<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Sunstone Hotel Investors, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF SUNSTONE HOTEL INVESTORS]
TO THE STOCKHOLDERS OF SUNSTONE HOTEL INVESTORS, INC.
You are cordially invited to attend the Annual Meeting of Stockholders of
Sunstone Hotel Investors, Inc. ("Sunstone" or the "Company") on Monday, May
24, 1999, at 9:00 a.m. Pacific Standard Time. The Annual Meeting will be held
at the Corporate offices, located at 903 Calle Amanecer, San Clemente, CA
92673.
At the meeting you will be asked to consider and vote upon the election of
three individuals to serve on the Company's Board of Directors until 2002.
Whether or not you plan to attend the Annual Meeting, please mark, sign,
date and return the enclosed proxy card promptly in the accompanying postage
pre-paid envelope. By returning the proxy card, you can help the Company avoid
the expense of duplicate proxy solicitations and possibly having to reschedule
the Annual Meeting if a quorum of the outstanding shares is not present or
represented by proxy. If you decide to attend the Annual Meeting and wish to
change your proxy vote, you may do so simply by voting in person at the Annual
Meeting.
March 24, 1999
/s/ ROBERT A. ALTER
-------------------------
ROBERT A. ALTER
Chairman and President
903 Calle Amanecer
San Clemente, CA 92673-6212
(949) 369-4000
<PAGE>
SUNSTONE HOTEL INVESTORS, INC.
REVISED NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 24, 1999
To the Stockholders of Sunstone Hotel Investors, Inc.:
Notwithstanding what is printed on the proxy statement enclosed herewith,
notice is hereby given that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of Sunstone Hotel Investors, Inc. will be held at the
Holiday Inn located at 14299 Firestone Boulevard, La Mirada, California 90638-
5591 at 10:00 a.m. Pacific Standard Time, on May 24, 1999.
Please do not come to the Corporate offices on May 24, 1999. The Annual
Meeting will not be held there.
By Order of the Board of Directors,
/s/ Robert A. Alter
ROBERT A. ALTER
Secretary
San Clemente, California
March 24, 1999
<PAGE>
SUNSTONE HOTEL INVESTORS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 24, 1999
To the Stockholders of Sunstone Hotel Investors, Inc.:
Notice is hereby given that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of Sunstone Hotel Investors, Inc. ("Sunstone" or the
"Company"), will be held at the Corporate offices, located at 903 Calle
Amanecer, San Clemente, CA 92673, commencing at 9:00 a.m. Pacific Standard
Time, on May 24, 1999 for the following purposes:
1. To elect three directors to serve for three-year terms until the 2002
Annual Meeting; and
2. To conduct such other business as may properly come before the Annual
Meeting and any adjournment or postponement thereof.
The close of business on April 12, 1999 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. Only stockholders of record at
such time will be so entitled to vote.
You are cordially invited to attend the Annual Meeting in person. Even if
you plan to attend the Annual Meeting, please promptly complete, sign, date
and return the enclosed proxy card in the enclosed self-addressed, postage
pre-paid envelope. It will assist us in keeping down the expenses of the
Annual Meeting if all stockholders, whether you own a few shares or many
shares, return your signed proxies promptly.
YOUR VOTE IS IMPORTANT.
A majority of the outstanding shares of Common Stock entitled to vote at the
Annual Meeting must be represented at the Annual Meeting, in person or by
proxy, in order to constitute a quorum at the annual meeting. Please return
your proxy card in order to ensure that a quorum is obtained and to avoid the
additional costs to the Company of adjourning the Annual Meeting and
resoliciting proxies.
By Order of the Board of Directors,
/s/ ROBERT A. ALTER
-----------------------
ROBERT A. ALTER
Secretary
San Clemente, California
March 24, 1999
<PAGE>
SUNSTONE HOTEL INVESTORS, INC.
903 Calle Amanecer
San Clemente, CA 92673
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 24, 1999
----------------
PROXY STATEMENT
----------------
GENERAL INFORMATION
This Proxy Statement is furnished to stockholders of Sunstone Hotel
Investors, Inc., a Maryland corporation ("Sunstone" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors for use
at the Annual Meeting of Stockholders to be held on Monday, May 24, 1999, at
9:00 a.m. Pacific Standard Time, and at any and all adjournments or
postponements thereof for the purposes set forth in the Notice of Annual
Meeting accompanying this Proxy Statement. The Annual Meeting will be held at
the Corporate offices located at 903 Calle Amanecer, San Clemente, CA 92673.
These proxy solicitation materials are first being mailed on or about April
15, 1999 to all stockholders entitled to vote at the Annual Meeting.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (sent to the
attention of Robert A. Alter) a written notice of revocation or a duly
executed proxy bearing a later date, or by attending the Annual Meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a
proxy.
Voting and Solicitation
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. In addition, the Company has retained Chase Mellon
Shareholder Services, LLC to act as a proxy solicitor in conjunction with the
Annual Meeting. Under the terms of an agreement dated March 22, 1999, the
Company has agreed to pay $4,500 to Chase Mellon Shareholder Services, LLC for
proxy solicitation services. The Company may conduct further solicitation
personally or telephonically through its officers, directors and regular
employees, none of whom will receive additional compensation for assisting
with the solicitation.
Only stockholders of record at the close of business on April 12, 1999 are
entitled to notice of and to vote at the Annual Meeting. As of March 24, 1999,
37,638,427 shares of Common Stock were issued and outstanding and 250,000
shares of Preferred Stock which vote on an as converted basis as 1,699,605
shares of Common Stock. On each matter to be considered at the Annual Meeting,
stockholders will be entitled to cast one vote for each share of Common Stock
held of record on April 12, 1999. The Company's Bylaws do not provide for
cumulative voting by stockholders.
1
<PAGE>
A majority of the shares of Common Stock entitled to vote will constitute a
quorum for the transaction of business at the Annual Meeting. Each matter to
be submitted to a vote of the stockholders, other than the election of
directors and certain extraordinary matters such as charter amendments, must
be approved by a majority of all the votes cast on such matter at the Annual
Meeting. Directors shall be elected by a plurality of the votes cast. Certain
extraordinary actions must be approved by a majority or more of all votes
entitled to be cast. Votes withheld from any director are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business, but have no legal effect under Maryland law. The Company intends to
count abstentions as present or represented for purposes of determining the
presence or absence of a quorum for the transaction of business. Abstentions
will not be counted for purposes of determining whether a proposal requires
approval by a majority or more of the votes entitled to be cast, in which case
an abstention will have the same effect as a negative vote. The Company also
intends to count broker non-votes as present or represented for purposes of
determining the presence or absence of a quorum for the transaction of
business. Broker non-votes will also not be counted for purposes of
determining whether a proposal has been approved unless such proposal requires
approval by a majority or more of the votes entitled to be cast, in which case
broker non-votes will have the same effect as negative votes.
The shares represented by all valid proxies will be voted in accordance with
the specifications therein. Unless otherwise directed in the proxy, the
persons named therein will vote FOR the election of the three nominees listed
below. The Board of Directors knows of no other matters likely to be brought
before the Annual Meeting other than those mentioned above. However, if any
other matters, not now known or determined, properly come before the meeting
or any adjournments or postponements thereof, the persons named in the
enclosed form of Proxy will vote such Proxy in accordance with their best
judgment in such matters pursuant to discretionary authority granted in the
Proxy.
PROPOSAL 1:
ELECTION OF DIRECTORS
The Articles of Incorporation of the Company provide for the Company's Board
of Directors to be divided into three classes, as nearly equal in number as is
reasonably possible, serving staggered tiers so that directors' terms will
expire either at the 2000 (Class II), 2001 (Class I) or 2002 (Class III)
Annual Meeting of Stockholders. The preceding notwithstanding, directors serve
until their successors have been duly elected and qualified or until they
resign, become disqualified or disabled, or are otherwise removed. The
following persons shall be designated as nominees to serve as Class III
directors of the Company until the 2002 Annual Meeting: Messrs. Enever,
Lambert and Sondker. If any of such nominees should unexpectedly become
unavailable for election, proxies will be voted for the election of persons
selected as nominees in their place by the Board of Directors.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote FOR the
election of each of Messrs. Enever, Lambert and Sondker to serve as directors
of the Company until the 2002 Annual Meeting, at which time their successors
will be elected and qualified.
2
<PAGE>
Certain information about Messrs. Enever, Lambert and Sondker is set forth
below.
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
- ---- --- -------------------- --------
<S> <C> <C> <C>
C. Robert Enever.................. 71 Retired 1994
David E. Lambert 46 Chief Executive Officer, 1995
(/1/)(/2/)(/3/)(/4/)............. Enso Audio Imaging Corporation
Edward H. Sondker (/2/)(/3/)...... 51 President and 1995
Chief Executive Officer,
Bay View Capital Corporation
</TABLE>
- --------
(1)Member of the Executive Committee
(2)Member of the Compensation Committee
(3)Member of the Audit Committee
(4)Member of the Lessee Special Assessment Committee
Mr. Enever has served as a director since September 1994. Mr. Enever is
retired but currently manages a portfolio of real estate and securities
investments. From 1971 until his retirement, Mr. Enever was engaged in real
estate development management and ownership, through several owned entities.
Before that he had a career in financial analysis, pricing and international
operations with Ford Motor Company. Mr. Enever holds a Bachelor of Science
degree in Economics from the University of London, a C.P.A. from the State of
Illinois and a Masters Degree in Business Administration (with distinction) in
Finance and Accounting from Northwestern University.
Mr. Lambert has served as a director since August 1995. Mr. Lambert also
serves as Chairman of the Compensation Committee. Since February 1999, Mr.
Lambert has served as Chief Executive Officer of Enso Audio Imaging
Corporation. Prior to joining Enso Audio Imaging Corporation, Mr. Lambert was
Executive Vice President of Preview Travel, Inc., from June 1995, a San
Francisco Bay Area company in the online travel business and media production
and syndication business. Prior to joining Preview Travel, Mr. Lambert had
served as Executive Vice President and Chief Financial Officer of Excalibur
Technologies Corporation, a publicly-traded computer software company from
1992 to 1995. Prior to joining Excalibur Technologies, Mr. Lambert served as a
private consultant in marketing, strategic planning, operations and computer
systems from 1991 to 1992 and as Chairman of the Board, President and Chief
Executive Officer of Grand American Fare, Inc., a $30 million restaurant
company, from 1985 to 1991. From 1981 to 1985, Mr. Lambert served as Executive
Vice President of Colony Hotels and Resorts, a subsidiary of Radisson Hotels.
Mr. Lambert holds Bachelor of Arts degrees in Physics and Math from Occidental
College and a Masters in Business Administration from the University of
California, Los Angeles, and is a licensed California real estate broker.
Mr. Sondker has served as a director since August 1995. Also since August
1995, Mr. Sondker has served as President and Chief Executive Officer of Bay
View Capital Corporation, a publicly-traded bank holding company located in
the San Francisco Bay Area. Prior to joining Bay View Capital Corporation, Mr.
Sondker served from 1990 through June 1995 as the President and Chief
Executive Officer of Independence One Bank of California. During the fifteen
years prior to that time, Mr. Sondker served in senior executive positions
with several independent financial institutions having assets ranging in size
from $200 million to over $1 billion. Mr. Sondker holds both a Bachelor of
Arts and a J.D. degree from Washburn University. Mr. Sondker currently is a
director of Bay Area Council, a public policy forum for businesses in San
Francisco, California.
3
<PAGE>
Directors Continuing To Serve Until 2000
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
- ---- --- -------------------- --------
<S> <C> <C> <C>
Charles L. Biederman.............. 65 Vice Chairman and 1994
Executive Vice President,
Sunstone Hotel Investors, Inc.,
President,
Woodstone Homes, Inc.
H. Raymond Bingham (/2/)(/3/)..... 54 Executive Vice President and 1995
Chief Financial Officer,
Cadence Design Systems
Laurence S. Geller (/1/)(/4/)..... 51 Chief Executive Officer, 1996
Strategic Hotel
Capital Incorporated
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Lessee Special Assessment Committee
Mr. Biederman has served as Executive Vice President and a director since
September 1994. Mr. Biederman has also served as Vice Chairman of the Board of
Directors since January 1998. From 1990 until August 1995, Mr. Biederman
served as Executive Vice President of Sunstone Hotel Management, Inc. (the
"Management Company"). Mr. Biederman has previously served as President of
Provident Development Group Corporation, a Florida corporation engaged in the
design, development and sale of luxury homes in South Florida, from 1989 until
1992 and as President and Vice President of Colorado Home Improvements, Inc.,
a Colorado corporation engaged in general contracting, renovation and related
services for existing homes in the Denver, Colorado area, since 1989. From
1974 to 1996, Mr. Biederman was Vice President of Robert Rose and Associates,
and President of NDH. He is currently the President of Woodstone Homes, Inc.,
a Colorado corporation engaged in luxury home construction in the Vail,
Colorado area, President of C.L.B., Inc., a director of One Liberty
Properties, Inc., a New York-based real estate investment trust specializing
in the purchase and leasing of single tenant net leased properties throughout
the United States. Mr. Biederman has been engaged in the real estate
development business since 1962. Mr. Biederman holds a Bachelor of Arts degree
from Colgate University and a Bachelor of Architecture and a Masters in
Architecture from Columbia University and is a registered architect.
Mr. Bingham has served as a director since August 1995. Mr. Bingham also
serves as Chairman of the Audit Committee. Since 1993, Mr. Bingham has served
as the Executive Vice President and Chief Financial Officer of Cadence Design
Systems, a publicly traded computer aided design company. Prior to joining
Cadence Design Systems, Mr. Bingham served as Executive Vice President and
Chief Financial Officer of Red Lion Hotels & Inns for eight years. Mr. Bingham
is currently a director of WTD Industries, a wood products and wood mills
company, and IMS, a test equipment and manufacturing company. Mr. Bingham is
the former Chairman of the American Hotel & Motel Association Industry Real
Estate Finance Council and a former Director of the National Realty Committee.
Mr. Bingham holds a Bachelor of Science degree in Economics from Weber State
College and a Masters in Business Administration from Harvard Business School.
4
<PAGE>
Laurence Geller has served as a director since November 1996. Since May,
1997, Mr. Geller has been Chief Executive Officer of Strategic Hotel Capital
Incorporated. From 1989 to 1997, Mr. Geller was Chairman of Geller & Co., a
hotel-industry consulting firm based in Chicago, Illinois. From 1984 through
December 1989, Mr. Geller served as the Executive Vice President and Chief
Operating Officer of Hyatt Development Corporation, a developer of domestic
and international hotels and resorts, and from 1976 to 1981, as a Senior Vice
President of Holiday Inns, Inc. Mr. Geller serves as a consultant to the
Company pursuant to a consulting agreement entered into in July 1996. Mr.
Geller is a graduate of the Ealing Technical College (U.K.) in Hotel
Management and Catering.
Directors Continuing To Serve Until 2001
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
- ---- --- -------------------- --------
<S> <C> <C> <C>
Robert A. Alter (/1/)..... 48 Chairman, President, 1994
Chief Executive Officer
and Secretary,
Sunstone Hotel Investors, Inc.
Fredric H. Gould
(/2/)(/3/)(/4/).......... 63 General Partner, Gould Investors, L.P. 1995
Paul D. Kazilionis........ 41 Managing Principal of 1997
Westbrook Partners
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Lessee Special Assessment Committee
Mr. Alter has served as President, Secretary, Chief Executive Officer and
Chairman of the Board since August 1994. From 1990 until August 1995, Mr.
Alter served as President of the Management Company, which currently manages
all of the hotels owned by the Company. Mr. Alter also serves as chairman of
the board of directors of both the Management Company and Sunstone Hotel
Properties, Inc., the lessee of all the hotels owned by the Company. Mr. Alter
has been engaged in the hotel ownership, development and management business
since 1976. Mr. Alter is a Certified Hotel Administrator, as designated by the
American Hotel and Motel Association, and is a past President and a former
member of the Board of Directors of the International Association of Holiday
Inns, the franchisee association for Holiday Inn hotels. Mr. Alter is
President of Riverside Hotel Partners and a Partner of Southeast Aurora Hotel
Venture. Mr. Alter holds a Bachelor of Science degree in Hotel Administration
from Cornell University.
Mr. Gould has served as a director since August 1995. Mr. Gould has served
for the past seven years as General Partner of Gould Investors L.P., a master
limited partnership engaged in the ownership and operation of various types of
income-producing real property located throughout the United States and which
holds substantial interests in publicly held real estate investment trusts and
savings and commercial banks. In addition, Mr. Gould is currently the Chairman
of the Board of Trustees of BRT Realty Trust, a publicly-traded mortgage real
estate investment trust, Chairman of the Board of Directors of One Liberty
Properties, Inc., President of REIT Management Corporation, President of
Majestic Property Management Corporation and Chairman of Georgetown Partners,
Inc. Mr. Gould holds a Bachelor of Business Administration from Lehigh
University and an L.L.B. from New York Law School.
5
<PAGE>
Mr. Kazilionis has served as a director since October 1997. From April 1994
until the present, Mr. Kazilionis has been a Managing Principal of Westbrook
Real Estate Partners, L.L.C., a real estate investment management company.
Prior to co-founding Westbrook Partners, Mr. Kazilionis spent 12 years at
Morgan Stanley and Company serving most recently as Managing Director and
President of the General Partner of the Morgan Stanley Real Estate Fund,
through which Morgan Stanley conducted its principal real estate investment
activities. Mr. Kazilionis is also a Director of Berkshire Realty Company,
Inc. and Sarakreek Holding, N.V. Mr. Kazilionis received a Bachelor of Arts
degree from Colby College in 1979 and a Masters in Business Administration
degree from the Amos Tuck School of Business Administration at Dartmouth
College in 1982. Mr. Kazilionis is a member of the Dartmouth College real
estate advisory committee.
There is no family relationship between any director or executive officer of
the Company.
The Board of Directors and its Committees
The Board of Directors has four committees: the Audit Committee, the
Compensation Committee, the Lessee Special Assessment Committee and the
Executive Committee. During the 1998 fiscal year, Sunstone's Board of
Directors held nine (9) meetings. No incumbent Director attended fewer than
75% of the aggregate meetings of the Board of Directors and meetings of the
committees of the Board on which he served other than Mr. Kazilionis who did
not attend any meetings. Westbrook Partners did send a representative to each
Board meeting who was granted observation rights.
The Audit Committee, which held three meetings during fiscal 1998, consists
of Fredric H. Gould, H. Raymond Bingham, David E. Lambert and Edward H.
Sondker. The Audit Committee recommends engagement of the Company's
independent accountants and is primarily responsible for approving the
services performed by the Company's independent accountants and for reviewing
and evaluating the Company's accounting principles and its system of internal
accounting controls.
The Compensation Committee of the Board of Directors consists of Fredric H.
Gould, H. Raymond Bingham, David E. Lambert and Edward H. Sondker. The
Compensation Committee held one meeting during fiscal 1998. The Compensation
Committee is responsible for administering the Company's 1994 Stock Incentive
Plan and other Stock Option Plans. The Compensation Committee determines
recipients of awards, sets the exercise price of options granted and
determines the terms, provisions and conditions of all rights granted under
such plan. This Committee also reviews and approves the Company's general
compensation policies and determines the recipients of and the amount of cash
bonuses to be paid to key management.
The Executive Committee held one meeting during fiscal year 1998. Its
members are Robert A. Alter, David E. Lambert and Laurence S. Geller. The
Executive Committee has the right to exercise all powers of the Board of
Directors except those powers, which, by law, or under the Charter or Bylaws
of the Corporation, cannot be delegated to a committee of the Board of
Directors. However, its current function is to review the construction budgets
for hotels being renovated by the Company and analyze whether amendments
should be made to the Percentage Leases with Sunstone Hotel Properties, as
lessee.
The Board of Directors formed the Lessee Special Assessment Committee in
September 1998 with David E. Lambert, as Chairman, Laurence Geller and Fredric
Gould. The Committee held four meetings during 1998. The Committee was formed
in order to study a possible restructuring of the relationship between the
Company and the Lessee.
6
<PAGE>
Director Remuneration
Directors who are not employees of the Company or one of its subsidiaries
receive a cash payment of $2,500 for each quarterly Board meeting attended,
and $1,000 for each special Board meeting attended. Directors who are
employees will not receive such a payment in connection with their attendance
at any quarterly or special meeting of the Board. However, the Company
reimburses all directors for their out-of-pocket expenses incurred in
connection with their services on the Board of Directors.
Non-employee directors are also eligible to participate in the Company's
1994 Directors Plan (the "Directors Plan"), which consists of two programs:
(i) the Automatic Option Grant Program pursuant to which options to purchase
shares of Common Stock are automatically granted at periodic intervals, and
(ii) the Automatic Stock Issuance Program under which direct issuances of
Common Stock are automatically made at periodic intervals in consideration of
the non-employee director's service on the Board.
Under the Directors Plan, automatic option grants and direct stock issuances
are made upon the occurrence of each of the following three events. First,
following an individual's initial election to serve as a non-employee Board
member, he or she receives an option to purchase 1,500 shares of Common Stock
and a direct issuance of 1,500 shares of Common Stock on the date of the first
Board meeting held after the annual stockholders meeting at which that
individual was elected to the Board of Directors. Second, each continuing non-
employee Board member receives an additional option to purchase 1,500 shares
of Common Stock and an additional issuance of 1,500 shares of Common Stock on
each anniversary of the later of (a) August 10, 1995, or (b) the date on which
the non-employee Board member was first elected or appointed to the Board of
Directors, if such Board member continues to serve on the Board of Directors
through such anniversary date. Third, each individual who ceases to serve as a
Board member but is subsequently re-elected or re-appointed to the Board of
Directors will be granted an option to purchase 1,500 shares of Common Stock
and a direct issuance of 1,500 shares of Common Stock on the date of the first
Board meeting held after the annual stockholders meeting at which that
individual is re-elected, provided that individual continues to serve as a
non-employee Board member through the date of such Board meeting.
Options are granted under the Automatic Option Grant Program at an exercise
price per share equal to the fair market value per share of Common Stock on
the option grant date. Each option has a maximum term of ten years. Each
automatic option grant is immediately exercisable for fully vested shares of
Common Stock. The automatic option grant remains exercisable until the
expiration date of such option, whether or not the optionee continues to serve
as a Board member, unless terminated in connection with an acquisition of the
Company by merger or asset sale.
Each direct stock issuance is subject to a six-month vesting schedule.
Should the non-employee Board member cease to remain in Board service prior to
the expiration of the six-month vesting period, then all shares subject to the
issuance must be surrendered to the Company for cancellation, and the Board
member will have no further rights with respect to those shares.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Automatic Option Grant Program which is not to be
assumed by the successor corporation will terminate and cease to be
outstanding and each outstanding direct stock issuance under the Automatic
Stock Issuance Program will immediately vest in full.
Neither Mr. Alter nor Mr. Biederman received any compensation as a director,
other than reimbursement for their out-of-pocket expenses incurred in
connection with their attendance at meetings of the Board of Directors.
7
<PAGE>
OTHER MATTERS
The Company knows of no other matters to be brought before the Annual
Meeting. If any other business should properly come before the Annual Meeting,
the persons named in the proxy intend to vote thereon in accordance with their
best judgment.
OWNERSHIP OF SECURITIES
The following table sets forth information concerning the beneficial
ownership of shares of the Company's Common Stock by (i) each beneficial owner
of more than 5% of the outstanding shares of Common Stock; (ii) each director
and nominee of the Company, (iii) the executive officers named in the Summary
Compensation Table below; and (iv) by all current directors and executive
officers of the Company as a group. This information is presented as of March
24, 1999. The number of shares of Common Stock includes the number of shares
of Common Stock into which Units may be redeemed in certain circumstances.
Except as otherwise noted, each beneficial owner listed has sole investment
and voting power with respect to the Common Stock indicated.
<TABLE>
<CAPTION>
Name of Individual or Number of Shares
Number of Persons on Position with of Common Stock Percent
Group Company Beneficially Owned (/1/) of Class
--------------------- ------------- ------------------------ --------
<S> <C> <C> <C>
Westbrook Real Estate 3,989,867 (/2/) 9.6%
Fund I, L.P.
Westbrook Real Estate
Co-Investment
Partnership I, L.P.
c/o Westbrook Partners
599 Lexington Avenue,
Suite 3800
New York, NY 10022
Robert A. Alter......... President, Secretary, 427,564 (/3/) 1.0
Chief Executive Officer
and Director
Charles L. Biederman.... Executive Vice President 462,047 (/4/) 1.1
and Director
R. Terrence Crowley..... Chief Operating Officer 20,000 (/5/) *
Kenneth J. Biehl........ Chief Financial Officer (/6/) 3,000 (/5/) *
H. Raymond Bingham...... Director 12,038 (/7/) *
C. Robert Enever........ Director 194,140 (/8/) *
Laurence S. Geller...... Director 70,250 (/9/) *
Fredric H. Gould........ Director 39,538 (/10/) *
David E. Lambert........ Director 18,334 (/11/) *
Paul D. Kazilionis...... Director 3,989,867 (/2/)(/12/) 9.6
Edward H. Sondker....... Director 14,138 (/13/) *
All current directors
and executive officers
as a group (11
persons)............... 5,250,916 (/14/) 12.7
</TABLE>
- --------
*Less than one percent
8
<PAGE>
(1) Sunstone Hotel Investors, L.P. (the "Partnership") had 39,710,677 Common
Units and 250,000 Preferred Units of partnership interests outstanding as
of March 24 1999, of which 37,638,427 Common Units and all of the
Preferred Units were owned by the Company, corresponding to the number of
shares of Common Stock or 250,000 shares of convertible Preferred Stock
outstanding as of that date, and 2,072,250 by other limited partners.
Each of the Common Units are redeemable pursuant to certain redemption
rights (the "Redemption Rights") on a one-for-one basis for shares of
Common Stock. The number and percentages set forth above assumes that all
Units held by the person are redeemed for shares of Common Stock. The
total number of shares of Common Stock outstanding used in calculating
the percentage assumes that all convertible Preferred Stock is converted
and all of the Units held by other persons are redeemed for shares of
Common Stock.
(2) Includes (i) 1,699,605 shares of Common Stock initially issuable to the
Westbrook Funds upon conversion of Preferred Stock, subject to adjustment
in certain events and (ii) 3,000 shares of Common Stock underlying stock
options granted pursuant to the Directors Plan which are currently
exercisable or which become exercisable within 60 days after March 24,
1999.
(3) Includes (i) 42,000 shares of Common Stock underlying stock options
granted pursuant to the Incentive Plan which are currently exercisable or
which become exercisable within 60 days after March 24, 1999 and (ii)
385,564 Partnership Units redeemable pursuant to the Redemption Rights on
a one-for-one basis for shares of Common Stock, including 65,600
Partnership Units owned by Riverside Hotel Partners of which Mr. Alter
has an 82% interest and 1,003 Partnership Units owned by Alter Investment
Group, Ltd.
(4) Includes (i) 26,320 shares of Common Stock underlying stock options
granted pursuant to the Incentive Plan which are currently exercisable or
which become exercisable within 60 days after March 24, 1999 and (ii)
397,047 Partnership Units redeemable pursuant to the Redemption Rights on
a one-for-one basis for shares of Common Stock, including 14,400
Partnership Units owned by Riverside Hotel Partners of which Mr.
Biederman has an 18% interest.
(5) Common Stock underlying stock options granted pursuant to the Incentive
Plan which are currently exercisable or which become exercisable within
60 days after March 24, 1999.
(6) Mr. Biehl resigned his position as Chief Financial Officer of the Company
on February 26, 1999.
(7) Includes 6,000 shares of Common Stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after March 24, 1999.
(8) Includes (i) 3,000 shares of Common Stock underlying stock options
granted pursuant to the Directors Plan which are currently exercisable or
which become exercisable within 60 days after March 24, 1999, (ii) 61,049
Partnership Units redeemable pursuant to the Redemption Rights on a one-
for-one basis for shares of Common Stock, (iii) 100,254 Partnership Units
owned by Enever Rout Investment Group Ltd. redeemable on a one-for-one
basis for shares of Common Stock and (iv) 20,799 shares of Common Stock
owned by Mr. Enever's spouse.
(9) Includes 54,500 shares of Common Stock underlying stock options which are
currently exercisable or which become exercisable within 60 days after
March 24, 1999, of which 50,000 were granted in connection with his
consulting agreement with the Company pursuant to the Incentive Plan and
4,500 were granted pursuant to the Directors Plan.
(10) Includes (i) 1,500 shares of Common Stock underlying stock options
granted pursuant to the Directors Plan which are currently exercisable or
which become exercisable within 60 days after March 24, 1999 and (ii)
12,000 shares of Common Stock held by One Liberty Properties, Inc.
9
<PAGE>
of which Mr. Gould is Chairman of the Board, (ii) 3,000 shares held by BRT
Pension Trust of which Mr. Gould is the Trustee, (iii) 3,000 Shares held
by GIT Pension Trust of which Mr. Gould is the Trustee, (iv) 3,000 shares
held by REIT Management Corporation Pension Trust of which Mr. Gould is
the Trustee, (v) 3,000 shares held by REIT Management Corporation Profit
Sharing Trust of which Mr. Gould is the Trustee.
(11) Includes 6,000 shares of Common Stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
become exercisable within 60 days after March 24, 1999.
(12) Includes (i) 2,287,262 shares of Common Stock owned by the Westbrook
Funds, (ii) 1,699,605 shares of Common Stock initially issuable to the
Westbrook Funds upon conversion of the Preferred Stock, subject to
adjustment in certain events and (iii) 3,000 shares of Common Stock
underlying stock options granted pursuant to the Directors Plan which are
currently exercisable or which become exercisable within 60 days after
March 24, 1999. Mr. Kazilionis is a Managing Principal of Westbrook
Partners, the General Partner of the Westbrook Funds.
(13) Includes (i) 6,000 shares of Common Stock underlying stock options
granted pursuant to the Directors Plan which are currently exercisable or
which become exercisable within 60 days after March 24, 1999 and (ii)
2,000 shares owned by the Sondker Family Trust.
(14) Includes (i) 171,320 shares of Common Stock underlying stock options
granted pursuant to the Incentive Plan and the Directors Plan which are
currently exercisable or which become exercisable within 60 days after
March 24, 1999 and (ii) 964,713 Partnership Units redeemable pursuant to
the Redemption Rights on a one-for-one basis for shares of Common Stock.
Also includes the shares deemed to be beneficially owned by Mr.
Kazilionis.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Summary of Cash and Other Compensation
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and each of the
executive officers of the Company whose salary and bonus for the 1998 fiscal
year was in excess of $100,000 for services rendered in all capacities to the
Company and its subsidiaries for the fiscal years ended December 31, 1996,
1997 and 1998. Such individuals will be hereafter referred to as the "Named
Executive Officers."
<TABLE>
<CAPTION>
Shares
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation (/1/) Options (/2/) Compensation
------------------ ---- -------- -------- ------------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter......... 1998 $120,000 $100,000 $5,064 527,600 (/3/) $30,829 (/4/)
President, Chief 1997 120,000 200,000 5,964 124,000 10,793 (/5/)
Executive Officer and 1996 60,000 150,000 6,294 113,600 9,186 (/6/)
Secretary
Charles L. Biederman.... 1998 30,000 200,000 3,386 119,400 (/3/) 21,747 (/7/)
Executive Vice 1997 30,000 400,000 2,989 106,000 8,805 (/8/)
President 1996 30,000 400,000 3,768 50,900 13,795 (/6/)
R. Terrence Crowley..... 1998 225,000 225,000 1,053 -- 2,905 (/9/)
Chief Operating Officer 1997 (/10/) 34,618 37,500 176 100,000 129 (/6/)
Kenneth J. Biehl........ 1998 161,497 26,289 1,053 -- 2,160 (/6/)
Chief Financial
Officer (/11/) 1997 (/12/) 196,596 14,375 -- 15,000 1,826 (/6/)
</TABLE>
- -------
10
<PAGE>
(1) Represents medical insurance premiums paid by the Company on behalf of
the Named Executive Officers.
(2) The options were granted under the Company's 1994 Stock Incentive Plan.
See "Executive Compensation and Related Information--Option Grants in
Last Fiscal Year."
(3) Includes a total of 357,600 and 89,400 transferable warrants which were
granted to Mr. Alter and Mr. Biederman, respectively, in replacement of
previously granted options for the same number of shares, at the same
exercise prices, which were cancelled as of September 25, 1998. See
"Certain Transactions--Lessee SAR/Warrant Exchange Program."
(4) Represents (i) life insurance premiums in the aggregate amount of $8,801
paid by the Company on behalf of Mr. Alter and (ii) a matching
contribution of $22,028 made by the Company on behalf of Mr. Alter under
the Company's Executive Deferred Compensation Plan.
(5) Represents (i) life insurance premiums in the aggregate amount of $10,293
paid by the Company on behalf of Mr. Alter and (ii) a matching
contribution of $500 made by the Company on behalf of Mr. Alter under the
Company's 401(k) Plan.
(6) Represents life insurance premiums paid by the Company on behalf of the
Named Executive Officer.
(7) Represents life insurance premiums in the aggregate amount of $8,235 paid
by the Company on behalf of Mr. Biederman and (ii) a matching
contribution of $13,512 made by the Company on behalf of Mr. Biederman
under the Company's Executive Deferred Compensation Plan.
(8) Represents (i) life insurance premiums in the aggregate amount of $8,235
paid by the Company on behalf of Mr. Biederman and (ii) a matching
contribution of $570 made by the Company on behalf of Mr. Biederman under
the Company's 401(k) Plan.
(9) Represents (i) insurance premiums in the aggregate amount of $722 paid by
the Company on behalf of Mr. Crowley and (ii) a matching contribution of
$2,183 made by the Company on behalf of Mr. Crowley under the Company's
Executive Deferred Compensation Plan.
(10) Mr. Crowley commenced employment with the Company on October 1, 1997.
(11) Mr. Biehl resigned his position as Chief Financial Officer of the Company
on February 26, 1999.
(12) Mr. Biehl commenced employment with the Company on January 16, 1997.
Prior to joining the Company, Mr. Biehl served as Chief Financial Officer
of Sunstone Hotel Properties, Inc., the operator of the Company's hotels,
from February 1996.
11
<PAGE>
Stock Options
The following table contains information concerning the grant of stock
options and transferable warrants to the Named Executive Officers under the
Company's 1994 Stock Incentive Plan for the fiscal year ended December 31,
1998.
OPTION GRANTS/WARRANT ISSUANCES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------
Number of Percent of Potential Realizable
Securities Total Options Value at Assumed Annual
Underlying Granted/ Rates of Stock Price
Options Warrants Appreciation for
Granted/ Issued to Exercise or Basic Options/Warrants (/2/)
Warrants Employees Price Expiration -----------------------
Name Issued in 1998 (per share) (/1/) Date 5% 10%
- ---- ---------- ------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter......... 120,000 (/3/)(/4/) 17.7% $16.25 01/15/08 $ 1,226,344 $ 3,107,798
50,000 (/3/) 7.4% 15.88 03/02/08 499,342 1,265,432
130,000 (/5/) 19.2% 9.50 09/24/03 341,208 753,980
83,600 (/5/) 12.4% 10.50 09/24/03 242,520 535,906
24,000 (/5/) 3.6% 16.63 09/24/03 110,262 243,667
120,000 (/5/) 17.7% 16.25 09/24/03 538,749 1,190,495
Charles L. Biederman.... 30,000 (/3/)(/4/) 4.4% 16.25 01/15/08 306,586 776,949
10,680 (/5/) 1.6% 9.50 09/24/03 28,032 61,942
26,000 (/5/) 3.8% 9.88 09/24/03 70,971 156,828
16,720 (/5/) 2.5% 10.50 09/24/03 48,504 107,181
6,000 (/5/) 0.9% 16.63 09/24/03 27,567 60,917
30,000 (/5/) 4.4% 16.25 09/24/03 134,687 297,624
R. Terrence Crowley..... -- -- -- -- -- --
Kenneth J. Biehl (/6/).. -- -- -- -- -- --
</TABLE>
- --------
(1) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option/warrant exercise by
loaning the holder sufficient funds to pay the exercise price for the
purchased shares, together with any federal and state income tax liability
incurred by the holder in connection with such exercise. The Compensation
Committee of the Board of Directors, as the Plan Administrator of the
Company's 1994 Stock Incentive Plan, has the discretionary authority to
reprice the options and warrants through the cancellation of those options
and warrants and the grant of replacement options and warrants with an
exercise price based on the fair market value of the underlying shares on
the grant date.
(2) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the option or warrant term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Common Stock does in fact appreciate over the option term, no value will
be realized from the option grants or warrant issuances made to the
executive officers.
(3) The options were granted under the Company's 1994 Stock Incentive Plan.
Each option becomes exercisable in a series of five (5) equal annual
installments measured from the grant date. The
12
<PAGE>
options will automatically accelerate in full in the event of an
acquisition of the Company by a merger or asset sale in which such option
is not to be assumed or replaced by the successor corporation. Each option
includes a limited stock appreciation right which provides the optionee
with the right, exercisable upon the successful completion of a hostile
tender offer for more than 50% of the Company's outstanding voting
securities, to surrender the option to the Company, to the extent the
option is exercisable for vested shares, in return for a cash distribution
per surrendered option share equal to the excess of (i) the fair market
value on the surrender date over (ii) the option exercise price payable per
share. Each option has a maximum term of ten years, subject to earlier
termination following the optionee's cessation of service with the Company.
(4) The options were granted on January 16, 1998 and were intended to provide
Messrs. Alter and Biederman with a source of funding for their obligations
to support stock appreciation rights granted by Sunstone Hotel Properties,
Inc. to its employees. The options were cancelled effective September 25,
1998 and replaced with transferable warrants for the same number of shares
at the same exercise price. See footnote (5) below.
(5) The transferable warrants were granted under the Company's 1994 Stock
Incentive Plan. Each warrant was granted in replacement of a previously
granted option for the same number of shares, at the same exercise price,
which was cancelled effective September 25, 1998. Each warrant becomes
exercisable in full on October 25, 1999. The warrants will accelerate and
become fully exercisable in the event of an acquisition of the Company or
Sunstone Hotel Properties, Inc. by a merger or asset sale or in the event
Sunstone Hotel Properties, Inc. completes an initial public offering of
its Common Stock yielding net proceeds of at least $15 million. The
warrants are being assigned by Messrs. Alter and Biederman to employees of
Sunstone Hotel Properties, Inc. of which Mr. Alter and Mr. Biederman own
eighty percent (80%) and twenty percent (20%), respectively, of the
outstanding voting securities. See "Certain Transactions--Lessee
SAR/Warrant Exchange Program."
(6) Mr. Biehl resigned his position as Chief Financial Officer of the Company
on February 26, 1999.
13
<PAGE>
Option Exercises and Holdings
The following table provides information, with respect to the Named
Executive Officers, concerning the exercise of options during the 1998 fiscal
year and unexercised options and warrants held by them at the end of that
fiscal year. No stock appreciation rights were exercised by any such officer
during such year and, except for the stock appreciation rights described in
footnote (1) above, no stock appreciation rights were outstanding on December
31, 1998.
AGGREGATE
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised In-the-Money
Options/Warrants at Options/Warrants at
Shares FY-End FY-End (/2/)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized (/1/) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter......... -- -- 32,000 560,600 $ 0 $ 0
Charles L. Biederman.... 38,680 $282,318 26,320 248,080 0 0
R. Terrence Crowley..... -- -- 20,000 80,000 0 0
Kenneth J. Biehl (/3/).. -- -- 3,000 12,000 0 0
</TABLE>
- --------
(1) Based on the market price of the purchased shares on the exercise date
less the option exercise price paid for those shares.
(2) Based on the fair market value of the option or warrant shares at fiscal
year-end ($9.4375 per share) less the exercise price.
(3) Mr. Biehl resigned his position as Chief Financial Officer of the Company
on February 26, 1999.
Management Contracts and Change in Control Agreements
Messrs. Alter and Biederman each have entered into Employment Agreements
with the Company. Each Employment Agreement is for a one-year term which will
renew automatically until terminated. Mr. Alter's base salary is $120,000 per
year, subject to increases approved by the Compensation Committee. Mr.
Biederman's base salary is $30,000 per year, subject to increase based on
recommendations by the President for performance of special assignments. Mr.
Alter is required to devote substantially all of his time to the business of
the Company, while Mr. Biederman is not. The Company is required to maintain a
comprehensive medical plan, life insurance and other fringe benefits for both
Messrs. Alter and Biederman. Upon a termination without cause, the Company is
required to pay one year's base salary to Mr. Alter and Mr. Biederman.
As Plan Administrator of the Company's 1994 Stock Incentive Plan, the
Compensation Committee of the Board of Directors has the authority to provide
for the accelerated vesting of any outstanding options to purchase shares of
the Company's Common Stock held by the Named Executive Officers under such
plan, in the event their employment were to be terminated (whether
involuntarily or through a forced resignation) following (i) an acquisition of
the Company by merger or asset sale or (ii) a hostile change in control of the
Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or by proxy contest for the election of Board
members).
14
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors as of December 31, 1998
is comprised of Messrs. Gould, Bingham, Lambert and Sondker. None of such
persons was at any time during the fiscal year ended December 31, 1998, or at
any other time an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
COMPENSATION COMMITTEE REPORT
Overview and Philosophy
The Compensation Committee (the "Committee") of the Company's Board of
Directors is responsible for establishing the compensation payable to the
Company's executive officers. Such compensation is primarily comprised of the
following elements: base salary, annual performance incentives and stock
options.
It is the Committee's objective that executive compensation be directly
influenced by the Company's business results. Accordingly, the Company's
executive compensation program is structured to stimulate and reward
exceptional performance that results in enhanced corporate and stockholder
values. To reinforce the attainment of Company goals, the Committee determined
that a substantial portion of the compensation for the executive officers for
the 1998 fiscal year should be in the form of cash bonuses, based upon the
Company's performance in 1998, and stock options.
Compensation Components
Base Salary
The base salary for each executive officer is set on the basis of personal
performance, the Compensation Committee's assessment of salary levels in
effect for comparable positions with the Company's principal competitors and
internal comparability considerations. The weight given to each of these
factors may vary from individual to individual. Base salaries are reviewed on
an annual basis, and adjustments, if any, will be made in accordance with the
factors indicated above. For the 1998 fiscal year, the base salary for Mr.
Biederman was set at $30,000, the same level as that established for the 1997
fiscal year, which had been determined by the employment agreement entered
into by Mr. Biederman at the time of the initial public offering of the
Company's Common Stock.
Cash Bonuses
The Compensation Committee awarded bonuses in fiscal 1998 designed to reward
executive officers on the basis of each executive officer's individual
performance. Mr. Biederman was awarded cash bonuses in an aggregate amount of
$200,000 in recognition of his contribution to the renovation and
reconstruction activity he supervised during fiscal year 1998. Four cash bonus
awards, each in the amount of $50,000, were paid based on the construction
expenditures for renovations of 20 of the Company's hotels which are
undertaken during fiscal year 1998.
Stock Options
Stock options are designed to align the interests of the executive officers
with those of the stockholders and to provide each with an equity stake in the
business. The Compensation Committee
15
<PAGE>
has established general guidelines for awarding options to executive officers
which takes into account an individual's current position with the Company,
comparability with grants made to other Company executives, and his or her
potential for growth within the Company. The Compensation Committee does not
always strictly adhere to these guidelines and will occasionally vary the size
of the option award as circumstances warrant. In 1998, Mr. Biederman received
a stock option for 30,000 shares. However, that option was intended to serve
as a source of funding for Mr. Biederman's obligations to support stock
appreciation rights granted by Sunstone Hotel Properties, Inc. to its
employees. The option was cancelled effective September 25, 1998 and replaced
with a transferable warrant for the same number of shares at the same exercise
price. See "Certain Transactions--Lessee SAR/Warrant Exchange Program." No
stock options were awarded to either of Messrs. Crowley or Biehl in 1998.
Chief Executive Officer Performance and Compensation
In establishing Mr. Alter's base salary, cash bonus and stock option grants
for fiscal 1998, the Committee considered information regarding the
compensation paid to presidents of other publicly-held hotel real estate
investment trusts and also considered the compensation paid to Mr. Alter by
Sunstone Hotel Management, Inc. and Sunstone Hotel Properties, Inc. during
1998. For the 1998 fiscal year, the base salary for Mr. Alter was set at the
same level as that established for the 1997 fiscal year which had been
determined by the employment agreement entered into by Mr. Alter at the time
of the initial public offering of the Company's Common Stock. Mr. Alter earned
a cash bonus of $100,000 for fiscal year 1998 in recognition of his increased
responsibilities in managing the Company as a result of its significant growth
in 1998 and in light of the relatively low base salary paid to Mr. Alter in
1998.
In 1998, Mr. Alter was granted two options to purchase shares of the
Company's Common Stock under the Company's 1994 Stock Incentive Plan. The
first option, for 120,000 shares, was intended to serve as a source of funding
for Mr. Alter's obligations to support stock appreciation rights granted by
Sunstone Hotel Properties, Inc. to its employees. The option was cancelled
effective September 25, 1998 and replaced with a transferable warrant for the
same number of shares at the same exercise price. See "Certain Transactions--
Lessee SAR/Warrant Exchange Program".
The second option, for 50,000 shares, was granted in March 1998 and becomes
exercisable in a series of five (5) equal annual installments over Mr. Alter's
period of service with the Company. Accordingly, the option will provide a
return only if Mr. Alter remains with the Company and only if the market price
of the Company's Common Stock appreciates over the term of the option.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to publicly held companies for compensation exceeding $1 million
paid to certain executive officers. The compensation paid to the Company's
executive officers for the 1998 fiscal year did not exceed the $1 million
limit per officer, nor is it expected that the compensation to be paid to the
Company's executive officers for fiscal 1999 will exceed that limit. The
Company's 1994 Stock Incentive Plan is structured so that any compensation
deemed paid to an executive officer when he exercises an outstanding option
under that Plan with an exercise price equal to the fair market value of the
option shares on the grant date will qualify as performance-based compensation
which will not be subject to the $1 million limitation. Because it is very
unlikely that the cash compensation payable to any of the Company's executive
officers in the foreseeable future will approach the $1 million limit, the
Compensation Committee has decided at this time not to take any other action
to limit or restructure the elements of cash
16
<PAGE>
compensation payable to the Company's executive officers. The Compensation
Committee will reconsider this decision should the individual compensation of
any executive officer ever approach the $1 million level.
It is the opinion of the Committee that the adopted executive compensation
policies and plans provide the necessary total remuneration program to align,
in the context of the Company's relationship with the Lessee necessitated by
the Internal Revenue Code for Real Estate Investment Trusts, the Company's
performance and the interests of the Company's stockholders with competitive
and equitable executive compensation in a balanced and reasonable manner, for
both the short- and long-term.
This report has been furnished by members of the Compensation Committee.
COMPENSATION COMMITTEE
Fredric H. Gould
H. Raymond Bingham
David E. Lambert
Edward H. Sondker
17
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the change in the Company's stockholder return
on the Common Stock during 1998 (which is traded on the New York Stock
Exchange under the symbol "SSI") with the changes in (i) the Standard & Poor's
500 Stock Index (the "S&P 500 Index"), (ii) the National Association of Real
Estate Trust Equity Index ("NAREIT Equity Index") and (iii) a peer group of
six issuers with similar businesses ("Peer Group") for the same period,
assuming a base investment of $100 in the Common Stock in each index for
comparative purposes.
SUNSTONE HOTEL INVESTORS, INC.
[SUNSTONE HOTEL GRAPH APPEARS HERE]
The foregoing graph is based upon the following data:
<TABLE>
<CAPTION>
Aug 16, Dec 31, Jun 30, Dec 31, Jun 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
INDEX 95 95 96 96 97 97 98 98 98 98
----- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sunstone Hotel
Investors.............. 100.00 111.71 121.24 152.97 175.38 219.51 203.60 172.41 120.09 129.01
S&P..................... 100.00 110.98 122.17 136.35 164.45 181.66 207.23 214.07 192.78 233.83
NAREIT Equity Index..... 100.00 108.05 116.22 148.35 157.19 179.74 178.76 170.83 153.53 149.86
Peer Group.............. 100.00 110.07 120.86 153.72 162.27 176.52 179.17 154.58 122.42 124.86
</TABLE>
- --------
(1) The peer group companies consist of MeriStar Hospitality Corporation,
Boykin Lodging Company, Equity Inns, Felcor Suite Hotels, Inc., Innkeepers
USA Trust and RFS, Inc.
The foregoing price performance comparisons shall not be deemed incorporated
by reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933, as amended, (the
"Securities Act"), or under the Exchange Act, except to the extent that the
Company specifically incorporates this graph by reference and shall not
otherwise be deemed filed under the Securities Act or Exchange Act.
There can be no assurance that the Company's share performance will continue
into the future with the same or similar trends depicted in the above graph.
The Company will not make or endorse any predictions as to future share
performance.
18
<PAGE>
CERTAIN TRANSACTIONS
The Company, a Maryland corporation, was formed on September 21, 1994, as a
real estate investment trust ("REIT"). The Company completed an initial public
offering (the "Offering") on August 16, 1995 and contributed the net proceeds
therefrom to Sunstone Hotel Investors, L.P. (the "Partnership"). On October
15, 1997, the Company purchased a portfolio consisting of 17 hotels (the
"Kahler Hotels"). In order to qualify as a REIT, neither the Company nor the
Partnership may operate hotels. As of March 24, 1999, the Partnership has a
portfolio of 56 hotels which it leases to Sunstone Hotel Properties, Inc. (the
"Lessee") pursuant to separate percentage leases which provide for rent
payments equal to the greater of (i) fixed based rent and (ii) percentage rent
based on room revenues, Lessee's food and beverage revenues and sublease and
concession rentals (the "Percentage Leases"). The Lessee is owned by Robert A.
Alter, Chairman and President of the Company (80%) and Charles L. Biederman,
Vice Chairman and Executive Vice President of the Company (20%). The Lessee
has entered into a management agreement (the "Management Agreement") pursuant
to which all of the hotels it leases from the Partnership are managed by
Sunstone Hotel Management, Inc. (the "Management Company"), of which Mr. Alter
is the sole shareholder.
The Company and the Partnership have entered into a number of transactions
and agreements with Mr. Alter and Mr. Biederman and certain of their
affiliates.
Percentage Leases
In order to qualify as a REIT, the Partnership has leased each of its hotels
to the Lessee pursuant to the Percentage Leases. Each Percentage Lease has
been approved by a majority of the Independent Directors. The Percentage
Leases are designed to allow the Company to participate in revenue growth by
providing that (i) between approximately 9% to 50% in the first tier and 60%
to 68% in the second tier of room revenues in excess of specified amounts,
(ii) 5% of the Lessee's food and beverage revenues, (iii) 100% of any sublease
and concession rentals, and (iv) other net revenues described in the
Percentage Lease for the applicable hotel in excess of base rent will be paid
to the Partnership as percentage rent. Once such expenses together with all
other operating expenses of each hotel is paid by the Lessee, the Lessee will
be entitled to all of the net income from the hotels.
Management Agreement
The Lessee has entered into the Management Agreement with the Management
Company for each of the hotels it leases from the Partnership. Pursuant to the
Management Agreement, the Management Company provides management and
administrative services to the Lessee in consideration for between 1% to 2% of
gross revenue of the hotels and reimbursement of certain direct expenses
incurred by the Management Company for the Lessee. As the sole shareholder of
the Management Company, Mr. Alter would be entitled to the net income of the
Management Company. Because of the Lessee's current financial condition, the
Management Company has agreed to abate payment of management fees and
reimbursements, up to a maximum of $3.5 million during 1998. Through December
31, 1998, management fees amounting to $3.3 million have been abated. No such
agreement is in effect for 1999.
Employment Agreements
The Company entered into Employment Agreements with each of Mr. Alter and
Mr. Biederman that renew automatically each August 16 until terminated. Mr.
Alter serves as President and is required to devote substantially all of his
time to the business of the Company with an annual base
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compensation of $120,000 a year subject to any further increases approved by
the Compensation Committee. Mr. Biederman serves as Executive Vice President
for an annual base compensation of $30,000, subject to any increases based on
recommendations by the President of the Company for performance of special
assignments. Mr. Biederman is not required to devote substantially all of his
time to the business of the Company. Each of the Employment Agreements
restrict competitive activities by Mr. Alter, Mr. Biederman or any of their
affiliates.
Transactions with Lessee
The Lessee and Company entered into a series of transactions during fiscal
year 1998 relating to the hotels acquired by the Company and leased to the
Lessee. Mr. Alter owns 80% and Mr. Biederman owns 20% of the Lessee. During
fiscal 1998, the Company reimbursed the Lessee $962,000 for certain Lessee's
employees' salaries and identifiable expenses incurred in connection with
acquisition and construction services. Commencing in 1999, the Lessee
employees involved in acquisition and construction services became employees
of the Company.
Upon the execution of each Percentage Lease, the Company assigns all hotel
operating assets and liabilities to the Lessee at the Company's cost. The
Lessee records all such hotel operating assets and liabilities at the
Company's cost with a corresponding net amount payable to or receivable from
the Company, depending on whether net assets or liabilities were assigned.
During 1998, the net assets assigned in this manner totaled $218,000.
The Lessee was reimbursed in 1998 by the Company for $1.6 million in costs
it incurred related to the Company's renovation of the hotels. In addition,
the Company reimbursed the Lessee for general and administrative expenses
incurred by the Lessee on behalf of the Company. The total costs reimbursable
to the Lessee during 1998 totaled $167,000.
During 1998, the Lessee reconveyed to the Company certain hotel telephone
equipment relating to hotels acquired from Kahler that was being leased from a
third party pursuant to a capital lease agreement. The equipment carried at
$404,000 and related capital lease obligation of $421,000 were previously
assigned to the Lessee by the Company. The Company agreed to assume the
capital lease obligation and to reimburse the Lessee for all lease payments
made by the Lessee since the equipment was assigned to the Lessee in October
1997.
During 1998, the Lessee reconveyed to the Company approximately $2.2 million
in china, glass, silver and linen that was previously assigned to the Lessee
by the Company and originally recorded by the Lessee at the Company's cost.
Transactions With Management Company
The Company paid Sunstone Hotel Management, Inc. (the "Management Company")
$171,000 in 1998 for certain accounting and management services relating to
taking over newly acquired hotels. Additionally, the Company paid the
Management Company $18,000 for employee salaries, identifiable employee
expenses and other costs incurred in connection with acquisition, and
construction and renovation services performed for the Company during 1998.
Mr. Alter owns 100% of the Management Company.
Third Party Pledge
Mr. Alter and Mr. Biederman, the stockholders of the Lessee, have through
March 24, 1999 pledged to the Partnership 481,955 Units with a value equal to
approximately $3.5 million, to secure
20
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the Lessee's obligations under the Percentage Leases. Provided no event of
default under any Percentage Lease exists, the pledged Units corresponding to
a particular Percentage Lease will be returned to the pledgors on the third
anniversary of such Percentage Lease. The Independent Directors approved an
amendment to the Third Party Pledge Agreement with Mr. Alter and Mr. Biederman
to limit the total number of Units that would be required to be pledged to
secure the Lessee's obligations under the Percentage Leases to four (4) months
base rent under each new Percentage Lease, up to an aggregate of 481,955
Units. The Independent Directors also approved an amendment to the pledge
agreement with Mr. Alter and Mr. Biederman to limit the total number of Units
that would be required to be pledged to the number currently owned. The
Independent Directors also approved the subordination of the Company's lien in
the Units to a lien proposed in favor of an institutional lender that, as a
condition to making a proposed working capital facility available to the
Lessee, has required that Mr. Alter guarantee the loan and secure it with a
first priority lien in his Units. The loan was recently restructured so that
the lender has made the loan directly to Mr. Alter, who in turn lends the
money to the Lessee.
Unit Purchase Agreement
Mr. Alter and Mr. Biederman have entered into a unit purchase agreement with
the Company, the Lessee and the Partnership to use distributions from the
Lessee, in excess of their tax liability for earnings of the Lessee, to either
accumulate reserves for the Lessee's rental obligations due under the
Percentage Leases, or purchase from the Partnership additional Units at the
then current market price of the Common Stock. The unit purchase agreement
will remain in effect so long a there is a Percentage Lease in effect. The
Lessee has lost money since its inception and has a cumulative deficit of
$10.5 million as of December 31, 1998. Therefore, neither Mr. Alter nor Mr.
Biederman have purchased any Units under this Agreement.
Lessee SAR/Warrant Exchange Program
In 1996, the Lessee implemented its 1996 Stock Appreciation Rights Plan (the
"Lessee SAR Plan"), pursuant to which employees of the Lessee were granted
stock appreciation rights ("SARs") with a base price per share tied to the
fair market value of the Company's Common Stock on the date of grant of the
SAR. Each SAR entitled the holder, to the extent vested in the SAR shares, to
surrender the SAR and receive from the Lessee, with respect to each SAR share
surrendered, a cash payment equal to the excess of the fair market value per
share of the Company's Common Stock on the date of exercise over the SAR base
price per share. Messrs. Alter and Biederman agreed to contribute in cash, in
the 80%/20% proportion reflecting their respective ownership interests in the
Lessee, the amount necessary to enable the Lessee to pay the amounts due to
the Lessee's employees upon exercise of their SARs, to the extent the Lessee
did not otherwise have sufficient cash available to meet such obligation. In
consideration for their services to the Company, during the period from August
1995 to January 1998, the Company granted Messrs. Alter and Biederman options
(the "SAR Support Options"), under the Company's 1994 Stock Incentive Plan to
purchase up to an aggregate of 447,000 shares of Common Stock at exercise
prices ranging from $9.50 to $16.63 per share, to provide them with a source
of cash to fund this obligation to the Lessee.
For financial reporting purposes, the Lessee was required to record a
compensation expense with respect to all outstanding SARs, equal to the
appreciation in the fair market value of the number of shares of Common Stock
covered by such SARs over the aggregate amount of the base prices established
for such SARs. Because of the negative impact of such compensation expense on
the Lessee's financial statements, the Lessee determined in September 1998
that it was in its best interest
21
<PAGE>
to terminate the Lessee SAR Plan and cancel the outstanding SARs. However, it
was determined that, in order to continue to incentivize the Lessee's
employees, it was necessary to provide them with an alternative equity
incentive program linked to the Company's Common Stock. Accordingly, effective
September 25, 1998 the Company awarded to each of Messrs. Alter and Biederman
transferable warrants to purchase an aggregate of 454,500 shares of the
Company's Common Stock under the Company's 1994 Stock Incentive Plan (the
"Warrants") at exercise prices ranging from $9.50 to $16.63 per share. Messrs.
Alter and Biederman each agreed to assign their Warrants to the SAR holders to
replace the SARs, which the SAR holders agreed to surrender to the Lessee for
cancellation. Messrs. Alter and Biederman surrendered the SAR Support Options
to the Company for cancellation as they were no longer required to fund the
SARs. Each Warrant issued to Messrs. Alter and Biederman covers the same
number of shares of Common Stock covered by the SAR Support Option which such
warrant replaces and is exercisable at the same exercise price as applied
under such SAR Support Option. Each Warrant becomes exercisable in full on
October 25, 1999 and remains so exercisable until September 24, 2003. Upon
assignment of each Warrant to an employee of the Lessee, the shares of the
Company's Common Stock purchasable upon exercise of such Warrant are subject
to repurchase by the assignors (in the ratio of approximately 80%
repurchasable by Mr. Alter and approximately 20% by Mr. Biederman), at the
warrant exercise price paid per share, in the event the assignee terminates
service with the Lessee prior to vesting in the warrant shares. Such
repurchase right will lapse, and the assignee will vest in the Warrant Shares,
over the assignee's continued period of service with the Lessee in accordance
with the vesting schedule which applied under the surrendered SAR which such
Warrant replaced.
Consulting Agreement with Mr. Geller
In July 1996, the Company entered into a consulting agreement with Mr.
Geller, a member of the Board of Directors. Through his company, Geller & Co.,
Mr. Geller provides strategic consulting services to the Company for a two-
year period with an option at the Company's election to extend for an
additional year. The Company has exercised the option to extend the term until
July 1999. The Company will pay Geller & Co.'s expenses in connection with
services rendered to the Company. In consideration for services rendered by
Mr. Geller under the consulting agreement, Mr. Geller has been granted non-
qualified options to purchase 50,000 shares of Common Stock, which will vest
in equal installments each month over 24 months. Of these options, 25,000 are
exercisable at $10.50 per share and 25,000 at $15.50 per share. In addition,
Mr. Geller receives each quarter during the term of the agreement a restricted
stock grant of 1,250 shares of Common Stock.
APPOINTMENT OF INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP, the Company's independent public
accountants for the fiscal year ended December 31, 1998, was selected by the
Board of Directors, upon recommendation of the Audit Committee, to act in the
same capacity for the fiscal year ending December 31, 1999.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting and will be available to respond to appropriate questions and
to make such statements as they may desire.
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COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC") and
the National Association of Securities Dealers. Officers, directors and
stockholders owning greater than 10% of the Common Stock of the Company are
required by SEC regulations to furnish the Company with copies of all reports
filed pursuant to Section 16(a).
Based solely on review of copies of such reports required by Section 16(a)
or written representations that no such reports were required, the Company
believes that during 1998, all of its officers, directors, and stockholders
owning greater than 10% of the Common Stock of the Company timely complied
with all applicable Section 16(a) filing requirements other than except as set
forth below.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by stockholders at the Company's 2000 Annual Meeting must be received by the
Company no later than November 14, 1999 to be included in the proxy statement
and form of proxy relating to the 2000 Annual Meeting.
1998 ANNUAL REPORT
The Company's Annual Report for the fiscal year ended December 31, 1998,
including audited financial statements, is being sent with this Proxy
Statement to all stockholders of record as of April 12, 1999. Except for
"Executive Officers of the Registrant" from Part I of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, the Annual
Report is not incorporated into this Proxy Statement and is not considered
proxy solicitation material.
FORM 10-K
Copies of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 as filed with the SEC will be provided to stockholders
without charge upon written request to Robert A. Alter, Sunstone Hotel
Investors, Inc., 903 Calle Amanecer, San Clemente, California 92673.
By Order of the Board of Directors
/s/ ROBERT A. ALTER
-------------------------
ROBERT A. ALTER
Secretary
San Clemente, California
March 24, 1999
23
<PAGE>
FORM OF PROXY
SUNSTONE HOTEL INVESTORS
PROXY
ANNUAL MEETING OF STOCKHOLDERS, MAY 24, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of Annual Meeting of Stockholders To Be Held On May 24, 1999 and the
accompanying Proxy Statement, and appoints Robert A. Alter, Charles L.
Beiderman, C. Robert Enever, David E. Lambert, H. Raymond Bingham, Laurence S.
Geller, Fredric H. Gould, Edward H. Sondker, Paul D. Kazilionis, and each of
them, the proxy of the undersigned, with full power of substitution, to vote all
shares of the Common Stock of Sunstone Hotel Investors, Inc., which the
undersigned is entitled to vote, either on his own or her own behalf, or on
behalf of an entity or entities, at the Annual Meeting of Stockholders of
Sunstone Hotel Investors, Inc. to be held at the San Clemente offices located at
903 Calle Amanecer, on May 24, 1999, at 9:00 a.m. local time, and at any
adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if present thereat. The Shares represented by this
Proxy shall be voted in the following manner.
(Continued and to be signed on reverse side)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
<PAGE>
<TABLE>
Please mark your votes
as indicated in this example [X]
<S> <C> <C> <C>
1. To elect the following directors WITHHOLD AUTHORITY 2. In their discretion, the proxies are authorized
to serve for a term of three years: FOR TO VOTE to vote upon matters not known to the Board of
[_] [_] Directors as of the date of the accompanying proxy
(Instructions: To withhold authority statement, approval of minutes of the prior annual
to vote for any individual nominee, meeting, matters incident to the conduct of the
strike that nominee's name below.) meeting and to vote for any nominee of the Board
whose nomination results from the inability of
C. Robert Enever any of the above named nominees to serve.
David E. Lambert
In addition, the proxies are authorized, in their
Edward H Sondker discretion, to vote upon such other matters as may
properly come before the Annual Meeting. The Board
of Directors recommends a vote FOR the nominees
listed above. This Proxy, when properly executed
will be voted as specified above. THIS PROXY WILL BE
VOTED FOR THE NOMINEES LISTED ABOVE IF NO
SPECIFICATION IS MADE.
PLEASE RETURN YOUR EXECUTED PROXY TO
CHASE MELLON SHAREHOLDERS SERVICES
IN THE ENCLOSED SELF-ADDRESSED, POSTAGE PRE-PAID ENVELOPE
PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE.
Signature: Date:
_______________________________________________________________________________________ __________________________
(This Proxy must be signed exactly as your name appears hereon. Executors, administrators, trustees, etc., should give full title
as such. If the stockholder is a corporation, a duly authorized officer should sign on behalf of the corporation and should
indicate his or her title.)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOLD AND DETACH HERE
</TABLE>
