<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 MARCH 31, 1999 COMMISSION FILE NO. 1-11915
SUNBURST HOSPITALITY CORPORATION
10770 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 592-3000
Delaware 53-1985619
-------- ----------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
-------------------------------------------
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
-
SHARES OUTSTANDING
CLASS AT MARCH 31, 1999
----- -----------------
Common Stock, $0.01
par value per share 19,181,000
----------
================================================================================
1
<PAGE>
SUNBURST HOSPITALITY CORPORATION
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and March 31, 1998
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and March 31, 1999
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
PART II. OTHER INFORMATION 18
</TABLE>
2
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
As of
-------------------------------
March 31, December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
ASSETS
Real estate, net $ 406,484 $ 400,145
Receivables (net of allowance for doubtful
accounts of $662 and $611, respectively) 6,499 7,271
Other assets 10,928 10,982
Cash and cash equivalents 5,606 4,113
------------ -------------
TOTAL ASSETS
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt $ 295,178 $ 281,189
Accounts payable, accrued expenses and other liabilities 32,769 38,685
------------ -------------
TOTAL LIABILITIES 327,947 319,874
TOTAL STOCKHOLDERS' EQUITY 101,570 102,637
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 429,517 $ 422,511
============ =============
</TABLE>
The accompanying notes are in integral part of these Condensed Consolidated
Balance Sheets.
3
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the three months ended March 31,
---------------------------------------------
1999 1998
---------------------------------------------
<S> <C> <C>
REVENUES
Rooms $44,152 $39,982
Food and beverage 4,067 4,108
Other 2,053 2,049
------- -------
Total revenues 50,272 46,139
------- -------
OPERATING EXPENSES
Departmental expenses 15,910 15,164
Undistributed operating expenses 16,864 14,962
Depreciation and amortization 6,295 6,382
Corporate 2,667 3,464
------- -------
Total operating expenses 41,736 39,972
------- -------
OPERATING INCOME 8,536 6,167
------- -------
INTEREST EXPENSE 6,023 4,943
------- -------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 2,513 1,224
INCOME TAXES 1,005 516
------- -------
NET INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 1,508 708
EXTRAORDINARY LOSS FROM EARLY DEBT REDEMPTION, NET OF $42 TAX BENEFIT
98 -
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF $421 TAX
BENEFIT 599 -
------- -------
NET INCOME $ 811 $ 708
======= =======
Basic earnings per share
- ------------------------
Net income before extraordinary loss and cumulative effect of a
change in accounting principle $ 0.08 $ 0.04
Extraordinary loss (0.01) -
Cumulative effect of a change in accounting principle (0.03) -
------- -------
Net Income $ 0.04 $ 0.04
======= =======
Diluted earnings per share
- --------------------------
Net income before extraordinary loss and cumulative effect of a
change in accounting principle $ 0.08 $ 0.03
Extraordinary loss (0.01) -
Cumulative effect of a change in accounting principle (0.03) -
------- -------
Net Income $ 0.04 $ 0.03
======= =======
</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)
<TABLE>
<CAPTION>
For the three months ended March 31,
----------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C>
Operating Cash Flows
Income before extraordinary loss and cumulative effect
of change in accounting principle $ 1,508 $ 708
Non-cash items 9,835 6,362
Changes in assets and liabilities (5,920) (572)
-------- --------
Net cash provided by operating activities 5,423 6,498
Net cash utilized in investing activities (12,631) (23,110)
Net cash provided by financing activities 8,701 12,308
-------- --------
Net change in cash and equivalents 1,493 (4,304)
CASH AND EQUIVALENT AT BEGINNING OF PERIOD 4,113 5,908
-------- --------
Cash and equivalents at end of period $ 5,606 $ 1,604
======== ========
</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
MARCH 31, 1999
(UNAUDITED)
The accompanying consolidated financial statements of Sunburst Hospitality
Corporation and subsidiaries (the "Company") have been prepared by the Company
without audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the disclosures
made are adequate to make the information presented not misleading. The
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31, 1998
and notes thereto included in the Company's Form 10-K, dated March 29, 1999.
Certain reclassifications have been made to the prior year amounts to conform to
current period presentation.
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1999, the results of operations and cash flows for the
three months ended March 31, 1999 and 1998, respectively. Interim results are
not necessarily indicative of full year performance because of the impact of
seasonal and short-term variations.
On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Manor Care Distribution").
On September 30, 1996 the Board of Directors of Manor Care declared a special
dividend to its shareholders of one share of common stock of Choice Hotels
International, Inc. for each share of Manor Care stock, and the Board set the
Record Date and the Distribution Date. The Stock Distribution was made on
November 1, 1996 to holders of record of Manor Care's common stock on October
10, 1996.
The Manor Care Distribution separated the lodging and health care businesses of
Manor Care into two public corporations. The operations of the Company consisted
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through its
subsidiaries.
On November 1, 1996, concurrent with the Manor Care Distribution, the Company
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. and the Company's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc. ("Franchising").
On April 29, 1997, the Company's Board of Directors announced its intention to
separate the Company's franchising business ("Choice Franchising Business") from
its owned hotel business. On September 16, 1997, the Board of Directors and
shareholders of the Company approved the separation of the business via a spin-
off of the franchising business, along with the Company's European hotel and
franchising operations (the "Choice Spin-Off"), to its shareholders. The Board
set October 15, 1997 as the date of distribution and on that date, Company
shareholders received one share in Franchising (renamed "Choice Hotels
International, Inc.") for every share of Company stock held on October 7, 1997
(the date of record). Concurrent with the October 15, 1997 distribution date,
the Company changed its name to Sunburst Hospitality Corporation and effected a
one-for-three reverse stock split of its common stock.
The following table illustrates the reconciliation of net income and number of
shares used in the basic and diluted earnings per share ("EPS") calculations.
6
<PAGE>
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------------
(in thousands except per share data) 1999 1998
--------------------------------------------
<S> <C> <C>
Net income before extraordinary loss and cumulative effect of
accounting change $ 1,508 $ 708
Weighted average shares 19,416 19,956
------- -------
Basic EPS before extraordinary loss and cumulative effect of accounting
change $ 0.08 $ 0.04
======= =======
Shares for basic EPS 19,416 19,956
Effect of dilutive employee stock options 160 567
------- -------
Shares for diluted EPS 19,576 20,523
------- -------
Diluted EPS before extraordinary loss and cumulative effect of $ 0.08 $ 0.03
accounting change ======= =======
</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>
March 31,
----------------------------------------
1999 1998
----------------------------------------
<S> <C> <C>
Number of shares 2,032,064 71,268
Weighted average exercise price $ 7.01 $ 9.43
</TABLE>
As of April 1, 1999, the Company owned and managed 87 hotels with 12,020 rooms
in 26 states under the following brand names: Comfort, Clarion, Sleep, Quality,
MainStay, Rodeway and Econo Lodge.
At March 31, 1999, the Company has twelve hotels that are currently being
marketed for sale with a carrying value of $35.7 million. In accordance with
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company has discontinued depreciating these assets while
they are held for sale. In addition, SFAS No. 121 requires that assets held for
sale be reported at the lower of the carrying amount or fair value less costs to
sell. As the Company began actively marketing these hotels, it became apparent,
given current real estate values, that certain asset carrying values exceeded
estimated fair values less costs to sell. The Company, accordingly, recognized a
$4 million asset impairment provision during 1998 to reduce the carrying value
of certain of the assets to the estimated fair value less costs to sell. The
twelve hotels held for sale reported total revenues of $4.8 million and $5.1
million for the three months ended March 31, 1999 and 1998, respectively.
Income from operations before interest, taxes, depreciation and amortization and
allocations for corporate expenses of the twelve hotels was $1.7 million and
$2.1 million for the three months ended March 31, 1999 and 1998, respectively.
The Company recognized an extraordinary loss of $98,000, net of taxes, in the
three months ended March 31, 1999. The extraordinary loss represents a yield
maintenance penalty and deferred financing fees associated with the early
extinguishment of a portion of the Company's multi-class mortgage pass-through
certificates (collectively, "the CMBS debt"). The prepayment was made as a
result of the sale of one of the properties collateralizing the CMBS debt.
For purposes of providing orderly transitions after the Manor Care distribution
and the Choice spin-off, the Company and Franchising entered into various
agreements with Manor Care and Choice Hotels International, Inc. In December
1998, the Company and Choice Hotels International, Inc. entered into an
agreement to amend certain agreements executed at the time of the Choice spin-
off. The amendment effectively resolved a number of matters, including the
satisfaction of the Company's liability to Choice Hotels International, Inc.
resulting from the final allocation of assets, liabilities and equities between
the two companies. In February, 1999, the Company entered into a release
agreement with Manor Care which effectively terminated all inter-company
service, consulting and lease agreements.
7
<PAGE>
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities"
(the "SOP"). The SOP was adopted by the Company effective January 1, 1999 and
required that costs related to start-up activities be expensed as incurred.
Initial application of the SOP is reflected as the cumulative effect of a change
in accounting principle in the condensed consolidated income statement for the
three months ended March 31, 1998. Also, effective January 1, 1999, new hotel
pre-opening costs, amounting to $323,000 during the three months ended March 31,
1999, were expensed as incurred.
If the Company would have adopted this standard on January 1, 1998, the effect
would have been to increase net income before extraordinary loss and cumulative
effect of a change in accounting principle by approximately $176,000 for the
three months ended March 31, 1998. Net income for the three month period would
have decreased by approximately $518,000, as a result of a charge for the
cumulative effect of a change in accounting principle of $694,000 (net of
taxes).
8
<PAGE>
SUNBURST HOSPITALITY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
March 31, 1999
--------------
The Company is a national owner and operator of hotel properties with a
portfolio at April 1, 1999 of 87 hotels (12,020 rooms) in a total of 26 states.
The Company operates its hotels under the following brands: MainStay, Comfort,
Quality, Clarion, Sleep, Rodeway and Econo Lodge. The Company's continuing
business consists primarily of guest room revenue, meeting room revenue, and
food and beverage revenue from owned and operated hotels.
On October 15, 1997, the Company separated the Choice Franchising Business
(which had previously been conducted primarily through Franchising) and its
European owned and managed hotels from its other operations pursuant to a pro
rata distribution to its shareholders of all the common stock of Franchising. At
the time of the Choice Spin-Off, Franchising changed its name to "Choice Hotels
International, Inc." The Company changed its name to "Sunburst Hospitality
Corporation" and effected a one-for-three reverse stock split.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998:
- -------------------------------------------------------------------------
Total revenues for the three months ended March 31, 1999 increased 9.1% to $50.3
million, compared to $46.1 million in the prior year. The increase in revenue
is primarily due to a 4% increase in new rooms and suites within the portfolio
and an increase of 2.8% in revenues per available room. Operating expenses
increased $2.7 million or 8.8% during the quarter as compared to the first
quarter of 1998. Notwithstanding the tight labor markets within which the
Company operates, various cost control measures enabled the Company to hold
operating cost increases below the rate of total revenue increases. In
addition, consolidated operating margins benefit as the Company opens and ramps-
up newly developed, mid-priced extended stay MainStay Suites hotels, which
operate at higher margins than the Company's traditional hotels.
For those properties opened at least one year, occupancies increased from 63.0%
in the first quarter of the prior year to 63.6% in the first quarter of 1999 and
average daily rates increased from $64.59 to $65.62, or 1.6%. This resulted in
an increase in revenue per available room of 2.5% on a "same store" basis.
During the first quarter of 1999, corporate expense amounted to $2.7 million, a
decrease of approximately $0.8 million or 23% from the prior year's first
quarter. Corporate expense amounted to 5.3% of total revenues during the first
quarter of 1999 as compared to 7.5% during the first quarter of the prior year.
A number of initiatives to reduce overhead resulted in the overall cost
reduction. Initiatives included corporate level staffing reductions,
consolidation of office space, sub-leasing of excess office space and
termination of various service agreements with formerly affiliated entities.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 18.2%, from $12.5 million in the first quarter of the prior year to
$14.8 million in the current year. The Company considers EBITDA to be an
indicative measure of operating performance for its business. Such information
should not be considered an alternative to net income, operating income, cash
flow from operations or any other operating or liquidity performance measure
defined by generally accepted accounting principles. EBITDA presented by the
Company may not necessarily be comparable to EBITDA defined and presented by
other companies.
Interest expense increased 21.9% from $4.9 million in the first quarter of the
prior year to $6.0 million in the current year. The increase is principally the
result of additional borrowings associated with the Company's development of
hotels as well as an increase in the effective rate utilized to accrue interest
on the subordinated note payable to Choice Hotels International, Inc. The
Choice note's effective rate is 10.6% if outstanding through maturity in 2002.
Notwithstanding the opening of a number of newly developed hotels during the
past year, depreciation expense levels were comparable to the prior year. The
increased depreciation expense associated with newly developed hotels was offset
by a decline in depreciation expense relative to hotels held for sale. In
accordance with Statement of Financial Accounting Standards No. 121, the Company
discontinued depreciating those assets while they are held for sale. This had
the effect of reducing depreciation expense in the first quarter of 1999 by
approximately $585,000. The twelve hotels held for sale at March 31, 1999, have
been reported at the lower of the carrying amount or fair value less cost of
sale. The twelve hotels held for sale have a combined book value of $35.7
million.
9
<PAGE>
After the effect of an extraordinary loss from early debt redemption and the
accumulative effect of a change in accounting principle, the Company reported
net income of $811,000 during the first quarter of 1999 versus $708,000 during
the prior year's first quarter. The extraordinary loss from early debt
redemption during the quarter of $98,000 (net of $42,000 tax benefit) related to
the early retirement of debt collateralized by a property sold. On January 1,
1999, the Company adopted the AICPA Accounting Standards Executive Committee's
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP
98-5"). In accordance with that new accounting pronouncement, the Company wrote
off the unamortized balance of deferred pre-opening costs on its balance sheet
at January 1, 1999 and recorded an after-tax charge of $599,000 (net of $421,000
tax benefit) for the cumulative effect of that change in accounting principle.
Beginning January 1, 1999, pre-opening costs associated with properties under
construction are expensed as incurred. Pre-opening costs incurred and expensed
in the first quarter of 1999, amounting to $323,000, are included in hotel
operating expenses.
Net income before extraordinary loss and cumulative effect of a change in
accounting principle more than doubled in the first quarter of 1999 to $2.5
million from $1.2 million in the first quarter of the prior year. On an after
tax basis, net income before the extraordinary loss and the cumulative effect of
the change in accounting principle increased 113% to $1.5 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Availability under the Company's committed credit facility with a group of banks
amounted to $80 million during the quarter ended March 31, 1999. Borrowings
under the credit facility amounted to $41 million at December 31, 1998 and $53
million at March 31, 1999. The Company utilizes its credit facility to fulfill
its seasonal requirements and to fund construction and development.
At March 31, 1999, the Company has $295.2 million of long-term debt outstanding,
none of which matures in the next twelve months. The credit facility expires in
October 2000 and $131.3 million of subordinated debt payable to Choice Hotels
International, Inc. matures in October, 2002. The Choice note provides
additional financial flexibility as interest is not payable until maturity.
The Company intends to develop MainStay Suites, a mid-priced extended stay hotel
product. At March 31, 1999, fifteen MainStay Suites were open and operating
with another six hotels under construction. The cost of developing a MainStay
suites approximates $6.0 million. At March 31, 1999, costs incurred to date on
the six hotels under construction amounted to $18 million. Accordingly, the
estimated cost to complete is approximately $21 million. In order for the
Company to continue on a long-term basis the MainStay Suites development
program, additional capital will be required.
The Company's objective is to reduce its overall leverage while continuing to
grow through development. The Company continuously evaluates its existing
portfolio and seeks to sell hotels that have limited upside potential or that
are projected to under-perform in order to redeploy capital in higher yielding
assets. The Company has identified twelve such properties that as of March 31,
1999, are being marketed for sale in 1999. During the quarter ended March 31,
1999, the Company sold one hotel for total proceeds of $2.0 million.
Pursuant to a share repurchase program announced on September 25, 1998, the
Company has purchased a total of 946,000 shares at a total cost of $4.1 million.
The Company intends to utilize cash flow from operations to fund the continuing
execution of this program while maintaining availability under the credit
facility to finance construction and development.
At March 31, 1999, the Company's debt to book capitalization amounted to 74%
while debt to market cap was 80%.
While operating cash flow along with credit available under the Company's credit
facility and the proceeds from the sale of hotels is expected to be adequate to
fund operations and committed construction projects, accessing additional
capital will be imperative in order for the Company to expand its long range
development and growth plans.
10
<PAGE>
YEAR 2000:
- -----------
Many existing computer programs use two digits to identify a year. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If the programs are not corrected, computer
applications could fail or create erroneous results at the turn of the century.
The Company has developed a plan to address the impact of the Year 2000 on its
computer systems and other systems with embedded microprocessors that could be
date sensitive (collectively, "in-house systems"), as well as issues related to
third party vendors and suppliers of the Company. The Company's plan consists
of four phases: 1) Assess computer systems and other systems with embedded
microprocessors and determine which such systems are critical to the ongoing
operations of the Company; 2) Inventory critical systems to determine
manufacturers, suppliers or vendors; 3) Test or assess the readiness of systems
and vendors and suppliers, and; 4) Inventory and assess the readiness of non-
critical systems. Corrective actions are being taken as issues arise. The
following discusses the Companies progress in addressing both in-house systems
and third party vendors.
The Company's financial accounting and reporting systems are scheduled to be
upgraded in early 1999 to a version that has been certified to be Year 2000
compliant. Following the upgrade, the accounting and reporting systems are
expected to adequately provide information and reporting needs into the next
century. Non-compliant computer hardware and software at the Company's
corporate headquarters and all its hotels has been identified and a schedule to
upgrade affected systems by September 1999 has been established. The Company
estimates that approximately 85% of its employee workstations will need to be
upgraded. In order to accommodate a new property management system required by
Choice Hotels International, Inc., the Company had previously planned to update
these systems. Therefore, the cost of upgrading the systems, outside of
previously planned upgrades, is estimated to be immaterial.
The Company has inventoried systems with embedded chips used at the Company's
corporate headquarters as well as building systems at the company's hotel
properties (i.e., elevators, room key systems, HVAC equipment, and fire safety
equipment) and has begun contacting manufacturers to determine the readiness of
the systems for the Year 2000. Any systems determined to be Year 2000 sensitive
and non-compliant will be replaced or modified as necessary. Although the
Company does not have an estimate for the cost to bring all critical systems
into compliance, it is not believed to be material.
The Company is developing a contingency plan to address the possible failure of
any in-house systems. As critical non-compliant systems are identified that the
Company believes may not be compliant by the year 2000, contingency plans will
be created.
The Company relies significantly on third party systems to provide various goods
and services. The Company has identified those vendors and suppliers that it
believes to be critical to the ongoing operations of the Company and has begun
contacting them to verify their state of readiness and evaluate their
contingency plans. Based on the responses received, the Company believes that
the critical third party systems are or will be Year 2000 compliant. To the
extent that a third party cannot certify that their systems will be Year 2000
complaint, the Company will take actions to correct the non-compliant situation
or develop contingency plans.
Because the Company relies significantly on Choice Hotels International, Inc.
("Choice") for reservation and property management systems as well as overall
franchisee support, their state of readiness for Year 2000 is critical to the
Company. Therefore, a description of the Choice plan to address the Year 2000
issue, as set forth in its SEC filings, follows.
Choice's exposure to potential Year 2000 problems exists in two general
areas: technological operations in the sole control of Choice, and
technological operations dependent in some way on one or more third
parties. With respect to internal systems, Choice has conducted Year 2000
compliance testing on all of its proprietary software, including its
reservations and reservations support systems, its franchise support system
and its franchisee property management support systems. Choice has
indicated that the proprietary software is Year 2000 compliant.
Choice's Year 2000 Compliance Committee is currently identifying third
party vendors and service providers whose non-compliant systems could have
a material impact on Choice and undertaking an assessment as to such
parties' compliant status. These parties include franchisees, airline
global distribution systems ("GDS"), utility providers, telephone service
providers, banks and data processing
11
<PAGE>
services. The GDS companies, which provide databases through which travel
agents can book hotel rooms, have assured Choice in writing that they are
making the necessary changes in their system to become compliant and Choice
has begun conducting tests with the GDS companies.
Additional information regarding Choice's Year 2000 preparedness can be obtained
from their SEC filings.
Failure by the Company or one or more of its third party vendors to adequately
address the Year 2000 issue could have a material adverse impact on the Company.
The Company is not able to estimate the impact such failure could have due to
its dependence on third parties including utility companies, airlines, hotel
reservation centers, Choice, banks and credit card payment processing centers.
In addition, the severity and duration of failures will greatly affect the
impact of such failures on the Company.
As a result of the considerable publicity surrounding, and the increased
consumer awareness of, the Year 2000 issue, it is possible that travel patterns
may be disrupted. The Company is unable to estimate the effect such
disruptions, if any, may have on its hotel operations.
FORWARD-LOOKING STATEMENTS
- ---------------------------
The statements contained in this document that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for
future periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company.
Certain statements contained in this Form 10-Q, including those in the
section entitled "Management's Discussion and Analysis of Operating Results and
Financial Condition," contain forward-looking information that involves risk and
uncertainties, including the Company's plans to address the Year 2000 issue.
Actual future results and trends may differ materially depending on a variety of
factors discussed in the "Risk Factors" section included in the Company's SEC
filings, including (a) the Company's success in implementing its business
strategy, including its success in arranging financing where required, (b) the
nature and extent of future competition, and political, economic and demographic
developments in regions where the Company does business or in the future may do
business, and; (c) the timely resolution by the Company and its vendors and
suppliers of the Year 2000 issue.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements.
12
<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 - March 31, 1999
(b) The following reports were filed pertaining to the quarter ended March 31,
1999.
None
13
<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: May 13, 1999 /s/ James A. MacCutcheon
------------ --------------------------
By: James A. MacCutcheon
Executive Vice President,
Chief Financial Officer and
Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, the consolidated statements of income and the
consolidated statements of cash flows and is qualified in its entirety by
reference to such financial statements and the notes thereto.
</LEGEND>
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</TABLE>
