SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 1-11915
SUNBURST HOSPITALITY CORPORATION
10770 COLUMBIA PIKE SILVER SPRING, MD. 20901
(301) 592-3800
Delaware 53-1985619
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
___________________________________
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No __
-
SHARES OUTSTANDING
CLASS AT SEPTEMBER 30, 2000
----- ---------------------
Common Stock, $0.01
par value per share 15,839,281
----------
================================================================================
1
SUNBURST HOSPITALITY CORPORATION
INDEX
-----
PAGE NO.
-------
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
September 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Operations and
Financial Condition 9
PART II. OTHER INFORMATION 14
2
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
As of
------------------------------
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Real estate, net $ 297,154 $ 359,258
Real estate held for sale 49,955 34,498
Receivables (net of allowance for doubtful
accounts of $577 and $500, respectively) 12,524 7,851
Other assets 6,042 8,617
Cash and cash equivalents 3,340 2,965
------------- ------------
Total assets $ 369,015 $ 413,189
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt
Senior debt and capital leases $ 98,340 $ 151,807
Subordinated debt 137,051 141,856
------------- ------------
235,391 293,663
Accounts payable and accrued expenses 34,963 30,096
Deferred income taxes ($3,890 and $5,368, respectively) and other
Liabilities 4,332 6,383
------------- ------------
Total liabilities 274,686 330,142
Total stockholders' equity 94,329 83,047
------------- ------------
Total liabilities and stockholders' equity $ 369,015 $ 413,189
============= ============
The accompanying notes are an integral part of these Condensed Consolidated
3
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
REVENUES
Rooms $ 50,224 $ 50,689 $ 144,644 $ 144,081
Food and beverage 4,226 3,965 13,286 12,465
Other 2,109 2,117 6,362 6,202
---------- ---------- ---------- ----------
Total revenues 56,559 56,771 164,292 162,748
---------- ---------- ---------- ----------
OPERATING EXPENSES
Departmental expenses 16,968 18,318 50,785 52,653
Undistributed operating expenses 17,626 18,089 52,369 51,639
Depreciation and amortization 5,762 6,756 18,499 19,572
Corporate 2,966 2,512 9,521 7,641
Gains on property dispositions, net of impairment charges (39) (1,546) (7,678) (1,546)
Recapitalization Costs 8,967 - 8,967 -
---------- ---------- ---------- ----------
Total operating expenses 52,250 44,129 132,463 129,959
---------- ---------- ---------- ----------
OPERATING INCOME 4,309 12,642 31,829 32,789
---------- ---------- ---------- ----------
INTEREST EXPENSE 5,936 6,064 19,106 18,298
---------- ---------- ---------- ----------
INCOME(LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (1,627) 6,578 12,723 14,491
Income taxes (985) 2,727 5,119 5,908
---------- ---------- ---------- ----------
INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (642) 3,851 7,604 8,583
EXTRAORDINARY ITEMS - Loss from early extinguishments of
debt (net of $91, $221, $207 and $476 tax benefit, respectively) 139 339 315 772
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE - (net of $421 tax benefit) - - - 599
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (781) $ 3,512 $ 7,289 $ 7,212
========== ========== ========== ==========
Basic earnings per share
- ------------------------
Income(loss) before extraordinary item and cumulative effect of a
change in accounting principle $ (0.04) $ 0.20 $ 0.49 $ 0.44
Extraordinary item (0.01) (0.01) (0.02) (0.04)
Cumulative effect of a change in accounting principle - - - (0.03)
---------- ---------- ---------- ----------
Net income(loss) $ (0.05) $ 0.19 $ 0.47 $ 0.37
========== ========== ========== ==========
Diluted earnings per share
- --------------------------
Income(loss) before extraordinary item and cumulative effect
of a change in accounting principle $ (0.04) $ 0.20 $ 0.49 $ 0.44
Extraordinary item (0.01) (0.02) (0.02) (0.04)
---------- ---------- ---------- ----------
Cumulative effect of a change in accounting principle - - - (0.03)
Net income(loss) $ (0.05) $ 0.18 $ 0.47 $ 0.37
========== ========== ========== ==========
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Income.
4
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
---------------------------------------
2000 1999
---------- ----------
Cash Flows From Operating Activities
Income before extraordinary items and cumulative effect of a change
in accounting principle $ 7,604 $ 8,583
Adjustments to reconcile income before extraordinary item and cumulative
effect of a change in accounting principle to net cash provided
by operating activities:
Depreciation and amortization 18,499 19,572
Other non-cash items 10,432 9,468
Changes in assets and liabilities 5,395 (510)
---------- ----------
Net cash provided by operating activities 41,930 37,113
---------- ----------
Cash Flows From Investing Activities
Investment in property and equipment (25,585) (42,363)
Proceeds from sale of property and equipment 53,733 32,650
---------- ----------
Net cash provided by (utilized in) investing activities 28,148 (9,713)
---------- ----------
Cash Flows From Financing Activities
Net repayment of debt (69,784) (22,710)
Proceeds from issuance of stock 573 79
Purchases of treasury stock (492) (4,495)
---------- ----------
Net cash utilized in financing activities (69,703) (27,126)
---------- ----------
Increase in cash and cash equivalents 375 274
Cash and cash equivalents at beginning of period 2,965 4,113
---------- ----------
Cash and cash equivalents at end of period $ 3,340 $ 4,387
========== ==========
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Cash Flows.
5
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
The accompanying condensed consolidated financial statements of Sunburst
Hospitality Corporation and subsidiaries (the "Company") have been prepared by
the Company without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not misleading.
The condensed consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements for the year ended December
31, 1999 and notes thereto included in the Company's Form 10-K, dated March 30,
2000.
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 2000, the results of operations for the three and
nine months ended September 30, 2000 and 1999, respectively, and cash flows for
the nine months ended September 30, 2000 and 1999, respectively. Interim results
are not necessarily indicative of full year performance because of the impact of
seasonal and short-term variations.
The following table illustrates the reconciliation of net income (loss) and
number of shares used in the basic and diluted earnings per share ("EPS")
calculations (in thousands, except per share data).
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------
Income(loss) before extraordinary items and
cumulative effect of a change in accounting principle $ (642) $ 3,851 $ 7,604 $ 8,583
Weighted average shares 15,822 18,929 15,497 19,346
--------------------------------------------------------
Basic EPS before extraordinary items and cumulative
effect of a change in accounting principle $ (0.04) $ 0.20 $ 0.49 $ 0.44
========================================================
Shares for basic EPS 15,822 18,929 15,497 19,346
Effect of dilutive securities 174 261 147 207
--------------------------------------------------------
Shares for diluted EPS 15,996 19,190 15,644 19,553
--------------------------------------------------------
Diluted EPS before extraordinary items and cumulative
effect of a change in accounting principle $ (0.04) $ 0.20 $ 0.49 $ 0.44
========================================================
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. In February, 2000, the Board of Directors
authorized the Company, through March 16, 2000, to offer current employees the
opportunity to terminate stock options with a strike price of $5.25 (the then
current fair market price) or higher, and replace the terminated options with an
award of restricted stock based upon a Black-Scholes valuation of the stock
options terminated. At the expiration of the offer, 1,300,994 shares under
option with an average strike price of $7.00, were, accordingly, terminated and
638,355 shares of restricted stock were issued. The Company recorded non-cash
compensation expenses of $239,000 and $611,000 for the three and nine months
ended September 30, 2000 relating to this transaction.
6
As of September 30, 2000, the Company owned and managed 75 hotels with 10,329
rooms in 25 states under the following brand names: Comfort, Clarion, Sleep,
Quality, MainStay and Holiday Inn Express.
At September 30, 2000, the Company has eight hotels with 1,554 rooms that are
currently being marketed for sale with a carrying value of $50.0 million. In
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No.
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company has discontinued depreciating these
assets while they are held for sale. In addition, SFAS No. 121 requires that
assets held for sale be reported at the lower of the carrying amount or fair
value less costs to sell. In accordance with SFAS No. 121, the Company recorded
an impairment charge of $650,000 and $2.6 million for the three and nine months
ended September 30, 2000, to write certain properties down to their fair value
less cost to sell. The eight hotels held for sale reported total revenues of
$9.6 million and $27.5 million for the three and nine months ended September 30,
2000, and $9.3 million and $26.4 million for the three and nine months ended
September 30, 1999, respectively. Income from operations before interest, taxes,
depreciation and amortization and allocations for corporate expenses of the
eight hotels was $2.3 million and $6.0 million for the three and nine months
ended September 30, 2000, $2.3 million and $5.8 million for the three and nine
months ended September 30, 1999, respectively. The eight hotels held for sale
reported total revenues of $36.0 million, income before income taxes,
extraordinary items and cumulative effect of a change in accounting principle of
$1.2 million and EBITDA of $9.3 million over the last twelve months.
During the nine months ended September 30, 2000, the Company sold 6 hotels (859
rooms) for total proceeds of approximately $34.8 million. The company recorded
net gains from these dispositions of approximately $8.6 million during the
current year. In addition, the Company sold four land parcels for total proceeds
of approximately $2.6 million, which resulted in net gains of approximately
$400,000 for the nine months ended September 30, 2000. Subsequent to the third
quarter ended September 30, 2000, the Company sold one hotel for total proceeds
of $17.3 million and a net gain of approximately $8.0 million.
On March 27, 2000, the Company entered into a Put/Call Agreement with Choice
Hotels International, Inc. which provided an option for Choice to acquire three
of Sunburst's MainStay Suites hotels in 2000 at a price equal to Sunburst's
original cost, with the proceeds used to reduce the balance of Sunburst's term
note to Choice. On September 1, 2000, Choice acquired the three Sunburst
MainStay Suites. Proceeds of $16.3 million were used to reduce the balance of
Sunburst's term note to Choice.
At the time of the Choice 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 of 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) provided a
put/call option for Choice to acquire three of Sunburst's MainStay Suites hotels
in 2000 at a price equal to Sunburst's original cost, with the proceeds used to
reduce the balance of Sunburst's term note to Choice; (v) Choice and the Company
have agreed to continue to cooperate with respect to matters of mutual interest,
including new product and concept testing for Choice in hotels owned by the
Company; and (vi) 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.
On September 20, 2000 the Company announced that it had entered into a
definitive agreement to be acquired by a group of Sunburst's existing
shareholders and management. The transaction, which is structured as a
recapitalization and is subject to shareholder approval, provides for the
acquisition of all outstanding publicly held shares of common stock of Sunburst
at a price of $7.375 per share in cash. The agreement was unanimously approved
by Sunburst's Board of Directors acting upon the unanimous recommendation of a
Special Committee of the Board of Directors, comprised of directors who are not
7
SUNBURST HOSPITALITY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
SEPTEMBER 30, 2000
affiliated with the group of purchasing stockholders. Salomon Smith Barney
served as the financial advisor to the Special Committee. The agreement is
conditioned upon approval of the holders of two-thirds of all outstanding shares
of Sunburst and the approval by a majority of the shares that are not held by
members of the group of purchasing stockholders. The acquiring group has
arranged financing for the transaction through The Chase Manhattan Bank. The
transaction is expected to be treated as a recapitalization for accounting
purposes, as Sunburst will not meet the requirements for a new accounting basis
as a result of the interests of the continuing stockholders. A recapitalization
is a transaction structured to transfer the controlling interest of an operating
entity to a new investor, with some owners also retaining an ownership interest.
A recapitalization results in no change in accounting basis of the assets or
liabilities presented in the stand-alone financial statements of the operating
entity. The consideration paid for the shares is accounted for as a reduction in
equity. Additional information relating to this announcement can be obtained in
the Preliminary Proxy Statement on Schedule 14A filed with the Securities
Exchange Commission on October 6, 2000.
8
SUNBURST HOSPITALITY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
SEPTEMBER 30, 2000
The Company is a national owner and operator of hotel properties with a
portfolio at September 30, 2000 of 75 hotels (10,329 rooms) in a total of 25
states. The Company operates its hotels under the following brands: MainStay,
Comfort, Quality, Clarion, Sleep and Holiday Inn Express. The Company's
continuing business consists primarily of guest room revenue, meeting room
revenue, and food and beverage revenue from owned and operated hotels.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 and 1999:
- -----------------------------------------------------------------------------
Total revenues for the three months ended September 30, 2000 decreased 0.4% to
$56.6 million, compared to $56.8 million in the prior year. While the number of
rooms decreased 8.9% to 10,329 at September 30, 2000 from 11,340 at September
30, 1999, revenue per available room for the entire portfolio increased 9.4%.
The Company's portfolio of recently developed, mid-priced, extended-stay hotels
reported a revenue increase of 29.7% to $9.8 million in the third quarter of
2000, from $7.6 million in the third quarter of the prior year. This increase in
revenue was largely offset by the sale of 10 lower-margin hotels since the end
of the third quarter in 1999.
Same store properties opened at least one year reported an occupancy increase to
74.1% in the third quarter of 2000 from 73.7% in the third quarter of the prior
year and increased average daily rates to $69.24 from $67.90. This resulted in
an increase in RevPar of 2.4% on a "same store" basis.
Hotel operating profit increased to 38.8% in the third quarter 2000 from 35.9%
in the prior year. Notwithstanding the tight labor markets within which the
company operates, various cost control measures enabled the Company to hold most
operating cost increases below the rate of total revenue increases. In addition,
operating margins benefit as the Company opens and ramps-up newly developed,
mid-priced extended stay hotels, which operate at higher margins than the
Company's traditional hotels and as the Company has sold lower margin
properties.
Recurring earnings before gains, losses on property transactions,
recapitalization costs, interest, taxes, depreciation and amortization
("Recurring EBITDA") increased to $19.0 million in the third quarter of 2000
from $17.9 million in the third quarter of the prior year. Recurring 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 recurring EBITDA to be an indicative measure of
the operating performance particularly due to the large amount of depreciation
and amortization recorded on the Company's real estate. Such information should
not be considered an alternative to net income, operating income, cash flow from
operations or any other operating or liquidity performance measure defined by
generally accepted accounting principles. Cash expenditures incurred (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
recurring EBITDA presentation and therefore recurring EBITDA does not represent
funds available for management's discretionary use. The items excluded from the
calculation of recurring EBITDA are significant components in understanding and
assessing the Company's results of operations. Recurring EBITDA presented by the
Company may not necessarily be comparable to recurring EBITDA defined and
presented by other companies.
The following schedule is a reconciliation of recurring EBITDA to income (loss)
from continuing operations (in thousands):
9
For the three months ended
September 30,
2000 1999
---------- ----------
Recurring EBITDA $ 18,999 $ 17,852
Gains on property dispositions, net of impairments 39 1,546
Recapitalization costs (8,967) -
Interest expense (5,936) (6,064)
Income taxes 985 (2,727)
Depreciation and amortization (5,762) (6,756)
---------- ----------
Income (loss) from continuing operations before extraordinary
items and cumulative effect of a change in accounting principle $ (642) $ 3,851
========== ==========
During the quarter ended September 30, 2000, the Company announced a
recapitalization transaction, which remains subject to shareholder approval. As
a result of that transaction, the Company recorded a charge of $9.0 million in
the quarter. Included in that charge were $8.4 million in termination costs
associated with personnel changes made involving eight corporate employees, of
which $4.7 million related to non-cash compensation expenses from the
acceleration of vesting of stock options and restricted stock grants held by
certain of these employees.
Interest expense decreased 2.1% to $5.9 million in the third quarter of 2000
from $6.1 million in the third quarter of the prior year. The decrease is
principally the result of a reduction in borrowings.
Depreciation expense decreased 14.7% to $5.8 million in the current quarter from
$6.8 million in the third quarter of the prior year. The increased depreciation
expense associated with newly developed hotels was offset by a decline in
depreciation expense relative to hotels held for sale. In accordance with
Statement of Financial Accounting Standards No. 121, the Company discontinued
depreciating those assets while they are held for sale. The eight hotels held
for sale at September 30, 2000, have been reported at the lower of the carrying
amount or fair value less cost of sale. The eight hotels held for sale have a
combined book value of $50.0 million at September 30, 2000.
Income (loss) before income taxes, extraordinary items and cumulative effect of
a change in accounting principle decreased $8.2 million to a loss of $1.6
million in the third quarter of 2000 from a gain of $6.6 million in the third
quarter of the prior year. The decrease results from the $9.0 million in
expenses associated with the recapitalization announcement made on September 20,
2000. After the effect of an extraordinary loss from early debt redemption and
cumulative effect of a change in accounting principle, the Company reported a
decrease of $4.3 million in net income to a loss of $781,000 for the third
quarter of 2000 from a gain of $3.5 million during the prior year's third
quarter. The extraordinary loss from early debt redemption during the current
quarter of $139,000 (net of $91,000 tax benefit) and third quarter of 1999 of
$339,000 (net of $221,000 tax benefit) related to the early redemption of debt
collateralized by one property sold during the third quarter of 2000 and two
properties sold during the second quarter of 1999.
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999:
- ----------------------------------------------------------------------------
Total revenue for the nine months ended September 30, 2000 increased 1.0% to
$164.3 million, compared to $162.7 million in the prior year. While the number
of rooms decreased 8.9% to 10,329 at September 30, 2000 from 11,340 at September
30,1999 revenue per available room for the entire portfolio increased 8.1%. Same
store properties opened at least one year reported an occupancy increase to
71.0% for nine months ended September 30, 2000 from 69.6% for the nine months
ended September 30, 1999 and increased average daily rates to $67.62 from
$66.88.
10
For the nine months ended September 30, 2000, hotel operating profit increased
to 37.2% from 35.9% in the prior year. Interest expense increased $808,000 or
4.4% to $19.1 million for the nine months ended September 30, 2000 from $18.3
million for the prior year as a result of increased short-term rates associated
with the floating rate bank debt. Depreciation expense decreased 5.6% to $18.5
million for the first nine months of 2000 from $19.6 million in the prior year.
The decline in depreciation expense is primarily a result of the discontinuance
of depreciation on the hotels that were held for sale during the nine month
period offset by the additional depreciation expense associated with newly
developed hotels.
Recurring earnings before gains, losses on property transactions,
recapitalization costs, interest, taxes, depreciation and amortization
("Recurring EBITDA") increased 1.6% to $51.6 million for the nine months ended
September 30, 2000 from $50.8 million for the same period in the prior year.
The following schedule is a reconciliation of recurring EBITDA to income from
continuing operations (in thousands):
For the nine months ended
September 30,
1999 1998
---------- ----------
Recurring EBITDA $ 51,617 $ 50,815
Gains on property dispositions, net of impairments 7,678 1,546
Recapitalization costs (8,967) -
Interest expense (19,106) (18,298)
Income taxes (5,119) (5,908)
Depreciation and amortization (18,499) (19,572)
---------- ----------
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 7,604 $ 8,583
========== ==========
For the year ended
---------------------------
December 31, December 31,
1999 1998
------------ ------------
Recurring EBITDA $ 61,450 $ 58,254
Net gains on property dispositions/ provision for asset
impairment and non-recurring charges 1,878 (4,264)
Interest expense (24,677) (20,756)
Income taxes (5,104) (2,563)
Depreciation and amortization (26,240) (26,983)
------------ ------------
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 7,307 $ 3,688
============ ============
Income before income taxes, extraordinary item and cumulative effect of a change
in accounting principle decreased $1.8 million to $12.7 million for the nine
months ended September 30, 2000 from $14.5 million in the prior year. The
decrease results from the $9.0 million in Recapitalization Costs which were
partially offset by the $7.7 million gain from the sale of assets for the nine
months ended September 30, 2000 compared to the $1.5 million gain from the sale
of assets for the nine months ended the prior year. After the effect of an
extraordinary loss from early debt redemption and cumulative effect of a change
in accounting principle, the Company reported a slight increase in net income to
11
$7.3 million for the nine months ended September 30, 2000 from $7.2 million
during the prior year. The extraordinary loss from early debt redemption during
the first nine months of the current year of $315,000 (net of $207,000 tax
benefit) and the prior year of $772,000 (net of $476,000 tax benefit) related to
the early redemption of debt collateralized by two properties sold during the
first nine months of 2000 and five properties sold during the same period of
1999, respectively.
On January 1, 1999 the Company adopted the AICPA Accounting Standards Executive
Committee's Statement of Position 98-5, "Reporting on the Cost of Start-Up
Activities" ("SOP 98-5"). In accordance with that new accounting pronouncement,
the Company wrote off the unamortized balance of deferred pre-opening costs on
its balance sheet at January 1, 1999 and recorded an after-tax charge of
$599,000 (net of $421,000 tax benefit) for the cumulative effect of that change
in accounting principle. Beginning January 1, 1999, pre-opening costs associated
with properties under construction are expensed as incurred.
Liquidity and Capital Resources:
- --------------------------------
The Company has maintained an $80 million committed line of credit with a group
of banks to support ongoing operations and to fulfill capital requirements.
On October 15, 2000 the Credit Facility was reduced to $25 million and extended
to February 2001. Borrowings under the line amounted to $7 million at September
30, 2000 compared to $51 million at December 31, 1999.
At September 30, 2000, the Company has $235.4 million of long-term debt
outstanding. The $137.1 million of subordinated debt payable to Choice Hotels
International, Inc. matures in October 2002. The Choice note provides additional
financial flexibility, as interest is not payable until maturity. The
Recapitalization agreement announced on September 20, 2000, subject to approval
by the Company's shareholders, would constitute a default, if approved, under
the Subordinated Note. Sunburst and Choice have, subject to the recapitalization
being approved by the Company's shareholders, entered into an agreement pursuant
to which Sunburst will repay this indebtedness in part and incur new
indebtedness to Choice for the remaining amount. If the Company is not
successful in seeking alternative sources of funding or approval of the
Recapitalization Agreement, long term financing will be sought to pay the Choice
debt. If adequate financing cannot be obtained, continued sales of assets will
be necessary to meet this obligation.
On September 1, 2000, Choice acquired three of Sunburst's MainStay Suites hotels
pursuant to a previously executed put/call agreement. Proceeds of $16.3 million
were used to reduce the balance of Sunburst's term note to Choice. The three
hotel put/call hotels reported total revenues of $4.4 million, loss before
income taxes, extraordinary items and cumulative effect of a change in
accounting principle of $435,000 and EBITDA of $1.7 million over the last twelve
months.
The Company reported an increase in cash and cash equivalents of $375,000 during
the nine months ended September 30, 2000. Cash from operations was $41.9 million
for the nine months ended September 30, 2000 compared to $37.1 million for the
same period the prior year. Cash from investing activities was $28.1 million
through the third quarter of 2000 compared to cash used in investing activities
of $9.7 million through the third quarter of 1999. Cash utilized in financing
activities for the nine months ended September 30, 2000 was $69.7 million
compared to $27.1 million for the same period the prior year. The increase in
cash from investing activities and the increase in cash utilized for financing
activities was a result of the Company's program to dispose of assets that do
not meet the Company's criteria for long-term retention to repay debt.
The Company's objective is to reduce its overall leverage. 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
reduce debt and redeploy capital to higher yielding opportunities. The Company
has identified eight such properties that as of September 30, 2000 are being
marketed for sale. During the quarter ended September 30, 2000, the Company sold
one hotel for total proceeds of $3.0 million. The six hotels sold during 2000
reported last twelve months revenue of $12.8 million, loss before income taxes,
extraordinary items and cumulative effect of a change in accounting principle of
$266,000 and EBITDA of $2.7 million.
12
The Company's Board of Directors authorized a Treasury share purchase program
aggregating six million shares. The program was completed in January, 2000 and
six million shares have been purchased at an aggregate cost of $30 million, or
$5.00 per share. The Company does not anticipate expanding the Treasury share
purchase program, at least until such time as additional financing is arranged.
At September 30, 2000, the Company's debt to book capitalization amounted to
71.4% and debt to market capitalization was 68.8%.
Debt analysis for nine months Ratio of Ratio of
ended September 30, 2000 debt to senior debt to
- ------------------------------ --------- --------------
Recurring EBITDA 4.6X 1.9X
Net income 32.3X 13.5X
Cash flows from operating activities 5.6X 2.3X
Ratio analysis for nine months Ratio of Ratio of
ended September 30, 2000 recurring EBITDA to net income to
- --------------------------------- ------------------- -------------
Fixed charges 5.0X 0.7X
Cash interest 6.5X 0.9X
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, accessing additional capital is imperative in order for the Company
to implement 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 completing planned asset sales, approval of the
Recapitalization Agreement, or otherwise arranging for an extension of its bank
facility which otherwise expires February 12, 2001, alternative sources of
capital will have to be identified and accessed.
FORWARD-LOOKING STATEMENTS
- --------------------------
The statements contained in this document that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for
future periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company.
Certain statements contained in this Form 10-Q, including those in the
section entitled "Management's Discussion and Analysis of Operating Results and
Financial Condition," contain forward-looking information that involves risk and
uncertainties. Actual future results and trends may differ materially depending
on a variety of factors discussed in the "Risk Factors" section included in the
Company's SEC filings, including (a) the Company's success in implementing its
business strategy, including its success in arranging financing where required
and (b) the nature and extent of future competition, and political, economic and
demographic developments in regions where the Company does business or in the
future may do business.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements.
13
PART II OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings relating to the proposed
recapitalization plan. The details of these proceedings are presented in the
Preliminary Proxy Statement on Schedule 14A filed with the Securities Exchange
Commission on October 6, 2000. The Company is party to other routine litigation
incidental to the business of the Company. None of such routine litigation,
either individually or in the aggregate, is expected to be material to the
business, financial condition or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.01 - Financial Data Schedule - September 30, 2000
(b) The following reports were filed pertaining to the quarter ended September
30, 2000.
None
14
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SUNBURST HOSPITALITY CORPORATION
Date: November 13, 2000 /s/ Charles Warczak
----------------------------
By: Charles Warczak
Senior Vice President,
Chief Financial Officer and
Treasurer
15