SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998 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)
-------------------------------------------
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
SHARES OUTSTANDING
CLASS AT MARCH 31, 1998
- ----------------------- ------------------------
Common Stock, $0.01
par value per share 19,963,190
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================================================================================
SUNBURST HOSPITALITY CORPORATION
INDEX
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PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1998 (Unaudited) and
March 31, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 (Unaudited)
and March 31, 1997 (Unaudited) 5
Notes to Condensed 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
As of
--------------------------------
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Real estate, net $ 387,326 $ 371,305
Receivables (net of allowance for doubtful
accounts of $632 and $616, respectively) 8,365 6,261
Other assets 15,283 17,509
Cash and cash equivalents 1,604 5,908
--------- ---------
Total assets $ 412,578 $ 400,983
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt
Mortgages and other long term debt $ 145,924 $ 133,648
Note payable to Choice Hotels International, Inc. 113,904 114,472
--------- ---------
259,828 248,120
Accounts payable and accrued expenses 39,959 36,063
Payable to Choice Hotels International, Inc. 19,921 25,066
Deferred income taxes ($1,800 and $1,378, respectively) and
other liabilities 2,847 2,427
--------- ---------
Total liabilities 322,555 311,676
========= =========
STOCKHOLDERS' EQUITY
Common stock (60,000,000 and 60,000,000 authorized, at $0.01 par
value, 21,382,430 and 21,366,282 issued and 19,963,190 and
19,947,042 outstanding at March 31, 1998 and December 31, 1997,
respectively) 200 200
Additional paid-in-capital 105,661 105,653
Retained earnings (15,838) (16,546)
--------- ---------
Total stockholders' equity 90,023 89,307
--------- ---------
Total liabilities and stockholders' equity $ 412,578 $ 400,983
========= =========
The accompanying notes are an integral part of these Condensed Consolidated
Balance Sheets. 3
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the three months ended
March 31,
--------------------------
1998 1997
-------- --------
REVENUES
Rooms $ 39,982 $ 40,104
Food and beverage 4,108 3,143
Other 2,049 1,744
-------- --------
Total revenues 46,139 44,991
-------- --------
OPERATING EXPENSES
Departmental Expenses 15,164 17,037
Undistributed Operating Expenses 14,962 14,472
Depreciation and amortization 6,382 5,381
Corporate 3,464 1,637
-------- --------
Total operating expenses 39,972 38,527
-------- --------
OPERATING INCOME 6,167 6,464
-------- --------
INTEREST EXPENSE 4,943 4,334
-------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 1,224 2,130
Income taxes 516 937
-------- --------
INCOME FROM CONTINUING OPERATIONS 708 1,193
DISCONTINUED OPERATIONS: Income from
operations of discontinued franchising business
(less applicable income taxes of $3,595) - 5,026
-------- --------
NET INCOME $ 708 $ 6,219
======== ========
Basic earnings per share
- ------------------------
From continuing operations $ 0.04 $ 0.06
From discontinued operations - 0.24
-------- --------
Earnings per share $ 0.04 $ 0.30
======== ========
Diluted earnings per share
- --------------------------
From continuing operations $ 0.03 $ 0.06
From discontinued operations - 0.23
-------- --------
Earnings per share $ 0.03 $ 0.29
======== ========
The accompanying notes are an integral part of these Condensed Statements of
Income.
4
SUNBURST HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the three months ended
March 31,
------------ ------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES ------------ ------------
Income from continuing operations $ 708 $ 1,193
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 6,382 5,381
Other non-cash items (20) 349
Change in assets and liabilities:
Change in receivables (2,216) (1,211)
Change in other assets (122) (1,613)
Change in accounts payable and accrued expenses 3,896 (2,759)
Decrease in payable to Choice Hotels International, Inc. (5,145) -
Change in current taxes receivable 3,017 (4,299)
Change in other liabilities (2) -
------ -------
NET CASH PROVIDED BY (UTILIZED BY) CONTINUING OPERATIONS 6,498 (2,959)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 28,003
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,498 25,044
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (23,110) (14,899)
Acquisition of operating hotels - (5,550)
Proceeds from sale of property and equipment - 2,522
-------- --------
NET CASH UTILIZED BY CONTINUING OPERATIONS (23,110) (17,927)
NET CASH UTILIZED BY DISCONTINUED OPERATIONS - (8,812)
-------- --------
NET CASH UTILIZED BY INVESTING ACTIVITIES (23,110) (26,739)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long term debt 13,000 44,100
Principal payments of debt (724) (134)
Proceeds from issuance of common stock 32 4,312
Purchases of treasury stock - (24,397)
-------- --------
NET CASH PROVIDED BY CONTINUING OPERATIONS 12,308 23,881
NET CASH UTILIZED BY DISCONTINUED OPERATIONS - (22,045)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,308 1,836
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,304) 141
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,908 4,170
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,604 $ 4,311
======== ========
Cash and cash equivalents of continuing operations $ 1,604 $ 1,652
Cash and cash equivalents of discontinued operations $ - $ 2,659
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
MARCH 31, 1998
(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
Company's consolidated financial statements for the seven months ended
December 31, 1997 and notes thereto included in the Company's Form 10-K, dated
March 30, 1998. Certain reclassifications have been made to the prior year
amounts to conform to current period presentation.
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1998, and the results of operations for the three months
ended March 31, 1998 and 1997, respectively, and cash flows for the three months
ended March 31, 1998 and 1997, 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 Hotels
International, Inc. for each share of Manor Care stock, and the Board set the
Record Date and the Distribution Date. The Stock Distribution was made on
November 1, 1996 to holders of record of Manor Care's common stock on October
10, 1996.
The Manor Care Distribution separated the lodging and health care businesses of
Manor Care into two public corporations. The operations of the Company consist
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through its
subsidiaries.
On November 1, 1996, concurrent with the Manor Care Distribution, the Company
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. and the Company's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc. ("Franchising").
On April 29, 1997, the Company's Board of Directors announced its intention to
separate the Company's franchising business ("Choice Franchising Business") from
its owned hotel business. On September 16, 1997, the Board of Directors and
shareholders of the Company approved the separation of the business via a spin-
off of the franchising business, along with the Company's European hotel and
franchising operations (the "Choice Spin-Off"), to its shareholders. The Board
set October 15, 1997 as the date of distribution and on that date, Company
shareholders received one share in Franchising (renamed "Choice Hotels
International, Inc.") for every share of Company stock held on October 7, 1997
(the date of record). Concurrent with the October 15, 1997 distribution date,
the Company changed its name to Sunburst Hospitality Corporation and effected a
one-for-three reverse stock split of its common stock.
In connection with the Distribution, the Company has presented the franchising
business as a discontinued operation in the consolidated statement of income and
consolidated statement of cash flows for the three months ended March 31, 1997.
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 of the Company for the three months ended March 31,1997.
6
Three months ended Domestic Hotel European Hotel Continuing
March 31, 1997 Operations Operations Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $41,258 $3,733 $44,991
Operating income 6,778 (314) 6,464
Pretax income 2,682 (552) 2,130
Net income 1,527 (334) 1,193
3. The following table illustrates the reconciliation of income from
continuing operations and number of shares used in the basic and diluted
earnings per share calculations.
(in thousands, except per share amounts) March 31,
--------------------------------
1998 1997
--------------------------------
Computation of basic earnings per share
Income from continuing operations $ 708 $ 1,193
Weighted average shares outstanding 19,956 21,035
--------------------------------
Basic earnings per share $ 0.04 $ 0.06
================================
Computation of diluted earnings per share
Income from continuing operations $ 708 $ 1,193
Weighted average shares outstanding 19,956 21,035
Effect of dilutive securities:
Employee stock option plan 567 519
--------------------------------
Shares for diluted earnings per share 20,523 21,554
--------------------------------
Diluted earnings per share $ 0.03 $ 0.06
================================
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.
March 31,
--------------------------------
1998 1997
--------------------------------
Number of shares 71,268 60,000
Weighted average exercise price $ 9.43 $ 7.74
The weighted average number of common shares outstanding for the first quarter
of 1997 is after giving effect to the one-for-three reverse stock split.
4. As of March 31, 1998, the Company owned and managed 83 hotels with 11,554
rooms in 28 states under the following brand names: Comfort, Clarion, Sleep,
Quality, Mainstay, Rodeway and Econolodge.
5. On February 4, 1998, the Board of Directors of the Company approved a plan
to sell certain properties in the Company's portfolio. The properties had a net
book value of $17.7 million at March 31, 1998.
6. 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
7
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 March 31, 1998, the Company has a
$19.9 million liability to Choice related to the net worth guarantee, the
estimated final allocation of liabilities and assets and for expenses incurred
by Choice on behalf of the Company.
7. 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, which is effective for fiscal years beginning
after December 15, 1998, requires costs related to start-up activities to be
expensed as incurred. Presently, the Company capitalizes such costs and
amortizes them over a period of one year. The Company intends to adopt the
standard on January 1, 1999. Initial application of the SOP will be reported as
a cumulative effect of a change in accounting principle.
If the Company would have adopted this standard on January 1, 1998, the effect
would have been to increase income from continuing operations by approximately
$176,000 and decrease net income by approximately $518,000, as a result of a
charge for the cumulative effect of a change in accounting principle of $694,000
(net of taxes).
8. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" on January 1, 1998. The adoption of
SFAS No. 130 does not impact the operations of the Company as the Company does
not have any items considered to be other comprehensive income under SFAS
No. 130.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------
The Company is a national owner and operator of hotel properties with a
portfolio at March 31, 1998 of 83 hotels (11,554 rooms) in a total of 28
states. The Company operates each of its hotels under one of the Choice
Brands: MainStay, Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge.
The Company's continuing business consists primarily of guest room revenue,
meeting room revenue, and food and beverage revenue from owned and operated
hotels.
On October 15, 1997, the Company separated the Choice Franchising Business
(which had previously been conducted primarily through Franchising) and its
European owned and managed hotels from its other operations pursuant to a pro
rata distribution to its shareholders of all the common stock of Franchising.
At the time of the Choice Spin-Off, Franchising changed its name to "Choice
Hotels International, Inc." The Company changed its name to "Sunburst
Hospitality Corporation" and effected a one-for-three reverse stock split.
European hotel operations, which were distributed to Choice in the Choice
Spin-Off, are presented as part of continuing operations in the consolidated
financial statements for all periods prior to the Choice Spin-Off in
accordance with generally accepted accounting principles. However, for
purposes of analyzing the operations of the Company, management focuses on
domestic hotel operations. Therefore, the following discussion focuses on the
results of operations of the domestic hotels which constitute the ongoing
operations of the Company subsequent to October 15, 1997.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ------------------------------------------------------------------------
Continuing Operations
- ---------------------
Total revenues for the three months ended March 31, 1998 increased $1.1
million to $46.1 million from $45.0 million for the same period of 1997.
Revenues from European hotel operations, which were distributed to
shareholders with Choice in the Choice Spin-Off on October 15, 1997, are
included in the first quarter of 1997 but not in the first quarter of 1998.
Total domestic revenues increased $4.9 million, or 11.8%, from $41.3 million
in the first quarter of 1997 to $46.1 million for the same period of 1998. The
increase in domestic revenues is a result of the net addition of 13 hotels
from 70 hotels at March 31, 1997 to 83 hotels at March 31, 1998, as well as a
4.9% increase in the average daily room rate, from $61.26 for the three months
ended March 31, 1997 to $64.25 for the three months ended March 31, 1998.
While room revenue contributed $3.6 million to the increase in domestic
revenues, food and beverage revenues were up $1.0 million, or 30.7%, for the
first quarter of 1998 compared to the first quarter of 1997.
Operating expenses increased $1.5 million from $38.5 million for the three
months ended March 31, 1997 to $40.0 million for the same period of 1998.
Domestic operating expenses increased from $34.5 million in the first quarter
of 1997 to $40.0 million, or 15.9%, in the first quarter of 1998. The increase
in domestic operating expenses is attributable primarily to the additional
costs of operating the Company on a stand-alone basis and an increase in the
number of hotels owned and operated. Domestic depreciation and amortization
increased $1.4 million from $5.0 million for the three months ended March 31,
1997 to $6.4 million for the three months ended March 31, 1998. Corporate
expenses increased from $1.6 million in the first quarter of 1997 to $3.5
million in the first quarter of 1998.
Income from continuing operations before interest, taxes, depreciation and
amortization ("EBITDA") increased $704 to $12.5 million for the three months
ended March 31, 1998 compared to $11.8 million for the same period of 1997.
Gross profit from facility operations (operating income before corporate
expense, depreciation and amortization) increased from $13.5 million, or 30.0%
of total revenue, in the three months ended March 31, 1997 to $16.0 million, or
34.7% of total revenues, in three months ended March 31, 1998. 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.
Interest expense increased 14.1%, or $609,000, to $4.9 million in the first
quarter of 1998 compared to the same period in 1997. Domestic interest expense
increased $847,000 from $4.1 million for the three months ended March 31, 1997
to $4.9 million for the same period of 1998. The increase in interest expense is
a result of the increased debt outstanding over the three months ended March 31,
1998 compared to the same period of 1997 due to the opening of new hotels.
Income from continuing operations decreased from $1.2 million for the three
months ended March 31, 1997 to $708,000 for the same period of 1998. The
decrease is a result of increased expenses associated with operating as a
separate company and increased depreciation and amortization and interest
expense associated with the addition of hotels to the Company's portfolio.
Income from discontinued operations of $5.0 million for the three months
ended March 31, 1997 represents the income, net of taxes, of the Choice
Franchising Business.
The following table breaks-out the operating results of the Company's
portfolio into four segments: extended-stay (consisting of the Company's
MainStay Suites hotels), traditional all-suite, full-service, and limited-
service.
9
Number of Three months ended
Hotels March 31,
March 31, -------------------------------------------------
1998/1997 1998 1997
-----------------------------------------------------------------------
Extended-Stay (1) 9 / 1
Average daily rate $55.43 $55.67
Occupancy % 35.7% 67.1%
RevPAR $19.81 $37.37
Traditional All-Suite 5 / 5
Average daily rate $85.02 $81.06
Occupancy % 73.1% 72.3%
RevPAR $62.18 $58.63
Full-Service 16 / 15
Average daily rate $70.71 $65.79
Occupancy % 60.4% 62.0%
RevPAR $42.74 $40.76
Limited-Service 53 / 49
Average daily rate $59.40 $57.09
Occupancy % 63.2% 66.6%
RevPAR $37.54 $38.01
Total Portfolio 83 / 70
Average daily rate $64.25 $61.26
Occupancy % 61.5% 65.4%
RevPAR $39.49 $40.07
- --------
(1) Only one of the Company's MainStay Suites has been open during all periods
presented. The decline in RevPAR and occupancy rates for the Company's
MainStay Suites primarily results from the lower RevPAR and occupancy
rates at the Company's eight recently opened MainStay Suites which are
currently experiencing the stabilization period common to newly opened
hotels.
Discontinued Operations
- -----------------------
Income from discontinued operations of $5.0 million for the three months
ended March 31, 1997, represents the income, net of taxes, of the Franchising
segment. The Franchising segment, along with European hotel operations, was
distributed to shareholders on October 15, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $6.5 million for the three
months ended March 31, 1998 compared to $25.0 million for the three months
ended March 31, 1997. Net cash provided by operating activities for the three
months ended March 31, 1997 includes net cash provided by discontinued
operations, as well as net cash provided by European hotel operations, which
were distributed to shareholders pursuant to the Choice Spin-Off. Net cash
provided by continuing operations was $6.5 million for the three months ended
March 31, 1998, compared to net cash utilized by continuing operations of $3.0
million for the three months ended March 31, 1997.
At March 31, 1998, the Company had $259.8 million of long-term debt
outstanding. Of this amount, $29.0 million reflects amounts outstanding under
the Company's $80 million credit facility (the "Credit Facility"). The Credit
Facility expires in October 2000. At March 31, 1998, permitted availability
under the Credit Facility amounted to $69.5 million. The Credit Facility's
permitted availability will expand to certain levels as the Company's cash flow
increases.
At March 31, 1998, the Company owed Choice $115.0 million and $5.8 million
in accrued interest pursuant to the Choice Note, a subordinated note which
matures October 15, 2002. The Choice Note provides additional financial
flexibility due to the fact that no interest is payable until maturity. The
Company does, however, expect to refinance the Choice Note with a longer-term
subordinated debt financing as soon as practicable.
At March 31, 1998, the Company owed Choice $19.9 million representing
liabilities of the Company discharged or assumed by Choice in connection with
the Choice Spin-Off. The Company has reached an understanding with Choice to
satisfy this obligation no later than December 31, 1998. These amounts are
classified as "Payable to Choice Hotels International, Inc." on the Company's
balance sheet.
On April 23, 1997, QI Capital Corp., a wholly owned subsidiary of the
Company, issued the CMBS Certificates with an aggregate principal amount of
$117.5 million, representing beneficial ownership interests in a trust fund
holding the Mortgage Note issued by First Choice. The Mortgage Note is secured
by 37 cross-defaulted and cross-collateralized mortgages, representing first
priority mortgage liens on fee interests or fee and leasehold interests in 37
hotels owned by First Choice. The terms of the Mortgage Note provide for
monthly payments of principal and interest in an aggregate amount equal to
interest accruing for such month and monthly principal payments based on a
240-month amortization schedule, computed using an assumed weighted average
interest rate equal to 7.75% per annum. The Mortgage Note has a scheduled
maturity date of May 5, 2012, on which date a balloon payment of the then
outstanding principal balance will be due (currently estimated to be $48.5
million). The Mortgage Note may not be prepaid, in whole or in part, except
upon payment of a premium equal to the greater of 1% of the principal amount
of the Mortgage Note being prepaid and a treasury-based yield maintenance
amount, provided that no prepayment premium will be required in the event of a
prepayment made: (i) in connection with casualty or condemnation events; or
(ii) on or after the date that is six months prior to the scheduled maturity
date. The CMBS Certificates bear a 7.8% blended weighted average interest
rate. The 37 hotel properties so collateralized reported earnings before
interest, taxes, depreciation and amortization and an allocation for corporate
expenses of $9.0 million for the three months ended March 31, 1998. The Company
used the proceeds to repay debt payable to its former parent, Manor Care. At
March 31, 1998, $115.2 million aggregate principal amount was outstanding under
the CMBS Certificates.
At March 31, 1998, the Company's debt to book capitalization amounted to
74.3%, while debt to market capitalization was 59.8%.
Notwithstanding the real estate-intensive nature of the Company's business,
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 are
projected to underperform in order to redeploy capital in higher-yielding
assets. The Company has identified six such properties which it is marketing
for sale in 1998.
The Company intends to aggressively develop MainStay Suites, a mid-price
extended-stay hotel product. At March 31, 1998, nine MainStay Suites were open
and operating with another six under construction. In addition to those under
construction, there were another 13 projects under development. A typical
MainStay Suites costs approximately $5.0 to $6.9 million to develop and
construct (including land cost), with an average cost per room ranging from
$50,000 to $65,000. In order for the Company to continue the MainStay Suites
development program on a long-term basis, additional capital will be required.
Subject to market conditions, the Company anticipates raising additional equity
and/or debt capital in the foreseeable future to fund its growth strategy or to
satisfy its obligations. While cash flow from operations, credit available under
the Credit Facility and the sale of the six identified hotels is expected to be
adequate to fund operations and committed construction projects, accessing
additional capital is imperative in order for the Company to continue executing
its development and growth plans.
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 MainStay Suites and Sleep Inns in 1998 are projected to be
approximately $83.6 million. Planned capital expenditures for the development
of MainStay Suites in calendar 1999 are projected to be $93.5 million. The
Company will also continue to pursue selectively the acquisition of hotel
properties in all segments of the lodging industry where the Company believes
long-term value can be created from renovation and, where appropriate, the
repositioning of the hotel to a different brand or service level.
10
In April 1997, the Company, through its indirect subsidiary, First Choice
Properties, completed an offering of $117.5 million multiclass mortgage pass-
through certificates, which are non-recourse and collateralized by 37 hotel
properties with a net book value of $145.2 million at March 31, 1998. The
certificates bear a blended weighted average interest rate and have a final
maturity of May 5, 2012. The 37 hotel properties so collateralized reported
earnings before interest, taxes, depreciation and amortization, and management
fee allocations of $9.0 million for the three months ended March 31, 1998. The
proceeds from the offering were used to repay the Company's former parent, Manor
Care, for amounts outstanding at the time under the Manor Care Note Payable. At
March 31, 1998, $115.2 million aggregate principal amount was outstanding under
the certificates.
At March 31, 1998, the Company owed Choice $19.9 million relating to the
final allocation of assets, liabilities and equity between the two parties and
for expenditures incurred by Choice on behalf of the Company.
At March 31, 1998, the Company's debt to book capitalization amounted to
74.3%, while debt to market capitalization was 59.8%.
The Company intends to aggressively develop MainStay Suites, a mid-price
extended-stay hotel product. At March 31, 1998, nine MainStay Suites were open
and operating with another eight under construction. In addition to those under
construction, there were another six projects in development. The cost to
develop an average MainStay Suite costs approximately $5.0 to $6.9 million.
In order for the Company to continue the MainStay development program on a long
term basis, additional capital will be required. Subject to market conditions,
the Company anticipates raising additional equity and debt capital during
calendar year 1998.
The Company believes that operating cash flows, combined with availability
under the line of credit and the proceeds from the planned sale of six
properties in the Company's portfolio will be adequate to fund operations and
committed construction projects. However, additional capital is imperative for
the Company to continue executing its development and growth plans.
FORWARD-LOOKING STATEMENTS
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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 SEC filings, including (a) the Company's success in implementing its
business strategy, including its success in arranging financing where required,
(b) the nature and extent of future competition, and political, economic and
demographic developments in regions where the Company does business or in the
future may do business.
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
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(a) Exhibits
Exhibit 27.01 - Financial Data Schedule March 31, 1998
(b) The following reports were filed pertaining to the quarter ended March 31,
1998.
Form 8-K dated March 11, 1998 - Announcement of the adoption of a
Stockholder Rights Plan by the Company's Board of Directors.
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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: May 1, 1998 /s/ /s/ James A. MacCutcheon
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By: James A. MacCutcheon
Executive Vice President,
Chief Financial Officer and
Treasurer
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