<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from to
Commission file number 001-11915
---------
SUNBURST HOSPITALITY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1985619
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10770 Columbia Pike, Silver Spring, Maryland 20901
(Address of Principal Executive Offices) ZipCode
Registrant's telephone number, including area code (301) 592-3800
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
<S> <C>
Common Stock, Par Value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
</TABLE>
-------------------------------------------------
(Title of Class)
-------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months as for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting stock of Sunburst Hospitality
Corporation held by non-affiliates was $29,673,343 as of March 27, 2000 based
upon a closing price of $4.50 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Sunburst Hospitality Corporation's
common stock at March 27, 2000 was 15,358,837.
DOCUMENTS INCORPORATED BY REFERENCE.
PART III Proxy Statement dated April 10, 2000.
===============================================================================
<PAGE>
PART I
Item 1. Business
Sunburst Hospitality Corporation ("Sunburst" or the "Company") owns and
operates hotels in one of four principal categories within the lodging industry:
extended-stay, traditional all-suites, full service and limited service. As of
March 1, 2000, the Sunburst portfolio included 83 hotels open with 11,365 rooms
in 27 States and 3 hotels under construction or in development. Each hotel is
branded with a Choice Hotels International, Inc. ("Choice") brand. Sunburst is
Choice's largest franchisee. The Company is in the process of converting its
Miami Springs Comfort Inn hotel to a Holiday Inn Express and expects to complete
the conversion in June 2000. Twenty-eight of the 83 hotels, with a net book
value of $124.9 million at December 31, 1999, serve as collateral for the
Company's multi-class mortgage pass-through certificates.
Sunburst has a successful record of managing ahead of industry cycles.
Prior to an industry downturn in the late 1980s, the Company was able to
liquidate a substantial portion of its existing hotel portfolio. Then in 1992,
the Company began to opportunistically acquire hotels at prices well below their
replacement cost. All of these hotels have benefited from a significant
investment of capital used to renovate and upgrade the properties. The hotels
have also benefited from the installation of professional management and
marketing systems. In the past four years the Company has responded to changing
industry cycles by shifting its development strategy to the new construction of
mid-market, all-suite extended-stay hotels and has opened 21 such hotels, all
branded MainStay Suites.
Sunburst's strategy is to: (i) actively manage the Company's existing
portfolio and optimize performance by applying proven operating systems and
procedures, (ii) sell hotels projected to underperform and redeploying capital
into higher yielding assets; (iii) develop extended-stay hotels to capitalize on
the positive fundamentals of the extended-stay opportunity; and (iv) selectively
pursue development and repositioning opportunities.
Historical Acquisition Strategy
The primary focus of Sunburst from 1992 through 1996 was the
acquisition of hotels. During this period many hotels were facing financial
hardship, creating an opportunity for Sunburst to acquire properties at prices
well below replacement cost. Sunburst's strategy was to acquire and renovate the
hotels, install professional management and marketing systems, and in some cases
reposition the hotels to a different brand or service level. Between 1992 and
1997, Sunburst acquired 55 hotels, containing 7,809 rooms, for an aggregate
purchase price of $187.7 million. Approximately $95.6 million was spent on
additional capital improvements to those hotels. The total investment basis in
the 55 acquired hotels is approximately 60% of the estimated replacement value
of the hotels at their respective dates of acquisition.
The Company believes that there are currently limited opportunities to
acquire hotels at a substantial discount to replacement value. As a result, no
hotels have been acquired by the Company since February 1997. The Company will
evaluate acquisitions on an opportunistic basis when it believes that long-term
value can be created.
Hotel Development
The Company's recent strategy to concentrate on the development of
mid-market, extended-stay hotels is intended to capitalize on the demand/supply
imbalance in that niche. Historically, these hotels have produced higher than
average returns on investment and management believes that demand in this
segment significantly exceeds supply.
<PAGE>
Sunburst's focus on external development is geared to capitalize on the
under-served, high-growth, mid-priced extended-stay all-suite segment, and the
development of other high-quality, consumer-focused hotels.
The following is a list of new hotels developed by Sunburst
since 1994 or under development as of March 1, 2000.
<TABLE>
<CAPTION>
Year of Opening
---------------
Market Brand
- ------ -----
<S> <C> <C>
Dallas/Plano, TX................................................ Sleep Inn 1994
San Antonio, TX................................................. Sleep Inn 1995
Baton Rouge, LA................................................. Sleep Inn 1996
Houston/Airport, TX............................................. Sleep Inn 1996
Austin/Round Rock, TX........................................... Sleep Inn 1996
Dallas/Plano, TX................................................ MainStay Suites 1996
Raleigh, NC..................................................... Sleep Inn 1997
Dallas/Arlington, TX............................................ Sleep Inn 1997
Kansas City/Airport, MO......................................... Sleep Inn 1997
Charlotte, NC................................................... Sleep Inn 1997
Rockville, MD................................................... Sleep Inn 1997
Providence/Airport, RI.......................................... MainStay Suites 1997
Cincinnati/Blue Ash, OH ........................................ MainStay Suites 1997
Kansas City/Airport, MO......................................... MainStay Suites 1998
Indianapolis, IN................................................ MainStay Suites 1998
Louisville, KY.................................................. MainStay Suites 1998
Greenville, SC.................................................. MainStay Suites 1998
Denver/Airport, CO.............................................. Sleep Inn 1998
Orlando/Lake Mary, FL ......................................... MainStay Suites 1998
Denver/Tech Center, CO ......................................... MainStay Suites 1999
Jacksonville, FL ............................................... MainStay Suites 1998
Nashville, Brentwood, TN ....................................... MainStay Suites 1998
Miami/Airport, FL ............................................. MainStay Suites 1998
Pittsburgh/Airport, PA ........................................ MainStay Suites 1998
Fishkill/Poughkeepsie, NY ...................................... MainStay Suites 1998
Denver/Tech Center, CO ........................................ Sleep Inn 1999
Tempe, AZ ...................................................... MainStay Suites 1999
Miami/Airport, FL .............................................. Sleep Inn 1999
Annapolis, MD .................................................. MainStay Suites 1999
Peabody, MA .................................................... MainStay Suites 1999
Raleigh, NC .................................................... MainStay Suites 1999
North Charleston, SC ........................................... MainStay Suites 1999
Malvern, PA .................................................... MainStay Suites 1999
Secaucus, NJ ................................................... MainStay Suites 2000
Mt. Laurel, NJ (1) ............................................. MainStay Suites 2000
Schaumberg, IL (1).............................................. MainStay Suites 2001
Bedford, MA (1)................................................. MainStay Suites 2001
</TABLE>
__________
(1) Hotel under development at December 31, 1999.
Sunburst's focus on developing the mid-market, extended-stay product is
based on statistics indicating the demand/supply imbalance. According to various
industry studies, demand in the extended-stay market is strong, yet supply is
limited, particularly in the mid-price segment. Industry sources define
extended-stay as stays of five or more nights and reported that demand
accommodated in extended-stay
3
<PAGE>
hotels grew faster than supply in 1999. By applying its hotel real estate
development expertise, Sunburst is targeting markets with ideal conditions for
the extended-stay product and building MainStay Suites hotels.
The MainStay Suites brand, which was created by the Company in
conjunction with Choice Hotels International, Inc, has a unique product design
and service package which enhance property level appeal, productivity and
profitability. Among the MainStay brand's most unique features are the automated
check-in kiosk (which allows guests to check in and out without assistance from
an employee) and the optional daily light touch housekeeping (full housekeeping
just every five days). These features enable MainStay Suites hotels to operate
with fewer full time equivalent employees than a similar limited service hotel.
Sunburst anticipates that its extended-stay projects can produce
stabilized, unleveraged pre-tax property level returns on investment of
approximately 15%. This belief is supported by the Company's experience at the
MainStay Suites hotels that are nearing stabilization. Projections are based on
rate and occupancy forecasts generated internally by the Company and by external
feasibility consultants, as well as internal operating guidelines, land cost and
projected construction costs. The ultimate returns will, however, be impacted by
a number of factors, including the extent of new competitive supply in each
market, and there can be no assurance that projected returns will be achieved or
that actual results will not differ materially. (See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Forward Looking Statements, below.)
Each of the Company's MainStay Suites hotels averages approximately 100
suites and are developed on 2.5 to 3.0 acres of land in suburban office parks or
locations in close proximity to major employers, restaurants and retail
amenities. MainStay Suites feature high quality, interior corridor building
construction with amenities and features provided in direct response to consumer
demand. The suites feature bedroom areas, a living room area with a pull-out
couch or recliner, private bathroom and fully furnished kitchen. The kitchen
includes a full-size refrigerator, dishwasher, microwave, stove, coffee maker,
toaster and all cooking utensils. Each suite also features an over-sized counter
which serves as an eating area and work center, along with two ergonomic chairs.
Suite alternatives include a studio suite or one-bedroom suite. Each suite
includes two direct dial phone lines with data ports, voice mail and other
automated phone services.
Hotel Dispositions
During 1999, the Company sold eleven hotels for $37.0 million. At
December 31, 1999, the Company had an additional seven hotels, with a total net
book value of $34.5 million, being marketed for sale. The Company anticipates
closing on the sale of these hotels during 2000. The Company has sold one hotel
since December 31, 1999.
Operations
Sunburst's owned and managed hotels typically operate under one of the
Choice brand names. Sunburst's hotels take advantage of the same systems and
services available to Choice franchisees with respect to a particular brand. The
hotels participate in Choice's central reservation system, marketing and
advertising efforts and volume purchasing discounts and are subject to Choice's
same quality assurance program. In addition, Sunburst has instituted the
following systems in the hotels it operates.
. Yield Management. An automated yield management system allows each
property's management to take advantage of the supply and demand conditions
in the local marketplace. The automated system performs calculations and
suggests pricing strategies to the local hotel management. The system
continuously updates information based on the availability of room supply,
reservation volume and projected demand and stay patterns within each
hotel.
4
<PAGE>
. Training. Sunburst has developed a training system for all guest services
representatives that teaches the basic sales techniques. A computerized
guest comment system solicits the comments of guests and the experiences
they had at the hotel while providing management with immediate guest
feedback.
. E-Commerce. Sunburst has several electronic commerce initiatives aimed at
producing incremental revenue and improving productivity. Approximately
1.6% of the Company's room revenue were booked through Internet sites and
the Company expects that to increase to at least 3% in 2000. The Company
also expects to install an Internet-based procurement system in 2000 which
is expected to reduce the overall cost of purchasing various supplies.
. Information Systems. Each of the Sunburst-operated hotels has a
computerized front desk and accounting system and all units are connected
to Sunburst's own wide area network. These systems allow key financial
indicators (such as daily occupancy and revenue) to be immediately gathered
from each hotel and electronically transmitted to the key operating
officers and managers of Sunburst. Instant access to information allows
management to quickly spot trends and make corrections and changes where
necessary. The system also allows for cost savings in the accounting and
bookkeeping departments of each hotel.
. Time and Attendance System. Sunburst hotels maintain labor scheduling and
automated time and attendance systems that are tied into a central payroll
system at the corporate headquarters. This computerized method of
scheduling and tracking time provides for scheduling based on up-to-date
occupancy projections and allows management to make quick decisions on
controlling labor costs.
. Capital Reinvestment Program. Each of Sunburst's hotels completes a
detailed capital spending budget annually. The hotels spend on average
5%-7% of total revenues on capital improvements annually. This reinvestment
allows the hotels to maintain a competitive advantage in the local markets.
. Annual Business Planning Process. Each hotel prepares a zero-based annual
business plan which incorporates historical performance and market
conditions. The plan, which is reviewed and approved by senior management,
provides detailed strategies in the key operating areas of marketing, guest
services and food and beverage. The annual plan serves as a fundamental
measurement of management's performance.
The Hotel Properties
Sunburst's hotel properties serve four categories of the lodging
industry; traditional all-suite, extended-stay, full service and limited
service.
ALL SUITE HOTELS
All-Suite Hotels. Sunburst has five hotels in the traditional all-suite
segment. Sunburst's all-suite hotel properties compete in the mid-price and
upscale price segments.
<TABLE>
<CAPTION>
Brand Number of Hotels Number of Rooms Price Segment
----- ---------------- --------------- -------------
<S> <C> <C> <C>
Quality Suites................................. 3 345 upscale
Comfort Suites................................. 2 232 mid-price
</TABLE>
5
<PAGE>
EXTENDED-STAY HOTELS
Extended-Stay Hotels. Sunburst has 21 hotels with another 3 under
construction or in development in the extended-stay segment. All are branded
MainStay Suites and compete in the mid-price price segment.
<TABLE>
<CAPTION>
Brand Number of Hotels Number of Rooms Price Segment
- ----- ---------------- --------------- -------------
<S> <C> <C> <C>
MainStay Suites........................................ 21 2,054 mid-price
</TABLE>
FULL SERVICE HOTELS
Full Service Hotels. Sunburst has 16 hotels in the full service
segment. Sunburst's full service hotels compete in the mid-price and upscale
price segments. The table below identifies Sunburst's full service hotels by
brand and price segment.
<TABLE>
<CAPTION>
Brand Number of Hotels Number of Rooms Price Segment
- ----- ---------------- --------------- -------------
<S> <C> <C> <C>
Clarion Hotel & Inns................................... 11 2,126 upscale
Quality Hotel & Inns................................... 5 1,327 mid-price
</TABLE>
LIMITED SERVICE HOTELS
Limited Service Hotels. Sunburst has 41 hotels in the limited service
segment open. Sunburst's limited service hotel properties compete in the
mid-price price segments. The table below identifies Sunburst's limited service
hotels by brand and price segment.
<TABLE>
<CAPTION>
Brand Number of Hotels Number of Rooms Price Segment
- ----- ---------------- --------------- -------------
<S> <C> <C> <C>
Comfort Inns........................................... 22 3,173 mid-price
Quality Inns........................................... 6 661 mid-price
Sleep Inns............................................. 13 1,447 mid-price
</TABLE>
Franchise and Strategic Alliance Agreements
Each Franchise Agreement with Choice Hotels International, Inc. has an
initial term of twenty years. The Franchise Agreements have varying original
dates, from 1982 through 1998. Certain Franchise Agreements allow for unilateral
termination by either party on the 5th, 10th, or 15th anniversary of the
Franchise Agreement. Sunburst's Franchise Agreements with Choice allow for early
termination by Sunburst, subject to liquidated damage provisions which range
from zero dollars to a maximum of $100,000 per property.
The Franchise Agreements require the payment of certain fees and
charges, including the following: (a) a royalty fee of between 1.93% to 5.0% of
monthly gross room revenues; (b) a marketing fee of between 0.7% and 2.5% plus
$0.28 per day multiplied by the specified room count; and (c) 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 all its
franchisees, generally. Late payments (i) will be a breach of the Franchise
Agreement and (ii) will accrue interest from the date of delinquency at a rate
of 1.5% per month or portion thereof.
At the time of the Spin-off and as subsequently amended, Choice and the
Company entered into a Strategic Alliance Agreement pursuant to which: (i)
requires the Company to give Choice two weeks notice of the filing of a hotel
franchise application with any competitor of Choice; (ii) the Company has also
agreed, barring a material change in market conditions, to continue to develop
MainStay Suites hotels so that it will have opened a total 25 MainStay Suites
hotels by October 15, 2001; (iii) Choice will provide certain credits against
MainStay Suites franchise fees otherwise payable by the Company if certain
financial performance goals for those hotels are not achieved; (iv) Choice and
the Company have agreed to
6
<PAGE>
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, on a non-exclusive basis, to negotiate with
third-party vendors on the Company's behalf for the purchase of certain items.
The Strategic Alliance Agreement expires on October 15, 2002.
Competition
The Company is a leading owner and operator of hotels in the United
States. 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, which are located in 27 States, as well as its range of products and
room rates.
Seasonality
The Company's principal sources of revenue are revenues generated by
its properties. The Company experiences seasonal revenue patterns similar to
those of the lodging industry in general. This seasonality can be expected to
cause quarterly fluctuations in the Company's revenues, profit margins and net
income.
Regulation and Environmental Matters
The Company's hotels are subject to numerous federal, state and local
government regulations, including those pertaining to the preparation and sale
of food and beverages (such as health and liquor license laws), building and
zoning requirements and laws governing a hotel owner's relationship with
employees, including minimum wage requirements, overtime, working conditions and
work permit requirements. While the Company's operations have not been
materially affected by such regulations, the Company cannot predict the effect
of future regulations or legislation.
The hotel properties are subject to environmental regulations under
Federal, state and local laws. Certain of these laws may require a current or
previous owner or operator of real estate to clean up designated hazardous or
toxic substances or petroleum product releases affecting the property. In
addition, the owner or operator may be held liable to a governmental entity or
to third parties for damages or costs incurred by such parties in connection
with the contamination. The Company does not believe that it is subject to any
material environmental liability.
Employees
At December 31, 1999, Sunburst employed approximately 3,500 employees.
As is typical in the lodging industry, the Company experiences high rates of
employee turnover. Less than 5% of the Company's employees are represented by
unions. All of the Company's union employees are employed at Comfort Inn by the
Bay, San Francisco, California. The Company considers its relations with its
employees to be good.
7
<PAGE>
Item 2. Properties
The following chart lists by market segment Sunburst's hotels
at March 1, 2000.
<TABLE>
<CAPTION>
Year
No. of Constructed/Last
Hotel Market Rooms Major Renovation
- ----- ------ ------ ----------------
<S> <C> <C> <C>
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
Extended-Stay
Mid-Price
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 1997
MainStay Suites Louisville................... Louisville, Kentucky 100 1998
MainStay Suites Tech Center.................. Denver, Colorado 100 1998
MainStay Suites Lake Mary.................... Orlando, Florida 100 1998
MainStay Suites South Pointe................. Jacksonville, Florida 100 1998
MainStay Suites Greenville................... Greenville, South Carolina 100 1998
MainStay Suites Brentwood.................... Nashville, Tennessee 100 1998
MainStay Suites Miami Springs................ Miami Springs, Florida 102 1998
MainStay Suites Fishkill..................... Fishkill, New York 106 1998
MainStay Suites Annapolis.................... Annapolis, Maryland 97 1999
MainStay Suites Pittsburgh................... Pittsburgh, Pennsylvania 100 1998
MainStay Suites Raleigh...................... Raleigh, North Carolina 88 1999
MainStay Suites Tempe ....................... Tempe, Arizona 94 1999
MainStay Suites Peabody ..................... Peabody, Massachusetts 94 1999
MainStay Suites King of Prussia ............. Malvern, PA 78 1999
MainStay Suites N. Charleston................ Charleston, SC 97 1999
MainStay Suites Secaucus..................... Secaucus, NJ 132 2000
Full Service
Upscale
Clarion Hotel Baltimore...................... Baltimore, Maryland 103 1927/1996
Clarion Hotel Worthington.................... Columbus, Ohio 231 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 109 1970/1996
Clarion Hotel Hollywood Beach................ Miami-Ft. Lauderdale, Florida 309 1972/1996
Clarion Hotel................................ Mobile, Alabama 251 1979/1994
Clarion Hotel Virginia Beach................. Norfolk-Virginia Beach, Virginia 149 1985/1995
Clarion Hotel Roanoke........................ Roanoke, Virginia 154 1981/1997
Clarion Hotel Springfield.................... Springfield, Missouri 199 1974/1997
Clarion Hotel................................ Charlotte, North Carolina 174 1974/1997
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C>
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 189 1972/1995
Quality Hotel Arlington...................... Washington, DC 392 1962/1997
Limited Service
Mid-Price
Comfort Inn Albuquerque...................... Albuquerque, New Mexico 118 1985/1996
Quality Inn Anderson......................... Anderson, South Carolina 121 1988/1995
Comfort Inn N.W. Pikesville(2)............... Baltimore, Maryland 190 1964/1994
Comfort Inn University....................... Baton Rouge, Louisiana 150 1972/1994
Comfort Inn Danvers.......................... Boston, Massachusetts 140 1972/1997
Comfort Inn Brooklyn......................... Brooklyn, New York 70 1926/1997
Comfort Inn Canton........................... Canton, Ohio 124 1989/1994
Comfort Inn Charlotte........................ Charlotte, North Carolina 150 1985/1996
Quality Inn & Suites--Crown Point............. Charlotte, North Carolina 100 1988/1996
Comfort Inn Middleburg Heights............... Cleveland, Ohio 136 1989
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
Comfort Inn Collierville..................... Memphis, Tennessee 95 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 153 1952/1997
Comfort Inn--Lee Road........................ Orlando, Florida 145 1985/1994
Comfort Inn Portland......................... Portland, Maine 127 1984/1996
Quality Inn Richmond......................... Richmond, Virginia 193 1985/1997
Quality Inn Midvalley........................ Salt Lake City, Utah 131 1972/1995
Comfort Inn by the Bay(1).................... San Francisco, California 138 1971/1996
Comfort Inn Westport......................... St. Louis, Missouri 169 1971/1995
Comfort Inn Tyson's.......................... Washington, DC 250 1982/1995
Comfort Inn West Palm Beach.................. West Palm Beach, Florida 162 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 102 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
Sleep Inn Denver Tech........................ Denver, Colorado 119 1999
Sleep Inn Miami Airport...................... Miami Springs, Florida 119 1999
</TABLE>
(1) Leased property
(2) Hotel on leased land
9
<PAGE>
The following chart shows operating statistics for all of Sunburst's
owned and managed hotels presented by market segment for the three fiscal years
ended May 31, 1997, the seven months ended December 31, 1997, and the twelve
months ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
FY 1995 FY 1996 FY 1997
---------------------------------- ---------------------------------- ----------------------------------
ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4)
------- ------------ --------- ------ ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Traditional
All-Suite......... $58.74 61.34% $36.03 $64.70 69.00% $44.65 $70.55 73.42% 51.80%
Extended-Stay..... - - - - - - 57.09 65.55 37.42
Full Service...... 54.04 65.43 35.36 58.85 65.41 38.49 63.25 67.05 42.41
Limited Service... 48.39 69.15 33.46 53.36 67.11 35.81 56.39 69.23 39.04
All Hotels........ 51.28 67.10 34.40 55.97 66.61 37.28 59.60 68.69 40.94
</TABLE>
<TABLE>
<CAPTION>
Seven months ended
December 31, 1997(1) Year ended December 31, 1998 Year ended December 31, 1999
---------------------------------- --------------------------------- -----------------------------------
ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4)
------ ------------ -------- ------ ------------ --------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Traditional
All-Suite......... $70.03 72.05% $50.45 $75.27 72.65% $54.69 $76.96 70.76% $54.45
Extended-Stay..... 61.57 48.64 29.95 56.03 57.17 32.04 57.82 70.24 40.62
Full Service...... 65.23 66.46 43.35 67.69 66.81 45.23 69.37 65.01 45.09
Limited Service... 59.11 68.01 40.20 59.98 67.36 40.40 63.40 66.95 42.45
All Hotels........ 61.81 67.41 41.67 62.90 66.57 41.87 64.22 66.80 42.88
</TABLE>
_______________________________________
(1) The information provided in the table above for the seven months ended
December 31, 1997 is not representative of a full fiscal year due to
the seasonality of the hotel industry.
(2) Average Daily Rate ("ADR") is determined by dividing room revenue by
the number of rooms occupied on a daily basis for the applicable
period.
(3) Occupancy is determined by dividing the number of guest rooms occupied
on a daily basis by the total number of guest rooms available for the
period.
(4) Revenue Per Available Room ("RevPAR") is calculated by multiplying the
percentage of occupied rooms by the average daily room rate realized.
<TABLE>
<CAPTION>
Seven Months
Ended Year Ended Year Ended
Fiscal Year Ended May 31, December 31, December 31, December 31,
1995 1996 1997 1997 (1) 1998 1999
------------ ------------ ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Number of properties, end of period....... 48 65 71 76 86 83
Number of rooms, end of period............ 7,941 9,713 10,330 10,885 11,910 11,351
Average occupancy percentage.............. 67.10% 66.61% 68.70% 67.41% 66.57% 66.80%
Average daily room rate (ADR)............. $51.28 $55.97 $59.62 $ 61.81 $ 62.90 $ 64.22
RevPAR.................................... $34.40 $37.28 $40.96 $ 41.67 $ 41.87 $ 42.88
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
___________________________________________
(1) The information provided in the table above for the seven months ended
December 31, 1997 is not representative of a full fiscal year due to the
seasonality of the hotel industry.
10
<PAGE>
Item 3. Legal Proceedings
The Company is not a party to any litigation, other than routine
litigation incidental to its business. 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
Executive Officers Of Sunburst Hospitality Corporation
The name, age, title, present principal occupation, business address
and other material occupations, positions, offices and employment of each of the
executive officers of Sunburst are set forth below. The business address of each
executive officer is 10770 Columbia Pike, Silver Spring, Maryland 20901, unless
otherwise indicated.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stewart Bainum, Jr................ 55 Chairman of the Board of Directors
Donald J. Landry.................. 51 Vice Chairman, Chief Executive Officer and President
James A. MacCutcheon.............. 47 Executive Vice President, Chief Financial Officer and Treasurer
Kevin P. Hanley................... 42 Senior Vice President, Development and Extended-Stay
Gregory D. Miller................. 45 Senior Vice President, Marketing and Human Resources
Douglas H. Verner................. 46 Senior Vice President, General Counsel & Secretary
Charles G. Warczak, Jr............ 52 Vice President, Finance and Systems
Pamela M. Williams................ 44 Vice President, Assistant General Counsel and Assistant Secretary
</TABLE>
Stewart Bainum, Jr., Chairman of the Board of the Company since December 1998
and from November 1996 to July 1998; 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, Inc. from March 1987 through September 1998;
Chairman of the Board of HCR/Manor Care since September 1998; 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 from September 1991 through June
1998; 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.
Donald J Landry. Chief Executive Officer, President and Vice Chairman of the
Company since July 1999; 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.
and its predecessors for more than 20 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 from September 1993 to November
1996; Senior Vice President, Chief Financial Officer and Treasurer of Manor Care
from October 1987 through November 1996; Treasurer of Vitalink from September
1992 to January 1997 and a Director of Vitalink from September 1994 to June
1998.
Kevin P. Hanley. Senior Vice President, Development and Extended Stay of the
Company since June 1999; Vice President, Real Estate and Development of the
Company from December 1994 to June 1999; 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
11
<PAGE>
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, Marketing and Human Resources of the
Company since June 1999, Senior Vice President, Human Resources from October
1997 to June 1999; 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 November 1996.
Charles G. Warczak, Jr. Vice President, Finance and Systems of the Company since
October 1997; Vice President, Hotel Accounting of the Company from March 1997 to
October 1997; 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.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The shares of Sunburst's Common Stock are listed and traded on the New
York Stock Exchange. The following table sets forth the high and low sales
prices of Sunburst's Common Stock since it began trading on November 4, 1996:
High Low
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 5/16 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 9 5 3/8
Quarter ended September 30, 1998 6 7/8 3
Quarter ended December 31, 1998 4 3/4 4 7/16
FISCAL YEAR ENDED DECEMBER 31, 1999
Quarter ended March 31, 1999 5 1/8 3 3/4
Quarter ended June 30, 1999 6 3/16 3 7/8
Quarter ended September 30, 1999 6 3/4 5 5/8
Quarter ended December 31, 1999 6 1/4 4 7/8
- -------------
(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.
On October 15, 1997, 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 of the outstanding shares of the common stock of Choice Hotels
Franchising, Inc. (now known as Choice Hotels International, Inc.). This was the
only dividend paid since November 4, 1996. The Company does not anticipate the
payment of any cash dividends on its common stock in the foreseeable future.
Payments of dividends on Company common stock may be subject to limitations as
may be imposed by the Company's credit facilities from time to time. The
declaration of dividends will be subject to the discretion of the Board of
Directors.
As of March 20, 2000, there were approximately 7,631 holders of the
Company's common stock.
13
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the year For the year For the seven
ended ended months ended For the fiscal year ended
December 31, December 31, December 31, May 31,
-----------------------------------
1999 1998 1997 1997 1996 1995
------------ ------------ ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data
Total revenues $ 210,036 $ 204,096 $ 114,553 $ 185,753 $ 154,625 $ 114,514
Hotel operating expenses 138,181 131,881 77,134 129,699 114,403 87,588
Corporate expense 10,405 13,961 8,244 7,691 8,026 6,038
------------ ------------ ------------ ---------- --------- ----------
Recurring EBITDA 61,450 58,254 29,175 48,363 32,196 20,888
Provision for asset impairment/ (net gains
on property dispositions) (1,878) 4,264 5,119 - 24,595 -
Depreciation and amortization
26,240 26,983 14,246 20,632 16,636 12,513
Interest expense 24,677 20,756 10,138 15,891 12,839 9,155
------------ ------------ ------------ ---------- --------- ----------
Income/(loss) from continuing operations
before income taxes 12,411 6,251 (328) 11,840 (21,874) (780)
Income taxes 5,104 2,563 (44) 5,035 (8,523) (323)
------------ ------------ ------------ ---------- --------- ----------
Income/(loss) from continuing operations 7,307 3,688 (284) 6,805 (13,351) (457)
Discontinued operations (1) - - 16,369 35,219 21,809 17,268
------------ ------------ ------------ ---------- --------- ----------
Net income before extraordinary loss and
cumulative effect of a change in accounting
principle 7,307 3,688 16,085 42,024 8,458 16,811
Extraordinary loss from early debt
redemption, net of $476, $201 and $747 tax benefit,
respectively (772) (308) - (1,144) - -
Cumulative effect of a change in accounting,
principle net of $421 tax benefit (599) - - - - -
------------ ------------ ------------ ---------- --------- ----------
Net income $ 5,936 $ 3,380 $ 16,085 $ 40,880 $ 8,458 $ 16,811
Basic earnings per share data
From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 $ (0.64) $ (0.02)
From discontinued operations - - 0.82 1.69 1.05 0.83
From extraordinary items (0.04) (0.01) - (0.05) - -
From cumulative effect of a change in
accounting principle (0.03) - - - - -
------------ ------------ ------------ ---------- --------- ----------
Net income $ 0.31 $ 0.17 $ 0.81 $ 1.96 $ 0.41 $ 0.81
============ ============ ============ ========== ========= ==========
Diluted earnings per share data
From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 $ (0.64) $ (0.02)
From discontinued operations
- - 0.82 1.66 1.05 0.83
From extraordinary items
(0.04) (0.01) - (0.05) - -
From cumulative effect of a change in
accounting principle (0.03) - - - - -
------------ ------------ ------------ ---------- --------- ----------
Net income $ 0.31 $ 0.17 $ 0.81 $ 1.93 $ 0.41 $ 0.81
============ ============ ============ ========== ========= ==========
Weighted average common shares outstanding (2) 19,036 19,956 19,979 20,893 20,876 20,827
============ ============= ============ =========== ========= ==========
</TABLE>
14
<PAGE>
1) Discontinued operations represents the income of the discontinued
franchising business less applicable income taxes of $11,825, $25,165,
$15,923, and $13,467, respectively.
2) Weighted average common shares outstanding represents the weighted average
common shares outstanding of the Company's parent Manor Care, Inc. for
fiscal years 1995 and 1996. Fiscal year 1997 represents the weighted
average common shares of Manor Care, Inc. for the period through November
1, 1997. The period following November 1, 1997 represents the weighted
average common shares of the Company. Fiscal year 1995 through 1997 have
been adjusted for the one-for-three reverse stock split.
<TABLE>
<CAPTION>
As of December 31, As of May 31,
----------------------------------------- ------------------------------------
1999 1998 1997 1997 1996 1995
------------- ------------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets 413,189 422,511 400,983 426,429 328,311 254,229
Notes payable to Manor Care, Inc. - - - 37,022 147,023 119,823
Total debt 293,663 281,189 248,120 260,369 163,497 137,122
Total liabilities 330,142 319,874 311,676 301,942 180,752 188,400
Equity or investments and advances
from Parent 83,047 102,637 89,307 124,487 147,559 65,829
</TABLE>
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company owned and operated 83 hotels with 11,351 rooms in 26 states
at December 31, 1999. The hotels are under the brand names Comfort, Clarion,
Sleep, Quality and MainStay Suites. 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 Calendar Year 1999 and Calendar Year 1998
- -------------------------------------------------------
The following tables present calendar quarter and full calendar year
information showing the results of operations of the Company's ongoing hotel
operations for 1999 and 1998 (in thousands, unaudited).
Quarter Ending
------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------
Year ended December 31, 1999
Revenue $50,272 $55,706 $56,771 $47,287
Recurring EBITDA (1) 14,831 18,133 17,852 10,634
Year ended December 31, 1998
Revenue $46,139 $54,440 $56,320 $47,197
Recurring EBITDA (1) 12,549 16,518 16,719 12,468
________________________
(1) Recurring EBITDA consists of the sum of net income (loss), interest expense,
income taxes, and depreciation and amortization and non-recurring charges for
the Company's ongoing operations. EBITDA is presented because such data is used
by certain investors to determine the Company's ability to meet debt service,
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.
Year ending
December 31,
---------------------------
1999 1998
---------------------------
Revenues
Rooms $184,833 $178,755
Food and beverage 17,153 17,247
Other 8,050 8,094
--------------------------
Total revenues 210,036 204,096
--------------------------
Hotel operating expenses 138,181 131,881
Corporate expense 10,405 13,961
--------------------------
Recurring EBITDA 61,450 58,254
--------------------------
(Net gains on property dispositions)/
provision for asset impairment (1,878) 4,264
Depreciation and amortization 26,240 26,983
Interest expense 24,677 20,756
--------------------------
16
<PAGE>
Income from continuing operations before
income taxes 12,411 6,251
Income taxes 5,104 2,563
-----------------------
Income from continuing operations $7,307 $3,688
=======================
Basic earnings per share from continuing operations $ 0.38 $ 0.18
=======================
Total revenues increased from $204.1 million in 1998 to $210.0 million
in 1999, an increase of 2.9%. The Company utilizes Revenue per Available Room
("RevPAR"), which is calculated by multiplying the percentage of occupied rooms
by the average daily room rate realized, as a measure of the operating
performance of its hotels. RevPAR for those properties opened at least one year
remained consistent with prior year. RevPAR for the extended-stay portfolio
increased a full 26%, as these newly-developed hotels continued to ramp up. With
the growth in its REVPAR and an increase from 13 to 20 open extended-stay
hotels, extended-stay revenue increased from $12.3 million in 1998 to $25.1
million in 1999. This increase in revenue was largely offset by the sale of
eleven hotels.
Corporate expense amounted to $10.4 million, a decrease of
approximately $3.6 million or 25.5% from the prior year. Corporate expense
amounted to 4.9% of revenues during 1999 as compared to 6.8% during 1998. 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.
Recurring earnings before interest, taxes, depreciation and amortization
("Recurring EBITDA") increased 5.5%, to $61.5 million in 1999 from $58.3 million
in 1998. Recurring EBITDA margin for 1999 was 29.3% as compared to 28.5% in
1998.
Included in net gains on property dispositions and provision for asset
impairment were $1.9 million of pre-tax net gains on sales of eleven hotels in
1999 and a pre-tax charge of approximately $4.3 million against earnings in 1998
to reduce several hotels being marketed for sale to estimated net realizable
value, net of disposition costs.
Interest expense increased 18.9% to $24.7 million in 1999 from $20.8 million in
1998. 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.
Income from continuing operations of $7.3 million, increased 98% from
$3.7 million in 1998.
Comparison of Calendar Year 1998 and Calendar Year 1997 (Domestic Hotels)
- -------------------------------------------------------------------------
The following tables present calendar quarter and full calendar year
information showing the results of operations of the Company's ongoing domestic
hotel operations for 1998 and 1997 (in thousands, unaudited).
<TABLE>
<CAPTION>
Quarter Ending
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Domestic Revenue $46,139 $54,440 $56,320 $47,197
Recurring Domestic EBITDA (2) 12,549 16,518 16,719 12,468
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Domestic Revenue $41,258 $46,982 $49,052 $42,760
Recurring Domestic EBITDA (2) 11,793 15,484 14,092 8,413
</TABLE>
____________________________
(2) Recurring domestic EBITDA consists of the sum of net income (loss), interest
expense, income taxes, and depreciation and amortization and non-recurring
charges for the Company's ongoing domestic operations. EBITDA is presented
because such data is used by certain investors to determine the Company's
ability to meet debt service, 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.
Year ending
December 31,
-----------------------------
1998 1997
-----------------------------
Revenues
Rooms $178,755 $ 157,380
Food and beverage 17,247 14,991
Other 8,094 7,681
-----------------------------
Total revenues 204,096 180,052
-----------------------------
Hotel operating expenses 131,881 119,190
Corporate expense 13,961 11,079
-----------------------------
Recurring EBITDA 58,254 49,783
-----------------------------
Provision for asset impairment and other
non-recurring charges 4,264 5,119
Depreciation and amortization 26,983 22,372
Interest expense 20,756 16,461
-----------------------------
Income from continuing operations before
income taxes 6,251 5,831
Income taxes 2,563 2,537
-----------------------------
Income from continuing operations $ 3,688 $ 3,294
=============================
Basic earnings per share from continuing
operations $ 0.18 $ 0.16
=============================
Hotel revenues increased from $180.1 million in calendar 1997 to $204.1
million in 1998, an increase of 13.3%. Increases in revenue were the result of
an increase in the size of the Company's portfolio and improved RevPAR. The
portfolio increased from 76 hotels at December 31, 1997 to 86 hotels at December
31,1998, an increase of 9.4% in the number of rooms. Gross operating margin
(operating income before corporate expense, depreciation and amortization and
non-recurring charges) increased from 21.4% in 1997 to 22.0% in 1998.
Food and beverage ("F&B") revenues increased 15.1% and F&B operating
margins increased from 20.1% to 23.6% as a result of an increased focus on
improving F&B operating margins.
The increase in depreciation expense from 1997 to 1998 is the result of
the growth in the portfolio. While two, older limited service hotels were sold
during 1998, the Company opened 12 newly-constructed hotels.
18
<PAGE>
Calendar year 1998 represented the first full year operating as a
separate, stand-alone company and, accordingly, general corporate expense
increased from 6.2% of revenues to 6.8% of revenues in 1998. Recurring domestic
EBITDA increased 17% to $58.3 million in 1998 from $49.8 million in 1997.
Recurring domestic EBITDA margin for 1998 was 28.5% as compared to 27.7% in
1997.
Included in provision for asset impairment and other non-recurring
charges in 1998 were non-cash write-downs of approximately $4 million (pre-tax)
to reduce several hotels being marketed for sale to estimated net realizable
value, net of disposition costs. In 1997, non-recurring loss provisions of
approximately $5 million (pre-tax) were recorded in order to reserve for various
items related to the Manor Care and Choice spin-offs.
Interest expense increased from $16.5 million to $20.8 million in
1998, an increase of 26.1%. The increase results from an increased amount of
debt outstanding over the respective periods. The Company's debt has increased
over the period to fund the development of hotels.
Income from continuing operations of $3.7 million, increased 12% from
$3.3 million in 1997.
Not reflected in the above discussion are the European hotel
operations which were spun-off to shareholders along with the discontinued
franchise business. In 1997, European hotel operations contributed $7.0 million
of revenue and $0.40 in EBITDA, through the spin-off date in October, 1997.
Liquidity and Capital Resources
- -------------------------------
The Company maintains an $80 million committed line of credit with a
group of four banks to support on-going operations and to fulfill capital
requirements. The Credit Facility expires in October 2000. Availability under
that line of credit is a function of trailing cash flow, but amounted to the
full $80.0 million at December 31, 1999. Borrowings under the line amounted to
$51 million at December 31, 1999. The Company is currently negotiating a one
year extension of the bank facility, which will include a reduction in the
commitment to $60 million.
At the distribution date, the Company owed Choice $115.0 million in the
form of a pay-in-kind subordinated note with a five year maturity. The note
provides financial flexibility due to the fact that accrued interest is not
payable until maturity.
On April 23, 1997, the Company, through its indirect subsidiary, First
Choice Properties, completed an offering of $117.5 million multi-class mortgage
pass-through certificates (the "CMBS debt"). This CMBS debt is non-recourse and
is collateralized by 28 hotel properties with a net book value of $124.9 million
owned by the Company. The CMBS debt carries a 7.8% blended weighted average
interest rate and has a final maturity of May 5, 2012. The hotel properties so
collateralized reported EBITDA of $29.7 million for calendar year 1999. The
Company used the proceeds to repay debt payable to its former parent, Manor
Care, Inc.
The Company intends to develop MainStay Suites, a mid-priced extended-
stay hotel product. At December 31, 1999, 20 MainStay Suites were open and
operating with another four hotels under development. The cost to develop a
MainStay Suites hotel approximates $5.5 to $6.0 million. In order for the
Company to continue on a long-term basis a 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 into higher
yielding assets. The Company identified eleven such hotels that were sold in
1999 for total proceeds of $37.0 million. As of December 31, 1999, an additional
seven hotels are being marketed for sale in 2000. Proceeds from asset sales in
1999 were used to purchase shares for Treasury and reduce debt, including $9.2
million of CMBS debt which resulted in a pre-payment penalty of $772,000, after
tax.
19
<PAGE>
Net cash provided by continuing operating activities was $45.4 million
for the year ended December 31, 1999, as compared to $35.3 million, for the year
ended December 31, 1998.
The Company's Board of Directors authorized Treasury share purchase
programs aggregating six million shares. As of December 31, 1999, 5,911,366
shares were purchased at an aggregate cost of $29.6 million. The program was
completed in January 2000. The Company does not anticipate expanding the
Treasury share purchase program, at least until such time as additional
financing is arranged.
At December 31, 1999, the Company's debt to book capitalization
amounted to 78.0% and debt to market capitalization was 77.9%. Debt to recurring
EBITDA amounted to 4.8:1 and recurring EBITDA to interest was 2.4:1 for calendar
year 1999. Senior debt to recurring EBITDA was 2.4:1 for 1999 and recurring
EBITDA to cash interest was 5.9:1 for calendar year 1999.
While operating cash flow, credit available under the Company's bank
facility and proceeds from the sale of hotels are expected to be adequate to
fund operations and committed construction projects, accessing additional
capital is imperative in order for the Company to expand its development and
growth plans. Also, given the relatively short maturities of the note payable to
Choice and the near term expiration of the bank facility, refinancing or
extending maturities is an imperative. If the Company is unsuccessful in
arranging for an extension of its bank facility which otherwise expires October
15, 2000, alternative sources of capital will have to be identified and accessed
during 2000.
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 hotels in 2000 are projected to be approximately $20 million.
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 year ended December 31, 1999 or 1998.
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis, as well as other parts of this
Annual Report on Form 10-K, contain information based on management's beliefs
and forward-looking statements that involve a number of risks, uncertainties and
assumptions. There can be no assurances that actual results will not materially
differ from the forward-looking statements as a result of various factors,
including, but not limited to: the Company's substantial leverage and its plan
to realize cash proceeds through leveraging its remaining assets; its plans to
make selected strategic investments and acquisitions and develop new hotels; its
success in implementing its business strategy, including its success in
arranging financing where required; competition; government regulation; and
general economic and business conditions. The Company's intentions with respect
to the development of MainStay Suites and other new hotels is subject to: the
Company's ability to access sufficient capital to continue such development; the
acceptance of and demand for such products by the consumer and competition.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION> Page
----
<S> <C>
Report of Independent Public Accountants....................................................... 22
Consolidated Balance Sheets.................................................................... 23
Consolidated Statements of Income.............................................................. 24
Consolidated Statements of Cash Flows.......................................................... 25
Consolidated Statements of Stockholders' Equity and Comprehensive Income....................... 26
Notes to Consolidated Financial Statements .................................................... 27
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Sunburst Hospitality Corporation:
We have audited the accompanying consolidated balance sheets of
Sunburst Hospitality Corporation and subsidiaries (the "Company" formerly Choice
Hotels International, Inc., see Basis of Presentation) as of December 31, 1999
and 1998, the related consolidated statements of income, stockholders' equity
and comprehensive income and cash flows for the years ended December 31, 1999
and 1998, the seven months ended December 31, 1997 and the fiscal year ended May
31, 1997. These financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sunburst Hospitality
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years ended December 31, 1999
and 1998, the seven months ended December 31, 1997 and the fiscal year ended May
31, 1997, in conformity with accounting principles generally accepted in the
United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at Item
14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Vienna, Virginia
February 16, 2000
22
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
As of
-----------------------------------
December 31, December 31,
1999 1998
--------------- ----------------
ASSETS
<S> <C> <C>
Real estate, net $ 359,258 $ 363,023
Real estate held for sale 34,498 37,122
Receivables (net of allowance for doubtful
accounts of $500 and $611, respectively) 7,851 7,271
Other assets 8,617 10,982
Cash and cash equivalents 2,965 4,113
--------------- ----------------
Total assets $ 413,189 $ 422,511
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt
Senior debt and capital leases $ 151,807 $ 153,341
Subordinated debt 141,856 127,848
--------------- ----------------
293,663 281,189
Accounts payable and accrued expenses 30,096 32,633
Deferred income taxes ($5,368 and $1,352, respectively) and
other liabilities 6,383 6,052
--------------- ----------------
Total liabilities 330,142 319,874
--------------- ----------------
STOCKHOLDERS' EQUITY
Common stock (60,000,000 authorized, at $0.01 par value,
22,148,313 and 21,545,305 issued and 14,808,060 and 19,606,006
outstanding at December 31, 1999 and 1998, respectively) 245 244
Additional paid-in-capital 173,363 171,462
Treasury stock (7,340,253 and 1,939,299 shares, respectively) (93,284) (65,856)
Retained earnings (deficit) 2,723 (3,213)
--------------- ----------------
Total stockholders' equity 83,047 102,637
--------------- ----------------
Total liabilities and stockholders' equity $ 413,189 $ 422,511
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
23
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the seven For the fiscal
For the year For the year months year
ended ended ended ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Rooms $ 184,833 $ 178,755 $ 100,670 $ 165,239
Food and beverage 17,153 17,247 9,231 13,356
Other 8,050 8,094 4,652 7,158
---------------- --------------- --------------- -------------
Total revenues 210,036 204,096 114,553 185,753
---------------- --------------- --------------- -------------
OPERATING EXPENSES
Departmental expenses
Rooms 52,932 51,227 33,484 58,502
Food and beverage 12,935 13,183 7,319 10,887
Other 3,631 3,056 1,530 2,674
Undistributed operating expenses 68,683 64,415 34,801 57,636
Depreciation and amortization 26,240 26,983 14,246 20,632
Corporate 10,405 13,961 8,244 7,691
(Net gains on property dispositions)/ provision for
asset impairment and non-recurring charges (1,878) 4,264 5,119 -
---------------- --------------- --------------- -------------
Total operating expenses 172,948 177,089 104,743 158,022
---------------- --------------- --------------- -------------
OPERATING INCOME 37,088 27,007 9,810 27,731
---------------- --------------- --------------- -------------
INTEREST EXPENSE 24,677 20,756 10,138 15,891
---------------- --------------- --------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 12,411 6,251 (328) 11,840
Income taxes 5,104 2,563 (44) 5,035
---------------- --------------- --------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 7,307 3,688 (284) 6,805
DISCONTINUED OPERATIONS: Income from operations
of discontinued franchising business (less applicable
income taxes of $0, $0, $11,825, and $25,165,
respectively) - - 16,369 35,219
---------------- --------------- --------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 7,307 3,688 16,085 42,024
EXTRAORDINARY ITEM -- Loss from early extinguishment
of debt (net of $476, $201, and $747 tax benefit) 772 308 - 1,144
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE - (net of $421 tax benefit) 599 - - -
---------------- --------------- --------------- -------------
NET INCOME $ 5,936 $ 3,380 $ 16,085 $ 40,880
================ =============== =============== =============
Basic earnings per share
- ------------------------
From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32
From discontinued operations - - 0.82 1.69
From extraordinary item (0.04) (0.01) - (0.05)
From cumulative effect of a change in accounting
principle (0.03) - - -
---------------- --------------- --------------- ------------
Earnings per share $ 0.31 $ 0.17 $ 0.81 $ 1.96
================ =============== =============== ============
Diluted earnings per share
- --------------------------
From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32
From discontinued operations - - 0.82 1.66
From extraordinary item (0.04) (0.01) - (0.05)
From cumulative effect of a change in accounting
principle (0.03) - - -
---------------- --------------- --------------- -------------
Earnings per share $ 0.31 $ 0.17 $ 0.81 $ 1.93
================ =============== =============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
income.
24
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the year For the year For the seven For the fiscal
ended ended months ended year ended
December 31, December 31, December 31, May 31,
Cash Flows From Operating Activities 1999 1998 1997 1997
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before extraordinary item
and cumulative effect of a change in accounting principle $ 7,307 $ 3,688 $ (284) $ 6,805
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 26,240 26,983 14,246 20,632
Amortization of deferred financing fees 287 244 248 -
Amortization of debt discount 1,543 1,921 528 29
Accrued interest on Choice Hotels International, Inc. note 12,646 8,808 2,648 -
Provision for bad debts, net 531 424 247 560
Increase in deferred taxes 4,016 466 695 2,920
(Gain) loss on sale of property (1,878) (65) - 220
Provision for asset impairment and other non-recurring charges - 3,983 5,119 -
Change in assets and liabilities:
Change in receivables (1,111) (1,434) (152) (1,686)
Change in other assets 4,167 (2,351) (357) (3,963)
Change in accounts payable, accrued expenses and other
liabilities (6,222) (790) (9,323) 17,391
Change in payable to Choice Hotels International, Inc. - (8,601) 10,066 -
Change in current taxes receivable (2,089) 2,018 (2,310) (483)
-------------- -------------- -------------- ------------
Net cash provided by continuing operations 45,437 35,294 21,371 42,425
Net cash provided by discontinued operations - - 20,876 44,833
-------------- -------------- -------------- ------------
Net cash provided by operating activities 45,437 35,294 42,247 87,258
-------------- -------------- -------------- ------------
Cash Flows From Investing Activities
Investment in property and equipment (54,923) (60,476) (61,460) (75,523)
Acquisition of operating hotels - - - (5,550)
Distribution of Choice - - (4,166) -
Proceeds from sale of property and equipment 36,950 5,864 170 2,522
-------------- -------------- -------------- ------------
Net cash utilized by continuing operations (17,973) (54,612) (65,456) (78,551)
Net cash utilized by discontinued operations - - (118,474) (15,864)
-------------- -------------- -------------- ------------
Net cash utilized by investing activities (17,973) (54,612) (183,930) (94,415)
-------------- -------------- -------------- ------------
Cash Flows From Financing Activities
Proceeds from mortgages and other long term debt 10,000 25,000 16,023 208,000
Proceeds from note payable to Choice Hotels
International, Inc. - - 115,000 -
Principal payments of debt (11,715) (5,256) (92,171) (1,157)
Principal payments on notes payable to Manor Care, Inc. - - (37,022) (110,000)
Payment of financing fees - - - (3,959)
Payment of prepayment penalty (772) (439) - (1,891)
Proceeds from issuance of common stock 1,303 359 1,153 3,410
Purchases of treasury stock (27,428) (2,141) (10,554) (53,150)
Payable to Choice Hotels International, Inc. for net worth
guarantee - - 15,000 -
Advances to Manor Care, Inc., net - - - (9,971)
-------------- -------------- -------------- ------------
Net cash (utilized by) provided by continuing operations
(28,612) 17,523 7,429 31,282
Net cash provided by (utilized by) discontinued operations - - 129,337 (17,839)
-------------- -------------- -------------- ------------
Net cash (utilized by) provided by financing activities
(28,612) 17,523 136,766 13,443
-------------- -------------- -------------- ------------
Net change in cash and cash equivalents (1,148) (1,795) (4,917) 6,286
Cash and cash equivalents at beginning of period 4,113 5,908 10,825 4,539
-------------- -------------- -------------- ------------
Cash and cash equivalents at end of period $ 2,965 $ 4,113 $ 5,908 $ 10,825
============== ============== ============== ============
Cash and cash equivalents of continuing operations $ 2,965 $ 4,113 $ 5,908 $ 7,033
Cash and cash equivalents of discontinued operations $ - $ - $ - $ 3,792
</TABLE>
The accompanying notes are an integral part of these consolidated
statements of cash flows.
25
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands, except shares)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in- Comprehensive Retained Treasury Comprehensive
---------------------
Shares Amount Capital Income Earnings Stock Income
----------- --------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution from Manor Care, Inc. 63,081,129 $ 631 $ 162,512 $ (1,750) $ - $ - $ -
Net income 40,880 40,880
Transfer of net income to Manor Care,
Inc. (23,805)
Exercise of stock options 781,542 8 4,651
Translation adjustment (5,268) (5,268)
-------------
Comprehensive income $ 35,612
=============
Treasury purchases (3,697,724) (53,372)
----------- -------- ----------- ---------- --------- --------
Balance, May 31, 1997 60,164,947 $ 639 $ 167,163 $ (7,018) $ 17,075 $(53,372)
----------- -------- ----------- ---------- --------- --------
Net income $ 16,085 $ 16,085
Adjustment to Nov. 1, 1996
distribution from Care Inc. (1,044)
Exercise of stock options 202,386 2 1,910
Issuance of stock 13,786 65
Treasury purchases (588,931) (10,554)
Translation adjustment (1,644) (1,644)
-------------
Comprehensive Income $ 14,441
=============
Distribution of Franchising 8,662 (48,662)
One-for-three reverse stock split on
October 15, 1997 (39,845,146) (398) 398
----------- -------- ----------- ---------- --------- --------
Balance, December 31, 1997 19,947,042 $ 243 $ 169,536 $ - $ (16,546) $ (63,926)
----------- -------- ----------- ---------- --------- --------
Net income 3,380
Sale of MainStay brand option to
Choice Hotels International, Inc. 9,953
Exercise of stock options 79,414 1 1,926
Issuance of stock 89,962 216
Treasury purchases (510,412) (2,146)
----------- -------- ----------- ---------- --------- --------
Balance, December 31, 1998 19,606,006 $ 244 $ 171,462 $ - $ (3,213) $ (65,856)
----------- -------- ----------- ---------- --------- --------
Net income 5,936
Exercise of stock options 105,663 1 1,388
Issuance of stock 497,345 513
Treasury purchases (5,400,954) (27,428)
----------- -------- ----------- ---------- --------- --------
Balance, December 31, 1999 14,808,060 $ 245 $ 173,363 $ - $ 2,723 $ (93,284)
=========== ======== =========== ========== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements of stockholders' equity and comprehensive income.
26
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1999 AND 1998
1. Summary of Significant Accounting Policies
Basis of Presentation
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 through 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. (the "Company") for each share of Manor Care
stock, and the Board of Directors set the Record Date and the Distribution Date.
The Manor Care 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. At that time, the operations of the
Company consisted principally of the hotel franchise operations and the owned
and managed domestic and European hotel operations formerly conducted by Manor
Care directly or through its subsidiaries (the "Lodging Business").
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. ("Choice").
On April 29, 1997, the Company's Board of Directors announced its intention to
separate the Company's franchising business from its owned, domestic hotel
business. On September 16, 1997 the Board of Directors and shareholders of the
Company approved the separation of the businesses through a Spin-off of the
franchising business, along with the Company's European hotel and franchising
operations, to its shareholders (the "Distribution"). The Board of Directors set
October 15, 1997 as the date of distribution and on that date, Company
shareholders received one share in Choice (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.
In connection with the Spin-off of the franchising business, the Company has
presented the franchising business as a discontinued operation in the
accompanying consolidated financial statements. Although the Company's European
hotel operations were distributed to shareholders along with the franchising
business, generally accepted accounting principles do not permit presenting this
operation as discontinued. Therefore, the European hotel operations are included
in continuing operations. The following tables illustrate the impact of the
European hotel operations on the continuing operations of the Company (in
thousands).
<TABLE>
<CAPTION>
Seven months ended Domestic hotel European hotel Continuing
December 31, 1997 operations operations operations
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $107,574 $ 6,979 $114,553
Operating expenses 98,169 6,574 104,743
--------------------------------------------------------
Operating income 9,405 405 9,810
--------------------------------------------------------
Interest expense 9,800 338 10,138
--------------------------------------------------------
Pretax (loss) income (395) 67 (328
Income tax (benefit) expense (71) 27 (44)
--------------------------------------------------------
Net (loss) income from
continuing operations $ (324) $ 40 $ (284)
========================================================
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ending Domestic hotel European hotel Continuing
May 31, 1997 operations operations operations
- --------------------------------------- -------------------- ------------------ ---------------
<S> <C> <C> <C>
Revenues $168,016 $ 17,737 $185,753
Operating expenses 140,468 17,554 158,022
-------------------------------------------------------
Operating income 27,548 183 27,731
-------------------------------------------------------
Interest expense 14,899 992 15,891
-------------------------------------------------------
Pretax income (loss) 12,649 (809) 11,840
Income tax expense (benefit) 5,355 (320) 5,035
-------------------------------------------------------
Net income (loss) from
continuing operations $ 7,294 $ (489) $ 6,805
=======================================================
</TABLE>
Fiscal Year
In October 1997, the Company changed its fiscal year end from May 31 to December
31. Therefore, the period ending December 31, 1997 includes seven months of
operations. The following table presents the Company's results of operations for
the full calendar year 1997 (unaudited, in thousands, except per share data).
<TABLE>
<CAPTION>
Calendar Year 1997
--------------------------------------------------------
(Unaudited)
Domestic hotel European hotel Continuing
operations operations operations
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $180,052 $13,741 $ 193,793
Operating expenses 135,388 12,401 147,789
Depreciation and amortization 22,142 1,399 23,541
-------------------------------------------------------
Operating income (loss) 22,522 (59) 22,463
Interest expense 16,461 724 17,185
-------------------------------------------------------
Pretax income (loss) from
continuing operations 6,061 (783) 5,278
Income tax expense (benefit) 2,629 (310) 2,319
-------------------------------------------------------
Income (loss) from continuing
operations $ 3,432 $ (473) $ 2,959
=======================================================
Earnings (loss) per share:
Basic $ 0.17 $ (0.02) $ 0.15
=======================================================
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Pre-opening Costs
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 reported as a cumulative effect of a
change in accounting principle for the year ended December 31, 1999. Prior to
the adoption of the SOP, pre-opening costs of an operating nature incurred were
deferred and amortized over two years for hotels opened prior to November 1,
1996 and one year for hotels opened after that date. Such costs, which were
included in other assets, amounted to $724,000, net of accumulated amortization,
at December 31, 1998.
If the Company would have adopted this SOP on January 1, 1998, the effect would
have been to increase income from continuing operations by approximately
$274,000 for the year ended December 31, 1998, and to decrease net
28
<PAGE>
income for the year by approximately $420,000, as a result of a charge for the
cumulative effect of a change in accounting principle of $694,000 (net of
taxes).
Real Estate
The components of real estate are as follows:
December 31, December 31,
1999 1998
---------------- -------------
Land $ 61,397 $ 56,007
Buildings 295,414 281,821
Furniture, fixtures and equipment 87,016 77,127
Hotels under construction 14,100 31,962
---------------- -------------
457,927 446,917
Less: accumulated depreciation (98,669) (83,894)
---------------- -------------
$ 359,258 $ 363,023
================ =============
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
Self-Insurance Program
Prior to the Manor Care Distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. All self-insurance
liabilities through November 1, 1996, were assumed by Manor Care.
Subsequent to the Manor Care distribution, the Company has maintained its own
insurance program, which includes certain levels of retained risk. Estimated
costs are accrued at present values based on actuarial projections for known and
anticipated claims.
Impairment Policy
The Company evaluates the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured based on net, undiscounted expected
cash flows. Assets are considered to be impaired if the undiscounted expected
cash flows are less than the carrying amount of the assets. Impairment charges
are recorded based upon the difference between the carrying value of the asset
and fair value. Real estate held for sale is recorded based on its estimated
fair value less cost to sell.
Capitalization Policies
The Company capitalizes interest costs and property taxes incurred during the
construction of capital assets. The Company capitalized $1.3 million and $2.4
million in interest costs for the years ended December 31, 1999 and 1998,
respectively. Maintenance, repairs and minor replacements are charged to expense
as incurred.
Impact of New Accounting Pronouncements
The Company is required to adopt Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in 2000. As the Company does not routinely use derivative
instruments, the standard will not have a material impact on the consolidated
financial statements of the Company.
29
<PAGE>
Stock-based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
In the event the stock options are issued at an exercise price below the market
price, compensation expense is recorded ratably over the vesting period for the
options issued at a discount. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the
Company to make certain disclosures as if the fair value based method of
accounting had been applied to the Company's stock option grants (see Note 9).
Reclassifications
Certain amounts previously presented have been reclassified to conform to the
December 31, 1999 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Income Taxes
The Company was included in the consolidated Federal income tax returns of Manor
Care prior to the Manor Care Distribution. Subsequent to November 1, 1996, the
Company is a separate taxpayer and files its own tax returns. The income tax
provision included in these consolidated statements reflects the historical
income tax provision and temporary differences attributable to the operations of
the Company on a separate return basis. Deferred taxes are recorded for the tax
effect of temporary differences between book and tax income.
Income before income taxes from continuing operations was derived from the
following (in thousands):
<TABLE>
<CAPTION>
For the year For the year For the seven For the fiscal
ended ended months ended year ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
----------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations before income taxes
Domestic operations $ 12,411 $ 6,251 $ (395) $ 12,649
Foreign operations - - 67 (809)
---------------- --------------- ----------------- ---------------
Income (loss) before income taxes $ 12,411 $ 6,251 $ (328) $ 11,840
================ =============== ================= ===============
</TABLE>
The provision for income taxes for continuing operations (in thousands):
<TABLE>
<CAPTION>
For the year For the year For the seven For the fiscal
ended ended months ended year ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Current tax expense (benefit)
Federal $ 210 $ 1,723 $ 621 $ 2,583
Foreign operations - - 27 (320)
State 468 386 134 292
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Deferred tax expense (benefit)
Federal 3,989 371 (680) 2,048
Foreign operations - - - -
State 437 83 (146) 432
---------------- ---------------- --------------- ---------------
$ 5,104 $ 2,563 $ (44) $ 5,035
================ ================ =============== ===============
</TABLE>
Deferred tax liabilities were composed of the following (in thousands):
December 31,
1999 1998
------------- -------------
Depreciation and amortization $ (8,372) $ (2,667)
Accrued expenses 3,493 2,428
Other (489) (1,113)
----------- -----------
Net deferred tax liability $ (5,368) $ (1,352)
=========== ===========
A reconciliation of income tax expense (benefit) at the statutory rate to income
tax expense included in the accompanying consolidated statements follows (in
thousands, except Statutory Federal income tax rate):
<TABLE>
<CAPTION>
For the year For the year For the seven For the fiscal
ended ended months ended year ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Statutory Federal income tax rate 35% 35% 35% 35%
Federal taxes at statutory rate $ 4,344 $ 2,188 $ (115) $ 4,144
State income taxes, net of Federal tax benefit 588 305 (4) 573
Other 172 70 75 318
---------------- ---------------- ---------------- ---------------
Income tax expense (benefit) $ 5,104 $ 2,563 $ (44) $ 5,035
================ ================ ================ ===============
</TABLE>
Cash paid for state income taxes was $972,000, $1,262,000, $486,000 and $805,000
for the years ended December 31, 1999 and 1998, the seven months ending December
31, 1997 and the fiscal year ending May 31, 1997, respectively. The Company paid
Federal income taxes of $4,650,000 and $2,055,000 for the years ended December
31, 1999 and 1998, respectively. At December 31, 1999, the Company had an income
tax receivable of $2.1 million.
2. Accrued Expenses
Accrued expenses were as follows (in thousands):
December 31,
-------------------------------
1999 1998
------------ -------------
Payroll $ 4,887 $ 5,534
Taxes, other than income 4,108 4,331
Other 6,415 6,354
------------ -------------
$ 15,410 $ 16,219
============ =============
31
<PAGE>
3. Long-Term Debt and Notes Payable
Debt consisted of the following at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
------------------ ----------------
<S> <C> <C>
$80.0 million revolving Credit Facility with an
average rate of 7.96% and 7.68% at December 31,
1999 and 1998, respectively $ 51,000 $ 41,000
Multi-class mortgage pass-through certificates
with a blended weighted average rate of 7.8% at
December 31, 1999 and 1998 98,821 110,913
Note payable to Choice Hotels International with an
effective rate of 10.60% at December 31, 1999 and
1998 141,856 127,849
Capital lease obligations 1,986 1,427
----------------- ---------------
Total indebtedness $ 293,663 $ 281,189
================= ===============
</TABLE>
Maturities of debt at December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Subordinated Capital
Year Senior Debt Debt Leases Total
- ---- ----------- ---- ------- -----
<S> <C> <C> <C> <C>
2000 $ 54,144 $ - $ 730 $ 54,874
2001 3,397 - 1,006 4,403
2002 3,670 141,856 250 145,776
2003 3,964 - - 3,964
2004 4,282 - - 4,282
Thereafter 80,364 - - 80,364
-------------- -------------- ------------- --------------
Total $ 149,821 $ 141,856 $ 1,986 $ 293,663
============== ============== ============= ==============
</TABLE>
On April 23, 1997 the Company, through its indirect subsidiary First Choice
Properties Corporation, completed an offering of $117.5 million multi-class
mortgage pass through certificates (collectively, "the CMBS debt"). The CMBS
debt, which carries a blended, weighted average interest rate of 7.8% and has a
final maturity of May 5, 2012, contain customary covenants with respect to,
among other things, limits on levels of indebtedness, liens, certain
investments, transactions with affiliates, asset sales, mergers, consolidations,
and transfers of cash to affiliates. Restricted net assets related to the CMBS
debt were $27.5 million and $31.3 million as of December 31, 1999 and 1998,
respectively. The Company had $1.9 million and $2.2 million in escrow at
December 31, 1999 and 1998, respectively, related to the CMBS debt. The escrow,
which is included in other assets, is for property taxes, insurance and capital
expenditures of the properties collateralizing the CMBS debt. The CMBS debt is
non-recourse and is collateralized by 28 hotels owned by the Company. The
offering's net proceeds of $110 million were used to prepay a portion of a loan
from Manor Care. The prepayment resulted in an extraordinary loss from early
debt redemption of $1.1 million, net of taxes, in the fiscal year ended May 31,
1997. During 1998, the sale of one of the collateralized hotels resulted in a
prepayment of CMBS debt in the amount of $2.2 million and a prepayment penalty.
During 1999, the sale of five collateralized hotels resulted in a prepayment of
CMBS debt in the amount of $9.2 million and a prepayment penalty. These
prepayments resulted in extraordinary losses of $772,000 and $308,000, net of
tax, for the years ended December 31, 1999 and 1998, respectively.
32
<PAGE>
In conjunction with the April 1997 issuance of the CMBS debt, the Company
entered into a series of interest rate swap agreements having a total notional
principal amount of $50.0 million. The agreements were terminated concurrent
with the pricing of the mortgage securities, resulting in a $862,000 gain. The
gain has been deferred and is being amortized over the life of the mortgage
securities as an offset to interest expense.
The Company entered into two debt facilities in October 1997 in connection with
the distribution: (i) a $80.0 million revolving Credit Facility (the "October
1997 Credit Facility"); and (ii) a $115.0 million pay-in-kind note payable to
Choice (the "Choice Note"). Proceeds from the new debt were used to repay the
Company's remaining portion of the loan from Manor Care and the outstanding
balance of its revolving Credit Facility, and for advances previously made by
Choice to the Company. The unused portion of the October 1997 Credit Facility
will be used by the Company for working capital, capital expenditures and
acquisitions.
The October 1997 Credit Facility expires in October 2000 and includes customary
financial and other covenants that will require the maintenance of certain
ratios including maximum leverage, minimum net worth and interest coverage.
Additional covenants restrict the Company's ability to make certain investments,
repurchase stock, incur debt, and dispose of assets. Availability under the
October 1997 Credit Facility is a function of trailing cash flow. 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), plus a facility fee. The
rate is determined based on the Company's consolidated leverage ratio at the
time of borrowing. At December 31, 1999, the Company had the full $80.0 million
of availability under the October 1997 Credit Facility, resulting in excess
borrowing capacity of $29.0 million. The Company and the banks participating in
the October 1997 Credit Facility have entered into negotiations to extend its
expiration date.
The Choice Note has a maturity of five years from October 1997 and accrues
simple interest at a rate equal to 500 basis points above the interest rate on a
five-year U.S. Treasury Note, resulting in an effective rate of 8.8% through
December 28, 1998. In December 1998, the Choice Note terms were amended
providing that the Choice Note will accrue interest at a rate of 11.0% per annum
compounded daily on principal and unpaid interest beginning on October 15, 2000.
As a result of the amendment, the Company began accruing interest at the
effective rate of the note of 10.6%. The Choice Note contains restrictive
covenants that restrict or limit 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.
Cash paid for interest was $12.8 million, $9.9 million, $10.7 million, and $14.8
million for the years ended December 31, 1999 and 1998, the seven months ended
December 31, 1997 and fiscal year ended May 31, 1997, respectively. At December
31, 1999 and 1998, real estate property with a net book value of $124.9 million
and $138.6 million, respectively, was pledged or mortgaged as collateral.
4. Leases
The Company operates certain property and equipment under leases that expire at
various dates through 2014. Future minimum lease payments are as follows (in
thousands):
Operating Capital
Leases Leases
------------- -------------
2000 $ 1,231 $ 825
2001 1,258 1,173
2002 1,103 250
2003 825 -
2004 850 -
Thereafter 21,417 -
------------ ------------
Total minimum lease payments $ 26,684 2,248
============
Less: interest (262)
------------
Present value of lease payments $ 1,986
============
33
<PAGE>
Rental expense under non-cancelable operating leases was $789,000, $1.9 million,
$1.9 million and $329,000 in the years ended December 31, 1999 and 1998, the
seven months ended December 31, 1997, and the fiscal year 1997, respectively.
For the year ended December 31, 1998 and the seven months ended December 31,
1997, the Company paid $2.5 million and $2.9 million, respectively, to Manor
Care for office rent, of which Choice reimbursed the Company $1.0 million each
of the respective years for its portion of the total space occupied. In February
1999, the Company entered into a release agreement with Manor Care which
effectively terminated all inter-company service, consulting and lease
agreements.
5. Acquisitions and Divestitures
During 1999, the Company sold eleven hotels containing 1,343 rooms for $37
million. During 1998, the Company sold two hotels containing 193 rooms for $4.5
million and two parcels of unimproved land for $1.6 million. During fiscal year
1997, the Company acquired two hotels containing 324 rooms for $10.7 million and
disposed of one hotel containing 153 rooms for $2.5 million.
In addition to the eleven hotels sold in 1999, the Company has seven hotels that
are currently being marketed for sale with a carrying value of $34.5 million as
of December 31, 1999. The Company anticipates the sale of the properties to be
completed during 2000. 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 the fair value less costs to sell. At December
31, 1999, the assets held for sale are reported at the lower of the carrying
amount or the fair value less costs to sell. The seven hotels held for sale
reported total revenues of $23.7 million for the year ended December 31, 1999.
Income from operations before interest, taxes, depreciation and amortization and
allocations for corporate expenses of the seven hotels was $5.3 million for the
year ended December 31, 1999.
6. Discontinued Operations
The revenues, income from discontinued hotel franchise operations before income
taxes, and net income from discontinued hotel franchise operations were as
follows (in thousands):
Seven months Fiscal year
ended ended
December 31, May 31,
1997 1997
-------------- -------------
Revenue $ 112,286 $ 249,822
Expenses 84,092 189,438
-------------- -------------
Income from discontinued
operations before income taxes 28,194 60,384
Income taxes 11,825 25,165
-------------- -------------
Net income from discontinued
Operations $16,369 $35,219
============== =============
Net income from discontinued hotel franchise operations for the seven months
ended December 31, 1997 includes the results of operations of the franchising
business through October 15, 1997 and costs associated with the distribution of
$1.9 million (net of taxes).
7. Commitments and Contingencies
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and legal counsel, the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's business, financial position, or results of operations.
34
<PAGE>
8. Pension, Profit Sharing and Incentive Plans
Bonuses accrued for key executives of the Company under incentive compensation
plans were $1.1 million, $1.1 million, $357,000 and $200,000 for the years ended
December 31, 1999 and 1998, the seven months ended December 31, 1997 and in
fiscal year ended May 31, 1997, respectively.
Employees participate in retirement plans sponsored by the Company, and prior to
the Manor Care Distribution, employees participated in retirement plans
sponsored by Manor Care. Costs allocated to the Company were based on the size
of its payroll relative to the sponsor's payroll. Retirement costs were
approximately $111,000, $506,000, $217,000 and $800,000 for the years ended
December 31, 1999 and 1998, the seven months ended December 31, 1997 and fiscal
year ended May 31, 1997, respectively.
9. Capital Stock
On December 8, 1999, the Company's Board of Directors approved a plan for the
Company to repurchase up to 3.5 million shares of common stock. The 3.5 million
shares approved is in addition to the 2.5 million shares approved by the
Company's Board of Directors on September 16, 1998. During the year ended
December 31, 1999, the Company repurchased 5.4 million shares of its common
stock at a total cost of $27.4 million. During the year ended December 31, 1998,
the Company repurchased 510,412 shares of its common stock at a total cost of
$2.1 million.
On February 23, 1998, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right will be distributed
for each outstanding share of the Company's common stock to shareholders of
record on April 3, 1998. Each right will, upon exercise, entitle the holder to
buy 1/100th 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
are exercisable, subject to certain exceptions, after a person or group acquires
beneficial ownership of 10% or more of the Company's 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. The rights are
non-voting and expire on January 31, 2008, unless exercised or previously
redeemed by the Company for $.001 each. If the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each right will entitle its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquirer having a value of
twice the exercise price of the right.
At December 31, 1999, the Company had 254,062 shares authorized under its stock
option program. Stock options may be granted to officers, key employees and non-
employee directors with an exercise price not less than the fair market value of
the common stock on the date of grant.
Option activity under the above plans is as follows:
<TABLE>
<CAPTION>
Number of Weighted
Shares Option Price
----------------- ----------------
<S> <C> <C>
Outstanding at May 31, 1997 4,949,032 $3.02
Adjustment as a result of the Distribution (2,687,141)
Granted 552,441 8.04
Exercised (202,386) 2.03
Cancelled (30,241) 4.94
---------------- ----------------
Outstanding at December 31, 1997 2,581,705 5.67
Granted 442,536 6.57
Exercised (79,414) 1.80
Cancelled (114,458) 7.29
---------------- ----------------
Outstanding at December 31, 1998 2,830,369 5.88
Granted 10,000 5.00
Exercised (105,663) 1.80
Cancelled (154,325) 6.92
---------------- ----------------
Outstanding at December 31, 1999 2,580,381 $5.99
================ ================
</TABLE>
35
<PAGE>
In connection with the Distribution, the outstanding options held by current and
former employees of the Company as of October 15, 1997 were redenominated in
both Company and Choice stock, and the number and exercise prices of the options
were adjusted based on the relative trading prices of shares of the common stock
of the two companies to retain the intrinsic value of the options. The option
prices for the period prior to May 31, 1997 in the table above have been
adjusted for the reverse stock split.
The following table provides information on the exercise prices of options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Number of Weighted Weighted Average Number of
Exercise Price Options Average Contractual Life Options Currently
Range Outstanding Exercise Price (in years) Exercisable
----- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
$ 1.79 to $ 2.00 69,323 $1.79 .69 69,323
2.01 to 3.50 329,655 2.75 1.89 262,335
3.51 to 5.50 400,374 4.35 3.79 225,950
5.51 to 8.50 1,672,430 6.98 6.98 811,193
8.51 to 10.00 108,599 9.23 7.72 35,676
--------------- -----------------
2,580,381 1,404,477
=============== =================
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"), requires companies to provide additional
disclosures about employee stock-based compensation plans based on a fair value
based method of accounting. As permitted by this accounting standard, the
Company continues to account for these plans under Accounting Principles Board
Opinion 25, under which no compensation cost has been recognized.
For the purpose of these disclosures required by SFAS No. 123, compensation cost
for the Company's stock option plan was determined based on the fair value at
the grant dates for awards under those plans. The fair value of each option
grant has been estimated on the date of grant using an option-pricing model. For
the years ended December 31, 1999 and 1998, the Company assumed a risk free
interest rate of 6.4% and 4.7%, respectively, expected volatility of 38.2% and
34.5%, respectively, a dividend yield of 0% and expected lives of ten years from
the date of grant. The weighted average fair value per option granted during the
year ended December 31, 1999 and 1998 was $2.66 and $4.16, respectively. If
options had been reported as compensation expense based on their fair value pro
forma, net income and earnings per share would have been as follows for the
years ended December 31, 1999 and 1998.
For the year ended For the year ended
December 31, 1999 December 31, 1998
-------------------------------------------
Net income:
As reported $ 5,936 $ 3,380
Pro forma $ 4,905 $ 2,352
Earnings per share:
Basic, as reported $ 0.31 $ 0.17
Basic, pro forma $ 0.26 $ 0.12
Diluted, as reported $ 0.31 $ 0.17
Diluted, pro forma $ 0.25 $ 0.12
10. Earnings Per Share from Continuing Operations
The following table illustrates the reconciliation of income from continuing
operations and number of shares used in the calculation of basic and diluted
earnings per share from continuing operations (in thousands, except per share
amounts).
36
<PAGE>
<TABLE>
<CAPTION>
For the seven For the fiscal
months ended year ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Computation of basic earnings per share from
continuing operations:
Income from continuing operations before
extraordinary item and cumulative effect of
a change in accounting principle $ 7,307 $ 3,688 $ (284) $ 6,805
Weighted average shares outstanding 19,036 19,956 19,979 20,893
---------------- --------------- ---------------- ---------------
Basic earnings per share from continuing
operations $ 0.38 $ 0.18 $ (0.01) $ 0.32
================ =============== ================ ===============
Computation of diluted earnings per share from
continuing operations:
Income from continuing operations before
extraordinary item and cumulative effect of
a change in accounting principle $ 7,307 $ 3,688 $ (284) $ 6,805
Weighted average shares outstanding 19,036 19,956 19,979 20,893
Effect of dilutive securities:
Employee stock option plan 210 320 1,052 298
---------------- --------------- ---------------- ---------------
Shares for diluted earnings per share 19,246 20,276 21,031 21,191
---------------- --------------- ---------------- ---------------
Diluted earnings per share from continuing
operations $ 0.38 $ 0.18 $ (0.01) $ 0.32
================ =============== ================ ===============
</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.
December 31, December 31,
1999 1998
------------- -------------
Number of shares (in thousands) 1,834 1,734
Weighted average exercise price $ 7.08 $ 7.28
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding. The weighted average number of
common shares outstanding is after giving effect to the one for three reverse
stock split. Because the Company's continuing operations had a net loss for the
seven months ended December 31, 1997, diluted earnings per share was not
calculated as any potentially dilutive securities would have an anti-dilutive
effect on earnings per share from continuing operations.
11. Relationship with Manor Care
The Company entered into various agreements in connection with the Manor Care
Distribution which provided for various service, consulting and lease
arrangements and tax sharing commitments. For the year ended December 31, 1998,
the Company incurred $1.3 million in rent expense for office space leased from
Manor Care and $2.0 million in corporate expense for corporate services provided
by Manor Care. In February 1999, the Company entered into a release agreement
with Manor Care which effectively terminated all inter-company service,
consulting and lease agreements.
37
<PAGE>
12. Relationship with Choice Hotels International, Inc.
For purposes of providing an orderly transition after the Distribution, the
Company and Choice entered into various agreements, including, among others, a
Distribution Agreement, a Tax Sharing Agreement, a Corporate Services Agreement
and an Employee Benefits Allocation Agreement. Effective as of October 15, 1997,
these agreements provide, among other things, that the Company (i) would receive
and/or provide certain corporate and support services, such as accounting, tax
and computer systems support, (ii) would adjust outstanding options to purchase
shares of Company common stock held by Company employees, Choice employees, and
employees of Manor Care, (iii) is responsible for filing and paying the related
taxes on consolidated Federal tax returns and consolidated or combined state tax
returns for itself and any of its affiliates (including Choice) for the periods
of time that the affiliates were members of the consolidated group, (iv) would
be reimbursed by Choice for the portion of income taxes paid that relate to
Choice and its subsidiaries, (v) would enter into a five-year loan agreement
with Choice for $115.0 million at an interest rate of 500 basis points over the
interest rate of a five-year U.S. Treasury Note, and (vi) guarantees that Choice
would, at the date of distribution, have a specified level of net worth. At
December 31, 1997, approximately $25 million of liabilities were due to Choice
that related to the net worth guarantee. This liability related to the net worth
guarantee and the reimbursement of various expenses subsequent to the
distribution date.
On December 28, 1998, the Company and Choice entered into an agreement to amend
a prior strategic alliance agreement and amend the Choice Note. The amendment
provided for, among other things, (i) the elimination of the Company's option to
purchase the MainStay Suites Hotel system from Choice in exchange for the
satisfaction of $16.5 million of the remaining $19.5 million payable to Choice;
(ii) waiver of liquidated damage provisions on all franchising agreements
entered into prior to December 28, 1998 (excluding MainStay Suites or Sleep
Inns) and limitation of liquidated damages on all other franchise agreements to
$100,000; (iii) commitment by the Company to develop a total of 25 MainStay
Suites hotels by October 2001; (iv) an increase in the effective interest rate
of the Note during its final two years and (v) credits for royalty, marketing
and reservation fees. During 1999, the Company recorded $1.9 million of credits
against franchise fees, which are favorably impacting undistributed operating
expenses. In conjunction with this agreement, the Company paid the remaining
$3.0 million due to Choice for the net worth guarantee. The satisfaction of the
Choice payable, net of tax, is reflected as a credit to equity, during 1998, as
an adjustment to the accounting for the Distribution.
The Company operates substantially all of its hotels pursuant to franchise
agreements with Choice. Total fees paid to Choice included in the accompanying
consolidated financial statements for franchising marketing, reservation and
royalty fees are $10.2 million, $11.5 million, $6.2 million and $9.5 million for
the years ended December 31, 1999 and 1998, the seven months ended December 31,
1997 and the fiscal year ended May 31, 1997.
13. Fair Value of Financial Instruments
The balance sheet carrying amount of cash and cash equivalents and receivables
approximate fair value due to the short term nature of these items. Mortgages
and other long-term debt consist of bank loans and mortgages. The interest rate
on the October 1997 Credit Facility adjusts frequently based on market rates;
accordingly, the carrying amount is equivalent to fair value. At December 31,
1999, the fair value of the Choice Note and the mortgage securities is $135.0
million and $98.9 million, respectively, based on rates for similarly structured
instruments. At December 31, 1998, the carrying amount of the Choice note and
the mortgage securities approximated fair value.
14. Provision for Asset Impairment and Other Non-Recurring Charges
The Company recognized a provision for asset impairment and other non-recurring
charges of $4.3 million (pre-tax) in the year ended December 31, 1998. Included
in the provision is a $4.0 million asset impairment charge related to certain
hotels held for sale and $300,000 in non-recurring charges. Non-recurring
charges includes a restructuring charge of $146,000 to account for a reduction
in force at the Company's corporate headquarters. The restructuring charge
includes transition pay and benefits of the twelve employees terminated.
Benefits totaling $109,000 have been paid and charged against the liability
through December 31, 1998. There was no provision for asset impairment or other
non-recurring charges recorded during the year ended December 31, 1999.
38
<PAGE>
15. Geographic and Business Segment Information
The Company operates in one business segment, hotel ownership. The Company's
hotels are operated under Choice Hotels International, Inc. brands, contain an
average of 140 rooms, and supply other amenities such as meeting space, a
variety of restaurants and lounges, gifts shops and swimming pools. They are
typically located in suburban locations. The Company evaluates the performance
of its segment based primarily on operating profit before depreciation,
corporate expenses, and interest expense.
The following table presents segmented financial information, (in
thousands):
<TABLE>
<CAPTION>
For the year ended December 31, 1999
---------------------------------------------------------------
Hotels Corporate & Other Consolidated
---------------------------------------------------------------
<S> <C> <C> <C>
Revenues........................................ $209,986 $ 50 $ 210,036
Operating income................................ 34,086 3,002 37,088
Interest expense................................ - 24,677 24,677
Depreciation and amortization................... - 26,240 26,240
Capital expenditures............................ - 54,923 54,923
Total assets.................................... 406,750 6,439 413,189
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------------------------
Hotels Corporate & Other Consolidated
---------------------------------------------------------------
<S> <C> <C> <C>
Revenues........................................ $203,822 $ 274 $ 204,096
Operating income................................ 33,636 (6,629) 27,007
Interest expense................................ - 20,756 20,756
Depreciation and amortization................... - 26,983 26,983
Capital expenditures............................ - 60,476 60,476
Total assets.................................... 419,661 2,850 422,511
</TABLE>
16. Summary of Quarterly Results (unaudited)
<TABLE>
<CAPTION>
Operating Net Income Basic Diluted
Quarters ended Revenues (1) Income (2) (loss) EPS EPS
---------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1999
March 31, 1999 $ 50,272 $ 8,610 $ 811 $ 0.04 $ 0.04
June 30, 1999 55,706 11,687 2,889 0.15 0.15
September 30, 1999 56,771 12,711 3,512 0.19 0.18
December 31, 1999 47,287 4,080 (1,276) (0.07) (0.07)
1998
March 31, 1998 $ 46,139 $ 6,181 $ 708 $ 0.04 $ 0.03
June 30, 1998 54,440 9,271 2,358 0.12 0.12
September 30, 1998 56,320 6,315 448 0.02 0.02
December 31, 1998 47,197 5,240 (134) (0.01) (0.01)
</TABLE>
(1) Revenues reflect revenues from continuing operations.
(2) Operating income reflects income from continuing operations before interest
expense, income taxes and extraordinary items.
39
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The required information on directors is included on pages 6-8 of the
Proxy Statement dated April 10, 2000 and is incorporated herein by reference.
The required information on executive officers is set forth in Part I of this
Form 10-K under an unnumbered item captioned "Executive Officers of Sunburst
Hospitality Corporation."
Item 11. Executive Compensation.
The required information is included on pages 7-14 of the Proxy
Statement dated April 10, 2000 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information is included on pages 5-7 of the Proxy
Statement dated April 10, 2000 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The required information is included on pages 14-20 of the Proxy
Statement dated April 10, 2000 and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents Filed as Part of this Report
1. Financial Statements
The Consolidated Financial Statements filed with this Form
10-K are listed in Item 8 above.
2. Financial Statement Schedules
The following reports are filed herewith on the pages indicated:
Schedule I: Condensed Financial Information..................... p.44
Schedule III: Real Estate and Accumulated Depreciation........... p.48
All other schedules are not applicable.
3. Exhibits
3.01 Restated Certificate of Incorporation of the Registrant*
3.02 Amendments to Restated Certificate of Incorporation*
40
<PAGE>
3.03 By-laws of the Registrant*
4.01 Common Stock Certificate*
4.02 Competitive Advance and Multi-Company Facility Agreement
between the Registrant and Chase Manhattan Bank dated October
15, 1997 *****
4.03 Subordinated Note due October 15, 2002 by the Registrant
payable to Choice Hotels International, Inc.***
4.05 Promissory Note dated April 22, 1997 by and between First
Choice Properties Corp in favor of QI Capital Corp in the
principal amount of $117,500,000****
4.06 Loan Agreement dated as of April 22, 1997 by and between First
Choice Properties Corp and QI Capital Corp.****
10.01 Distribution Agreement, dated October 31, 1996, between Manor
Care, Inc. and the Registrant*
10.02 Corporate Services Agreement between Manor Care, Inc. and the
Registrant*
10.03 Office Lease between Manor Care, Inc. and the Registrant*
10.04 Office Lease between Manor Care, Inc. and the Registrant*
10.05 Strategic Alliance Agreement dated as of October 15, 1997 by
and between the Registrant and Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.)**
10.06 Non-Competition Agreement dated as of October 15, 1997 by and
between the Registrant and Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.)**
10.07 Amended and Restated Agreement dated as of October 15, 1997 by
and between the Registrant and Stewart Bainum, Jr.**
10.08 Employment Agreement between the Registrant and James A.
MacCutcheon*
10.09 Supplemental Executive Retirement Plan*
10.10 Non-Employee Director Stock Option and Deferred Compensation
Stock Purchase Plan*
10.11 1996 Non-Employee Director Stock Compensation Plan*
10.12 1996 Long-Term Incentive Plan*
10.13 Pikesville Sublease between Manor Care, Inc. and the
Registrant*
10.14 Employee Benefits and Other Employment Matters Allocation
Agreement between Manor Care, Inc. and the Registrant*
10.15 Distribution Agreement dated as of October 15, 1997 by and
between Registrant and Choice Hotels Franchising, Inc. (renamed
Choice Hotels International, Inc.)**
10.16 Employee Benefits Allocation Agreement dated as of October 15,
1997 by and between the Registrant and Choice Hotels
Franchising , Inc. (renamed Choice Hotels International,
Inc.)**
10.17 Employee Benefits Allocation Agreement dated as of October 15,
1997 by and between the Registrant and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)**
10.18 Tax Administration Agreement dated as of October 15, 1997 by
and between the Registrant and Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.)**
10.19 Tax Sharing Agreement dated as of October 15, 1997 by and
between the Registrant and Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.)**
10.20 Office Sublease dated as of October 15, 1997 by and between the
Registrant and Choice Hotels Franchising, Inc. (renamed Choice
Hotels International, Inc.)**
10.21 Corporate Services Agreement dated as of October 15, 1997 by
and between the Registrant and Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.)**
10.22 Omnibus Agreement and Guaranty dated as of October 15, 1997 by
and among the Registrant, Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.) and Manor Care,
Inc. **
10.23 The Rights Agreement dated February 23, 1998 by and between the
Registrant and Chase Mellon Shareholder Services, L.L.C., as
Rights Agents*****
10.24 Omnibus Amendment Agreement dated as of December 29, 1998 by
and among Registrant and Choice Hotels International,
Inc.******
41
<PAGE>
10.25 Second Omnibus Amendment Agreement dates as of February 29,
2000 by and among Registrant and Choice Hotels International,
Inc.
21.01 Subsidiaries of the Registrant
23.01 Consent of Arthur Andersen L.L.P.
27.01 Financial Data Schedule
99.01 Proxy Statement dated April 10, 2000 (information
incorporated by reference)
_____________
* Incorporated by reference to the Company's Registration Statement on Form
10, File No. 001-11915.
** Incorporated by reference to the Company's 8-K dated October 15, 1997,
filed October 29, 1997.
*** Incorporated by reference to the Company's 8-K dated October 15, 1997,
filed December 17, 1997.
**** Incorporated by reference to the Company's Registration Form 10-K for the
fiscal year ended May 31, 1997, filed August 15, 1997.
***** Incorporated by reference to the Company's 8-K dated February 23, 1998,
filed March 11, 1998. ****** Incorporated by reference to Company's 8-K
dated December 29, 1998, filed December 31, 1998.
(b) Reports on Form 8-K.
None
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2000 SUNBURST HOSPITALITY CORPORATION
By: /s/ James A. MacCutcheon
-----------------------------------
James A. MacCutcheon
Executive Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dated indicated.
Signature Title Date
--------- ----- ----
/s/ Stewart Bainum, Jr. Chairman March 29, 2000
- ------------------------------
Stewart Bainum, Jr.
/s/ Donald J. Landry Vice Chairman, Chief Executive March 29, 2000
- ------------------------------
Donald J. Landry Officer and President
/s/ Paul A. Gould Director March 29, 2000
- ------------------------------
Paul A. Gould
/s/ Leland C. Pillsbury Director March 29,2000
- ------------------------------
Leland C. Pillsbury
/s/ Keith B. Pitts Director March 29, 2000
- ------------------------------
Keith B. Pitts
/s/ Carole Y. Prest Director March 29, 2000
- ------------------------------
Carole Y. Prest
/s/ Christine A. Shreve Director March 29, 2000
- ------------------------------
Christine A. Shreve
/s/ Charles G. Warczak, Jr. Vice President, Finance and March 29, 2000
- ------------------------------
Charles G. Warczak, Jr. Systems (Chief Accounting
Officer)
43
<PAGE>
SCHEDULE I
Page 1 of 4
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Real estate, net $ 244,983 $ 253,812
Real estate held for sale 23,861 7,698
Receivables, net 4,911 4,620
Net investment in restricted subsidiaries 27,547 31,342
Other assets 3,831 4,914
Cash and cash equivalents 2,243 3,576
--------------- ---------------
Total assets $ 307,376 $ 305,962
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Debt $ 194,842 $ 170,292
Accounts payable and accrued expenses 22,537 26,981
Other liabilities 6,950 6,052
--------------- ---------------
Total liabilities 224,329 203,325
--------------- ---------------
Stockholders' Equity
Common stock 245 244
Additional paid-in-capital 173,363 171,462
Retained earnings 2,723 (3,213)
Treasury stock, at cost (93,284) (65,856)
--------------- ---------------
Total stockholders' equity 83,047 102,637
--------------- ---------------
Total liabilities and stockholders' equity $ 307,376 $ 305,962
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
44
<PAGE>
SCHEDULE I
Page 2 of 4
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
For the year For the year For the year For the seven
ended ended ended months ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 116,959 $ 104,494 $ 55,487 $ 87,262
Operating expenses 79,460 82,480 44,506 69,780
(Net gains on property
dispositions)/provision for asset
impairment and other non-recurring charges (1,878) 4,264 5,119 -
Depreciation and amortization 16,560 17,118 8,561 10,988
Interest expense 16,402 11,549 4,580 6,484
---------------- ---------------- -------------- ---------------
Total expenses 110,544 115,411 62,766 87,252
---------------- ---------------- -------------- ---------------
Income (loss) before income taxes and equity
in earnings of restricted subsidiaries 6,415 (10,917) (7,279) 10
Equity in earnings of restricted subsidiaries 5,996 17,168 6,951 11,830
Income tax (benefit) expense 5,104 2,563 (44) 5,035
---------------- ---------------- -------------- ---------------
Income (loss) from continuing operations 7,307 3,688 (284) 6,805
Income from discontinued operations, net of tax - - 16,369 35,219
---------------- ---------------- ------------- ---------------
Net income before extraordinary item 7,307 3,688 16,085 42,024
Extraordinary item -- loss from early
extinguishment of debt (net of tax) 772 308 - 1,144
Cumulative effect of a change in accounting
principle 599 - - -
---------------- ---------------- -------------- ---------------
Net income $ 5,936 $ 3,380 $ 16,085 $ 40,880
================ ================ ============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
45
<PAGE>
SCHEDULE I
Page 3 of 4
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the year For the year For the year For the seven
ended Ended ended months ended
December 31, December 31, December 31, May 31,
1999 1998 1997 1997
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net cash provided by continuing operations $ 30,467 $ 27,411 $ 2,316 $ 20,282
Net cash provided by discontinued operations - - 20,876 46,724
---------------- -------------- -------------- --------------
Net cash provided from operating activities 30,467 27,411 23,192 67,006
---------------- -------------- -------------- --------------
Cash flows from investing activities
Investment in property and equipment (38,218) (52,735) (51,213) (60,641)
Acquisition of operating hotel - - - (5,550)
Distribution of Franchising segment - - (4,166) -
---------------- -------------- -------------- --------------
Net cash utilized by continuing operations (38,218) (52,735) (55,379) (66,191)
Net cash utilized by discontinued operations - - (118,474) (15,864)
---------------- -------------- -------------- --------------
Net cash utilized by investing activities (38,218) (52,735) (173,853) (82,055)
---------------- -------------- -------------- --------------
Cash flows from financing activities
Proceeds from mortgages and other long term debt 10,000 25,000 16,023 90,500
Principal payments of debt - (2,238) (90,694) (951)
Repayment of notes payable to Manor Care, Inc. - - (37,022) -
Proceeds from note payable to Choice
Hotels International - - 115,000 -
Proceeds from issuance of common stock 1,303 359 1,153 3,410
Purchases of treasury stock (27,428) (2,141) (10,554) (53,150)
Payable to Choice Hotels International, Inc. for net
worth guarantee - - 15,000 -
Advances from restricted subsidiaries 22,543 3,572 6,503 11,028
Advances to Manor Care, Inc., net - - - (9,971)
---------------- -------------- -------------- --------------
Net cash provided by continuing operations 6,418 24,552 15,409 40,866
Net cash provided by (utilized by) discontinued
operations - - 129,337 (19,730)
---------------- -------------- -------------- --------------
Net cash provided by financing activities 6,418 24,552 144,746 21,136
---------------- -------------- -------------- --------------
Net change in cash and cash equivalents (1,333) (772) (5,915) 6,087
Cash and cash equivalents at beginning of period 3,576 4,348 10,263 4,176
---------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 2,243 $ 3,576 $ 4,348 $ 10,263
================ ============== ============== ==============
Cash and cash equivalents of continuing operations $ 2,243 $ 3,576 $ 4,348 $ 6,471
Cash and cash equivalents of discontinued operations $ - $ - $ - $ 3,791
</TABLE>
See accompanying notes to condensed financial statements.
46
<PAGE>
SCHEDULE I
Page 4 of 4
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying condensed financial information of Sunburst Hospitality
Corporation (the "Parent Company") presents the financial condition, results of
operations and cash flows of the Parent Company with the investment in and
operations of its restricted subsidiary, First Choice Properties Corporation
("First Choice") on the equity method of accounting. Pursuant to the rules and
regulations of the Securities and Exchange Commission, the condensed financial
statements of the registrant do not include all of the information and notes
normally included with financial statements prepared in accordance with
generally accepted accounting principles and the statements should therefore be
read in conjunction with the consolidated financial statements and notes thereto
included in this Form 10-K.
As more fully described in the notes to the Parent Company's consolidated
financial statements, the Parent Company distributed its franchising business to
its shareholders on October 15, 1997 (distribution date). The accompanying
condensed financial information has been stated to reflect the franchising
business as discontinued operations through the distribution date.
In April 1997, First Choice, an indirect, wholly-owned subsidiary of the Parent
Company issued $117.5 million multi-class mortgage pass-through certificates
(collectively, "the mortgage securities"). The mortgage securities are non-
recourse and collateralized by 28 hotels owned by First Choice. The mortgage
securities bear a blended weighted average interest rate of 7.8% and have a
final maturity of May 5, 2012.
The mortgage securities contain customary covenants with respect to, among other
things, limits on the incurrence of debt, liens, certain investments,
transactions with affiliates, asset sales, mergers, and consolidations and
transfer of cash to affiliates.
The accompanying condensed financial statements present the debt of First Choice
as a component of net investment in restricted subsidiaries. Prior to the April
1997 issuance of the mortgage securities, the financial statements include the
push down effect of $110 million in Manor Care notes payable, as the April 1997
proceeds of the mortgage securities were used to repay the Manor Care notes
payable.
B. Debt
Aggregate debt maturities at December 31, 1999, are (in thousands):
2000 $51,730
2001 1,006
2002 142,106
------------
Total $194,842
============
C. Dividends
First Choice has never paid dividends to the Parent Company.
47
<PAGE>
SCHEDULE III
Page 1 of 2
SUNBURST HOSPITALITY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Initial cost to Company Subsequent Gross Amount at December 31, 1999
------------------------- ---------------------------------------
Building and Capitalized Asset Buildings and
Description Encumbrances Land Improvements Costs Writedowns Land Improvements Total
- -------------- --------------------------------------- ------------ ------------ --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
All properties,
each less than
5% of total $ 98,821 $ 51,275 $ 224,206 $ 85,630 $ (4,300) $ 61,397 $ 295,414 $ 356,811
<CAPTION>
Accumulated Date of Date Depreciable
Description Depreciation Construction Acquired Life
- -------------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
All properties,
each less than
5% of total $ 62,484 Various Various Various
</TABLE>
See accompanying notes to condensed financial statements.
48
<PAGE>
SCHEDULE III
Page 2 of 2
SUNBURST HOSPITALITY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(In thousands)
(A) The change in total cost of properties for the calendar years ended December
31, 1999 and 1998, the seven months ended December 31, 1997 and fiscal year
ended May 31, 1997 is as follows:
Balance at May 31, 1996 $ 248,736
Additions:
Acquisitions 21,278
Capital expenditures 16,363
Transfers from construction-in-progress 3,831
Deductions:
Dispositions and other (7,008)
-----------
Balance at May 31, 1997 283,200
Additions:
Acquisitions -
Capital expenditures 22,562
Transfer from construction-in-progress 19,772
Deductions:
Dispositions and other (170)
-----------
Balance at December 31, 1997 325,364
Additions:
Acquisitions -
Capital expenditures 6,478
Transfer from construction-in-progress 48,930
Deductions:
Dispositions and other (42,944)
----------
Balance at December 31, 1998 337,828
Acquisitions -
Capital expenditures 13,540
Transfer from construction-in-progress 86,790
Deductions:
Dispositions and other (81,347)
----------
Balance at December 31, 1999 $ 356,811
==========
(B) The change in accumulated depreciation and amortization for the calendar
years ended December 31, 1999 and 1998, the seven months ended December 31,
1997, and fiscal year ended May 31, 1997 is as follows:
Balance at May 31, 1996 $ 29,817
Depreciation and amortization 8,992
Disposals (2,145)
----------
Balance at May 31, 1997 36,664
Depreciation and amortization 7,247
----------
Balance at December 31, 1997 43,911
Depreciation and amortization 16,154
Disposals (4,987)
----------
Balance at December 31, 1998 55,078
Depreciation and amortization 12,442
Disposals (5,036)
----------
Balance at December 31, 1999 $ 62,484
==========
49
<PAGE>
(C) The total cost of properties excludes construction-in-progress and European
hotels, which were distributed on October 15, 1997 with Franchising.
(D) The aggregate cost of properties for Federal income tax purposes is
approximately $357 million at December 31, 1999.
50
<PAGE>
SECOND OMNIBUS AMENDMENT AGREEMENT
THIS SECOND OMNIBUS AMENDMENT AGREEMENT (this "Agreement") is made
this 29th day of February, 2000 by and between CHOICE HOTELS INTERNATIONAL,
INC., a Delaware corporation ("Choice"), and SUNBURST HOSPITALITY CORPORATION, a
Delaware corporation ("Sunburst").
WHEREAS, in connection with the spin-off of Choice by Sunburst (the
"Spin-off"), Choice and Sunburst entered into a Strategic Alliance Agreement
(the "Strategic Alliance Agreement") dated October 15, 1997 pursuant to which,
among other things, the parameters of the operating relationship between Choice
and Sunburst with regard to matters of mutual interest are set forth;
WHEREAS, in connection with the Spin-off, Choice and Sunburst also
entered into a Noncompetition Agreement dated October 15, 1997 (the
"Noncompetition Agreement");
WHEREAS, in connection with the Spin-off, Choice and Sunburst entered
into a Distribution Agreement dated October 15, 1997 pursuant to which, among
other things, Choice agreed to loan to Sunburst $115,000,000 which was evidenced
by a subordinated note (the "Term Note") with an aggregate principal amount of
$115,000,000 and a maturity date of five years;
WHEREAS, the Strategic Alliance Agreement contains a form of
Franchising Agreement (the "Franchising Agreement") as Exhibit A to be entered
---------
into by and between Choice and Sunburst whenever Choice is to brand any hotel or
lodging property of any kind that Sunburst develops or acquires and intends to
franchise during the term of the Strategic Alliance Agreement;
WHEREAS, Choice and Sunburst have entered into numerous franchising
agreements substantially in the form of the Franchising Agreement;
WHEREAS, Choice and Sunburst entered into an Omnibus Amendment
Agreement (the "First Omnibus Amendment Agreement" and, together with this
Agreement, the Strategic Alliance
<PAGE>
-2-
Agreement, the Noncompetition Agreement, the Term Note and the franchising
agreements entered into between Franchising and Realco prior to, on or after the
date hereof, the "Transaction Documents") dated December 28, 1998, pursuant to
which, among other things, Choice and Sunburst agreed to amend the Strategic
Alliance Agreement, the Term Note and the aforementioned franchising agreements;
WHEREAS, Choice and Sunburst desire to further amend the Strategic
Alliance Agreement, the aforementioned franchising agreements and the Term Note;
and
WHEREAS, Choice and Sunburst desire to terminate the Noncompetition
Agreement;
NOW, THEREFORE, Choice and Sunburst agree as follows:
ARTICLE ONE
AMENDMENTS TO STRATEGIC ALLIANCE AGREEMENT
AND FRANCHISING AGREEMENTS
Section 1.1. Definitions. Any capitalized term used within this
-----------
Article One and not defined within this Agreement, will have the meaning
ascribed to such term in the Strategic Alliance Agreement.
Section 1.2. Term. Section 2.1 of the Strategic Alliance Agreement
----
is hereby amended and restated as follows:
This Agreement shall go into effect on the date of the Distribution
(the "Effective Date") and shall continue in force until October 15, 2002
(the "Expiration Date"), except for Section 7.2 and Sections 1.6 and 1.7 of
the Second Omnibus Amendment Agreement which shall survive so long as any
franchising agreements between Realco and Franchising are in effect. This
Agreement may be renewed upon the mutual consent of the Parties.
<PAGE>
-3-
Section 1.3. Elimination of Right to First Refusal in Strategic
--------------------------------------------------
Alliance Agreement. The Strategic Alliance Agreement is hereby amended such
- ------------------
that Sections 3.2, 3.3, 3.4, 3.5 and 3.6 are deleted in their entirety and the
following new Section 3.2 is hereby inserted as follows:
3.2 Until the Expiration Date, Realco shall give Franchising written
notice at least fourteen days prior to executing a franchise application
with a third party with respect to the franchising of a hotel or lodging
property. Such written notice shall include a summary term sheet of the
proposed arrangement with the third party. Franchising shall have the
opportunity to present Realco with a plan to brand the hotel or lodging
property with one of its brands provided that Realco shall have no
obligation to enter into an agreement with Franchising to use any of its
brands on the hotel or lodging property.
Section 1.4. Development. Section 4 of the Strategic Alliance
-----------
Agreement is hereby amended and restated in its entirety as follows:
4. Development
-----------
4.1. Realco and Franchising are currently in the midst of a program
under which Realco has developed the twenty-one MainStay Suite Hotels
listed on Appendix I to the Second Omnibus Amendment Agreement and which
----------
are franchised by Franchising. Realco agrees that it will continue to
develop at least four additional MainStay Suite Hotels so that it will have
opened and continue to operate no fewer than a total of twenty-five
MainStay Suite Hotels prior to the Expiration Date (the "MainStay Quota").
For purposes of Sections 4.1 and 4.2, the following shall be included in
the MainStay Quota notwithstanding Realco's transfer of such hotels prior
to the Expiration Date:
(a) The three MainStay Suites properties (the "Put Call Properties")
which are subject to a Put Call Agreement between Realco and Franchising;
<PAGE>
-4-
(b) The two MainStay Suites properties identified in Appendix III to
------------
the Second Omnibus Amendment Agreement; and
(c) Any MainStay Suite property sold, transferred or conveyed by
Realco if such property is relicensed by the new owner or transferee as a
MainStay Suites under market terms acceptable to Franchising.
4.2. Until the MainStay Suite Hotels subject to the MainStay Quota
are Developed(as defined below), expenditures by Realco (or any of its
subsidiaries or affiliates) of cash or other assets, or agreements,
understandings or commitments for the same (whether binding, contingent,
conditional or otherwise), in connection with or related to the development
of any hotel or lodging property other than a MainStay Suite Hotel,
including without limitation, by way of acquisition of any property or any
capital stock (but excluding a stock for stock acquisition or merger) or
assets of any person or entity that directly or indirectly owns, operates
or manages a hotel or lodging property (collectively, "Hotels
Expenditures") shall not exceed the aggregate amount spent by Realco in
connection with or related to the development of MainStay Suite Hotels
(collectively, "MainStay Expenditures"). The ratio of Hotel Expenditures to
MainStay Expenditures shall be measured on a bi-annual, cumulative
aggregate basis. Within thirty days after the end of such bi-annual period,
Realco will deliver to Franchising a statement detailing (i) all Hotel
Expenditures made by Realco during such period, (ii) all MainStay
Expenditures made by Realco during such period, and (iii) outstanding
agreements, understandings and commitments for the same. "Developed" shall
mean either: (i) that, on or before April 15, 2001, three of the remaining
four MainStay Suites to be built to satisfy the MainStay Quota are open and
operating and the fourth has commenced construction; or (ii), if the
conditions of clause (i) are not satisfied, then all four of the remain-
<PAGE>
-5-
ing MainStay Suites to be built to satisfy the MainStay Quota are open and
operating.
Section 1.5. Dispute and MainStay Brand Issues Resolution. The
--------------------------------------------
Strategic Alliance Agreement is hereby amended by retitling Section 7 as
"Dispute and Brand Issue Resolution" and amending and restating Sections 7.1 and
7.2 in their entitety as follows:
7.1. Realco and Franchising agree to use their commercially
reasonable best efforts to address the brand issues identified on Appendix
--------
II to the Second Omnibus Amendment Agreement within the time frames set
--
forth therein. Realco and Franchising agree to use their commercially
reasonable best efforts to have their respective designated representatives
meet once every two weeks for six months from February 15, 2000 to discuss
ongoing matters with respect to the MainStay Suite Hotel brand. At the end
of the initial six month period, either party may require such bi-weekly
meetings to continue for an additional six month period and then once a
month for the following year. The representatives shall be the Executive
Vice President, Franchise Operations and the Senior Vice President,
Marketing for Franchising and the Chief Executive Officer for Realco.
7.2. Arbitration. Notwithstanding anything contained in the
-----------
Transaction Documents to the contrary, any claim arising out of or related
to any of the Transaction Documents, which has not been resolved by mutual
agreement of the parties after a written notice of the claim by the
complaining party to the other party and a forty-five (45) day negotiation
period in which the Parties try to resolve the claim, shall be finally
settled by arbitration. Such arbitration shall be conducted in Bethesda,
Maryland in accordance with the Commercial Rules of the American
Arbitration Association then in effect, as modified or supplemented herein,
or as the parties mutually agree otherwise. Notwithstanding the rules of
the arbitral body, the Parties hereto agree (a) that any arbitration shall
be presided over by a single arbitrator, who shall have been ad-
<PAGE>
-6-
mitted to the practice of law, and be in good standing or on retirement
status in any of the fifty United States or the District of Columbia and
have experience in hotel franchise matters, (b) that the arbitrator shall
base his decision on the facts as presented into evidence, and (c) that the
arbitrator shall prepare a written memorandum of decision setting forth the
findings of fact and conclusions of law. The arbitrator shall be selected
by the Parties. If they cannot agree on such selection within a thirty (30)
day period, they shall ask the American Arbitration Association to appoint
an arbitrator. The decision of the arbitrator shall be final, and judgment
may be entered upon it in accordance with the applicable law in any court
having jurisdiction. Any claim for relief made pursuant to this Agreement
shall be made within one (1) year from the date upon which the claim arose.
All costs of the arbitration shall be borne by the Party determined to be
the losing Party by the arbitrator. For purposes of determining the
prevailing and losing Party, the arbitrator may consider offers of
settlement by either Party, or both of them. The Circuit Court of
Montgomery County, Maryland shall have exclusive jurisdiction to enforce
this arbitration provision, for injunctive relief in and of arbitration and
for enforcement of any arbitration award.
Section 1.6. Liquidated Damages Provision in Franchising Agreements.
------------------------------------------------------
Notwithstanding Section 3.1 of the Strategic Alliance Agreement and with
reference to Section 1.3 of the First Omnibus Amendment Agreement, as long as
Sunburst has not defaulted under the Term Note:
(a) Notwithstanding the terms of any and all franchising agreements
entered into prior to, on or after the date hereof by and between Choice
and Sunburst (or any of their respective predecessors or affiliates)
related to the twenty-five MainStay Suite Hotels subject to the MainStay
Quota, Sunburst agrees that it shall not reflag any such MainStay Suite
Hotel, through a sale or otherwise (except as provided in the Put Call
Agreement), or seek termination of any such franchising agreement or fail
to
<PAGE>
-7-
enter into a franchising agreement for any such hotels or allow any other
brand to be flagged to any such hotel prior to October 15, 2002;
provided, however, Sunburst may: (i) reflag, or permit the reflagging of,
-------- --------
up to two of the properties so identified on Appendix III to the Second
------------
Omnibus Amendment Agreement during such three year period or thereafter;
and (ii) sell, transfer or convey any such MainStay Suites hotel if such
property is relicensed by the new owner or transferee as a MainStay Suites
under market terms acceptable to Choice. Upon an event specified in clause
(i) or (ii) of the preceding sentence, Choice shall terminate the
respective franchise agreements and waive any claim for damages against
Sunburst caused by such reflagging, sale, transfer or termination including
the obligation to pay liquidated damages. After October 15, 2002, Sunburst
may reflag, or permit the reflagging of, any MainStay Suite Hotels and
terminate any such franchising agreement and Choice shall waive any claim
against Sunburst for damages caused by such reflagging or termination,
including liquidated damages, if (x) Sunburst gives thirty days prior
written notice to Choice and (y) Sunburst pays Choice $100,000 as a
termination fee for each MainStay Suites Hotel, other than the two
properties referred to in clause (i) above, that is to be reflagged or for
which the franchising agreement is to be terminated. Choice and Sunburst
acknowledge that if any or all of the Put Call Properties are transferred
pursuant to the Put Call Agreement, that Choice shall terminate the
respective franchise agreements and shall waive any claim against Sunburst
for damages, including liquidated damages. Choice and Sunburst agree that
irreparable damage would occur in the event any of the provisions of this
Section 1.6(a) were not performed in accordance with the terms hereof and
that Choice's remedy at law for any breach of Sunburst's obligations
hereunder would be inadequate. Sunburst agrees and consents that temporary
and permanent injunctive relief may be granted in any proceeding which may
be brought to enforce any provision hereof without the necessity of proof
of actual damage.
<PAGE>
-8-
(b) Choice and Sunburst acknowledge that the reference in Section 1.3
of the First Omnibus Amendment Agreement to the liquidated damages
provision applicable to Sleep Inn franchise agreements is intended as a
termination fee such that Sunburst has the right at any time on or after
February 29, 2000 to terminate any such Sleep Inn franchise agreements upon
payment to Choice of $100,000 per agreement and Choice shall waive any
claim against Sunburst for damages caused by such termination, including
liquidated damages.
(c) Choice and Sunburst acknowledge that pursuant to Section 1.3 of
the First Omnibus Amendment Agreement, if Sunburst reflags a hotel or
lodging property that is neither a Sleep Inn nor MainStay Suite Hotel and
that hotel or lodging property is not sold by Sunburst within three years
from the date it was flagged with a non-Choice brand, then on such third
anniversary Sunburst shall pay Choice $100,000 in liquidated damages for
each such reflagged hotel or lodging property and Choice shall waive any
claim against Sunburst for damages caused by such reflagging, including
liquidated damages.
Section 1.7. Franchise Fee Credits. Notwithstanding anything
---------------------
contained in any MainStay Suites franchising agreements entered into prior to,
on or after the date hereof by and between Choice and Sunburst (or any of their
respective predecessors or affiliates) Section 4 of each franchising agreement
is hereby amended to add new subsections as follows:
(h) On the date hereof Franchising shall establish an account to
serve as a mechanism for administering the Shortfall Balance, as defined in
and pursuant to this Section 4. The initial amount credited to the
Shortfall Balance on the date hereof shall be $2,142,887 (the "Shortfall
Amount"), which represents the amount by which an agreed upon target
Cumulative EBITDA for the MainStay Suites hotels subject to the MainStay
Quota (excluding the Put Call Properties) for the period from October 1,
1996 through December 31, 1999 exceeds the actual Cumulative EBITDA for
such period.
<PAGE>
-9-
(i) For each year beginning January 1, 2001 until the Shortfall
Freeze Date (as defined below), the Shortfall Balance shall be adjusted (an
"Adjustment") by 50% of the amount, if any, by which the Target Cumulative
EBITDA (as set forth on Appendix IV) for the preceding year exceeds the
-----------
actual Cumulative EBITDA for the MainStay Suites Hotels subject to the
MainStay Quota (exclusive of the Put Call Properties) for such year as
finally determined pursuant to clause (j) below. Each year, on or prior to
February 15 of such year, Realco shall determine the actual Cumulative
EBITDA for the preceding year in a manner consistent with the calculation
of the Target Cumulative EBITDA and whether an Adjustment is warranted and
shall deliver written notice thereof to Franchising together with the
monthly operating statements for each applicable hotel. From and after the
earlier of February 28, 2010 and the first year in which no Adjustment is
required pursuant to this clause (h) (the "Shortfall Freeze Date"), no
further Adjustments shall be determined pursuant to this paragraph and the
Shortfall Balance shall thereafter never be increased.
(j) The Shortfall Balance, if any, shall be applied by Realco as a
credit against royalty, reservation and marketing fees ("Fees") payable to
Franchising as follows:
(1) First, to Fees payable pursuant to the franchise agreements
related to the MainStay Suites Hotels subject to the
MainStay Quota for each month prior to the tenth anniversary
of the date of each such franchise agreement. The Fee credit
shall be applied no later than the fifteenth day of each
month against Fees payable as of the last day of the
preceding month; and
(2) Second, to Fees payable pursuant to franchise agreements for
MainStay Suite Hotels other
<PAGE>
-10-
than those referred to in (i)(1) above or for any brand
developed by Franchising after the date hereof. The Fee
credit shall be applied no later than the fifteenth day of
each month against Fees payable as of the last day of the
preceding month.
The Shortfall Balance shall immediately be reduced by the amounts used as
Fee credits pursuant to this section. Any remainder of the Shortfall
Balance shall carry forward until used.
(k) Franchising or its representatives shall have the right to review
and audit the books and records of Realco for the purposes of determining
the Shortfall Amount and the Fees payable in any particular month. If
Franchising agrees with the Shortfall Amount determined by Realco, then
that amount shall be deemed finally determined. In the event Franchising
disagrees with the Shortfall Amount or the Fees payable as determined by
Realco, then Franchising shall so notify Realco in writing within 10 days
of receipt of notice from Realco of the Shortfall Amount. If Franchising
and Realco are unable to agree in good faith by the tenth day of any month,
then Franchising shall, within 10 days from its delivery of the notice to
Realco, retain a firm of independent accountants to determine the Shortfall
Amount and/or the Fees payable. The accountant shall deliver its
determination no later than the last day of such month. The cost of such
accountants shall be borne by Franchising unless the accountant's
determination of the Shortfall Amount and/or Fees payable deviates by 5% or
more from the amount determined by Realco, in which case Realco shall bear
the cost. If Franchising and Realco agree with the accountants
determination of the Shortfall Amount and/or the Fees payable, then that
amount shall be deemed finally determined. If Franchising or Realco
disagree with the accountants determination, then the parties shall settle
the disagreement and the Shortfall Amount and/or the Fees payable shall be
finally determined in accordance with the dispute resolution mechanism set
forth in the Strategic Alliance Agreement, as amended. Realco agrees that
it shall cooperate with
<PAGE>
-11-
Franchising and the accountant and provide them reasonable access to its
books records and employees in connection with their review of the
Shortfall Amount and/or the Fees payable.
Section 1.8. Elimination of Right to First Refusal in Franchising
----------------------------------------------------
Agreements. Notwithstanding anything contained in any franchising agreements
- ----------
entered into prior to, on or after the date hereof by and between Choice and
Sunburst (or any of their respective predecessors or affiliates), the provision
regarding the right of first refusal contained in each franchising agreement is
hereby deleted in its entirety.
ARTICLE TWO
AMENDMENTS TO TERM NOTE
Section 2.1. Definitions. Any defined term used within this Article
-----------
Two and not defined within this Agreement shall have the meaning ascribed to
such term in the Term Note (as amended).
Section 2.2. Asset Sale Proceeds. Section 1.6 of the Term Note is
-------------------
hereby amended by deleting the section in its entirety and replacing it with the
following:
Within fourteen (14) calendar days after the consummation of an Asset
Sale involving the Put Call Properties, the Payor will pay to the Payee by
wire transfer to the bank account designated by the Payee such aggregate
principal amount of this Note as equals one hundred percent (100%) of the
Asset Sale Proceeds.
Section 2.3. Event of Default. Section 2 of the Term Note is hereby
----------------
amended by adding the following after paragraph 2(e):
(f) A Change of Control of the Payor. For purposes of this paragraph,
a "Change of Control" shall mean:
<PAGE>
-12-
1. Any "person" as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (other than (i) the Payor,
(ii) any trustee or other fiduciary holding securities under an employee
benefit plan of the Payor, (iii) any corporations owned, directly or
indirectly, by the stockholders of the Payor in substantially the same
proportions as their ownership of stock of the Payor, or(iv) Stewart
Bainum, his wife, their lineal descendants and their spouses (so long as
they remain spouses) and the estate of any of the foregoing persons, and
any partnership, trust, corporation or other entity to the extent shares of
common stock (or their equivalent) are considered to be beneficially owned
by any of the persons or estates referred to in the foregoing provisions of
this subsection or any transferee thereof) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act)), directly or indirectly,
of securities of the Payor representing 20% or more of the combined voting
power of the Payor's then outstanding voting securities.
2. Individuals constituting the Board of Directors of the Payor on
the date of this Agreement and the successors of such individuals
("Continuing Directors") cease to constitute a majority of the Board. For
this purpose, a director shall be a successor if and only if he or she was
nominated by a Board (or a Nominating Committee thereof) on which
individuals constituting the Board on February 29, 2000 and their
successors (determined by prior application of this sentence) constituted a
majority;
3. The stockholders of the Payor approve a plan of merger or
consolidation ("Combination") with any other corporation or legal person,
other than a Combination which would result in stockholders of the Payor
immediately prior to the Combination owning, immediately thereafter, more
than sixty-five percent (65%) of the combined voting power of either the
surviving entity or the entity owning directly or indirectly all of the
common stock, or its equivalent, of the surviving entity; provided, how-
<PAGE>
-13-
ever, that if stockholder approval is not required for such Combination,
the Change in Control shall occur upon the consummation of such
Combination;
4. The Payor or an affiliate of the Payor engages in a "Rule 13e-3
transaction" as defined in the Securities and Exchange Act of 1934, as
amended.
5. The stockholders of the Payor approve a plan of liquidation of the
Payor or an agreement for the sale or disposition (including through a
sale/leaseback) by the Payor of more than 50% of the Payor's stock and/or
assets, or accept a tender offer for more than 50% of the Payor's stock (or
any transaction having a similar effect); provided, however, that if
stockholder approval is not required for such transaction, the Change in
Control shall occur upon consummation of such transaction.
Section 2 shall be further amended by adding the following paragraph
immediately preceding the last paragraph of Section 2:
If an Event of Default specified in Section 2(f) shall have occurred
and be continuing, Payee may, at its option, by written notice to Payor and
to Chase, declare the entire principal amount of this Note and the interest
accrued thereon to be due and payable.
Section 2.4. Representation of Payor. Section 6 of the Term Note
-----------------------
is amended by adding the following new provision:
6.10. Representation and Warranty of Payor. The Payor hereby
------------------------------------
represents and warrants that the Lenders have consented to and approved the
amendments to the Note contained in the Omnibus Amendment Agreement dated
December 28, 1998 (as amended herein) and the Second Omnibus Amendment
Agreement dated February 29, 2000. The Payor further represents and
warrants that the Lenders have waived any default or event of default under
the Credit Agreement or any other Senior Debt Document that may arise as a
result
<PAGE>
-14-
of any payment under this Note in accordance with its terms, including
without limitation pursuant to Section 1.6 hereof.
Section 2.5. Covenant of Payor. Section 3.2 of the Term Note is
-----------------
amended by adding the following new provision:
Payor further covenants and agrees that for so long as any
indebtedness evidenced by this Note remains outstanding, Payor will not,
without the written consent of Payee, enter into any agreement that
restricts or prohibits any payment by Payor to Payee under the terms of
this Note.
ARTICLE THREE
NONCOMPETITION AGREEMENT
Section 3.1. Termination. The Noncompetition Agreement is hereby
-----------
terminated and shall from and after the date hereof be of no further force or
effect.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
Section 4.1. Conflicts. In the event of any conflict between the
---------
terms of this Agreement and the terms of the Strategic Alliance Agreement, any
franchising agreement entered into by and between Choice and Sunburst referred
to in this Agreement, the Term Note, the Noncompetition Agreement, the First
Omnibus Amendment Agreement and any other documents related thereto and executed
by one or more parties hereto in connection with any of the aforementioned
agreements, the terms and provisions of this Agreement shall control.
Section 4.2. Agreements Remain in Effect. The Strategic Alliance
---------------------------
Agreement, any franchising agreement en-
<PAGE>
-15-
tered into by and between Choice and Sunburst referred to in this Agreement, the
First Omnibus Amendment Agreement and the Term Note shall remain fully effective
and are changed only as specifically provided herein and shall bind the parties
to each in all respects as originally contemplated.
Section 4.3. Counterparts. This Agreement may be executed in one or
------------
more counterparts, all of which taken together shall constitute one instrument.
Section 4.4. Board Approval. This Agreement has been approved by
--------------
the Board of Directors of both Choice and Sunburst.
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the day and year first written above.
CHOICE HOTELS INTERNATIONAL, INC.
/s/ Joseph M. Squeri
- ---------------------------------------
Name: Joseph M. Squeri
Title: Senior Vice President and Chief
Financial Officer
SUNBURST HOSPITALITY CORPORATION
/s/ Donald J. Landry
- ---------------------------------------
Name: Donald J. Landry
Title: CEO
<PAGE>
Exhibit 21.01
SUBSIDIARIES
BOULEVARD MOTEL CORP.
Arlington Spirits Corp.
Bay Ridge Spirits Corp.
Biscayne Land Associates, Inc.
Biscayne Properties, Inc.
Bowling Green Inn - Brandywine, Inc.
Cardinal Beverage Corp.
Everglades Beverage Corp.
Fairways Beverage Corp.
Fairways, Inc.
First Choice Properties Corp.
First Choice Capital Corp.
QI Capital Corp.
MCH Baltimore Corp.
MCH Hot Springs Corp.
MCH Roanoke Corp.
MCH Springfield Corp.
MCH Wichita Corp.
MCHD Cypress Creek Corp.
MCHD Ft. Lauderdale Corp.
MCHD Hampton Corp.
MCH Shady Grove Corp.
CACTUS HOTEL CORP.
CHOICE MANAGEMENT & REALTY SERVICES, INC.
Beltway Management Company
COMFORT CALIFORNIA, INC.
GULF HOTEL CORP.
HEFRU FOOD SERVICES, INC.
QCM BEVERAGES, INC. (49%; 51% Texas Resident)
QCM CORPORATION
SUNBURST HOTEL CORP.
THICKET, INC (THE) (Non-Profit; owned by members)
Subsidiaries are wholly-owned except where indicated.
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 333-14203, No. 333-15661, No. 333-17577 and No.
333-17575.
Arthur Andersen LLP
Vienna, Virginia
March 28, 2000
<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 inits entirety by
reference to such financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,965
<SECURITIES> 0
<RECEIVABLES> 8,351
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 503,406
<DEPRECIATION> 109,650
<TOTAL-ASSETS> 413,189
<CURRENT-LIABILITIES> 0
<BONDS> 293,663
0
0
<COMMON> 245
<OTHER-SE> 82,802
<TOTAL-LIABILITY-AND-EQUITY> 413,189
<SALES> 0
<TOTAL-REVENUES> 210,036
<CGS> 0
<TOTAL-COSTS> 172,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,677
<INCOME-PRETAX> 12,411
<INCOME-TAX> 5,104
<INCOME-CONTINUING> 7,307
<DISCONTINUED> 0
<EXTRAORDINARY> 772
<CHANGES> 599
<NET-INCOME> 5,936
<EPS-BASIC> .38
<EPS-DILUTED> .38
</TABLE>
