (v) rights ("Rights") to subscribe for Preferred Stock, Common Stock or
Warrants to purchase Preferred Stock or Common Stock with an aggregate public
offering price of up to $250,000,000. The Debt Securities may be issued as
exchangeable and/or Convertible Debt Securities, exchangeable for or
convertible into shares of Common Stock or Preferred Stock. The Preferred
Stock may be issued as exchangeable and/or convertible Preferred Stock,
exchangeable for or convertible into Debt Securities or shares of Common
Stock. The Debt Securities, the Common Stock, the Preferred Stock, the
Warrants and the Rights may be offered, separately or together, in one or more
separate classes or series and in amounts, at prices and on terms to be
determined at the time of offering and to be set forth in one or more
supplements to this Prospectus (each, a "Prospectus Supplement").
Additionally, the Company may issue Rights to its stockholders (any such
issuance, a "Rights Offering"). The Debt Securities, the Common Stock, the
Preferred Securities and the Rights are sometimes referred to together as the
"Offered Securities".
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Debt
Securities, the specific designation, aggregate principal amount, designated
currency (or currency unit), purchase price, maturity, interest rate (or
manner of calculation thereof), time of payment of interest (if any), terms
(if any) of the subordination, redemption or conversion thereof, and any other
specific terms of the Debt Securities, (ii) in the case of Common Stock, the
number of shares, purchase price and terms of the offering and sale thereof,
(iii) in the case of Preferred Stock, the specific designation, number of
shares, liquidation preference, purchase price, dividend, voting, redemption,
exchange and conversion provisions and any other specific terms of the
Preferred Stock, (iv) in the case of Warrants, the specific designations,
number, duration, purchase price, exercise price, detachability and any other
terms in connection with the offering, sale and exercise of the Warrants, as
well as the terms on which and the Offered Securities for which such Warrants
may be exercised, and (v) in the case of Rights, the designations, number,
exercise price and duration, transferability, any overscription privilege and
any other terms in connection with the distribution of the Rights, as well as
the terms on which and the securities for which such Rights may be exercised.
The Company's Common Stock is traded on The New York Stock Exchange (the
"NYSE") under the symbol "SNB." Any Common Stock sold pursuant to a Prospectus
Supplement may be listed on the NYSE. On March 12, 1998, the last reported
sales price of the Common Stock on the NYSE was $8.56 per share. The Company
has not determined whether any of the other Offered Securities will be listed
on the NYSE. If the Company decides to seek listing of any such Offered
Securities, the Prospectus Supplement relating thereto will disclose such
exchange or market. The applicable Prospectus Supplement will also contain
information, where applicable, about certain material United States Federal
income tax considerations relating to the Offered Securities covered by such
Prospectus Supplement.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------
The Offered Securities may be offered directly to the Company's stockholders
(in the case of Rights) or to purchasers, to or through agents, underwriters
or dealers, as designated from time to time, or through a combination of such
methods, each as set forth in the applicable Prospectus Supplement. The
Company reserves the sole right to accept, and together with its agents, from
time to time, to reject in whole or in part any proposed purchase of Offered
Securities to be made directly or through agents. Certain terms of the
offering and sale of the Offered Securities, including, where applicable, the
names of any underwriters, dealers, or agents, any applicable commission,
discounts and other items constituting compensation of such underwriters,
dealers or agents, and the proceeds to the Company from such sale will be set
forth in the accompanying Prospectus Supplement. See "Plan of Distribution"
for possible indemnification arrangements for underwriters, dealers and
agents.
No Offered Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of the
Offered Securities.
THE DATE OF THIS PROSPECTUS IS MARCH 16, 1998.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND THEREIN, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR ANY
PROSPECTUS SUPPLEMENT SHALL CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY OFFERED SECURITIES IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE HEREIN OR IN ANY PROSPECTUS SUPPLEMENT IS CORRECT AS
OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR OF SUCH PROSPECTUS SUPPLEMENT.
IN CONNECTION WITH THE OFFERING OF CERTAIN OFFERED SECURITIES, CERTAIN
PERSONS PARTICIPATING IN SUCH OFFERING MAY EFFECT TRANSACTIONS WHICH
STABILIZE, MAINTAIN OR OTHERWISE EFFECT THE MARKET PRICES OF SUCH OFFERED
SECURITIES OR OTHER SECURITIES OF THE COMPANY INCLUDING OVER-ALLOTMENT,
STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE
IMPOSITION OF A PENALTY BID, IN CONNECTION WITH AN OFFERING OF OFFERED
SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Offered Securities. This Prospectus and any Prospectus Supplement do not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information about the Company and
the Offered Securities, reference is hereby made to the Registration
Statement, including the exhibits and schedules filed as a part thereof and
otherwise incorporated therein. Statements made in this Prospectus as to the
contents of any agreement or other document referred to herein are not
necessarily complete, and in each instance, reference is made to the copy of
such document so filed, each such statement being qualified in its entirety by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission. The Registration Statement, including the exhibits thereto, as
well as such reports and other information filed by the Company with the
Commission, can be inspected, without charge, and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington D.C., 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
also maintains a site on the World Wide Web at http://www.sec.gov., which
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission and certain of the Company's
filings are available at such web site. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
ii
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are hereby incorporated by reference in, and shall be deemed to be a part
of, this Prospectus:
(a) Annual Report on Form 10-K for the fiscal year ended May 31, 1997
(the "Form 10-K");
(b) Quarterly Report on Form 10-Q for the quarterly period ended August
31, 1997 filed with the Commission on October 15, 1997;
(c) Amended Report on Form 10-Q/A for the quarter ended August 31, 1997
filed with the Commission on October 17, 1997;
(d) Current Report on Form 8-K filed with the Commission on October 1,
1997;
(e) Current Report on Form 8-K filed with the Commission on October 29,
1997;
(f) Current Report on Form 8-K filed with the Commission on December 17,
1997.
(g) Quarterly Report on Form 10-Q for the quarterly period ended November
30, 1997 filed with the Commission on January 14, 1998;
(h) Amended Report on Form 10-Q/A for the quarter ended November 30, 1997
filed with the Commission on February 12, 1998.
(i) Current Report on Form 8-K filed with the Commission on February 12,
1998.
(j) Current Report on Form 8-K filed with the Commission on March 11,
1998;
(k) Description of the Company's Common Stock included in a Registration
Statement on Form 10 filed with the Commission on October 10, 1996;
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of all Offered Securities to which this
Prospectus relates shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the respective dates of filing of such
documents. Any statement contained in this Prospectus or in any Prospectus
Supplement or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus and any Prospectus Supplement to the extent that a statement
contained herein or in any Prospectus Supplement or in any other subsequently
filed document which also is incorporated or deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus or any Prospectus
Supplement.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon request, a copy
of any of the foregoing documents (other than exhibits incorporated by
reference into such document). Requests for documents should be submitted to
the Corporate Secretary, Sunburst Hospitality Corporation, 10770 Columbia
Pike, Silver Spring, MD 20901. The information relating to the Company
contained in this Prospectus does not purport to be comprehensive and should
be read together with the information contained in the documents incorporated
or deemed to be incorporated by reference herein.
iii
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the documents that are incorporated herein by
reference, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Such forward-
looking statements relate to, among other things, capital expenditures, cost
reduction, cash flow and operating improvements and are indicated by words or
phrases such as "anticipate," "estimate," "plans," "projects," "management
believes," "the Company believes," "the Company intends" and similar words or
phrases. Such statements are subject to inherent uncertainties and risks, that
could cause the actual results, performance or achievements of the Company,
including among others: general business and economic conditions in the
Company's operating regions; pricing pressures and other competitive factors;
the Company's substantial leverage, the Company's plans to realize cash
proceeds through leveraging its remaining assets and its plans to make
selected strategic investments and acquisitions and develop new hotels.
Consequently, actual events and results may vary significantly from those
included in or contemplated or implied by such statements. The Company
disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
iv
<PAGE>
THE COMPANY
Sunburst is a leading national hotel company with a portfolio of 76 hotels
containing 10,859 rooms located in 25 states as of November 30, 1997. Each
hotel is operated by the Company pursuant to a franchise agreement with Choice
Hotels International, Inc. ("Choice"), under one of the Choice franchise
brands (Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo
Lodge(R) and MainStay Suitessm) and Sunburst is Choice's largest franchisee.
Sunburst's hotels operate in one of three principal segments of the lodging
industry: extended stay, full service and limited service.
The Company was formed under the name Choice Hotels Holdings, Inc. on June
27, 1996 as a wholly owned subsidiary of Manor Care, Inc., a Delaware
corporation, in order to hold Manor Care's hotel ownership and franchising
business. On November 1, 1996, Manor Care distributed to its stockholders, on
a pro rata basis, all of the stock of the Company (which was re-named "Choice
Hotels International, Inc.) (the "Company Spin-off"). At the time of the
Company Spin-off, Choice was a wholly owned subsidiary of the Company under
the name "Choice Hotels Franchising, Inc." As a subsidiary of the Company,
Choice conducted the hotel franchising business that it formerly conducted as
a subsidiary of Manor Care.
On October 15, 1997, the Company distributed to its stockholders, on a pro
rata basis, all of the stock of Choice (the "Choice Spin-off"). At the time of
the Choice Spin-off, the Company changed its name to "Sunburst Hospitality
Corporation" and Choice changed its name to "Choice Hotels International,
Inc." Choice currently operates its hotel franchising business as a separate
corporation.
The Company's principal executive offices are located at 10770 Columbia
Pike, Silver Spring, MD 20901, and its telephone number is (301) 979-5000.
USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company anticipates that any net proceeds from the sale of Offered Securities
will be used for general corporate purposes, which may include, but are not
limited to, working capital, capital expenditures, acquisitions and the
repayment, refinancing or repurchase of the Company's indebtedness or capital
stock, including the Company's outstanding long-term debt securities. The
factors which the Company will consider in any refinancing will include the
amount and characteristics of any Offered Securities issued and may include,
among others, the impact of such refinancing on the Company's liquidity, debt-
to-capital ratio and earnings per share. When a particular series of Offered
Securities is offered, the Prospectus Supplement relating thereto will set
forth the Company's intended use for the net proceeds received from the sale
of such Offered Securities. Pending the application of the net proceeds, the
Company expects to invest such proceeds in short-term, interest-bearing
instruments or other investment-grade debt securities or to reduce
indebtedness under the Company's bank credit agreement.
RISK FACTORS
CERTAIN OF THE OFFERED SECURITIES TO BE OFFERED HEREBY THEMSELVES MAY
INVOLVE A HIGH DEGREE OF RISK. SUCH RISKS WILL BE SET FORTH IN THE PROSPECTUS
SUPPLEMENT RELATING TO SUCH OFFERED SECURITIES.
1
<PAGE>
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's ratio of earnings to combined
fixed charges and preferred stock dividends on a historical basis for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
NOVEMBER 30, FISCAL YEAR
---------------- --------------------
1997 1996 1997 1996 1995
------- ------- ----- -------- -----
(IN THOUSANDS EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges and preferred stock
dividends(a)......................... 1.9 2.3 1.7 -- --
Deficiency of earnings to combined
fixed charges and preferred stock
dividends(b)......................... -- -- -- $ 21,874 $ 780
</TABLE>
- --------
(a) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by total fixed
charges. Fixed charges represent interest expense (including capitalized
interest), the amortization of debt issuance costs and the portion of
rental expense which represents interest.
(b) The deficiency of earnings to fixed charges in fiscal year 1996 is the
result of a $24.5 million provision for asset impairment. The ratio of
earnings to fixed charges for fiscal year 1996 excluding the impact of the
provision for asset impairment is 1.2. The deficiency of earnings to fixed
charges in fiscal year 1995 is largely the result of depreciation and
amortization of $6.0 million.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of "earnings" to fixed charges of
the Company for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
NOVEMBER 30, FISCAL YEAR
---------------- --------------------
1997 1996 1997 1996 1995
------- ------- ----- -------- -----
(IN THOUSANDS EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
(a)................................... 1.9 2.3 1.7 -- --
Deficiency of earnings to fixed charges
(b)................................... -- -- -- $ 21,874 $ 780
</TABLE>
- --------
(a) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by total fixed
charges. Fixed charges represent interest expense (including capitalized
interest), the amortization of debt issuance costs and the portion of
rental expense which represents interest.
(b) The deficiency of earnings to fixed charges in fiscal year 1996 is the
result of a $24.5 million provision for asset impairment. The ratio of
earnings to fixed charges for fiscal year 1996 excluding the impact of the
provision for asset impairment is 1.2. The deficiency of earnings to fixed
charges in fiscal year 1995 is largely the result of depreciation and
amortization of $6.0 million.
2
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The Debt Securities offered hereby are to be issued under an indenture (the
"Indenture") to be executed by the Company and a trustee to be identified in
the applicable Prospectus Supplement, as Trustee (the "Trustee"). The terms of
the Debt Securities will include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"TIA") as in effect on the date of the Indenture. The Debt Securities will be
subject to all such terms, and potential purchasers of the Debt Securities are
referred to the Indenture and the TIA for a statement thereof. A copy of the
form of Indenture has been filed as an exhibit to the Registration Statement.
Section references used in this Prospectus refer to sections of the Indenture.
The Company may offer under this Prospectus up to $250,000,000 aggregate
principal amount of Debt Securities, or if Debt Securities are issued at a
discount, or in a foreign currency or composite currency, such principal
amount as may be sold for an initial public offering price of up to
$250,000,000. Unless otherwise specified in the applicable Prospectus
Supplement, the Debt Securities will represent direct, unsecured obligations
of the Company and will rank equally with all other unsecured and
unsubordinated indebtedness of the Company.
The following statements relating to the Debt Securities and the Indenture
are summaries and do not purport to be complete. Such summaries may make use
of certain terms defined in the Indenture and are qualified in their entirety
by express reference to the Indenture. Certain other specific terms of any
series of Debt Securities will be described in the applicable Prospectus
Supplement. To the extent that any particular terms of the Debt Securities
described in a Prospectus Supplement differ from any of the terms described
herein, then such terms described herein shall be deemed to have been
superseded by such Prospectus Supplement.
GENERAL
The terms of each series of Debt Securities will be established by or
pursuant to a resolution of the Board of Directors of the Company and set
forth or determined in the manner provided in an Officers' Certificate or by a
supplemental indenture. (Indenture sec. 2.2) The particular terms of each
series of Debt Securities will be described in a Prospectus Supplement
relating to such series (including any pricing supplement thereto).
The Debt Securities that may be offered under the Indenture are not limited
in aggregate principal amount. The Debt Securities may be issued in one or
more series with the same or various maturities, at par, at a premium, or at a
discount. The Prospectus Supplement (including any pricing supplement thereto)
will set forth the initial offering price, the aggregate principal amount and
the following terms of the Debt Securities in respect of which this Prospectus
is delivered: (1) the title of such Debt Securities; (2) the price or prices
(expressed as a percentage of the aggregate principal amount thereof) at which
the Debt Securities will be issued; (3) any limit on the aggregate principal
amount of such Debt Securities; (4) the date or dates on which principal on
such Debt Securities will be payable; (5) the rate or rates (which may be
fixed or variable) per annum or, if applicable, the method used to determine
such rate or rates (including any commodity, commodity index, stock exchange
index or financial index) at which such Debt Securities will bear interest, if
any, the date or dates from which such interest, if any, will accrue, the date
or dates on which such interest, if any, will commence and be payable and any
regular record date for the interest payable on any interest payment date; (6)
the place or places where principal of, premium, if any, and interest, if any,
on such Debt Securities will be payable; (7) the period or periods within
which, the price or prices at which and the terms and conditions upon which
the Debt Securities may be redeemed, in whole or in part, at the option of the
Company; (8) the obligation, if any, of the Company to redeem or purchase the
Debt Securities, in whole or in part, pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof; (9) the dates, if
any, on which and the price or prices at which the Debt Securities will be
repurchased by the Company at the option of the Holders thereof and other
detailed terms and provisions of such repurchase obligations; (10) the
denominations in which such Debt Securities may be issuable, if other than
denominations of $1,000 and any integral multiple thereof; (11) whether the
Debt Securities are to be issuable in the form of Certificated Debt Securities
(as defined below) or Global Debt Securities (as defined below); (12) the
portion of principal amount of such Debt Securities that shall be payable
3
<PAGE>
upon declaration of acceleration of the maturity date thereof, if other than
the principal amount thereof; (13) the currency of denomination of such Debt
Securities; (14) the designation of the currency, currencies or currency units
in which payment of principal of, premium, if any, and interest, if any, on
such Debt Securities will be made; (15) if payments of principal of, premium,
if any, or interest, if any, on the Debt Securities are to be made in one or
more currencies or currency units other than that or those in which such Debt
Securities are denominated, the manner in which the exchange rate with respect
to such payments will be determined; (16) the manner in which the amounts of
payment of principal of, premium, if any, or interest, if any, on such Debt
Securities will be determined, if such amounts may be determined by reference
to an index based on a currency or currencies other than that in which the
Debt Securities are denominated or designated to be payable or by reference to
a commodity, commodity index, stock exchange index or financial index; (17)
the provisions, if any, relating to any security provided for such Debt
Securities; (18) any addition to or change in the Events of Default described
herein or in the Indenture with respect to such Debt Securities; (19) any
addition to or change in the covenants described herein or in the Indenture
with respect to such Debt Securities and any change in the acceleration
provisions described herein or in the Indenture with respect to such Debt
Securities; (20) the terms and conditions, if any, upon which the Debt
Securities shall be exchanged for or converted into Common Stock or Preferred
Stock; (21) any other terms of such Debt Securities, which may modify or
delete any provision of the Indenture insofar as it applies to such series;
(22) any depositories, interest rate calculation agents, exchange rate
calculation agents or other agents with respect to the Debt Securities; and
(23) whether such Debt Securities rank as senior subordinated Debt Securities
or subordinated Debt Securities or any combination thereof; (Indenture sec.
2.2)
Debt Securities may be issued that provide for an amount less than the
stated principal amount thereof to be due and payable upon declaration of
acceleration of the maturity thereof pursuant to the terms of the Indenture
("Discount Debt Securities"). Federal income tax considerations and other
special considerations applicable to any such Discount Debt Securities will be
described in the applicable Prospectus Supplement.
Debt Securities may be issued in bearer form, with or without coupons.
Federal income tax considerations and other special considerations applicable
to bearer securities will be described in the applicable Prospectus
Supplement.
If the purchase price of any of the Debt Securities is denominated in a
foreign currency or currencies or a foreign currency unit or units, or if the
principal of and any premium and interest, if any, on any series of Debt
Securities is payable in a foreign currency or currencies or a foreign
currency unit or units, the restrictions, elections, general tax
considerations, specific terms and other information with respect to such
issue of Debt Securities and such foreign currency or currencies or foreign
currency unit or units will be set forth in the applicable Prospectus
Supplement.
EXCHANGE AND/OR CONVERSION RIGHTS
The terms, if any, on which Debt Securities of a series may be exchanged for
or converted into shares of Common Stock or Preferred Stock will be set forth
in the Prospectus Supplement relating thereto.
TRANSFER AND EXCHANGE
Each Debt Security will be represented by either one or more global
securities (a "Global Debt Security") registered in the name of The Depository
Trust Company, as Depositary (the "Depositary") or a nominee of the Depositary
(each such Debt Security represented by a Global Debt Security being herein
referred to as a "Book-Entry Debt Security"), or a certificate issued in
definitive registered form (a "Certificated Debt Security"), as set forth in
the applicable Prospectus Supplement. Except as set forth under "--Global Debt
Securities and Book-Entry System" below, Book-Entry Debt Securities will not
be issuable in certificated form.
Certificated Debt Securities. Certificated Debt Securities may be
transferred or exchanged at the Trustee's office or paying agencies in
accordance with the terms of the Indenture. No service charge will be made for
any
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transfer or exchange of Certificated Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
The transfer of Certificated Debt Securities and the right to receive the
principal of, premium, if any, and interest, if any, on such Certificated Debt
Securities may be effected only by surrender of the certificate representing
such Certificated Debt Securities and either reissuance by the Company or the
Trustee of such certificate to the new holder or the issuance by the Company
or the Trustee of a new certificate to the new Holder.
Global Debt Securities and Book-Entry System. Each Global Debt Security
representing Book-Entry Debt Securities will be deposited with, or on behalf
of, the Depositary, and registered in the name of the Depositary or a nominee
of the Depositary. Except as set forth below, Book-Entry Debt Securities will
not be exchangeable for Certificated Debt Securities and will not otherwise be
issuable as Certificated Debt Securities.
The procedures that the Depositary has indicated it intends to follow with
respect to Book-Entry Debt Securities are set forth below.
Ownership of beneficial interests in Book-Entry Debt Securities will be
limited to persons that have accounts with the Depositary for the related
Global Debt Security ("participants") or persons that may hold interests
through participants. Upon the issuance of a Global Debt Security, the
Depositary will credit, on its book-entry registration and transfer system,
the participants' accounts with the respective principal amounts of the Book-
Entry Debt Securities represented by such Global Debt Security beneficially
owned by such participants. The accounts to be credited shall be designated by
any dealers, underwriters or agents participating in the distribution of such
Book-Entry Debt Securities. Ownership of Book-Entry Debt Securities will be
shown on, and the transfer of such ownership interests will be effected only
through, records maintained by the Depositary for the related Global Debt
Security (with respect to interests of participants) and on the records of
participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to own, transfer or pledge beneficial interests in
Book-Entry Debt Securities.
So long as the Depositary for a Global Debt Security, or its nominee, is the
registered owner of such Global Debt Security, the Depositary or such nominee,
as the case may be, will be considered the sole owner or Holder of the Book-
Entry Debt Securities represented by such Global Debt Security for all
purposes under the Indenture. Except as set forth below, beneficial owners of
Book-Entry Debt Securities will not be entitled to have such securities
registered in their names, will not receive or be entitled to receive physical
delivery of a certificate in definitive form representing such securities and
will not be considered the owners or Holders thereof under the Indenture.
Accordingly, each person beneficially owning Book-Entry Debt Securities must
rely on the procedures of the Depositary for the related Global Debt Security
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a
Holder under the Indenture.
The Company understands, however, that under existing industry practice, the
Depositary will authorize the persons on whose behalf it holds a Global Debt
Security to exercise certain rights of Holders of Debt Securities, and the
Indenture provides that the Company, the Trustee and their respective agents
will treat as the Holder of a Debt Security the persons specified in a written
statement of the Depositary with respect to such Global Debt Security for
purposes of obtaining any consents or directions required to be given by
Holders of the Debt Securities pursuant to the Indenture. (Indenture sec.
2.14.6)
Payments of principal of, premium, if any, and interest on Book-Entry Debt
Securities will be made to the Depositary or its nominee, as the case may be,
as the registered holder of the related Global Debt Security. (Indenture sec.
2.14.5) None of the Company, the Trustee or any other agent of the Company or
agent of the Trustee will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in such Global Debt Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
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The Company expects that the Depositary, upon receipt of any payment of
principal of, premium, if any, or interest, if any, on a Global Debt Security,
will immediately credit participants' accounts with payments in amounts
proportionate to the respective amounts of Book-Entry Debt Securities held by
each such participant as shown on the records of such Depositary. The Company
also expects that payments by participants to owners of beneficial interests
in Book-Entry Debt Securities held through such participants will be governed
by standing customer instructions and customary practices, as is now the case
with the securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
If the Depositary is at any time unwilling or unable to continue as
Depositary or ceases to be a clearing agency registered under the Exchange
Act, and a successor Depositary registered as a clearing agency under the
Exchange Act is not appointed by the Company within 90 days, the Company will
issue Certificated Debt Securities in exchange for each Global Debt Security.
In addition, the Company may at any time and in its sole discretion determine
not to have the Book-Entry Debt Securities of any series represented by one or
more Global Debt Securities and, in such event, will issue Certificated Debt
Securities in exchange for the Global Debt Securities of such series. Global
Debt Securities will also be exchangeable by the Holders for Certificated Debt
Securities if an Event of Default with respect to the Book Entry Debt
Securities represented by such Global Debt Securities has occurred and is
continuing. Any Certificated Debt Securities issued in exchange for a Global
Debt Security will be registered in such name or names as the Depositary shall
instruct the Trustee. It is expected that such instructions will be based upon
directions received by the Depositary from participants with respect to
ownership of Book-Entry Debt Securities relating to such Global Debt Security.
The foregoing information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
NO PROTECTION IN THE EVENT OF CERTAIN TRANSACTIONS
Unless otherwise set forth in the Prospectus Supplement, there are no
covenants or other provisions in the Indenture providing for a put or
increased interest or otherwise that would afford holders of Debt Securities
additional protection in the event of a recapitalization transaction, a change
of control of the Company or a highly leveraged transaction.
COVENANTS
Unless otherwise indicated in this Prospectus or a Prospectus Supplement,
the Debt Securities will not have the benefit of any covenants that limit or
restrict the Company's business or operations, the pledging of the Company's
assets or the incurrence of indebtedness of the Company.
The applicable Prospectus Supplement will describe any material covenants in
respect of a series of Debt Securities. Other than the covenants of the
Company included in the Indenture as described above or as described in the
applicable Prospectus Supplement, there are no covenants or other provisions
in the Indenture providing for a put or increased interest or otherwise that
would afford holders of Debt Securities additional protection in the event of
a recapitalization transaction, a change of control of the Company or a highly
leveraged transaction.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all of its properties and assets to,
any Person (a "successor Person") unless (i) the Company is the surviving
corporation or the successor Person (if other than the Company) is a
corporation, partnership, trust or other entity organized and validly existing
under the laws of any U.S. domestic jurisdiction and expressly assumes the
Company's obligations on the Debt Securities and under the Indenture, (ii)
immediately after giving effect to the transaction, no Event of Default, and
no event which, after notice or lapse of time, or both, would become an Event
of Default, shall have occurred and be continuing under the Indenture and
(iii) certain other conditions are met. (Indenture sec. 5.1)
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EVENTS OF DEFAULT
Unless otherwise specified in the applicable Prospectus Supplement, the
following will be Events of Default under the Indenture with respect to Debt
Securities of any series: (a) default in the payment of any interest upon any
Debt Security of that series when it becomes due and payable, and continuance
of such default for a period of 30 days (unless the entire amount of such
payment is deposited by the Company with the Trustee or with a paying agent
prior to the expiration of such period of 30 days); (b) default in the payment
of principal of or premium, if any, on any Debt Security of that series when
due and payable, at maturity, upon redemption or otherwise; (c) default in the
deposit of any sinking fund payment, when and as due in respect of any Debt
Security of that series; (d) default in the performance or breach of any other
covenant or warranty of the Company in the Indenture (other than a covenant or
warranty that has been included in the Indenture solely for the benefit of a
series of Debt Securities other than that series), which default continues
uncured for a period of 30 days after written notice to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the outstanding Debt Securities of that series
as provided in the Indenture; (e) certain events of bankruptcy, insolvency or
reorganization with respect to the Company; and (f) any other Event of Default
provided with respect to Debt Securities of that series that is described in
the Prospectus Supplement accompanying this Prospectus. No Event of Default
with respect to a particular series of Debt Securities (except as to certain
events in bankruptcy, insolvency or reorganization with respect to the
Company) necessarily constitutes an Event of Default with respect to any other
series of Debt Securities. (Indenture sec. 6.1). The occurrence of an Event of
Default may constitute an event of default under the Company's bank credit
agreements in existence from time to time. In addition, the occurrence of
certain Events of Default or an acceleration under the Indenture may
constitute an event of default under certain other indebtedness of the Company
outstanding from time to time.
If an Event of Default with respect to Debt Securities of any series at the
time outstanding occurs and is continuing, then in every such case the Trustee
or the holders of not less than 25% in principal amount of the outstanding
Debt Securities of that series may, by a notice in writing to the Company (and
to the Trustee if given by the Holders), declare to be due and payable
immediately the principal (or, if the Debt Securities of that series are
Discount Debt Securities, such portion of the principal amount as may be
specified in the terms of that series) of and accrued and unpaid interest, if
any, on all Debt Securities of that series. In the case of an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization, the
principal (or such specified amount) of and accrued and unpaid interest, if
any, on all outstanding Debt Securities shall ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder of outstanding Debt Securities. At any time after
a declaration of acceleration with respect to Debt Securities of any series
has been made, but before a judgment or decree for payment of the money due
has been obtained by the Trustee, the holders of a majority in principal
amount of the outstanding Debt Securities of that series may rescind and annul
such acceleration if all Events of Default, other than the non-payment of
accelerated principal and interest, if any, with respect to Debt Securities of
that series, have been cured or waived as provided in the Indenture.
(Indenture sec. 6.2) For information as to waiver of defaults see the
discussion set forth below under "--Modification and Waiver."
The Indenture provides that the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of outstanding Debt Securities, unless the Trustee receives indemnity
satisfactory to it against any loss, liability or expense. (Indenture sec.
7.1(e)) Subject to certain rights of the Trustee, the Holders of a majority in
principal amount of the outstanding Debt Securities of any series shall have
the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee with respect to the Debt Securities of that series.
(Indenture sec. 6.12)
No Holder of any Debt Security of any series will have any right to
institute any proceeding, judicial or otherwise, with respect to the Indenture
or for the appointment of a receiver or trustee, or for any remedy under the
Indenture, unless such Holder shall have previously given to the Trustee
written notice of a continuing Event
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of Default with respect to Debt Securities of that series and unless also the
Holders of at least 25% in principal amount of the outstanding Debt Securities
of that series shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as trustee, and the
Trustee shall not have received from the Holders of a majority in principal
amount of the outstanding Debt Securities of that series a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. (Indenture sec. 6.7) Notwithstanding the foregoing,
the Holder of any Debt Security will have an absolute and unconditional right
to receive payment of the principal of, premium, if any, and any interest on
such Debt Security on or after the due dates expressed in such Debt Security
and to institute suit for the enforcement of any such payment. (Indenture sec.
6.8)
The Indenture requires the Company, within 120 days after the end of each of
its fiscal years, to furnish to the Trustee a statement as to compliance with
the Indenture. (Indenture sec. 4.3) The Indenture provides that the Trustee
may withhold notice to the Holders of Debt Securities of any series of any
Default or Event of Default (except in payment on any Debt Securities of such
series) with respect to Debt Securities of such series if it in good faith
determines that withholding such notice is in the interest of the Holders of
such Debt Securities. (Indenture sec. 7.5)
MODIFICATION AND WAIVER
Modifications to, and amendments of, the Indenture may be made by the
Company and the Trustee with the consent of the Holders of at least a majority
in principal amount of the outstanding Debt Securities of each series affected
by such modifications or amendments; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Debt Security affected thereby: (a) reduce the amount of Debt
Securities whose Holders must consent to an amendment or waiver; (b) reduce
the rate of or extend the time for payment of interest (including default
interest) on any Debt Security; (c) reduce the principal of or premium, if
any, on or change the fixed maturity of any Debt Security or reduce the amount
of, or postpone the date fixed for, the payment of any sinking fund or
analogous obligation with respect to any series of Debt Securities; (d) reduce
the principal amount of Discount Debt Securities payable upon acceleration of
the maturity thereof; (e) waive a Default or an Event of Default in the
payment of the principal of, premium, if any, or interest, if any, on any Debt
Security (except a rescission of acceleration of the Debt Securities of any
series by the Holders of at least a majority in aggregate principal amount of
the then outstanding Debt Securities of such series and a waiver of the
payment default that resulted from such acceleration); (f) make the principal
of or premium, if any, or interest, if any, on any Debt Security payable in
currency other than that stated in the Debt Security; (g) make any change to
certain provisions of the Indenture relating to, among other things, the right
of Holders of Debt Securities to receive payment of the principal of, premium,
if any, and interest, if any, on such Debt Securities and to institute suit
for the enforcement of any such payment and to waivers or amendments; or
(h) waive a redemption payment with respect to any Debt Security. (Indenture
sec. 9.3) The Company and the Trustee may amend the Indenture of the Debt
Securities without notice to or consent of any holder of a Debt Security; (i)
to cure any ambiguity, defect or inconsistency; (ii) to comply with the
Indenture's provisions regarding successor corporations; (iii) to comply with
any requirements of the Commission in connection with the qualification of the
Indenture under the TIA; (iv) to provide for Global Debt Securities in
addition to or in place of Certificated Debt Securities; (v) to add to, change
or eliminate any of the provisions of the Indenture in respect of one or more
series of Debt Securities; provided however, that any such addition, change or
elimination (A) shall neither (i) apply to any Debt Security of any series
created prior to the execution of such amendment and entitled to the benefit
of such provision, nor (2) modify the rights of a holder of any such Debt
Security with respect to such provision, or (B) shall become effective only
when there is no outstanding Debt Security of any series created prior to such
amendment and entitled to the benefit of such provisions; (vi) to make any
change that does not adversely affect in any material respect the interest of
any holder; or (vii) to establish additional series of Debt Securities as
permitted by the Indenture.
The Holders of at least a majority in principal amount of the outstanding
Debt Securities of any series may on behalf of the Holders of all Debt
Securities of that series waive, insofar as that series is concerned,
compliance
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by the Company with provisions of the Indenture other than certain specified
provisions. (Indenture sec. 9.2) The Holders of a majority in principal amount
of the outstanding Debt Securities of any series may on behalf of the Holders
of all the Debt Securities of such series waive any past default under the
Indenture with respect to such series and its consequences, except a default
in the payment of the principal of, premium, if any, or any interest, if any,
on any Debt Security of that series or in respect of a covenant or provision
which cannot be modified or amended without the consent of the Holder of each
outstanding Debt Security of such series affected; provided, however, that the
Holders of a majority in principal amount of the outstanding Debt Securities
of any series may rescind an acceleration and its consequences, including any
related payment default that resulted from such acceleration. (Indenture sec.
6.13)
DEFEASANCE OF SECURITIES AND CERTAIN COVENANTS IN CERTAIN CIRCUMSTANCES
Legal Defeasance. The Indenture provides that, unless otherwise provided by
the terms of the applicable series of Debt Securities, the Company may be
discharged from any and all Obligations in respect of the Debt Securities of
any series (except for certain obligations to register the transfer or
exchange of Debt Securities of such series, to replace stolen, lost or
mutilated Debt Securities of such series, and to maintain paying agencies and
certain provisions relating to the treatment of funds held by paying agents)
upon the deposit with the Trustee, in trust, of money and/or U.S. Government
obligations or, in the case of Debt Securities denominated in a single
currency other than U.S. Dollars, Foreign Government Obligations (as defined
below), that, through the payment of interest and principal in respect thereof
in accordance with their terms, will provide money in an amount sufficient in
the opinion of a nationally recognized firm of independent public accountants
to pay and discharge each installment of principal (and premium, if any) and
interest, if any, on and any mandatory sinking fund payments in respect of the
Debt Securities of such series on the stated maturity of such payments in
accordance with the terms of the Indenture and such Debt Securities. Such
discharge may occur only if, among other things, the Company shall have
delivered to the Trustee an opinion of counsel stating that the Company has
received from, or there has been published by, the United States Internal
Revenue Service a ruling or, since the date of execution of the Indenture,
there has been a change in the applicable United States federal income tax
law, in either case to the effect that, and based thereon such opinion shall
confirm that, the Holders of the Debt Securities of such series will not
recognize income, gain or loss for United States federal income tax purposes
as a result of such deposit, defeasance and discharge and will be subject to
United States federal income tax on the same amounts and in the same manner
and at the same times as would have been the case if such deposit, defeasance
and discharge had not occurred. (Indenture sec. 8.3)
Defeasance of Certain Covenants. The Indenture provides that, unless
otherwise provided by the terms of the applicable series of Debt Securities,
upon compliance with certain conditions, (i) the Company may omit to comply
with the covenants described above under "--Consolidation, Merger and Sale of
Assets" and certain other covenants set forth in the Indenture, as well as any
additional restrictive covenants, or other provisions which may be set forth
in the applicable Prospectus Supplement, and any omission to comply with such
covenants will not constitute a Default or an Event of Default with respect to
the Debt Securities of such series ("covenant defeasance"). The conditions
include: the deposit with the Trustee of money and/or U.S. Government
Obligations or, in the case of Debt Securities denominated in a single
currency other than U.S. Dollars, Foreign Government Obligations, that,
through the payment of interest and principal in respect thereof in accordance
with their terms, will provide money in an amount sufficient in the opinion of
a nationally recognized firm of independent public accountants to pay and
discharge each installment of principal of, premium, if any, and interest, if
any, on and any mandatory sinking fund payments in respect of the Debt
Securities of such series on the stated maturity of such payments in
accordance with the terms of the Indenture and such Debt Securities; and the
delivery to the Trustee of an opinion of counsel to the effect that the
Holders of the Debt Securities of such series will not recognize income, gain
or loss for United States federal income tax purposes as a result of such
deposit and related covenant defeasance and will be subject to United States
federal income tax on the same amounts and in the same manner and at the same
times as would have been the case if such deposit and related covenant
defeasance had not occurred. (Indenture sec. 8.4)
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Covenant Defeasance and Events of Default. In the event the Company
exercises its option to effect covenant defeasance with respect to any series
of Debt Securities and the Debt Securities of such series are declared due and
payable because of the occurrence of any Event of Default, the amount of money
and/or U.S. Government Obligations or Foreign Government obligations on
deposit with the Trustee will be sufficient to pay amounts due on the Debt
Securities of such series at the time of their stated maturity but may not be
sufficient to pay amounts due on the Debt Securities of such series at the
time of the acceleration resulting from such Event of Default. However, the
Company shall remain liable for such payments.
"Foreign Government Obligations" means, with respect to Debt Securities of
any series that are denominated in a currency other than U.S. Dollars, (i)
direct obligations of the government that issued or caused to be issued such
currency for the payment of which obligations its full faith and credit is
pledged or (ii) obligations of a Person controlled or supervised by or acting
as an agency or instrumentality of such government the timely payment of which
is unconditionally guaranteed as a full faith and credit obligation by such
government, which, in either case under clauses (i) or (ii), are not callable
or redeemable at the option of the issuer thereof.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the internal laws of the State of New York. (Indenture sec.
10.10).
REGARDING THE TRUSTEE
The Trustee with respect to any series of Debt Securities will be identified
in the Prospectus Supplement relating to such Debt Securities. The Indenture
and the provision of the TIA incorporated by reference therein contain certain
limitation on the rights of the Trustee, should it become a creditor of the
Company, to obtain payments of claims in certain cases, or to realize on
certain property received in respect of any such claim, as security or
otherwise. The Trustee and its affiliates may engage in, and will be permitted
to continue to engage in, other transaction with the Company and its
affiliates, provided, however, that if it acquires any conflicting interest
(as defined in the TIA), it must eliminate such conflict or resign.
The holders of a majority in principal amount of the then outstanding Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee. The TIA and the Indenture provide that in the case an Event of
Default shall occur (and be continuing), the Trustee will be required, in the
exercise of its rights and powers, to use the degree of care and skill of a
prudent man in the conduct of his own affairs. Subject to such provision, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any of the holders of the Debt
Securities issued thereunder, unless they have offered to the Trustee
indemnity satisfactory to it.
DESCRIPTION OF PREFERRED STOCK
Under the Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), shares of Preferred Stock may be issued from
time to time, in one or more classes or series, as authorized by the Board of
Directors, generally without the approval of the stockholders. Prior to
issuance of shares of each series, the Board of Directors is required by the
General Corporation Law of the State of Delaware (the "DGCL") and the
Certificate of Incorporation to adopt resolutions and file a Certificate of
Designation (the "Certificate of Designation") with the Secretary of State of
the State of Delaware, fixing for each such class or series the designation,
powers, preferences and rights of the shares of such class or series and the
qualifications, limitations or restrictions thereon, including, but not
limited to, dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
the redemption price or prices, and the liquidation preferences as are
permitted by the DGCL. The Board of Directors could authorize the issuance of
shares of Preferred Stock with terms and conditions which could have the
effect of discouraging a
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takeover or other transaction which holders of some, or a majority, of such
shares might believe to be in their best interest or in which holders of some,
or a majority, of such shares might receive a premium for their shares over
the then-market price of such shares.
Subject to limitations prescribed by the DGCL, the Certificate of
Incorporation and the Amended and Restated Bylaws of the Company (the
"Bylaws"), the Board of Directors is authorized to fix the number of shares
constituting each class or series of Preferred Stock and the designations and
powers, preferences and relative, participating, optional or other special
rights, including such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of assets, conversion
or exchange, and such other subjects or matters as may be fixed by resolution
of the Board of Directors or duly authorized committee thereof. The Preferred
Stock offered hereby will, when issued, be fully paid and nonassessable and
will not have, or be subject to, any preemptive or similar rights.
Reference is made to the Prospectus Supplement relating to the class or
series of Preferred Stock being offered for the specific terms thereof,
including:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the purchase price of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) Whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provisions for a sinking fund, if any, for such Preferred Stock;
(7) The provisions for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange or
market;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock of the Company, including the
conversion price (or manner of calculation thereof) and conversion period;
(10) The terms and conditions, if applicable, upon which Preferred Stock
will be exchangeable into Debt Securities of the Company, including the
exchange price (or manner of calculation thereof) and exchange period);
(11) Voting rights, if any, of such Preferred Stock;
(12) Whether interests in such Preferred Stock will be represented by
depositary shares;
(13) A discussion of any material and/or special United States federal
income tax considerations applicable to such Preferred Stock;
(14) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(15) Any limitations on issuance of any class or series of Preferred
Stock ranking senior to or on a parity with such series of Preferred Stock
as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; and
(16) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
11
<PAGE>
DESCRIPTION OF COMMON STOCK
The Company's authorized common stock consists of 60,000,000 shares which
are designated as Common Stock, par value, $.01 per share ("Common Stock"),
19,956,912 shares of which were issued and outstanding as of February 4, 1998.
Holders of Common Stock are entitled to receive, subject to preferences that
may be applicable from time to time with respect to any outstanding preferred
stock, such dividends as are declared by the Company's Board of Directors, one
vote for each share at all meetings of stockholders, and, subject to
preferences that may be applicable from time to time with respect to any
outstanding preferred stock, the remaining assets of the Company upon
liquidation, dissolution or winding up of the Company. The Company may issue
additional shares of common stock without further stockholder approval, up to
the maximum authorized number of shares, except as may be otherwise required
by applicable law or stock exchange regulations. The dividend policy of the
Company is determined by its Board of Directors. The terms of the Company's
current credit facility restrict the ability of the Company to pay dividends.
Shares of common stock may be issued from time to time in one or more
classes or series. With respect to the issuance of common shares of any class
or series, the Company's Board of Directors is authorized to determine,
without any further action by the holders of Common Stock, among other things,
the dividend rights, dividend rate, conversion rights, voting rights and
rights and terms of redemption, as well as the number of shares constituting
such class or series. Should the Company's Board of Directors elect to
exercise its authority, the rights and privileges of holders of Common Stock
could be made subject to rights and privileges of any other series of Common
Stock. The Company has no present plans to issue any common stock of a class
or series other than Common Stock.
Holders of shares of Common Stock have no preemptive or other similar
rights. The shares of Common Stock are not subject to redemption or a sinking
fund.
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying any change of
control of the Company and may maintain the incumbency of the Board of
Directors and management. The authorization of 5,000,000 shares of preferred
stock makes it possible for the Board of Directors to issue preferred stock
with voting or other rights or preferences that could impede the success of
any attempt to effect a change of control of the Company. In addition, the
Certificate of Incorporation provides for three classes of directors serving
for staggered three-year terms. Under the DGCL, subject to certain
inapplicable exceptions, directors on a classified board may only be removed
by shareholders for cause. This provision could also impede the success of any
attempt to effect a change of control of the Company.
The Company has expressly elected not to be subject to Section 203 ("Section
203") of the DGCL. Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, subject to certain exceptions.
DESCRIPTION OF WARRANTS
The Company may issue warrants to purchase Debt Securities (the "Debt
Warrants"), Preferred Stock (the "Preferred Stock Warrants") or Common Stock
(the "Common Stock Warrants" and, collectively with the Debt Warrants and the
Preferred Stock Warrants, the "Warrants"). Warrants may be issued
independently or together with any Offered Securities and may be attached to
or separate from such Offered Securities. The Warrants are to be issued under
warrant agreements (each a "Warrant Agreement") to be entered into between the
Company and a bank or trust company, as warrant agent (the "Warrant Agent"),
all as shall be set forth in the Prospectus Supplement relating to the
Warrants being offered pursuant thereto.
12
<PAGE>
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and Debt Warrant certificates representing such Debt Warrants, including the
following:
(1) the title for such Debt Warrants;
(2) the aggregate number of such Debt Warrants;
(3) the price or prices at which such Debt Warrants will be issued;
(4) the designation, aggregate principal amount and terms of the Debt
Securities purchasable upon exercise of such Debt Warrants, and the
procedures and conditions relating to the exercise of such Debt Warrants;
(5) the designation and terms of any related Debt Securities with which
such Debt Warrants are issued, and the number of such Debt Warrants issued
with each such security;
(6) the date, if any, on and after which such Debt Warrants and the
related Debt Securities will be separately transferable;
(7) the principal amount of Debt Securities purchasable upon exercise of
each Debt Warrant, and the price at which such principal amount of Debt
Securities may be purchased upon such exercise;
(8) the date on which such right shall expire;
(9) the maximum or minimum number of such Debt Warrants which may be
exercised at any time;
(10) a discussion of the material United States federal income tax
considerations applicable to the exercise of such Debt Warrants; and
(11) any other terms of such Debt Warrants and terms, procedures and
limitations relating to the exercise of such Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated
in the applicable Prospectus Supplement. Prior to the exercise of their Debt
Warrants, holders of Debt Warrants will not have any of the rights of holders
of the securities purchasable upon such exercise and will not be entitled to
payments of principal of (or premium, if any) or interest, if any, on the
securities purchasable upon such exercise.
OTHER WARRANTS
The applicable Prospectus Supplement will describe the following terms of
Preferred Stock Warrants or Common Stock Warrants in respect of which this
Prospectus is being delivered:
(1) the title of such Warrants;
(2) the securities for which such Warrants are exercisable;
(3) the price or prices at which such Warrants will be issued;
(4) the number of such Warrants issued with each share of Preferred Stock
or Common Stock;
(5) any provisions for adjustment of the number or amount of shares of
Preferred Stock or Common Stock receivable upon exercise of such Warrants
or the exercise price of such Warrants;
(6) if applicable, the date on and after which such Warrants and the
related Preferred Stock or Common Stock will be separately transferable;
(7) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of such Warrants;
(8) any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants;
13
<PAGE>
(9) the date on which the right to exercise such Warrants shall commence,
and the date on which such right shall expire; and
(10) the maximum or minimum number of such Warrants which may be
exercised at any time.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities or shares of Preferred Stock or Common
Stock at such exercise price as shall in each case be set forth in, or be
determinable as set forth in, the Prospectus Supplement relating to the
Warrants offered thereby. Warrants may be exercised at any time up to the
close of business on the expiration date set forth in the Prospectus
Supplement relating to the Warrants offered thereby. After the close of
business on the expiration date, unexercised Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement relating
to the Warrants offered thereby. Upon receipt of payment and the Warrant
certificate properly completed and duly executed at the corporate trust office
of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the Debt
Securities or shares of Preferred Stock or Common Stock purchasable upon such
exercise. If less than all of the Warrants represented by such Warrant
certificate are exercised, a new Warrant certificate will be issued for the
remaining Warrants.
DESCRIPTION OF RIGHTS
The Company may issue Rights to purchase Preferred Stock (the "Preferred
Stock Rights"), including, but not limited to the Preferred Stock Purchase
Rights referred to below, Common Stock (the "Common Stock Rights"), or
Warrants to purchase Preferred Stock or Common Stock (the "Warrant Rights"
and, collectively with the Preferred Stock Rights and the Common Stock Rights,
the "Rights"). The Company has adopted a Preferred Stock Purchase Plan
pursuant to which it intends to distribute to its stockholders Preferred Stock
Purchase Rights. For a description of the material terms of the Preferred
Stock Purchase Rights, see the Company's Current Report on Form 8-K filed with
the Commission on March 11, 1998 which is incorporated herein by reference.
See, "Information Incorporated By Reference."
Rights may be issued independently or together with any other Offered
Security and may or may not be transferable. Additionally, the Company may
issue Rights to its stockholders in a Rights Offering. In connection with any
Rights Offering, the Company may enter into a standby underwriting arrangement
with one or more underwriters pursuant to which such underwriter will purchase
any Offered Securities remaining unsubscribed for after the Rights Offering.
The material terms of any Rights offered will be set forth in a Prospectus
Supplement and, in certain cases, the Rights will be evidenced by a
certificate. In the case of a Rights Offering, certificates evidencing the
Rights and a Prospectus Supplement relating to the Rights Offering will be
distributed to the Company's stockholders on the record date for receiving
Rights in such Rights Offering set by the Company.
The applicable Prospectus Supplement will describe the following terms of
Rights in respect of which this Prospectus is being delivered:
(1) the title of such Rights;
(2) the securities for which such Rights are exercisable;
(3) the exercise price for such Rights;
(4) the number of such Rights issued to each stockholder;
(5) the extent to which such Rights are transferable;
(6) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of such
Rights;
(7) any other terms of such Rights, including terms, procedures and
limitations relating to the exchange and exercise of such Rights;
14
<PAGE>
(8) the date on which the right to exercise such Rights shall commence,
and the date on which such right shall expire.
(9) the extent to which such Rights includes an over-subscription
privilege with respect to unsubscribed securities.
(10) if applicable, the material terms of any standby underwriting
arrangement entered into by the Company in connection with any Rights
Offering.
EXERCISE OF RIGHTS
Each Right will entitle the holder of Rights to purchase for cash such
principal amount of shares of Preferred Stock, Common Stock, Common Stock
Warrants or Preferred Stock Warrants, or any combination thereof, at such
exercise price as shall in each case be set forth in, or be determinable as
set forth in, the Prospectus Supplement relating to the Rights offered
thereby. Rights may be exercised at any time up to the close of business on
the expiration date for such Rights set forth in the Prospectus Supplement.
After the close of business on the expiration date, all unexercised Rights
will become void.
Rights may be exercised as set forth in the Prospectus Supplement relating
to the Rights offered thereby. Upon receipt of payment and the Rights
certificate properly completed and duly executed at the corporate trust office
of the Rights Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the shares of
Preferred Stock or Common Stock, Common Stock Warrants or Preferred Stock
Warrants purchasable upon such exercise. In the event that not all of the
Rights issued in any Rights Offering are exercised, the Company may determine
to offer any unsubscribed Offered Securities directly to persons other than
stockholders, to or through agents, underwriters or dealers or through a
combination of such methods, (including pursuant to standby underwriting
arrangements), as set forth in the applicable Prospectus Supplement.
15
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities being offered hereby: (i)
directly to purchasers; (ii) through agents; (iii) through dealers; (iv)
through underwriters; (v) directly to the Company's stockholders (in the case
of Rights); or (vi) through a combination of any such methods of sale.
The distribution of the Offered Securities may be effected from time to time
in one or more transactions either (i) at a fixed price or prices, which may
be changed, (ii) at market prices prevailing at the time of sale, (iii) at
prices related to such prevailing market prices; or (iv) at negotiated prices.
Offers to purchase Offered Securities may be solicited directly by the
Company. Offers to purchase Offered Securities may also be solicited by agents
designated by the Company from time to time. Any such agent, who may be deemed
to be an "underwriter" as that term is defined in the Securities Act, involved
in the offer or sale of the Offered Securities in respect of which this
Prospectus is delivered will be named, and any commissions payable by the
Company to such agent will be set forth in the Prospectus Supplement.
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealer, as principal. The dealer, who may be deemed to be an
"underwriter" as that term is defined in the Securities Act, may then resell
such Offered Securities to the public at varying prices to be determined by
such dealer at the time of resale.
If an underwriter is, or underwriters are, utilized in the sale, the Company
will execute an underwriting agreement with such underwriters at the time of
sale to them and the names of the underwriters will be set forth in the
Prospectus Supplement, which will be used by the underwriter to make resales
of the Offered Securities in respect of which this Prospectus is delivered to
the public. In connection with the sale of Offered Securities, such
underwriter may be deemed to have received compensation from the Company in
the form of underwriting discounts or commissions and may also receive
commissions from purchasers of Offered Securities for whom they may act as
agents. Underwriters may also sell Offered Securities to or through dealers,
and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commission from the
purchasers for whom they may act as agents. Any underwriting compensation paid
by the Company to underwriters in connection with the offering of Offered
Securities, and any discounts, concessions or commission allowed by
underwriters to participating dealers, will be set forth in the applicable
Prospectus Supplement.
Pursuant to any standby underwriting agreement entered into in connection
with a Rights Offering, persons acting as standby underwriters may receive a
commitment fee for all securities underlying the Rights that the underwriter
commits to purchase on a standby basis. Additionally, prior to the expiration
date with respect to any Rights, any standby underwriters in a Rights Offering
may offer such securities on a when-issued basis, including securities to be
acquired through the purchase and exercise of Rights, at prices set from time
to time by the standby underwriters. After the expiration date with respect to
such Rights, the underwriters may offer securities of the type underlying the
Rights, whether acquired pursuant to a standby underwriting agreement, the
exercise of the Rights or the purchase of such securities in the market, to
the public at a price or prices to be determined by the underwriters. The
standby underwriters may thus realize profits or losses independent of the
underwriting discounts or commission paid by the Company. In the event that
the Company does not enter into a standby underwriting arrangement in
connection with a Rights Offering, the Company may elect to retain a dealer-
manager to manage the Rights Offering for the Company. Any such dealer-manager
may offer securities of the type underlying the Rights acquired or to be
acquired pursuant to the purchase and exercise of Rights and may thus realize
profits or losses independent of any dealer-manager fee paid by the Company.
Underwriters, dealers, agents and other persons may be entitled, under
agreements that may be entered into with the Company, to indemnification by
the Company against certain civil liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments which they may be
required to make in respect thereof. Underwriters and agents may engage in
transactions with, or perform services for, the Company in the ordinary course
of business.
16
<PAGE>
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters, dealers or other persons to solicit offers by certain
institutions to purchase Offered Securities pursuant to contracts providing
for payment and delivery on a future date or dates. Institutions with which
such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others. The obligations of any purchasers under any such
contract will not be subject to any conditions except that (a) the purchase of
the Offered Securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject and (b) if the
Offered Securities are also being sold to underwriters, the Company shall have
sold to such underwriters the Offered Securities not sold for delayed
delivery. The underwriters, dealers and such other persons will not have any
responsibility in respect of the validity or performance of such contracts.
The Prospectus Supplement relating to such contracts, the commission payable
for solicitation of such contracts and the date or dates in the future for
delivery of Offered Securities pursuant to such contracts.
Any underwriter may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 under the Exchange Act. Rule 104
permits stabilizing bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. The underwriters may over-
allot shares of the Common Stock in connection with an offering of Common
Stock, thereby creating a short position in the underwriters' account.
Syndicate covering transactions involve purchases of the Debt Securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing and syndicate covering transactions may
cause the price of the Debt Securities to be higher than it would otherwise be
in the absence of such transactions. These transactions, if commenced, may be
discontinued at any time.
The anticipated date of delivery of Offered Securities will be set forth in
the applicable Prospectus Supplement relating to each offer.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Latham & Watkins, Washington, D.C. If the Offered Securities are
distributed in an underwritten offering or through agents, certain legal
matters may be passed upon for any agents or underwriters by counsel for such
agents or underwriters identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements and related schedule of the Company
for the fiscal years ended May 31, 1997, 1996 and 1995 included in the
Company's Form 10-K and the Company's Form 8-K dated February 12, 1998 and
incorporated by reference in this Prospectus and related registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
17
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY
ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PRO-
SPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH
IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO
WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH OFFER IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
NOR THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGES
-----
<S> <C>
Prospectus Supplement Summary............................................. S- 3
Risk Factors.............................................................. S-12
Use of Proceeds........................................................... S-19
Price Range of Common Stock............................................... S-19
Dividend Policy........................................................... S-20
Capitalization............................................................ S-20
Pro Forma Financial Data.................................................. S-21
Selected Historical Consolidated Financial Data........................... S-21
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ S-25
Business and Properties................................................... S-32
Management................................................................ S-47
Underwriting.............................................................. S-49
Incorporation of Certain Documents by Reference........................... S-50
Legal Matters............................................................. S-50
PROSPECTUS
Available Information..................................................... ii
Information Incorporated by Reference..................................... iii
Disclosure Regarding Forward-Looking Statements........................... iv
The Company............................................................... 1
Use of Proceeds........................................................... 1
Risk Factors.............................................................. 1
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends............................................ 2
Ratio of Earnings to Fixed Charges........................................ 2
Description of Debt Securities............................................ 3
Description of Preferred Stock............................................ 10
Description of Common Stock............................................... 12
Description of Warrants................................................... 12
Description of Rights..................................................... 14
Plan of Distribution...................................................... 16
Legal Matters............................................................. 17
Experts................................................................... 17
</TABLE>
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5,000,000 Shares
[LOGO OF SUNBURST HOSPITALITY CORPORATION APPEARS HERE]
Common Stock
--------
PROSPECTUS
SUPPLEMENT
, 1998
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Salomon Smith Barney
Bear, Stearns & Co. Inc.
NationsBanc Montgomery
Securities LLC
================================================================================
