<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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
SUNRISE ASSISTED LIVING, INC.
-------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-------------------------------------------------------------------------
(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:
---------------
2) Aggregate number of securities to which transaction applies:
---------------
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:
---------------
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.:
-----------------------
3) Filing Party:
-------------------------------------------------------
4) Date Filed:
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<PAGE> 2
SUNRISE ASSISTED LIVING, INC.
9401 LEE HIGHWAY
SUITE 300
FAIRFAX, VA 22031
(703) 273-7500
March 31, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 annual meeting of
stockholders (the "Annual Meeting") of Sunrise Assisted Living, Inc. (the
"Company") to be held on Monday, April 28, 1997, at 9:00 a.m., at The
Ritz-Carlton (Tysons Corner), 1700 Tysons Boulevard, McLean, Virginia.
The Annual Meeting has been called for the following purposes: (1) to
elect three directors for terms of three years each; (2) to approve the 1997
Stock Option Plan; and (3) to transact such other business as may properly come
before the Annual Meeting or any adjournments thereof.
It is important that your shares be represented at the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, you are requested to
complete, date, sign and return the enclosed proxy card in the enclosed
envelope for which postage has been paid.
Very truly yours,
/s/ Paul J. Klaassen
Paul J. Klaassen
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 3
SUNRISE ASSISTED LIVING, INC.
9401 LEE HIGHWAY
SUITE 300
FAIRFAX, VA 22031
(703) 273-7500
-------------------
NOTICE TO ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 28, 1997
-------------------
NOTICE IS HEREBY GIVEN that the 1997 annual meeting of stockholders
(the "Annual Meeting") of Sunrise Assisted Living, Inc. (the "Company") will
be held at The Ritz-Carlton (Tysons Corner), 1700 Tysons Boulevard, McLean,
Virginia on Monday, April 28, 1997 at 9:00 a.m., for the following purposes:
(1) To elect three directors of the Company for three-year terms
and until their successors shall have been elected and qualified;
(2) To approve the 1997 Stock Option Plan; and
(3) To transact such other business as may properly come before
the meeting or any adjournments thereof.
Pursuant to the Bylaws, the Board of Directors has fixed March 17,
1997 as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting and to all adjournments thereof.
Only stockholders of record at the close of business on that date will be
entitled to notice and to vote at the Annual Meeting. All stockholders are
cordially invited to attend the Annual Meeting.
In the event that there are not sufficient votes to approve any one or
more of the foregoing proposals at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit further solicitation of proxies by
the Company.
By Order of the Board of Directors
/s/ Paul J. Klaassen
Paul J. Klaassen
Chairman of the Board,
President and Chief Executive Officer
Fairfax, Virginia
March 31, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING PRE-ADDRESSED
ENVELOPE WHICH REQUIRES NO POSTAGE STAMP. YOUR PROXY MAY BE REVOKED PRIOR TO
THE VOTING BY FILING WITH THE SECRETARY OF THE COMPANY A WRITTEN REVOCATION OR
A DULY EXECUTED PROXY BEARING A LATER DATE OR BY ATTENDING THE ANNUAL MEETING
AND VOTING IN PERSON.
<PAGE> 4
SUNRISE ASSISTED LIVING, INC.
9401 LEE HIGHWAY
SUITE 300
FAIRFAX, VA 22031
(703) 273-7500
-------------------
PROXY STATEMENT
1997 ANNUAL MEETING OF STOCKHOLDERS
APRIL 28, 1997
-------------------
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This proxy statement is furnished to stockholders of Sunrise Assisted
Living, Inc. (the "Company") in connection with the solicitation by the Board
of Directors of the Company of proxies to be used at the 1997 annual meeting of
stockholders (the "Annual Meeting"), to be held at The Ritz-Carlton (Tysons
Corner), 1700 Tysons Boulevard, McLean, Virginia on Monday, April 28, 1997 at
9:00 a.m., and at any adjournments thereof.
If the enclosed form of proxy is properly executed and returned to the
Company in time to be voted at the Annual Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
EXECUTED BUT UNMARKED PROXIES WILL BE VOTED (I) FOR THE ELECTION OF THE BOARD
OF DIRECTORS' THREE NOMINEES AS DIRECTORS AND (II) FOR APPROVAL OF THE 1997
STOCK OPTION PLAN. If any other matters are properly brought before the Annual
Meeting, the persons named in the accompanying proxy will vote the shares
represented by such proxies on such matters as determined by a majority of the
Company's board of directors. The presence of a stockholder at the Annual
Meeting will not automatically revoke such stockholder's proxy. Stockholders
may, however, revoke a proxy at any time prior to its exercise by filing with
the secretary of the Company a written revocation or a duly executed proxy
bearing a later date or by attending the Annual Meeting and voting in person.
The cost of solicitation of proxies in the form enclosed herewith will
be borne by the Company. In addition to the solicitation of proxies by mail,
the Company, through its directors, officers and regular employees, may also
solicit proxies personally or by telephone or telegraph. The Company will also
request persons, firms and corporations holding shares in their names, or in
the name of their nominees, to send proxy material to and obtain proxies from
beneficial owners and will reimburse such holders for their reasonable expenses
in so doing. The Company has also retained Corporate Investor Communications,
Inc., a proxy soliciting firm, to assist in solicitation of proxies at a fee of
$2,750, plus reimbursement of out-of-pocket expenses. It is anticipated that
this proxy statement will be mailed to stockholders on or about March 31, 1997.
The securities which can be voted at the Annual Meeting consist of
shares of common stock of the Company, par value $.01 per share (the "Common
Stock"). Each share entitles its owner to one vote on all matters. The
Company's Certificate of
<PAGE> 5
Incorporation does not provide for cumulative voting in the election of
directors. The close of business on March 17, 1997 has been fixed by the Board
as the record date for determination of stockholders entitled to vote at the
Annual Meeting. The number of shares of Common Stock outstanding on the record
date was 18,641,518.
The presence, in person or by proxy, of at least a majority of the
outstanding shares of Common Stock is necessary to constitute a quorum at the
Annual Meeting. Stockholders' votes will be tabulated by the persons appointed
by the Board of Directors to act as inspectors of election for the Annual
Meeting. Abstentions and broker non-votes will be treated as shares that are
present, in person or by proxy, and entitled to vote for purposes of
determining the presence of a quorum at the Annual Meeting. Broker non-votes
will not be counted as a vote cast or entitled to vote on any matter presented
at the Annual Meeting. Abstentions will have the same effect as a negative
vote on Proposal 2.
A copy of the Company's Annual Report to Stockholders for the year
ended December 31, 1996 accompanies this Proxy Statement. THE COMPANY IS
REQUIRED TO FILE AN ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996 WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). STOCKHOLDERS MAY
OBTAIN, FREE OF CHARGE, A COPY OF THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K
(WITHOUT EXHIBITS) BY WRITING TO SUNRISE ASSISTED LIVING, INC., 9401 LEE
HIGHWAY, SUITE 300, FAIRFAX, VA 22301, ATTENTION: CORPORATE SECRETARY. THE
COMPANY WILL PROVIDE COPIES OF THE EXHIBITS TO THE FORM 10-K UPON PAYMENT OF A
REASONABLE FEE.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Company's Certificate of Incorporation provides for a minimum of
two directors and a maximum of 11 directors. The Board of Directors of the
Company currently consists of nine members. The directors are divided into
three classes, each consisting of one-third of the total number of directors.
In general, the term of office of only one class expires in each year and their
successors are elected for terms of three years and until their successors are
elected and qualified. At the Annual Meeting, three directors will be elected,
each for a three-year term. As described below, the Board of Directors'
nominees are Thomas J. Donohue, David W. Faeder and Scott F. Meadow. THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE BOARD OF DIRECTORS' THREE
NOMINEES FOR ELECTION AS DIRECTORS.
Unless otherwise specified on the proxy, it is the intention of the
persons named in the proxy to vote the shares represented by each properly
executed proxy for the election as directors of Messrs. Donohue, Faeder and
Meadow for three-year terms. The Board of Directors believes that such
nominees will stand for election and will serve if elected as directors.
However, if any person nominated by the Board of Directors fails to stand for
election or is unable to accept election, the proxies will be voted for the
election of such other person or persons as a majority of the Company's Board
of Directors may recommend. Pursuant to the Company's Bylaws, directors are
elected by plurality vote.
-2-
<PAGE> 6
INFORMATION AS TO NOMINEES AND OTHER DIRECTORS
The following table sets forth certain information regarding the Board
of Directors' three nominees for election as directors and those directors who
will continue to serve as such after the Annual Meeting.
<TABLE>
<CAPTION>
AGE AT
MARCH 15, DIRECTOR FOR TERM POSITION(S) HELD WITH
1997 SINCE (1) TO EXPIRE THE COMPANY
-------- --------- --------- -----------------
<S> <C> <C> <C> <C>
NOMINEES:
- ---------
Thomas J. Donohue.................... 58 1995 2000 Director
David W. Faeder...................... 40 1993 2000 Executive Vice President,
Chief Financial Officer
and Director
Scott F. Meadow...................... 43 1996 2000 Director
CONTINUING DIRECTORS:
- ---------------------
Richard A. Doppelt................... 41 1995 1998 Director
Paul J. Klaassen (2)................. 39 1981 1998 Chairman of the Board of
Directors, President and
Chief Executive Officer
Timothy S. Smick..................... 45 1996 1998 Executive Vice President,
Chief Operating Officer
and Director
Ronald V. Aprahamian................. 50 1995 1999 Director
Teresa M. Klaassen (2)............... 41 1981 1999 Executive Vice President,
Secretary and Director
Darcy J. Moore....................... 40 1996 1999 Director
</TABLE>
- ----------------------
(1) The dates shown (except for Mr. Meadow) reflect the year in which
these persons were first elected as directors of the Company or its
predecessors. Mr. Meadow also served as a director of the Company
from January 1995 to August 1995, and most recently has been a
director since February 1996. Messrs. Doppelt and Meadow and Ms.
Moore were designated as director representatives of the former
holders of series A convertible preferred stock, Messrs. Aprahamian
and Donohue were designated as non-management directors and Messrs.
Klaassen and Faeder and Ms. Klaassen were designated as management
directors, pursuant to a Stockholders' Agreement dated as of January
4, 1995. The Stockholders' Agreement terminated upon completion of
the Company's initial public offering in June 1996.
-3-
<PAGE> 7
(2) Paul J. Klaassen and Teresa M. Klaassen are related as husband and
wife.
The principal occupations for the past five years of each of the three
nominees for director and the six directors whose terms of office will continue
after the Annual Meeting are set forth below.
THOMAS J. DONOHUE has been the President and Chief Executive Officer of
the American Trucking Association, the national trade organization of the
trucking industry, since 1984. Mr. Donohue is a director of: the National
Football League Alumni Association; IPAC, an international consulting firm;
Newmyer Associates, a Washington, D.C. firm that tracks and analyzes public
policy; and the Hudson Institute. In addition, Mr. Donohue served on the
President's Commission on Intermodal Transportation.
DAVID W. FAEDER has served as Executive Vice President and Chief Financial
Officer of the Company and its predecessor entities since 1993. From 1991 to
1993, Mr. Faeder was a Vice President of CS First Boston Corporation, serving
in both the investment banking and fixed income departments. From 1984 to
1991, Mr. Faeder served as a Vice President of Morgan Stanley, where he worked
in the Real Estate Capital Markets Group.
SCOTT F. MEADOW has been a Vice President of The Sprout Group, the venture
capital division of DLJ Capital Corporation, since February 1996. From 1992 to
1995, Mr. Meadow was a General Partner of Frontenac Company, a venture capital
firm. From 1982 to 1992, he was a general partner of William Blair Venture
Partners, a venture capital firm. Mr. Meadow is a director of several
privately held companies.
RICHARD A. DOPPELT is Director of Allstate Private Equity, a division of
Allstate Insurance Company. He has been a member of Allstate Venture Capital
since 1987. Prior to joining Allstate, he practiced as a corporate attorney
with the law firm of Morrison & Foerster. Mr. Doppelt is a director of Factory
Card Outlet, a specialty retail company, and of several privately held
companies.
PAUL J. KLAASSEN, a co-founder of the Company, has served as Chairman of
the Board, President and Chief Executive Officer of the Company and its
predecessor entities since 1981. Mr. Klaassen is the founding Chairman of the
Assisted Living Facilities Association of America ("ALFAA"), the largest
assisted living industry trade association. Mr. Klaassen also serves on the
editorial advisory boards of Contemporary Long Term Care, Retirement Housing
Report, Assisted Living Today and Assisted Living Briefing magazines.
TIMOTHY S. SMICK has served as Chief Operating Officer of the Company
since February 1996, was named an Executive Vice President of the Company in
May 1996 and was appointed a director of the Company in October 1996. From
1994 to 1996, Mr. Smick was a senior housing consultant to LaSalle Advisory,
Ltd., a pension fund advisory company. From 1984 to 1994, Mr. Smick was the
Chairman and Chief Executive Officer of PersonaCare, Inc., a company which he
co-founded and which provided subacute, skilled nursing and assisted living
care. From 1979 to 1981, Mr. Smick was the Regional
-4-
<PAGE> 8
Operations Director for Manor Healthcare, a division of ManorCare, Inc., a
long-term care company.
RONALD V. APRAHAMIAN served as Chairman of the Board and Chief Executive
Officer of The Compucare Company, a health care information technology company,
from 1988 until October 1996. Mr. Aprahamian also is a director of Metrocall,
Inc., a paging company.
TERESA M. KLAASSEN, a co-founder of the Company, has served as Executive
Vice President and Secretary of the Company and its predecessor entities since
1981. Ms. Klaassen is a founding member of ALFAA and currently serves on the
boards of directors of several long-term care organizations.
DARCY J. MOORE has been a General Partner of Frontenac Company, a venture
capital firm, since 1992. From 1990 to 1992, Ms. Moore served as an Associate
of the venture capital firm of William Blair Venture Partners. Ms. Moore is a
director of: Princeps, Inc., a radiology services company; CareWise, a health
care demand management company; and ElderHealth, Inc., an elder care company.
OTHER EXECUTIVE OFFICERS
The principal occupation during the past five years of the Company's other
executive officers follows:
THOMAS B. NEWELL, 39, has served as General Counsel of the Company and
President of Sunrise Development, Inc., the Company's development subsidiary,
since January 1996 and was named an Executive Vice president of the Company in
May 1996. From 1989 to January 1996, Mr. Newell was a partner with the law
firm of Watt Tieder & Hoffar, where his practice concentrated on all aspects of
commercial and real estate development transactions and where he represented
the Company for more than five years.
BRIAN C. SWINTON, 51, joined the Company as Executive Vice President,
Sales and Marketing, on May 31, 1996. From January 1994 to April 1996, Mr.
Swinton was a Senior Vice President of Forum Group, Inc., a developer and
operator of retirement communities and assisted living facilities, where his
responsibilities included marketing, sales and product development. From 1986
to 1994, Mr. Swinton served as Vice President, Sales, Marketing and Product
Development at Marriott International, where he was responsible for designing,
developing, marketing and the initial operations of the Brighton Gardens
assisted living concept.
Executive officers are elected annually and serve at the discretion of
the Board of Directors.
-5-
<PAGE> 9
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS AND NOMINATIONS BY
STOCKHOLDERS
During 1996, the Company's Board of Directors held four regular
meetings and four special meetings. For the 1996 period, no director attended
less than 75 percent of the (i) total number of meetings held by the Board and
(ii) total number of meetings held by all committees of the Board on which the
director served. The Company has the following standing committees of the
Board:
Executive Committee. The members of the Executive Committee are Messrs.
Klaassen and Faeder and Ms. Klaassen. The Executive Committee has been
delegated all of the powers of the Board of Directors, when the Board of
Directors is not in session, to the extent permitted under the Delaware General
Corporation Law. The Executive Committee held no meetings during 1996.
Audit Committee. The members of the Audit Committee are Messrs.
Aprahamian, Donohue and Doppelt, all of whom are non-employee directors. The
Audit Committee, among other things, makes recommendations concerning the
engagement of the Company's independent auditors, reviews the results and scope
of the annual audit and other services provided by the Company's independent
auditors and reviews the adequacy of the Company's internal accounting
controls. The Audit Committee held one meeting during 1996.
Compensation Committee. The members of the Compensation Committee are
Messrs. Aprahamian, Donohue and Meadow, all of whom are non-employee directors.
The Compensation Committee makes recommendations to the full Board of Directors
concerning salary and bonus compensation and benefits for executive officers of
the Company. The Compensation Committee held three meetings during 1996.
Stock Option Committee. The members of the Stock Option Committee are
Messrs. Aprahamian, Meadow and Donohue, all of whom are non-employee directors.
The Stock Option Committee has the power and authority to take all actions and
make all determinations under the Company's stock option plans, including the
grant of options thereunder. The Stock Option Committee held five meetings
during 1996.
The entire Board of Directors of the Company acts as a nominating
committee for selecting management's nominees for election as directors and has
made its nominations for the Annual Meeting. The Company's Bylaws require that
stockholder nominations for directors be made pursuant to timely notice in
writing to the secretary of the Company. To be timely, notice must be
delivered to, or mailed to and received at, the principal executive offices of
the Company not less than 60 days prior to the meeting; however, in the event
that less than 75 days notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be received no later than the close of business on the 15th day
following the day on which such notice of the date or public disclosure was
made. Public notice of the date of the Annual Meeting was made on March 5,
1997 by the issuance of a press release and by the filing of a current report
on Form 8-K with the SEC. A stockholder's notice of nomination must set forth
certain information specified in the Company's Bylaws concerning each person
the stockholder
-6-
<PAGE> 10
proposes to nominate for election and the nominating stockholder. Stockholder
nominations for the Annual Meeting were required to be received on or before
March 20, 1997. No such nominations were received. The Company's Bylaws
provide that no person may be elected as a director unless nominated in
accordance with the procedures set forth in the Bylaws.
COMPENSATION OF DIRECTORS
Non-employee directors are reimbursed for expenses actually incurred
in connection with attending meetings of the Board of Directors. No Board fees
are paid for attendance at Board or committee meetings. In 1996, Messrs.
Aprahamian and Donohue each received grants of ten-year non-incentive stock
options for 3,334 shares of Common Stock at an exercise price of $10.50 per
share, which vested upon completion of the Company's June 5, 1996 initial
public offering, and 15,000 shares of Common Stock at an exercise price of
$20.00 per share, which will vest one-third on each anniversary date thereof.
1996 DIRECTORS' STOCK OPTION PLAN
Non-employee directors of the Company (other than Messrs. Doppelt and
Meadow and Ms. Moore) are eligible to receive options under the Company's 1996
Directors' Stock Option Plan (the "Director Plan"). An aggregate of 50,000
shares of Common Stock are reserved for issuance under the Director Plan. Each
non-employee director whose commencement of service is after April 25, 1996,
the effective date of the Director Plan, and before termination of the Plan
will be granted an initial non-qualifying option, as of the date of the
director's commencement of service, to purchase 10,000 shares of Common Stock.
An additional non-qualifying option to purchase 5,000 shares of Common Stock
will be granted immediately after each subsequent annual meeting of the
Company's stockholders (commencing with the Annual Meeting) occurring before
the Director Plan terminates to each eligible non-employee director who is then
serving on the board of directors. In the event of any changes in the Common
Stock by reason of stock dividends, split-ups, recapitalizations, mergers,
consolidations, combinations or other exchanges of shares and the like,
appropriate adjustments will be made by the Board of Directors to the number of
shares of Common Stock available for issuance under the Director Plan, the
number of shares subject to outstanding options and/or the exercise price per
share of outstanding options.
Options granted under the Director Plan give the option holder the
right to purchase Common Stock at a price fixed in the stock option agreement
executed by the option holder and the Company at the time of grant. The option
exercise price will not be less than the fair market value of a share of Common
Stock on the date the option is granted. "Fair market value" for purposes of
the Director Plan generally will be equal to the closing price for the Common
Stock on the day prior to the date of grant. The period for exercising an
option begins six months after the option is granted and generally ends ten
years from the date the option is granted. Pursuant to the Director Plan,
Messrs. Aprahamian and Donohue will receive additional option grants for 5,000
shares each effective as of the date of the Annual Meeting.
-7-
<PAGE> 11
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for the years ended December 31, 1996 and
1995, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued during those years, to the Company's Chief
Executive Officer and each of the other four most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 in 1996 (the
"named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
AWARDS
------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK ALL OTHER
------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(S) YEAR SALARY ($) OPTIONS (#) ($)(1)
------------------------------ ---- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Paul J. Klaassen 1996 $200,000 N/A $2,375
Chairman of the Board, President 1995 200,000 N/A 2,310
and Chief Executive Officer
David W. Faeder 1996 175,000 191,666 2,375
Executive Vice President and 1995 175,000 450,000 2,310
Chief Financial Officer
Timothy S. Smick(2) 1996 175,000 266,666 N/A
Executive Vice President and 1995 N/A N/A N/A
Chief Operating Officer
Thomas B. Newell(3) 1996 175,000 213,333 N/A
Executive Vice President and 1995 N/A 66,666 N/A
General Counsel of the Company
and President of Sunrise
Development, Inc.
Brian C. Swinton(4) 1996 165,000 195,000 N/A
Executive Vice President, 1995 N/A N/A N/A
Sales and Marketing
</TABLE>
- ----------------------
(1) Represents matching contributions made by the Company under its 401(k)
plan.
(2) Mr. Smick joined the Company in February 1996.
(3) Mr. Newell joined the Company in January 1996.
(4) Mr. Swinton joined the Company in May 1996.
-8-
<PAGE> 12
OPTION GRANTS
The following table contains certain information with respect to stock
options granted in 1996 to each of the named executive officers of the Company.
All options granted in 1996 were ten-year non-qualified options.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
% OF ASSUMED ANNUAL RATES OF STOCK
SHARES OF TOTAL OPTIONS PRICE
COMMON STOCK GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES IN OR BASE OPTION TERM
OPTIONS FISCAL PRICE EXPIRATION -----------
NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------- ---------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Paul J. Klaassen -0- -0-% $-0- -0- $-0- $-0-
David W. Faeder 16,666(1) .87 10.50 02/15/06 110,052 278,898
25,000(2) 1.31 20.00 05/30/06 314,445 796,870
150,000(3) 7.85 25.625 12/13/06 2,417,299 6,125,938
Timothy S. Smick 141,666(1) 7.41 10.50 02/15/06 935,476 2,370,681
25,000(2) 1.31 20.00 05/30/06 314,445 796,870
100,000(3) 5.23 25.625 12/13/06 1,611,533 4,083,958
Thomas B. Newell 63,333(1) 3.31 10.50 02/15/06 418,212 1,059,833
25,000(2) 1.31 20.00 05/30/06 314,445 796,870
125,000(3) 6.54 25.625 12/13/06 2,014,416 5,104,948
Brian C. Swinton 120,000(1) 6.28 20.00 05/30/06 1,509,338 3,824,976
75,000(3) 3.92 25.625 12/13/06 1,208,649 3,062,969
</TABLE>
- ----------------------
(1) These options vested 25% on June 5, 1996. The balance vest 25% on
each of the next three anniversary dates thereof, except as otherwise
indicated. Vesting is accelerated if the options are not assumed in
connection with any dissolution or liquidation of the Company, the
sale of substantially all of the Company's assets, a merger,
reorganization or consolidation in which the Company is not the
surviving corporation or any other transaction (including, without
limitation, a merger or reorganization in which the Company is the
surviving corporation) approved by the Board which results in any
person or entity owning 80% or more of the total combined voting power
of all classes of stock of the Company (collectively, a "Corporate
Reorganization"). The vesting of Mr. Newell's options also accelerate
in the event of involuntary termination of employment (other than for
cause).
(2) These options are 100% vested.
(3) These options vest in four equal installments commencing on December
13, 1997. Vesting is accelerated if the options are not assumed in
connection with a Corporate Reorganization. The optionee may exercise
the vested portion of the option to the extent such exercise would not
result in any amount of employee remuneration to the optionee being
determined to be not deductible pursuant to Section 163(m) of the
Internal Revenue Code of 1986, as amended.
-9-
<PAGE> 13
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to each of the
named executive officers of the Company concerning the exercise of stock
options during 1996, the number of securities underlying unexercised options at
the 1996 year-end and the 1996 year-end value of all unexercised in-the-money
options held by such individuals.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)(1)
ACQUIRED ON VALUE ---------------------- --------------------------
NAME EXERCISE (#) REALIZED($)(1) EXERCISABLEUNEXERCISABLE EXERCISABLEUNEXERCISABLE
- ---------------- ------------ -------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul J. -0- $-0- -0- -0- $-0- $-0-
Klaassen
David W. 150,000 2,400,000 254,166 237,501 4,423,426 1,748,453
Faeder
Timothy S. 33,333 450,000 27,083 206,251 199,213 1,813,297
Smick
Thomas B. 20,000 324,000 37,499 222,503 367,171 1,858,495
Newell
Brian C. -0- -0- 30,000 165,000 198,750 671,250
Swinton
</TABLE>
- ----------------------
(1) Market values of underlying securities at exercise or year-end minus
the exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed entirely of non-employee
directors. During 1996, Messrs. Aprahamian, Donohue and Meadow served on the
Compensation Committee. In 1993, Mr. Donohue, jointly with his wife, made a
capital contribution of $500,000 in exchange for a 30% membership interest in
Sunrise Village House LLC, a limited liability company (the "LLC") that owns
the Company's Village House facility. At that time, the Company owned a 50%
membership interest in, and was the managing member of, the LLC, and managed
the facility pursuant to a management contract that expires in 2003.
Distributions made by the LLC to the Donohues in 1996 totaled $40,582. On May
28, 1996, the Company purchased the Donohues' 30% interest in the LLC in
exchange for 52,500 shares of Common Stock. The purchase price was determined
based on a valuation of the facility prepared by the Company based primarily
upon a capitalization of net operating income from the facility. The Donohues
were granted "piggy-back" registration rights with respect to such shares.
On January 4, 1995 and January 14, 1996, DLJ Capital Corporation and
Sprout Growth II, L.P. (entities affiliated with Scott F. Meadow) purchased
from the Company in a private placement an aggregate of 733,333 shares of
Series A Convertible Preferred Stock at $9.00 per share and an aggregate of
300,000 shares of Series B Exchangeable Preferred Stock at $10.00 per share,
respectively. The Series A Convertible Preferred Stock converted into an equal
number of shares of Common Stock upon completion of the
-10-
<PAGE> 14
Company's initial public offering and the Series B Preferred Stock was redeemed
by the Company for $10.00 per share (plus accrued but unpaid dividends) with a
portion of the net proceeds of the initial public offering. See "Certain
Transactions."
Scott F. Meadow is an executive officer of The Sprout Group, the
venture capital division of DLJ Capital Corporation. DLJ Capital Corporation
is an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, the
lead managing underwriter in the Company's initial public offering and its
October 1996 follow-on public offering.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return
on the Company's Common Stock from May 31, 1996 (the date the Company's Common
Stock began trading on the Nasdaq National Market), through December 31, 1996,
and through February 28, 1997, with the cumulative total return of the Standard
and Poor's Index 500 Stock and the Peer Group Index (as defined below**). The
graph assumes the investment of $100 in the Company's Common Stock on May 31,
1996. The initial public offering price of the Company's Common Stock was
$20.00 per share.
Comparison of Cumulative Total Return*
May 31, 1996 to December 31, 1996 and to February 28, 1997
<TABLE>
<CAPTION>
5/96 6/96 7/96 8/96 9/96 10/96 11/96 12/96 1/97 2/97
---- ---- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sunrise Assisted 100 120 114 133 140 115 121 139 129 140
Living, Inc.
Peer Group 100 99 85 88 96 102 97 104 105 113
S&P 500 100 100 96 98 103 106 114 112 119 120
</TABLE>
- ---------------------------
*Cumulative Total Return assumes an initial investment of $100 on May 31, 1996
and the reinvestment of dividends. There were no dividends paid by the Company
during the period presented.
-11-
<PAGE> 15
**Peer Group Index is composed of selected assisted living or other long term
care companies. These companies are: Alternative Living Services, Inc.,
Assisted Living Concepts, Inc., ATRIA Communities, Inc., CareMatrix
Corporation, Integrated Health Services, Inc. and Manor Care, Inc.
REPORT ON EXECUTIVE COMPENSATION
The Board of Directors and its Compensation and Stock Option
Committees have prepared the following report on the Company's policies with
respect to the compensation of executive officers for 1996.
Commencing June 5, 1996, the date the Company completed its initial
public offering, the Board of Directors has made all decisions on compensation
of the Company's executive officers (other than stock options), based upon
recommendations of the Compensation Committee. No member of the Compensation
Committee is an employee of the Company. Prior to June 5, 1996, the
Compensation Committee determined all executive compensation matters (other
than stock options). Decisions as to the grant of stock options are made by
the Stock Option Committee. Effective June 5, 1996, the Stock Option Committee
was reconstituted so that the members of the Compensation Committee also serve
as members of the Stock Option Committee. Prior thereto, the Stock Option
Committee consisted of Messrs. Klaassen and Faeder and Ms. Klaassen.
COMPENSATION OF EXECUTIVE OFFICERS
The compensation policies of the Company are designed to enable the
Company to attract, motivate and retain experienced and qualified executives.
The Company seeks to provide competitive compensation. The Company's policy
has been to provide a significant component of an executive officer's
compensation through the grant of stock options. The Company believes that
grants of stock options to executives, as well as to employees generally, help
align the interests of such persons with the interests of Company'
stockholders.
The following describes in more specific terms the elements of
compensation of executive officers for 1996:
BASE SALARIES
Base salaries of executives are initially determined by evaluating the
responsibilities of the position, the experience and knowledge of the
individual, and the competitive marketplace for executive talent. Base
salaries for executive officers are reviewed annually by the Compensation
Committee and the Board based on, among other things, individual performance
and responsibilities. Base salaries for the Company's executive officers were
not increased in 1996 due to the Company's emphasis on stock option grants as a
primary compensation tool.
STOCK OPTIONS
Stock options are considered an effective long-term incentive because
gains are linked to increases in the stock value, which in turn provides
stockholder gains. Stock options generally are granted by the Stock Option
Committee at an exercise price equal to the market price of the Common Stock at
the date of the grant. The options typically vest
-12-
<PAGE> 16
in equal portions over a four year period, and are exercisable within ten years
from the date of vesting. The full benefit of the options is realized upon
appreciation of the stock price in future periods, thus providing an incentive
to create value to the Company's stockholders through appreciation of the stock
price. Management of the Company believes that stock options have been helpful
in attracting and retaining skilled executive personnel.
Stock option grants made to executive officers in 1996 reflect
significant individual performance and contributions relating to the Company's
operations, implementation of the Company's development and acquisition
programs and the successful completion of the Company's initial public offering
and October 1996 follow-on public offering. The Company also believes that the
market for experienced executives in the assisted living industry has become
more competitive as the number of public assisted living companies and entrants
into the assisted living industry has increased. The stock option grants made
to the Company's executive officers in 1996 also reflect these competitive
factors. Certain newly-hired executive officers also received stock option
grants at the time of their employment with the Company.
Reflecting the Company's belief in the value and desirability of all
employees having a proprietary interest in the Company, during 1996, the
Company granted stock options covering a total of 1,911,271 shares of Common
Stock to 457 employees. Such number includes options covering an aggregate of
866,668 shares of Common Stock granted to four of the Company's executive
officers. The per share option exercise prices of such options ranged from
$10.50 to $25.625, which generally equaled the fair market value of a share of
the Company's Common Stock on the date of grant.
OTHER
The Company has adopted a contributory retirement plan (the "401(k)
Plan") for all of its employees (including executive officers) age 21 and over
with at least one year of service to the Company. The 401(k) Plan provides
that each participant may contribute up to 16% of his or her salary (not to
exceed the annual statutory limit). In general, the Company makes matching
contributions to each participant's account equal to 25% of such participant's
contribution up to 7% of such participant's annual compensation. Effective
April 1, 1997, the Company no longer makes matching contributions for
participants with annual compensation in excess of $40,000.
CEO'S COMPENSATION
Mr. Klaassen received a salary of $200,000 in 1996 and in 1995 and
participated in the Company's 401(k) Plan. He and his wife, Teresa M.
Klaassen, Executive Vice President and a director of the Company, currently
beneficially own 5,076,336 shares of Company Common Stock, or approximately
27.2% of the outstanding shares. In view of their stock ownership, neither Mr.
Klaassen nor Ms. Klaassen has received grants of stock options. The Company
reserves the right to make future grants of options to Mr. Klaassen and/or Ms.
Klaassen.
-13-
<PAGE> 17
COMPENSATION DEDUCTIBILITY POLICY
Under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") and applicable Treasury regulations, no deduction is allowed for
annual compensation in excess of $1 million paid by a publicly traded
corporation to its chief executive officer and the four other most highly
compensated officers. Under those provisions, however, there is no limitation
on the deductibility of "qualified performance-based compensation." In
general, the Company's policy is to maximize the extent of tax deductibility of
executive compensation under the provisions of Section 162(m) so long as doing
so is compatible with its determinations as to the most appropriate methods and
approaches for the design and delivery of compensation to the Company's
executive officers.
Respectfully submitted,
The Board of Directors Compensation and Stock Option Committees
Paul J. Klaassen, Chairman Thomas J. Donohue, Chairman
Ronald A. Aprahamian Ronald A. Aprahamian
Thomas J. Donohue Scott F. Meadow
Richard A. Doppelt
David W. Faeder
Teresa M. Klaassen
Scott F. Meadow
Darcy J. Moore
Timothy S. Smick
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, officers and beneficial owners of more
than 10% of the Company's outstanding equity securities to file with the SEC
initial reports of ownership of the Company's equity securities and to file
subsequent reports when there are changes in such ownership. Based on a review
of reports submitted to the Company in 1996, the Company believes that all
Section 16(a) filing requirements for that year applicable to such persons were
complied with on a timely basis, except that the Company's Controller was late
in filing his initial ownership report.
CERTAIN TRANSACTIONS
The Company leases certain real property on which the Fairfax facility
is located from Teresa M. Klaassen and Paul J. Klaassen pursuant to a 99-year
ground lease dated June 5, 1986 (the "Ground Lease"). The Ground Lease
provides for monthly rent of $21,272, as adjusted annually based on the
Consumer Price Index. Annual rent expense under the ground lease for 1996 was
$262,000. The Company has subleased approximately 50% of the property subject
to the Ground Lease to Sunrise Foundation, Inc., a not-for-profit organization
operated by the Klaassens ("Sunrise Foundation"), which operates a school and
day care center on the property. The sublease terminates upon expiration of
the
-14-
<PAGE> 18
Ground Lease and provides for monthly rent equal to 50% of all of the rent
payable under the Ground Lease. Sunrise Foundation also reimburses the Company
for use of office facilities and support services. Reimbursements for 1996
were $132,000. The Company believes that, at the time entered into, the terms
of the lease and sublease were no less favorable to the Company than those
which it could have obtained from an unaffiliated third party.
The Klaassens also lease certain real property located in Fairfax
County, Virginia for use as a residence pursuant to a 99-year ground lease with
the Company entered into in June 1994. The rent is $1.00 per month. This
property is part of a parcel, which includes the Company's Oakton facility,
that was previously transferred by the Klaassens to the Company in connection
with obtaining certain financing. Rather than attempting to subdivide the
parcel, which would have caused a significant delay in consummation of the
financing transaction, the Company agreed to lease the Klaassens' residence
back to them as a condition to the transfer of the property.
In 1996 prior to the Company's initial public offering, one of the
Company's predecessor entities made a $390,000 distribution to the Klaassens
relating to prior period net income.
The table below sets forth (i) the number of shares of Series A
Convertible Preferred Stock issued by the Company for $9.00 per share on
January 4, 1995 and (ii) the number of shares of Series B Exchangeable
Preferred Stock issued by the Company for $10.00 per share on January 19, 1996,
to certain entities affiliated with directors of the Company. In June 1996
upon completion of the Company's initial public offering, the Series A
Convertible Preferred Stock converted automatically into an equal number of
shares of Common Stock and the Series B Exchangeable Preferred Stock was
redeemed by the Company for $10.00 per share (plus accrued but unpaid
dividends).
<TABLE>
<CAPTION>
PRIOR TO CONVERSION OF
SERIES A PREFERRED STOCK AND
REDEMPTION OF SERIES B
PREFERRED STOCK
---------------
REDEMPTION
NUMBER OF NUMBER OF PRICE PAID TO
SHARES OF SHARES OF HOLDERS OF
SERIES A SERIES B SERIES B
PREFERRED PREFERRED PREFERRED
ENTITY/DIRECTOR STOCK STOCK STOCK
--------------- ----- ----- -----
<S> <C> <C> <C>
Allstate Insurance Company and affiliated entities/
Richard A. Doppelt 977,778 400,000 $4,066,000
DLJ Capital Corporation and Sprout
Growth II, L.P./ Scott F. Meadow 733,333 300,000 3,049,500
Frontenac VI Limited Partnership/
Darcy J. Moore 733,333 300,000 3,049,500
</TABLE>
For a description of certain other transactions involving the Company
and its directors, see "Compensation Committee Interlocks and Insider
Participation."
-15-
<PAGE> 19
APPROVAL OF
1997 STOCK OPTION PLAN
(PROPOSAL 2)
On March 26, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Option Plan"), subject to approval of stockholders at the
Annual Meeting. As of the date of adoption of the 1997 Option Plan by the
Board, there were approximately 2,570 officers and employees of the Company and
its subsidiaries who are eligible to participate in the 1997 Option Plan.
The principal provision of the 1997 Stock Option Plan are summarized
below. Such summary does not, however, purport to be complete and is qualified
in its entirety by the terms of the 1997 Option Plan, a copy of which is
attached hereto as Exhibit A and incorporated herein by reference.
DESCRIPTION OF 1997 OPTION PLAN
The 1997 Option Plan provides for the granting of options to acquire
Common Stock, which may be either incentive stock options (an "ISO") or
nonqualified stock options (an "NSO"). The 1997 Option Plan is administered by
the Stock Option Committee of the Board of Directors, and all employees of the
Company or any subsidiary and any consultant or adviser providing bona fide
services to the Company or any subsidiary (provided that such services are not
in connection with the offer or sale of securities in a capital raising
transaction) whose participation in the 1997 Option Plan is determined by the
Stock Option Committee to be in the best interests of the Company are eligible
to receive option grants thereunder. The 1997 Option Plan does not have a
termination date, but a grant of an ISO may not occur 10 years after March 26,
1997, the effective date of the 1997 Option Plan. Receipt of option grants
under the 1997 Option Plan is contingent upon the execution by each prospective
option holder of an agreement in such form as the Stock Option Committee may
from time to time determine.
The 1997 Option Plan provides for the grant of options to purchase up to
1,800,000 shares of Common Stock. The purchase price per share of Common Stock
subject to an option is fixed by the Stock Option Committee when the option is
granted. Options to purchase no more than 500,000 shares of Common Stock may
be granted to any one eligible individual during the first 10 years after the
effective date of the 1997 Option Plan and 200,000 shares per year thereafter.
The terms of options granted under the 1997 Option Plan, including the vesting
provisions of such options, will be established at the time of grant. The
Stock Option Committee, in its sole discretion, may rescind, modify or waive an
limitation or condition on the exercise of an option contained in any option
agreement so as to accelerate the time at which an option may be exercised or
extend the period during which the option may be exercised. No person may
receive an ISO if, at the time of grant, such person owns directly or
indirectly more than 10% of the total combined voting power of the Company
unless the option price is at least 110% of the fair market value of the Common
Stock and the exercise period of such ISO is by its terms limited to
-16-
<PAGE> 20
five years. There is also a $100,000 limit on the value of Common Stock
(determined at the time of grant) covered by ISOs that first become exercisable
by an optionee in any calendar year. No option granted to a reporting person
under Section 16 of the Exchange Act may be exercisable during the first six
months after the date of grant.
Payment for shares purchased under the 1997 Option Plan may be made: (i)
in cash or in cash equivalents; (ii) if permitted by the option agreement, by
exchanging shares of Common Stock with a fair market value equal to or less
than the total option price plus cash for any difference; (iii) if permitted by
the option agreement, by delivery of a promissory note of the person exercising
the option; (iv) if permitted by the option agreement, by causing the Company
to withhold shares of Common Stock otherwise issuable pursuant to the exercise
of an option equal in value to the exercise price; or (v) by a combination of
the foregoing. Payment in full of the option price need not accompany the
written notice of exercise provided the notice directs that the stock
certificate for the shares for which the option is exercised be delivered to a
licensed broker acceptable to the Company as the agent for the individual
exercising the option and, at the time such stock certificate is delivered, the
broker tenders to the Company cash (or cash equivalents acceptable to the
Company) equal to the option price.
In the event of stock splits, stock dividends, recapitalizations,
combinations of shares or certain other events, the 1997 Option Plan provides
for adjustment of: (i) the number of shares available for option grants,
including the maximum number of shares that may be granted to any one
individual, and (ii) the number of shares and the per share exercise price for
shares subject to unexercised options. Upon any dissolution or liquidation of
the Company, the sale of substantially all of the Company's assets, a merger,
reorganization or consolidation in which the Company is not the surviving
corporation or any other transaction (including, without limitation, a merger
or reorganization in which the Company is the surviving corporation) approved
by the Board which results in any person or entity owning 80% or more of the
total combined voting power of all classes of stock of the Company, the 1997
Option Plan and the options issued thereunder will terminate, unless provision
is made in connection with such transaction for the continuation of the plans
and/or the assumption of the options or for the substitution for such options
of new options covering the stock of a successor corporation or a parent or
subsidiary thereof, with appropriate adjustment as to the number and kinds of
shares and the per share exercise price.
Options granted under the 1997 Plan generally are non-transferable except
by will or by the laws of descent and distribution upon the death of the option
holder.
The Board of Directors may terminate or amend the 1997 Option Plan at any
time; provided, however, that any amendment by the Board which, if not approved
by the Company's stockholders would cause the Plan to not comply with Sections
162(m) or 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
shall not be effective unless approved by the affirmative vote of stockholders
who hold more than 50% of the combined voting power of the outstanding shares
of voting stock of the Company present or represented, and entitled to vote
thereon at a duly constituted stockholders' meeting.
-17-
<PAGE> 21
Based on the closing price of $28 1/8 per share on March 17, 1997, the
aggregate market value of the 1,800,000 shares of Common Stock issuable under
the 1997 Option Plan is $50.6 million. In addition to the 1997 Option Plan,
the Company maintains two other stock options plans under which employees are
eligible to receive option grants: the 1995 Stock Option Plan (1,298,065
shares reserved, of which 1,269,438 shares have been granted, net of
forfeitures, as of March 17, 1997) and the 1996 Non-Incentive Stock Option Plan
(1,100,000 shares reserved, of which 1,095,491 shares have been granted as of
March 17, 1997). In January 1995, the Company also made a non-plan option
grant to Mr. Faeder covering 450,000 shares of Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
The grant of an option will not be a taxable event for the optionee or the
Company.
Incentive Stock Options. An optionee will not recognize taxable income
upon exercise of an ISO (except that the alternative minimum tax may apply),
and any gain realized upon a disposition of shares of stock received pursuant
to the exercise of an ISO will be taxed as long-term capital gain if the
optionee holds the shares for at least two years after the date of grant and
for one year after the date of exercise (the "holding period requirement").
The Company will not be entitled to any business expense deduction with respect
to the exercise of an ISO, except as discussed below.
For the exercise of an option to qualify for the foregoing tax treatment,
the optionee generally must be an employee of the Company or a subsidiary from
the date the option is granted through a date within three months before the
date of exercise of the option. In the case of an optionee who is disabled,
the three-month period for exercise following termination of employment is
extended to one year. In the case of an employee who dies, both the time for
exercising ISOs after termination of employment and the holding period for
stock received pursuant to the exercise of the option are waived.
If all of the foregoing requirements are met except the holding period
requirement mentioned above, the optionee will recognize ordinary income upon
the disposition of the stock in an amount generally equal to the excess of the
fair market value of the stock at the time the option was exercised over the
option exercise price (but not in excess of the gain realized on the sale).
The balance of the realized gain, if any, will be capital gain. The employer
corporation will be allowed a business expense deduction to the extent the
optionee recognizes ordinary income subject to Section 162(m) of the Code
summarized below.
If an optionee exercises an ISO by tendering shares of Common Stock with a
fair market value equal to part or all of the option exercise price, the
exchange of shares will be treated as a nontaxable exchange (except that this
treatment would not apply if the optionee had acquired the shares being
transferred pursuant to the exercise of an ISO and had not satisfied the
holding period requirement summarized above). If the exercise is treated as a
tax free exchange, the optionee would have no taxable income from the exchange
and exercise (other than minimum taxable income as discussed above) and the tax
basis of the shares exchanged would be treated as the substituted basis for the
shares received. If the optionee used shares received pursuant to the exercise
of an ISO (or another statutory option) as to which the optionee had not
satisfied the applicable holding
-18-
<PAGE> 22
period requirement, the exchange would be treated as a taxable disqualifying
disposition of the exchanged shares.
If, pursuant to an option agreement, the Company withholds shares in
payment of the option price for incentive options, the transaction should
generally be treated as if the withheld shares had been sold in a disqualifying
disposition after exercise of the option, so that the optionee will realize
ordinary income with respect to such shares. The shares paid for by the
withheld shares should be treated as having been received upon exercise of an
incentive stock option, with the tax consequences described above. However,
the Internal Revenue Service has not ruled on the tax treatment of shares
received on exercise of an incentive stock option where the option exercise
price is paid with withheld shares.
Non-Qualified Options. Upon exercising a NSO, an optionee will recognize
ordinary income in an amount equal to the difference between the exercise price
and the fair market value of the stock on the date of exercise (except that, if
the optionee is subject to certain restrictions imposed by the securities laws,
the measurement date will be deferred, unless the optionee makes a special tax
election within 30 days after exercise). Upon a subsequent sale or exchange of
shares acquired pursuant to the exercise of a NSO, the optionee will have
taxable gain or loss, measured by the difference between the amount realized on
the disposition and the tax basis of the shares (generally, the amount paid for
the shares plus the amount treated as ordinary income at the time the option
was exercised).
If the employer corporation complies with applicable reporting
requirements and with the restrictions of Section 162(m) of the Code, it will
be entitled to a business expense deduction in the same amount and generally at
the same time as the optionee recognizes ordinary income. Under Section 162(m)
of the Code, if the optionee is one of certain specified executive officers,
then, unless certain exceptions apply, the employer is not entitled to deduct
compensation with respect to the optionee, including compensation related to
the exercise of stock options, to the extent such compensation in the aggregate
exceeds $1.0 million for the taxable year. The options are intended to comply
with the exception to Section 162(m) for "performance-based" compensation.
If the optionee surrenders shares of Common Stock in payment of part or
all of the exercise price for NSOs, no gain or loss will be recognized with
respect to the shares surrendered (regardless of whether the shares were
acquired pursuant to the exercise of an incentive option) and the optionee will
be treated as receiving an equivalent number of shares pursuant to the exercise
of the option in a nontaxable exchange. The basis of the shares surrendered
will be treated as the substituted tax basis for an equivalent number of option
shares received and the new shares will be treated as having been held for the
same holding period as had expired with respect to the transferred shares. The
difference between the aggregate option exercise price and the aggregate fair
market value of the shares received pursuant to the exercise of the option will
be taxed as ordinary income. The optionee's basis in the additional shares
will be equal to the amount included in the optionee's income.
If, pursuant to an option agreement, the Company withholds shares in
payment of the option price for NSOs or in payment of tax withholding, the
transaction should
-19-
<PAGE> 23
generally be treated as if the withheld shares had been sold for an amount
equal to the exercise price after exercise of the option.
REASONS FOR OBTAINING STOCKHOLDER APPROVAL
The Board has approved the 1997 Option Plan subject to stockholder
approval at the Annual Meeting. The Company is submitting the 1997 Option Plan
for stockholder approval at the Annual Meeting because stockholder approval is
required to (i) qualify the 1997 Option Plan under Section 422 of the Code
relating to the grant of ISOs and (ii) obtain a federal income tax deduction
under Section 162(m) of the Code for compensation recognized by optionees in
connection with the exercise of options granted under the 1997 Option Plan.
Section 422 of the Code and applicable Treasury regulations, among
other things, condition ISO treatment for option grants on stockholder approval
of the stock option plan pursuant to which the ISOs are granted. Under Section
162(m) of the Code and applicable Treasury regulations, no deduction is allowed
for annual compensation in excess of $1 million paid by a publicly traded
corporation to its chief executive officer and the four other most highly
compensated officers. Under those provisions, however, there is no limitation
on the deductibility of "qualified performance-based compensation." To satisfy
this definition: (i) the compensation must be paid solely on account of the
attainment of one or more pre-established, objective performance goals; (ii)
the performance goals under which compensation is paid must be established by a
compensation committee having the authority to establish and administer
performance goals and comprised solely of two or more directors who qualify as
"outside directors" for purposes of the exception; (iii) the material terms
under which the compensation is to be paid must be disclosed to and
subsequently approved by stockholders of the corporation before payment is made
in a separate vote; and (iv) the compensation committee must certify in writing
before payment of the compensation that the performance goals and any other
material terms were in fact satisfied. Under applicable Treasury regulations,
in the case of compensation attributable to stock options, the performance goal
requirement (summarized in (i) above) and the stockholder approval requirement
(summarized in (iii) above) are deemed satisfied, and the certification
requirement (summarized in (iv) above) is inapplicable, if: (i) the grant or
award is made by a compensation committee satisfying the above requirements;
(ii) the plan under which the option is granted states the maximum number of
shares with respect to which options may be granted during a specified time
period to an employee; (iii) under the option exercise price equals or exceeds
the fair market value of the stock on the date of grant; and (iv) the stock
option plan is approved by stockholders.
The Company has in the past used stock options as an important device
to motivate and reward its employees and employees of its subsidiaries, and
believes that equity incentives represented by stock options enhance its
ability to attract and retain key personnel.
REQUIRED VOTE
The approval by the affirmative vote of the holders of a
majority of the shares of Common Stock present or represented and entitled to
vote at the Annual Meeting is required to approve the 1997 Option Plan.
Abstentions will have the same effect as a
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<PAGE> 24
negative vote. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
1997 OPTION PLAN.
1995 STOCK OPTION PLAN
Set forth below is certain information regarding the Company's 1995 Stock
Option Plan, as amended (the "1995 Option Plan"). Such information is included
in this proxy statement for the purpose of satisfying the requirements of
former Rule 16b-3 for options granted under the 1995 Option Plan prior to
November 1, 1996.
DESCRIPTION OF 1995 OPTION PLAN
The 1995 Option Plan provides for the granting of options to acquire
Common Stock, which may be either ISOs or NSOs. The 1995 Option Plan is
administered by the Stock Option Committee of the Board of Directors, and all
full-time employees or any other individual (including non-employee directors
of, or consultants or advisors providing bona fide services to, the Company)
whose participation in the 1995 Option Plan is determined by the Stock Option
Committee to be in the best interests of the Company are eligible to receive
option grants thereunder. The 1995 Option Plan does not have a termination
date, but a grant of an ISO may not occur 10 years after May 16, 1995, the
effective date of the 1995 Option Plan. Receipt of option grants under the
1995 Option Plan is contingent upon the execution by each prospective option
holder of an agreement in such form as the Stock Option Committee may from time
to time determine.
The 1995 Option Plan provides for the grant of options to purchase up to
1,298,065 shares of Common Stock. The purchase price per share of Common Stock
subject to an option is fixed by the Stock Option Committee when the option is
granted. Options to purchase no more than 250,000 shares of Common Stock may
be granted to any one eligible individual during the first 10 years after the
effective date of the 1995 Option Plan and 50,000 shares per year thereafter.
The terms of options granted under the 1995 Option Plan, including the vesting
provisions of such options, are established at the time of grant. The Stock
Option Committee, in its sole discretion, may rescind, modify or waive an
limitation or condition on the exercise of an option contained in any option
agreement so as to accelerate the time at which an option may be exercised or
extend the period during which the option may be exercised. No person may
receive an ISO if, at the time of grant, such person owns directly or
indirectly more than 10% of the total combined voting power of the Company
unless the option price is at least 110% of the fair market value of the Common
Stock and the exercise period of such ISO is by its terms limited to five
years. There is also a $100,000 limit on the value of Common Stock (determined
at the time of grant) covered by ISOs that first become exercisable by an
optionee in any calendar year. No option granted to a reporting person under
Section 16 of the Exchange Act may be exercisable during the first six months
after the date of grant.
Payment for shares purchased under the 1995 Option Plan may be made: (i)
in cash or in cash equivalents; (ii) if permitted by the option agreement, by
exchanging shares of Common Stock with a fair market value equal to or less
than the total option price plus cash for any difference; (iii) if permitted by
the option
-21-
<PAGE> 25
agreement, by delivery of a promissory note of the person exercising the
option; (iv) if permitted by the option agreement, by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option equal in value to the exercise price; or (v) by a combination of the
foregoing. Payment in full of the option price need not accompany the written
notice of exercise provided the notice directs that the stock certificate for
the shares for which the option is exercised be delivered to a licensed broker
acceptable to the Company as the agent for the individual exercising the option
and, at the time such stock certificate is delivered, the broker tenders to the
Company cash (or cash equivalents acceptable to the Company) equal to the
option price.
In the event of stock splits, stock dividends, recapitalizations,
combinations of shares or certain other events, the 1995 Option Plan provides
for adjustment of: (i) the number of shares available for option grants,
including the maximum number of shares that may be granted to any one
individual, and (ii) the number of shares and the per share exercise price for
shares subject to unexercised options. Upon any dissolution or liquidation of
the Company, the sale of substantially all of the Company's assets, a merger,
reorganization or consolidation in which the Company is not the surviving
corporation or any other transaction (including, without limitation, a merger
or reorganization in which the Company is the surviving corporation) approved
by the Board which results in any person or entity owning 80% or more of the
total combined voting power of all classes of stock of the Company, the 1995
Option Plan and the options issued thereunder will terminate, unless provision
is made in connection with such transaction for the continuation of the plans
and/or the assumption of the options or for the substitution for such options
of new options covering the stock of a successor corporation or a parent or
subsidiary thereof, with appropriate adjustment as to the number and kinds of
shares and the per share exercise price. In the event of any such termination,
the option agreements entered into with optionees provide that the optionee
shall have the right during such period before such termination as the Board of
Directors shall determine to exercise the related option in whole or in part
and whether or not the option was exercisable at the time of any such
termination.
Options granted under the 1995 Option Plan generally terminate upon the
earliest of: (i) ten years from the date of grant; (ii) termination of
employment or other relationship for any reason (to the extent the option has
not vested); (iii) termination of employment or other relationship for cause
(whether or not the option has vested); (iv) one year after termination of
employment or other relationship due to death or disability (to the extent the
option has vested); and (v) three months after the optionee's termination of
employment or other relationship other than for cause, death or disability (to
the extent the option has vested). Options granted under the 1995 Option Plan
generally are non-transferable except by will or by the laws of descent and
distribution upon the death of the option holder.
The Board of Directors may terminate or amend the 1995 Option Plan at any
time; provided, however, that any amendment by the Board which, if not approved
by the Company's stockholders in accordance with applicable requirements of
Rule 16b-3, would cause the Plan to not comply with Rule 16b-3 (or any
successor rule or other regulatory requirements) or the Code, shall not be
effective unless approved by the affirmative vote of stockholders who hold more
than 50% of the combined voting power of the outstanding
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<PAGE> 26
shares of voting stock of the Company present or represented, and entitled to
vote thereon at a duly constituted stockholders' meeting.
PLAN BENEFITS
The table below indicates options granted to date under the 1995
Option Plan. With the exception of an option grant for 6,666 shares at an
exercise price of $3.75 per share, the option exercise price of options granted
under the 1995 Option Plan was not less than the fair market value of the
Company's Common Stock on the date of grant, as determined pursuant to the
Plan. All of such options have been NSOs.
PLAN BENEFITS
<TABLE>
<CAPTION>
1995 OPTION PLAN
--------------------
AVERAGE PER SHARE NUMBER
NAME AND POSITION(S) EXERCISE PRICE($) OF OPTIONS (#)
-------------------- ----------------- --------------
<S> <C> <C>
Paul J. Klaassen $-0- -0-
Chairman of the Board, President
and Chief Executive Officer
David W. Faeder 16.20 41,667
Executive Vice President and
Chief Financial Officer
Timothy S. Smick 11.93 166,667
Executive Vice President and
Chief Operating Officer
Thomas B. Newell 10.65 155,002
Executive Vice President and
General Counsel of the Company and
President of Sunrise Development, Inc.
Brian C. Swinton 20.00 120,000
Executive Vice President,
Sales and Marketing
Executive Group (6 persons) 13.89 483,336
Non-Executive Director
Group (2 persons) 14.20 50,000
Non-Executive Officer Employee Group
(212 persons) 11.34 736,177
</TABLE>
Based on the closing price of $28 1/8 per share on March 17, 1997, the
aggregate market value of the 1,298,065 shares of Common Stock issuable under
the 1995 Option Plan is $36.5 million.
-23-
<PAGE> 27
FEDERAL INCOME TAX CONSEQUENCES
For a description of the federal income tax consequences of the issuance
and exercise of options under the 1995 Option Plan to the optionee and the
Company, see "Approval of 1997 Stock Option Plan -- Federal Income Tax
Consequences."
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP to act
as the Company's independent public accountants for 1997. Representatives of
Ernst & Young LLP will be present at the Annual Meeting. They will be given an
opportunity to make a statement if they desire to do so and will be available
to respond to appropriate questions. Ernst & Young LLP was first appointed to
act as the Company's independent public accountants in November 1994.
STOCK OWNED BY MANAGEMENT
The following table sets forth certain information with respect to beneficial
ownership of the Common Stock as of March 17, 1997 by (i) each director and
nominee for director of the Company; (ii) each named executive officer of the
Company; and (iii) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
NAME AND POSITION(S) AMOUNT AND NATURE OF PERCENT OF COMMON
WITH THE COMPANY BENEFICIAL OWNERSHIP(1) STOCK OUTSTANDING
---------------- ----------------------- -----------------
<S> <C> <C>
Paul J. Klaassen(2) 5,076,336 27.2%
Chairman of the Board, President
and Chief Executive Officer
Teresa M. Klaassen(2) 5,076,336 27.2
Executive Vice President and
Secretary
David W. Faeder(3) 179,166 *
Executive Vice President and
Chief Financial Officer
Timothy S. Smick(4) 30,083 *
Executive Vice President and
Chief Operating Officer
Thomas B. Newell(3) 27,499 *
Executive Vice President and
General Counsel of the Company
and President of Sunrise
Development, Inc.
Brian C. Swinton(3) 30,000 *
Executive Vice President, Sales
and Marketing
</TABLE>
-24-
<PAGE> 28
<TABLE>
<S> <C> <C>
Ronald V. Aprahamian(5) 65,000 *
Director
Thomas J. Donohue(6) 77,500 *
Director
Richard A. Doppelt(7) 728,778 3.9
Director
Scott F. Meadow(8) 51,516 *
Director
Darcy J. Moore -0- *
Director
Executive officers and directors 6,265,878 33.1
as a group (11 persons)(9)
</TABLE>
- ----------------------
* Less than one percent.
(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or
indirectly, through any contract, arrangement, undertaking,
relationship or otherwise has or shares voting power and/or investment
power and as to which such person has the right to acquire such voting
and/or investment power within 60 days. Percentage of beneficial
ownership as to any person as of a particular date is calculated by
dividing the number of shares beneficially owned by such person by the
sum of the number of shares outstanding as of such date and the number
of shares as to which such person has the right to acquire voting
and/or investment power within 60 days.
(2) Includes 4,876,336 shares held jointly by the Klaassens, as tenants by
the entireties, and 200,000 shares held by the Sunrise Foundation,
Inc. over which the Klaassens have voting and investment power. See
"Principal Holders of Voting Securities."
(3) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of March 17, 1997.
(4) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of March 17, 1997 and 3,000 shares held in
a trust for which Mr. Smick serves as trustee.
(5) Represents 25,000 shares issuable upon the exercise of stock options
that are exercisable within 60 days of March 17, 1997 and 40,000
shares of Common Stock held directly.
(6) Represents 25,000 shares issuable upon the exercise of stock options
that are exercisable within 60 days of March 17, 1997 and 52,500
shares of Common Stock held directly.
(7) Includes 1,000 shares owned directly, 407,555 shares beneficially
owned by Allstate Insurance Company and 254,722 shares beneficially
owned by Allstate Life Insurance. Also includes shares held in trust
for the benefit of Allstate Retirement Plan (36,389 shares) and Agents
Pension Plan (29,112 shares) by CTC Illinois Trust Company, as
trustee. Mr. Doppelt is Director of Allstate Private Equity, a
division of Allstate Insurance Company, and in such capacity may be
deemed to share beneficial ownership with respect to such shares;
however, he disclaims any beneficial ownership except to the extent of
his pecuniary interest therein.
(8) Represents 1,542 shares owned directly, 2,143 shares beneficially
owned by DLJ Growth Associates II, L.P. ("DLJ Growth") and 47,831
shares beneficially owned by DLJ Capital Corporation ("DLJ Capital").
Mr. Meadow is a general partner of DLJ Growth, and a Vice President of
The Sprout Group, a division of DLJ Capital. Mr. Meadow may be deemed
to share beneficial ownership with respect to the shares owned by DLJ
Growth and DLJ
-25-
<PAGE> 29
Capital; however, he disclaims any beneficial ownership, except to the
extent of his pecuniary interest therein.
(9) See notes (3), (4), (5), (6), (7) and (8) above. Includes the
5,076,336 shares beneficially owned by Paul J. and Teresa M.
Klaassen.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of March 17, 1997 with
respect to the ownership of shares of Company Common Stock by each person
believed by management to be the beneficial owner of more than five percent of
the Company's outstanding Common Stock. The information is based on the most
recent Schedule 13D or 13G filed with the SEC on behalf of such persons or
other information made available to the Company. Except as otherwise
indicated, the reporting persons have stated that they possess sole voting and
sole dispositive power over the entire number of shares reported.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF COMMON
BENEFICIAL OWNER BENEFICIAL OWNERSHIP STOCK OUTSTANDING
---------------------- -------------------- -----------------
<S> <C> <C>
Paul J. and Teresa M. Klaassen(1) 5,076,336 27.2%
9401 Lee Highway, Suite 300
Fairfax, VA 22031
Cohen & Steers Capital 2,319,900 12.4
Management, Inc.(2)
757 Third Avenue
New York, NY 10017
Putnam Investments, Inc.(3) 1,914,769 10.3
One Post Office Square
Boston, MA 02109
ARK Asset Management Co, Inc.(4) 1,225,000 6.6
One New York Plaza
New York, NY 10004
FMR Corp.(5) 1,114,000 6.0
82 Devonshire Street
Boston, MA 02109
Janus Capital Corporation(6) 945,375 5.1
100 Fillmore Street
Denver, Colorado 80206
</TABLE>
- ----------------------
(1) See "Stock Owned by Management."
(2) The Amendment No. 1 to Schedule 13G dated February 11, 1997 of Cowen &
Steers Capital Management, Inc. ("Cowen & Steers") states that Cowen &
Steers, an investment adviser, has sole power to vote 1,986,000 shares
and sole power to dispose of 2,319,900 shares.
(3) Amendment No. 1 to Schedule 13G dated January 27, 1997 jointly filed
by Putnam Investments, Inc. ("PI"), Marsh & McLennan Companies, Inc.
("M&MC"), Putnam Investment Management Inc. ("PIM"), The Putnam
Advisory Company, Inc. ("PAC") and Putnam New Opportunities Fund
("Fund") reports that these shares are beneficially owned as follows:
PI (shared voting power--37,386 shares and shared dispositive
power--1,914,769
-26-
<PAGE> 30
shares), M&MC (none); PIM (shared dispositive power --1,847,431
shares), PAC (shared voting power--37,386 shares and shared
dispositive power--67,338 shares) and Fund (shared dispositive
power--1,100,000). The filing states that PI, which is a wholly-owned
subsidiary of M&MC, wholly owns two registered investment advisers:
PIM, which is the investment adviser to the Putnam family of mutual
funds, and PAC, which is the investment adviser to Putnam's
institutional clients. Both subsidiaries have dispository power over
the shares as investment managers, but each of the mutual fund's
trustees have voting power over the shares held by each fund, and PAC
has shared voting power over the shares held by the institutional
clients.
(4) The Schedule 13G dated February 3, 1997 of ARK Asset Management Co,
Inc. ("ARK") states that ARK, which is an investment adviser, has sole
power to vote 967,200 shares and sole power to dispose of 1,225,000
shares.
(5) The Schedule 13G dated February 14, 1997 of FMR Corp. states that FMR
Corp. has sole power to dispose of the entire number of such shares.
The Schedule 13G also states that Fidelity Management & Research
Company, a wholly-owned subsidiary of FMR Corp. and an investment
adviser ("Fidelity"), is the beneficial owner of such shares as a
result of acting as investment adviser to various Fidelity funds.
Further, the Schedule 13G states that Edward C. Johnson 3d, FMR
Corp.'s Chairman, FMR Corp. through Fidelity, and the funds each has
sole power to dispose of the shares. The Schedule 13G also indicates
that Fidelity votes the shares under written guidelines established by
the funds' board of directors, which have the sole power to vote the
shares.
(6) The Schedule 13G dated February 10, 1997 jointly filed by Janus
Capital Corporation ("Janus Capital") and Thomas H. Bailey, Chairman
of the Board, President and a 12.2% stockholder of Janus Capital,
states that Janus Capital, an investment adviser, and Mr. Bailey
possess shared voting and dispositive power over the entire number of
such shares. The Schedule 13G indicates that Janus Capital may be
deemed to be the beneficial owner of shares of Company Common Stock
held by portfolios managed by it and Mr. Bailey also may be deemed to
beneficially own such shares as a result of the positions he holds
with Janus Capital.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1998 annual
meeting must be received by the Company no later than December 1, 1997 pursuant
to the proxy soliciting rules of the SEC in order to be considered for
inclusion in the Company's proxy statement and form fo proxy relating to the
1998 annual meeeting. Nothing in this paragraph shall be deemed to require the
Company to include in its proxy statement and proxy relating to the 1998 annual
meeting any stockholder proposal which may be omitted from the Company's proxy
materials pursuant to applicable regulations of the SEC in effect at the time
such proposal is received. Pursuant to the Company's Bylaws, any stockholder
of the Company who intends to present a proposal for action at the 1998 annual
meeting also must file a copy thereof with the Secretary of the Company at
least 60 days prior to the meeting; however, in the event that less than 75
days notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
no later than the close of business on the 15th day following the day on which
such notice of the date or public disclosure was made.
-27-
<PAGE> 31
OTHER BUSINESS TO BE TRANSACTED
The Board of Directors does not know of any other matters to
be presented for action by the stockholders at the Annual Meeting. If,
however, any other matters not now known are properly brought before the
meeting, the persons names in the accompanying proxy will vote such proxy in
accordance with the determination of a majority of the Company's Board of
Directors.
By Order of the Board of Directors
/s/ Paul J. Klaassen
Paul J. Klaassen
Chairman of the Board,
President and Chief Executive Officer
Fairfax, Virginia
March 31, 1997
-28-
<PAGE> 32
EXHIBIT A
SUNRISE ASSISTED LIVING, INC.
1997 STOCK OPTION PLAN
SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the
"Corporation"), sets forth herein the terms of this 1997 Stock Option Plan (the
"Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation
and any subsidiary thereof within the meaning of Rule 405 of Regulation C under
the Securities Act of 1933, as amended (with the term "person" as used in such
Rule 405 being defined as in Section 2(2) of such Act) (a "Subsidiary"), by
providing eligible individuals (as designated pursuant to Section 4 below) with
incentives to improve business results, by providing an opportunity to acquire
or increase a proprietary interest in the Corporation, which thereby will
create a stronger incentive to expend maximum effort for the growth and success
of the Corporation and its Subsidiaries, and will encourage such eligible
individuals to continue to serve the Corporation and its Subsidiaries, whether
as an employee, as a director, as a consultant or advisor or in some other
capacity. To this end, the Plan provides for the grant of stock options, as
set out herein.
This Plan provides for the grant of stock options (each of which
is an "Option") in accordance with the terms of the Plan. An Option may be an
incentive stock option (an "ISO") intended to satisfy the applicable
requirements under Section 422 of the Internal Revenue Code of 1986, as amended
from time to time, or the corresponding provision of any subsequently-enacted
tax statute (the "Code"), or a nonqualified stock option (an "NSO"). An Option
is an NSO to the extent that the Option would exceed the limitations set forth
in Section 7 below. An Option is also an NSO if either (i) the Option is
specifically designated at the time of grant as an NSO or not being an ISO or
(ii) the Option does not otherwise satisfy the requirements of Code Section 422
at the time of grant. Each Option shall be evidenced by a written agreement
between the Corporation and the recipient individual that sets out the terms
and conditions of the grant as further described in Section 8.
2. ADMINISTRATION
(a) BOARD
The Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), which shall have the full power and authority to
take all actions and to make all determinations required or provided for under
the Plan or any Option granted or Option Agreement (as defined in Section 8
below) entered into hereunder and all such other actions and determinations not
inconsistent with the
A-1
<PAGE> 33
specific terms and provisions of the Plan deemed by the Board to be necessary
or appropriate to the administration of the Plan or any Option granted or
Option Agreement entered into hereunder. The interpretation and construction
by the Board of any provision of the Plan or of any Option granted or Option
Agreement entered into hereunder shall be final, binding and conclusive.
(b) ACTION BY COMMITTEE
The Board from time to time may appoint a Stock Option Committee
consisting of two or more members of the Board of Directors who, in the sole
discretion of the Board, may be the same Directors who serve on the
Compensation Committee, or may appoint the Compensation Committee to serve as
the Stock Option Committee (the "Committee"). The Board, in its sole
discretion, may provide that the role of the Committee shall be limited to
making recommendations to the Board concerning any determinations to be made
and actions to be taken by the Board pursuant to or with respect to the Plan,
or the Board may delegate to the Committee such powers and authorities related
to the administration of the Plan, as set forth in Section 2(a) above, as the
Board shall determine, consistent with the Restated Certificate of
Incorporation and By-Laws of the Corporation and applicable law. In the event
that the Plan or any Option granted or Option Agreement entered into hereunder
provides for any action to be taken by or determination to be made by the
Board, such action may be taken by or such determination may be made by the
Committee if the power and authority to do so has been delegated to the
Committee by the Board as provided for in this Section. Unless otherwise
expressly determined by the Board, any such action or determination by the
Committee shall be final and conclusive.
(c) NO LIABILITY
No member of the Board or of the Committee shall be liable for
any action or determination made in good faith with respect to the Plan or any
Option granted or Option Agreement entered into hereunder.
3. STOCK
The stock that may be issued pursuant to Options under the Plan
shall be shares of common stock, par value $.01 per share, of the Corporation
(the "Stock"), which shares may be treasury shares or authorized but unissued
shares. The number of shares of Stock that may be issued pursuant to Options
under the Plan shall not exceed, in the aggregate, one million eight hundred
thousand (1,800,000) shares. If any Option expires, terminates, or is
terminated or canceled for any reason prior to exercise, the shares of Stock
that were subject to the unexercised, forfeited, terminated or canceled portion
of such Option shall be available immediately for future grants of Options
under the Plan.
A-2
<PAGE> 34
4. ELIGIBILITY
(a) DESIGNATED RECIPIENTS
Subject to the next sentence, Options may be granted under the
Plan to (i) any employee of the Corporation or any Subsidiary (including any
such individual who is an officer or director of the Corporation or any
Subsidiary) as the Board shall determine and designate from time to time or
(ii) any consultant or advisor providing bona fide services to the Corporation
or any Subsidiary (provided that such services must not be in connection with
the offer or sale of securities in a capital-raising transaction) whose
participation in the Plan is determined by the Board to be in the best
interests of the Corporation and is so designated by the Board. Options
granted to a full-time employee of the Corporation or a "subsidiary
corporation" thereof within the meaning of Section 424(f) of the Code shall be
either ISOs or NSOs, as determined in the sole discretion of the Board, and
Options granted to any other eligible individual shall be NSOs.
(b) SUCCESSIVE GRANTS
An individual may hold more than one Option, subject to such
restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) EFFECTIVE DATE
The Plan shall be effective as of the date of adoption by the
Board, subject to approval of the Plan within one year of such effective date
by the affirmative vote of stockholders who hold more than fifty percent (50%)
of the combined voting power of the outstanding shares of voting stock of the
Corporation present or represented, and entitled to vote thereon at a duly
constituted stockholders' meeting, or by consent as permitted by law. Upon
approval of the Plan by the stockholders of the Corporation as set forth above,
however, all Options granted under the Plan on or after the effective date
shall be fully effective as if the stockholders of the Corporation had approved
the Plan on the Plan's effective date. If the stockholders fail to approve the
Plan within one year of such effective date, any Options granted hereunder
shall be null and void and of no effect.
(c) TERM
The Plan shall have no termination date, but no grant of an ISO
may occur after the date that is ten years after the effective date.
6. GRANT OF OPTIONS
(a) GENERAL
Subject to the terms and conditions of the Plan, the Board may,
A-3
<PAGE> 35
at any time and from time to time, grant to such eligible individuals as the
Board may determine (each of the whom is an "Optionee"), Options to purchase
such number of shares of Stock on such terms and conditions as the Board may
determine, including any terms or conditions that may be necessary to qualify
such Options as ISOs under Section 422 of the Code. Such authority
specifically includes the authority, in order to effectuate the purposes of the
Plan but without amending the Plan, to modify grants to eligible individuals
who are foreign nationals or are individuals who are employed outside the
United States to recognize differences in local law, tax policy, or custom.
(b) LIMITATION ON GRANTS OF OPTIONS
The maximum number of shares subject to Options that can be
granted under the Plan to any executive officer of the Company or a Subsidiary,
or to any other person eligible for a grant of an Option under Section 4, is
500,000 shares during the first ten years after the effective date of the Plan
and 200,000 shares per year thereafter (in each case, subject to adjustment as
provided in Section 16(a) hereof).
7. LIMITATIONS ON INCENTIVE STOCK OPTIONS
(a) PRICE AND DOLLAR LIMITATIONS
An Option that is designated as being one that is intended to
qualify as an ISO shall qualify for treatment as an ISO only to the extent that
the aggregate fair market value (determined at the time the Option is granted)
of the Stock with respect to which all options that are intended to constitute
"incentive stock options," within the meaning of Code Section 422, are
exercisable for the first time by any Optionee during any calendar year (under
the Plan and all other plans of the Optionee's employer corporation and its
parent and subsidiary corporations within the meaning of Section 422(d) of the
Code) does not exceed $100,000.
(b) PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other
agreement, contract, or understanding heretofore or hereafter entered into by
the Optionee with the Corporation, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this paragraph (an "Other Agreement"), and notwithstanding any
formal or informal plan or other arrangement for the direct or indirect
provision of compensation to the Optionee (including groups or classes of
participants or beneficiaries of which the Optionee is a member), whether or
not such compensation is deferred, is in cash, or is in the form of a benefit
to or for the Optionee (a "Benefit Arrangement"), if the Optionee is a
"disqualified individual," as defined in Section 280G(c) of the Code, any
Option held by that Optionee and any right to receive any payment or other
benefit under this Plan shall not become exercisable or vested (i) to the
extent that such right to exercise, vesting, payment, or benefit, taking into
account all other rights, payments, or benefits to or for the Optionee under
this Plan, all Other Agreements, and all Benefit Arrangements, would cause any
payment or benefit to the Optionee under this Plan to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the
A-4
<PAGE> 36
Code as then in effect (a "Parachute Payment") and (ii) if, as a result of
receiving a Parachute Payment, the aggregate after-tax amounts received by the
Optionee from the Corporation under this Plan, all Other Agreements, and all
Benefit Arrangements would be less than the maximum after-tax amount that could
be received by him without causing any such payment or benefit to be considered
a Parachute Payment. In the event that the receipt of any such right to
exercise, vesting, payment, or benefit under this Plan, in conjunction with all
other rights, payments, or benefits to or for the Optionee under any Other
Agreement or any Benefit Arrangement would cause the Optionee to be considered
to have received a Parachute Payment under this Plan that would have the effect
of decreasing the after-tax amount received by the Optionee as described in
clause (ii) of the preceding sentence, then the Optionee shall have the right,
in the Optionee's sole discretion, to designate those rights, payments, or
benefits under this Plan, any Other Agreements, and any Benefit Arrangements
that should be reduced or eliminated so as to avoid having the payment or
benefit to the Optionee under this Plan be deemed to be a Parachute Payment.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
agreements ("Option Agreements"), to be executed by the Corporation and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same
time need not contain similar provisions; provided, however, that all such
Option Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement. In the case of an Option intended to constitute an ISO, the
Option Price shall be not less than the greater of par value or 100 percent of
the fair market value of a share of Stock on the date on which the Option is
granted (as determined in good faith by the Board); provided, however, that in
the event the Optionee would otherwise be ineligible to receive an ISO by
reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating
to stock ownership of more than ten percent), the Option Price of an Option
that is intended to be an ISO shall not be less than the greater of par value
or 110 percent of the fair market value of a share of Stock at the time such
Option is granted. In the event that the Stock is listed on an established
national or regional stock exchange or The Nasdaq Stock Market, is admitted to
quotation on the National Association of Securities Dealers Automated Quotation
System, or is publicly traded in an established securities market, in
determining the fair market value of the Stock, the Board shall use the closing
price of the Stock on such exchange or system or in such market (the highest
such closing price if there is more than one such exchange or market) on the
trading date immediately before the Option is granted (or, if there is no such
closing price, then the Board shall use the mean between the highest bid and
lowest asked prices or between the high and low prices on such date), or, if no
sale of the Stock has been made on such day, on the next preceding day on which
any such sale shall have been made. In the case of an Option that is an NSO,
the Option Price shall not be less than par value.
A-5
<PAGE> 37
10. TERM AND EXERCISE OF OPTIONS
(a) TERM
Upon the expiration of ten years from the date on which an ISO
is granted or on such date prior thereto as may be fixed by the Board and
stated in the Option Agreement relating to such Option, that ISO shall be
ineligible for treatment as an "incentive stock option," as defined in Section
422 of the Code, and shall be exercisable only as an NSO. In the event the
Optionee otherwise would be ineligible to receive an "incentive stock option"
by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code
(relating to stock ownership of more than 10 percent), such ten year
restriction on exercisability as an ISO shall be read to impose a five year
restriction on such exercisability. If an Optionee shall terminate employment
prior to the ten-year or five-year limitation described in the immediately
preceding sentences, any outstanding ISO shall be ineligible for treatment as
an "incentive stock option," as defined in Section 422 of the Code, and shall
be exercisable only as an NSO, unless exercised within three months after such
termination or, in the case of termination on account of "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code), within one
year after such termination.
(b) OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable, in
whole or in part, at any time and from time to time, over a period commencing
on or after the date of grant and, to the extent that the Board determines and
sets forth a termination date for such Option in the Option Agreement
(including any amendment thereto), ending upon the stated expiration or
termination date. The Board in its sole discretion may specify events or
circumstances, including the giving of notice, which will cause an Option to
terminate as set forth in the Option Agreement or in this Plan. No Option
granted to a person who is required to file reports under Section 16(a) of the
Securities Exchange Act of 1934 (as now in effect or as hereafter amended)
shall be exercisable during the first six months after the date of grant.
Without limiting the foregoing but subject to the terms and conditions of the
Plan, the Board may in its sole discretion provide that an Option may not be
exercised in whole or in part for any period or periods of time during which
such Option is outstanding and may condition exercisability (or vesting) of an
Option upon the attainment of performance objectives, upon continued service,
upon certain events or transactions, or a combination of one or more of such
factors, or otherwise, as set forth in the Option Agreement. Subject to the
parachute payment restrictions under Section 7(b), however, the Board, in its
sole discretion, may rescind, modify, or waive any such limitation or condition
on the exercise of an Option contained in any Option Agreement, so as to
accelerate the time at which the Option may be exercised or extend the period
during which the Option may be exercised. Notwithstanding any other provisions
of the Plan, no Option granted to an Optionee under the Plan shall be
exercisable in whole or in part prior to the date on which the stockholders of
the Corporation approve the Plan, as provided in Section 5 above.
A-6
<PAGE> 38
(c) METHOD OF EXERCISE
An Option that is exercisable hereunder may be exercised by
delivery to the Corporation on any business day, at the Corporation's principal
office, addressed to the attention of the President, of written notice of
exercise, which notice shall specify the number of shares with respect to which
the Option is being exercised and shall be accompanied by payment in full of
the Option Price of the shares for which the Option is being exercised. The
minimum number of shares of Stock with respect to which an Option may be
exercised, in whole or in part, at any time shall be the lesser of (i) 100
shares or such lesser number set forth in the applicable Option Agreement and
(ii) the maximum number of shares available for purchase under the Option at
the time of exercise. Payment of the Option Price for the shares of Stock
purchased pursuant to the exercise of an Option shall be made (i) in cash or in
cash equivalents; (ii) to the extent permitted by applicable law and under the
terms of the Option Agreement with respect to such Option, through the tender
to the Corporation of shares of Stock, which shares shall be valued, for
purposes of determining the extent to which the Option Price has been paid
thereby, at their fair market value (determined in accordance with Section 9)
on the date of exercise; (iii) to the extent permitted by applicable law and
under the terms of the Option Agreement with respect to such Option, by the
delivery of a promissory note of the person exercising the Option to the
Corporation on such terms as shall be set out in such Option Agreement; (iv) to
the extent permitted by applicable law and under the terms of the Option
Agreement with respect to such Option, by causing the Corporation to withhold
shares of Stock otherwise issuable pursuant to the exercise of an Option equal
in value to the Option Price or portion thereof to be satisfied pursuant to
this clause (iv); or (v) by a combination of the methods described in (i),
(ii), (iii), and (iv). An attempt to exercise any Option granted hereunder
other than as set forth above shall be invalid and of no force and effect.
Payment in full of the Option Price need not accompany the written notice of
exercise provided the notice directs that the Stock certificate or certificates
for the shares for which the Option is exercised be delivered to a licensed
broker acceptable to the Corporation as the agent for the individual exercising
the Option and, at the time such Stock certificate or certificates are
delivered, the broker tenders to the Corporation cash (or cash equivalents
acceptable to the Corporation) equal to the Option Price. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the individual exercising the Option shall be
entitled to the issuance of a Stock certificate or Stock certificates
evidencing his ownership of such shares. A separate Stock certificate or
separate Stock certificates shall be issued for any shares purchased pursuant
to the exercise of an Option that is an ISO, which certificate or certificates
shall not include any shares that were purchased pursuant to the exercise of an
Option that is an NSO. Unless otherwise stated in the applicable Option
Agreement, an individual holding or exercising an Option shall have none of the
rights of a stockholder (for example, the right to receive cash or stock
dividend payments attributable to the subject shares or to direct the voting of
the subject shares) until the shares of Stock covered thereby are fully paid
and issued to him. Except as provided in Section 16 below, no adjustment shall
be made for dividends or other rights for which the record date is prior to the
date of such issuance.
A-7
<PAGE> 39
(d) DATE OF GRANT
The date of grant of an Option under this Plan shall be the date
as of which the Board approves the grant.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee, only such Optionee (or, in
the event of legal incapacity or incompetency, the guardian or legal
representative of the Optionee) may exercise the Option, except as otherwise
specifically permitted by this Section 11. No Option shall be assignable or
transferable other than by will or in accordance with the laws of descent and
distribution; provided, however, subject to the terms of the applicable Option
Agreement, and to the extent the transfer is in compliance with any applicable
restrictions on transfers, an Optionee may transfer an NSO to a family member
of the Optionee (defined as an individual who is related to the Optionee by
blood or adoption) or to a trust established and maintained for the benefit of
the Optionee or a family member of the Optionee (as determined under applicable
state law and the Code).
12. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP OF OPTIONEE
In the Board's sole discretion, the Board may include language
in an Option Agreement providing for the termination of any unexercised Option
in whole or in part upon or at any time after the termination of employment or
other relationship of the Optionee with the Corporation or a Subsidiary
(whether as an employee, a director, a consultant or advisor providing bona
fide services to the Corporation or a Subsidiary, or otherwise). Whether a
leave of absence or leave on military or government service shall constitute a
termination of employment or other relationship of the Optionee with the
Corporation or a Subsidiary for purposes of the Plan shall be determined by the
Board, which determination shall be final and conclusive.
13. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock
pursuant to the exercise of Options granted under the Plan shall constitute
general funds of the Corporation.
14. REQUIREMENTS OF LAW
The Corporation shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the Optionee, the individual exercising the Option,
or the Corporation of any provisions of any law or regulation of any
governmental authority, including without limitation any federal or state
securities laws or regulations. If at any time the Corporation shall
determine, in its discretion, that the listing, registration, or qualification
of any shares subject to the Option upon any securities exchange or under any
state or federal law, or the consent or approval of any government regulatory
or
A-8
<PAGE> 40
self-regulatory body is necessary or desirable as a condition of, or in
connection with, the issuance or purchase of shares, the Option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent, or approval shall have been effected or obtained free of any
conditions not acceptable to the Corporation, and any delay caused thereby
shall in no way affect the date of termination of the Option. Specifically in
connection with the Securities Act of 1933 (as now in effect or as hereafter
amended), upon the exercise of any Option, unless a registration statement
under such Act is in effect with respect to the shares of Stock covered
thereby, the Corporation shall not be required to sell or issue such shares
unless the Board has received evidence satisfactory to it that the holder of
such Option may acquire such shares pursuant to an exemption from registration
under such Act. Any determination in this connection by the Board shall be
final, binding, and conclusive. The Corporation may, but shall in no event be
obligated to, register any securities covered hereby pursuant to the Securities
Act of 1933 (as now in effect or as hereafter amended). The Corporation shall
not be obligated to take any affirmative action in order to cause the
exercisability or vesting of an Option or to cause the exercise of an Option or
the issuance of shares pursuant thereto to comply with any law or regulation of
any governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such Option (under circumstances
in which the laws of such jurisdiction apply) shall be deemed conditioned upon
the effectiveness of such registration or the availability of such an
exemption.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend, or terminate the Plan as to any shares of Stock as to which Options
have not been granted; provided, however, that any amendment by the Board
which, if not approved by the Corporation's stockholders, would cause the Plan
to not comply with Sections 162(m) or 422 of the Code shall not be effective
unless approved by the affirmative vote of stockholders who hold more than
fifty percent (50%) of the combined voting power of the outstanding shares of
voting stock of the Corporation present or represented, and entitled to vote
thereon at a duly constituted stockholders' meeting, or by consent as permitted
by law. The Corporation, however, may retain the right in an Option Agreement
to convert an ISO into an NSO. The Corporation may also retain the right in an
Option Agreement to cause a forfeiture of the shares of Stock or gain realized
by a holder of an Option (a) if the holder violates any agreement covering
non-competition with the Corporation or any Subsidiary or nondisclosure of
confidential information of the Corporation or any Subsidiary, (b) if the
holder's employment is terminated for cause or (c) if the Board determines that
the holder committed acts or omissions which would have been the basis for a
termination of holder's employment for cause had such acts or omissions been
discovered prior to termination of holder's employment. Furthermore, the
Corporation may, in the Option Agreement, retain the right to annul the grant
of an Option, if the holder of such grant was an employee of the Corporation or
a Subsidiary and the holder's employment is terminated for cause, as defined in
the applicable Option Agreement. Except as permitted under this Section 15 or
Section 16 hereof, no amendment, suspension, or termination of the Plan shall,
without the
A-9
<PAGE> 41
consent of the holder of the Option, alter or impair rights or obligations
under any Option theretofore granted under the Plan.
16. EFFECT OF CHANGES IN CAPITALIZATION
(a) CHANGES IN STOCK
If the number of outstanding shares of Stock is increased or
decreased or the shares of Stock are changed into or exchanged for a different
number or kind of shares or other securities of the Corporation on account of
any recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of
consideration by the Corporation, occurring after the effective date of the
Plan, the number and kind of shares for the acquisition of which Options may be
granted under the Plan, and the limitations on the maximum number of shares
subject to Options that can be granted to any individual under the Plan as set
forth in Section 6(b) hereof, shall be adjusted proportionately and accordingly
by the Corporation. In addition, the number and kind of shares for which
Options are outstanding shall be adjusted proportionately and accordingly so
that the proportionate interest of the holder of the Option immediately
following such event shall, to the extent practicable, be the same as
immediately before such event. Any such adjustment in outstanding Options
shall not change the aggregate Option Price payable with respect to shares that
are subject to the unexercised portion of the Option outstanding but shall
include a corresponding proportionate adjustment in the Option Price per share.
(b) REORGANIZATION IN WHICH THE CORPORATION IS THE
SURVIVING CORPORATION
Subject to Subsection (c)(iv) hereof, if the Corporation shall
be the surviving corporation in any reorganization, merger, or consolidation of
the Corporation with one or more other corporations, any Option theretofore
granted pursuant to the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to such Option would
have been entitled immediately following such reorganization, merger, or
consolidation, with a corresponding proportionate adjustment of the Option
Price per share so that the aggregate Option Price thereafter shall be the same
as the aggregate Option Price of the shares remaining subject to the Option
immediately prior to such reorganization, merger, or consolidation.
(c) DISSOLUTION, LIQUIDATION, SALE OF ASSETS,
REORGANIZATION IN WHICH THE CORPORATION IS NOT THE
SURVIVING CORPORATION, ETC.
The Plan and all Options outstanding hereunder shall terminate
(i) upon the dissolution or liquidation of the Corporation, or (ii) upon a
merger, consolidation, or reorganization of the Corporation with one or more
other corporations in which the Corporation is not the surviving corporation,
or (iii) upon a sale of substantially all of the assets of the Corporation to
another person or entity, or (iv) upon a merger,
A-10
<PAGE> 42
consolidation or reorganization (or other transaction if so determined by the
Board in its sole discretion) in which the Corporation is the surviving
corporation, that is approved by the Board and that results in any person or
entity (other than persons who are holders of Stock of the Corporation at the
time the Plan is approved by the stockholders and other than an Affiliate)
owning 80 percent or more of the combined voting power of all classes of stock
of the Corporation, except to the extent provision is made in writing in
connection with any such transaction covered by clauses (i) through (iv) for
the continuation of the Plan or the assumption of such Options theretofore
granted, or for the substitution for such Options of new options covering the
stock of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and exercise
prices, in which event the Plan and Options theretofore granted shall continue
in the manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have the right
(subject to the general limitations on exercise set forth in Section 10(b)
above), during such period occurring before such termination as the Board in
its sole discretion shall determine and designate, and in any event immediately
before the occurrence of such termination, to exercise such Option in whole or
in part, to the extent that such Option was otherwise exercisable at the time
such termination occurs, except that, by inclusion of appropriate language in
an Option Agreement, the Board may provide that the Option may be exercised
before termination without regard to any installment limitation or other
condition on exercise imposed pursuant to Section 10(b) above. The Corporation
shall send written notice of a transaction or event that will result in such a
termination to all individuals who hold Options not later than the time at
which the Corporation gives notice thereof to its stockholders.
(d) ADJUSTMENTS
Adjustments under this Section 16 related to stock or securities
of the Corporation shall be made by the Board, whose determination in that
respect shall be final, binding, and conclusive. No fractional shares of Stock
or units of other securities shall be issued pursuant to any such adjustment,
and any fractions resulting from any such adjustment shall be eliminated in
each case by rounding downward to the nearest whole share or unit.
(e) NO LIMITATIONS ON CORPORATION
The grant of an Option pursuant to the Plan shall not affect or
limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations, or changes of its capital or business
structure or to merge, consolidate, dissolve, or liquidate, or to sell or
transfer all or any part of its business or assets.
17. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ or service of or to maintain a
relationship with the Corporation or any Subsidiary, or to interfere in any way
with any contractual or other right or authority of the Corporation or any
Subsidiary either to increase or decrease the compensation or other payments to
any individual at any time, or to terminate any
A-11
<PAGE> 43
employment or other relationship between any individual and the Corporation or
any Subsidiary. The obligation of the Corporation to pay any benefits pursuant
to this Plan shall be interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed
herein. The Plan shall in no way be interpreted to require the Corporation to
transfer any amounts to a third party trustee or otherwise hold any amounts in
trust or escrow for payment to any participant or beneficiary under the terms
of the Plan.
18. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan
to the stockholders of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt
such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or
specifically to a particular individual or particular individuals) as the Board
in its discretion determines desirable, including, without limitation, the
granting of stock options otherwise than under the Plan.
19. CAPTIONS
The use of captions in this Plan or any Option Agreement is for
the convenience of reference only and shall not affect the meaning of any
provision of the Plan or such Option Agreement.
20. DISQUALIFYING DISPOSITIONS
If Stock acquired by exercise of an ISO granted under this Plan
is disposed of within two years following the date of grant of the ISO or one
year following the transfer of the subject Stock to the Optionee (a
"disqualifying disposition"), the holder of the Stock shall, immediately prior
to such disqualifying disposition, notify the Corporation in writing of the
date and terms of such disposition and provide such other information regarding
the disposition as the Corporation may reasonably require.
21. WITHHOLDING TAXES
The Corporation shall have the right to deduct from payments
of any kind otherwise due to an Optionee any Federal, state, or local taxes of
any kind required by law to be withheld with respect to any shares issued upon
the exercise of an Option under the Plan or in connection with the purchase of
an Option by the Corporation. At the time of exercise, the Optionee shall pay
to the Corporation any amount that the Corporation may reasonably determine to
be necessary to satisfy such withholding obligation. The Board in its sole
discretion may provide in the Option Agreement that, subject to the prior
approval of the Corporation, which may be withheld by the Corporation in its
sole discretion, the Optionee may elect to satisfy such obligations, in whole
or in part, (i) by causing the Corporation to withhold shares of Stock
otherwise issuable pursuant to the exercise of an Option or (ii) by delivering
to the Corporation shares of Stock already owned by the Optionee. The shares
so delivered or withheld shall have a fair market value equal to such
withholding
A-12
<PAGE> 44
obligations. The fair market value of the shares used to satisfy such
withholding obligation shall be determined by the Corporation as of the date
that the amount of tax to be withheld is to be determined. An Optionee who has
made an election pursuant to this Section 21 may only satisfy his or her
withholding obligation with shares of Stock that are not subject to any
repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
22. OTHER PROVISIONS
Each Option granted under the Plan may be subject to, and the
Option Agreement relating to such Option may contain, such other terms and
conditions not inconsistent with the Plan as may be determined by the Board, in
its sole discretion. Notwithstanding the foregoing, each ISO granted under the
Plan shall include those terms and conditions that are necessary to qualify the
ISO as an "incentive stock option" within the meaning of Section 422 of the
Code or the regulations thereunder and shall not include any terms or
conditions that are inconsistent therewith.
23. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall
include the plural form, the masculine gender shall include the feminine
gender, etc., as the context requires.
24. SEVERABILITY
If any provision of the Plan or any Option Agreement shall be
determined to be illegal or unenforceable by any court of law in any
jurisdiction, the remaining provisions hereof and thereof shall be severable
and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.
25. GOVERNING LAW
The validity and construction of this Plan and the instruments
evidencing the Options granted hereunder shall be governed by the laws of the
State of Delaware (excluding its choice of law rules).
* * *
A-13
<PAGE> 45
<TABLE>
<CAPTION>
=================================================== ===================================================
PROXY STATEMENT
<S> <C> <C>
TABLE OF CONTENTS SUNRISE ASSISTED LIVING, INC.
Page
Solicitation, Voting and
Revocability of Proxies . . . . . . 1
Election of Directors . . . . . . . . . 2
Executive Compensation and
Other Information . . . . . . . . . 8
Approval of 1997 Stock
Option Plan . . . . . . . . . . . . 16
Independent Public Accountants . . . . 24
Stock Owned by Management . . . . . . . 24
Principal Holders of
Voting Securities . . . . . . . . . 26
Date for Submission of
Stockholder Proposals . . . . . . . 27
Other Business to be Transacted . . . . 28
Exhibit A -- 1997 Stock
Option Plan . . . . . . . . . . . . A-1
MARCH 31, 1997
=================================================== ===================================================
</TABLE>
A-14
<PAGE> 46
SUNRISE ASSISTED LIVING, INC.
9401 LEE HIGHWAY, SUITE 300, FAIRFAX, VA 22031
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS - APRIL 28, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Sunrise Assisted Living, Inc.
hereby appoints Teresa M. Klaassen and Timothy S. Smick, and each of them,
with full power of substitution, as proxies to cast all votes, as designated
below, which the undersigned stockholder is entitled to cast at the 1997 annual
meeting of stockholders (the "Annual Meeting") to be held on April 28, 1997 at
9:00 a.m., local time, at The Ritz-Carlton (Tysons Corner), 1700 Tysons
Boulevard, McLean, Virginia, and at any adjournments thereof, upon the
following matters:
1. To elect three directors each for a three-year term.
FOR all nominees listed WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees listed
contrary below)
Nominees: Thomas J. Donohue
David W. Faeder
Scott F. Meadow
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
- --------------------------------------------------------------------------------
2. To approve the 1997 Stock Option Plan.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
(Continued and to be signed and dated on reverse side)
<PAGE> 47
(Continued from reverse side)
This proxy will be voted as directed by the undersigned
stockholder. UNLESS CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1, FOR PROPOSAL 2 AND IN
ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY OF THE BOARD OF DIRECTORS AS
TO OTHER MATTERS.
The undersigned stockholder hereby acknowledges receipt of the
Notice of Annual Meeting and Proxy Statement and hereby revokes any proxy or
proxies heretofore given. This proxy may be revoked at any time prior to its
exercise.
If you receive more than one proxy card, please date, sign and
return all cards in the accompanying envelope.
Dated:
-------------------------------------
-------------------------------------------
-------------------------------------------
(Please date and sign here exactly as name
appears at left. When signing as attorney,
administrator, trustee or guardian, give
full title as such; and when stock has been
issued in the name of two or more persons,
all should sign.)
