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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended
MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-26304
SUNSTONE HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
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Maryland 52-1891908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
903 Calle Amanecer, San Clemente, CA 92673
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 369-4000
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
--- ---
As of May 11, 1999, there were 37,641,085 shares of Common Stock outstanding.
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The Company hereby amends its Quarterly Report on Form 10-Q, dated May
11, 1999 for the quarter ended March 31, 1999. The Principal changes from the
Form 10-Q dated May 11, 1999, are as follows:
(1) Page 21, second paragraph, Funds from Operations ("FFO") - revising the
disclosure with respect to FFO to include statements that FFO may not be
comparable to FFO reported by other REITS that do not compute FFO in the same
manner as the Company; that FFO should be considered in conjunction with cash
flows from operating, investing and financing activities as presented in the
Company's consolidated financial statements and notes thereto; and that FFO
should not be considered as an alternative to cash flow from investing or
financing activities determined in accordance with GAAP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
When used throughout this report, the words "believes", "anticipates"
and "expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to the many risks and uncertainties
which affect the Company's business, and actual results could differ materially
from those projected and forecasted. These uncertainties, which include
competition within the lodging industry, the balance between supply and demand
for hotel rooms, the Company's continued ability to execute acquisitions and
renovations, the effect of economic conditions, the availability of capital to
finance planned growth, the Year 2000 Issue, and the liquidity of the Lessee,
are described but are not limited to those disclosed in this report. These and
other factors which could cause actual results to differ materially from those
in the forward-looking statements are discussed under the heading "Risk
Factors". Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Company also undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances. The following
discussion should be read in conjunction with the financial statements included
elsewhere in this report, as well as the information presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
GENERAL
Sunstone Hotel Investors, Inc. (the "Company") is a self-administered,
equity real estate investment trust ("REIT") that through its 94.8% ownership
interest in Sunstone Hotel Investors, LP (the "Operating Partnership"), owns and
leases luxury, upscale and mid-price hotels located primarily in the Pacific and
Mountain regions of the western United States. The hotels operate primarily
under national franchises that are among the most respected and widely
recognized in the lodging industry, including brands affiliated with Marriott
International, Inc., Bass Hotels and Resorts, Hilton Hotels Corporation and
Promus Hotel Corporation. As of May 11, 1999, the Company's portfolio consisted
of 56 hotels with a total of 10,086 rooms. The majority of the Company's hotel
portfolio consists of luxury, upscale and mid-price full-service hotels and
upscale extended-stay properties (approximately 84.5%) with the remainder of the
Company's portfolio consisting of mid-price limited service properties.
The Company's growth strategy is to maximize shareholder value by (i)
acquiring underperforming and undercapitalized hotels that are in strong market
locations with significant barriers to entry and (ii) improving such hotels'
financial performance by renovating, redeveloping, rebranding and repositioning
the hotels and through the implementation of focused sales and marketing
programs.
The Company's business strategy is to seek to increase market share at
its hotels through an expansion of a strong base of direct sales and marketing
with an emphasis on repeat customers. The Company's goal is to increase each
hotel's customer base by providing a high level of guest satisfaction,
high-quality hotels and quality food and beverage services.
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PROPOSED ACQUISITION
On April 5, 1999, the Company received an offer by SHP Acquisition, LLC
("SHP Acquisition"), formed by Robert A. Alter, certain management personnel of
the Lessee and Westbrook Funds III. The Lessee leases and operates each of the
Company's 56 hotels and is owned by Robert A. Alter, Chairman, President and
Chief Executive Officer of the Company and Charles L. Biederman, Vice Chairman
and Executive Vice President of the Company. Westbrook Partners LLC is a New
York based real estate opportunity fund, which is a 9.6% stockholder in the
Company, whose managing principal, Paul Kazilionis, is a director of the
Company. The acquisition proposal is for all of the common stock of the Company
at $9.50 to $10.00 in cash per share. Under this proposal, the holders of
outstanding Operating Partnership units in the Operating Partnership (other than
the Company) would receive, at their option, either cash in an amount per
Operating Partnership unit equal to the cash price per common share or
redeemable perpetual preferred units in the Operating Partnership having a face
value equal to the cash price. The Company's 7.9% Class A Preferred Stock would
be redeemed in accordance with its term of a cash amount equal to its
liquidation preference plus accrued and unpaid dividends. The acquisition
proposal is subject to certain conditions, including due diligence review of the
Company and obtaining the necessary financing.
In response to the acquisition proposal, the Company formed a Special
Committee of the Board of Directors, comprised of all the independent members of
the Board of Directors, to study the proposal and consider the Company's
alternatives. The Special Committee has appointed Goldman, Sachs & Co. to act as
its independent financial advisor to evaluate the proposal made by SHP
Acquisition and to review the Company's strategic alternatives. The Special
Committee also appointed the law firm of Altheimer & Gray to act as its
independent legal advisor. The Special Committee and its advisors are currently
in the process of considering the acquisition proposal and the Company's
alternatives.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1999 to 1998
For the three months ended March 31, 1999, lease revenues increased $1.1
million, to $24.8 million from $23.7 million for the corresponding quarter of
1998. The 4.6% growth is attributable to the net increase in investment in hotel
properties during 1998 and the first quarter of 1999. During 1998, the Company
acquired ten hotels and disposed of six non-core hotels. Additionally, one hotel
was sold during the first quarter of 1999. Net REVPAR increases for continuously
owned hotels also contributed to the 4.6% growth in lease revenues.
Total room revenue generated by the Company's hotels increased 10.0% to
$52.7 million for the first quarter of 1999 from $47.9 million for the
corresponding quarter of 1998. On a same-unit-sales basis for the entire hotel
portfolio, REVPAR increased 5.9% to $56.98 for the first quarter of 1999 from
$53.82 for the first quarter of 1998. The 5.9% growth in REVPAR was driven by an
increase in the ADR, to $86.96 from $84.01, and an increase in occupancy, to
65.5% from 64.1%.
REVPAR for the non-renovation hotels increased by 6.3% to $54.30 for the
first quarter of 1999 from $51.07 for the first quarter of 1998. Non-renovation
hotels include 38 of the Company's 56 hotels which were not under renovation in
either the first quarter of 1999 or 1998. The 6.3% growth in REVPAR was driven
by an increase in the ADR, to $80.89 from $79.02, and an increase in occupancy,
to 67.1% from 64.6%.
Within the portfolio of non-renovation hotels, those hotels branded with
Marriott franchises achieved 14.9% REVPAR growth for the first quarter of 1999
over the corresponding quarter of 1998. These Marriott hotels represent 34.0% of
non-renovation hotel rooms available and 36.8% of non-renovation hotels (14 of
38 hotels). Additionally, the non-renovation hotels located in the Pacific
region achieved 8.9% REVPAR growth for the first quarter of 1999. The Pacific
region hotels represent 50.5% of non-renovation hotel rooms available and 55.3%
of total non-renovation hotels (21 of 38 hotels).
During the first quarter of 1999, the Company invested $16.2 million
redeveloping and renovating eight hotels as compared to $25.4 million invested
redeveloping and renovation twelve hotels during the first quarter of 1998.
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The following table summarizes average occupancy rate, ADR and REVPAR,
on a same-unit-sales basis, for the Company's hotels owned during the three
months ended March 31, 1999.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1999 1998
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<S> <C> <C>
SAME-UNIT-SALES ANALYSIS
ALL HOTELS(1):
Occupancy 65.5% 64.1%
ADR $86.96 $84.01
REVPAR $56.98 $53.82
REVPAR growth 5.9%
NON-RENOVATION HOTELS(1):
Occupancy 67.1% 64.6%
ADR $80.89 $79.02
REVPAR $54.30 $51.07
REVPAR growth 6.3%
RENOVATION HOTELS(2):
Occupancy 63.0% 62.2%
ADR $96.43 $89.66
REVPAR $60.78 $55.74
REVPAR growth 9.0%
</TABLE>
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(1) Excludes the Hampton Inn located in Arcadia, California which was sold
during the first quarter of 1999.
(2) Includes six hotels undergoing renovation in the first quarter of 1999 and
ten hotels undergoing renovation in the first quarter of 1998. Two hotels
that were under renovation during the first quarter of both 1999 and 1998
have been excluded.
The revenue performance of the Company's hotel portfolio in the first
quarter of 1999 was due to the results from the Company's recently redeveloped
hotels and internal growth of continuously owned and recently acquired hotels as
indicated in the following table:
SELECTED REVPAR PERFORMERS FOR FIRST QUARTER OF 1999
<TABLE>
<CAPTION>
REVPAR
----------------------------
Rooms 1998(1) 1999 % Change
----- ------- ---- --------
<S> <C> <C> <C> <C>
Courtyard by Marriott - Los Angeles, (LAX) California 178 $32.28 $72.26 123.9%
Holiday Inn Old Town - San Diego, California 151 50.92 73.62 44.6
Holiday Inn Select - La Mirada, California 289 33.34 47.32 41.9
Marriott - Ogden, Utah 288 33.41 47.07 40.9
Holiday Inn & Suites - Price, Utah 151 25.39 33.38 31.5
Marriott - Provo, Utah 333 34.44 44.95 30.5
Marriott - Napa, California 192 60.46 69.28 14.6
Marriott - Santa Monica, California(2) 168 75.72 83.34 10.1
</TABLE>
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(1) The Company did not own certain hotels for the entire period presented.
(2) The Company has obtained approval for the indicated franchise license,
subject to completion of certain renovation or improvements.
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Interest expense and amortization of financing costs increased to $6.5
million for the quarter ended March 31, 1999 from $4.6 million for the
corresponding quarter of 1998. This increase is attributable to increased
borrowings outstanding on the Credit Facility and a reduction in the amount of
interest capitalized related to hotels undergoing major renovations. Real estate
and personal property taxes and insurance increased to $3.1 million for the
quarter ended March 31, 1999 from $2.8 million for the corresponding quarter of
1998. Additionally, real estate related depreciation and amortization increased
$2.1 million, to $10.0 million from $7.9 million. These increases are consistent
with the net increase in investment in hotel and other real estate properties.
During the three months ended March 31, 1999, the Company invested $17.5 million
(net of $4.0 million in proceeds from the sale of one hotel) in the renovation
and development of hotel and other real estate properties. Real estate
investments are typically initially financed with debt, contributing to the
increase in interest expense and amortization of financing costs.
During the first quarter of 1999, the Company disposed of the 129-room
Hampton Inn located in Arcadia, California, for $8.5 million and recognized a
$490,000 gain.
As a result of the above factors, net income available to common
stockholders decreased $2.3 million, to $3.8 million for the first quarter of
1999 from $6.1 million for the corresponding quarter of 1998. Earnings per share
for the first quarter of 1999 were impacted by the 5.3 million common shares
that were issued during 1998, and on a diluted basis was $0.10 per share as
compared to $0.17 per share for the corresponding quarter of 1998. (See
discussion of Funds From Operations in "Liquidity and Capital Resources").
Seasonality and Regional Focus
The Company currently focuses its acquisition efforts principally on the
Pacific and Mountain regions which collectively comprise the western United
States. The geographic distribution of the hotels, which are located in eight
states as of May 11, 1999, reflects the Company's belief that a certain amount
of geographic distribution helps to insulate the Company's hotel portfolio from
local market fluctuations and off-peak seasonal operations that are typical for
the hotel industry. The Company has also sought to increase its geographic
distribution by focusing on major metropolitan areas.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided by Operating Activities. The Company's operating
activities provide the principal source of cash to fund the Company's operating
expenses, interest expense, recurring capital expenditures and distribution
payments. The Company anticipates that its annual cash flow provided by leasing
the hotels to the Lessee will provide the necessary funds to meet its annual
operating cash requirements. (See discussion of the Lessee's stockholders'
deficit in the following section, "The Lessee.") During the first quarter of
1999, the Company made distributions to stockholders and minority interest
holders totaling $11.8 million.
The Company believes a regular program of capital improvements,
including replacement and refurbishment of furniture, fixtures and equipment at
its hotels, as well as the periodic renovation and redevelopment of certain of
its hotels, is essential to maintaining the competitiveness of the hotels and
maximizing revenue growth. The Company is required under the Percentage Leases
to make available to the Lessee for the repair, replacement and refurbishment of
furniture, fixtures and equipment an amount equal to 4% of the room revenue per
quarter on a cumulative basis, provided that such amount may be used for capital
expenditures made by the Company with respect to the hotels. The Company expects
that this amount will be adequate to fund the required repairs, replacements and
refurbishments and to maintain its hotels in a competitive condition.
Cash Flows from Investing and Financing Activities. The Company intends
to finance the acquisition of additional hotel properties, hotel renovations and
non-recurring capital improvements through its $350 million unsecured revolving
line of credit facility (the "Credit Facility") from its lenders (led by Bank
One of Arizona, N.A., as the agent bank), proceeds from the disposition of
certain non-core hotel assets and, when market conditions warrant, proceeds from
the issuance of additional equity or debt securities. During the three months
ended March 31, 1999, the Company borrowed $17.0 million on the Credit Facility
and $5.5 million under a promissory note secured by the Company's corporate
facility. Additionally, the Company received $4.0 million net proceeds from the
disposition of the 129-room
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limited service Hampton Inn located in Arcadia, California. As of March 31,
1999, approximately $163.2 million was available under the Company's shelf
registration statement and the Company had $62.5 million of unused commitment on
the Credit Facility. The Credit Facility contains financial covenants that
require the Company to maintain certain specified financial ratios. Under the
most restrictive of these provisions, the maximum additional indebtedness that
could be drawn by the Company under the Credit Facility for the acquisition and
renovation of hotel properties would have been between $17.5 million and $35.0
million at March 31, 1999, depending upon the use of the funds.
Borrowings under the Credit Facility accrue interest at LIBOR plus 1.40%
per annum, to LIBOR plus 2.00% per annum, based upon the leverage of the
Company. At March 31, 1999, the Company's actual borrowing rate was LIBOR plus
1.75%. The Credit Facility may be retired in whole or in part from the proceeds
of public or private issuances of equity or debt securities by the Company and
may be refinanced in whole or in part with fixed-rate financing. The Company may
seek to obtain such financing if market conditions are appropriate in
management's view.
Under the terms of the Credit Facility, the Company has an option to
request a one year extension of the term to June 30, 2001. The Company exercised
its option, effective March 31, 1999, and requested such an extension. The
Credit Facility lenders have 45 days to respond the Company's request.
As part of its investment strategy, the Company may acquire additional
hotels. Future acquisitions are expected to be funded through the use of the
Credit Facility or other borrowings, proceeds from the disposition of non-core
hotel assets and the issuance of additional equity or debt securities. The
Company's Articles of Incorporation limits consolidated indebtedness to 50% of
the Company's investment in hotel properties, at cost on a consolidated basis,
after giving effect to the Company's use of proceeds from any indebtedness.
Management believes that it will have access to capital resources sufficient to
satisfy the Company's existing commitments and develop its business in
accordance with its current strategy for limited growth.
During the three months ended March 31, 1999, the Company invested
approximately $16.2 million in major renovations of eight of its hotels. The
Company estimates it will invest an additional $25.8 million through the first
quarter of 2000 to complete the renovation of those hotels currently under
renovation and certain other recently acquired hotels. Management believes the
renovations should result in incremental increases in REVPAR after a ramp-up
period at these renovation hotels and increased lease revenue for the Company.
The Company selectively develops luxury and upscale hotels in markets
where management believes room demand and other competitive factors justify new
construction. The Company is in the construction phases of developing three
additional hotels, which are expected to open in 1999. The Company estimates it
will invest approximately $33.4 million to complete the development of these
hotels. This development will be funded by approximately $21.0 million in loan
proceeds from the existing construction lender for two of the hotels which are
being built by third parties, $7.5 million in loan proceeds from a third party
lender secured by the hotel being developed by the Company and the Credit
Facility.
In conjunction with the on-going renovation and development activity,
the Company has various contracts and commitments outstanding with third
parties. The Company plans to fund these remaining obligations through the use
of the Credit Facility and proceeds from the disposition of certain non-core
hotel assets. In addition, the Company may invest additional cash for
renovations during 1999.
On May 11, 1999, the Company repaid a $6.1 million promissory note with
proceeds from a new $16.1 million promissory note that requires monthly interest
only payments at LIBOR plus 2.25%, matures October 30, 1999 and is secured by
certain hotel properties. Additionally, on April 28, 1999, the Company accepted
two offers, which have not closed, from third parties to purchase an aggregate
$2.5 million in Common Stock through the Company's Dividend Reinvestment and
Stock Purchase Plan (the "Plan"). The Plan provides for the issuance of Common
Stock at a share price based on the twelve day trading period subsequent to
acceptance and subject to certain thresholds and discounts as set by the
Company. The Company anticipates using the proceeds from the preceding
transactions to repay an existing $3.1 million note payable and for general
working capital purposes.
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The Company historically has financed hotel acquisitions through
advances on the Credit Facility and the issuance of equity securities. The
Company intends to finance future acquisitions of hotel properties, hotel
renovations and non-recurring capital improvements principally through the
Credit Facility, proceeds from the disposition of non-core hotel assets and,
when market conditions warrant, by issuing additional equity or debt securities.
There can be no assurance that the Company will have access to capital on
favorable terms. If the Company's access to capital is restricted, its ability
to acquire additional hotel properties, to complete development or major
renovation projects or to pay distributions may be adversely affected. A decline
in the Company's acquisition pace relative to historical periods may result in a
decline in earnings.
Funds From Operations ("FFO")
Management believes that funds from operations ("FFO") is a useful
measure of financial performance of an equity REIT, such as the Company. FFO (as
defined in the footnote below) for the three months ended March 31, 1999
decreased by 5.9% over the corresponding period of 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
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<S> <C> <C>
Net Income $ 4,272,000 $ 6,597,000
Add (subtract):
Real estate related depreciation
and amortization 9,989,000 7,919,000
Gain on disposition of hotel property (490,000) --
Minority interest 212,000 351,000
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Funds from operations $13,983,000 $14,867,000
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</TABLE>
Management and industry analysts generally consider Funds From Operations to be
an appropriate measure of the performance of an equity REIT. The White Paper on
Funds From Operations approved by the Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") defines Funds From
Operations as net income or loss (computed in accordance with GAAP), excluding
gains or losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. The Company computes Funds From Operations in
accordance with standards established by NAREIT, adjusted for minority interest,
which may not be comparable to Funds From Operations reported by other REITs
that do not define the term in accordance with the current NAREIT definition or
that interpret the current NAREIT definition differently than the Company.
Funds From Operations should be considered in conjunction with net income and
cash flows from operating, investing and financing activities as presented in
the Company's consolidated financial statements and notes thereto. Funds From
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indication of the Company's financial performance
or to cash flow from operating, investing or financing activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make cash distributions. Funds From Operations may include funds that
may not be available for management's discretionary use due to the requirements
to conserve funds for capital expenditures and property acquisitions and other
commitments.
The Lessee
For a discussion of the Lessee's revenue operations and a comparison of
the three months ended March 31, 1999 to 1998, see "Results of Operations" of
the Company. Additionally, the Lessee has incurred significant losses from its
inception in 1995. At March 31, 1999, the Lessee's stockholders' deficit
amounted to $9.7 million. At March 31,
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1999, the Lessee's rent payable to the Company amounted to $12.3 million. Also
at March 31, 1999, the Lessee's current liabilities exceeded its current assets
by $9.1 million. The ability of the Lessee to fund its daily operations and
continue to remain current on its substantial rent obligation to the Company is
a result of the original terms under the Percentage Leases, for the payment of
rent to the Company, which allow monthly base rent to be paid in arrears and
monthly percentage rent to be paid within 45 days after the respective month
end.
The Lessee's losses from inception are primarily attributable to the
substantial renovations to the Company's hotels which the Lessee operates and
the original terms of the Percentage Leases. During 1998, 1997 and 1996, a
significant portion of the Company's hotel portfolio underwent renovation and
redevelopment, representing 20, 19 and 8 hotels, respectively.
Such renovations were made in conjunction with the Company's strategy of
acquiring hotels that can benefit from extensive improvements, reflagging and
repositioning, resulting in higher potential revenue. There can be no assurance,
however, that the Lessee's operating results will improve because of various
factors described under "Risk Factors." During periods of significant
renovation, the hotels generally do not generate sufficient revenue to meet
operating expenses, including lease payments.
YEAR 2000 ISSUE
The term "Year 2000 issue" is a general term used to describe the
complications that may be caused by existing computer hardware and software that
were designed by the respective manufacturers without consideration of the
upcoming change in the century. Many computer systems recognize calendar years
by the last two digits in the date code field. Beginning in the year 2000, these
date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. If not corrected,
computer systems may fail or create erroneous results causing disruptions of
operations.
The Company's in-house computer systems environment is limited to
software and hardware developed by third parties. All of the Company's computer
systems, consisting of financial reporting and accounting systems only, were
installed in the last two years and management believes such systems are Year
2000 compliant. However, the Company's business is heavily dependent upon the
efforts of the Lessee and third parties with whom the Lessee conducts
significant business.
The Lessee relies on information technology ("IT") systems and other
systems and facilities such as PBX switches, elevators, heating, ventilation and
air conditioning, security, fire and life safety and other environmental systems
("embedded systems") to conduct its business. Both the IT and the embedded
systems are subject to the Year 2000 Issue which, if not remedied in time, could
have an impact on the operations of the Lessee. The Lessee may also be exposed
to risk from third parties with whom the Lessee interacts who fail to adequately
address their own Year 2000 issues. Such third parties include franchisors,
vendors, suppliers and significant customers.
To mitigate and minimize the number and seriousness of any disruptions
caused by the Year 2000 Issue, the Company and the Lessee have developed and
adopted a Year 2000 Compliance Program (the "Compliance Program") which involves
the following four phases: assessment, which includes development of an action
plan and inventorying of hotel systems, remediation, testing and implementation.
With the assistance of outside consultants, site surveys are being performed and
all hotel systems will be identified and inventoried and will include
information such as the manufacturer or vendor who performed the installation,
currently services or maintains each system. The Lessee has begun contacting
these vendors to obtain certification relating to their Year 2000 compliance
testing. In addition, all parties for building systems that service leased
premises, or a facility within leased premises are located and are operated and
controlled by or interact with a software program will be identified and
contacted. It should be noted that due to the complexity of some of the systems,
in many cases, the only way to determine the potential impact of the systems
would be to verify the Year 2000 effect with the particular vendor. The
assessment phase was completed in February 1999.
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Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase - Hotel and Lessee Systems:
Based on the results of the site assessments, the identified IT and
embedded systems will be replaced or upgraded. The system upgrades will be
prioritized according to their critical importance. Life safety systems and
emergency services will take priority in accordance with the steps laid out in
the Compliance Program. The various vendors associated with any system
replacements or upgrades will be contacted to determine their readiness to deal
with these system enhancements. Performance of certain testing by the vendors
may be required in several cases to ensure Year 2000 compliance. Certain
vendors, manufacturers, service personnel, consultants, contractors, lessees and
lessors will be requested to prepare a letter certifying and warranting that all
systems, utilities and services containing time and date-related coding and
internal programs, shall continue without interruption beyond December 31, 1999.
The implementation will be monitored and managed on a real-time basis to ensure
a smooth upgrade of the systems. Completion of the implementation and testing
phases for all significant systems is expected by June 30, 1999, with all
remediated systems fully tested and implemented by September 30, 1999, with 100%
completion targeted for October 31, 1999.
Nature and Level of Importance of Third Party Systems and Their Exposure to the
Year 2000:
The Lessee is in the process of surveying its vendors and service
providers that are critical to the Lessee's business to determine whether they
are Year 2000 compliant. The Lessee expects that these surveys will be completed
by the end of the second quarter of 1999, but cannot guarantee that all vendors
or service providers will respond to the survey, and therefore the Lessee may
not be able to determine Year 2000 compliance of those vendors or service
providers. By the end of the second quarter of 1999, the Lessee will determine
the extent to which the Lessee will be able to replace those vendors not in
compliance. There may be instances in which the Lessee will have no alternative
but to remain with non-compliant vendors or service providers. The inability of
vendors to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company and the Lessee. The effect of compliance by
vendors is not determinable.
Cost of Addressing Year 2000 Issues:
The Company estimates that total cost for the Year 2000 compliance
review, evaluation, assessment and remediation efforts should not exceed $1.0
million and will be funded by the Company through its operating cash flows. To
date, the costs incurred to address the Year 2000 issue consist primarily of
services provided by outside consultants for onsite system surveys and total
$163,000 which was expensed by the Company in the first quarter of 1999. The
remaining balance is also anticipated to be expended in 1999.
Risks Presented by Year 2000 Issues:
Management of the Company and the Lessee believe they have an effective
plan in place to resolve the Year 2000 Issue in a timely manner. As noted above,
the Lessee has not yet completed all necessary phases of the Year 2000 program.
In the event that the Lessee does not complete any additional phases, the Lessee
may encounter system failures associated with third-party vendors such as
disruptions in passenger transportation or transportation systems generally,
loss of utility and telecommunications services, the loss or disruption of hotel
reservations made on centralized reservation systems and errors or failures in
financial transactions or payment processing systems such as credit cards. These
disruptions could adversely affect the Company and the Lessee, their businesses
and their financial conditions. The Company and the Lessee cannot predict the
actual effects of the Year 2000 Issue on their businesses, such effects depend
on numerous uncertainties such as whether significant third parties have
properly and timely addressed the Year 2000 Issue, and whether broad-based or
systemic economic failures may occur. Due to the general uncertainty inherent in
the Year 2000 Issue and the Company's and Lessee's dependence on third parties,
Management is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact.
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Contingency Plan:
The Lessee is in the process of developing its contingency plan for the
systems operated an maintained by the Lessee and the hotels. This is necessary
in order to provide for the most likely worst case scenarios regarding Year 2000
compliance. The contingency plan is expected to be completed in 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 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, in the City of San
Clemente, State of California, on July 6, 1999.
SUNSTONE HOTEL INVESTORS, INC.
By: /s/Robert A. Alter
--------------------------------------------
Robert A. Alter
President, Secretary and
Chairman of the Board of Directors
By: /s/R. Terrence Crowley
--------------------------------------------
R. Terrence Crowley
Chief Operating Officer
(Principal Financial and Accounting Officer)
10
