SUNBURST HOSPITALITY CORP
10-Q, 1999-11-12
HOTELS & MOTELS
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<PAGE>

================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-Q

         [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                       OR

         [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934


     FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NO. 1-11915


                        SUNBURST HOSPITALITY CORPORATION
                              10770 COLUMBIA PIKE
                            SILVER SPRING, MD. 20901
                                 (301) 592-3000

        Delaware                                        53-1985619
        ---------                                       ----------
(STATE OF INCORPORATION)                             (I.R.S. EMPLOYER
                                                   IDENTIFICATION NUMBER)



                  -------------------------------------------
                  (Former name, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
                               Yes  X      No ___
                                   ---


                                                        SHARES OUTSTANDING
    CLASS                                               AT SEPTEMBER 30, 1999
    ------                                              ---------------------
Common Stock, $0.01
par value per share                                          18,757,000
                                                             ----------


================================================================================

                                                                               1
<PAGE>

                        SUNBURST HOSPITALITY CORPORATION

                                     INDEX
                                     -----


<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        -------
<S>                                                                     <C>
PART I.  FINANCIAL INFORMATION:

    Condensed Consolidated Balance Sheets -

       September 30, 1999 (Unaudited) and December 31, 1998                 3

    Condensed Consolidated Statements of Income -

       Three and nine months ended September 30, 1999 and
          September 30, 1998 (Unaudited)                                    4

    Condensed Consolidated Statements of Cash Flows -

       Nine months ended September 30, 1999 and
          September 30, 1998 (Unaudited)                                    5

    Notes to Condensed Consolidated Financial Statements (Unaudited)        6

    Management's Discussion and Analysis of Operations and
        Financial Condition                                                 9

PART II.  OTHER INFORMATION                                                14

</TABLE>

                                                                               2
<PAGE>

                       SUNBURST HOSPITALITY CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                    As of
                                                         -----------------------------
                                                         September 30,    December 31,
                                                             1999             1998
                                                         -------------    ------------
                                                          (Unaudited)
<S>                                                      <C>              <C>
                     ASSETS

Real estate, net                                             $381,719         $363,023
Real estate held for sale                                      10,113           37,122
Receivables (net of allowance for doubtful
   accounts of $647 and $611, respectively)                    10,015            7,271
Other assets                                                    8,233           10,982
Cash and cash equivalents                                       4,387            4,113
                                                         ------------    -------------

          Total assets                                       $414,467         $422,511
                                                         ============    =============


        LIABILITIES AND STOCKHOLDERS' EQUITY

Debt                                                         $269,487         $281,189
Accounts payable, accrued expenses and other
 liabilities                                                   38,488           38,685
                                                         ------------    -------------

          Total liabilities                                   307,975          319,874

          Total stockholders' equity                          106,492          102,637
                                                         ------------    -------------

          Total liabilities and stockholders' equity         $414,467         $422,511
                                                         ============    =============
</TABLE>

The accompanying notes are an integral part of these Condensed Consolidated
Balance Sheets.

                                                                               3
<PAGE>

                        SUNBURST HOSPITALITY CORPORATION
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (Unaudited)

<TABLE>
<CAPTION>

                                               For the three months ended    For the nine month ended
                                                      September 30,                September 30,
                                               --------------------------    ------------------------
                                                    1999         1998           1999           1998
                                                 ---------    ---------      ---------      ---------
<S>                                              <C>          <C>            <C>            <C>
REVENUES

        Rooms                                      $50,689      $50,404       $144,081       $138,077
        Food and beverage                            3,965        3,947         12,465         12,487
        Other                                        2,117        1,969          6,202          6,335
                                                 ---------    ---------      ---------      ---------

                 Total revenues                     56,771       56,320        162,748        156,899
                                                 ---------    ---------      ---------      ---------

OPERATING EXPENSES

        Departmental expenses                       18,318       18,284         52,653         51,131
        Undistributed operating expenses            18,089       17,973         51,639         49,146
        Depreciation and amortization                6,756        6,768         19,572         20,474
        Corporate                                    2,512        3,344          7,641         10,836
        Provision for asset impairment/
         (net gains on property dispositions)       (1,546)       3,714         (1,546)         3,714
                                                 ---------    ---------      ---------      ---------

                 Total operating expenses           44,129       50,083        129,959        135,301
                                                 ---------    ---------      ---------      ---------

OPERATING INCOME                                    12,642        6,237         32,789         21,598
                                                 ---------    ---------      ---------      ---------

Interest expense                                     6,064        4,951         18,298         15,126
                                                 ---------    ---------      ---------      ---------

INCOME BEFORE INCOME TAXES,
 EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
 OF A CHANGE IN ACCOUNTING PRINCIPLE                 6,578        1,286         14,491          6,472

                 Income taxes                        2,727          530          5,908          2,650
                                                 ---------    ---------      ---------      ---------

INCOME BEFORE EXTRAORDINARY LOSS AND
 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
 PRINCIPLE                                           3,851          756          8,583          3,822

Extraordinary loss from early debt
redemption, net of $221 and $476 tax benefit,
 respectively                                          339          308            772            308

Cumulative effect of a change in accounting
 principle, net of $421 tax benefit                      -            -            599              -
                                                 ---------    ---------      ---------      ---------

NET INCOME                                         $ 3,512      $   448       $  7,212       $  3,514
                                                 =========    =========      =========      =========

Basic earnings per share
- ------------------------
        Income before extraordinary loss and
         change in accounting principle            $  0.20      $  0.04       $   0.44       $   0.19
        Extraordinary loss                           (0.01)       (0.02)         (0.04)         (0.01)
        Cumulative effect of a change in
         accounting principle                            -            -          (0.03)             -
                                                 ---------    ---------      ---------      ---------
        Net income                                 $  0.19      $  0.02       $   0.37       $   0.18
                                                 =========    =========      =========      =========

Diluted earnings per share
- --------------------------
        Income before extraordinary loss
         and change in accounting principle        $  0.20      $  0.04       $   0.44       $   0.19
        Extraordinary loss                           (0.02)       (0.02)         (0.04)         (0.02)
        Cumulative effect of a change in
         accounting principle                            -            -          (0.03)             -
                                                 ---------    ---------      ---------      ---------
        Net income                                 $  0.18      $  0.02       $   0.37       $   0.17
                                                 =========    =========      =========      =========
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Income.

                                       4
<PAGE>

                        SUNBURST HOSPITALITY CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                          For the nine months ended
                                                                                September 30,
                                                                         --------------------------
                                                                              1999         1998
                                                                          -----------  -----------
<S>                                                                       <C>          <C>
Cash Flows From Operating Activities
       Income before extraordinary loss and cumulative
        effect of a change in accounting principle                           $  8,583     $  3,822
       Adjustments to reconcile income before
        extraordinary loss and cumulative effect of a
        change in accounting principle to net cash
        provided by operating activities:
              Depreciation and Amortization                                    19,572       20,474
              Other non-cash items                                              9,468       12,242
              Changes in assets and liabilities                                  (510)      (9,497)
                                                                          -----------  -----------
       Net cash provided by operating activities                               37,113       27,041
                                                                          -----------  -----------

Cash Flows From Investing Activities
       Investment in property and equipment                                   (42,363)     (45,185)
       Proceeds from sale of property and equipment                            32,650        2,260
                                                                          -----------  -----------
       Net cash utilized in investing activities                               (9,713)     (42,925)
                                                                          -----------  -----------

Cash Flows From Financing Activities
       (Repayment of) proceeds from debt                                      (22,710)      15,030
       Proceeds from issuance of stock                                             79           52
       Purchases of treasury stock                                             (4,495)           -
                                                                          -----------  -----------
       Net cash (utilized in) provided by financing activities                (27,126)      15,082
                                                                          -----------  -----------

Net change in cash and cash equivalents                                           274         (802)
Cash and cash equivalents at beginning of period                                4,113        5,908
                                                                          -----------  -----------

Cash and cash equivalents at end of period                                   $  4,387     $  5,106
                                                                          ===========  ===========
</TABLE>



The accompanying notes are an integral part of these Condensed Consolidated
Statements of Cash Flows.

                                       5
<PAGE>

                        SUNBURST HOSPITALITY CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1999
                                  (Unaudited)


The accompanying condensed consolidated financial statements of Sunburst
Hospitality Corporation (the "Company") have been prepared without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. The condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31, 1998
and notes thereto included in the Company's Form 10-K, dated March 29, 1999.

In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1999, the results of operations for the three and
nine months ended September 30, 1999 and 1998, respectively, and cash flows for
the nine months ended September 30, 1999 and 1998, respectively.  Interim
results are not necessarily indicative of full year performance because of the
impact of seasonal and short-term variations.

On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Manor Care Distribution").
On September 30, 1996 the Board of Directors of Manor Care declared a special
dividend to its shareholders of one share of common stock of Choice Hotels
International, Inc. for each share of Manor Care stock, and the Board set the
Record Date and the Distribution Date.  The Stock Distribution was made on
November 1, 1996 to holders of record of Manor Care's common stock on
October 10, 1996.

The Manor Care Distribution separated the lodging and health care businesses of
Manor Care into two public corporations. The operations of the Company consisted
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through its
subsidiaries.

On November 1, 1996, concurrent with the Manor Care Distribution, the Company
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. and the Company's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc. ("Franchising").

On April 29, 1997, the Company's Board of Directors announced its intention to
separate the Company's franchising business ("Choice Franchising Business") from
its owned hotel business. On September 16, 1997, the Board of Directors and
shareholders of the Company approved the separation of the business via a spin-
off of the franchising business, along with the Company's European hotel and
franchising operations (the "Choice Spin-Off"), to its shareholders. The Board
set October 15, 1997 as the date of distribution and on that date, Company
shareholders received one share in Franchising (renamed "Choice Hotels
International, Inc.") for every share of Company stock held on October 7, 1997
(the date of record). Concurrent with the October 15, 1997 distribution date,
the Company changed its name to Sunburst Hospitality Corporation and effected a
one-for-three reverse stock split of its common stock.

                                                                               6
<PAGE>

The following table illustrates the reconciliation of net income and number of
shares used in the basic and diluted earnings per share calculations.

<TABLE>
<CAPTION>
                                                        For the three months ended       For the nine months ended
                                                        --------------------------       -------------------------
(in thousands, except per share amounts)                       September 30,                   September 30,
                                                        --------------------------       -------------------------
                                                           1999             1998           1999             1998
                                                        ---------        ---------       --------         --------
<S>                                                     <C>              <C>             <C>              <C>
Computation of basic earnings per share

         Income before income taxes, extraordinary
          loss and cumulative effect of a change
          in accounting principle                         $ 3,851          $   756        $ 8,583          $ 3,822
         Weighted average shares outstanding               18,929           19,973         19,346           19,966
                                                        ---------        ---------       --------         --------
Basic earnings per share from continuing
 operations                                               $  0.20          $  0.04        $  0.44          $  0.19
                                                        =========        =========       ========         ========

Computation of diluted earnings per share

         Income before income taxes, extraordinary
          loss and cumulative effect of a change
          in accounting principle                         $ 3,851          $   756        $ 8,583          $ 3,822
         Weighted average shares outstanding               18,929           19,973         19,346           19,966

         Effect of dilutive earnings per share
          Employee stock option plan                          261              213            207              383
                                                        ---------        ---------       --------         --------

         Shares for diluted earnings per share             19,190           20,186         19,553           20,349
                                                        ---------        ---------       --------         --------
Diluted earnings per share from continuing
 operations                                               $  0.20          $  0.04        $  0.44          $  0.19
                                                        =========        =========       ========         ========
</TABLE>

The effect of dilutive securities is computed using the treasury stock method
and average market prices during the period.  Certain options to purchase common
stock were not included in the computation of diluted earnings per share because
the exercise price of the options exceeded the average market price of the
common shares for the period.  The following table summarizes such options.

<TABLE>
<CAPTION>
                                                         September 30,
                                                ------------------------------
                                                   1999                1998
                                                ----------         -----------
<S>                                             <C>                 <C>
Number of shares                                 1,606,281           1,667,271
Weighted average exercise price                 $     7.30          $     7.14
</TABLE>

As of September 30, 1999, the Company owned and managed 82 hotels with 11,340
rooms in 26 states under the following brand names:  Comfort, Clarion, Sleep,
Quality and MainStay.

At September 30, 1999, the Company has three hotels that are currently being
marketed for sale with a carrying value of $10.1 million.   In accordance with
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company has discontinued depreciating these assets while
they are held for sale.  In addition, SFAS No. 121 requires that assets held for
sale be reported at the lower of the carrying amount or fair value less costs to
sell.  As the Company began actively marketing these hotels, it became apparent,
given current real estate values, that certain asset carrying values exceeded
estimated fair values less costs to sell. The Company, accordingly, recognized a
$4 million asset impairment provision during 1998 to reduce the carrying value
of certain of the assets to the estimated fair value less costs to sell. The
hotels held for sale reported total revenues of $1.2 million and $3.6 million
for the three and nine months ended September 30, 1999 and September 30, 1998,
respectively.  Income from operations before interest, taxes, depreciation and
amortization and allocations for corporate expenses of the three hotels was
$312,000 and $844,000 for the three and nine months ended September 30, 1999,
and $263,000 and $957,000 for the three and nine months ended September 30,
1998, respectively.

                                       7

<PAGE>

The Company recognized an extraordinary loss of $339,000 and $772,000, net of
taxes, in the three and nine months ended September 30, 1999, respectively.  The
extraordinary loss relates to the early extinguishment of a portion of the
Company's multi-class mortgage pass-through certificates (collectively, the
"CMBS debt") associated with the sale of five of the properties collateralizing
the CMBS debt.

For purposes of providing orderly transitions after the Manor Care distribution
and the Choice Spin-Off, the Company and Franchising entered into various
agreements with Manor Care and Choice Hotels International, Inc. In December
1998, the Company and Choice Hotels International, Inc. entered into an
agreement to amend certain agreements executed at the time of the Choice Spin-
Off.  The amendment effectively resolved a number of matters, including the
satisfaction of the Company's liability to Choice Hotels International, Inc.
resulting from the final allocation of assets and liabilities between the two
companies, favorable modification to liquidated damage provisions on all
franchising agreements and elimination of various inter-company service
agreements. In February 1999, the Company entered into a release agreement with
Manor Care which effectively terminated all inter-company service, consulting
and lease agreements.

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities"
(the "SOP").  The SOP was adopted by the Company effective January 1, 1999 and
required that costs related to start-up activities be expensed as incurred.
Initial application of the SOP is reflected as the cumulative effect of a change
in accounting principle in the condensed consolidated income statement for the
nine months ended September 30, 1999.  Also, effective January 1, 1999, new
hotel pre-opening costs, amounting to $270,000 and $905,000 during the three and
nine months ended September 30, 1999, were expensed as incurred.



















                                                                               8
<PAGE>

                        SUNBURST HOSPITALITY CORPORATION
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
                               September 30, 1999


The Company is a national owner and operator of hotel properties with a
portfolio at September 30, 1999 of 82 hotels (11,340 rooms) in a total of 26
states. The Company operates its hotels under the following brands: MainStay,
Comfort, Quality, Clarion and Sleep. The Company's continuing business consists
primarily of guest room revenue, meeting room revenue, and food and beverage
revenue from owned and operated hotels.


COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 and 1998:
- -----------------------------------------------------------------------------

Total revenues for the three months ended September 30, 1999 increased less than
1% to $56.8 million, compared to $56.3 million in the prior year.  Revenue per
available room for the extended-stay segment increased a full 23.9%, as the
Company has 18 mid-priced, extended-stay hotels open and operating at
September 30, 1999, compared to 13 in the prior year that have ramped up over
the last year. For the extended-stay segment, occupancy increased from 68.5% in
the third quarter of the prior year to 81.1% in the third quarter of 1999 and
average daily rates increased from $55.67 to $58.32, or 4.8%. Total extended-
stay revenue increased from $4.4 million in the third quarter of 1998 to
$7.6 million in the third quarter of 1999. This increase in revenue was largely
offset by the sale of 12 lower-margin hotels since the end of the third quarter
of 1998.

During the third quarter of 1999, hotel operating profit increased $300,000 or
1.5% to $20.4 million, compared to $20.1 million in the prior year.  Operating
margins benefit as the Company opens and ramps up newly developed, mid-priced,
extended-stay hotels, which operate at higher margins than the traditional
hotels.  Corporate expense amounted to $2.5 million, a decrease of approximately
$832,000 or 24.9% from the prior year's third quarter.  Corporate expense
amounted to 4.4% of total revenues during the third quarter of 1999 as compared
to 5.9% during the third quarter of the prior year.  A number of initiatives to
reduce overhead resulted in the overall cost reduction.  Initiatives included
corporate level staffing reductions, consolidation of office space, sub-leasing
of excess office space and termination of various service agreements with
formerly affiliated entities.

Total operating expenses decreased $6.0 million or 11.9% for the three months
ended September 30, 1999 compared to the same period of 1998.  Operating
expenses for the third quarter 1999 and 1998 include a $1.5 million net gain on
the sale of six properties and 1998 third quarter results included $3.7 million
of asset impairment and other restructuring charges, respectively.

Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 6.8%, to $17.9 million in the third quarter of 1999 from $16.7 million
in the third quarter of the prior year.  The Company considers EBITDA to be an
indicative measure of operating performance for its business.  Such information
should not be considered an alternative to net income, operating income, cash
flow from operations or any other operating or liquidity performance measure
defined by generally accepted accounting principles.  EBITDA presented by the
Company may not necessarily be comparable to EBITDA defined and presented by
other companies.

Interest expense increased 22.5% to $6.1 million in the third quarter of the
current year from $5.0 million in the third quarter of the prior year.  The
increase is principally the result of additional borrowings associated with the
Company's development of hotels as well as an increase in the effective rate
utilized to accrue interest on the subordinated note payable to Choice.  The
Choice note's effective rate is 10.6% if outstanding through maturity in 2002.

During the third quarter of 1999, depreciation expense was level with prior
year.  The increased depreciation expense associated with newly developed hotels
was offset by a decline in depreciation expense as a result of the hotels held
for sale.  In accordance with Statement of Financial Accounting Standards No.
121, the Company discontinued depreciating those assets while they are held for
sale.  The three hotels held for sale at September 30, 1999, have been reported
at the lower of the carrying amount or fair value less cost of sale.  The three
hotels held for sale have a combined book value of $10.1 million at
September 30, 1999.

Income before income taxes, extraordinary loss and cumulative effect of a change
in accounting principle increased $5.3 million to $6.6 million in the third
quarter of 1999 from $1.3 million in the third quarter of 1998.  The increase
results from the gain on the sale of assets and the provision for asset
impairment and other non recurring charges during the third quarter of 1999 and
1998, respectively.  After the effect of an extraordinary loss from early debt

                                                                               9
<PAGE>

redemption and cumulative effect of a change in accounting principle, the
Company reported an increase of $3.1 million in net income to $3.5 million for
the third quarter of 1999 from $448,000 during the prior year's third quarter.
The extraordinary loss from early debt redemption during the quarter of $339,000
(net of $221,000 tax benefit) related to the early redemption of debt
collateralized by two properties sold during the third quarter.

In accordance with the AICPA Accounting Standards Executive Committee's
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP
98-5"), pre-opening costs associated with properties under construction are
expensed as incurred.  Pre-opening costs incurred and expensed during the three
months ended September 30, 1999, amounting to $270,000, are included in hotel
operating expenses.


COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998:
- ----------------------------------------------------------------------------

Total revenues for the nine months ended September 30, 1999 increased 3.7% to
$162.7 million, compared to $156.9 million in the prior year.  The increase
results primarily due to a 26.5% increase in revenue per available room for the
extended-stay segment.  For those properties opened at least one year, average
daily rates increased from $65.62 to $67.19, or 2.4%.

For the nine months ended September 30, 1999 facility level operating profit
increased 3.2% from the same period in the prior year.  Favorably impacting
undistributed operating expenses were $1.9 million of credits against franchise
fees pursuant to an agreement with Choice.   Corporate expense amounted to
$7.6 million, a decrease of approximately $3.2 million or 29.5% from the prior
year. Corporate expense amounted to 4.7% of total revenues for the nine months
ended September 30, 1999 as compared to 6.9% during the prior year. Depreciation
expense decreased $902,000 or 4.4%, to $19.6 million in the current year from
$20.5 million in the third quarter of the prior year. The decline in
depreciation expense is primarily a result of discontinuance of depreciation on
the hotels that were held for sale during the nine month period offset by the
additional depreciation expense associated with the newly developed hotels.

Total operating expenses decreased $5.3 million or 3.9% for the nine months
ended September 30, 1999 compared to the same period of 1998.  Operating
expenses for the nine months ended September 30, 1999 and 1998 include a
$1.5 million net gain on the sale of six properties and $3.7 million of asset
impairment and other restructuring charges, respectively.

EBITDA increased 11.0%, to $50.8 million for the nine months ended September 30,
1999 from $45.8 million for the same period in the prior year. Interest expense
increased $3.2 million or 21.0% to $18.3 million as a result of increased
borrowings associated with the Company's development and construction of new
hotels and an increase in the effective rate utilized to accrue interest on the
subordinated note payable to Choice.

Income before income taxes, extraordinary loss and cumulative effect of a change
in accounting principle increased $8.0 million to $14.5 million for the nine
months ended September 30, 1999 from $6.5 million for the same period of 1998.
The increase results from the gain on the sale of assets and the provision for
asset impairment and other non recurring charges during the nine months ended
September 30, 1999 and 1998, respectively.  After the effect of an extraordinary
loss from early debt redemption and cumulative effect of a change in accounting
principle, the Company reported an increase of $3.7 million in net income to
$7.2 million for the nine months ended September 30, 1999 versus $3.5 million
for the nine months ended September 30, 1998.  The extraordinary loss from early
debt redemption during the quarter of $772,000 (net of $476,000 tax benefit)
related to the early redemption of debt collateralized by five properties sold
during 1999.

On January 1, 1999, the Company adopted SOP 98-5.  In accordance with that new
accounting pronouncement, the Company wrote off the unamortized balance of
deferred pre-opening costs on its balance sheet at January 1, 1999 and recorded
an after-tax charge of $599,000 (net of $421,000 tax benefit) for the cumulative
effect of that change in accounting principle.  Beginning January 1, 1999, pre-
opening costs associated with properties under construction are expensed as
incurred.  Pre-opening costs incurred and expensed during the nine months ended
September 30, 1999, amounting to $905,000, are included in hotel operating
expenses.

Liquidity and Capital Resources:
- -------------------------------

Borrowing capacity under the Company's committed credit facility with a group of
banks amounted to $80 million

                                                                              10
<PAGE>

during the quarter ended September 30, 1999. Borrowings under the credit
facility amounted to $41 million at December 31, 1998 and $30 million at
September 30, 1999. The Company utilizes its credit facility to fulfill its
seasonal requirements and to fund construction and development.

At September 30, 1999, the Company has $269.5 million of long-term debt
outstanding, none of which matures in the next twelve months.  The credit
facility expires in October 2000 and $138.4 million of subordinated debt payable
to Choice Hotels International, Inc. matures in October 2002.  The Choice note
provides additional financial flexibility as interest is not payable until
maturity.

The Company intends to develop mid-priced, extended-stay hotels.  At
September 30, 1999, eighteen MainStay Suites were open and operating with
another six hotels under development. The cost of developing a MainStay Suites
approximates $6.0 million. At September 30, 1999, costs incurred to date on the
six hotels under development amounted to $16.9 million. Accordingly, the
estimated cost to complete is approximately $25.6 million. In order for the
Company to continue on a long-term basis the development program, additional
capital will be required.

The Company's objective is to reduce its overall leverage while continuing to
grow through development.  The Company continuously evaluates its existing
portfolio and seeks to sell hotels that have limited upside potential or that
are projected to under-perform in order to redeploy capital in higher yielding
assets.  The Company has identified three such properties that as of
September 30, 1999, are being marketed for sale in 1999. During the quarter
ended September 30, 1999, the Company sold six hotels for total proceeds of
$22.0 million. Proceeds from asset sales were used to reduce senior debt.

Pursuant to a share repurchase program announced on September 25, 1998, the
Company has purchased a total of 1,394,391 shares at a total cost of
$6.6 million. The Company intends to utilize cash flow from operations to fund
the continuing execution of this program while maintaining availability under
the credit facility to finance construction and development.

At September 30, 1999, the Company's debt to book capitalization amounted to
71.7% while debt to market cap was 69.9%.

While operating cash flow along with credit available under the Company's credit
facility and the proceeds from the sale of hotels is expected to be adequate to
fund operations and committed construction projects, accessing additional
capital will be imperative in order for the Company to expand its long range
development and growth plans.

Year 2000:
- -----------

Many existing computer programs use two digits to identify a year.  These
programs were designed and developed without considering the impact of the
upcoming change in the century.  If the programs are not corrected, computer
applications could fail or create erroneous results at the turn of the century.

The Company has developed a plan to address the impact of the Year 2000 on its
computer systems and other systems with embedded microprocessors that could be
date sensitive (collectively, "in-house systems"), as well as issues related to
third party vendors and suppliers of the Company.  The Company's plan consists
of four phases: 1) assess computer systems and other systems with embedded
microprocessors and determine which such systems are critical to the ongoing
operations of the Company; 2) inventory critical systems to determine
manufacturers, suppliers or vendors; 3) test or assess the readiness of systems
and vendors and suppliers, and; 4) inventory and assess the readiness of non-
critical systems.  Corrective actions are being taken as issues arise.  The
following discusses the Companies progress in addressing both in-house systems
and third party vendors.

The Company's financial accounting and reporting system's upgrade was completed
during the second quarter of 1999 and are expected to adequately provide
information and reporting needs into the next century.  Non-compliant computer
hardware and software at the Company's corporate headquarters and employee
workstations have been upgraded.  In order to accommodate a new property
management system required by Choice Hotels International, Inc., the Company had
previously planned to update these systems.  Therefore, the cost of upgrading
the systems, outside of previously planned upgrades, is estimated to be
immaterial.

                                                                              11
<PAGE>

The Company has inventoried systems with embedded chips used at the Company's
corporate headquarters as well as building systems at the company's hotel
properties (i.e., elevators, room key systems, HVAC equipment, and fire safety
equipment) and has contacted manufacturers to determine the readiness of the
systems for the Year 2000.   Based on the responses received, the Company
believes that the critical systems are or will be Year 2000 compliant.  Any
systems that are Year 2000 sensitive and non-compliant will be replaced or
modified as necessary or addressed in the contingency plan.  Although the
Company does not have an estimate for the cost to bring all critical systems
into compliance, it is not believed to be material.

The Company is developing a contingency plan to address the possible failure of
any in-house systems.  The contingency manual will be completed by October 31,
1999.

The Company relies significantly on third party systems to provide various goods
and services.  The Company has identified those vendors and suppliers that it
believes to be critical to the ongoing operations of the Company and has
contacted them to verify their state of readiness and evaluate their contingency
plans.  Based on the responses received, the Company believes that the critical
third party systems are or will be Year 2000 compliant.  To the extent that a
third party cannot certify that their systems will be Year 2000 compliant, the
Company will take actions to correct the non-compliant situation or develop
contingency plans.

Because the Company relies significantly on Choice Hotels International, Inc.
("Choice") for reservation and property management systems as well as overall
franchisee support, their state of readiness for Year 2000 is critical to the
Company.  Therefore, a description of the Choice plan to address the Year 2000
issue, as set forth in its SEC filings, follows.

     Choice's exposure to potential Year 2000 problems exists in two general
     areas: technological operations in the sole control of Choice, and
     technological operations dependent in some way on one or more third
     parties.   With respect to internal systems, Choice has conducted Year 2000
     compliance testing on all of its proprietary software, including its
     reservations and reservations support systems, its franchise support system
     and its franchisee property management support systems.  Choice has
     indicated that the proprietary software is Year 2000 compliant.

     Choice's Year 2000 Compliance Committee is currently identifying third
     party vendors and service providers whose non-compliant systems could have
     a material impact on Choice and undertaking an assessment as to such
     parties' compliant status.  These parties include franchisees, airline
     global distribution systems ("GDS"), utility providers, telephone service
     providers, banks and data processing services.  The GDS companies, which
     provide databases through which travel agents can book hotel rooms, have
     assured Choice in writing that they are making the necessary changes in
     their system to become compliant and Choice has begun conducting tests with
     the GDS companies.

Additional information regarding Choice's Year 2000 preparedness can be obtained
from their SEC filings.

Failure by the Company or one or more of its third party vendors to adequately
address the Year 2000 issue could have a material adverse impact on the Company.
The Company is not able to estimate the impact such failure could have due to
its dependence on third parties including utility companies, airlines, hotel
reservation centers, Choice, banks and credit card payment processing centers.
In addition, the severity and duration of failures will greatly affect the
impact of such failures on the Company.

As a result of the considerable publicity surrounding, and the increased
consumer awareness of, the Year 2000 issue, it is possible that travel patterns
may be disrupted.  The Company is unable to estimate the effect such
disruptions, if any, may have on its hotel operations.


FORWARD-LOOKING STATEMENTS
- ---------------------------

     The statements contained in this document that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.

     A number of important factors could cause the Company's actual results for
future periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company.

                                                                              12
<PAGE>

     Certain statements contained in this Form 10-Q, including those in the
section entitled "Management's Discussion and Analysis of Operating Results and
Financial Condition," contain forward-looking information that involves risk and
uncertainties, including the Company's plans to address the Year 2000 issue.
Actual future results and trends may differ materially depending on a variety of
factors discussed in the "Risk Factors" section included in the Company's SEC
filings, including (a) the Company's success in implementing its business
strategy, including its success in arranging financing where required, (b) the
nature and extent of future competition, and political, economic and demographic
developments in regions where the Company does business or in the future may do
business, and; (c) the timely resolution by the Company and its vendors and
suppliers of the Year 2000 issue.

     Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.  The Company undertakes no
obligation to revise or update these forward-looking statements.






















                                                                              13
<PAGE>

                           PART II OTHER INFORMATION
                           -------------------------


ITEM 1.         LEGAL PROCEEDINGS
                -----------------

The Company is not party to any litigation, other than routine litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.



ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K
                --------------------------------

(a)  Exhibits

     Exhibit 27.01 - Financial Data Schedule  September 30, 1999


(b)  The following reports were filed pertaining to the quarter ended
     September 30, 1999.

     None



















                                                                              14
<PAGE>

                                   SIGNATURE

Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

                                          SUNBURST HOSPITALITY CORPORATION

Date: November 11, 1999                       /s/   James A. MacCutcheon
      -----------------                       --------------------------

                                          By:  James A. MacCutcheon
                                               Executive Vice President,
                                               Chief Financial Officer and
                                               Treasurer



















                                      15

<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheets, the condensed consolidated statements of
income and the condensed consolidated statements of cash flows and is qualified
in its entirety by reference to such financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                           4,387
<SECURITIES>                                         0
<RECEIVABLES>                                   10,662
<ALLOWANCES>                                       647
<INVENTORY>                                          0
<CURRENT-ASSETS>                                     0
<PP&E>                                         495,586
<DEPRECIATION>                                 103,754
<TOTAL-ASSETS>                                 414,467
<CURRENT-LIABILITIES>                                0
<BONDS>                                        269,487
                                0
                                          0
<COMMON>                                           244
<OTHER-SE>                                     106,248
<TOTAL-LIABILITY-AND-EQUITY>                   106,492
<SALES>                                              0
<TOTAL-REVENUES>                               162,748
<CGS>                                                0
<TOTAL-COSTS>                                  129,959
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              18,298
<INCOME-PRETAX>                                 14,491
<INCOME-TAX>                                     5,908
<INCOME-CONTINUING>                              8,583
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                    772
<CHANGES>                                          599
<NET-INCOME>                                     7,212
<EPS-BASIC>                                        .37
<EPS-DILUTED>                                      .37



</TABLE>


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