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 NOVEMBER 30, 1997 COMMISSION FILE NO. 1-11915
SUNBURST HOSPITALITY CORPORATION
10770 COLUMBIA PIKE
SILVER SPRING, MD. 20901
(301) 979-5000
Delaware 53-1985619
------------------------ -------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
Choice Hotels International, Inc.
-------------------------------------------
(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 NOVEMBER 30, 1997
-------------------- --------------------
Common Stock, $0.01
par value per share 19,940,933
----------
================================================================================
SUNBURST HOSPITALITY CORPORATION
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheets -
November 30, 1997 (Unaudited) and May 31, 1997 3
Consolidated Statements of Income -
Three months and six months ended November 30, 1997 and
November 30, 1996 (Unaudited) 4
Consolidated Statements of Cash Flows -
Six months ended November 30, 1997
and November 30, 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION AND SIGNATURE 13
2
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
November 30, May 31,
1997 1997
(Unaudited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,136 $ 7,033
Receivables (net of allowance for doubtful
accounts of $666 and $585, respectively) 8,294 7,659
Current income tax receivable 1,782 1,232
Other 6,496 5,569
Net investment in discontinued operations - 48,876
------------ ------------
Total current assets 29,708 70,369
------------ ------------
PROPERTY AND EQUIPMENT, AT COST, NET
OF ACCUMULATED DEPRECIATION 361,135 338,419
DEFERRED INCOME TAXES ($0 AND $10,663)
AND OTHER ASSETS 6,199 17,641
------------ ------------
Total assets $ 397,042 $ 426,429
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 2,957 $ 27,919
Accounts payable 44,569 25,605
Accrued expenses 11,707 15,968
------------ ------------
Total current liabilities 59,233 69,492
------------ ------------
MORTGAGES AND OTHER LONG TERM DEBT 127,074 195,428
NOTES PAYABLE TO CHOICE HOTELS
INTERNATIONAL, INC. 114,673 -
NOTES PAYABLE TO MANOR CARE, INC. - 37,022
DEFERRED INCOME TAXES ($236 AND $0,
RESPECTIVELY) AND OTHER
LONG TERM LIABILITIES 1,246 -
------------ ------------
Total liabilities 302,226 301,942
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 214 639
Additional paid-in-capital 168,540 167,163
Retained earnings (10,122) 17,075
Cumulative translation adjustment - (7,018)
Treasury stock, at cost (63,816) (53,372)
------------ ------------
Total stockholders' equity 94,816 124,487
------------ ------------
Total liabilities and stockholders'
equity $ 397,042 $ 426,429
============ ============
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
3
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Six months ended
-------------------- --------------------
November 30, November 30,
-------------------- --------------------
1997 1996 1997 1996
(Unaudited) (Unaudited)
-------- -------- -------- --------
REVENUES
Rooms $ 42,327 $ 40,036 $ 90,366 $ 83,460
Food and beverage 3,993 3,243 7,627 6,440
Other 1,849 1,671 4,274 4,703
-------- -------- -------- --------
Total revenues 48,169 44,950 102,267 94,603
-------- -------- -------- --------
OPERATING EXPENSES
Departmental Expenses
Rooms 14,240 14,491 29,567 29,462
Food and beverage 3,131 2,692 6,101 5,370
Other 732 639 1,474 1,491
Undistributed Operating Expenses
Administrative and general 3,891 4,532 7,999 9,121
Marketing 3,983 3,627 7,662 7,300
Utility costs 2,361 2,078 4,902 4,356
Property operation and maintenance 2,499 2,242 5,021 4,576
Property taxes, rent and insurance 2,147 1,646 3,942 3,097
Depreciation and amortization 5,968 5,145 11,355 9,533
Corporate 3,707 3,036 6,990 4,621
-------- -------- -------- --------
Total operating expenses 42,659 40,128 85,013 78,927
-------- -------- -------- --------
OPERATING INCOME 5,510 4,822 17,254 15,676
-------- -------- -------- --------
INTEREST EXPENSE 3,653 3,485 8,153 6,865
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,857 1,337 9,101 8,811
Income taxes 761 548 3,743 3,625
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,096 789 5,358 5,186
DISCONTINUED OPERATIONS: Income from
operations of discontinued franchising business
(less applicable income taxes of $22,931) 4,407 9,826 16,260 20,826
-------- -------- -------- --------
NET INCOME 5,503 10,615 21,618 26,012
-------- -------- -------- --------
Pro forma weighted average common shares outstanding 19,919 21,016 19,985 21,007
======== ======== ======== ========
Earnings per share from continuing operations $ 0.06 $ 0.04 $ 0.27 $ 0.25
Earnings per share from discontinued operations 0.22 0.47 0.81 0.99
-------- -------- -------- --------
Earnings per share $ 0.28 $ 0.51 $ 1.08 $ 1.24
======== ======== ======== ========
The accompanying notes are an intergral part of these Consolidated Statements of
Income.
4
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
---------------------------------
November 30, November 30,
1997 1996
(Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations $ 5,358 $ 5,186
Net income from discontinued operations 16,260 20,826
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 11,355 9,533
Amortization of debt (premium) discount (327) 15
Provision for bad debts, net 223 206
Change in deferred taxes 447 516
Change in assets and liabilities:
Change in receivables (2,008) (571)
Change in inventories and other current assets (1,593) (686)
Change in current liabilities 17,369 4,623
Change in current taxes payable/receivable (563) 2,081
Change in net investment in discontinued operations
through date of distribution 17,193 (3,120)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63,714 38,609
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (44,459) (35,652)
Distribution of European Hotel Operations (375) -
Other items, net (413) 894
------------ ------------
NET CASH UTILIZED BY INVESTING ACTIVITIES (45,247) (34,758)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long term debt 127,000 -
Principal payments of debt (91,788) (2,754)
Principal payments on notes payable to Manor Care, Inc. (37,022) -
Proceeds from issuance of common stock - 136
Purchases of treasury stock (10,554) -
Proceeds from Choice Hotels International, Inc. - -
Advances to Manor Care, Inc., net (1,999)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (12,364) (4,617)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,103 (766)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,033 1,436
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,136 $ 670
============ ============
The accompanying notes are an integral part of these Consolidated Statements
of Cash Flows.
5
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
(UNAUDITED)
1. The accompanying consolidated financial statements of Sunburst Hospitality
Corporation and subsidiaries (the "Company") have been prepared by the Company
without audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the disclosures
made are adequate to make the information presented not misleading. The
consolidated financial statements should be read in conjunction with the Choice
Hotels International, Inc. ("Choice") consolidated financial statements for the
fiscal year ended May 31, 1997 and notes thereto included in Choice's Form 10-K,
dated August 15, 1997 and the Notice of Annual Meeting and Proxy Statement dated
August 15, 1997. Certain reclassifications have been made to the prior year
amounts to conform to current period presentation.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of Sunburst
Hospitality Corporation and subsidiaries as of November 30, 1997 and May 31,
1997, and the results of operations for the three months and six months ended
November 30, 1997 and November 30, 1996, respectively, and cash flows for the
six months ended November 30, 1997 and Novtember 30, 1996, respectively. Interim
results are not necessarily indicative of full year performance because of the
impact of seasonal and short-term variations.
2. On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Manor Care Distribution").
On September 30, 1996 the Board of Directors of Manor Care declared a special
dividend to its shareholders of one share of common stock of Choice for each
share of Manor Care Stock, and the Board set the Record Date and the
Distribution Date. The Stock Distribution was made on November 1, 1996 to
holders of record of Manor Care's Common Stock on October 10, 1996.
The Manor Care Distribution separated the lodging and health care businesses of
Manor Care into two public corporations. The operations of the Company consist
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care, Inc. 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. ("Franchising").
3. On April 29, 1997, the Company's Board of Directors announced its
intention to separate the Company's franchising business from its owned hotel
business. On September 16, 1997 the Board of Directors and shareholders of the
Company approved the separation of the business via a spin-off of the
franchising business, along with the Company's European hotel and franchising
operations (the "Distribution"), to its shareholders. The Board set
October 15, 1997 as the date of distribution and on that date, Company
shareholders received one share in Franchising (renamed "Choice Hotels
International, Inc.") for every share of Company stock held on October 7, 1997
(the date of record). Concurrent with the October 15, 1997 distribution date,
the Company changed its name to Sunburst Hospitality Corporation and effected
a one-for-three reverse stock split of its common stock.
In connection with the Distribution, the Company has presented the franchising
business as a discontinued operation in the condensed 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.
The following schedules illustrate the impact of the European Hotel Operations
on the operating results and financial condition of the Company.
6
Three months ending Domestic Hotel European Hotel Continuing
November 30, 1997 Operations Operations Operations
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 45,512 $ 2,657 $ 48,169
EBITDA 10,969 509 11,478
Pretax income 1,705 152 1,857
Net income 1,006 90 1,096
Six months ending Domestic Hotel European Hotel Continuing
November 30, 1997 Operations Operations Operations
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 95,288 $ 6,979 $102,267
EBITDA 27,609 1,000 28,609
Pretax income 8,458 643 9,101
Net income 4,979 379 5,358
Three months ending Domestic Hotel European Hotel Continuing
November 30, 1996 Operations Operations Operations
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 39,799 $ 5,151 $ 44,950
EBITDA 9,424 543 9,967
Pretax income 1,145 192 1,337
Net income 676 113 789
Six months ending Domestic Hotel European Hotel Continuing
November 30, 1996 Operations Operations Operations
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 84,916 $ 9,687 $ 94,603
EBITDA 24,379 830 25,209
Pretax income 8,332 479 8,811
Net income 4,904 282 5,186
Financial condition as of May 31, 1997
Domestic European
Hotels Hotels Consolidated
Assets
Current assets $ 68,166 $ 2,203 $ 70,369
Property and Equipment, net 326,867 11,552 338,419
Other long-term assets 6,023 11,618 17,641
---------------------------------------------------------------------------
Total assets $401,056 $25,373 $426,429
===========================================================================
Liabilities
Current liabilities $ 38,907 $ 2,666 $ 41,573
Long-term debt 246,840 13,529 260,369
---------------------------------------------------------------------------
Total liabilities 285,747 16,195 301,942
Stockholder's Equity 115,309 9,178 124,487
---------------------------------------------------------------------------
Total liablities and
stockholders' equity $401,056 $25,373 $426,429
===========================================================================
4. Earnings per common share is computed by dividing net income by the pro forma
weighted average number of common shares outstanding. The pro forma weighted
average number of common shares outstanding is after giving effect to the one-
for-three reverse stock split and is based on Manor
7
Care's weighted average number of outstanding common shares for the period June
1, 1996 through November 1, 1996 and the Company's own shares outstanding
subsequent to November 1, 1996.
5. As of November 30, 1997, the Company owned and managed 76 hotels with 10,881
rooms in 26 states under the following brand names: Comfort, Clarion, Sleep,
Quality, Mainstay, Rodeway and Econolodge.
6. Income from discontinued operations for the period ending November 30, 1997
includes the results of operations of the lodging segment through October 15,
1997, net of costs associated with the distribution of $1.7 million (net of
income taxes).
7. In conjunction with the Distribution, the Company entered into two new debt
facilities on October 15, 1997: (i) a $115.0 million pay-in-kind note payable
to Franchising (the "Franchising Note"); and, (ii) a $80.0 million revolving
credit facility (the "October credit facility"). The proceeds from the new debt
facilities were used to repay the Company's remaining portion of a loan from
Manor Care, Inc. and an existing revolving credit facility, and for advances
previously made by Franchising to the Company. The unused portion of the
October credit facility will be used by the Company for working capital,
including capital expenditures and acquisitions.
The October 1997 credit facility includes customary financial and other
covenants that will require the maintenance of certain ratios including maximum
leverage, minimum net worth and interest coverage, and will restrict the
Company's ability to make certain investments, repurchase stock, incur debt, and
dispose of assets. 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. The maturity date of the October credit
facility is October 15, 2000.
The Franchising Note has a maturity of five years, is pay-in-kind and accrues
interest at an effective interest rate through maturity of 8.8%. The Franchising
Note contains restrictive covenants similar to those in the October 1997 credit
facility.
8. Relationship with Choice Hotels International, Inc.
For purposes of providing an orderly transition after the Distribution, the
Company and Franchising 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) will receive and/or provide certain corporate and support services, such as
accounting, tax and computer systems support, (ii) will adjust outstanding
options to purchase shares of Company Common Stock held by Company employees,
Franchising 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 Franchising) for the periods of time that the affiliates were members
of the consolidated group, (iv) will be reimbursed by Franchising for the
portion of income taxes paid that relate to Franchising and its subsidiaries,
and (v) guarantees that Franchising will, at the date of the Distribution have a
specified minimum level of net worth. As of November 30, 1997, approximately
$28 million of estimated liabilities to Choice are included in accounts
payable. These liabilities relate to the net worth guarantee, the estimated
final allocation of liabilities and assets and the reimbursement of various
expenses subsequent to the distribution date.
The Company and Franchising have entered into a strategic alliance agreement.
Among other things, the agreement provides for (i) a right of first refusal to
Franchising to franchise properties to be acquired or developed by the Company,
(ii) certain commitments by the Company for the development of Sleep Inns and
MainStay Suites hotels, (iii) continued cooperation of both parties with respect
to matters of mutual interest, such as new product and concept testing, (iv)
continued cooperation with respect to third party vendor arrangements and
certain limitations on competition in each others' line of business. The
strategic alliance agreement extends for a term of 20 years with mutual rights
of termination on the 5th, 10th and 15th anniversaries. The Company and
Franchising also entered into a financial consulting agreement which provides
for certain payments to the Company by Franchising.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
- ---------------------------------------------------------------------------
Continuing Operations
- ---------------------
The Company's continuing business consists primarily of guest room revenue,
meeting room revenue and food and beverage revenue from owned and operated
hotels. Unless otherwise indicated, the Occupancy, Average Daily Rate (ADR) and
Revenue Per Available Room (RevPAR) information presented below reflects the
operations of the Company's hotels that were acquired and opened for operations
prior to June 1, 1997 and excludes all Sleep Inns and Mainstay Suites
("Comparable Hotels"). Hotels that were opened after June 1, 1997 and all
Sleep Inns and Mainstay Suites are not considered by the Company to be
stabilized and therefore are not believed to provide a meaningful period-to-
period comparison.
Income from continuing operations increased 38.9% to $1.1 million, while income
from continuing domestic operations increased $0.3 million, or 48.8% for the
quarter ended November 30, 1997 compared to the same period of the prior fiscal
year. Earnings per share from continuing operations increased 50% from $0.04 per
share for the three months ending November 30, 1996, to $0.06 per share for the
same period of 1997.
The Company's domestic revenues increased 14.4%, or $5.7 million, for the three
months ending November 30, 1997 compared to the same period of 1996. The
increase in revenues is primarily attributable to increasing ADR in Comparable
Hotels and a 9.1% increase in the number of rooms, from 9,971 at November 30,
1996 to 10,881 at November 30, 1997. Comparable Hotel ADR increased 7.7% to
$61.37 for the three months ending November 30, 1997 compared to the same period
of 1996, while occupancy at Comparable Hotels decreased from 69.2% for the three
months ending November 30, 1996 to 67.9% for the same period of 1997. The
Company's decrease in occupancy rates is consistent with industry trends.
RevPAR on Comparable Hotels increased 5.7% for the three months ending November
30, 1997.
The increase in revenues for the three months ending November 30, 1997 is also
attributable to a 23% increase in food and beverage revenue over the same period
of 1996.
Domestic operating expenses, excluding depreciation and amortization, increased
13.7% over the three months ending November 30, 1996. The increase is a result
of an increase in the number of hotels owned and operated during the three
months ended November 30, 1997 compared to the same period of 1996. The
increased operating expenses can also be attributed to the incremental costs of
operating the Company on a stand alone basis following the distribution of
Franchising. The Company's domestic Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") for the three months ending November
30, 1997 increased 16.4% compared to the same period of 1996.
Interest expense increased $168,000 for the three months ending November 30,
1997 compared to the same period of 1996. The increase results from
additional debt outstanding over the period ending November 30, 1997 compared to
1996.
The following table summarizes certain operating data for the Company's
domestic hotels for the three months ended November 30, 1997 and 1996:
Three months ending
Number of November 30,
Hotels -----------------------
(1997/1996) 1997 1996
------------------------------------
Total Comparable Hotels 61 / 61
- -----------------------
ADR $61.37 56.98
Occupancy 67.9% 69.2%
RevPAR $41.65 39.42
Fiscal Year 1997 Acquisitions 2 / 1
- -----------------------------
ADR $69.41 **
Occupancy 34.8%
RevPAR $24.17
Sleep Inns 10 / 5
- ----------
ADR $50.51 **
Occupancy 59.2%
RevPAR $29.90
9
Mainstay Suites 3 / 1
- ---------------
ADR $64.63 **
Occupancy 50.3%
RevPAR $32.51
Total Portfolio 76 / 68
- ---------------
ADR $61.25 $57.95
Occupancy 65.6% 67.8%
RevPAR $40.19 $39.31
** Data is not meaningful.
Discontinued Operations
- -----------------------
Income from discontinued operations represents the operations of Franchising
through October 15, 1997, the date of distribution, net of costs associated with
the Distribution of $1.7 million (net of income taxes). Income from
discontinued operations decreased due to the impact of the costs of the
distribution, as well as the fact that the three months ending November 30, 1997
does not include the operations of Franchising for the period of October 16,
1997 through November 30, 1997.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
- -------------------------------------------------------------------------
Continuing Operations
- ---------------------
Income from continuing operations increased 3.3% to $5.4 million for the six
months ending November 30, 1997 compared to the same period of 1996. Domestic
income from continuing operations increased 1.5% for the first two quarters of
fiscal 1998 compared to the same period of fiscal 1997.
The Company's revenues from domestic hotels increased 12.2% for the six months
ending November 30, 1997 compared to the same period of 1996. The increase of
$10.3 million in domestic revenues is a result of a 5.6% increase in Comparable
Hotel ADR and an increase in the number of available rooms in the Company's
portfolio compared to the six months ending November 30, 1996. RevPAR on
Comparable Hotels increased 5.5% for the three months ending November 30, 1997,
while occupancy remained at 71.9% for both periods.
Domestic operating expenses, excluding depreciation and amortization, increased
11.8%, or $7.1 million, from $60.5 million for the six months ending November
30, 1996 to $67.7 for the same period of 1997. The increase can be attributed
to the increased number of hotels owned and operated during the first six months
of fiscal 1998 compared to the same period of 1997. In addition, the six months
ending November 30, 1997 reflect the increased cost of operating the Company as
a separate entity.
Interest expense increased 18.8% for the six months ending November 30, 1997
compared to the same period of 1996. The increase in interest expense reflects
the increase in borrowings of the six month period of fiscal 1997 versus fiscal
1996.
The following table summarizes certain operating data for the Company's
domestic hotels for the six months ended November 30, 1997 and 1996:
Six months ending
Number of November 30,
Hotels ------------------------------
(1997/1996) 1997 1996
-------------------------------------------
Total Comparable Hotels 61 / 61
- -----------------------
ADR $62.77 $59.46
Occupancy 71.9% 71.9%
RevPAR $45.12 $42.77
10
Fiscal Year 1997 Acquisitions
- -----------------------------
ADR 2 / 1 $60.60 **
Occupancy 39.1%
RevPAR $23.71
Sleep Inns 10 / 5
- ----------
ADR $51.38 **
Occupancy 64.9%
RevPAR $33.33
Mainstay Suites 3 / 1
- ---------------
ADR $62.23 **
Occupancy 57.9%
RevPAR $36.02
Total Portfolio
- ---------------
ADR 76 / 68 $62.39 $58.95
Occupancy 70.4% 71.9%
RevPAR $43.93 $42.38
** Data is not meaningful
Discontinued Operations
- -----------------------
Income from discontinued operations represents the operations of Franchising
through October 15, 1997, the date of distribution, net of costs associated with
the distribution of $1.7 million (net of taxes). Income from discontinued
oeprations decreased 21.9% due to the costs of the Distribution, as well as the
fact that the six month period of fiscal 1998 does not include income from
Franchising for the period following the distribution.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $63.7 million for the first six
months of fiscal year 1998, an increase of $25.1 million from $38.6 million in
fiscal year 1997. At November 30, 1997, the Company had $244.7 million of long-
term debt outstanding.
Total investment in property plant and equipment was $44.5 million for the first
quarter of 1998. These expenditures primarily relate to the continued
development of the Sleep Inn and MainStay Suites hotels to be operated by the
Company.
During the six months ended November 30, 1997, the Company repurchased 588,931
shares of its outstanding common stock at a total cost of $10.6 million.
In conjunction with the distribution, the Company entered into two new debt
facilities: i) a $115.0 subordinated note to Choice, and ii) a $80.0 million
revolving credit facility ("October 1997 credit facility"). Proceeds from the
borrowings were used to satisfy a $37.0 million note payable to Manor Care,
Inc. and amounts outstanding under the existing revolving credit facility.
The unused portion of the October 15 credit facility will be used for
working capital, including capital expenditures and construction of new hotels.
At November 30, 1997, outstanding borrowings under the facility amount to $12.0
million.
At November 30, 1997, the balance on the pay-in-kind Choice note is $115.0
million ("Choice note"), which is offset by a discount of $0.3 million. The
note has an effective interest rate through maturity of 8.8%. The note matures
on October 15, 2002 and does not have a prepayment penalty.
The October 1997 credit facility includes customary financial and other
covenants that will require the maintenance of certain ratios including maximum
leverage, minimum net worth and interest coverage, and will restrict the
Company's ability to make certain investments, repurchase stock, incur debt, and
dispose of assets. 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
11
a facility fee. The rate is determined based on the Company's consolidated
leverage ratio at the time of borrowing. The maturity date of the October
credit facility is October 15, 2000.
As part of the Company's ongoing development program, the Company has 3 Sleep
Inn and 12 Mainstay Suites hotels under construction at December 31, 1997. In
addition, another 14 Mainstay Suites and 2 Sleep Inn projects are under
development. The Company believes that sufficient operating cash flows, together
with credit available under the existing bank facility will be sufficient to
fund the development of these projects. Continuing development will be
contingent on the Company raising additional capital.
The Company believes that cash flows from operations and the new financing
obtained is adequate in the short-term to meet its immediate capital
expenditure, operating and debt service requirements. The Company is currently
considering options, including additional debt or equity financing to address
its capital development and debt service needs in the future. There can,
however, be no assurance that sufficient financing can be arranged to permit
continuing development of new hotels.
FORWARD-LOOKING STATEMENTS
- --------------------------
The statements contained in this document that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for
future periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company.
Certain statements contained in this Form 10-Q, including those in the section
entitled "Management's Discussion and Analysis of Operating Results and
Financial Condition," contain forward-looking information that involves risk and
uncertainties, including the Company's plans to raise additional equity and/or
debt. 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 Form 10 Registration Statement dated October 15, 1996 and various
reports on Form 8-K, including (a) the Company's success in implementing its
business strategy, including its success in arranging financing where required,
(b) the nature and extent of future competition, and political, economic and
demographic developments in regions where the Company does business or in the
future may do business.
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.
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PART II OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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The Company is not party to any litigation, other than routine litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 27.01 - Financial Data Schedule - November 30, 1997
The following reports were filed pertaining to the quarter ended
November 30, 1997.
Form 8-k dated October 1, 1997 - Announcement of both the Company and
Franchising's change in its fiscal year end. Also, an announcement of
the Board's acceptance of the spin-off.
Form 8-K dated October 29, 1997 - Announcement of the completion of the
spin-off. Also, submission of final distribution agreements associated
with the spin-off.
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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: January 14, 1998 /s/
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By: James A. MacCutcheon
Executive Vice President,
Chief Financial Officer and
Treasurer
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