-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TFvTox22b1zgMr+fd9+yJtUMyfYdtEyRZC6n4WMmRtzXBVgCck5Dq/vx986WVNZh 9goBYHVm+ymRkYG6SZQWQA== 0000928385-00-001021.txt : 20000331 0000928385-00-001021.hdr.sgml : 20000331 ACCESSION NUMBER: 0000928385-00-001021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBURST HOSPITALITY CORP CENTRAL INDEX KEY: 0001018146 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521985619 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11915 FILM NUMBER: 585842 BUSINESS ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3019795000 MAIL ADDRESS: STREET 1: 10770 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC DATE OF NAME CHANGE: 19970108 FORMER COMPANY: FORMER CONFORMED NAME: CHOICE HOTELS HOLDINGS INC DATE OF NAME CHANGE: 19960705 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]. For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]. For the transition period from to Commission file number 001-11915 --------- SUNBURST HOSPITALITY CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 52-1985619 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 10770 Columbia Pike, Silver Spring, Maryland 20901 (Address of Principal Executive Offices) ZipCode Registrant's telephone number, including area code (301) 592-3800 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, Par Value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:
------------------------------------------------- (Title of Class) ------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed in Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months as for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. The aggregate market value of voting stock of Sunburst Hospitality Corporation held by non-affiliates was $29,673,343 as of March 27, 2000 based upon a closing price of $4.50 per share. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [_] No [_] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) The number of shares outstanding of Sunburst Hospitality Corporation's common stock at March 27, 2000 was 15,358,837. DOCUMENTS INCORPORATED BY REFERENCE. PART III Proxy Statement dated April 10, 2000. =============================================================================== PART I Item 1. Business Sunburst Hospitality Corporation ("Sunburst" or the "Company") owns and operates hotels in one of four principal categories within the lodging industry: extended-stay, traditional all-suites, full service and limited service. As of March 1, 2000, the Sunburst portfolio included 83 hotels open with 11,365 rooms in 27 States and 3 hotels under construction or in development. Each hotel is branded with a Choice Hotels International, Inc. ("Choice") brand. Sunburst is Choice's largest franchisee. The Company is in the process of converting its Miami Springs Comfort Inn hotel to a Holiday Inn Express and expects to complete the conversion in June 2000. Twenty-eight of the 83 hotels, with a net book value of $124.9 million at December 31, 1999, serve as collateral for the Company's multi-class mortgage pass-through certificates. Sunburst has a successful record of managing ahead of industry cycles. Prior to an industry downturn in the late 1980s, the Company was able to liquidate a substantial portion of its existing hotel portfolio. Then in 1992, the Company began to opportunistically acquire hotels at prices well below their replacement cost. All of these hotels have benefited from a significant investment of capital used to renovate and upgrade the properties. The hotels have also benefited from the installation of professional management and marketing systems. In the past four years the Company has responded to changing industry cycles by shifting its development strategy to the new construction of mid-market, all-suite extended-stay hotels and has opened 21 such hotels, all branded MainStay Suites. Sunburst's strategy is to: (i) actively manage the Company's existing portfolio and optimize performance by applying proven operating systems and procedures, (ii) sell hotels projected to underperform and redeploying capital into higher yielding assets; (iii) develop extended-stay hotels to capitalize on the positive fundamentals of the extended-stay opportunity; and (iv) selectively pursue development and repositioning opportunities. Historical Acquisition Strategy The primary focus of Sunburst from 1992 through 1996 was the acquisition of hotels. During this period many hotels were facing financial hardship, creating an opportunity for Sunburst to acquire properties at prices well below replacement cost. Sunburst's strategy was to acquire and renovate the hotels, install professional management and marketing systems, and in some cases reposition the hotels to a different brand or service level. Between 1992 and 1997, Sunburst acquired 55 hotels, containing 7,809 rooms, for an aggregate purchase price of $187.7 million. Approximately $95.6 million was spent on additional capital improvements to those hotels. The total investment basis in the 55 acquired hotels is approximately 60% of the estimated replacement value of the hotels at their respective dates of acquisition. The Company believes that there are currently limited opportunities to acquire hotels at a substantial discount to replacement value. As a result, no hotels have been acquired by the Company since February 1997. The Company will evaluate acquisitions on an opportunistic basis when it believes that long-term value can be created. Hotel Development The Company's recent strategy to concentrate on the development of mid-market, extended-stay hotels is intended to capitalize on the demand/supply imbalance in that niche. Historically, these hotels have produced higher than average returns on investment and management believes that demand in this segment significantly exceeds supply. Sunburst's focus on external development is geared to capitalize on the under-served, high-growth, mid-priced extended-stay all-suite segment, and the development of other high-quality, consumer-focused hotels. The following is a list of new hotels developed by Sunburst since 1994 or under development as of March 1, 2000.
Year of Opening --------------- Market Brand - ------ ----- Dallas/Plano, TX................................................ Sleep Inn 1994 San Antonio, TX................................................. Sleep Inn 1995 Baton Rouge, LA................................................. Sleep Inn 1996 Houston/Airport, TX............................................. Sleep Inn 1996 Austin/Round Rock, TX........................................... Sleep Inn 1996 Dallas/Plano, TX................................................ MainStay Suites 1996 Raleigh, NC..................................................... Sleep Inn 1997 Dallas/Arlington, TX............................................ Sleep Inn 1997 Kansas City/Airport, MO......................................... Sleep Inn 1997 Charlotte, NC................................................... Sleep Inn 1997 Rockville, MD................................................... Sleep Inn 1997 Providence/Airport, RI.......................................... MainStay Suites 1997 Cincinnati/Blue Ash, OH ........................................ MainStay Suites 1997 Kansas City/Airport, MO......................................... MainStay Suites 1998 Indianapolis, IN................................................ MainStay Suites 1998 Louisville, KY.................................................. MainStay Suites 1998 Greenville, SC.................................................. MainStay Suites 1998 Denver/Airport, CO.............................................. Sleep Inn 1998 Orlando/Lake Mary, FL ......................................... MainStay Suites 1998 Denver/Tech Center, CO ......................................... MainStay Suites 1999 Jacksonville, FL ............................................... MainStay Suites 1998 Nashville, Brentwood, TN ....................................... MainStay Suites 1998 Miami/Airport, FL ............................................. MainStay Suites 1998 Pittsburgh/Airport, PA ........................................ MainStay Suites 1998 Fishkill/Poughkeepsie, NY ...................................... MainStay Suites 1998 Denver/Tech Center, CO ........................................ Sleep Inn 1999 Tempe, AZ ...................................................... MainStay Suites 1999 Miami/Airport, FL .............................................. Sleep Inn 1999 Annapolis, MD .................................................. MainStay Suites 1999 Peabody, MA .................................................... MainStay Suites 1999 Raleigh, NC .................................................... MainStay Suites 1999 North Charleston, SC ........................................... MainStay Suites 1999 Malvern, PA .................................................... MainStay Suites 1999 Secaucus, NJ ................................................... MainStay Suites 2000 Mt. Laurel, NJ (1) ............................................. MainStay Suites 2000 Schaumberg, IL (1).............................................. MainStay Suites 2001 Bedford, MA (1)................................................. MainStay Suites 2001
__________ (1) Hotel under development at December 31, 1999. Sunburst's focus on developing the mid-market, extended-stay product is based on statistics indicating the demand/supply imbalance. According to various industry studies, demand in the extended-stay market is strong, yet supply is limited, particularly in the mid-price segment. Industry sources define extended-stay as stays of five or more nights and reported that demand accommodated in extended-stay 3 hotels grew faster than supply in 1999. By applying its hotel real estate development expertise, Sunburst is targeting markets with ideal conditions for the extended-stay product and building MainStay Suites hotels. The MainStay Suites brand, which was created by the Company in conjunction with Choice Hotels International, Inc, has a unique product design and service package which enhance property level appeal, productivity and profitability. Among the MainStay brand's most unique features are the automated check-in kiosk (which allows guests to check in and out without assistance from an employee) and the optional daily light touch housekeeping (full housekeeping just every five days). These features enable MainStay Suites hotels to operate with fewer full time equivalent employees than a similar limited service hotel. Sunburst anticipates that its extended-stay projects can produce stabilized, unleveraged pre-tax property level returns on investment of approximately 15%. This belief is supported by the Company's experience at the MainStay Suites hotels that are nearing stabilization. Projections are based on rate and occupancy forecasts generated internally by the Company and by external feasibility consultants, as well as internal operating guidelines, land cost and projected construction costs. The ultimate returns will, however, be impacted by a number of factors, including the extent of new competitive supply in each market, and there can be no assurance that projected returns will be achieved or that actual results will not differ materially. (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward Looking Statements, below.) Each of the Company's MainStay Suites hotels averages approximately 100 suites and are developed on 2.5 to 3.0 acres of land in suburban office parks or locations in close proximity to major employers, restaurants and retail amenities. MainStay Suites feature high quality, interior corridor building construction with amenities and features provided in direct response to consumer demand. The suites feature bedroom areas, a living room area with a pull-out couch or recliner, private bathroom and fully furnished kitchen. The kitchen includes a full-size refrigerator, dishwasher, microwave, stove, coffee maker, toaster and all cooking utensils. Each suite also features an over-sized counter which serves as an eating area and work center, along with two ergonomic chairs. Suite alternatives include a studio suite or one-bedroom suite. Each suite includes two direct dial phone lines with data ports, voice mail and other automated phone services. Hotel Dispositions During 1999, the Company sold eleven hotels for $37.0 million. At December 31, 1999, the Company had an additional seven hotels, with a total net book value of $34.5 million, being marketed for sale. The Company anticipates closing on the sale of these hotels during 2000. The Company has sold one hotel since December 31, 1999. Operations Sunburst's owned and managed hotels typically operate under one of the Choice brand names. Sunburst's hotels take advantage of the same systems and services available to Choice franchisees with respect to a particular brand. The hotels participate in Choice's central reservation system, marketing and advertising efforts and volume purchasing discounts and are subject to Choice's same quality assurance program. In addition, Sunburst has instituted the following systems in the hotels it operates. . Yield Management. An automated yield management system allows each property's management to take advantage of the supply and demand conditions in the local marketplace. The automated system performs calculations and suggests pricing strategies to the local hotel management. The system continuously updates information based on the availability of room supply, reservation volume and projected demand and stay patterns within each hotel. 4 . Training. Sunburst has developed a training system for all guest services representatives that teaches the basic sales techniques. A computerized guest comment system solicits the comments of guests and the experiences they had at the hotel while providing management with immediate guest feedback. . E-Commerce. Sunburst has several electronic commerce initiatives aimed at producing incremental revenue and improving productivity. Approximately 1.6% of the Company's room revenue were booked through Internet sites and the Company expects that to increase to at least 3% in 2000. The Company also expects to install an Internet-based procurement system in 2000 which is expected to reduce the overall cost of purchasing various supplies. . Information Systems. Each of the Sunburst-operated hotels has a computerized front desk and accounting system and all units are connected to Sunburst's own wide area network. These systems allow key financial indicators (such as daily occupancy and revenue) to be immediately gathered from each hotel and electronically transmitted to the key operating officers and managers of Sunburst. Instant access to information allows management to quickly spot trends and make corrections and changes where necessary. The system also allows for cost savings in the accounting and bookkeeping departments of each hotel. . Time and Attendance System. Sunburst hotels maintain labor scheduling and automated time and attendance systems that are tied into a central payroll system at the corporate headquarters. This computerized method of scheduling and tracking time provides for scheduling based on up-to-date occupancy projections and allows management to make quick decisions on controlling labor costs. . Capital Reinvestment Program. Each of Sunburst's hotels completes a detailed capital spending budget annually. The hotels spend on average 5%-7% of total revenues on capital improvements annually. This reinvestment allows the hotels to maintain a competitive advantage in the local markets. . Annual Business Planning Process. Each hotel prepares a zero-based annual business plan which incorporates historical performance and market conditions. The plan, which is reviewed and approved by senior management, provides detailed strategies in the key operating areas of marketing, guest services and food and beverage. The annual plan serves as a fundamental measurement of management's performance. The Hotel Properties Sunburst's hotel properties serve four categories of the lodging industry; traditional all-suite, extended-stay, full service and limited service. ALL SUITE HOTELS All-Suite Hotels. Sunburst has five hotels in the traditional all-suite segment. Sunburst's all-suite hotel properties compete in the mid-price and upscale price segments.
Brand Number of Hotels Number of Rooms Price Segment ----- ---------------- --------------- ------------- Quality Suites................................. 3 345 upscale Comfort Suites................................. 2 232 mid-price
5 EXTENDED-STAY HOTELS Extended-Stay Hotels. Sunburst has 21 hotels with another 3 under construction or in development in the extended-stay segment. All are branded MainStay Suites and compete in the mid-price price segment.
Brand Number of Hotels Number of Rooms Price Segment - ----- ---------------- --------------- ------------- MainStay Suites........................................ 21 2,054 mid-price
FULL SERVICE HOTELS Full Service Hotels. Sunburst has 16 hotels in the full service segment. Sunburst's full service hotels compete in the mid-price and upscale price segments. The table below identifies Sunburst's full service hotels by brand and price segment.
Brand Number of Hotels Number of Rooms Price Segment - ----- ---------------- --------------- ------------- Clarion Hotel & Inns................................... 11 2,126 upscale Quality Hotel & Inns................................... 5 1,327 mid-price
LIMITED SERVICE HOTELS Limited Service Hotels. Sunburst has 41 hotels in the limited service segment open. Sunburst's limited service hotel properties compete in the mid-price price segments. The table below identifies Sunburst's limited service hotels by brand and price segment.
Brand Number of Hotels Number of Rooms Price Segment - ----- ---------------- --------------- ------------- Comfort Inns........................................... 22 3,173 mid-price Quality Inns........................................... 6 661 mid-price Sleep Inns............................................. 13 1,447 mid-price
Franchise and Strategic Alliance Agreements Each Franchise Agreement with Choice Hotels International, Inc. has an initial term of twenty years. The Franchise Agreements have varying original dates, from 1982 through 1998. Certain Franchise Agreements allow for unilateral termination by either party on the 5th, 10th, or 15th anniversary of the Franchise Agreement. Sunburst's Franchise Agreements with Choice allow for early termination by Sunburst, subject to liquidated damage provisions which range from zero dollars to a maximum of $100,000 per property. The Franchise Agreements require the payment of certain fees and charges, including the following: (a) a royalty fee of between 1.93% to 5.0% of monthly gross room revenues; (b) a marketing fee of between 0.7% and 2.5% plus $0.28 per day multiplied by the specified room count; and (c) a reservation fee of 0.88% to 1.75% of monthly gross room revenues (or 1% of monthly gross room revenues plus $1.00 per room confirmed through Choice's reservation system). The marketing fee and the reservation fee are subject to reasonable increases during the term of the franchise if Choice raises such fees uniformly among all its franchisees, generally. Late payments (i) will be a breach of the Franchise Agreement and (ii) will accrue interest from the date of delinquency at a rate of 1.5% per month or portion thereof. At the time of the Spin-off and as subsequently amended, Choice and the Company entered into a Strategic Alliance Agreement pursuant to which: (i) requires the Company to give Choice two weeks notice of the filing of a hotel franchise application with any competitor of Choice; (ii) the Company has also agreed, barring a material change in market conditions, to continue to develop MainStay Suites hotels so that it will have opened a total 25 MainStay Suites hotels by October 15, 2001; (iii) Choice will provide certain credits against MainStay Suites franchise fees otherwise payable by the Company if certain financial performance goals for those hotels are not achieved; (iv) Choice and the Company have agreed to 6 continue to cooperate with respect to matters of mutual interest, including new product and concept testing for Choice in hotels owned by the Company; and (v) the Company has authorized Choice, on a non-exclusive basis, to negotiate with third-party vendors on the Company's behalf for the purchase of certain items. The Strategic Alliance Agreement expires on October 15, 2002. Competition The Company is a leading owner and operator of hotels in the United States. Competition in the United States lodging industry is generally based on convenience of location, price, range of services and guest amenities offered, plus the quality of customer service and overall product. Newer, recently constructed hotels compete effectively against older hotels if such hotels are not refurbished on a regular basis. The effect of local economic conditions on the Company's results is reduced by the Company's geographic diversity of its properties, which are located in 27 States, as well as its range of products and room rates. Seasonality The Company's principal sources of revenue are revenues generated by its properties. The Company experiences seasonal revenue patterns similar to those of the lodging industry in general. This seasonality can be expected to cause quarterly fluctuations in the Company's revenues, profit margins and net income. Regulation and Environmental Matters The Company's hotels are subject to numerous federal, state and local government regulations, including those pertaining to the preparation and sale of food and beverages (such as health and liquor license laws), building and zoning requirements and laws governing a hotel owner's relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. While the Company's operations have not been materially affected by such regulations, the Company cannot predict the effect of future regulations or legislation. The hotel properties are subject to environmental regulations under Federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. The Company does not believe that it is subject to any material environmental liability. Employees At December 31, 1999, Sunburst employed approximately 3,500 employees. As is typical in the lodging industry, the Company experiences high rates of employee turnover. Less than 5% of the Company's employees are represented by unions. All of the Company's union employees are employed at Comfort Inn by the Bay, San Francisco, California. The Company considers its relations with its employees to be good. 7 Item 2. Properties The following chart lists by market segment Sunburst's hotels at March 1, 2000.
Year No. of Constructed/Last Hotel Market Rooms Major Renovation - ----- ------ ------ ---------------- Traditional All-Suite Upscale Quality Suites Deerfield..................... Fort Lauderdale, Florida 107 1991/1995 Quality Suites............................... Raleigh, North Carolina 114 1988/1994 Quality Suites Shady Grove................... Rockville, Maryland 124 1978/1996 Mid-Price Comfort Suites Haverhill..................... Boston, Massachusetts 131 1989/1997 Comfort Suites Deerfield..................... Fort Lauderdale, Florida 101 1991/1995 Extended-Stay Mid-Price MainStay Suites Plano........................ Dallas, Texas 96 1996 MainStay Suites Warwick...................... Providence, Rhode Island 94 1997 MainStay Suites Blue Ash..................... Cincinnati, Ohio 100 1997 MainStay Suites Airport...................... Kansas City, Missouri 88 1998 MainStay Suites Northwest.................... Indianapolis, Indiana 88 1997 MainStay Suites Louisville................... Louisville, Kentucky 100 1998 MainStay Suites Tech Center.................. Denver, Colorado 100 1998 MainStay Suites Lake Mary.................... Orlando, Florida 100 1998 MainStay Suites South Pointe................. Jacksonville, Florida 100 1998 MainStay Suites Greenville................... Greenville, South Carolina 100 1998 MainStay Suites Brentwood.................... Nashville, Tennessee 100 1998 MainStay Suites Miami Springs................ Miami Springs, Florida 102 1998 MainStay Suites Fishkill..................... Fishkill, New York 106 1998 MainStay Suites Annapolis.................... Annapolis, Maryland 97 1999 MainStay Suites Pittsburgh................... Pittsburgh, Pennsylvania 100 1998 MainStay Suites Raleigh...................... Raleigh, North Carolina 88 1999 MainStay Suites Tempe ....................... Tempe, Arizona 94 1999 MainStay Suites Peabody ..................... Peabody, Massachusetts 94 1999 MainStay Suites King of Prussia ............. Malvern, PA 78 1999 MainStay Suites N. Charleston................ Charleston, SC 97 1999 MainStay Suites Secaucus..................... Secaucus, NJ 132 2000 Full Service Upscale Clarion Hotel Baltimore...................... Baltimore, Maryland 103 1927/1996 Clarion Hotel Worthington.................... Columbus, Ohio 231 1975/1996 Clarion Hotel Richardson..................... Dallas, Texas 296 1982/1995 Clarion on the Lake.......................... Hot Springs, Arkansas 151 1965/1997 Clarion Hotel Miami Airport.................. Miami, Florida 109 1970/1996 Clarion Hotel Hollywood Beach................ Miami-Ft. Lauderdale, Florida 309 1972/1996 Clarion Hotel................................ Mobile, Alabama 251 1979/1994 Clarion Hotel Virginia Beach................. Norfolk-Virginia Beach, Virginia 149 1985/1995 Clarion Hotel Roanoke........................ Roanoke, Virginia 154 1981/1997 Clarion Hotel Springfield.................... Springfield, Missouri 199 1974/1997 Clarion Hotel................................ Charlotte, North Carolina 174 1974/1997
8 Mid-Price Quality Inn South Point...................... Jacksonville, Florida 184 1988/1994 Quality Hotel Airport........................ Los Angeles, California 278 1971/1994 Quality Hotel Maingate Anaheim(1)............ Los Angeles, California 284 1970/1995 Quality Inn & Suites Hampton................. Norfolk-Virginia Beach, Virginia 189 1972/1995 Quality Hotel Arlington...................... Washington, DC 392 1962/1997 Limited Service Mid-Price Comfort Inn Albuquerque...................... Albuquerque, New Mexico 118 1985/1996 Quality Inn Anderson......................... Anderson, South Carolina 121 1988/1995 Comfort Inn N.W. Pikesville(2)............... Baltimore, Maryland 190 1964/1994 Comfort Inn University....................... Baton Rouge, Louisiana 150 1972/1994 Comfort Inn Danvers.......................... Boston, Massachusetts 140 1972/1997 Comfort Inn Brooklyn......................... Brooklyn, New York 70 1926/1997 Comfort Inn Canton........................... Canton, Ohio 124 1989/1994 Comfort Inn Charlotte........................ Charlotte, North Carolina 150 1985/1996 Quality Inn & Suites--Crown Point............. Charlotte, North Carolina 100 1988/1996 Comfort Inn Middleburg Heights............... Cleveland, Ohio 136 1989 Quality Inn Plymouth......................... Detroit, Michigan 123 1989/1996 Comfort Inn Deerfield Beach.................. Fort Lauderdale, Florida 69 1975/1997 Comfort Inn Hershey.......................... Hershey, Pennsylvania 125 1990/1997 Comfort Inn Hilton Head...................... Hilton Head, South Carolina 150 1988/1996 Quality Inn & Suites Indianapolis............ Indianapolis, Indiana 116 1982/1996 Comfort Inn Collierville..................... Memphis, Tennessee 95 1984/1996 Comfort Inn & Suites, Miami Springs.......... Miami, Florida 165 1970/1996 Comfort Inn Miami Springs.................... Miami, Florida 110 1986/1996 Comfort Inn Miami Beach...................... Miami, Florida 153 1952/1997 Comfort Inn--Lee Road........................ Orlando, Florida 145 1985/1994 Comfort Inn Portland......................... Portland, Maine 127 1984/1996 Quality Inn Richmond......................... Richmond, Virginia 193 1985/1997 Quality Inn Midvalley........................ Salt Lake City, Utah 131 1972/1995 Comfort Inn by the Bay(1).................... San Francisco, California 138 1971/1996 Comfort Inn Westport......................... St. Louis, Missouri 169 1971/1995 Comfort Inn Tyson's.......................... Washington, DC 250 1982/1995 Comfort Inn West Palm Beach.................. West Palm Beach, Florida 162 1974/1995 Comfort Inn Wichita.......................... Wichita, Kansas 114 1985/1997 Sleep Inn Round Rock......................... Austin, Texas 107 1996 Sleep Inn Six Flags.......................... Dallas-Fort Worth, Texas 124 1997 Sleep Inn Baton Rouge........................ Baton Rouge, Louisiana 101 1996 Sleep Inn Plano.............................. Dallas, Texas 102 1994 Sleep Inn Intercontinental................... Houston, Texas 107 1996 Sleep Inn Raleigh............................ Raleigh, North Carolina 107 1996 Sleep Inn San Antonio........................ San Antonio, Texas 107 1995 Sleep Inn University......................... Charlotte, North Carolina 121 1997 Sleep Inn Airport............................ Kansas City, Missouri 107 1997 Sleep Inn Rockville.......................... Washington, DC 107 1997 Sleep Inn Airport............................ Denver, Colorado 119 1998 Sleep Inn Denver Tech........................ Denver, Colorado 119 1999 Sleep Inn Miami Airport...................... Miami Springs, Florida 119 1999
(1) Leased property (2) Hotel on leased land 9 The following chart shows operating statistics for all of Sunburst's owned and managed hotels presented by market segment for the three fiscal years ended May 31, 1997, the seven months ended December 31, 1997, and the twelve months ended December 31, 1998 and 1999.
FY 1995 FY 1996 FY 1997 ---------------------------------- ---------------------------------- ---------------------------------- ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4) ------- ------------ --------- ------ ----------- --------- ------- ----------- --------- Traditional All-Suite......... $58.74 61.34% $36.03 $64.70 69.00% $44.65 $70.55 73.42% 51.80% Extended-Stay..... - - - - - - 57.09 65.55 37.42 Full Service...... 54.04 65.43 35.36 58.85 65.41 38.49 63.25 67.05 42.41 Limited Service... 48.39 69.15 33.46 53.36 67.11 35.81 56.39 69.23 39.04 All Hotels........ 51.28 67.10 34.40 55.97 66.61 37.28 59.60 68.69 40.94
Seven months ended December 31, 1997(1) Year ended December 31, 1998 Year ended December 31, 1999 ---------------------------------- --------------------------------- ----------------------------------- ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4) ADR(2) Occupancy(3) RevPAR(4) ------ ------------ -------- ------ ------------ --------- ------ ------------ -------- Traditional All-Suite......... $70.03 72.05% $50.45 $75.27 72.65% $54.69 $76.96 70.76% $54.45 Extended-Stay..... 61.57 48.64 29.95 56.03 57.17 32.04 57.82 70.24 40.62 Full Service...... 65.23 66.46 43.35 67.69 66.81 45.23 69.37 65.01 45.09 Limited Service... 59.11 68.01 40.20 59.98 67.36 40.40 63.40 66.95 42.45 All Hotels........ 61.81 67.41 41.67 62.90 66.57 41.87 64.22 66.80 42.88
_______________________________________ (1) The information provided in the table above for the seven months ended December 31, 1997 is not representative of a full fiscal year due to the seasonality of the hotel industry. (2) Average Daily Rate ("ADR") is determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period. (3) Occupancy is determined by dividing the number of guest rooms occupied on a daily basis by the total number of guest rooms available for the period. (4) Revenue Per Available Room ("RevPAR") is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized.
Seven Months Ended Year Ended Year Ended Fiscal Year Ended May 31, December 31, December 31, December 31, 1995 1996 1997 1997 (1) 1998 1999 ------------ ------------ ------------ ------------- ------------- --------------- Number of properties, end of period....... 48 65 71 76 86 83 Number of rooms, end of period............ 7,941 9,713 10,330 10,885 11,910 11,351 Average occupancy percentage.............. 67.10% 66.61% 68.70% 67.41% 66.57% 66.80% Average daily room rate (ADR)............. $51.28 $55.97 $59.62 $ 61.81 $ 62.90 $ 64.22 RevPAR.................................... $34.40 $37.28 $40.96 $ 41.67 $ 41.87 $ 42.88 - --------------------------------------------------------------------------------------------------------------------------------
___________________________________________ (1) The information provided in the table above for the seven months ended December 31, 1997 is not representative of a full fiscal year due to the seasonality of the hotel industry. 10 Item 3. Legal Proceedings The Company is not a party to any litigation, other than routine litigation incidental to its business. None of such litigation, either individually or in the aggregate, is expected to be material to the business, financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1999. Executive Officers Of Sunburst Hospitality Corporation The name, age, title, present principal occupation, business address and other material occupations, positions, offices and employment of each of the executive officers of Sunburst are set forth below. The business address of each executive officer is 10770 Columbia Pike, Silver Spring, Maryland 20901, unless otherwise indicated.
Name Age Position - ---- --- -------- Stewart Bainum, Jr................ 55 Chairman of the Board of Directors Donald J. Landry.................. 51 Vice Chairman, Chief Executive Officer and President James A. MacCutcheon.............. 47 Executive Vice President, Chief Financial Officer and Treasurer Kevin P. Hanley................... 42 Senior Vice President, Development and Extended-Stay Gregory D. Miller................. 45 Senior Vice President, Marketing and Human Resources Douglas H. Verner................. 46 Senior Vice President, General Counsel & Secretary Charles G. Warczak, Jr............ 52 Vice President, Finance and Systems Pamela M. Williams................ 44 Vice President, Assistant General Counsel and Assistant Secretary
Stewart Bainum, Jr., Chairman of the Board of the Company since December 1998 and from November 1996 to July 1998; Chairman of the Board of Choice from March 1987 to November 1996 and since October 1997; Chairman of the Board and Chief Executive Officer of Manor Care, Inc. from March 1987 through September 1998; Chairman of the Board of HCR/Manor Care since September 1998; Vice Chairman of the Board of Manor Care and subsidiaries from June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink from September 1991 through June 1998; President of MCHS from May 1990 to May 1991; Chairman of the Board and Chief Executive Officer of Vitalink from September 1991 to February 1995 and President and Chief Executive Officer from March 1987 to September 1991. Donald J Landry. Chief Executive Officer, President and Vice Chairman of the Company since July 1999; Chief Executive Officer and Vice Chairman of the Company since October 1997; President of the Company from January 1995 to October 1997; President of Manor Care Hotel Division ("MCHD") from March 1992 to November 1996; various executive positions with Richfield Hotel Management, Inc. and its predecessors for more than 20 years, including President of MHM Corporation. James A. MacCutcheon. Executive Vice President, Chief Financial Officer and Treasurer of the Company since November 1996; Senior Vice President, Chief Financial Officer and Treasurer of the Company from September 1993 to November 1996; Senior Vice President, Chief Financial Officer and Treasurer of Manor Care from October 1987 through November 1996; Treasurer of Vitalink from September 1992 to January 1997 and a Director of Vitalink from September 1994 to June 1998. Kevin P. Hanley. Senior Vice President, Development and Extended Stay of the Company since June 1999; Vice President, Real Estate and Development of the Company from December 1994 to June 1999; Vice President, Real Estate and Development of MCHD from December 1994 to November 1996; Executive Vice President of Hospitality Investment Trust from September 1994 to November 1994; Senior Vice President; Development and 11 Acquisitions of Motel 6, L.P. from May 1992 to September 1994; various other positions with Motel 6, L.P. since January 1987. Gregory D. Miller. Senior Vice President, Marketing and Human Resources of the Company since June 1999, Senior Vice President, Human Resources from October 1997 to June 1999; Vice President, Marketing of MCHS from March 1995 to October 1997; Vice President, Strategic Planning of Manor Care from May 1992 to September 1995. Douglas H. Verner. Senior Vice President, General Counsel and Secretary of the Company since March 1998; Executive Vice President, General Counsel and Secretary of Chartwell Leisure from January 1996 to March 1998; Senior Vice President, General Counsel and Secretary of Forte Hotels, Inc. from November 1990 to November 1996. Charles G. Warczak, Jr. Vice President, Finance and Systems of the Company since October 1997; Vice President, Hotel Accounting of the Company from March 1997 to October 1997; Vice President, Finance and Controller of the Company from November 1996 to March 1997; Vice President, Finance of Manor Care from 1992 to November 1996. Pamela M. Williams. Vice President, Assistant General Counsel and Assistant Secretary of the Company since October 1997; Senior Attorney of the Company from December 1996 to October 1997, Attorney from November 1996 to December 1996; Attorney of Manor Care from December 1995 to November 1996; Associate of Hogan and Hartson, L.L.P. from August 1988 to December 1995. 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The shares of Sunburst's Common Stock are listed and traded on the New York Stock Exchange. The following table sets forth the high and low sales prices of Sunburst's Common Stock since it began trading on November 4, 1996: High Low FISCAL YEAR ENDED MAY 31, 1997 November 4 - November 30, 1996 $ 16 $13 3/4 Quarter ended February 28, 1997 17 5/8 15 Quarter ended May 31, 1997 15 7/8 12 3/4 TRANSITION PERIOD ENDED DECEMBER 31, 1997 (1) Quarter ended August 30, 1997 19 5/16 15 1/2 Quarter ended November 30, 1997 (2) Prior to October 15, 1997 20 3/8 18 3/4 October 15, 1997 through November 30, 1997 11 5/8 9 1/8 December 1, 1997 - December 31, 1997 10 1/4 8 5/8 FISCAL YEAR ENDED DECEMBER 31, 1998 Quarter ended March 31, 1998 9 15/16 8 1/4 Quarter ended June 30, 1998 9 5 3/8 Quarter ended September 30, 1998 6 7/8 3 Quarter ended December 31, 1998 4 3/4 4 7/16 FISCAL YEAR ENDED DECEMBER 31, 1999 Quarter ended March 31, 1999 5 1/8 3 3/4 Quarter ended June 30, 1999 6 3/16 3 7/8 Quarter ended September 30, 1999 6 3/4 5 5/8 Quarter ended December 31, 1999 6 1/4 4 7/8 - ------------- (1) On September 16, 1997, the Company changed its fiscal year-end from May 31 to December 31. The Company elected to continue reporting its operations pursuant to its historical fiscal quarters during the transition period ended December 31, 1997. (2) On October 15, 1997, the Company spun off the Choice Franchising Business through a special dividend to the Company's shareholders of all of the common stock of Choice and effected a one-for-three reverse stock split. The stock prices for the quarter ended November 30, 1997 have not been adjusted to give effect to the substantially simultaneous spin-off of Choice and the reverse stock split. Accordingly, the high and low sales prices are presented for both the period prior to and after the Choice Spin-Off and the reverse stock split. On October 15, 1997, the Company made a special dividend, consisting of the distribution to holders of the Company's common stock, on a share-for-share basis, of all of the outstanding shares of the common stock of Choice Hotels Franchising, Inc. (now known as Choice Hotels International, Inc.). This was the only dividend paid since November 4, 1996. The Company does not anticipate the payment of any cash dividends on its common stock in the foreseeable future. Payments of dividends on Company common stock may be subject to limitations as may be imposed by the Company's credit facilities from time to time. The declaration of dividends will be subject to the discretion of the Board of Directors. As of March 20, 2000, there were approximately 7,631 holders of the Company's common stock. 13 Item 6. Selected Financial Data
For the year For the year For the seven ended ended months ended For the fiscal year ended December 31, December 31, December 31, May 31, ----------------------------------- 1999 1998 1997 1997 1996 1995 ------------ ------------ ------------- ---------- --------- ---------- Statement of Income Data Total revenues $ 210,036 $ 204,096 $ 114,553 $ 185,753 $ 154,625 $ 114,514 Hotel operating expenses 138,181 131,881 77,134 129,699 114,403 87,588 Corporate expense 10,405 13,961 8,244 7,691 8,026 6,038 ------------ ------------ ------------ ---------- --------- ---------- Recurring EBITDA 61,450 58,254 29,175 48,363 32,196 20,888 Provision for asset impairment/ (net gains on property dispositions) (1,878) 4,264 5,119 - 24,595 - Depreciation and amortization 26,240 26,983 14,246 20,632 16,636 12,513 Interest expense 24,677 20,756 10,138 15,891 12,839 9,155 ------------ ------------ ------------ ---------- --------- ---------- Income/(loss) from continuing operations before income taxes 12,411 6,251 (328) 11,840 (21,874) (780) Income taxes 5,104 2,563 (44) 5,035 (8,523) (323) ------------ ------------ ------------ ---------- --------- ---------- Income/(loss) from continuing operations 7,307 3,688 (284) 6,805 (13,351) (457) Discontinued operations (1) - - 16,369 35,219 21,809 17,268 ------------ ------------ ------------ ---------- --------- ---------- Net income before extraordinary loss and cumulative effect of a change in accounting principle 7,307 3,688 16,085 42,024 8,458 16,811 Extraordinary loss from early debt redemption, net of $476, $201 and $747 tax benefit, respectively (772) (308) - (1,144) - - Cumulative effect of a change in accounting, principle net of $421 tax benefit (599) - - - - - ------------ ------------ ------------ ---------- --------- ---------- Net income $ 5,936 $ 3,380 $ 16,085 $ 40,880 $ 8,458 $ 16,811 Basic earnings per share data From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 $ (0.64) $ (0.02) From discontinued operations - - 0.82 1.69 1.05 0.83 From extraordinary items (0.04) (0.01) - (0.05) - - From cumulative effect of a change in accounting principle (0.03) - - - - - ------------ ------------ ------------ ---------- --------- ---------- Net income $ 0.31 $ 0.17 $ 0.81 $ 1.96 $ 0.41 $ 0.81 ============ ============ ============ ========== ========= ========== Diluted earnings per share data From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 $ (0.64) $ (0.02) From discontinued operations - - 0.82 1.66 1.05 0.83 From extraordinary items (0.04) (0.01) - (0.05) - - From cumulative effect of a change in accounting principle (0.03) - - - - - ------------ ------------ ------------ ---------- --------- ---------- Net income $ 0.31 $ 0.17 $ 0.81 $ 1.93 $ 0.41 $ 0.81 ============ ============ ============ ========== ========= ========== Weighted average common shares outstanding (2) 19,036 19,956 19,979 20,893 20,876 20,827 ============ ============= ============ =========== ========= ==========
14 1) Discontinued operations represents the income of the discontinued franchising business less applicable income taxes of $11,825, $25,165, $15,923, and $13,467, respectively. 2) Weighted average common shares outstanding represents the weighted average common shares outstanding of the Company's parent Manor Care, Inc. for fiscal years 1995 and 1996. Fiscal year 1997 represents the weighted average common shares of Manor Care, Inc. for the period through November 1, 1997. The period following November 1, 1997 represents the weighted average common shares of the Company. Fiscal year 1995 through 1997 have been adjusted for the one-for-three reverse stock split.
As of December 31, As of May 31, ----------------------------------------- ------------------------------------ 1999 1998 1997 1997 1996 1995 ------------- ------------- ------------- ----------- ---------- ----------- Balance Sheet Data Total assets 413,189 422,511 400,983 426,429 328,311 254,229 Notes payable to Manor Care, Inc. - - - 37,022 147,023 119,823 Total debt 293,663 281,189 248,120 260,369 163,497 137,122 Total liabilities 330,142 319,874 311,676 301,942 180,752 188,400 Equity or investments and advances from Parent 83,047 102,637 89,307 124,487 147,559 65,829
15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company owned and operated 83 hotels with 11,351 rooms in 26 states at December 31, 1999. The hotels are under the brand names Comfort, Clarion, Sleep, Quality and MainStay Suites. The Company's continuing business consists primarily of guest room revenue, meeting room revenue, and food and beverage revenue from owned and operated hotels. Comparison of Calendar Year 1999 and Calendar Year 1998 - ------------------------------------------------------- The following tables present calendar quarter and full calendar year information showing the results of operations of the Company's ongoing hotel operations for 1999 and 1998 (in thousands, unaudited). Quarter Ending ------------------------------------------------ March 31 June 30 September 30 December 31 ------------------------------------------------ Year ended December 31, 1999 Revenue $50,272 $55,706 $56,771 $47,287 Recurring EBITDA (1) 14,831 18,133 17,852 10,634 Year ended December 31, 1998 Revenue $46,139 $54,440 $56,320 $47,197 Recurring EBITDA (1) 12,549 16,518 16,719 12,468 ________________________ (1) Recurring EBITDA consists of the sum of net income (loss), interest expense, income taxes, and depreciation and amortization and non-recurring charges for the Company's ongoing operations. EBITDA is presented because such data is used by certain investors to determine the Company's ability to meet debt service, fund capital expenditures and expand its business. The Company considers EBITDA to be an indicative measure of operating performance particularly due to the large amount of depreciation and amortization. Such information should not be considered an alternative to net income, operating income, cash flow from operations or any other operating or liquidity performance measure prescribed by GAAP. Cash expenditures (including nondiscretionary expenditures) for various long-term assets, interest expense and income taxes have been, and will be, incurred which are not reflected in the EBITDA presentation and therefore EBITDA does not represent funds available for management's discretionary use. Year ending December 31, --------------------------- 1999 1998 --------------------------- Revenues Rooms $184,833 $178,755 Food and beverage 17,153 17,247 Other 8,050 8,094 -------------------------- Total revenues 210,036 204,096 -------------------------- Hotel operating expenses 138,181 131,881 Corporate expense 10,405 13,961 -------------------------- Recurring EBITDA 61,450 58,254 -------------------------- (Net gains on property dispositions)/ provision for asset impairment (1,878) 4,264 Depreciation and amortization 26,240 26,983 Interest expense 24,677 20,756 -------------------------- 16 Income from continuing operations before income taxes 12,411 6,251 Income taxes 5,104 2,563 ----------------------- Income from continuing operations $7,307 $3,688 ======================= Basic earnings per share from continuing operations $ 0.38 $ 0.18 ======================= Total revenues increased from $204.1 million in 1998 to $210.0 million in 1999, an increase of 2.9%. The Company utilizes Revenue per Available Room ("RevPAR"), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized, as a measure of the operating performance of its hotels. RevPAR for those properties opened at least one year remained consistent with prior year. RevPAR for the extended-stay portfolio increased a full 26%, as these newly-developed hotels continued to ramp up. With the growth in its REVPAR and an increase from 13 to 20 open extended-stay hotels, extended-stay revenue increased from $12.3 million in 1998 to $25.1 million in 1999. This increase in revenue was largely offset by the sale of eleven hotels. Corporate expense amounted to $10.4 million, a decrease of approximately $3.6 million or 25.5% from the prior year. Corporate expense amounted to 4.9% of revenues during 1999 as compared to 6.8% during 1998. A number of initiatives to reduce overhead resulted in the overall cost reduction. Initiatives included corporate level staffing reductions, consolidation of office space, sub-leasing of excess office space and termination of various service agreements with formerly affiliated entities. Recurring earnings before interest, taxes, depreciation and amortization ("Recurring EBITDA") increased 5.5%, to $61.5 million in 1999 from $58.3 million in 1998. Recurring EBITDA margin for 1999 was 29.3% as compared to 28.5% in 1998. Included in net gains on property dispositions and provision for asset impairment were $1.9 million of pre-tax net gains on sales of eleven hotels in 1999 and a pre-tax charge of approximately $4.3 million against earnings in 1998 to reduce several hotels being marketed for sale to estimated net realizable value, net of disposition costs. Interest expense increased 18.9% to $24.7 million in 1999 from $20.8 million in 1998. The increase is principally the result of additional borrowings associated with the Company's development of hotels as well as an increase in the effective rate utilized to accrue interest on the subordinated note payable to Choice. The Choice note's effective rate is 10.6% if outstanding through maturity in 2002. Income from continuing operations of $7.3 million, increased 98% from $3.7 million in 1998. Comparison of Calendar Year 1998 and Calendar Year 1997 (Domestic Hotels) - ------------------------------------------------------------------------- The following tables present calendar quarter and full calendar year information showing the results of operations of the Company's ongoing domestic hotel operations for 1998 and 1997 (in thousands, unaudited).
Quarter Ending ---------------------------------------------------------------------- March 31 June 30 September 30 December 31 ---------------------------------------------------------------------- Year ended December 31, 1998 Domestic Revenue $46,139 $54,440 $56,320 $47,197 Recurring Domestic EBITDA (2) 12,549 16,518 16,719 12,468
17 Year ended December 31, 1997 Domestic Revenue $41,258 $46,982 $49,052 $42,760 Recurring Domestic EBITDA (2) 11,793 15,484 14,092 8,413
____________________________ (2) Recurring domestic EBITDA consists of the sum of net income (loss), interest expense, income taxes, and depreciation and amortization and non-recurring charges for the Company's ongoing domestic operations. EBITDA is presented because such data is used by certain investors to determine the Company's ability to meet debt service, fund capital expenditures and expand its business. The Company considers EBITDA to be an indicative measure of operating performance particularly due to the large amount of depreciation and amortization. Such information should not be considered an alternative to net income, operating income, cash flow from operations or any other operating or liquidity performance measure prescribed by GAAP. Cash expenditures (including nondiscretionary expenditures) for various long-term assets, interest expense and income taxes have been, and will be, incurred which are not reflected in the EBITDA presentation and therefore EBITDA does not represent funds available for management's discretionary use. Year ending December 31, ----------------------------- 1998 1997 ----------------------------- Revenues Rooms $178,755 $ 157,380 Food and beverage 17,247 14,991 Other 8,094 7,681 ----------------------------- Total revenues 204,096 180,052 ----------------------------- Hotel operating expenses 131,881 119,190 Corporate expense 13,961 11,079 ----------------------------- Recurring EBITDA 58,254 49,783 ----------------------------- Provision for asset impairment and other non-recurring charges 4,264 5,119 Depreciation and amortization 26,983 22,372 Interest expense 20,756 16,461 ----------------------------- Income from continuing operations before income taxes 6,251 5,831 Income taxes 2,563 2,537 ----------------------------- Income from continuing operations $ 3,688 $ 3,294 ============================= Basic earnings per share from continuing operations $ 0.18 $ 0.16 ============================= Hotel revenues increased from $180.1 million in calendar 1997 to $204.1 million in 1998, an increase of 13.3%. Increases in revenue were the result of an increase in the size of the Company's portfolio and improved RevPAR. The portfolio increased from 76 hotels at December 31, 1997 to 86 hotels at December 31,1998, an increase of 9.4% in the number of rooms. Gross operating margin (operating income before corporate expense, depreciation and amortization and non-recurring charges) increased from 21.4% in 1997 to 22.0% in 1998. Food and beverage ("F&B") revenues increased 15.1% and F&B operating margins increased from 20.1% to 23.6% as a result of an increased focus on improving F&B operating margins. The increase in depreciation expense from 1997 to 1998 is the result of the growth in the portfolio. While two, older limited service hotels were sold during 1998, the Company opened 12 newly-constructed hotels. 18 Calendar year 1998 represented the first full year operating as a separate, stand-alone company and, accordingly, general corporate expense increased from 6.2% of revenues to 6.8% of revenues in 1998. Recurring domestic EBITDA increased 17% to $58.3 million in 1998 from $49.8 million in 1997. Recurring domestic EBITDA margin for 1998 was 28.5% as compared to 27.7% in 1997. Included in provision for asset impairment and other non-recurring charges in 1998 were non-cash write-downs of approximately $4 million (pre-tax) to reduce several hotels being marketed for sale to estimated net realizable value, net of disposition costs. In 1997, non-recurring loss provisions of approximately $5 million (pre-tax) were recorded in order to reserve for various items related to the Manor Care and Choice spin-offs. Interest expense increased from $16.5 million to $20.8 million in 1998, an increase of 26.1%. The increase results from an increased amount of debt outstanding over the respective periods. The Company's debt has increased over the period to fund the development of hotels. Income from continuing operations of $3.7 million, increased 12% from $3.3 million in 1997. Not reflected in the above discussion are the European hotel operations which were spun-off to shareholders along with the discontinued franchise business. In 1997, European hotel operations contributed $7.0 million of revenue and $0.40 in EBITDA, through the spin-off date in October, 1997. Liquidity and Capital Resources - ------------------------------- The Company maintains an $80 million committed line of credit with a group of four banks to support on-going operations and to fulfill capital requirements. The Credit Facility expires in October 2000. Availability under that line of credit is a function of trailing cash flow, but amounted to the full $80.0 million at December 31, 1999. Borrowings under the line amounted to $51 million at December 31, 1999. The Company is currently negotiating a one year extension of the bank facility, which will include a reduction in the commitment to $60 million. At the distribution date, the Company owed Choice $115.0 million in the form of a pay-in-kind subordinated note with a five year maturity. The note provides financial flexibility due to the fact that accrued interest is not payable until maturity. On April 23, 1997, the Company, through its indirect subsidiary, First Choice Properties, completed an offering of $117.5 million multi-class mortgage pass-through certificates (the "CMBS debt"). This CMBS debt is non-recourse and is collateralized by 28 hotel properties with a net book value of $124.9 million owned by the Company. The CMBS debt carries a 7.8% blended weighted average interest rate and has a final maturity of May 5, 2012. The hotel properties so collateralized reported EBITDA of $29.7 million for calendar year 1999. The Company used the proceeds to repay debt payable to its former parent, Manor Care, Inc. The Company intends to develop MainStay Suites, a mid-priced extended- stay hotel product. At December 31, 1999, 20 MainStay Suites were open and operating with another four hotels under development. The cost to develop a MainStay Suites hotel approximates $5.5 to $6.0 million. In order for the Company to continue on a long-term basis a development program, additional capital will be required. The Company's objective is to reduce its overall leverage while continuing to grow through development. The Company continuously evaluates its existing portfolio and seeks to sell hotels that have limited upside potential or that are projected to under-perform in order to redeploy capital into higher yielding assets. The Company identified eleven such hotels that were sold in 1999 for total proceeds of $37.0 million. As of December 31, 1999, an additional seven hotels are being marketed for sale in 2000. Proceeds from asset sales in 1999 were used to purchase shares for Treasury and reduce debt, including $9.2 million of CMBS debt which resulted in a pre-payment penalty of $772,000, after tax. 19 Net cash provided by continuing operating activities was $45.4 million for the year ended December 31, 1999, as compared to $35.3 million, for the year ended December 31, 1998. The Company's Board of Directors authorized Treasury share purchase programs aggregating six million shares. As of December 31, 1999, 5,911,366 shares were purchased at an aggregate cost of $29.6 million. The program was completed in January 2000. The Company does not anticipate expanding the Treasury share purchase program, at least until such time as additional financing is arranged. At December 31, 1999, the Company's debt to book capitalization amounted to 78.0% and debt to market capitalization was 77.9%. Debt to recurring EBITDA amounted to 4.8:1 and recurring EBITDA to interest was 2.4:1 for calendar year 1999. Senior debt to recurring EBITDA was 2.4:1 for 1999 and recurring EBITDA to cash interest was 5.9:1 for calendar year 1999. While operating cash flow, credit available under the Company's bank facility and proceeds from the sale of hotels are expected to be adequate to fund operations and committed construction projects, accessing additional capital is imperative in order for the Company to expand its development and growth plans. Also, given the relatively short maturities of the note payable to Choice and the near term expiration of the bank facility, refinancing or extending maturities is an imperative. If the Company is unsuccessful in arranging for an extension of its bank facility which otherwise expires October 15, 2000, alternative sources of capital will have to be identified and accessed during 2000. Excluding development, recurring capital expenditures required to maintain operating assets in the appropriate condition are estimated to be approximately $15 million per year. Planned capital expenditures for the development of hotels in 2000 are projected to be approximately $20 million. Seasonality - ----------- Demand at many of the hotels is affected by recurring seasonal patterns, depending upon the location of the hotel. Accordingly, the Company's operations are seasonal in nature, with lower revenue and operating profit in November through February and higher revenue and operating profit in March through October. Inflation - --------- Inflation has not had a material effect on the revenues or operating results of the Company during the year ended December 31, 1999 or 1998. Forward Looking Statements - -------------------------- Management's Discussion and Analysis, as well as other parts of this Annual Report on Form 10-K, contain information based on management's beliefs and forward-looking statements that involve a number of risks, uncertainties and assumptions. There can be no assurances that actual results will not materially differ from the forward-looking statements as a result of various factors, including, but not limited to: the Company's substantial leverage and its plan to realize cash proceeds through leveraging its remaining assets; its plans to make selected strategic investments and acquisitions and develop new hotels; its success in implementing its business strategy, including its success in arranging financing where required; competition; government regulation; and general economic and business conditions. The Company's intentions with respect to the development of MainStay Suites and other new hotels is subject to: the Company's ability to access sufficient capital to continue such development; the acceptance of and demand for such products by the consumer and competition. 20 Item 8. Financial Statements and Supplementary Data
Page ---- Report of Independent Public Accountants....................................................... 22 Consolidated Balance Sheets.................................................................... 23 Consolidated Statements of Income.............................................................. 24 Consolidated Statements of Cash Flows.......................................................... 25 Consolidated Statements of Stockholders' Equity and Comprehensive Income....................... 26 Notes to Consolidated Financial Statements .................................................... 27
21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Sunburst Hospitality Corporation: We have audited the accompanying consolidated balance sheets of Sunburst Hospitality Corporation and subsidiaries (the "Company" formerly Choice Hotels International, Inc., see Basis of Presentation) as of December 31, 1999 and 1998, the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sunburst Hospitality Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Vienna, Virginia February 16, 2000 22 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
As of ----------------------------------- December 31, December 31, 1999 1998 --------------- ---------------- ASSETS Real estate, net $ 359,258 $ 363,023 Real estate held for sale 34,498 37,122 Receivables (net of allowance for doubtful accounts of $500 and $611, respectively) 7,851 7,271 Other assets 8,617 10,982 Cash and cash equivalents 2,965 4,113 --------------- ---------------- Total assets $ 413,189 $ 422,511 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Debt Senior debt and capital leases $ 151,807 $ 153,341 Subordinated debt 141,856 127,848 --------------- ---------------- 293,663 281,189 Accounts payable and accrued expenses 30,096 32,633 Deferred income taxes ($5,368 and $1,352, respectively) and other liabilities 6,383 6,052 --------------- ---------------- Total liabilities 330,142 319,874 --------------- ---------------- STOCKHOLDERS' EQUITY Common stock (60,000,000 authorized, at $0.01 par value, 22,148,313 and 21,545,305 issued and 14,808,060 and 19,606,006 outstanding at December 31, 1999 and 1998, respectively) 245 244 Additional paid-in-capital 173,363 171,462 Treasury stock (7,340,253 and 1,939,299 shares, respectively) (93,284) (65,856) Retained earnings (deficit) 2,723 (3,213) --------------- ---------------- Total stockholders' equity 83,047 102,637 --------------- ---------------- Total liabilities and stockholders' equity $ 413,189 $ 422,511 =============== ================
The accompanying notes are an integral part of these consolidated balance sheets. 23 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
For the seven For the fiscal For the year For the year months year ended ended ended ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ---------------- --------------- --------------- -------------- REVENUES Rooms $ 184,833 $ 178,755 $ 100,670 $ 165,239 Food and beverage 17,153 17,247 9,231 13,356 Other 8,050 8,094 4,652 7,158 ---------------- --------------- --------------- ------------- Total revenues 210,036 204,096 114,553 185,753 ---------------- --------------- --------------- ------------- OPERATING EXPENSES Departmental expenses Rooms 52,932 51,227 33,484 58,502 Food and beverage 12,935 13,183 7,319 10,887 Other 3,631 3,056 1,530 2,674 Undistributed operating expenses 68,683 64,415 34,801 57,636 Depreciation and amortization 26,240 26,983 14,246 20,632 Corporate 10,405 13,961 8,244 7,691 (Net gains on property dispositions)/ provision for asset impairment and non-recurring charges (1,878) 4,264 5,119 - ---------------- --------------- --------------- ------------- Total operating expenses 172,948 177,089 104,743 158,022 ---------------- --------------- --------------- ------------- OPERATING INCOME 37,088 27,007 9,810 27,731 ---------------- --------------- --------------- ------------- INTEREST EXPENSE 24,677 20,756 10,138 15,891 ---------------- --------------- --------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 12,411 6,251 (328) 11,840 Income taxes 5,104 2,563 (44) 5,035 ---------------- --------------- --------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 7,307 3,688 (284) 6,805 DISCONTINUED OPERATIONS: Income from operations of discontinued franchising business (less applicable income taxes of $0, $0, $11,825, and $25,165, respectively) - - 16,369 35,219 ---------------- --------------- --------------- ------------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 7,307 3,688 16,085 42,024 EXTRAORDINARY ITEM -- Loss from early extinguishment of debt (net of $476, $201, and $747 tax benefit) 772 308 - 1,144 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - (net of $421 tax benefit) 599 - - - ---------------- --------------- --------------- ------------- NET INCOME $ 5,936 $ 3,380 $ 16,085 $ 40,880 ================ =============== =============== ============= Basic earnings per share - ------------------------ From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 From discontinued operations - - 0.82 1.69 From extraordinary item (0.04) (0.01) - (0.05) From cumulative effect of a change in accounting principle (0.03) - - - ---------------- --------------- --------------- ------------ Earnings per share $ 0.31 $ 0.17 $ 0.81 $ 1.96 ================ =============== =============== ============ Diluted earnings per share - -------------------------- From continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 From discontinued operations - - 0.82 1.66 From extraordinary item (0.04) (0.01) - (0.05) From cumulative effect of a change in accounting principle (0.03) - - - ---------------- --------------- --------------- ------------- Earnings per share $ 0.31 $ 0.17 $ 0.81 $ 1.93 ================ =============== =============== =============
The accompanying notes are an integral part of these consolidated statements of income. 24 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the year For the year For the seven For the fiscal ended ended months ended year ended December 31, December 31, December 31, May 31, Cash Flows From Operating Activities 1999 1998 1997 1997 -------------- -------------- ------------- ------------ Income (loss) from continuing operations before extraordinary item and cumulative effect of a change in accounting principle $ 7,307 $ 3,688 $ (284) $ 6,805 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization 26,240 26,983 14,246 20,632 Amortization of deferred financing fees 287 244 248 - Amortization of debt discount 1,543 1,921 528 29 Accrued interest on Choice Hotels International, Inc. note 12,646 8,808 2,648 - Provision for bad debts, net 531 424 247 560 Increase in deferred taxes 4,016 466 695 2,920 (Gain) loss on sale of property (1,878) (65) - 220 Provision for asset impairment and other non-recurring charges - 3,983 5,119 - Change in assets and liabilities: Change in receivables (1,111) (1,434) (152) (1,686) Change in other assets 4,167 (2,351) (357) (3,963) Change in accounts payable, accrued expenses and other liabilities (6,222) (790) (9,323) 17,391 Change in payable to Choice Hotels International, Inc. - (8,601) 10,066 - Change in current taxes receivable (2,089) 2,018 (2,310) (483) -------------- -------------- -------------- ------------ Net cash provided by continuing operations 45,437 35,294 21,371 42,425 Net cash provided by discontinued operations - - 20,876 44,833 -------------- -------------- -------------- ------------ Net cash provided by operating activities 45,437 35,294 42,247 87,258 -------------- -------------- -------------- ------------ Cash Flows From Investing Activities Investment in property and equipment (54,923) (60,476) (61,460) (75,523) Acquisition of operating hotels - - - (5,550) Distribution of Choice - - (4,166) - Proceeds from sale of property and equipment 36,950 5,864 170 2,522 -------------- -------------- -------------- ------------ Net cash utilized by continuing operations (17,973) (54,612) (65,456) (78,551) Net cash utilized by discontinued operations - - (118,474) (15,864) -------------- -------------- -------------- ------------ Net cash utilized by investing activities (17,973) (54,612) (183,930) (94,415) -------------- -------------- -------------- ------------ Cash Flows From Financing Activities Proceeds from mortgages and other long term debt 10,000 25,000 16,023 208,000 Proceeds from note payable to Choice Hotels International, Inc. - - 115,000 - Principal payments of debt (11,715) (5,256) (92,171) (1,157) Principal payments on notes payable to Manor Care, Inc. - - (37,022) (110,000) Payment of financing fees - - - (3,959) Payment of prepayment penalty (772) (439) - (1,891) Proceeds from issuance of common stock 1,303 359 1,153 3,410 Purchases of treasury stock (27,428) (2,141) (10,554) (53,150) Payable to Choice Hotels International, Inc. for net worth guarantee - - 15,000 - Advances to Manor Care, Inc., net - - - (9,971) -------------- -------------- -------------- ------------ Net cash (utilized by) provided by continuing operations (28,612) 17,523 7,429 31,282 Net cash provided by (utilized by) discontinued operations - - 129,337 (17,839) -------------- -------------- -------------- ------------ Net cash (utilized by) provided by financing activities (28,612) 17,523 136,766 13,443 -------------- -------------- -------------- ------------ Net change in cash and cash equivalents (1,148) (1,795) (4,917) 6,286 Cash and cash equivalents at beginning of period 4,113 5,908 10,825 4,539 -------------- -------------- -------------- ------------ Cash and cash equivalents at end of period $ 2,965 $ 4,113 $ 5,908 $ 10,825 ============== ============== ============== ============ Cash and cash equivalents of continuing operations $ 2,965 $ 4,113 $ 5,908 $ 7,033 Cash and cash equivalents of discontinued operations $ - $ - $ - $ 3,792
The accompanying notes are an integral part of these consolidated statements of cash flows. 25 SUNBURST HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands, except shares)
Accumulated Additional Other Common Stock Paid-in- Comprehensive Retained Treasury Comprehensive --------------------- Shares Amount Capital Income Earnings Stock Income ----------- --------- ----------- ------------- ----------- ----------- ------------- Distribution from Manor Care, Inc. 63,081,129 $ 631 $ 162,512 $ (1,750) $ - $ - $ - Net income 40,880 40,880 Transfer of net income to Manor Care, Inc. (23,805) Exercise of stock options 781,542 8 4,651 Translation adjustment (5,268) (5,268) ------------- Comprehensive income $ 35,612 ============= Treasury purchases (3,697,724) (53,372) ----------- -------- ----------- ---------- --------- -------- Balance, May 31, 1997 60,164,947 $ 639 $ 167,163 $ (7,018) $ 17,075 $(53,372) ----------- -------- ----------- ---------- --------- -------- Net income $ 16,085 $ 16,085 Adjustment to Nov. 1, 1996 distribution from Care Inc. (1,044) Exercise of stock options 202,386 2 1,910 Issuance of stock 13,786 65 Treasury purchases (588,931) (10,554) Translation adjustment (1,644) (1,644) ------------- Comprehensive Income $ 14,441 ============= Distribution of Franchising 8,662 (48,662) One-for-three reverse stock split on October 15, 1997 (39,845,146) (398) 398 ----------- -------- ----------- ---------- --------- -------- Balance, December 31, 1997 19,947,042 $ 243 $ 169,536 $ - $ (16,546) $ (63,926) ----------- -------- ----------- ---------- --------- -------- Net income 3,380 Sale of MainStay brand option to Choice Hotels International, Inc. 9,953 Exercise of stock options 79,414 1 1,926 Issuance of stock 89,962 216 Treasury purchases (510,412) (2,146) ----------- -------- ----------- ---------- --------- -------- Balance, December 31, 1998 19,606,006 $ 244 $ 171,462 $ - $ (3,213) $ (65,856) ----------- -------- ----------- ---------- --------- -------- Net income 5,936 Exercise of stock options 105,663 1 1,388 Issuance of stock 497,345 513 Treasury purchases (5,400,954) (27,428) ----------- -------- ----------- ---------- --------- -------- Balance, December 31, 1999 14,808,060 $ 245 $ 173,363 $ - $ 2,723 $ (93,284) =========== ======== =========== ========== ========= ========
The accompanying notes are an integral part of these consolidated statements of stockholders' equity and comprehensive income. 26 SUNBURST HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1999 AND 1998 1. Summary of Significant Accounting Policies Basis of Presentation On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to proceed with the separation of its lodging business from its health care business through a spin-off of its lodging business (the "Manor Care Distribution"). On September 30, 1996, the Board of Directors of Manor Care declared a special dividend to its shareholders of one share of common stock of Choice Hotels International Inc. (the "Company") for each share of Manor Care stock, and the Board of Directors set the Record Date and the Distribution Date. The Manor Care Distribution was made on November 1, 1996 to holders of record of Manor Care's common stock on October 10, 1996. The Manor Care Distribution separated the lodging and health care businesses of Manor Care into two public corporations. At that time, the operations of the Company consisted principally of the hotel franchise operations and the owned and managed domestic and European hotel operations formerly conducted by Manor Care directly or through its subsidiaries (the "Lodging Business"). On November 1, 1996, concurrent with the Manor Care Distribution, the Company changed its name from Choice Hotels Holdings, Inc. to Choice Hotels International, Inc. and the Company's franchising subsidiary, formerly named Choice Hotels International, Inc., changed its name to Choice Hotels Franchising, Inc. ("Choice"). On April 29, 1997, the Company's Board of Directors announced its intention to separate the Company's franchising business from its owned, domestic hotel business. On September 16, 1997 the Board of Directors and shareholders of the Company approved the separation of the businesses through a Spin-off of the franchising business, along with the Company's European hotel and franchising operations, to its shareholders (the "Distribution"). The Board of Directors set October 15, 1997 as the date of distribution and on that date, Company shareholders received one share in Choice (renamed "Choice Hotels International, Inc.") for every share of Company stock held on October 7, 1997 (the date of record). Concurrent with the October 15, 1997 distribution date, the Company changed its name to Sunburst Hospitality Corporation and effected a one-for- three reverse stock split of its common stock. In connection with the Spin-off of the franchising business, the Company has presented the franchising business as a discontinued operation in the accompanying consolidated financial statements. Although the Company's European hotel operations were distributed to shareholders along with the franchising business, generally accepted accounting principles do not permit presenting this operation as discontinued. Therefore, the European hotel operations are included in continuing operations. The following tables illustrate the impact of the European hotel operations on the continuing operations of the Company (in thousands).
Seven months ended Domestic hotel European hotel Continuing December 31, 1997 operations operations operations - ----------------------------------------------------------------------------------------------- Revenues $107,574 $ 6,979 $114,553 Operating expenses 98,169 6,574 104,743 -------------------------------------------------------- Operating income 9,405 405 9,810 -------------------------------------------------------- Interest expense 9,800 338 10,138 -------------------------------------------------------- Pretax (loss) income (395) 67 (328 Income tax (benefit) expense (71) 27 (44) -------------------------------------------------------- Net (loss) income from continuing operations $ (324) $ 40 $ (284) ========================================================
27
Fiscal year ending Domestic hotel European hotel Continuing May 31, 1997 operations operations operations - --------------------------------------- -------------------- ------------------ --------------- Revenues $168,016 $ 17,737 $185,753 Operating expenses 140,468 17,554 158,022 ------------------------------------------------------- Operating income 27,548 183 27,731 ------------------------------------------------------- Interest expense 14,899 992 15,891 ------------------------------------------------------- Pretax income (loss) 12,649 (809) 11,840 Income tax expense (benefit) 5,355 (320) 5,035 ------------------------------------------------------- Net income (loss) from continuing operations $ 7,294 $ (489) $ 6,805 =======================================================
Fiscal Year In October 1997, the Company changed its fiscal year end from May 31 to December 31. Therefore, the period ending December 31, 1997 includes seven months of operations. The following table presents the Company's results of operations for the full calendar year 1997 (unaudited, in thousands, except per share data).
Calendar Year 1997 -------------------------------------------------------- (Unaudited) Domestic hotel European hotel Continuing operations operations operations ----------------- ----------------- ----------------- Revenues $180,052 $13,741 $ 193,793 Operating expenses 135,388 12,401 147,789 Depreciation and amortization 22,142 1,399 23,541 ------------------------------------------------------- Operating income (loss) 22,522 (59) 22,463 Interest expense 16,461 724 17,185 ------------------------------------------------------- Pretax income (loss) from continuing operations 6,061 (783) 5,278 Income tax expense (benefit) 2,629 (310) 2,319 ------------------------------------------------------- Income (loss) from continuing operations $ 3,432 $ (473) $ 2,959 ======================================================= Earnings (loss) per share: Basic $ 0.17 $ (0.02) $ 0.15 =======================================================
Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Pre-opening Costs In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities" (the "SOP"). The SOP was adopted by the Company effective January 1, 1999 and required that costs related to start-up activities be expensed as incurred. Initial application of the SOP is reported as a cumulative effect of a change in accounting principle for the year ended December 31, 1999. Prior to the adoption of the SOP, pre-opening costs of an operating nature incurred were deferred and amortized over two years for hotels opened prior to November 1, 1996 and one year for hotels opened after that date. Such costs, which were included in other assets, amounted to $724,000, net of accumulated amortization, at December 31, 1998. If the Company would have adopted this SOP on January 1, 1998, the effect would have been to increase income from continuing operations by approximately $274,000 for the year ended December 31, 1998, and to decrease net 28 income for the year by approximately $420,000, as a result of a charge for the cumulative effect of a change in accounting principle of $694,000 (net of taxes). Real Estate The components of real estate are as follows: December 31, December 31, 1999 1998 ---------------- ------------- Land $ 61,397 $ 56,007 Buildings 295,414 281,821 Furniture, fixtures and equipment 87,016 77,127 Hotels under construction 14,100 31,962 ---------------- ------------- 457,927 446,917 Less: accumulated depreciation (98,669) (83,894) ---------------- ------------- $ 359,258 $ 363,023 ================ ============= Depreciation has been computed for financial reporting purposes using the straight-line method. A summary of the ranges of estimated useful lives upon which depreciation rates have been based follows: Building and improvements 10-40 years Furniture, fixtures and equipment 3-20 years Self-Insurance Program Prior to the Manor Care Distribution, the Company participated in Manor Care's self-insurance program for certain levels of general and professional liability, automobile liability and workers' compensation coverage. All self-insurance liabilities through November 1, 1996, were assumed by Manor Care. Subsequent to the Manor Care distribution, the Company has maintained its own insurance program, which includes certain levels of retained risk. Estimated costs are accrued at present values based on actuarial projections for known and anticipated claims. Impairment Policy The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value of the asset and fair value. Real estate held for sale is recorded based on its estimated fair value less cost to sell. Capitalization Policies The Company capitalizes interest costs and property taxes incurred during the construction of capital assets. The Company capitalized $1.3 million and $2.4 million in interest costs for the years ended December 31, 1999 and 1998, respectively. Maintenance, repairs and minor replacements are charged to expense as incurred. Impact of New Accounting Pronouncements The Company is required to adopt Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," in 2000. As the Company does not routinely use derivative instruments, the standard will not have a material impact on the consolidated financial statements of the Company. 29 Stock-based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. In the event the stock options are issued at an exercise price below the market price, compensation expense is recorded ratably over the vesting period for the options issued at a discount. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to make certain disclosures as if the fair value based method of accounting had been applied to the Company's stock option grants (see Note 9). Reclassifications Certain amounts previously presented have been reclassified to conform to the December 31, 1999 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Income Taxes The Company was included in the consolidated Federal income tax returns of Manor Care prior to the Manor Care Distribution. Subsequent to November 1, 1996, the Company is a separate taxpayer and files its own tax returns. The income tax provision included in these consolidated statements reflects the historical income tax provision and temporary differences attributable to the operations of the Company on a separate return basis. Deferred taxes are recorded for the tax effect of temporary differences between book and tax income. Income before income taxes from continuing operations was derived from the following (in thousands):
For the year For the year For the seven For the fiscal ended ended months ended year ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ----------------- ---------------- ------------------ ---------------- Income (loss) from continuing operations before income taxes Domestic operations $ 12,411 $ 6,251 $ (395) $ 12,649 Foreign operations - - 67 (809) ---------------- --------------- ----------------- --------------- Income (loss) before income taxes $ 12,411 $ 6,251 $ (328) $ 11,840 ================ =============== ================= ===============
The provision for income taxes for continuing operations (in thousands):
For the year For the year For the seven For the fiscal ended ended months ended year ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ---------------- ---------------- ---------------- --------------- Current tax expense (benefit) Federal $ 210 $ 1,723 $ 621 $ 2,583 Foreign operations - - 27 (320) State 468 386 134 292
30 Deferred tax expense (benefit) Federal 3,989 371 (680) 2,048 Foreign operations - - - - State 437 83 (146) 432 ---------------- ---------------- --------------- --------------- $ 5,104 $ 2,563 $ (44) $ 5,035 ================ ================ =============== ===============
Deferred tax liabilities were composed of the following (in thousands): December 31, 1999 1998 ------------- ------------- Depreciation and amortization $ (8,372) $ (2,667) Accrued expenses 3,493 2,428 Other (489) (1,113) ----------- ----------- Net deferred tax liability $ (5,368) $ (1,352) =========== =========== A reconciliation of income tax expense (benefit) at the statutory rate to income tax expense included in the accompanying consolidated statements follows (in thousands, except Statutory Federal income tax rate):
For the year For the year For the seven For the fiscal ended ended months ended year ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ----------------- ----------------- ------------------ ---------------- Statutory Federal income tax rate 35% 35% 35% 35% Federal taxes at statutory rate $ 4,344 $ 2,188 $ (115) $ 4,144 State income taxes, net of Federal tax benefit 588 305 (4) 573 Other 172 70 75 318 ---------------- ---------------- ---------------- --------------- Income tax expense (benefit) $ 5,104 $ 2,563 $ (44) $ 5,035 ================ ================ ================ ===============
Cash paid for state income taxes was $972,000, $1,262,000, $486,000 and $805,000 for the years ended December 31, 1999 and 1998, the seven months ending December 31, 1997 and the fiscal year ending May 31, 1997, respectively. The Company paid Federal income taxes of $4,650,000 and $2,055,000 for the years ended December 31, 1999 and 1998, respectively. At December 31, 1999, the Company had an income tax receivable of $2.1 million. 2. Accrued Expenses Accrued expenses were as follows (in thousands): December 31, ------------------------------- 1999 1998 ------------ ------------- Payroll $ 4,887 $ 5,534 Taxes, other than income 4,108 4,331 Other 6,415 6,354 ------------ ------------- $ 15,410 $ 16,219 ============ ============= 31 3. Long-Term Debt and Notes Payable Debt consisted of the following at December 31, 1999 and 1998 (in thousands):
December 31, ------------------------------------ 1999 1998 ------------------ ---------------- $80.0 million revolving Credit Facility with an average rate of 7.96% and 7.68% at December 31, 1999 and 1998, respectively $ 51,000 $ 41,000 Multi-class mortgage pass-through certificates with a blended weighted average rate of 7.8% at December 31, 1999 and 1998 98,821 110,913 Note payable to Choice Hotels International with an effective rate of 10.60% at December 31, 1999 and 1998 141,856 127,849 Capital lease obligations 1,986 1,427 ----------------- --------------- Total indebtedness $ 293,663 $ 281,189 ================= ===============
Maturities of debt at December 31, 1999 were as follows (in thousands):
Subordinated Capital Year Senior Debt Debt Leases Total - ---- ----------- ---- ------- ----- 2000 $ 54,144 $ - $ 730 $ 54,874 2001 3,397 - 1,006 4,403 2002 3,670 141,856 250 145,776 2003 3,964 - - 3,964 2004 4,282 - - 4,282 Thereafter 80,364 - - 80,364 -------------- -------------- ------------- -------------- Total $ 149,821 $ 141,856 $ 1,986 $ 293,663 ============== ============== ============= ==============
On April 23, 1997 the Company, through its indirect subsidiary First Choice Properties Corporation, completed an offering of $117.5 million multi-class mortgage pass through certificates (collectively, "the CMBS debt"). The CMBS debt, which carries a blended, weighted average interest rate of 7.8% and has a final maturity of May 5, 2012, contain customary covenants with respect to, among other things, limits on levels of indebtedness, liens, certain investments, transactions with affiliates, asset sales, mergers, consolidations, and transfers of cash to affiliates. Restricted net assets related to the CMBS debt were $27.5 million and $31.3 million as of December 31, 1999 and 1998, respectively. The Company had $1.9 million and $2.2 million in escrow at December 31, 1999 and 1998, respectively, related to the CMBS debt. The escrow, which is included in other assets, is for property taxes, insurance and capital expenditures of the properties collateralizing the CMBS debt. The CMBS debt is non-recourse and is collateralized by 28 hotels owned by the Company. The offering's net proceeds of $110 million were used to prepay a portion of a loan from Manor Care. The prepayment resulted in an extraordinary loss from early debt redemption of $1.1 million, net of taxes, in the fiscal year ended May 31, 1997. During 1998, the sale of one of the collateralized hotels resulted in a prepayment of CMBS debt in the amount of $2.2 million and a prepayment penalty. During 1999, the sale of five collateralized hotels resulted in a prepayment of CMBS debt in the amount of $9.2 million and a prepayment penalty. These prepayments resulted in extraordinary losses of $772,000 and $308,000, net of tax, for the years ended December 31, 1999 and 1998, respectively. 32 In conjunction with the April 1997 issuance of the CMBS debt, the Company entered into a series of interest rate swap agreements having a total notional principal amount of $50.0 million. The agreements were terminated concurrent with the pricing of the mortgage securities, resulting in a $862,000 gain. The gain has been deferred and is being amortized over the life of the mortgage securities as an offset to interest expense. The Company entered into two debt facilities in October 1997 in connection with the distribution: (i) a $80.0 million revolving Credit Facility (the "October 1997 Credit Facility"); and (ii) a $115.0 million pay-in-kind note payable to Choice (the "Choice Note"). Proceeds from the new debt were used to repay the Company's remaining portion of the loan from Manor Care and the outstanding balance of its revolving Credit Facility, and for advances previously made by Choice to the Company. The unused portion of the October 1997 Credit Facility will be used by the Company for working capital, capital expenditures and acquisitions. The October 1997 Credit Facility expires in October 2000 and includes customary financial and other covenants that will require the maintenance of certain ratios including maximum leverage, minimum net worth and interest coverage. Additional covenants restrict the Company's ability to make certain investments, repurchase stock, incur debt, and dispose of assets. Availability under the October 1997 Credit Facility is a function of trailing cash flow. At the Company's option, the interest rate may be based on LIBOR, a certificate of deposit rate or an alternate base rate (as defined), plus a facility fee. The rate is determined based on the Company's consolidated leverage ratio at the time of borrowing. At December 31, 1999, the Company had the full $80.0 million of availability under the October 1997 Credit Facility, resulting in excess borrowing capacity of $29.0 million. The Company and the banks participating in the October 1997 Credit Facility have entered into negotiations to extend its expiration date. The Choice Note has a maturity of five years from October 1997 and accrues simple interest at a rate equal to 500 basis points above the interest rate on a five-year U.S. Treasury Note, resulting in an effective rate of 8.8% through December 28, 1998. In December 1998, the Choice Note terms were amended providing that the Choice Note will accrue interest at a rate of 11.0% per annum compounded daily on principal and unpaid interest beginning on October 15, 2000. As a result of the amendment, the Company began accruing interest at the effective rate of the note of 10.6%. The Choice Note contains restrictive covenants that restrict or limit the ability of the Company to merge or consolidate with any other person or entity unless the Company is the surviving entity, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Cash paid for interest was $12.8 million, $9.9 million, $10.7 million, and $14.8 million for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and fiscal year ended May 31, 1997, respectively. At December 31, 1999 and 1998, real estate property with a net book value of $124.9 million and $138.6 million, respectively, was pledged or mortgaged as collateral. 4. Leases The Company operates certain property and equipment under leases that expire at various dates through 2014. Future minimum lease payments are as follows (in thousands): Operating Capital Leases Leases ------------- ------------- 2000 $ 1,231 $ 825 2001 1,258 1,173 2002 1,103 250 2003 825 - 2004 850 - Thereafter 21,417 - ------------ ------------ Total minimum lease payments $ 26,684 2,248 ============ Less: interest (262) ------------ Present value of lease payments $ 1,986 ============ 33 Rental expense under non-cancelable operating leases was $789,000, $1.9 million, $1.9 million and $329,000 in the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997, and the fiscal year 1997, respectively. For the year ended December 31, 1998 and the seven months ended December 31, 1997, the Company paid $2.5 million and $2.9 million, respectively, to Manor Care for office rent, of which Choice reimbursed the Company $1.0 million each of the respective years for its portion of the total space occupied. In February 1999, the Company entered into a release agreement with Manor Care which effectively terminated all inter-company service, consulting and lease agreements. 5. Acquisitions and Divestitures During 1999, the Company sold eleven hotels containing 1,343 rooms for $37 million. During 1998, the Company sold two hotels containing 193 rooms for $4.5 million and two parcels of unimproved land for $1.6 million. During fiscal year 1997, the Company acquired two hotels containing 324 rooms for $10.7 million and disposed of one hotel containing 153 rooms for $2.5 million. In addition to the eleven hotels sold in 1999, the Company has seven hotels that are currently being marketed for sale with a carrying value of $34.5 million as of December 31, 1999. The Company anticipates the sale of the properties to be completed during 2000. In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company has discontinued depreciating these assets while they are held for sale. In addition, SFAS No. 121 requires that assets held for sale be reported at the lower of the carrying amount or the fair value less costs to sell. At December 31, 1999, the assets held for sale are reported at the lower of the carrying amount or the fair value less costs to sell. The seven hotels held for sale reported total revenues of $23.7 million for the year ended December 31, 1999. Income from operations before interest, taxes, depreciation and amortization and allocations for corporate expenses of the seven hotels was $5.3 million for the year ended December 31, 1999. 6. Discontinued Operations The revenues, income from discontinued hotel franchise operations before income taxes, and net income from discontinued hotel franchise operations were as follows (in thousands): Seven months Fiscal year ended ended December 31, May 31, 1997 1997 -------------- ------------- Revenue $ 112,286 $ 249,822 Expenses 84,092 189,438 -------------- ------------- Income from discontinued operations before income taxes 28,194 60,384 Income taxes 11,825 25,165 -------------- ------------- Net income from discontinued Operations $16,369 $35,219 ============== ============= Net income from discontinued hotel franchise operations for the seven months ended December 31, 1997 includes the results of operations of the franchising business through October 15, 1997 and costs associated with the distribution of $1.9 million (net of taxes). 7. Commitments and Contingencies The Company is a defendant in a number of lawsuits arising in the ordinary course of business. In the opinion of management and legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on the Company's business, financial position, or results of operations. 34 8. Pension, Profit Sharing and Incentive Plans Bonuses accrued for key executives of the Company under incentive compensation plans were $1.1 million, $1.1 million, $357,000 and $200,000 for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and in fiscal year ended May 31, 1997, respectively. Employees participate in retirement plans sponsored by the Company, and prior to the Manor Care Distribution, employees participated in retirement plans sponsored by Manor Care. Costs allocated to the Company were based on the size of its payroll relative to the sponsor's payroll. Retirement costs were approximately $111,000, $506,000, $217,000 and $800,000 for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and fiscal year ended May 31, 1997, respectively. 9. Capital Stock On December 8, 1999, the Company's Board of Directors approved a plan for the Company to repurchase up to 3.5 million shares of common stock. The 3.5 million shares approved is in addition to the 2.5 million shares approved by the Company's Board of Directors on September 16, 1998. During the year ended December 31, 1999, the Company repurchased 5.4 million shares of its common stock at a total cost of $27.4 million. During the year ended December 31, 1998, the Company repurchased 510,412 shares of its common stock at a total cost of $2.1 million. On February 23, 1998, the Board of Directors adopted a shareholder rights plan under which a dividend of one preferred stock purchase right will be distributed for each outstanding share of the Company's common stock to shareholders of record on April 3, 1998. Each right will, upon exercise, entitle the holder to buy 1/100th of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of $50 per share. The rights are exercisable, subject to certain exceptions, after a person or group acquires beneficial ownership of 10% or more of the Company's common stock (such a person or group, an "Acquiring Person"), or begins a tender or exchange offer that would result in a person or group becoming an Acquiring Person. The rights are non-voting and expire on January 31, 2008, unless exercised or previously redeemed by the Company for $.001 each. If the Company is involved in a merger or certain other business combinations not approved by the Board of Directors, each right will entitle its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right. At December 31, 1999, the Company had 254,062 shares authorized under its stock option program. Stock options may be granted to officers, key employees and non- employee directors with an exercise price not less than the fair market value of the common stock on the date of grant. Option activity under the above plans is as follows:
Number of Weighted Shares Option Price ----------------- ---------------- Outstanding at May 31, 1997 4,949,032 $3.02 Adjustment as a result of the Distribution (2,687,141) Granted 552,441 8.04 Exercised (202,386) 2.03 Cancelled (30,241) 4.94 ---------------- ---------------- Outstanding at December 31, 1997 2,581,705 5.67 Granted 442,536 6.57 Exercised (79,414) 1.80 Cancelled (114,458) 7.29 ---------------- ---------------- Outstanding at December 31, 1998 2,830,369 5.88 Granted 10,000 5.00 Exercised (105,663) 1.80 Cancelled (154,325) 6.92 ---------------- ---------------- Outstanding at December 31, 1999 2,580,381 $5.99 ================ ================
35 In connection with the Distribution, the outstanding options held by current and former employees of the Company as of October 15, 1997 were redenominated in both Company and Choice stock, and the number and exercise prices of the options were adjusted based on the relative trading prices of shares of the common stock of the two companies to retain the intrinsic value of the options. The option prices for the period prior to May 31, 1997 in the table above have been adjusted for the reverse stock split. The following table provides information on the exercise prices of options outstanding at December 31, 1999:
Number of Weighted Weighted Average Number of Exercise Price Options Average Contractual Life Options Currently Range Outstanding Exercise Price (in years) Exercisable ----- ----------- -------------- ---------- ----------- $ 1.79 to $ 2.00 69,323 $1.79 .69 69,323 2.01 to 3.50 329,655 2.75 1.89 262,335 3.51 to 5.50 400,374 4.35 3.79 225,950 5.51 to 8.50 1,672,430 6.98 6.98 811,193 8.51 to 10.00 108,599 9.23 7.72 35,676 --------------- ----------------- 2,580,381 1,404,477 =============== =================
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"), requires companies to provide additional disclosures about employee stock-based compensation plans based on a fair value based method of accounting. As permitted by this accounting standard, the Company continues to account for these plans under Accounting Principles Board Opinion 25, under which no compensation cost has been recognized. For the purpose of these disclosures required by SFAS No. 123, compensation cost for the Company's stock option plan was determined based on the fair value at the grant dates for awards under those plans. The fair value of each option grant has been estimated on the date of grant using an option-pricing model. For the years ended December 31, 1999 and 1998, the Company assumed a risk free interest rate of 6.4% and 4.7%, respectively, expected volatility of 38.2% and 34.5%, respectively, a dividend yield of 0% and expected lives of ten years from the date of grant. The weighted average fair value per option granted during the year ended December 31, 1999 and 1998 was $2.66 and $4.16, respectively. If options had been reported as compensation expense based on their fair value pro forma, net income and earnings per share would have been as follows for the years ended December 31, 1999 and 1998. For the year ended For the year ended December 31, 1999 December 31, 1998 ------------------------------------------- Net income: As reported $ 5,936 $ 3,380 Pro forma $ 4,905 $ 2,352 Earnings per share: Basic, as reported $ 0.31 $ 0.17 Basic, pro forma $ 0.26 $ 0.12 Diluted, as reported $ 0.31 $ 0.17 Diluted, pro forma $ 0.25 $ 0.12 10. Earnings Per Share from Continuing Operations The following table illustrates the reconciliation of income from continuing operations and number of shares used in the calculation of basic and diluted earnings per share from continuing operations (in thousands, except per share amounts). 36
For the seven For the fiscal months ended year ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ----------------- ---------------- ----------------- ---------------- Computation of basic earnings per share from continuing operations: Income from continuing operations before extraordinary item and cumulative effect of a change in accounting principle $ 7,307 $ 3,688 $ (284) $ 6,805 Weighted average shares outstanding 19,036 19,956 19,979 20,893 ---------------- --------------- ---------------- --------------- Basic earnings per share from continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 ================ =============== ================ =============== Computation of diluted earnings per share from continuing operations: Income from continuing operations before extraordinary item and cumulative effect of a change in accounting principle $ 7,307 $ 3,688 $ (284) $ 6,805 Weighted average shares outstanding 19,036 19,956 19,979 20,893 Effect of dilutive securities: Employee stock option plan 210 320 1,052 298 ---------------- --------------- ---------------- --------------- Shares for diluted earnings per share 19,246 20,276 21,031 21,191 ---------------- --------------- ---------------- --------------- Diluted earnings per share from continuing operations $ 0.38 $ 0.18 $ (0.01) $ 0.32 ================ =============== ================ ===============
The effect of dilutive securities is computed using the treasury stock method and average market prices during the period. Certain options to purchase common stock were not included in the computation of diluted earnings per share because the exercise price of the options exceeded the average market price of the common shares for the period. The following table summarizes such options. December 31, December 31, 1999 1998 ------------- ------------- Number of shares (in thousands) 1,834 1,734 Weighted average exercise price $ 7.08 $ 7.28 Earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding is after giving effect to the one for three reverse stock split. Because the Company's continuing operations had a net loss for the seven months ended December 31, 1997, diluted earnings per share was not calculated as any potentially dilutive securities would have an anti-dilutive effect on earnings per share from continuing operations. 11. Relationship with Manor Care The Company entered into various agreements in connection with the Manor Care Distribution which provided for various service, consulting and lease arrangements and tax sharing commitments. For the year ended December 31, 1998, the Company incurred $1.3 million in rent expense for office space leased from Manor Care and $2.0 million in corporate expense for corporate services provided by Manor Care. In February 1999, the Company entered into a release agreement with Manor Care which effectively terminated all inter-company service, consulting and lease agreements. 37 12. Relationship with Choice Hotels International, Inc. For purposes of providing an orderly transition after the Distribution, the Company and Choice entered into various agreements, including, among others, a Distribution Agreement, a Tax Sharing Agreement, a Corporate Services Agreement and an Employee Benefits Allocation Agreement. Effective as of October 15, 1997, these agreements provide, among other things, that the Company (i) would receive and/or provide certain corporate and support services, such as accounting, tax and computer systems support, (ii) would adjust outstanding options to purchase shares of Company common stock held by Company employees, Choice employees, and employees of Manor Care, (iii) is responsible for filing and paying the related taxes on consolidated Federal tax returns and consolidated or combined state tax returns for itself and any of its affiliates (including Choice) for the periods of time that the affiliates were members of the consolidated group, (iv) would be reimbursed by Choice for the portion of income taxes paid that relate to Choice and its subsidiaries, (v) would enter into a five-year loan agreement with Choice for $115.0 million at an interest rate of 500 basis points over the interest rate of a five-year U.S. Treasury Note, and (vi) guarantees that Choice would, at the date of distribution, have a specified level of net worth. At December 31, 1997, approximately $25 million of liabilities were due to Choice that related to the net worth guarantee. This liability related to the net worth guarantee and the reimbursement of various expenses subsequent to the distribution date. On December 28, 1998, the Company and Choice entered into an agreement to amend a prior strategic alliance agreement and amend the Choice Note. The amendment provided for, among other things, (i) the elimination of the Company's option to purchase the MainStay Suites Hotel system from Choice in exchange for the satisfaction of $16.5 million of the remaining $19.5 million payable to Choice; (ii) waiver of liquidated damage provisions on all franchising agreements entered into prior to December 28, 1998 (excluding MainStay Suites or Sleep Inns) and limitation of liquidated damages on all other franchise agreements to $100,000; (iii) commitment by the Company to develop a total of 25 MainStay Suites hotels by October 2001; (iv) an increase in the effective interest rate of the Note during its final two years and (v) credits for royalty, marketing and reservation fees. During 1999, the Company recorded $1.9 million of credits against franchise fees, which are favorably impacting undistributed operating expenses. In conjunction with this agreement, the Company paid the remaining $3.0 million due to Choice for the net worth guarantee. The satisfaction of the Choice payable, net of tax, is reflected as a credit to equity, during 1998, as an adjustment to the accounting for the Distribution. The Company operates substantially all of its hotels pursuant to franchise agreements with Choice. Total fees paid to Choice included in the accompanying consolidated financial statements for franchising marketing, reservation and royalty fees are $10.2 million, $11.5 million, $6.2 million and $9.5 million for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997. 13. Fair Value of Financial Instruments The balance sheet carrying amount of cash and cash equivalents and receivables approximate fair value due to the short term nature of these items. Mortgages and other long-term debt consist of bank loans and mortgages. The interest rate on the October 1997 Credit Facility adjusts frequently based on market rates; accordingly, the carrying amount is equivalent to fair value. At December 31, 1999, the fair value of the Choice Note and the mortgage securities is $135.0 million and $98.9 million, respectively, based on rates for similarly structured instruments. At December 31, 1998, the carrying amount of the Choice note and the mortgage securities approximated fair value. 14. Provision for Asset Impairment and Other Non-Recurring Charges The Company recognized a provision for asset impairment and other non-recurring charges of $4.3 million (pre-tax) in the year ended December 31, 1998. Included in the provision is a $4.0 million asset impairment charge related to certain hotels held for sale and $300,000 in non-recurring charges. Non-recurring charges includes a restructuring charge of $146,000 to account for a reduction in force at the Company's corporate headquarters. The restructuring charge includes transition pay and benefits of the twelve employees terminated. Benefits totaling $109,000 have been paid and charged against the liability through December 31, 1998. There was no provision for asset impairment or other non-recurring charges recorded during the year ended December 31, 1999. 38 15. Geographic and Business Segment Information The Company operates in one business segment, hotel ownership. The Company's hotels are operated under Choice Hotels International, Inc. brands, contain an average of 140 rooms, and supply other amenities such as meeting space, a variety of restaurants and lounges, gifts shops and swimming pools. They are typically located in suburban locations. The Company evaluates the performance of its segment based primarily on operating profit before depreciation, corporate expenses, and interest expense. The following table presents segmented financial information, (in thousands):
For the year ended December 31, 1999 --------------------------------------------------------------- Hotels Corporate & Other Consolidated --------------------------------------------------------------- Revenues........................................ $209,986 $ 50 $ 210,036 Operating income................................ 34,086 3,002 37,088 Interest expense................................ - 24,677 24,677 Depreciation and amortization................... - 26,240 26,240 Capital expenditures............................ - 54,923 54,923 Total assets.................................... 406,750 6,439 413,189 For the Year Ended December 31, 1998 --------------------------------------------------------------- Hotels Corporate & Other Consolidated --------------------------------------------------------------- Revenues........................................ $203,822 $ 274 $ 204,096 Operating income................................ 33,636 (6,629) 27,007 Interest expense................................ - 20,756 20,756 Depreciation and amortization................... - 26,983 26,983 Capital expenditures............................ - 60,476 60,476 Total assets.................................... 419,661 2,850 422,511
16. Summary of Quarterly Results (unaudited)
Operating Net Income Basic Diluted Quarters ended Revenues (1) Income (2) (loss) EPS EPS --------------------------------------------------------------------- (in thousands, except per share data) 1999 March 31, 1999 $ 50,272 $ 8,610 $ 811 $ 0.04 $ 0.04 June 30, 1999 55,706 11,687 2,889 0.15 0.15 September 30, 1999 56,771 12,711 3,512 0.19 0.18 December 31, 1999 47,287 4,080 (1,276) (0.07) (0.07) 1998 March 31, 1998 $ 46,139 $ 6,181 $ 708 $ 0.04 $ 0.03 June 30, 1998 54,440 9,271 2,358 0.12 0.12 September 30, 1998 56,320 6,315 448 0.02 0.02 December 31, 1998 47,197 5,240 (134) (0.01) (0.01)
(1) Revenues reflect revenues from continuing operations. (2) Operating income reflects income from continuing operations before interest expense, income taxes and extraordinary items. 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The required information on directors is included on pages 6-8 of the Proxy Statement dated April 10, 2000 and is incorporated herein by reference. The required information on executive officers is set forth in Part I of this Form 10-K under an unnumbered item captioned "Executive Officers of Sunburst Hospitality Corporation." Item 11. Executive Compensation. The required information is included on pages 7-14 of the Proxy Statement dated April 10, 2000 and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The required information is included on pages 5-7 of the Proxy Statement dated April 10, 2000 and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The required information is included on pages 14-20 of the Proxy Statement dated April 10, 2000 and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) List of Documents Filed as Part of this Report 1. Financial Statements The Consolidated Financial Statements filed with this Form 10-K are listed in Item 8 above. 2. Financial Statement Schedules The following reports are filed herewith on the pages indicated: Schedule I: Condensed Financial Information..................... p.44 Schedule III: Real Estate and Accumulated Depreciation........... p.48 All other schedules are not applicable. 3. Exhibits 3.01 Restated Certificate of Incorporation of the Registrant* 3.02 Amendments to Restated Certificate of Incorporation* 40 3.03 By-laws of the Registrant* 4.01 Common Stock Certificate* 4.02 Competitive Advance and Multi-Company Facility Agreement between the Registrant and Chase Manhattan Bank dated October 15, 1997 ***** 4.03 Subordinated Note due October 15, 2002 by the Registrant payable to Choice Hotels International, Inc.*** 4.05 Promissory Note dated April 22, 1997 by and between First Choice Properties Corp in favor of QI Capital Corp in the principal amount of $117,500,000**** 4.06 Loan Agreement dated as of April 22, 1997 by and between First Choice Properties Corp and QI Capital Corp.**** 10.01 Distribution Agreement, dated October 31, 1996, between Manor Care, Inc. and the Registrant* 10.02 Corporate Services Agreement between Manor Care, Inc. and the Registrant* 10.03 Office Lease between Manor Care, Inc. and the Registrant* 10.04 Office Lease between Manor Care, Inc. and the Registrant* 10.05 Strategic Alliance Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.06 Non-Competition Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.07 Amended and Restated Agreement dated as of October 15, 1997 by and between the Registrant and Stewart Bainum, Jr.** 10.08 Employment Agreement between the Registrant and James A. MacCutcheon* 10.09 Supplemental Executive Retirement Plan* 10.10 Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan* 10.11 1996 Non-Employee Director Stock Compensation Plan* 10.12 1996 Long-Term Incentive Plan* 10.13 Pikesville Sublease between Manor Care, Inc. and the Registrant* 10.14 Employee Benefits and Other Employment Matters Allocation Agreement between Manor Care, Inc. and the Registrant* 10.15 Distribution Agreement dated as of October 15, 1997 by and between Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.16 Employee Benefits Allocation Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising , Inc. (renamed Choice Hotels International, Inc.)** 10.17 Employee Benefits Allocation Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.18 Tax Administration Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.19 Tax Sharing Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.20 Office Sublease dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.21 Corporate Services Agreement dated as of October 15, 1997 by and between the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)** 10.22 Omnibus Agreement and Guaranty dated as of October 15, 1997 by and among the Registrant, Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.) and Manor Care, Inc. ** 10.23 The Rights Agreement dated February 23, 1998 by and between the Registrant and Chase Mellon Shareholder Services, L.L.C., as Rights Agents***** 10.24 Omnibus Amendment Agreement dated as of December 29, 1998 by and among Registrant and Choice Hotels International, Inc.****** 41 10.25 Second Omnibus Amendment Agreement dates as of February 29, 2000 by and among Registrant and Choice Hotels International, Inc. 21.01 Subsidiaries of the Registrant 23.01 Consent of Arthur Andersen L.L.P. 27.01 Financial Data Schedule 99.01 Proxy Statement dated April 10, 2000 (information incorporated by reference) _____________ * Incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-11915. ** Incorporated by reference to the Company's 8-K dated October 15, 1997, filed October 29, 1997. *** Incorporated by reference to the Company's 8-K dated October 15, 1997, filed December 17, 1997. **** Incorporated by reference to the Company's Registration Form 10-K for the fiscal year ended May 31, 1997, filed August 15, 1997. ***** Incorporated by reference to the Company's 8-K dated February 23, 1998, filed March 11, 1998. ****** Incorporated by reference to Company's 8-K dated December 29, 1998, filed December 31, 1998. (b) Reports on Form 8-K. None 42 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 2000 SUNBURST HOSPITALITY CORPORATION By: /s/ James A. MacCutcheon ----------------------------------- James A. MacCutcheon Executive Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dated indicated. Signature Title Date --------- ----- ---- /s/ Stewart Bainum, Jr. Chairman March 29, 2000 - ------------------------------ Stewart Bainum, Jr. /s/ Donald J. Landry Vice Chairman, Chief Executive March 29, 2000 - ------------------------------ Donald J. Landry Officer and President /s/ Paul A. Gould Director March 29, 2000 - ------------------------------ Paul A. Gould /s/ Leland C. Pillsbury Director March 29,2000 - ------------------------------ Leland C. Pillsbury /s/ Keith B. Pitts Director March 29, 2000 - ------------------------------ Keith B. Pitts /s/ Carole Y. Prest Director March 29, 2000 - ------------------------------ Carole Y. Prest /s/ Christine A. Shreve Director March 29, 2000 - ------------------------------ Christine A. Shreve /s/ Charles G. Warczak, Jr. Vice President, Finance and March 29, 2000 - ------------------------------ Charles G. Warczak, Jr. Systems (Chief Accounting Officer) 43 SCHEDULE I Page 1 of 4 SUNBURST HOSPITALITY CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (In thousands)
December 31, December 31, 1999 1998 --------------- --------------- ASSETS Real estate, net $ 244,983 $ 253,812 Real estate held for sale 23,861 7,698 Receivables, net 4,911 4,620 Net investment in restricted subsidiaries 27,547 31,342 Other assets 3,831 4,914 Cash and cash equivalents 2,243 3,576 --------------- --------------- Total assets $ 307,376 $ 305,962 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Debt $ 194,842 $ 170,292 Accounts payable and accrued expenses 22,537 26,981 Other liabilities 6,950 6,052 --------------- --------------- Total liabilities 224,329 203,325 --------------- --------------- Stockholders' Equity Common stock 245 244 Additional paid-in-capital 173,363 171,462 Retained earnings 2,723 (3,213) Treasury stock, at cost (93,284) (65,856) --------------- --------------- Total stockholders' equity 83,047 102,637 --------------- --------------- Total liabilities and stockholders' equity $ 307,376 $ 305,962 =============== ===============
See accompanying notes to condensed financial statements. 44 SCHEDULE I Page 2 of 4 SUNBURST HOSPITALITY CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (In thousands)
For the year For the year For the year For the seven ended ended ended months ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ----------------- ----------------- ---------------- --------------- Revenues $ 116,959 $ 104,494 $ 55,487 $ 87,262 Operating expenses 79,460 82,480 44,506 69,780 (Net gains on property dispositions)/provision for asset impairment and other non-recurring charges (1,878) 4,264 5,119 - Depreciation and amortization 16,560 17,118 8,561 10,988 Interest expense 16,402 11,549 4,580 6,484 ---------------- ---------------- -------------- --------------- Total expenses 110,544 115,411 62,766 87,252 ---------------- ---------------- -------------- --------------- Income (loss) before income taxes and equity in earnings of restricted subsidiaries 6,415 (10,917) (7,279) 10 Equity in earnings of restricted subsidiaries 5,996 17,168 6,951 11,830 Income tax (benefit) expense 5,104 2,563 (44) 5,035 ---------------- ---------------- -------------- --------------- Income (loss) from continuing operations 7,307 3,688 (284) 6,805 Income from discontinued operations, net of tax - - 16,369 35,219 ---------------- ---------------- ------------- --------------- Net income before extraordinary item 7,307 3,688 16,085 42,024 Extraordinary item -- loss from early extinguishment of debt (net of tax) 772 308 - 1,144 Cumulative effect of a change in accounting principle 599 - - - ---------------- ---------------- -------------- --------------- Net income $ 5,936 $ 3,380 $ 16,085 $ 40,880 ================ ================ ============== ===============
See accompanying notes to condensed financial statements. 45 SCHEDULE I Page 3 of 4 SUNBURST HOSPITALITY CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (In thousands)
For the year For the year For the year For the seven ended Ended ended months ended December 31, December 31, December 31, May 31, 1999 1998 1997 1997 ---------------- -------------- -------------- -------------- Net cash provided by continuing operations $ 30,467 $ 27,411 $ 2,316 $ 20,282 Net cash provided by discontinued operations - - 20,876 46,724 ---------------- -------------- -------------- -------------- Net cash provided from operating activities 30,467 27,411 23,192 67,006 ---------------- -------------- -------------- -------------- Cash flows from investing activities Investment in property and equipment (38,218) (52,735) (51,213) (60,641) Acquisition of operating hotel - - - (5,550) Distribution of Franchising segment - - (4,166) - ---------------- -------------- -------------- -------------- Net cash utilized by continuing operations (38,218) (52,735) (55,379) (66,191) Net cash utilized by discontinued operations - - (118,474) (15,864) ---------------- -------------- -------------- -------------- Net cash utilized by investing activities (38,218) (52,735) (173,853) (82,055) ---------------- -------------- -------------- -------------- Cash flows from financing activities Proceeds from mortgages and other long term debt 10,000 25,000 16,023 90,500 Principal payments of debt - (2,238) (90,694) (951) Repayment of notes payable to Manor Care, Inc. - - (37,022) - Proceeds from note payable to Choice Hotels International - - 115,000 - Proceeds from issuance of common stock 1,303 359 1,153 3,410 Purchases of treasury stock (27,428) (2,141) (10,554) (53,150) Payable to Choice Hotels International, Inc. for net worth guarantee - - 15,000 - Advances from restricted subsidiaries 22,543 3,572 6,503 11,028 Advances to Manor Care, Inc., net - - - (9,971) ---------------- -------------- -------------- -------------- Net cash provided by continuing operations 6,418 24,552 15,409 40,866 Net cash provided by (utilized by) discontinued operations - - 129,337 (19,730) ---------------- -------------- -------------- -------------- Net cash provided by financing activities 6,418 24,552 144,746 21,136 ---------------- -------------- -------------- -------------- Net change in cash and cash equivalents (1,333) (772) (5,915) 6,087 Cash and cash equivalents at beginning of period 3,576 4,348 10,263 4,176 ---------------- -------------- -------------- -------------- Cash and cash equivalents at end of period $ 2,243 $ 3,576 $ 4,348 $ 10,263 ================ ============== ============== ============== Cash and cash equivalents of continuing operations $ 2,243 $ 3,576 $ 4,348 $ 6,471 Cash and cash equivalents of discontinued operations $ - $ - $ - $ 3,791
See accompanying notes to condensed financial statements. 46 SCHEDULE I Page 4 of 4 SUNBURST HOSPITALITY CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Basis of Presentation The accompanying condensed financial information of Sunburst Hospitality Corporation (the "Parent Company") presents the financial condition, results of operations and cash flows of the Parent Company with the investment in and operations of its restricted subsidiary, First Choice Properties Corporation ("First Choice") on the equity method of accounting. Pursuant to the rules and regulations of the Securities and Exchange Commission, the condensed financial statements of the registrant do not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles and the statements should therefore be read in conjunction with the consolidated financial statements and notes thereto included in this Form 10-K. As more fully described in the notes to the Parent Company's consolidated financial statements, the Parent Company distributed its franchising business to its shareholders on October 15, 1997 (distribution date). The accompanying condensed financial information has been stated to reflect the franchising business as discontinued operations through the distribution date. In April 1997, First Choice, an indirect, wholly-owned subsidiary of the Parent Company issued $117.5 million multi-class mortgage pass-through certificates (collectively, "the mortgage securities"). The mortgage securities are non- recourse and collateralized by 28 hotels owned by First Choice. The mortgage securities bear a blended weighted average interest rate of 7.8% and have a final maturity of May 5, 2012. The mortgage securities contain customary covenants with respect to, among other things, limits on the incurrence of debt, liens, certain investments, transactions with affiliates, asset sales, mergers, and consolidations and transfer of cash to affiliates. The accompanying condensed financial statements present the debt of First Choice as a component of net investment in restricted subsidiaries. Prior to the April 1997 issuance of the mortgage securities, the financial statements include the push down effect of $110 million in Manor Care notes payable, as the April 1997 proceeds of the mortgage securities were used to repay the Manor Care notes payable. B. Debt Aggregate debt maturities at December 31, 1999, are (in thousands): 2000 $51,730 2001 1,006 2002 142,106 ------------ Total $194,842 ============ C. Dividends First Choice has never paid dividends to the Parent Company. 47 SCHEDULE III Page 1 of 2 SUNBURST HOSPITALITY CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (In thousands)
Initial cost to Company Subsequent Gross Amount at December 31, 1999 ------------------------- --------------------------------------- Building and Capitalized Asset Buildings and Description Encumbrances Land Improvements Costs Writedowns Land Improvements Total - -------------- --------------------------------------- ------------ ------------ --------- --------------- ---------- All properties, each less than 5% of total $ 98,821 $ 51,275 $ 224,206 $ 85,630 $ (4,300) $ 61,397 $ 295,414 $ 356,811 Accumulated Date of Date Depreciable Description Depreciation Construction Acquired Life - -------------- -------------- -------------- ----------- -------------- All properties, each less than 5% of total $ 62,484 Various Various Various
See accompanying notes to condensed financial statements. 48 SCHEDULE III Page 2 of 2 SUNBURST HOSPITALITY CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (In thousands) (A) The change in total cost of properties for the calendar years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and fiscal year ended May 31, 1997 is as follows: Balance at May 31, 1996 $ 248,736 Additions: Acquisitions 21,278 Capital expenditures 16,363 Transfers from construction-in-progress 3,831 Deductions: Dispositions and other (7,008) ----------- Balance at May 31, 1997 283,200 Additions: Acquisitions - Capital expenditures 22,562 Transfer from construction-in-progress 19,772 Deductions: Dispositions and other (170) ----------- Balance at December 31, 1997 325,364 Additions: Acquisitions - Capital expenditures 6,478 Transfer from construction-in-progress 48,930 Deductions: Dispositions and other (42,944) ---------- Balance at December 31, 1998 337,828 Acquisitions - Capital expenditures 13,540 Transfer from construction-in-progress 86,790 Deductions: Dispositions and other (81,347) ---------- Balance at December 31, 1999 $ 356,811 ========== (B) The change in accumulated depreciation and amortization for the calendar years ended December 31, 1999 and 1998, the seven months ended December 31, 1997, and fiscal year ended May 31, 1997 is as follows: Balance at May 31, 1996 $ 29,817 Depreciation and amortization 8,992 Disposals (2,145) ---------- Balance at May 31, 1997 36,664 Depreciation and amortization 7,247 ---------- Balance at December 31, 1997 43,911 Depreciation and amortization 16,154 Disposals (4,987) ---------- Balance at December 31, 1998 55,078 Depreciation and amortization 12,442 Disposals (5,036) ---------- Balance at December 31, 1999 $ 62,484 ========== 49 (C) The total cost of properties excludes construction-in-progress and European hotels, which were distributed on October 15, 1997 with Franchising. (D) The aggregate cost of properties for Federal income tax purposes is approximately $357 million at December 31, 1999. 50 EX-10.25 2 EXHIBIT 10.25 SECOND OMNIBUS AMENDMENT AGREEMENT THIS SECOND OMNIBUS AMENDMENT AGREEMENT (this "Agreement") is made this 29th day of February, 2000 by and between CHOICE HOTELS INTERNATIONAL, INC., a Delaware corporation ("Choice"), and SUNBURST HOSPITALITY CORPORATION, a Delaware corporation ("Sunburst"). WHEREAS, in connection with the spin-off of Choice by Sunburst (the "Spin-off"), Choice and Sunburst entered into a Strategic Alliance Agreement (the "Strategic Alliance Agreement") dated October 15, 1997 pursuant to which, among other things, the parameters of the operating relationship between Choice and Sunburst with regard to matters of mutual interest are set forth; WHEREAS, in connection with the Spin-off, Choice and Sunburst also entered into a Noncompetition Agreement dated October 15, 1997 (the "Noncompetition Agreement"); WHEREAS, in connection with the Spin-off, Choice and Sunburst entered into a Distribution Agreement dated October 15, 1997 pursuant to which, among other things, Choice agreed to loan to Sunburst $115,000,000 which was evidenced by a subordinated note (the "Term Note") with an aggregate principal amount of $115,000,000 and a maturity date of five years; WHEREAS, the Strategic Alliance Agreement contains a form of Franchising Agreement (the "Franchising Agreement") as Exhibit A to be entered --------- into by and between Choice and Sunburst whenever Choice is to brand any hotel or lodging property of any kind that Sunburst develops or acquires and intends to franchise during the term of the Strategic Alliance Agreement; WHEREAS, Choice and Sunburst have entered into numerous franchising agreements substantially in the form of the Franchising Agreement; WHEREAS, Choice and Sunburst entered into an Omnibus Amendment Agreement (the "First Omnibus Amendment Agreement" and, together with this Agreement, the Strategic Alliance -2- Agreement, the Noncompetition Agreement, the Term Note and the franchising agreements entered into between Franchising and Realco prior to, on or after the date hereof, the "Transaction Documents") dated December 28, 1998, pursuant to which, among other things, Choice and Sunburst agreed to amend the Strategic Alliance Agreement, the Term Note and the aforementioned franchising agreements; WHEREAS, Choice and Sunburst desire to further amend the Strategic Alliance Agreement, the aforementioned franchising agreements and the Term Note; and WHEREAS, Choice and Sunburst desire to terminate the Noncompetition Agreement; NOW, THEREFORE, Choice and Sunburst agree as follows: ARTICLE ONE AMENDMENTS TO STRATEGIC ALLIANCE AGREEMENT AND FRANCHISING AGREEMENTS Section 1.1. Definitions. Any capitalized term used within this ----------- Article One and not defined within this Agreement, will have the meaning ascribed to such term in the Strategic Alliance Agreement. Section 1.2. Term. Section 2.1 of the Strategic Alliance Agreement ---- is hereby amended and restated as follows: This Agreement shall go into effect on the date of the Distribution (the "Effective Date") and shall continue in force until October 15, 2002 (the "Expiration Date"), except for Section 7.2 and Sections 1.6 and 1.7 of the Second Omnibus Amendment Agreement which shall survive so long as any franchising agreements between Realco and Franchising are in effect. This Agreement may be renewed upon the mutual consent of the Parties. -3- Section 1.3. Elimination of Right to First Refusal in Strategic -------------------------------------------------- Alliance Agreement. The Strategic Alliance Agreement is hereby amended such - ------------------ that Sections 3.2, 3.3, 3.4, 3.5 and 3.6 are deleted in their entirety and the following new Section 3.2 is hereby inserted as follows: 3.2 Until the Expiration Date, Realco shall give Franchising written notice at least fourteen days prior to executing a franchise application with a third party with respect to the franchising of a hotel or lodging property. Such written notice shall include a summary term sheet of the proposed arrangement with the third party. Franchising shall have the opportunity to present Realco with a plan to brand the hotel or lodging property with one of its brands provided that Realco shall have no obligation to enter into an agreement with Franchising to use any of its brands on the hotel or lodging property. Section 1.4. Development. Section 4 of the Strategic Alliance ----------- Agreement is hereby amended and restated in its entirety as follows: 4. Development ----------- 4.1. Realco and Franchising are currently in the midst of a program under which Realco has developed the twenty-one MainStay Suite Hotels listed on Appendix I to the Second Omnibus Amendment Agreement and which ---------- are franchised by Franchising. Realco agrees that it will continue to develop at least four additional MainStay Suite Hotels so that it will have opened and continue to operate no fewer than a total of twenty-five MainStay Suite Hotels prior to the Expiration Date (the "MainStay Quota"). For purposes of Sections 4.1 and 4.2, the following shall be included in the MainStay Quota notwithstanding Realco's transfer of such hotels prior to the Expiration Date: (a) The three MainStay Suites properties (the "Put Call Properties") which are subject to a Put Call Agreement between Realco and Franchising; -4- (b) The two MainStay Suites properties identified in Appendix III to ------------ the Second Omnibus Amendment Agreement; and (c) Any MainStay Suite property sold, transferred or conveyed by Realco if such property is relicensed by the new owner or transferee as a MainStay Suites under market terms acceptable to Franchising. 4.2. Until the MainStay Suite Hotels subject to the MainStay Quota are Developed(as defined below), expenditures by Realco (or any of its subsidiaries or affiliates) of cash or other assets, or agreements, understandings or commitments for the same (whether binding, contingent, conditional or otherwise), in connection with or related to the development of any hotel or lodging property other than a MainStay Suite Hotel, including without limitation, by way of acquisition of any property or any capital stock (but excluding a stock for stock acquisition or merger) or assets of any person or entity that directly or indirectly owns, operates or manages a hotel or lodging property (collectively, "Hotels Expenditures") shall not exceed the aggregate amount spent by Realco in connection with or related to the development of MainStay Suite Hotels (collectively, "MainStay Expenditures"). The ratio of Hotel Expenditures to MainStay Expenditures shall be measured on a bi-annual, cumulative aggregate basis. Within thirty days after the end of such bi-annual period, Realco will deliver to Franchising a statement detailing (i) all Hotel Expenditures made by Realco during such period, (ii) all MainStay Expenditures made by Realco during such period, and (iii) outstanding agreements, understandings and commitments for the same. "Developed" shall mean either: (i) that, on or before April 15, 2001, three of the remaining four MainStay Suites to be built to satisfy the MainStay Quota are open and operating and the fourth has commenced construction; or (ii), if the conditions of clause (i) are not satisfied, then all four of the remain- -5- ing MainStay Suites to be built to satisfy the MainStay Quota are open and operating. Section 1.5. Dispute and MainStay Brand Issues Resolution. The -------------------------------------------- Strategic Alliance Agreement is hereby amended by retitling Section 7 as "Dispute and Brand Issue Resolution" and amending and restating Sections 7.1 and 7.2 in their entitety as follows: 7.1. Realco and Franchising agree to use their commercially reasonable best efforts to address the brand issues identified on Appendix -------- II to the Second Omnibus Amendment Agreement within the time frames set -- forth therein. Realco and Franchising agree to use their commercially reasonable best efforts to have their respective designated representatives meet once every two weeks for six months from February 15, 2000 to discuss ongoing matters with respect to the MainStay Suite Hotel brand. At the end of the initial six month period, either party may require such bi-weekly meetings to continue for an additional six month period and then once a month for the following year. The representatives shall be the Executive Vice President, Franchise Operations and the Senior Vice President, Marketing for Franchising and the Chief Executive Officer for Realco. 7.2. Arbitration. Notwithstanding anything contained in the ----------- Transaction Documents to the contrary, any claim arising out of or related to any of the Transaction Documents, which has not been resolved by mutual agreement of the parties after a written notice of the claim by the complaining party to the other party and a forty-five (45) day negotiation period in which the Parties try to resolve the claim, shall be finally settled by arbitration. Such arbitration shall be conducted in Bethesda, Maryland in accordance with the Commercial Rules of the American Arbitration Association then in effect, as modified or supplemented herein, or as the parties mutually agree otherwise. Notwithstanding the rules of the arbitral body, the Parties hereto agree (a) that any arbitration shall be presided over by a single arbitrator, who shall have been ad- -6- mitted to the practice of law, and be in good standing or on retirement status in any of the fifty United States or the District of Columbia and have experience in hotel franchise matters, (b) that the arbitrator shall base his decision on the facts as presented into evidence, and (c) that the arbitrator shall prepare a written memorandum of decision setting forth the findings of fact and conclusions of law. The arbitrator shall be selected by the Parties. If they cannot agree on such selection within a thirty (30) day period, they shall ask the American Arbitration Association to appoint an arbitrator. The decision of the arbitrator shall be final, and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction. Any claim for relief made pursuant to this Agreement shall be made within one (1) year from the date upon which the claim arose. All costs of the arbitration shall be borne by the Party determined to be the losing Party by the arbitrator. For purposes of determining the prevailing and losing Party, the arbitrator may consider offers of settlement by either Party, or both of them. The Circuit Court of Montgomery County, Maryland shall have exclusive jurisdiction to enforce this arbitration provision, for injunctive relief in and of arbitration and for enforcement of any arbitration award. Section 1.6. Liquidated Damages Provision in Franchising Agreements. ------------------------------------------------------ Notwithstanding Section 3.1 of the Strategic Alliance Agreement and with reference to Section 1.3 of the First Omnibus Amendment Agreement, as long as Sunburst has not defaulted under the Term Note: (a) Notwithstanding the terms of any and all franchising agreements entered into prior to, on or after the date hereof by and between Choice and Sunburst (or any of their respective predecessors or affiliates) related to the twenty-five MainStay Suite Hotels subject to the MainStay Quota, Sunburst agrees that it shall not reflag any such MainStay Suite Hotel, through a sale or otherwise (except as provided in the Put Call Agreement), or seek termination of any such franchising agreement or fail to -7- enter into a franchising agreement for any such hotels or allow any other brand to be flagged to any such hotel prior to October 15, 2002; provided, however, Sunburst may: (i) reflag, or permit the reflagging of, -------- -------- up to two of the properties so identified on Appendix III to the Second ------------ Omnibus Amendment Agreement during such three year period or thereafter; and (ii) sell, transfer or convey any such MainStay Suites hotel if such property is relicensed by the new owner or transferee as a MainStay Suites under market terms acceptable to Choice. Upon an event specified in clause (i) or (ii) of the preceding sentence, Choice shall terminate the respective franchise agreements and waive any claim for damages against Sunburst caused by such reflagging, sale, transfer or termination including the obligation to pay liquidated damages. After October 15, 2002, Sunburst may reflag, or permit the reflagging of, any MainStay Suite Hotels and terminate any such franchising agreement and Choice shall waive any claim against Sunburst for damages caused by such reflagging or termination, including liquidated damages, if (x) Sunburst gives thirty days prior written notice to Choice and (y) Sunburst pays Choice $100,000 as a termination fee for each MainStay Suites Hotel, other than the two properties referred to in clause (i) above, that is to be reflagged or for which the franchising agreement is to be terminated. Choice and Sunburst acknowledge that if any or all of the Put Call Properties are transferred pursuant to the Put Call Agreement, that Choice shall terminate the respective franchise agreements and shall waive any claim against Sunburst for damages, including liquidated damages. Choice and Sunburst agree that irreparable damage would occur in the event any of the provisions of this Section 1.6(a) were not performed in accordance with the terms hereof and that Choice's remedy at law for any breach of Sunburst's obligations hereunder would be inadequate. Sunburst agrees and consents that temporary and permanent injunctive relief may be granted in any proceeding which may be brought to enforce any provision hereof without the necessity of proof of actual damage. -8- (b) Choice and Sunburst acknowledge that the reference in Section 1.3 of the First Omnibus Amendment Agreement to the liquidated damages provision applicable to Sleep Inn franchise agreements is intended as a termination fee such that Sunburst has the right at any time on or after February 29, 2000 to terminate any such Sleep Inn franchise agreements upon payment to Choice of $100,000 per agreement and Choice shall waive any claim against Sunburst for damages caused by such termination, including liquidated damages. (c) Choice and Sunburst acknowledge that pursuant to Section 1.3 of the First Omnibus Amendment Agreement, if Sunburst reflags a hotel or lodging property that is neither a Sleep Inn nor MainStay Suite Hotel and that hotel or lodging property is not sold by Sunburst within three years from the date it was flagged with a non-Choice brand, then on such third anniversary Sunburst shall pay Choice $100,000 in liquidated damages for each such reflagged hotel or lodging property and Choice shall waive any claim against Sunburst for damages caused by such reflagging, including liquidated damages. Section 1.7. Franchise Fee Credits. Notwithstanding anything --------------------- contained in any MainStay Suites franchising agreements entered into prior to, on or after the date hereof by and between Choice and Sunburst (or any of their respective predecessors or affiliates) Section 4 of each franchising agreement is hereby amended to add new subsections as follows: (h) On the date hereof Franchising shall establish an account to serve as a mechanism for administering the Shortfall Balance, as defined in and pursuant to this Section 4. The initial amount credited to the Shortfall Balance on the date hereof shall be $2,142,887 (the "Shortfall Amount"), which represents the amount by which an agreed upon target Cumulative EBITDA for the MainStay Suites hotels subject to the MainStay Quota (excluding the Put Call Properties) for the period from October 1, 1996 through December 31, 1999 exceeds the actual Cumulative EBITDA for such period. -9- (i) For each year beginning January 1, 2001 until the Shortfall Freeze Date (as defined below), the Shortfall Balance shall be adjusted (an "Adjustment") by 50% of the amount, if any, by which the Target Cumulative EBITDA (as set forth on Appendix IV) for the preceding year exceeds the ----------- actual Cumulative EBITDA for the MainStay Suites Hotels subject to the MainStay Quota (exclusive of the Put Call Properties) for such year as finally determined pursuant to clause (j) below. Each year, on or prior to February 15 of such year, Realco shall determine the actual Cumulative EBITDA for the preceding year in a manner consistent with the calculation of the Target Cumulative EBITDA and whether an Adjustment is warranted and shall deliver written notice thereof to Franchising together with the monthly operating statements for each applicable hotel. From and after the earlier of February 28, 2010 and the first year in which no Adjustment is required pursuant to this clause (h) (the "Shortfall Freeze Date"), no further Adjustments shall be determined pursuant to this paragraph and the Shortfall Balance shall thereafter never be increased. (j) The Shortfall Balance, if any, shall be applied by Realco as a credit against royalty, reservation and marketing fees ("Fees") payable to Franchising as follows: (1) First, to Fees payable pursuant to the franchise agreements related to the MainStay Suites Hotels subject to the MainStay Quota for each month prior to the tenth anniversary of the date of each such franchise agreement. The Fee credit shall be applied no later than the fifteenth day of each month against Fees payable as of the last day of the preceding month; and (2) Second, to Fees payable pursuant to franchise agreements for MainStay Suite Hotels other -10- than those referred to in (i)(1) above or for any brand developed by Franchising after the date hereof. The Fee credit shall be applied no later than the fifteenth day of each month against Fees payable as of the last day of the preceding month. The Shortfall Balance shall immediately be reduced by the amounts used as Fee credits pursuant to this section. Any remainder of the Shortfall Balance shall carry forward until used. (k) Franchising or its representatives shall have the right to review and audit the books and records of Realco for the purposes of determining the Shortfall Amount and the Fees payable in any particular month. If Franchising agrees with the Shortfall Amount determined by Realco, then that amount shall be deemed finally determined. In the event Franchising disagrees with the Shortfall Amount or the Fees payable as determined by Realco, then Franchising shall so notify Realco in writing within 10 days of receipt of notice from Realco of the Shortfall Amount. If Franchising and Realco are unable to agree in good faith by the tenth day of any month, then Franchising shall, within 10 days from its delivery of the notice to Realco, retain a firm of independent accountants to determine the Shortfall Amount and/or the Fees payable. The accountant shall deliver its determination no later than the last day of such month. The cost of such accountants shall be borne by Franchising unless the accountant's determination of the Shortfall Amount and/or Fees payable deviates by 5% or more from the amount determined by Realco, in which case Realco shall bear the cost. If Franchising and Realco agree with the accountants determination of the Shortfall Amount and/or the Fees payable, then that amount shall be deemed finally determined. If Franchising or Realco disagree with the accountants determination, then the parties shall settle the disagreement and the Shortfall Amount and/or the Fees payable shall be finally determined in accordance with the dispute resolution mechanism set forth in the Strategic Alliance Agreement, as amended. Realco agrees that it shall cooperate with -11- Franchising and the accountant and provide them reasonable access to its books records and employees in connection with their review of the Shortfall Amount and/or the Fees payable. Section 1.8. Elimination of Right to First Refusal in Franchising ---------------------------------------------------- Agreements. Notwithstanding anything contained in any franchising agreements - ---------- entered into prior to, on or after the date hereof by and between Choice and Sunburst (or any of their respective predecessors or affiliates), the provision regarding the right of first refusal contained in each franchising agreement is hereby deleted in its entirety. ARTICLE TWO AMENDMENTS TO TERM NOTE Section 2.1. Definitions. Any defined term used within this Article ----------- Two and not defined within this Agreement shall have the meaning ascribed to such term in the Term Note (as amended). Section 2.2. Asset Sale Proceeds. Section 1.6 of the Term Note is ------------------- hereby amended by deleting the section in its entirety and replacing it with the following: Within fourteen (14) calendar days after the consummation of an Asset Sale involving the Put Call Properties, the Payor will pay to the Payee by wire transfer to the bank account designated by the Payee such aggregate principal amount of this Note as equals one hundred percent (100%) of the Asset Sale Proceeds. Section 2.3. Event of Default. Section 2 of the Term Note is hereby ---------------- amended by adding the following after paragraph 2(e): (f) A Change of Control of the Payor. For purposes of this paragraph, a "Change of Control" shall mean: -12- 1. Any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (other than (i) the Payor, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Payor, (iii) any corporations owned, directly or indirectly, by the stockholders of the Payor in substantially the same proportions as their ownership of stock of the Payor, or(iv) Stewart Bainum, his wife, their lineal descendants and their spouses (so long as they remain spouses) and the estate of any of the foregoing persons, and any partnership, trust, corporation or other entity to the extent shares of common stock (or their equivalent) are considered to be beneficially owned by any of the persons or estates referred to in the foregoing provisions of this subsection or any transferee thereof) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)), directly or indirectly, of securities of the Payor representing 20% or more of the combined voting power of the Payor's then outstanding voting securities. 2. Individuals constituting the Board of Directors of the Payor on the date of this Agreement and the successors of such individuals ("Continuing Directors") cease to constitute a majority of the Board. For this purpose, a director shall be a successor if and only if he or she was nominated by a Board (or a Nominating Committee thereof) on which individuals constituting the Board on February 29, 2000 and their successors (determined by prior application of this sentence) constituted a majority; 3. The stockholders of the Payor approve a plan of merger or consolidation ("Combination") with any other corporation or legal person, other than a Combination which would result in stockholders of the Payor immediately prior to the Combination owning, immediately thereafter, more than sixty-five percent (65%) of the combined voting power of either the surviving entity or the entity owning directly or indirectly all of the common stock, or its equivalent, of the surviving entity; provided, how- -13- ever, that if stockholder approval is not required for such Combination, the Change in Control shall occur upon the consummation of such Combination; 4. The Payor or an affiliate of the Payor engages in a "Rule 13e-3 transaction" as defined in the Securities and Exchange Act of 1934, as amended. 5. The stockholders of the Payor approve a plan of liquidation of the Payor or an agreement for the sale or disposition (including through a sale/leaseback) by the Payor of more than 50% of the Payor's stock and/or assets, or accept a tender offer for more than 50% of the Payor's stock (or any transaction having a similar effect); provided, however, that if stockholder approval is not required for such transaction, the Change in Control shall occur upon consummation of such transaction. Section 2 shall be further amended by adding the following paragraph immediately preceding the last paragraph of Section 2: If an Event of Default specified in Section 2(f) shall have occurred and be continuing, Payee may, at its option, by written notice to Payor and to Chase, declare the entire principal amount of this Note and the interest accrued thereon to be due and payable. Section 2.4. Representation of Payor. Section 6 of the Term Note ----------------------- is amended by adding the following new provision: 6.10. Representation and Warranty of Payor. The Payor hereby ------------------------------------ represents and warrants that the Lenders have consented to and approved the amendments to the Note contained in the Omnibus Amendment Agreement dated December 28, 1998 (as amended herein) and the Second Omnibus Amendment Agreement dated February 29, 2000. The Payor further represents and warrants that the Lenders have waived any default or event of default under the Credit Agreement or any other Senior Debt Document that may arise as a result -14- of any payment under this Note in accordance with its terms, including without limitation pursuant to Section 1.6 hereof. Section 2.5. Covenant of Payor. Section 3.2 of the Term Note is ----------------- amended by adding the following new provision: Payor further covenants and agrees that for so long as any indebtedness evidenced by this Note remains outstanding, Payor will not, without the written consent of Payee, enter into any agreement that restricts or prohibits any payment by Payor to Payee under the terms of this Note. ARTICLE THREE NONCOMPETITION AGREEMENT Section 3.1. Termination. The Noncompetition Agreement is hereby ----------- terminated and shall from and after the date hereof be of no further force or effect. ARTICLE FOUR MISCELLANEOUS PROVISIONS Section 4.1. Conflicts. In the event of any conflict between the --------- terms of this Agreement and the terms of the Strategic Alliance Agreement, any franchising agreement entered into by and between Choice and Sunburst referred to in this Agreement, the Term Note, the Noncompetition Agreement, the First Omnibus Amendment Agreement and any other documents related thereto and executed by one or more parties hereto in connection with any of the aforementioned agreements, the terms and provisions of this Agreement shall control. Section 4.2. Agreements Remain in Effect. The Strategic Alliance --------------------------- Agreement, any franchising agreement en- -15- tered into by and between Choice and Sunburst referred to in this Agreement, the First Omnibus Amendment Agreement and the Term Note shall remain fully effective and are changed only as specifically provided herein and shall bind the parties to each in all respects as originally contemplated. Section 4.3. Counterparts. This Agreement may be executed in one or ------------ more counterparts, all of which taken together shall constitute one instrument. Section 4.4. Board Approval. This Agreement has been approved by -------------- the Board of Directors of both Choice and Sunburst. IN WITNESS WHEREOF, intending to be legally bound hereby, the parties hereto have executed this Agreement as of the day and year first written above. CHOICE HOTELS INTERNATIONAL, INC. /s/ Joseph M. Squeri - --------------------------------------- Name: Joseph M. Squeri Title: Senior Vice President and Chief Financial Officer SUNBURST HOSPITALITY CORPORATION /s/ Donald J. Landry - --------------------------------------- Name: Donald J. Landry Title: CEO EX-21 3 EXHIBIT 21 Exhibit 21.01 SUBSIDIARIES BOULEVARD MOTEL CORP. Arlington Spirits Corp. Bay Ridge Spirits Corp. Biscayne Land Associates, Inc. Biscayne Properties, Inc. Bowling Green Inn - Brandywine, Inc. Cardinal Beverage Corp. Everglades Beverage Corp. Fairways Beverage Corp. Fairways, Inc. First Choice Properties Corp. First Choice Capital Corp. QI Capital Corp. MCH Baltimore Corp. MCH Hot Springs Corp. MCH Roanoke Corp. MCH Springfield Corp. MCH Wichita Corp. MCHD Cypress Creek Corp. MCHD Ft. Lauderdale Corp. MCHD Hampton Corp. MCH Shady Grove Corp. CACTUS HOTEL CORP. CHOICE MANAGEMENT & REALTY SERVICES, INC. Beltway Management Company COMFORT CALIFORNIA, INC. GULF HOTEL CORP. HEFRU FOOD SERVICES, INC. QCM BEVERAGES, INC. (49%; 51% Texas Resident) QCM CORPORATION SUNBURST HOTEL CORP. THICKET, INC (THE) (Non-Profit; owned by members) Subsidiaries are wholly-owned except where indicated. EX-23.1 4 EXHIBIT 23.1 Exhibit 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements File No. 333-14203, No. 333-15661, No. 333-17577 and No. 333-17575. Arthur Andersen LLP Vienna, Virginia March 28, 2000 EX-27 5 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated balance sheets, the consolidated statements of income and the consolidated statements of cash flows and is qualified inits entirety by reference to such financial statements and the notes thereto. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,965 0 8,351 500 0 0 503,406 109,650 413,189 0 293,663 0 0 245 82,802 413,189 0 210,036 0 172,948 0 0 24,677 12,411 5,104 7,307 0 772 599 5,936 .38 .38
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