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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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:
[ X ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 14a-11(c) or 14a-12
SUNSTONE HOTEL INVESTORS, INC.
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(Name of Registrant as Specified in Its Charter)
Sunstone Hotel Investors, Inc.
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(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)(1)and 0-11.
(1) Title of each class of securities to which transaction applies:
N/A
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(2) Aggregate number of securities to which transaction applies:
N/A
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was
determined):
N/A
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(4) Proposed maximum aggregate value of transaction:
N/A
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(5) Total fee paid:
N/A
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[ ] Fee paid previously with preliminary materials.
N/A
[ ] 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:
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N/A
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(2) Form, Schedule or Registration Statement No.:
N/A
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(3) Filing Party:
N/A
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(4) Date Filed:
*
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SUNSTONE HOTEL INVESTORS, INC.
PRELIMINARY PROXY STATEMENT
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TO THE STOCKHOLDERS OF SUNSTONE HOTEL INVESTORS, INC.
You are cordially invited to attend the Annual Meeting of
Stockholders of Sunstone Hotel Investors, Inc. ("Sunstone" or the "Company") on
Thursday, April 17, 1997, at 9:00 a.m. Pacific Standard Time. The Annual Meeting
will be held at The Residence Inn Hotel, located at 2101 West Vineyard Avenue,
Oxnard, California 93030.
At the meeting you will be asked to consider and vote upon the
following proposals: (i) the amendment of the Company's Charter; (ii) the
election of three individuals to serve on the Company's Board of Directors until
2000; (iii) the amendment of the Company's 1994 Stock Incentive Plan; and (iv)
the amendment of the Company's 1994 Directors Plan.
Whether or not you plan to attend the Annual Meeting, please mark,
sign, date and return the enclosed proxy card promptly in the accompanying
postage pre-paid envelope. By returning the proxy card, you can help the Company
avoid the expense of duplicate proxy solicitations and possibly having to
reschedule the Annual Meeting if a quorum of the outstanding shares is not
present or represented by proxy. If you decide to attend the Annual Meeting and
wish to change your proxy vote, you may do so simply by voting in person at the
Annual Meeting.
March 3, 1997
/s/ ROBERT A. ALTER
--------------------------------------
ROBERT A. ALTER
Chairman and President
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SUNSTONE HOTEL INVESTORS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 17, 1997
To the Stockholders of Sunstone Hotel Investors, Inc.:
Notice is hereby given that the 1997 Annual Meeting of Stockholders
(the "Annual Meeting") of Sunstone Hotel Investors, Inc. ("Sunstone" or the
"Company"), will be held at The Residence Inn Hotel, located at 2101 West
Vineyard Avenue, Oxnard, California 93030, commencing at 9:00 a.m. Pacific
Standard Time, on April 17, 1997 for the following purposes:
1. To amend the Charter of the Company to change the definition of
"Independent Director";
2. To elect three directors to serve until the 2000 Annual Meeting;
3. To amend the Company's 1994 Stock Incentive Plan to increase the
share reserve for such plan and to take advantage of recent
amendments to Section 16 of the Securities Exchange Act of 1934;
4. To amend the Company's 1994 Directors Plan to remove the maximum
limit on the aggregate number of options and shares of Common
Stock which may be issued per calendar year under such plan, to
increase the number of shares of Common Stock to be awarded
annually to continuing non-employee Board members and to take
advantage of recent amendments to Section 16 of the Securities
Exchange Act of 1934;
5. To conduct such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
The close of business on March 10, 1997 has been fixed as the record
date for the determination of stockholders entitled to notice of and to vote at
the Annual Meeting and any adjournment thereof. Only stockholders of record at
such time will be so entitled to vote.
You are cordially invited to attend the Annual Meeting in person.
Even if you plan to attend the Annual Meeting, please promptly complete, sign,
date and return the enclosed proxy card in the enclosed self-addressed, postage
pre-paid envelope. It will assist us in keeping down the expenses of the Annual
Meeting if all stockholders, whether you own a few shares or many shares, return
your signed proxies promptly.
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ENTITLED TO VOTE
AT THE ANNUAL MEETING MUST BE REPRESENTED AT THE ANNUAL MEETING, IN PERSON OR BY
PROXY, IN ORDER TO CONSTITUTE A QUORUM AT THE ANNUAL MEETING. PLEASE RETURN YOUR
PROXY CARD IN ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE
ADDITIONAL COSTS TO THE COMPANY OF ADJOURNING THE ANNUAL MEETING AND
RESOLICITING PROXIES.
YOUR VOTE IS IMPORTANT.
By Order of the Board of Directors,
/s/ ROBERT A. ALTER
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ROBERT A. ALTER
Secretary
San Clemente, California
March 3, 1997
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SUNSTONE HOTEL INVESTORS, INC.
115 CALLE DE INDUSTRIAS, SUITE 201
SAN CLEMENTE, CA 92672
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 17, 1997
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PROXY STATEMENT
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GENERAL INFORMATION
This Proxy Statement is furnished to stockholders of Sunstone Hotel
Investors, Inc., a Maryland corporation ("Sunstone" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors for use at
the Annual Meeting of Stockholders to be held on Thursday, April 17, 1997, at
9:00 a.m. Pacific Standard Time, and at any and all adjournments or
postponements thereof for the purposes set forth in the Notice of Annual Meeting
accompanying this Proxy Statement. The Annual Meeting will be held at The
Residence Inn Hotel, located at 2101 West Vineyard Avenue, Oxnard, California
93030.
These proxy solicitation materials are first being mailed on or about
March 17, 1997 to all stockholders entitled to vote at the Annual Meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use by delivering to the Company (sent
to the attention of Robert A. Alter) a written notice of revocation or a duly
executed proxy bearing a later date, or by attending the Annual Meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
VOTING AND SOLICITATION
The solicitation of proxies will be conducted by mail and the Company
will bear all attendant costs. These costs will include reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. The Company may conduct further solicitation personally
or telephonically through its officers, directors and regular employees, none of
whom will receive additional compensation for assisting with the solicitation.
Only stockholders of record at the close of business on March 10,
1997 are entitled to notice of and to vote at the Annual Meeting. As of March 3,
1997, 15,540,405 shares of Common Stock were issued and outstanding. On each
matter to be considered at the Annual Meeting, stockholders will be entitled to
cast one vote for each share of Common Stock held of record on March 10, 1997.
The Company's Bylaws do not provide for cumulative voting by stockholders.
A majority of the shares of Common Stock entitled to vote will
constitute a quorum for the transaction of business at the Annual Meeting. Each
matter to be submitted to a vote of the stockholders, other than the election of
directors and certain extraordinary matters such as charter amendments, must be
approved by a majority of all the votes cast on such matter at the Annual
Meeting. Directors shall be elected by a plurality of the votes cast. Certain
extraordinary actions must be approved by a majority or more of all votes
entitled to be cast. Votes withheld from any director are counted for purposes
of determining the presence or absence of a quorum for the
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transaction of business, but have no legal effect under Maryland law. The
Company intends to count abstentions as present or represented for purposes of
determining the presence or absence of a quorum for the transaction of business.
Abstentions will not be counted for purposes of determining whether a proposal
requires approval by a majority or more of the votes entitled to be cast, in
which case an abstention will have the same effect as a negative vote. The
Company also intends to count broker non-votes as present or represented for
purposes of determining the presence or absence of a quorum for the transaction
of business. Broker non-votes will also not be counted for purposes of
determining whether a proposal has been approved unless such proposal requires
approval by a majority or more of the votes entitled to be cast, in which case
broker non-votes will have the same effect as negative votes.
The shares represented by all valid proxies will be voted in
accordance with the specifications therein. Unless otherwise directed in the
proxy, the persons named therein will vote FOR: 1) the election of the three
nominees listed below; 2) the amendment of the Company Charter as specified
below; and 3) the amendment of the 1994 Stock Incentive Plan and the 1994
Directors Plan as specified below. The Board of Directors knows of no other
matters likely to be brought before the Annual Meeting other than those
mentioned above. However, if any other matters, not now known or determined,
properly come before the meeting or any adjournments or postponements thereof,
the persons named in the enclosed form of Proxy will vote such Proxy in
accordance with their best judgment in such matters pursuant to discretionary
authority granted in the Proxy.
PROPOSAL 1:
APPROVAL OF CHARTER AMENDMENT
REGARDING DEFINITION OF
INDEPENDENT DIRECTOR
The Company's Charter provides that the Board of Directors may range
in size from three to nine directors and requires that a majority of the Board
of Directors be "Independent Directors." The Board currently has nine directors,
five of whom are Independent Directors. The current definition of Independent
Directors excludes the following individuals: (i) officers and directors of the
Company, (ii) any person who is affiliated with (w) any advisor to the Company
under an advisory agreement, (x) any lessee of or management company operating
any property of the Company, (y) any subsidiary of the Company, or (z) any
partner of Sunstone Hotel Partners, L.P. (the "Partnership").
Under the current definition, Laurence Geller, a leading hotel
industry consultant, might not be considered an "Independent Director" because
he is a consultant to the Company under a consulting agreement. In addition,
were the Company to acquire a portfolio of hotels in exchange for Partnership
Units, as the Company has done previously, it might be valuable to appoint an
officer or director of the seller as a director of the Company because of his or
her expertise in operating the hotels and in the hotel industry in general.
Under the current definition, an officer of the seller would not be considered
an "Independent Director" if the seller owned Units. If the Company wanted to
appoint such a person or a consultant such as Mr. Geller to the Board, the
Company may be required at the same time to appoint another director to maintain
a majority of "Independent Directors." The need to expand the Board in this
context would increase the cost to the Company of corporate governance while
creating a large and less efficient Board.
The current definition of "Independent Director" in the Company's
Charter is not required by the rules of the New York Stock Exchange nor the
Securities and Exchange Commission. The NYSE does require that each company
whose common stock is listed on the NYSE establish and maintain an audit
committee comprised solely of directors independent of management and free from
relationships that, in the opinion of the Board of Directors, would interfere
with the exercise of independent judgment as a committee member. Notwithstanding
the proposed amendment to the Charter, the Company will comply with the NYSE
rules in selecting members of the audit committee.
The Board of Directors has determined that it is in the best
interests of the Company to amend the Charter so that the term "Independent
Director" shall simply mean a director of the Company who is not an officer or
employee of the Company. The Board of Directors believes that this new, less
restrictive definition of "Independent Director" will allow the Company
greater flexibility to obtain highly qualified directors and retain an active
and efficient Board of Directors.
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RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE COMPANY'S CHARTER. PURSUANT TO THE CHARTER, THE AFFIRMATIVE
VOTE OF 66 2/3% OF THE OUTSTANDING SHARES OF COMMON STOCK IS REQUIRED TO APPROVE
THE PROPOSED AMENDMENT.
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PROPOSAL 2:
ELECTION OF DIRECTORS
The Articles of Incorporation of the Company provide for the
Company's Board of Directors to be divided into three classes, as nearly equal
in number as is reasonably possible, serving staggered tiers so that directors'
initial terms will expire either at the 1998 (Class I), 1999 (Class III) or 2000
(Class II) Annual Meeting of Stockholders. The preceding notwithstanding,
directors serve until their successors have been duly elected and qualified or
until they resign, become disqualified or disabled, or are otherwise removed.
The following persons shall be designated as nominees to serve as Class II
directors of the Company until the 2000 Annual Meeting: Messrs. Biederman,
Bingham and Geller. If any of such nominees should unexpectedly become
unavailable for election, proxies will be voted for the election of persons
selected as nominees in their place by the Board of Directors.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF EACH OF MESSRS. BIEDERMAN, BINGHAM AND GELLER TO SERVE AS DIRECTORS
OF THE COMPANY UNTIL THE 2000 ANNUAL MEETING, AT WHICH TIME THEIR SUCCESSORS
WILL BE ELECTED AND QUALIFIED.
Certain information about Messrs. Biederman, Bingham and Geller is
set forth below.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ----------------------------------- ---------- ----------------------------------- -------------------------
<S> <C> <C> <C>
Charles L. Biederman 63 Executive Vice President, 1994
Sunstone Hotel Investors, Inc.
President,
Woodstone Homes, Inc.
H. Raymond Bingham(1)(2) 52 Chief Financial Officer and 1995
Executive Vice President,
Cadence Design Systems
Laurence S. Geller 49 Chairman, Geller & Co. 1996
</TABLE>
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(1) Member of the Compensation Committee
(2) Member of the Audit Committee
===============================================================================
Mr. Biederman has served as the Executive Vice President and a
director since September 1994. From 1990 until August 1995, Mr. Biederman has
served as Executive Vice President of Sunstone Hotel Management, Inc. Mr.
Biederman has previously served as President of Provident Development Group
Corporation, a Florida corporation engaged in the design, development and sale
of luxury homes in South Florida, from 1989 until 1992 and as President of
Colorado Home Improvements, Inc., a Colorado corporation engaged in general
contracting, renovation and related services for existing homes in the Denver,
Colorado area, since 1989. He is currently the President of Woodstone Homes,
Inc., a Colorado corporation engaged in luxury home construction in the Vail,
Colorado area, and a director of One Liberty Properties, Inc., a New York-based
real estate investment trust specializing in the purchase and leasing of single
tenant net leased properties throughout the United States. Mr. Biederman has
been engaged in the real estate development business since 1962. Mr. Biederman
holds a Bachelor of Arts degree from Colgate University and a Bachelor of
Architecture and a Masters in Architecture from Columbia University and is a
registered architect.
Mr. Bingham has served as a director since August 1995. Since 1993,
Mr. Bingham has served as the Chief Financial Officer and Executive Vice
President of Cadence Design Systems, a publicly traded computer aided design
company. Prior to joining Cadence Design Systems, Mr. Bingham served as
Executive Vice President and Chief Financial Officer of Red Lion Hotels & Inns
for eight years. Mr. Bingham is the former Chairman of the American Hotel &
Motel Association Industry Real Estate Finance Council and a former Director of
the National Realty Committee. Mr. Bingham holds a Bachelor of Science degree in
Economics from Weber State College and a Masters in Business Administration from
Harvard Business School.
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Laurence Geller has served as a director since November 1996. From
1984 through December 1989, Mr. Geller served as the Executive Vice President
and Chief Operating Officer of Hyatt Development Corporation, a developer of
domestic and international hotels and resorts, and from 1976 to 1981, as a
Senior Vice President of Holidays Inns, Inc. Since December 1989 Mr. Geller has
been Chairman of Geller & Co., a hotel-industry consulting firm based in
Chicago, Illinois. Mr. Geller serves as a consultant to the Company through
Geller & Co. pursuant to a consulting agreement entered into in July 1996. Mr.
Geller is a graduate of the Ealing Technical College (U.K.) in Hotel Management
and Catering.
DIRECTORS CONTINUING TO SERVE UNTIL 1998
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------- -------- --------------------------- ------------------
<S> <C> <C> <C>
Robert A. Alter 46 President, Chief Executive 1994
Officer and Secretary,
Sunstone Hotel Investors, Inc.
Mark A. Ferrucci 44 Assistant Vice President, 1997
The Corporation Trust Company
Fredric H. Gould(1)(2) 62 General Partner, 1995
Gould Investors L.P.
</TABLE>
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(1) Member of the Compensation Committee
(2) Member of the Audit Committee
================================================================================
Mr. Alter has served as President, Secretary, Chief Executive Officer
and Chairman of the Board since August 1994. From 1990 until August 1995, Mr.
Alter served as President of Sunstone Hotel Management, Inc. (the "Management
Company"), which currently manages all of the hotels owned by the Company. Mr.
Alter also serves as chairman of the board of directors of both the Management
Company and Sunstone Hotel Properties, Inc., the lessee of all the hotels owned
by the Company. Mr. Alter has been engaged in the hotel ownership, development
and management business since 1976. Mr. Alter is a Certified Hotel
Administrator, as designated by the American Hotel and Motel Association, and is
a past President and a former member of the Board of Directors of the
International Association of Holiday Inns, the franchisee association for
Holiday Inn hotels. Mr. Alter holds a Bachelor of Science degree in Hotel
Administration from Cornell University.
Mr. Ferrucci has served as a director since January 1997. From June
1987 to the present, Mr. Ferrucci has assisted in the Corporate Staffing
Division of The Corporation Trust Company. In January 1993, Mr. Ferrucci was
promoted to Division Head and in April 1993 was elected Assistant Vice President
of The Corporation Trust Company, CT Corporation System and as President of
Corporate Trinity Company. Mr. Ferrucci holds an Associates of Arts and Science
degree in accounting from Delaware Technical and Community College.
Mr. Gould has served as a director since August 1995. Mr. Gould has
served for the past five years as General Partner of Gould Investor L.P., a
master limited partnership engaged in the ownership and operation of various
types of income-producing real property located throughout the United States and
which holds substantial interests in publicly held real estate investment trusts
and savings and commercial banks. Mr. Gould is currently a director of BFS
Bankorp, Inc. In addition, Mr. Gould is currently the Chairman of the Board of
Trustees of BRT Realty Trust, a publicly-traded mortgage real estate investment
trust, and Chairman of the Board of Directors of One Liberty Properties, Inc.
Mr. Gould holds a Bachelor of Business Administration from Lehigh University and
an L.L.B. from New York University Law School.
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DIRECTORS CONTINUING TO SERVE UNTIL 1999
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---------------------------------- ---------- --------------------------------- ----------------
<S> <C> <C> <C>
C. Robert Enever 69 President, CRE Investments 1994
Ltd.
David Lambert (1)(2) 44 Chief Financial Officer, 1995
Preview Travel, Inc.
Edward H. Sondker (1)(2) 49 President and 1995
Chief Executive Officer,
Bayview Financial Corporation
</TABLE>
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(1) Member of the Compensation Committee
(2) Member of the Audit Committee
================================================================================
Mr. Enever has served as a director since September 1994. Since
1983, Mr. Enever has served as President of CRE Investments Ltd., a portfolio
management company, and has been engaged in the real estate development business
since 1972. Mr. Enever holds a Bachelor of Science degree in Economics from the
University of London, a C.P.A. from the State of Illinois and a Masters in
Business Administration in Finance and Accounting from Northwestern University.
Mr. Lambert has served as a director since August 1995. Since June
1995, Mr. Lambert has served as Chief Financial Officer of Preview Travel, Inc.,
a San Francisco Bay Area company in the online travel business and media
production and syndication business. Prior to joining Preview Travel, Mr.
Lambert had served as Executive Vice President and Chief Financial Officer of
Excalibur Technologies Corporation, a publicly-traded computer software company
from 1992 to 1995. Prior to joining Excalibur Technologies, Mr. Lambert served
as a private consultant in marketing, strategic planning, operations and
computer systems from 1991 to 1992 and as Chairman of the Board, President and
Chief Executive Officer of Grand American Fare, Inc., a $30 million restaurant
company, from 1985 to 1991. From 1981 to 1985, Mr. Lambert served as Executive
Vice President of Colony Hotels and Resorts, a subsidiary of Radisson Hotels.
Mr. Lambert holds a Bachelor of Arts degree in Physics and Math from Occidental
College and a Masters in Business Administration from the University of
California, Los Angeles, and is a licensed California real estate broker.
Mr. Sondker has served as a director since August 1995. Since August
1995, Mr. Sondker has served as President and Chief Executive Officer of Bayview
Financial Corporation, a publicly-traded bank holding company located in the San
Francisco Bay Area. Prior to joining Bayview Financial, Mr. Sondker served from
1990 through June 1995 as the President and Chief Executive Officer of
Independence One Bank of California. During the fifteen years prior to that
time, Mr. Sondker served in senior executive positions with several independent
financial institutions having assets ranging in size from $200 million to over
$1 billion. Mr. Sondker holds both a Bachelor of Arts and a J.D. degree from
Washburn University.
There is no family relationship between any director or executive
officer of the Company.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors has two committees: the Audit Committee and
the Compensation Committee. During the 1996 fiscal year, Sunstone's Board of
Directors held eleven (11) meetings. No incumbent Director attended fewer than
75% of the aggregate meetings of the Board of Directors and meetings of the
committees of the Board on which he served.
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The Audit Committee, which held two meetings during fiscal 1996,
consists of Fredric H. Gould, H. Raymond Bingham, David Lambert and Edward H.
Sondker. The Audit Committee recommends engagement of the Company's independent
accountants and is primarily responsible for approving the services performed by
the Company's independent accountants and for reviewing and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of
Fredric H. Gould, H. Raymond Bingham, David Lambert and Edward H. Sondker. The
Compensation Committee held two meetings during fiscal 1996. The Compensation
Committee is responsible for administering the Company's 1994 Stock Incentive
Plan. The Compensation Committee determines recipients of awards, sets the
exercise price of options granted and determines the terms, provisions and
conditions of all rights granted under such plan. This Committee also reviews
and approves the Company's general compensation policies and determines the
recipients of and the amount of cash bonuses to be paid to key management.
DIRECTOR REMUNERATION
Directors who are not officers of the Company received no cash
compensation for attending committee or regular or special Board meetings in
1996, but did receive automatic grants of stock and stock options under the
Company's 1994 Directors Plan. Assuming approval by the stockholders of
Proposals 3 and 4, all directors, whether or not officers of the Company, will
also be eligible to receive discretionary grants of stock, stock options and
performance share awards under the Company's 1994 Stock Incentive Plan.
Through December, 31, 1996, each director (other than Messrs. Alter,
Biederman and Geller) received (i) direct stock issuances of 3,038 shares of
Common Stock in the aggregate pursuant to the Automatic Stock Issuance Program
of the 1994 Directors Plan and (ii) options to purchase an aggregate of 3,000
shares of Common Stock pursuant to the Automatic Option Grant Program of such
plan. For 1997, assuming approval by the stockholders of Proposal 4, each
director (other than Mr. Alter and Mr. Biederman) will receive (i) 1,500 shares
of Common Stock and (ii) options to purchase 1,500 shares of Common Stock under
the 1994 Directors Plan, plus a cash payment of $2,500 for each quarterly Board
meeting and $1,000 for each special Board meeting attended in person or
telephonically. In addition, the Company will reimburse all directors for their
out-of-pocket expenses incurred in connection with their service on the Board of
Directors. Neither Mr. Alter nor Mr. Biederman will receive any compensation as
a director, other than reimbursement for their respective out-of-pocket expenses
incurred in connection with their attendance at meetings of the Board of
Directors.
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PROPOSAL 3:
APPROVAL OF AMENDMENTS TO THE 1994 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve several
amendments to the Company's 1994 Stock Incentive Plan (the "Incentive Plan")
that will (i) increase the maximum number of shares of Common Stock authorized
for issuance over the term of such plan by 700,000, from 500,000 to 1,200,000
shares, (ii) render the non-employee Board members eligible to receive option
grants, performance share awards and direct stock issuances under the Incentive
Plan, (iii) allow unvested shares issued under the Incentive Plan and
subsequently repurchased by the Company at the option exercise price or issue
price paid per share to be reissued under the Incentive Plan and (iv) remove
certain restrictions on the eligibility of non-employee Board members to serve
as Plan Administrator and effect a series of additional changes to the
provisions of the Incentive Plan (including the stockholder approval
requirements) in order to take advantage of the recent amendments to Rule 16b-3
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") which
exempts certain officer and director transactions under the Incentive Plan from
the short-swing liability provisions of the federal securities laws.
The increase in the share reserve is designed to assure that a
sufficient reserve of Common Stock is available under the Incentive Plan to
attract and retain the services of key individuals essential to the Company's
long-term growth and success. The other amendments will enhance the equity
incentives provided to the non-employee Board members and facilitate plan
administration.
The following is a summary of the principal features of the Incentive
Plan, assuming stockholder approval of this proposal. However, the summary does
not purport to be a complete description of all the provisions of the Incentive
Plan. Any stockholder of the Company who wishes to obtain a copy of the actual
plan document may do so upon written request to the Corporate Secretary at the
Company's principal executive offices in San Clemente, California.
The Incentive Plan was adopted by the Board of Directors on September
23, 1994, and subsequently approved by the Company's stockholders. The Incentive
Plan became effective on August 10, 1995, the date of execution of the
underwriting agreement in connection with the initial public offering of the
Company's Common Stock. The changes to the Incentive Plan effected by the
amendments which are the subject of this Proposal were adopted by the Board of
Directors on January 16, 1997.
EQUITY INCENTIVE PROGRAMS
The Incentive Plan contains three separate equity incentive programs:
(i) the Discretionary Option Grant Program, (ii) the Performance Share Program
and (iii) the Stock Issuance Program. The principal features of these programs
are described below.
ADMINISTRATION
The Incentive Plan is currently administered by the Compensation
Committee of the Board of Directors. However, one or more additional Board
committees may be appointed to administer the Incentive Plan with respect to
certain designated classes of individuals in the Company's service. The term
"Plan Administrator" as used in this summary will mean the Compensation
Committee and any other appointed committee acting within the scope of its
administrative authority under the Incentive Plan. The Plan Administrator will
have complete discretion (subject to the provisions of the Incentive Plan) to
authorize option grants, performance share awards and direct stock issuances
under the Incentive Plan.
SHARE RESERVE
A total of 1,200,000 shares of Common Stock have been reserved for
issuance over the ten-year term of the Incentive Plan, assuming stockholder
approval of the 700,000-share increase which forms part of this Proposal. In no
event may any one participant in the Incentive Plan be granted stock options and
separately exercisable stock
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appreciation rights for more than 250,000 shares in any calendar year. In
addition, no participant may receive performance share awards and direct stock
issuances for more than 50,000 shares in any calendar year.
In the event any change is made to the outstanding shares of Common
Stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate structure
effected without the Company's receipt of consideration, appropriate adjustments
will be made to the securities issuable (in the aggregate and to each
participant) under the Incentive Plan and to each outstanding option and
performance share award.
Should an option expire or terminate for any reason prior to exercise
in full, or should a performance share award terminate or expire prior to
vesting, the shares subject to the portion of the option not so exercised or the
performance share award so terminated will be available for subsequent issuance
under the Incentive Plan. Unvested shares issued under the Incentive Plan and
subsequently repurchased by the Company at the original option or issue price
paid per share will be added back to the share reserve and will accordingly be
available for subsequent issuance under the Incentive Plan. Shares subject to
any option surrendered in accordance with the stock appreciation right
provisions of the Incentive Plan will not be available for subsequent issuance.
ELIGIBILITY
Officers and other employees of the Company and its parent or
subsidiaries (whether now existing or subsequently established), non-employee
members of the Board or the board of directors of any parent or subsidiary, and
consultants and other advisors (and their respective employees) who provide
valuable services to the Company and its parent or subsidiaries will be eligible
to participate in the Incentive Plan.
As of March 3, 1997, three executive officers and two other
employees and consultants were eligible to participate in the Incentive Plan.
VALUATION
The fair market value per share of Common Stock on any relevant date
under the Incentive Plan will be the closing selling price per share on that
date on the New York Stock Exchange. On March 3, 1997, the closing selling price
per share was $13.25.
DISCRETIONARY OPTION GRANT PROGRAM
Options may be granted under the Discretionary Option Grant Program
at an exercise price per share not less than the fair market value per share of
Common Stock on the option grant date. No granted option will have a term in
excess of ten years.
Upon cessation of service, the optionee will have a limited period of
time in which to exercise any outstanding option to the extent exercisable for
vested shares. The Plan Administrator will have complete discretion to extend
the period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
The Plan Administrator is authorized to issue three types of stock
appreciation rights under the Discretionary Option Grant Program:
Tandem stock appreciation rights provide the holders with
the right to surrender their options for an appreciation distribution
from the Company equal in amount to the excess of (a) the fair market
value of the vested shares of Common Stock subject to the surrendered
option over
9
<PAGE> 15
(b) the aggregate exercise price payable for such shares. Such
appreciation distribution may, at the discretion of the Plan
Administrator, be made in cash or in shares of Common Stock.
Independent stock appreciation rights are free-standing
rights not tied to any underlying option and entitle the holder upon
exercise to an appreciation distribution from the Company equal to
the excess of (a) the fair market value of the shares of Common Stock
underlying the exercised right over (b) the base price in effect for
those shares. The base price will be determined by the Plan
Administrator at the time the rights are granted but may not be less
than the fair market value of the underlying shares of Common Stock
on the grant date. The appreciation distribution may, at the
discretion of the Plan Administrator, be made in cash or in shares of
Common Stock.
Limited stock appreciation rights may be granted to
officers and non-employee Board members of the Company as part of
their option grants. Any option with such a limited stock
appreciation right may be surrendered to the Company upon the
successful completion of a hostile take-over of the Company. In
return for the surrendered option, the officer or non-employee Board
member will be entitled to a cash distribution from the Company in an
amount per surrendered option share equal to the excess of (a) the
take-over price per share over (b) the exercise price payable for
such share.
The shares of Common Stock acquired upon the exercise of one or more
options may be unvested and subject to repurchase by the Company, at the
original exercise price paid per share, if the optionee ceases service with the
Company prior to vesting in those shares. The Plan Administrator will have
complete discretion to establish the vesting schedule to be in effect for any
such unvested shares and may at any time cancel the Company's outstanding
repurchase rights with respect to those shares and thereby accelerate vesting.
The Plan Administrator will have the authority to cancel outstanding
options under the Discretionary Option Grant Program which have exercise prices
in excess of the then current market price of Common Stock and to issue
replacement options with an exercise price based on the current market price of
the Common Stock.
PERFORMANCE SHARE PROGRAM
The Performance Share Program provides for the issuance of
performance shares which function as an equity type participating interest in
the Company and entitle the participant to receive a payment equal to the fair
market value per share of Common Stock on the date on which the performance
shares vest. The Plan Administrator may condition the vesting of performance
shares upon the attainment of performance goals or such other factors or
criteria as the Plan Administrator determines, including continued service,
appreciation in the fair market value of the Common Stock, increased return on
assets or earnings per share. However, no performance shares will vest prior to
the first anniversary of the date on which the performance share award is
authorized. All unvested performance shares held by a participant at the time of
cessation of service will automatically terminate without any payment to the
participant. However, the Plan Administrator may accelerate the vesting of
performance shares at any time.
The payment due upon vesting of the performance shares may be made in
cash or shares of Common Stock valued at fair market value on the vesting date.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per
share not less than the fair market value of the Common Stock on the date of
issuance, payable in cash or through a promissory note payable to the Company.
Shares may also be issued solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or
subject to a vesting schedule tied to the performance of service or the
attainment of performance goals. However, any shares which are to vest upon the
attainment of one or more prescribed performance goals may not vest sooner than
one (1) year following the
10
<PAGE> 16
date of the stock issuance and for any shares which are to vest in installments
over the participant's performance of service, full vesting of the shares may
not occur within three (3) years following the date of the stock issuance. The
Plan Administrator will, however, have the discretionary authority at any time
to accelerate the vesting of any unvested shares.
GENERAL PROVISIONS
ACCELERATION
In the event that the Company is acquired by merger or asset sale,
each outstanding option under the Discretionary Option Grant Program which is
not to be assumed by the successor corporation or replaced with a comparable
option to purchase shares of the capital stock of the successor corporation or a
comparable cash incentive program will automatically accelerate in full, and all
unvested shares under the Stock Issuance Program will immediately vest, except
to the extent the Company's repurchase rights with respect to those shares are
to be assigned to the successor corporation. The Plan Administrator has the
discretion to accelerate the vesting of any options assumed or replaced in
connection with such acquisition, and any unvested shares which do not vest at
the time of such acquisition, in the event the individual's service is
subsequently terminated within a designated period following the acquisition.
The Plan Administrator also has the discretion to accelerate the vesting of all
outstanding options under the Discretionary Grant Program and all outstanding
shares under the Stock Issuance Program upon a hostile change in control of the
Company (whether by successful tender offer for more than 50% of the outstanding
voting stock or by proxy contest for the election of Board members) or upon
termination of the individual's service within a designated period following the
change in control.
The acceleration of vesting in the event of a change in the ownership
or control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
FINANCIAL ASSISTANCE
The Plan Administrator may institute a loan program to assist one or
more participants in financing the exercise of outstanding options or the
purchase of shares under the Incentive Plan. The Plan Administrator will
determine the terms of any such assistance. However, the maximum amount of
financing provided any participant may not exceed the cash consideration payable
for the issued shares plus all applicable taxes incurred in connection with the
acquisition of the shares. Any such financing may be subject to forgiveness in
whole or in part, at the discretion of the Plan Administrator, over the
participant's period of service.
SPECIAL TAX ELECTION
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of Common Stock
in payment of such tax liability.
AMENDMENT AND TERMINATION
The Board of Directors may amend or modify the Incentive Plan in any
or all respects whatsoever subject to any required stockholder approval. The
Board of Directors may terminate the Incentive Plan at any time, and the
Incentive Plan will in all events terminate on September 22, 2004.
STOCK AWARDS
The table below shows, as to each of the Company's executive officers
named in the Summary Compensation Table and the various indicated individuals
and groups, the number of shares of Common Stock
11
<PAGE> 17
subject to options granted under the Incentive Plan, together with the weighted
average exercise price payable per share, for the period from the August 10,
1995 effective date of the Incentive Plan to March 1, 1997.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Options Granted Weighted Average
Name (Number of Shares) Exercise Price
---- ------------------ --------------
<S> <C> <C>
Robert A. Alter 298,600(1) $9.88
President, Chief Financial Officer, Director
and Secretary
Charles L. Biederman 105,900(2) $9.98
Executive Vice President and Director
All current executive officers as a group 404,500 $9.91
(2 persons)
C. Robert Enever, Director -- --
Fredric H. Gould, Director -- --
H. Raymond Bingham, Director -- --
David Lambert, Director -- --
Lawrence S. Geller, Director and Consultant 50,000 $13.00
Edward H. Sondker, Director -- --
All current non-employee directors as a group 50,000 $13.00
(6 persons)
All employees, including current officers who 1,500 $10.125
are not executive officers, as a group (1
person)
</TABLE>
1 The Company granted 130,000 of the stock options granted to Mr. Alter in
1995 and an additional 83,600 of the stock options granted to Mr. Alter in 1996
in order to provide at Mr. Alter's election a source of payment for the
obligations of Sunstone Hotel Properties, Inc., the lessee under the percentage
leases with the Company (the "Lessee"), under its Stock Appreciation Rights Plan
("SAR Plan"). Under the SAR Plan, the Lessee's employees would be entitled to a
cash payment equal to the increase in the share price of the Common Stock over
the base price at which the stock appreciation right is granted. In order to
fund this obligation of the Lessee, Mr. Alter and Mr. Biederman have each agreed
to contribute in the 80%/20% proportion reflecting their stock ownership of the
Lessee, an amount of money necessary to make such payments to the extent that
the Lessee does not otherwise have sufficient cash.
2 The Company granted 10,000 of the stock options granted to Mr. Biederman in
1995, together with an additional 50,900 of the stock options granted to Mr.
Biederman in 1996 in order to provide at Mr. Biederman's election a source of
payment for the Lessee's obligations under the SAR Plan.
12
<PAGE> 18
As of March 3, 1997, options covering 456,000 shares of Common Stock
were outstanding under the Incentive Plan, 740,000 shares remained available for
future option grant, assuming stockholder approval of the 700,000-share increase
which forms part of this Proposal, and 4,000 shares have been issued under the
Incentive Plan.
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the Incentive Plan may be either incentive
stock options which satisfy the requirements of Section 422 of the Internal
Revenue Code or non-statutory options which are not intended to meet such
requirements. The Federal income tax treatment for the two types of options
differs as follows:
Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of a taxable disposition. For Federal tax purposes, dispositions are
divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying
disposition occurs if the sale or other disposition is made after the optionee
has held the shares for more than two years after the option grant date and more
than one year after the exercise date. If either of these two holding periods is
not satisfied, then a disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction, for the
taxable year in which such disposition occurs, equal to the excess of (i) the
fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the shares. In no other instance will the Company be
allowed a deduction with respect to the optionee's disposition of the purchased
shares.
Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
such distribution for the taxable year in which the ordinary income is
recognized by the optionee.
DIRECT STOCK ISSUANCES
The tax principles applicable to direct stock issuances under the
Incentive Plan will be substantially the same as those summarized above for the
exercise of non-statutory option grants.
PERFORMANCE SHARES
A participant who receives a distribution upon the vesting of a
performance share will recognize ordinary income in the year of receipt equal to
the value of the distribution. The Company will be entitled to an income tax
deduction equal to the distribution for the taxable year in which the ordinary
income is recognized by the participant.
13
<PAGE> 19
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options granted with exercise prices equal to the
fair market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Code Section 162(m).
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a compensation expense to the Company's earnings equal to the difference
between the exercise or issue price and the fair market value of the shares on
the grant or issue date. Such expense will be accruable by the Company over the
period that the option shares or issued shares are to vest. Option grants or
stock issuances at 100% of fair market value will not result in any charge to
the Company's earnings, but the Company must disclose, in footnotes to the
Company's financial statements, the impact those options would have upon the
Company's reported earnings were the value of those options treated as
compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully-diluted basis.
Should one or more optionees be granted stock appreciation rights
which have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to the
Company's earnings. Similarly, the issuance of performance shares will result in
a compensation expense to the Company's earnings.
NEW PLAN BENEFITS
As of March 3, 1997, no options, performance share awards or direct
stock issuances have been granted to date on the basis of the 700,000-share
increase to the Incentive Plan.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares
of the Company present or represented and entitled to vote at the Annual Meeting
is required to approve the amendments to the Incentive Plan. Should such
stockholder approval not be obtained, then non-employee Board members will not
be eligible to participate in the Incentive Plan, unvested shares that are
repurchased by the Company will reduce share-for-share the reserve established
for the Incentive Plan, and any options granted, performance shares awarded, or
direct stock issuances made in reliance upon the 700,000-share increase which
forms part of this Proposal will terminate without becoming exercisable for any
of the shares of Common stock subject to those options, awards or issuances and
no further options, awards or issuances will be made on the basis of such share
increase. The Incentive Plan will, however, continue to remain in effect, and
option grants, performance share awards and stock issuances may continue to be
made pursuant to the existing provisions of the Incentive Plan, until the
available reserve of Common Stock under the Incentive Plan as last approved by
the stockholders is issued.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENTS TO THE INCENTIVE PLAN.
14
<PAGE> 20
PROPOSAL 4:
APPROVAL OF AMENDMENTS TO THE 1994 DIRECTORS PLAN
The Company's stockholders are being asked to approve several
amendments to the Company's 1994 Directors Plan (the "Directors Plan") that will
(i) enable non-employee Board members to participate in other equity incentive
plans of the Company, (ii) remove the maximum limit on the aggregate number of
shares of Common Stock which may be granted pursuant to the Automatic Option
Grant Program and issued pursuant to the Direct Stock Issuance Program per
calendar year, (iii) increase the number of shares of Common Stock awarded
annually under the Automatic Stock Issuance Program to continuing non-employee
Board members from the number of shares determined by dividing $15,000 by the
fair market value of the Common Stock on the stock issuance date to 1,500 shares
of Common Stock, (iv) allow unvested shares issued under the Directors Plan and
subsequently surrendered to the Company to be reissued under such plan, and (v)
effect a series of changes to the provisions of the Directors Plan (including
the stockholder approval requirements) in order to take advantage of the recent
amendments to Rule 16b-3 of the Exchange Act which exempts certain officer and
director transactions under the Directors Plan from the short-swing liability
provisions of the federal securities laws.
The purpose of these amendments is to assure that the Company is able
to retain skilled and experienced non-employee Board members by providing them
greater incentives to remain in the service of the Company.
Below is a summary of the principal features of the Directors Plan,
assuming stockholder approval of this Proposal. However, the summary does not
purport to be a complete description of all the provisions of the Directors
Plan. Any stockholder of the Company who wishes to obtain a copy of the actual
plan document may do so upon written request to the Corporate Secretary at the
Company's principal executive offices in San Clemente, California.
The Directors Plan was adopted by the Board of Directors on September
23, 1994 and was subsequently approved by the Company's stockholders. The
Directors Plan became effective on August 10, 1995, the date on which the
underwriting agreement in connection with the initial public offering of the
Company's Common Stock was executed. The changes to the Incentive Plan effected
by the amendments which are the subject of this Proposal were adopted by the
Board of Directors on January 16, 1997.
EQUITY INCENTIVE PROGRAMS
The Directors Plan consists of two separate equity programs: (i) the
Automatic Option Grant Program and (ii) the Automatic Stock Issuance Program.
Each program is self-executing in accordance with its terms and neither the
Board of Directors nor the Compensation Committee will perform any discretionary
functions under the Directors Plan.
SHARE RESERVE
The maximum number of shares of Common Stock issuable under the
Directors Plan is 150,000 shares. The Common Stock is made available from
authorized but unissued Common Stock or from shares of Common Stock reacquired
by the Corporation, including shares repurchased on the open market.
In the event any change is made to the outstanding shares of Common
Stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate structure
effected without the Company's receipt of consideration, appropriate adjustments
will be made to the securities issuable under the Directors Plan and to each
outstanding option.
Should an option expire or terminate for any reason prior to exercise
in full, the shares subject to the portion of the option not so exercised will
be available for subsequent issuance under the Directors Plan. Unvested
15
<PAGE> 21
shares issued under the Automatic Stock Issuance Program and subsequently
surrendered to the Company will be added back to the share reserve and will
accordingly be available for subsequent issuance under the Directors Plan.
ELIGIBILITY
Non-employee members of the Board of Directors are eligible to
participate in the Directors Plan. In addition, assuming stockholder approval of
this Proposal, non-employee Board members are eligible to participate in other
equity incentive plans of the Company.
As of March 3, 1997, six (6) non-employee Board members were eligible
to participate in the Directors Plan.
VALUATION
The fair market value per share of Common Stock on any relevant date
under the Directors Plan will be the closing selling price per share on that
date on the New York Stock Exchange. On March 3, 1997, the closing selling price
per share was $13.25.
AUTOMATIC OPTION GRANTS AND STOCK ISSUANCES
Under the Directors Plan, automatic option grants and direct stock
issuances are made upon the occurrence of each of the following three events.
First, following an individual's initial election to serve as a non-employee
Board member, he or she will receive an option to purchase 1,500 shares of
Common Stock and a direct issuance of 1,500 shares of Common Stock on the date
of the first Board meeting held after the annual stockholders meeting at which
that individual was elected to the Board of Directors. Second, each continuing
non-employee Board member will receive an additional option to purchase 1,500
shares of Common Stock and an additional issuance of 1,500 shares of Common
Stock on each anniversary of the later of (a) August 10, 1995, or (b) the date
on which the non-employee Board member was first elected or appointed to the
Board of Directors, if such Board member continues to serve on the Board of
Directors through such anniversary date. Third, each individual who ceases to
serve as a Board member but is subsequently re-elected or re-appointed to the
Board of Directors will be granted an option to purchase 1,500 shares of Common
Stock and a direct issuance of 1,500 shares of Common Stock on the date of the
first Board meeting held after the annual stockholders meeting at which that
individual is re-elected, provided that individual continues to serve as a
non-employee Board member through the date of such Board meeting.
TERMS OF AUTOMATIC OPTION GRANTS
Options are granted under the Automatic Option Grant Program at an
exercise price per share equal to the fair market value per share of Common
Stock on the option grant date. Each option has a maximum term of ten years.
Each automatic option grant is immediately exercisable for fully
vested shares of Common Stock. The automatic option grant remains exercisable
until the expiration date of such option, whether or not the optionee continues
to serve as a Board member, unless terminated in connection with an acquisition
of the Company by merger or asset sale.
TERMS OF AUTOMATIC STOCK ISSUANCES
Each direct stock issuance will be subject to a six-month vesting
schedule. Should the non-employee Board member cease to remain in Board service
prior to the expiration of the six-month vesting period, then all shares subject
to the issuance must be surrendered to the Company for cancellation, and the
Board member will have no further stockholder rights with respect to those
shares.
16
<PAGE> 22
GENERAL PROVISIONS
ACCELERATION
In the event that the Company is acquired by merger or asset sale,
each outstanding option under the Automatic Option Grant Program which is not to
be assumed by the successor corporation will terminate and cease to be
outstanding and each outstanding direct stock issuance under the Automatic Stock
Issuance Program will immediately vest in full.
STOCK AWARDS
The table below shows, for the period from the August 10, 1995
effective date of the Directors Plan to March 10, 1997, as to the Company's
current non-employee Board members, both individually and as a group, the number
of shares of Common Stock subject to options granted under the Automatic Option
Grant Program of the Directors Plan, together with the weighted average exercise
price payable per share, and the number of shares of Common Stock subject to
direct stock issuances made under Automatic Stock Issuance Program.
OPTION GRANTS AND DIRECT STOCK ISSUANCES
<TABLE>
<CAPTION>
Options Granted
(Number of Weighted Average Shares Issued
Name Shares) Exercise Price Directly
---- ------- -------------- --------
<S> <C> <C> <C>
C. Robert Enever 3,000 $9.94 3,038
Fredric H. Gould 3,000 $9.94 3,038
H. Raymond Bingham 3,000 $9.94 3,038
David Lambert 3,000 $9.94 3,038
Lawrence S. Geller -- -- --
Edward H. Sondker 3,000 $9.94 3,038
All current non-employee 15,000 $9.94 15,190
directors as a group (6
persons)
</TABLE>
As of March 3, 1997, options to purchase 13,500 shares of Common
Stock were outstanding, 16,690 shares of Common Stock have been issued and
119,810 shares remained available for future grant or issuance under the
Directors Plan.
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the Directors Plan will be non-statutory
options which are not intended to satisfy the requirements of Section 422 of the
Internal Revenue Code.
No taxable income is recognized by an optionee upon the grant of a
non-statutory option. The optionee will in general recognize ordinary income, in
the year in which the option is exercised, equal to the excess of the
17
<PAGE> 23
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares, and the optionee will be required to satisfy the tax
withholding requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee.
DIRECT STOCK ISSUANCES
The tax principles applicable to the automatic stock issuances under
the Directors Plan will be substantially the same as those summarized above for
the exercise of non-statutory options.
AMENDMENT AND TERMINATION
The Board of Directors may amend or modify the Directors Plan in any
or all respects whatsoever subject to any required stockholder approval. The
Board of Directors may terminate the Directors Plan at any time, and the
Directors Plan will in all events terminate on September 22, 2004.
ACCOUNTING TREATMENT
Option grants with exercise prices at 100% of fair market value will
not result in any charge to the Company's earnings, but the Company must
disclose, in footnotes to the Company's financial statements, the impact those
options would have upon the Company's reported earnings were the value of those
options treated as compensation expense. Whether or not granted at a discount,
the number of outstanding options may be a factor in determining the Company's
earnings per share on a fully-diluted basis. Stock issuances at less than fair
market value will result in a compensation expense to the Company's earnings
equal to the difference between the issue price and the fair market value of the
shares on the issue date. Such expense will be accruable by the Company over the
period that the issued shares are to vest.
NEW PLAN BENEFITS
Assuming stockholder approval of this Proposal, on April 17, 1997,
the date of the first Board meeting to be held after the Annual Meeting, Mr.
Geller will receive a direct stock issuance of 1,500 shares of Common Stock and
an option to purchase 1,500 shares of Common Stock, provided such individual
remains a non-employee Board member through such date. On August 10, 1997, each
of Messrs. Bingham, Gould, Enever, Lambert and Sondker will receive a direct
stock issuance of 1,500 shares of Common Stock and an option to purchase 1,500
shares of Common Stock, provided such individual remains a non-employee Board
member through such date. Mr. Ferrucci has indicated that if Proposal No. 1 is
adopted he intends to resign at that time and will therefore not receive any
stock or option grants.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares
of the Company present or represented and entitled to vote at the Annual Meeting
is required to approve the amendments to the Directors Plan. Should such
stockholder approval not be obtained, then non-employee Board members will not
be eligible to participate in any other equity incentive plan of the Company,
the maximum number of stock options and shares of Common Stock which may be
issued in the aggregate per calendar year under Directors Plan will be limited
to 15,000 shares, the annual automatic direct stock issuances will be limited to
the number of shares determined by dividing fifteen thousand dollars ($15,000)
by the fair market value of the Common Stock on the date of issuance and
unvested shares that are surrendered to the Company will reduce share-for-share
the reserve established for the Directors Plan. The Directors Plan will,
however, continue to remain in effect, and option grants and stock issuances
will continue to be made pursuant to the existing provisions of the Directors
Plan until the available reserve of Common Stock under the Directors Plan is
issued.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENTS TO THE DIRECTORS PLAN.
18
<PAGE> 24
OTHER MATTERS
The Company knows of no other matters to be brought before the Annual
Meeting. If any other business should properly come before the Annual Meeting,
the persons named in the proxy intend to vote thereon in accordance with their
best judgment.
19
<PAGE> 25
OWNERSHIP OF SECURITIES
The following table sets forth information concerning the beneficial
ownership of shares of the Company's Common Stock by (i) each beneficial owner
of more than 5% of the outstanding shares of Common Stock; (ii) each director
and nominee of the Company, (iii) the executive officers named in the Summary
Compensation Table below; and (iv) by all current directors and executive
officers of the Company as a group. This information is presented as of March
10, 1997. The number of Shares of Common Stock includes the number of shares of
Common Stock into which Units may be redeemed in certain circumstances. Except
as otherwise noted, each beneficial owner listed has sole investment and voting
power with respect to the Common Stock indicated.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR
NUMBER OF PERSONS IN POSITION WITH NUMBER OF SHARES OF COMMON PERCENT
GROUP COMPANY STOCK BENEFICIALLY OWNED (1) OF CLASS(1)
- ------------------------------------- -------------------------- ---------------------------------- -----------------
<S> <C> <C> <C>
Robert A. Alter President, 596,271 (2) *
Secretary, Chief
Executive
Officer and
Director
Charles L. Biederman Executive Vice 383,177 (3) *
President and
Director
H. Raymond Bingham Director 6,038 (4) *
C. Robert Enever Director 167,101 (5) *
Mark A. Ferrucci Director 0 (6) *
Laurence S. Geller Director 26,750 (7) *
Fredric H. Gould Director 6,038 (8) *
David Lambert Director 10,038 (9) *
Edward H. Sondker Director 6,038 (10) *
All current directors and 1,201,451 (11) 6.75%
executive officers as a group
(9 persons)
CAPITAL GROWTH 615,000 (12) 3.46%
MANAGEMENT LIMITED
PARTNERS
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS
02110
THE PRUDENTIAL INSURANCE 541,200 (13) 3.04%
COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY
07102-3777
WASATCH ADVISORS, INC. 1,220,050 (14) 6.86%
68 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84104
WELLINGTON MANAGEMENT 443,600 (15) 2.49%
COMPANY
75 STATE STREET
BOSTON, MASSACHUSETTS
02109
WELLINGTON TRUST COMPANY 372,300 (16) 2.09%
NATIONAL ASSOCIATION
75 STATE STREET
BOSTON, MASSACHUSETTS
02109
</TABLE>
20
<PAGE> 26
- ---------------
* Less than one percent
(1) Sunstone Hotel Investors, L.P. (the "Partnership") had 17,774,802 units
of partnership interests outstanding as of March 3, 1997, of which
15,540,405 were owned by the Company, corresponding to the number of
shares of Common Stock outstanding as of that date, and 2,234,397 by
other limited partners. Each of the Units are redeemable pursuant to
certain redemption rights (the "Redemption Rights") on a one-for-one
basis for shares of Common Stock. The number and percentages set forth
above assumes that all Units held by the person are redeemed for shares
of Common Stock. The total number of shares of Common Stock outstanding
used in calculating the percentage assumes that all of the Units held by
other persons are redeemed for shares of Common Stock.
(2) Includes (i) 37,000 shares underlying stock options which are currently
exercisable or which will become exercisable within 60 days after March
3, 1997 and (ii) 552,271 Units redeemable pursuant to the Redemption
Rights on a one-for-one basis for shares of Common Stock.
(3) Includes (i) 11,000 shares underlying stock options which are currently
exercisable or which will become exercisable within 60 days after March
3, 1997 and (ii) 370,177 Units redeemable pursuant to the Redemption
Rights on a one-for-one basis for shares of Common Stock.
(4) Includes 3,000 shares underlying stock options which are currently
exercisable.
(5) Includes 3,000 shares underlying stock options which are currently
exercisable.
(6) Intends to resign if shareholders approve Proposal No. 1.
(7) Includes (i) 20,833 shares underlying previously granted stock options
which are currently exercisable or which will become exercisable within
60 days after March 10, 1997 and (ii) the following securities to be
awarded to Mr. Geller on the date of the first meeting of the Board of
Directors held after the Annual Meeting: (a) 1,500 shares subject to an
immediately exercisable option and (b) 1,500 shares of Common Stock to be
issued directly.
(8) Includes 1,500 shares underlying stock options which are currently
exercisable.
(9) Includes 3,000 shares underlying stock options which are currently
exercisable.
(10) Includes 3,000 shares underlying stock options which are currently
exercisable.
(11) Includes (i) 97,833 shares underlying stock options which are currently
exercisable or which will become exercisable within 60 days after March
3, 1997 and (ii) 922,448 Units redeemable pursuant to the Redemption
Rights on a one-for-one basis for shares of Common Stock.
(12) Capital Growth Management is deemed a beneficial owner of the shares only
by virtue of the direct or indirect investment and/or voting discretion
it possesses pursuant to the provisions of investment advisory agreements
with its investment advisory clients.
(13) The Prudential Insurance Company of America is deemed a beneficial owner
of the shares only by virtue of the direct or indirect voting and/or
investment discretion it possesses because it holds the shares for the
benefit of its clients in separate accounts, externally managed accounts,
registered investment companies, subsidiaries and/or other affiliates.
(14) Wasatch Advisors, Inc. is deemed a beneficial owner of the shares only by
virtue of the direct or indirect investment and/or voting discretion it
possesses pursuant to the provisions of investment advisory agreements
with its investment advisory clients.
(15) Wellington Management Company is deemed a beneficial owner of the shares
only by virtue of the direct or indirect investment and/or voting
discretion it possesses pursuant to the provisions of investment advisory
agreements with its investment advisory clients.
(16) Wellington Trust Company, National Association is deemed a beneficial
owner of the shares only by virtue of the direct or indirect investment
and/or voting discretion it possesses pursuant to the provisions of
investment advisory agreements with its investment advisory clients.
21
<PAGE> 27
EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's President and Executive Vice President, who
are the only executive officers of the Company serving as such as of the end of
the last fiscal year. Such individuals will be hereafter referred to as the
"Named Executive Officers."
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------ ------
Shares
Name and Principal Other Annual Underlying All Other
Position Year Salary($) Bonus Compensation(1) Options(2) Compensation(3)
---------- ---- --------- ----- ---------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter 1996 $60,000 $150,000 $6,294 113,600 $ 9,186
President, Chief 1995 $22,500 (4) - $5,976 185,000 $ 2,025
Financial Officer
and Secretary
Charles L. 1996 $30,000 $430,325 $3,768 50,900 $13,795
Biederman 1995 $11,250 (4) - $5,100 55,000 $ 8,235
Executive Vice
President
</TABLE>
- --------------
(1) Represents medical insurance premiums paid by the Company on behalf of the
Named Executive Officers.
(2) The options were granted under the Company's 1994 Stock Incentive Plan. See
"Executive Compensation and Related Information - Option Grants in Last
Fiscal Year."
(3) Represents life insurance premiums paid by the Company on behalf of the
Named Executive Officers.
(4) Represents partial year from August 1995 through year end.
22
<PAGE> 28
STOCK OPTIONS
The following table contains information concerning the grant of stock
options to the Named Executive Officers under the Company's 1994 Stock Incentive
Plan for the fiscal year ended December 31, 1996.
TABLE II
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------
Number of Potential Realizable Value
Securities at Assumed Annual Rates
Underlying Percent of Total of Stock Price Appreciation
Options Options Granted to Exercise or For Option Term(s)(3)
Granted Employees in Basic Price Expiration --------------------
Name (#)(1) 1996 ($/Sh)(2) Date 5%($) 10%($)
---- -------- ------ --------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter 83,600 51% $10.50 07/15/06 $552,044 $1,398,987
30,000 18% $10.50 07/15/06 $198,102 $ 502,029
Charles L. Biederman 30,000 18% $10.50 07/15/06 $198,102 $ 502,029
20,900 13% $10.50 07/15/06 $138,011 $ 349,748
</TABLE>
- ---------------
(1) The options were granted under the Company's 1994 Stock Incentive
Plan. Each option will vest in a series of five (5) equal annual
installments measured from the grant date. In addition, the options
will automatically accelerate in full in the event of an acquisition
of the Company by a merger or asset sale in which such option is not
to be assumed or replaced by the successor corporation. Each option
includes a limited stock appreciation right which provides the
optionee with the right, exercisable upon the successful completion
of a hostile tender offer for more than 50% of the Company's
outstanding voting securities, to surrender the option to the
Company, to the extent the option is exercisable for vested shares,
in return for a cash distribution per surrendered option share equal
to the excess of (i) the fair market value on the surrender date over
(ii) the option exercise price payable per share. Each option will
have a maximum term of ten years, subject to earlier termination
following the optionee's cessation of service with the Company.
(2) The exercise price may be paid in cash, in shares of the Company's
Common Stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of
the purchased shares. The Company may also finance the option
exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares, together with any federal and state
income tax liability incurred by the optionee in connection with such
exercise. The Compensation Committee of the Board of Directors, as
the Plan Administrator of the Company's 1994 Stock Incentive Plan,
has the discretionary authority to reprice the options through the
cancellation of those options and the grant of replacement options
with an exercise price based on the fair market value of the option
shares on the grant date.
(3) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5%
and 10% levels or at any other defined level. Unless the market price
of the Common Stock does in fact appreciate over the option term, no
value will be realized from the option grants made to the executive
officers.
23
<PAGE> 29
OPTION EXERCISES AND HOLDINGS
No options were exercised by the Named Executive Officers in the 1996
fiscal year. No stock appreciation rights were exercised by any such officer
during such year and, except for the stock appreciation rights described in
footnote (1) above, no stock appreciation rights were outstanding on December
31, 1996. The table below sets forth information concerning the unexercised
options held as of the end of such year by the Named Executive Officers.
TABLE III
AGGREGATE
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised Unexercised
Options at In-the-Money
FY-End (#) Options at
----------------------- FY-End ($) (1)
-----------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert A. Alter 37,000 261,600 $134,125 $834,700
Charles L. Biederman 11,000 94,900 39,875 293,113
</TABLE>
(1) Based on the fair market value of the option shares at fiscal year-end
($13.125 per share) less the exercise price.
MANAGEMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Messrs. Alter and Biederman each have entered into Employment
Agreements with the Company. Each Employment Agreement is for a one-year term
which will renew automatically until terminated. Mr. Alter's salary is $120,000
per year subject to increases in base compensation approved by the Compensation
Committee. Mr. Biederman's salary is $30,000 per year subject to increases in
such base compensation based on recommendations by the President for performance
of special assignments. Mr. Alter is required to devote substantially all of his
time to the business of the Company, while Mr. Biederman is not. The Company is
required to maintain a comprehensive medical plan, life insurance and other
fringe benefits for both Messrs. Alter and Biederman. Upon a termination without
cause, the Company is required to pay one year's base salary to Mr. Alter and
Mr. Biederman.
As Plan Administrator of the Company's 1994 Stock Incentive Plan, the
Compensation Committee of the Board of Directors has the authority to provide
for the accelerated vesting of any outstanding options to purchase shares of the
Company's Common Stock held by Messrs. Alter and Biederman under such plan, in
the event their employment were to be terminated (whether involuntarily or
through a forced resignation) following (i) an acquisition of the Company by
merger or asset sale or (ii) a hostile change in control of the Company (whether
by successful tender offer for more than 50% of the outstanding voting stock or
by proxy contest for the election of Board members).
24
<PAGE> 30
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is currently
comprised of Messrs. Gould, Bingham, Lambert and Sondker. None of such persons
was at any time during the fiscal year ended December 31, 1996, or at any other
time an officer or employee of the Company.
No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
COMPENSATION COMMITTEE REPORT
OVERVIEW AND PHILOSOPHY
The Compensation Committee (the "Committee") of the Company's Board
of Directors is responsible for establishing the compensation payable to the
Company's executive officers. Such compensation is primarily comprised of the
following elements: base salary, annual performance incentives and stock
options.
It is the Committee's objective that executive compensation be
directly influenced by the Company's business results. Accordingly, the
Company's executive compensation program is structured to stimulate and reward
exceptional performance that results in enhanced corporate and stockholder
values. To reinforce the attainment of Company goals, the Committee determined
that a substantial portion of the compensation for the executive officers for
the 1996 fiscal year should be in the form of cash bonuses, based upon the
Company's performance in 1996, and stock options.
COMPENSATION COMPONENTS
Base Salary
For the 1996 fiscal year, the base salary for Mr. Biederman was set
at the same level as those established for the 1995 fiscal year which had been
determined by the employment agreement entered into by Mr. Biederman at the time
of the initial public offering of the Company's Common Stock. Mr. Alter's salary
was increased from $60,000 to $120,000 per year to reflect the growth in the
Company's portfolio and increase in Mr. Alter's responsibilities to manage the
larger Company.
Cash Bonuses
Messrs. Alter and Biederman each earned cash bonuses in the 1996
fiscal year. Mr. Biederman's bonuses, totalling $430,325, were awarded in
recognition of his contribution to the construction activity he supervised
during the past year. Two cash bonus awards, one for $200,000 and the other for
$230,325, were paid based on a percentage of the construction expenditures for
renovations of the Santa Fe Hotel, the Holiday Inn Steamboat Springs and the
Oakland Hampton Inn, the Cypress Inns in Clackamus, Kent, and Poulsbo, the
Holiday Inn in Stark, the Residence Inn in Highlands Ranch, and the Hampton Inn
in Denver. Mr. Alter's bonus, totaling $150,000, was awarded for his significant
contributions to the Company's accomplishments in 1996. These accomplishments
included the $46 million secondary offering of the Company's Common Stock in
August 1996, the addition in 1996 of twelve hotels to the Company's portfolio,
and the establishment of the Company's Dividend Reinvestment and Stock Purchase
Plan.
Stock Options
The compensation packages established for the executive officers for
the 1996 fiscal year included substantial stock option grants. Each grant allows
the officer to acquire shares of the Company's Common Stock at a fixed price per
share (the market price on the grant date) over a specified period of time. The
option vests in
25
<PAGE> 31
periodic installments over a five-year period, contingent upon the executive
officer's continued employment with the Company. Accordingly, the option will
provide a return only if the officer remains with the Company and only if the
market price appreciates over the option term. The Committee's goal in awarding
such grants is to align the interests of the executive officers with the
interests of the Company's stockholders.
CHIEF EXECUTIVE OFFICER PERFORMANCE AND COMPENSATION
In establishing Mr. Alter's total compensation package for fiscal
1996, the Committee reviewed information regarding the compensation paid to
presidents of other publicly-held hotel real estate investment trusts and also
considered the compensation paid to Mr. Alter by Sunstone Hotel Management, Inc.
and Sunstone Hotel Properties, Inc. Mr. Alter's performance bonus of $150,000
for fiscal 1996 was awarded in recognition of Mr. Alter's contributions to the
Company's success in that year and in particular to the $46 million secondary
offering of the Company's Common Stock completed in August 1996, the addition of
twelve new hotels to the Company's portfolio and the establishment of the
Company's new Dividend Reinvestment and Stock Purchase Plan.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code, enacted in 1993,
generally disallows a tax deduction to publicly held companies for compensation
exceeding $1 million paid to certain executive officers. The compensation paid
to the Company's executive officers for the 1996 fiscal year did not exceed the
$1 million limit per officer, nor is it expected that the compensation to be
paid to the Company's executive officers for fiscal 1997 will exceed that limit.
The Company's 1994 Stock Incentive Plan is structured so that any compensation
deemed paid to an executive officer when he exercises an outstanding option
under that Plan with an exercise price equal to the fair market value of the
option shares on the grant date will qualify as performance-based compensation
which will not be subject to the $1 million limitation. Because it is very
unlikely that the cash compensation payable to any of the Company's executive
officers in the foreseeable future will approach the $1 million limit, the
Compensation Committee has decided at this time not to take any other action to
limit or restructure the elements of cash compensation payable to the Company's
executive officers. The Compensation Committee will reconsider this decision
should the individual compensation of any executive officer ever approach the $1
million level.
It is the opinion of the Committee that the adopted executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders with competitive and equitable executive compensation in a balanced
and reasonable manner, for both the short- and long-term.
This report has been furnished by members of the Compensation
Committee.
COMPENSATION COMMITTEE
Fredric H. Gould
H. Raymond Bingham
David Lambert
Edward H. Sondker
STOCK PERFORMANCE GRAPH
The following graph compares the change in the Company's stockholder
return on the Common Stock during 1996 (which is traded on the New York Stock
Exchange under the symbol "SSI") with the changes in (i) the Standard & Poor's
500 Stock Index (the "S&P 500 Index"), (ii) the National Association of Real
Estate Trust Equity Index ("NAREIT Equity Index") and (iii) a peer group of five
issuers with similar businesses(1) ("Peer Group") for the same period, assuming
a base investment of $100 in the Common Stock in each index for comparative
purposes. Total return equals appreciation in stock price plus dividends paid,
and assumes that all dividends are reinvested. The Company will provide upon
request the names of the companies included in the NAREIT Equity Index. The
NAREIT Equity Index is published monthly by the National Association of Real
Estate Investors, Inc. ("NAREIT") in its publication REITWatch. The index is
available to the public upon request to NAREIT.
- -----------------
(1) The peer group companies consist of Equity Inns, Jameson Inns, Inc.,
Innkeepers, USA Trust, RFS, Inc. and Winston Hotels, Inc.
26
<PAGE> 32
SUNSTONE HOTEL INVESTORS, INC.
[ GRAPH ]
The foregoing graph is based upon the following data:
<TABLE>
<CAPTION>
PERIOD ENDING
-------------
INDEX 8/16/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
- ----- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SUNSTONE HOTEL INVESTORS 100.00 101.32 111.71 111.71 121.24 113.90 152.97
S&P 100.00 104.68 110.98 116.94 122.17 125.96 136.35
NAREIT EQUITY INDEX 100.00 102.28 106.52 108.94 113.79 121.23 144.09
PEER GROUP 100.00 107.67 110.32 122.94 117.42 128.67 153.57
</TABLE>
The foregoing price performance comparisons shall not be deemed incorporated by
reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933, as amended, (the
"Securities Act"), or under the Exchange Act, except to the extent that the
Company specifically incorporates this graph by reference and shall not
otherwise be deemed filed under the Securities Act or Exchange Act.
There can be no assurance that the Company's share performance will continue
into the future with the same or similar trends depicted in the above graph. The
Company will not make or endorse any predictions as to future share performance.
27
<PAGE> 33
CERTAIN TRANSACTIONS
The Company, a Maryland corporation, was formed on September 21,
1994, as a real estate investment trust ("REIT"). The Company completed an
initial public offering (the "Offering") on August 16, 1995 and contributed the
net proceeds therefrom to Sunstone Hotel Investors, L.P. (the "Partnership"). In
order to qualify as a REIT, neither the Company nor the Partnership may operate
hotels. The Partnership owns as of March 3, 1997, 26 hotels which it leases to
Sunstone Hotel Properties, Inc. (the "Lessee") pursuant to separate percentage
leases which provide for rent payments equal to the greater of (i) fixed based
rent and (ii) percentage rent based on room revenues, Lessee's food and beverage
revenues and sublease and concession rentals (the "Percentage Leases"). The
Lessee is owned by Robert A. Alter, Chairman and President of the Company (80%)
and Charles L. Biederman, Director and Executive Vice President of the Company
(20%). The Lessee has entered into a management agreement (the "Management
Agreement") pursuant to which all of the hotels it leases from the Partnership
are managed by Sunstone Hotel Management, Inc. (the "Management Company"), of
which Mr. Alter is the sole shareholder.
The Company and the Partnership have entered into a number of
transactions and agreements with Mr. Alter and Mr. Biederman and certain of
their affiliates.
PERCENTAGE LEASES
In order to qualify as a REIT, the Partnership has leased each of its
hotels to the Lessee pursuant to the Percentage Leases. Each Percentage Lease
has been approved by a majority of the Independent Directors. The Percentage
Leases are designed to allow the Company to participate in revenue growth by
providing that (i) between approximately 60% to 65% of room revenues in excess
of specified amounts, (ii) 5% of the Lessee's food and beverage revenues, (iii)
100% of any sublease and concession rentals, and (iv) other net revenues
described in the Percentage Lease for the applicable hotel in excess of base
rent will be paid to the Partnership as percentage rent. Once such expenses
together with all other operating expenses of each hotel is paid by the Lessee,
the Lessee will be entitled to all of the net income from the hotels. Mr. Alter
and Mr. Biederman have agreed, however, to use distributions from the Lessee, in
excess of their tax liability for the earnings of the Lessee, to either
accumulate reserves for the Lessee's rental obligations due under the Percentage
Leases or purchase from the Partnership additional Units at the then current
market price of the Common Stock.
MANAGEMENT AGREEMENT
The Lessee has entered into the Management Agreement with the
Management Company for each of the hotels it leases from the Partnership.
Pursuant to the Management Agreement, the Management Company provides management
and administrative services to the Lessee in consideration for 2% of gross
revenue and reimbursement of certain direct expenses incurred by the Management
Company for the Lessee. As the sole shareholder of the Management Company, Mr.
Alter would be entitled to the net income of the Management Company.
EMPLOYMENT AGREEMENTS
The Company entered into Employment Agreements with each of Mr. Alter
and Mr. Biederman that renew automatically each August 16 until terminated. Mr.
Alter serves as President and is required to devote substantially all of his
time to the business of the Company with an annual base compensation of $120,000
a year subject to any further increases approved by the Compensation Committee.
Mr. Biederman serves as Executive Vice President for an annual base compensation
of $30,000, subject to any increases based on recommendations by the President
of the Company for performance of special assignments. Mr. Biederman is not
required to devote substantially all of his time to the business of the Company.
Each of the Employment Agreements restrict competitive activities by Mr. Alter,
Mr. Biederman or any of their affiliates.
28
<PAGE> 34
THIRD PARTY PLEDGE
Mr. Alter and Mr. Biederman, the stockholders of the Lessee, have
through March 3, 1997 pledged to the Partnership their Units with a value equal
to four months of initial base rent, approximately $4.5 million, to secure the
Lessee's obligations under the Percentage Leases. The amount of pledged Units is
increased by an amount equal to 4 months base rent for each additional hotel
leased by the Lessee from the Partnership. As of December 31, 1996, the initial
base rent for the hotels was approximately $3.8 million. Provided no event of
default under one or more of the Percentage Leases exists, these pledged Units
will be returned to the pledgors on the third anniversary of the closing of the
Offering. At the Board of Directors meeting in February 1997, the Independent
Directors (with the concurrence of Mr. Geller) approved an amendment to the
pledge agreement with Mr. Alter and Mr. Biederman to limit the total number of
Units that would be required to be pledged to the number currently owned. The
Independent Directors (with the concurrence of Mr. Geller) also approved the
subordination of the Company's lien in the Units to a lien proposed in favor of
an institutional lender that, as a condition to making a proposed working
capital facility available to the Lessee, has required that Mr. Alter guaranty
the loan and secure it with a first priority lien in his Units.
UNIT PURCHASE AGREEMENT
Mr. Alter and Mr. Biederman have entered into a unit purchase
agreement with the Company, the Lessee and the Partnership to use distributions
from the Lessee, in excess of their tax liability for earnings of the Lessee, to
either accumulate reserves for the Lessee's rental obligations due under the
Percentage Leases, or purchase from the Partnership additional Units at the then
current market price of the Common Stock.
PURCHASE OF COURTYARD BY MARRIOTT-RIVERSIDE, CALIFORNIA HOTEL
On April 1, 1996, the Partnership acquired the Riverside Hotel
subject to the existing first and second trust deed with an outstanding balance
of approximately $3 million together with the issuance of 85,000 Units
representing the difference between the purchase price of approximately $4
million and the assumed indebtedness. The purchase price was calculated based on
the "Net Operating Income" for the 12 months ended March 31, 1996, subject to
adjustment based on the results of a post-closing audit to be conducted by
Coopers & Lybrand, L.L.P. in accordance with the Option Agreement as described
above.
In connection with the acquisition by Mr. Alter's and Mr. Biederman's
affiliate of the Riverside Hotel, Independence One Bank of California made a
loan in the amount of approximately $2.1 million which is secured by this hotel.
Edward H. Sondker, a director of the Company, was the president and chief
executive officer of Independence One Bank of California at the time such loan
was made, but was not then a director of the Company.
INDEMNIFICATION AGREEMENTS
The Company has entered into an Indemnification Agreement with each
of its directors (the "Indemnification Agreements") which provides that, with
certain exceptions, the Company will hold harmless and indemnify its directors
to the fullest extent permitted under Maryland Law. Under the Indemnification
Agreements, the Company is obligated to indemnify each of its directors against
all expenses (including attorneys' fees), fines, judgments and settlement
amounts that such director may incur in connection with any action or proceeding
(other than an action by or in the right of the Company) to which the director
is or may be made a party to by reason of such director's position as a
director, officer, employee or agent of the Company or any other company or
enterprise to which the person provides services at the request of the Company.
29
<PAGE> 35
APPOINTMENT OF INDEPENDENT AUDITORS
The Company has not yet selected its independent public auditors for
the year ending December 31, 1997. The Audit Committee is expected to make a
decision in the near future. Coopers & Lybrand LLP were the independent public
auditors for the Company for the year ended December 31, 1996. Representatives
of Coopers & Lybrand LLP are expected to be present at the Annual Meeting and
will be available to respond to appropriate questions and to make such
statements as they may desire.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the National Association of Securities Dealers. Officers, directors
and stockholders owning greater than 10% of the Common Stock of the Company are
required by SEC regulations to furnish the Company with copies of all reports
filed pursuant to Section 16(a).
Based solely on review of copies of such reports required by Section
16(a) or written representations that no such reports were required, the Company
believes that during 1996, all of its officers, directors, and stockholders
owning greater than 10% of the Common Stock of the Company complied with all
applicable Section 16(a) filing requirements.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be
presented by stockholders at the Company's 1998 Annual Meeting must be received
by the Company no later than December 15, 1997 to be included in the proxy
statement and form of proxy relating to the 1998 Annual Meeting.
1996 ANNUAL REPORT
The Company's Annual Report for the fiscal year ended December 31,
1996, including audited financial statements, is being sent with this Proxy
Statement to all stockholders of record as of March 10, 1997. Except for
"Executive Officers of the Registrant" from Part I of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, the Annual
Report is not incorporated into this Proxy Statement and is not considered proxy
solicitation material.
FORM 10-K
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996 AS FILED WITH THE SEC WILL BE PROVIDED TO
STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO ROBERT A. ALTER, SUNSTONE
HOTEL INVESTORS, INC., 115 CALLE DE INDUSTRIAS, SUITE 201, SAN CLEMENTE,
CALIFORNIA 92672.
By Order of the Board of Directors
-----------------------------------------
ROBERT A. ALTER
Secretary
San Clemente, California
March 3, 1997
30
<PAGE> 36
APPENDIX A
----------
1994 Stock Incentive Plan
<PAGE> 37
SUNSTONE HOTEL INVESTORS, INC.
1994 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL
-------
I. PURPOSE OF THE PLAN
A. This 1994 Stock Incentive Plan (the "Plan") is
intended to promote the interests of Sunstone Hotel Investors, Inc., a Maryland
corporation or any successor corporation (the "Corporation") adopting the Plan,
by providing (i) employees (including officers and directors) of the
Corporation (or its parent or subsidiary corporations) who are responsible for
the management, growth and financial success of the Corporation (or its parent
or subsidiary corporations), (ii) non-employee members of the Board or the
board of directors of any parent or subsidiary, and (iii) consultants and other
advisors (and their respective employees) who provide valuable services to the
Corporation (or its parent or subsidiary corporations) with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to remain in the service
of the Corporation (or its parent or subsidiary corporations).
B. The Plan shall become effective immediately upon the
execution and final pricing of the Underwriting Agreement for the initial
public offering of the Corporation's Common Stock. The execution date of such
Underwriting Agreement is hereby designated as the Effective Date of the Plan.
II. DEFINITIONS
A. For purposes of the Plan, the following definitions
shall be in effect:
BOARD: the Corporation's Board of Directors.
CHANGE IN CONTROL: a change in ownership or control of the
Corporation effected through either of the following transactions:
a. the direct or indirect acquisition by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders; or
<PAGE> 38
b. a change in the composition of the Board over
a period of thirty-six (36) consecutive months or less such that a
majority of the Board members (rounded up to the next whole number)
ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (i) have been
Board members continuously since the beginning of such period or (ii)
have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (i) who were still in office at the time such election or
nomination was approved by the Board.
CODE: the Internal Revenue Code of 1986, as amended.
COMMITTEE: one or more committees of the Board, each with at
least two (2) Board members, which shall assume responsibility for the
administration of one or more functions under the Plan, either to the extent
expressly provided in the Plan or as specifically authorized by Board
resolution.
COMMON STOCK: shares of the Corporation's common stock.
CORPORATE TRANSACTION: any of the following
stockholder-approved transactions to which the Corporation is a party:
a. a merger or consolidation in which the
Corporation is not the surviving entity, except for a transaction the
principal purpose of which is to change the state in which the
Corporation is incorporated;
b. the sale, transfer or other disposition of
all or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation; or
c. any reverse merger in which the Corporation
is the surviving entity but in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such merger.
EMPLOYEE: an individual who performs services while in the
employ of the Corporation or one or more parent or subsidiary corporations,
subject to the control and direction of the employer entity not only as to the
work to be performed but also as to the manner and method of performance.
EXERCISE DATE: the date on which the Corporation shall have
received written notice of the exercise of an option granted pursuant to the
Discretionary Option Grant Program of Article Two of the Plan.
2.
<PAGE> 39
FAIR MARKET VALUE: the value per share of Common Stock
determined in accordance with the following provisions:
a. For any option grants or direct stock
issuances made on the Effective Date, the Fair Market Value shall be
the price per share at which the Common Stock is to be sold in the
initial public offering of the Common Stock pursuant to the
Underwriting Agreement. For all other purposes, the Fair Market Value
shall be determined in accordance with the provisions of subparagraphs
b through d below.
b. If the Common Stock is at the time traded on
the Nasdaq National Market, the Fair Market Value shall be the closing
selling price per share on the date in question, as such price is
reported by the National Association of Securities Dealers on the
Nasdaq National Market or any successor system. If there is no
reported closing selling price for the Common Stock on the date in
question, then the closing selling price on the last preceding date
for which such quotation exists shall be determinative of Fair Market
Value.
c. If the Common Stock is at the time listed or
admitted to trading on any national securities exchange, then the Fair
Market Value shall be the closing selling price per share on the date
in question on the securities exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on
such exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the Fair Market Value shall be
the closing selling price on the exchange on the last preceding date
for which such quotation exists.
HOSTILE TAKE-OVER: a change in ownership of the Corporation
effected through the direct or indirect acquisition by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to
a tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept.
INCENTIVE OPTION: a stock option which satisfies the
requirements of Code Section 422.
1934 ACT: the Securities and Exchange Act of 1934, as amended
from time to time.
3.
<PAGE> 40
NON-STATUTORY OPTION: a stock option not intended to meet the
requirements of Code Section 422.
OPTIONEE: any person to whom an option is granted under the
Discretionary Option Grant Program in effect under Article Two of the Plan.
PARTICIPANT: any person who receives an award of Performance
Shares under the Performance Share Program of Article Three or a direct
issuance of Common Stock under the Stock Issuance Program of Article Four of
the Plan.
PERFORMANCE SHARE: an equity-like participating interest in
the Corporation which may be awarded to a Participant pursuant to the
Performance Share Program of Article Three of the Plan.
PERMANENT DISABILITY OR PERMANENTLY DISABLED: the inability
of an Optionee or a Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
PLAN ADMINISTRATOR: either the Board or a Committee of the
Board to the extent any such Committee is at the time responsible for the
administration of the Plan in accordance with Section IV of Article One.
PRIMARY COMMITTEE: a committee of two (2) or more
non-employee Board members appointed by the Board.
SECTION 12(G) REGISTRATION DATE: August 10, 1995, the date on
which the initial registration of the Common Stock under Section 12(g) of the
1934 Act became effective.
SERVICE: the performance of services on a periodic basis to
the Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant or advisor, except to the extent otherwise specifically provided in
the applicable stock option grant, Performance Share award, or stock issuance
agreement.
TAKE-OVER PRICE: the greater of (a) the Fair Market Value per
share of Common Stock on the date an option to purchase such stock is
surrendered to the Corporation in connection with a Hostile Take-Over or (b)
the highest reported price per share of Common Stock paid by the tender offeror
in effecting such Hostile Take-Over. However, if the surrendered option is an
Incentive Option, the Take-Over Price shall not exceed the clause (a) price per
share.
B. The following provisions shall be applicable in
determining the parent and subsidiary corporations of the Corporation:
4.
<PAGE> 41
Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a PARENT of the Corporation, provided each such
corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a SUBSIDIARY of the Corporation, provided each such
corporation in the unbroken chain (other than the last corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
III. STRUCTURE OF THE PLAN
A. Stock Programs. The Plan shall be divided into three
(3) separate components: the Discretionary Option Grant Program specified in
Article Two, the Performance Share Program specified in Article Three and the
Stock Issuance Program specified in Article Four. Under the Discretionary
Option Grant Program, eligible individuals may be granted options to purchase
shares of Common Stock. Under the Performance Share Program, Participants may
be awarded Performance Shares entitling them to receive a payment equal to the
Fair Market Value of a specified number of shares of Common Stock if certain
pre-determined performance goals are attained. Under the Stock Issuance
Program, eligible individuals may be issued shares of Common Stock directly,
either through the immediate purchase of such shares at a price not less than
the Fair Market Value of the shares at the time of issuance or as a bonus tied
to the performance of services or the Corporation's attainment of financial
objectives.
B. General Provisions. Unless the context clearly
indicates otherwise, the provisions of Articles One and Five shall apply to the
Discretionary Option Grant Program, the Performance Share Program and the Stock
Issuance Program and shall accordingly govern the interests of all individuals
under the Plan.
IV. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered in accordance with the
following provisions:
- The Primary Committee shall have sole and
exclusive authority to administer the Plan with respect to those
individuals subject to the short-swing profit restrictions of the
Federal securities laws.
5.
<PAGE> 42
- Administration of the Plan with respect to
all other individuals eligible to participate in the Plan may, at the
Board's discretion, be vested in the Primary Committee or a secondary
committee of two (2) or more Board members appointed by the Board, or
the Board may retain the power to administer those programs with
respect to all individuals who are not subject to the short-swing
profit restrictions of the Federal securities laws. The membership of
any secondary committee may include Board members who are Employees
eligible to receive option grants, stock appreciation rights,
Performance Share awards or stock issuances under this Plan or any
other stock option, stock appreciation, stock bonus or other stock
plan of the Corporation (or any parent or subsidiary corporation).
- Members of the Primary Committee or any
secondary committee shall serve for such period as the Board may
determine and shall be subject to removal by the Board at any time.
The Board may also at any time reassume all administrative powers and
authority delegated under the Plan to any secondary committee
appointed by the Board.
B. The Plan Administrator shall, within the scope of its
administrative authority under the Plan, have full power and discretion
(subject to the express provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for the proper administration of the
Plan and to make such determinations under, and issue such interpretations of,
the provisions of each program established under the Plan and any outstanding
option grants, stock appreciation rights, Performance Shares or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative authority under the Plan
shall be final and binding on all parties who have an interest in the Plan or
any outstanding option, stock appreciation right, Performance Share or stock
issuance thereunder.
C. Service on the Primary Committee or any secondary
committee shall constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No member
of either committee shall be liable for any act or omission made in good faith
with respect to the Plan or any options granted, Performance Shares awarded or
shares issued under the Plan.
V. OPTION GRANTS AND STOCK ISSUANCES
A. The following persons shall be eligible to
participate in the Plan:
1. Officers and other Employees of the
Corporation (or its parent or subsidiary corporations) who render
services which contribute to the management, growth and financial
success of the Corporation (or its parent or subsidiary corporations);
6.
<PAGE> 43
2. Non-employee members of the Board or the
board of directors of any of the Corporation's parent or subsidiary
corporations; and,
3. those consultants or other advisors (and
their respective employees) who provide valuable services to the
Corporation (or its parent or subsidiary corporations).
B. Participation by a non-employee Board member in the
Plan shall not limit such individual's eligibility to receive option grants,
direct stock issuances, stock appreciation rights or other grants pursuant to
any other plan of the Corporation, including the Corporation's 1994 Directors
Plan.
C. The Plan Administrator shall have full authority to
determine (i) with respect to the grants made under the Discretionary Option
Grant Program, which eligible individuals are to be granted stock options or
stock appreciation rights, the time or times when such grants are to be made,
the number of shares to be covered by each such grant, the status of any
granted option as either an Incentive Option or a Non-Statutory Option, the
time or times at which each granted option or stock appreciation right is to
become exercisable and the maximum term for which the option or stock
appreciation right may remain outstanding, (ii) with respect to awards made
under the Performance Share Program, which eligible individuals are to receive
Performance Shares, the number of Performance Shares to be awarded, the
performance- related objectives to be achieved, or the period of Service to be
completed, in order for such Performance Shares to become fully vested and the
form in which payment is to be made on the vested Performance Shares, and (iii)
with respect to direct issuances under the Stock Issuance Program, which
eligible individuals are to receive such issuances, the number of shares
subject to each such issuance, the vesting schedule (if any) to be applicable
to the issued shares and the consideration to be paid by the individual for
those shares.
VI. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for
issuance under the Plan and shall be drawn from either the Corporation's
authorized but unissued shares of Common Stock or from reacquired shares of
Common Stock, including shares repurchased by the Corporation on the open
market. The maximum number of shares of Common Stock which may be issued over
the term of the Plan shall not exceed 1,200,000 shares, subject to adjustment
from time to time in accordance with the provisions of this Section VI. Such
share reserve includes (i) the initial 500,000 share reserve authorized by the
Board on September 23, 1994, and subsequently approved by the Corporation's
stockholders, and (ii) an increase of 700,000 shares authorized by the Board on
January 16, 1997, subject to stockholder approval at the 1997 Annual Meeting.
B. In no event shall the aggregate number of shares of
Common Stock for which any one individual participating in the Plan may be
granted stock options and
7.
<PAGE> 44
separately exercisable stock appreciation rights exceed 250,000 shares in any
calendar year. In addition, the aggregate number of shares of Common Stock for
which any one individual participating in the Plan may receive Performance
Shares and direct stock issuances in any one calendar year shall not exceed
50,000 shares.
C. Should one or more outstanding options under Article
Two of this Plan expire or terminate for any reason prior to exercise in full
(including any option cancelled in accordance with the cancellation-regrant
provisions of Section IV of Article Two), then the shares subject to the
portion of each option not so exercised shall be available for subsequent
issuance under the Plan. In addition, unvested shares issued under the Plan
and subsequently repurchased by the Corporation, at the original exercise or
issue price paid per share, pursuant to the Corporation's repurchase rights
under the Plan shall be added back to the number of shares of Common Stock
reserved for issuance under the Plan and shall accordingly be available for
reissuance through one or more subsequent option grants or direct stock
issuances under the Plan. Should one or more Performance Shares awarded under
Article Three of this Plan terminate or expire prior to vesting, the number of
shares underlying those expired or terminated Performance Share award shall be
available for subsequent issuance under the Plan. However, shares subject to
any stock appreciation rights exercised in accordance with Section V of Article
Two or any vested Performance Shares liquidated pursuant to the payout
provisions of Article Three, shall reduce on a share-for-share basis the number
of shares of Common Stock available for subsequent issuance the Plan. In
addition, should the exercise price of an outstanding option under the Plan be
paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction of the
withholding taxes incurred in connection with the exercise of an outstanding
option under Article Two or the vesting of a direct stock issuance under
Article Four, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock actually issued to the holder of such option
or stock issuance.
D. Should any change be made to the Common Stock
issuable under the Plan by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, then appropriate adjustments shall be made to (i) the
maximum number and/or class of securities issuable under the Plan, (ii) the
maximum number and/or class of securities for which any one individual
participating in the Plan may be granted stock options, separately exercisable
stock appreciation rights, Performance Shares and direct stock issuances in the
aggregate per calendar year, (iii) the number and/or class of securities and
price per share in effect under each option or stock appreciation right
outstanding under the Discretionary Option Grant Program and (iv) the number
and/or class of securities underlying the Performance Shares outstanding under
the Performance Share Program. Such adjustments are to be effected by the Plan
Administrator
8.
<PAGE> 45
in a manner which shall preclude the enlargement or dilution of rights and
benefits under the Plan, and such adjustments shall be final, binding and
conclusive.
9.
<PAGE> 46
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Discretionary Option Grant
Program shall be authorized by action of the Plan Administrator and may, at the
Plan Administrator's discretion, be either Incentive Options or Non-Statutory
Options. Individuals who are not Employees of the Corporation or its parent or
subsidiary corporations may only be granted Non-Statutory Options. Each
granted option shall be evidenced by one or more instruments in the form
approved by the Plan Administrator; provided, however, that each such
instrument shall comply with the terms and conditions specified below. Each
instrument evidencing an Incentive Option shall, in addition, be subject to the
applicable provisions of Section II of this Article Two.
A. Exercise Price.
1. The exercise price per share shall be fixed
by the Plan Administrator but shall in no event be less than one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the grant
date.
2. The exercise price shall become immediately
due upon exercise of the option and, subject to the provisions of Section I of
Article Five and the instrument evidencing the grant, shall be payable in one
of the alternative forms specified below:
a. full payment in cash or check made
payable to the Corporation's order;
b. full payment in shares of Common
Stock held for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date;
c. full payment in a combination of
shares of Common Stock held for the requisite period necessary to
avoid a charge to the Corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date and cash
or check made payable to the Corporation's order; or
d. to the extent the option is
exercised for vested shares, full payment through a
broker-dealer sale and remittance procedure pursuant to which
the option holder shall provide concurrent irrevocable
10.
<PAGE> 47
written instructions (i) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the Corporation
in connection with such purchase and (ii) to the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
Except to the extent the sale and remittance procedure is
utilized in connection with the exercise of the option, payment of the exercise
price for the purchased shares must accompany the written notice to the
Corporation evidencing the option exercise.
B. Term and Exercise of Options. Each option granted
under this Discretionary Option Grant Program shall be exercisable at such time
or times and during such period as is determined by the Plan Administrator and
set forth in the instrument evidencing the grant. No such option, however,
shall have a maximum term in excess of ten (10) years measured from the grant
date. During the lifetime of the Optionee, Incentive Options shall be
exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of descent and distribution following the
Optionee's death. However, a Non-Statutory Option may, in connection with the
Optionee's estate plan, be assigned in whole or in part during the Optionee's
lifetime to one or more members of the Optionee's immediate family or to a
trust established exclusively for one or more such family members. The
assigned portion may only be exercised by the person or persons who acquire a
proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem
appropriate.
C. Termination of Service.
1. The following provisions shall govern the
exercise period applicable to any outstanding options held by the Optionee at
the time of cessation of Service or death.
a. Should an Optionee cease Service for
any reason (including death or Permanent Disability) while
holding one or more outstanding options under this Article
Two, then none of those options shall (except to the extent
otherwise provided pursuant to subparagraph 3 below) remain
exercisable for more than a thirty-six (36)-month period (or
such shorter period determined by the Plan Administrator and
set forth in the instrument evidencing the grant) measured
from the date of such cessation of Service.
11.
<PAGE> 48
b. Any option held by the Optionee
under this Article Two and exercisable in whole or in part on the date
of his or her death may be exercised by the personal representative of
the Optionee's estate or by the person or persons to whom the option
is transferred pursuant to the Optionee's will or in accordance with
the laws of descent and distribution. However, the right to exercise
such option shall lapse upon the earlier of (i) the third anniversary
of the date of the Optionee's death (or such shorter period determined
by the Plan Administrator and set forth in the instrument evidencing
the grant) or (ii) the specified expiration date of the option term.
Accordingly, upon the occurrence of the earlier event, the option
shall terminate and cease to remain outstanding.
c. Under no circumstances shall any
such option be exercisable after the specified expiration date of the
option term.
d. During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for
more than the number of shares (if any) in which the Optionee is
vested at the time of his or her cessation of Service. Upon the
expiration of the limited post-Service exercise period or (if earlier)
upon the specified expiration date of the option term, each such
option shall terminate and cease to remain outstanding with respect to
any vested shares for which the option has not otherwise been
exercised. However, each outstanding option shall immediately
terminate and cease to remain outstanding, at the time of the
Optionee's cessation of Service, with respect to any shares for which
the option is not otherwise at that time exercisable or in which the
Optionee is not otherwise vested.
e. Should (i) the Optionee's Service be
terminated for misconduct (including, but not limited to, any act of
dishonesty, willful misconduct, fraud or embezzlement) or (ii) the
Optionee make any unauthorized use or disclosure of confidential
information or trade secrets of the Corporation or its parent or
subsidiary corporations, then in any such event all outstanding
options held by the Optionee under this Article Two shall immediately
terminate and cease to remain outstanding.
2. The Plan Administrator shall have complete
discretion, exercisable either at the time the option is granted or at any time
while the option remains outstanding, to permit one or more options held by the
Optionee under this Article Two to be exercised, during the limited
post-Service exercise period applicable under this paragraph C., not only with
respect to the number of vested shares of Common Stock for which each such
option is exercisable at the time of the Optionee's cessation of Service but
also with respect to one or more additional installments in which the Optionee
would have subsequently vested had the Optionee continued in Service.
12.
<PAGE> 49
3. The Plan Administrator shall also have full
power and authority, exercisable either at the time the option is granted or at
any time while the option remains outstanding, to extend the period of time for
which the option is to remain exercisable following the Optionee's cessation of
Service or death from the limited period in effect under subparagraph C.1.
above to such greater period of time as the Plan Administrator shall deem
appropriate. In no event, however, shall such option be exercisable after the
specified expiration date of the option term.
D. Stockholder Rights. An Optionee shall have no
stockholder rights with respect to any shares covered by the option until such
individual shall have exercised the option and paid the exercise price for the
purchased shares.
E. Repurchase Rights. The shares of Common Stock
acquired upon the exercise of any Article Two option grant may be subject to
repurchase by the Corporation in accordance with the following provisions:
1. The Plan Administrator shall have the
discretion to authorize the issuance of unvested shares of Common Stock under
this Article Two. Should the Optionee cease Service while holding such
unvested shares, the Corporation shall have the right to repurchase any or all
of those unvested shares at the exercise price paid per share. The terms and
conditions upon which such repurchase right shall be exercisable (including the
period and procedure for exercise and the appropriate vesting schedule for the
purchased shares) shall be established by the Plan Administrator and set forth
in the instrument evidencing such repurchase right.
2. All of the Corporation's outstanding
repurchase rights under this Article Two shall automatically terminate, and all
shares subject to such terminated rights shall immediately vest in full, upon
the occurrence of a Corporate Transaction, except to the extent: (i) such
repurchase right is expressly assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction or (ii) such termination
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
3. The Plan Administrator shall have the
discretionary authority, exercisable either before or after the Optionee's
cessation of Service, to cancel the Corporation's outstanding repurchase rights
with respect to one or more shares purchased or purchasable by the Optionee
under this Discretionary Option Grant Program and thereby accelerate the
vesting of such shares in whole or in part at any time.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable
to all Incentive Options granted under this Article Two. Incentive Options may
only be granted to
13.
<PAGE> 50
individuals who are Employees. Options which are specifically designated as
Non-Statutory Options when issued under the Plan shall not be subject to such
terms and conditions.
A. Dollar Limitation. The aggregate Fair Market Value
(determined as of the respective date or dates of grant) of the Common Stock
for which one or more options granted to any Employee under this Plan (or any
other option plan of the Corporation or its parent or subsidiary corporations)
may for the first time become exercisable as Incentive Options under the
Federal tax laws during any one calendar year shall not exceed the sum of One
Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2)
or more such options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability of such options
as Incentive Options under the Federal tax laws shall be applied on the basis
of the order in which such options are granted. Should the number of shares of
Common Stock for which any Incentive Option first becomes exercisable in any
calendar year exceed the applicable One Hundred Thousand Dollar ($100,000)
limitation, then that option may nevertheless be exercised in such calendar
year for the excess number of shares as a Non-Statutory Option under the
Federal tax laws.
B. 10% Stockholder. If any individual to whom an
Incentive Option is granted is the owner of stock (as determined under Section
424(d) of the Code) possessing ten percent (10%) or more of the total combined
voting power of all classes of stock of the Corporation or any one of its
parent or subsidiary corporations, then the exercise price per share shall not
be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the grant date, and the option term shall not exceed five
(5) years measured from the grant date.
Except as modified by the preceding provisions of this Section
II, the provisions of Articles One, Two and Five of the Plan shall apply to all
Incentive Options granted hereunder.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each
option which is at the time outstanding under this Article Two shall
automatically accelerate so that each such option shall, immediately prior to
the specified effective date for the Corporate Transaction, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares as fully vested shares of Common Stock. However, an outstanding option
under this Article Two shall NOT so accelerate if and to the extent: (i) such
option is, in connection with the Corporate Transaction, either to be assumed
by the successor corporation or parent thereof or to be replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation or parent thereof, (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the option
spread existing at the time of the Corporate Transaction and provides for
subsequent payout in accordance
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with the same vesting schedule applicable to such option or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant. The determination of option
comparability under clause (i) above shall be made by the Plan Administrator,
and its determination shall be final, binding and conclusive.
B. Immediately following the consummation of the
Corporate Transaction, all outstanding options under this Article Two shall
terminate and cease to remain outstanding, except to the extent assumed by the
successor corporation or its parent corporation.
C. Each outstanding option under this Article Two which
is assumed in connection with the Corporate Transaction shall be appropriately
adjusted, immediately after such Corporate Transaction, to apply and pertain to
the number and class of securities which would have been issued to the option
holder in consummation of such Corporate Transaction, had such person exercised
the option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share,
provided the aggregate exercise price payable for such securities shall remain
the same. In addition, the class and number of securities available for
issuance under the Plan on an aggregate and per participant basis following the
consummation of the Corporate Transaction shall be appropriately adjusted.
D. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide (upon such terms as it may deem
appropriate) for (i) the automatic acceleration of one or more outstanding
options granted under this Article Two which are assumed or replaced in the
Corporate Transaction and do not otherwise accelerate at that time and/or (ii)
the immediate termination of one or more of the Corporation's outstanding
repurchase rights which are assigned in connection with the Corporate
Transaction and do not otherwise terminate at that time, in the event the
Optionee's Service should subsequently terminate within a designated period
following such Corporate Transaction.
E. The Plan Administrator shall have the discretionary
authority, exercisable at the time the option is granted or at any time while
the option remains outstanding, to provide (upon such terms as it may deem
appropriate) for the automatic acceleration of one or more outstanding options
under this Article Two (and the immediate termination of one or more of the
Corporation's outstanding repurchase rights under this Article Two) upon the
occurrence of a Change in Control. The Plan Administrator shall also have full
power and authority to condition any such option acceleration (and the
termination of any outstanding repurchase rights) upon the subsequent
termination of the Optionee's Service within a specified period following the
Change in Control.
F. Any options accelerated in connection with the Change
in Control shall remain fully exercisable until the expiration or sooner
termination of the option term.
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G. The grant of options under this Article Two shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
H. The portion of any Incentive Option accelerated under
this Section III in connection with a Corporate Transaction or Change in
Control shall remain exercisable as an Incentive Option under the Federal tax
laws only to the extent the dollar limitation of Section II of this Article Two
is not exceeded. To the extent such dollar limitation is exceeded, the
accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under this Article Two and to
grant in substitution therefor new options under the Plan covering the same or
different numbers of shares of Common Stock but with an exercise price per
share not less than the Fair Market Value per share of Common Stock on the new
grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and
authority, exercisable in its sole discretion, to grant stock appreciation
rights to selected Optionees or other individuals eligible to receive option
grants under the Discretionary Option Grant Program.
B. Three types of stock appreciation rights shall be
authorized for issuance under the Plan: Tandem Stock Appreciation Rights
("Tandem Rights"), Independent Stock Appreciation Rights ("Independent Rights")
and Limited Stock Appreciation Rights ("Limited Rights").
C. The following terms and conditions shall govern the
grant and exercise of Tandem Rights under this Article Two.
1. One or more Optionees may be granted the
Tandem Right, exercisable upon such terms and conditions as the Plan
Administrator may establish, to elect between the exercise of the
underlying Article Two stock option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (i) the Fair Market
Value (on the option surrender date) of the number of shares in which
the Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (ii) the aggregate exercise price
payable for such vested shares.
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2. No such option surrender shall be effective
unless it is approved by the Plan Administrator, whether at the time
of such surrender or at any earlier time. If the surrender is so
approved, then the distribution to which the Optionee shall
accordingly become entitled under this Section V may be made in shares
of Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
3. If the surrender of an option is not approved
by the Plan Administrator, then the Optionee shall retain whatever
rights the Optionee had under the surrendered option (or surrendered
portion thereof) on the option surrender date and may exercise such
rights at any time prior to the later of (i) five (5) business days
after the receipt of the rejection notice or (ii) the last day on
which the option is otherwise exercisable in accordance with the terms
of the instrument evidencing such option, but in no event may such
rights be exercised more than ten (10) years after the date of the
option grant.
D. The following terms and conditions shall govern the
grant and exercise of Independent Rights under this Article Two:
1. One or more individuals eligible to
participate in the Discretionary Option Grant Program may be granted
an Independent Right not tied to any underlying Article Two stock
option. The Independent Right shall be exercisable upon such terms
and conditions as the Plan Administrator may establish and shall
entitle the holder to receive a distribution from the Corporation in
an amount equal to the excess of (i) the aggregate Fair Market Value
(on the exercise date of such right) of the shares of Common Stock
underlying the exercised right over (ii) the aggregate base price in
effect for those shares.
2. The number of shares of Common Stock
underlying the Independent Right and the base price in effect for
those shares shall be determined by the Plan Administrator in its sole
discretion at the time the Independent Right is granted. The base
price may not be less than the Fair Market Value (on the grant date of
the right) of the shares of Common Stock underlying that right.
3. The distribution to which the holder of the
Independent Right shall become entitled under this Section V may be
made in shares of Common Stock valued at Fair Market Value on the
exercise date of such right, in cash, or partly in shares and partly
in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
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E. The following terms and conditions shall govern the
grant and exercise of Limited Rights under this Article Two:
1. One or more officers of the Corporation
subject to the short-swing profit restrictions of the Federal
securities laws may, in the Plan Administrator's sole discretion, be
granted Limited Rights with respect to their outstanding options under
this Article Two.
2. Upon the occurrence of a Hostile Take-Over,
each such officer holding one or more options with such a Limited
Right shall have the unconditional right (exercisable for a thirty
(30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the
time exercisable for fully vested shares of Common Stock. The officer
shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over
Price of the vested shares of Common Stock at the time subject to each
surrendered option (or surrendered portion of such option) over (ii)
the aggregate exercise price payable for such vested shares. Such
cash distribution shall be made within five (5) days following the
option surrender date.
3. The Plan Administrator shall pre-approve, at
the time the Limited Right is granted, the subsequent exercise of that
right in accordance with the terms of the grant and the provisions of
this Section V. No additional approval of the Plan Administrator or
the Board shall be required at the time of the actual option surrender
and cash distribution. Any unsurrendered portion of the option shall
continue to remain outstanding and become exercisable in accordance
with the terms of the instrument evidencing such grant.
F. The shares of Common Stock subject to any stock
appreciation right exercised in accordance with this Section V shall NOT be
available for subsequent issuance under the Plan.
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ARTICLE THREE
PERFORMANCE SHARE PROGRAM
-------------------------
I. AWARD OF PERFORMANCE SHARES
A. The Plan Administrator shall have full power and
authority, subject to the provisions of this Article Three, to award
Performance Shares. Each Performance Share shall function as an "equity-type"
participating interest in the Corporation and shall entitle the Participant to
receive a payment equal to the Fair Market Value per share of Common Stock on
the date on which the Performance Share vests. The Plan Administrator may
condition vesting of Performance Shares upon the attainment of specified
performance goals or upon other such factors or criteria as the Plan
Administrator shall determine, including (without limitation) continued
Service, appreciation in the Fair Market Value of the Common Stock, increased
return on assets or earnings per share growth.
Performance objectives may vary from Participant to
Participant and among groups of Participants and shall be based upon such
corporate-wide, subsidiary, group or division factors or criteria as the Plan
Administrator may deem appropriate.
B. Each Participant who is awarded Performance Shares
shall be issued a written agreement evidencing the total number of Performance
Shares awarded him or her and the terms and conditions upon which such
Performance Shares are to vest and become payable.
C. The award of Performance Shares under this Article
Three shall not entitle the holder to any stockholder rights, including
(without limitation) any voting, dividend or liquidation rights, with respect
to the underlying shares of Common Stock which serve to determine the value of
the award.
D. The award of Performance Shares under this Article
Three shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
II. VESTING OF PERFORMANCE SHARES
A. No Performance Share shall vest prior to the first
anniversary of the date on which the Performance Share award is approved by the
Plan Administrator. Subject to the foregoing restriction, the Plan
Administrator shall have full power and discretion to establish the vesting
schedule applicable to the Performance Shares.
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<PAGE> 56
B. All unvested Performance Shares held by a Participant
at the time of his or her cessation of Service shall automatically terminate
and cease to be outstanding, without any payment due the Participant on the
terminated shares. However, the Plan Administrator shall have full and
complete discretion, exercisable at any time, to accelerate in whole or in part
the vesting schedule in effect for one or more Performance Shares held by a
Participant.
III. LIQUIDATION OF PERFORMANCE SHARES
A. A Participant's Performance Shares shall be
liquidated upon the occurrence of the vesting event applicable to those
Performance Shares, and the Participant shall accordingly become entitled to a
payment in an amount determined by multiplying the number of vested Performance
Shares by the Fair Market Value of those Performance Shares on the vesting
date.
B. Payment for the liquidated Performance Shares shall
be made to the Participant within thirty (30) days after the vesting event.
Payment may, in the Plan Administrator's sole discretion, be made in cash or
shares of Common Stock valued at Fair Market Value on the vesting date.
IV. CANCELLATION OF PERFORMANCE SHARES
Each outstanding Performance Share shall terminate, and each
Participant holding one or more Performance Shares shall cease to have any
further rights or benefit entitlement thereunder, upon the receipt of the
amount (if any) which becomes due and payable to such individual under the
liquidation provisions of Section III of this Article Three.
V. NON-TRANSFERABILITY/DEATH
Neither the Performance Shares issued under this Article Three
nor any rights or interests pertaining thereto may be transferred, assigned,
pledged or encumbered, other than a transfer effected pursuant to the
Participant's will or in accordance with the laws of descent and distribution
following the Participant's death. Any unpaid amounts due the Participant with
respect to vested Performance Shares liquidated prior to his or her death shall
be paid to the administrator or executor of such individual's estate.
VI. WITHHOLDING
All payments under this Article Three shall be subject to the
Corporation's collection of all applicable Federal, state and local income and
employment taxes required to be withheld therefrom.
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VII. UNFUNDED AND UNSECURED OBLIGATION
The Corporation's obligation to pay the amounts which become
due and payable under this Article Three shall at all times be an unfunded and
unsecured obligation of the Corporation, and no trust fund, escrow arrangement
or other segregated account shall be established as a funding vehicle for any
payments to be made hereunder. Accordingly, holders of Performance Shares
shall only have the status of general creditors with respect to any amounts
which may actually become due and payable to them under this Article Three and
shall look solely and exclusively to the general assets of the Corporation for
payment.
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ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate purchases without any intervening stock
option grants. The issued shares shall be evidenced by a Stock Issuance
Agreement ("Issuance Agreement") that complies with the terms and conditions of
this Article Four.
A. Consideration.
1. Shares of Common Stock shall be issued under
the Stock Issuance Program for one or more of the following items of
consideration which the Plan Administrator may deem appropriate in each
individual instance:
a. full payment in cash or check made payable
to the Corporation's order;
b. a promissory note payable to the
Corporation's order in one or more installments, which may be subject
to cancellation in whole or in part upon terms and conditions
established by the Plan Administrator; or
c. past services rendered to the Corporation or
any parent or subsidiary corporation.
2. The issued shares shall, in all instances, be
issued for consideration with a value equal to the Fair Market Value of such
shares at the time of issuance.
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the absolute discretion of the Plan Administrator, be
fully and immediately vested upon issuance or may vest in one or more
installments over the Participant's period of Service or upon the attainment of
performance milestones. The elements of the vesting schedule applicable to any
unvested shares of Common Stock issued under the Stock Issuance Program,
namely:
a. the Service period to be completed by the
Participant or the performance milestones to be achieved by the
Corporation or the Participant,
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b. the number of installments in which the
shares are to vest,
c. the interval or intervals (if any) which
are to lapse between installments, and
d. the effect which death, Permanent
Disability or other event designated by the Plan Administrator is to
have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the
Issuance Agreement executed by the Corporation and the Participant at the time
such unvested shares are issued. However, (i) in the event that the Plan
Administrator determines that certain performance objectives are to be achieved
before the shares vest, such shares may not vest sooner than one year following
the date of the stock issuance, and (ii) in the event that the issued shares
are to vest in installments over the Participant's period of Service, full
vesting of such shares may not occur within the three (3)-year period
immediately following the date of the stock issuance.
2. The Participant shall have full stockholder
rights with respect to any shares of Common Stock issued to him or her under
the Plan, whether or not his or her interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares. Any new, additional or
different shares of stock or other property (including money paid other than as
a regular cash dividend) which the Participant may have the right to receive
with respect to his or her unvested shares by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued, subject to (i) the same
vesting requirements applicable to his or her unvested shares and (ii) such
escrow arrangements as the Plan Administrator shall deem appropriate.
3. Should the Participant cease to remain in
Service while holding one or more unvested shares of Common Stock under the
Stock Issuance Program, then those shares shall be immediately surrendered to
the Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money promissory
note), the Corporation shall repay to the Participant the cash consideration
paid for the surrendered shares and shall cancel the unpaid principal balance
of any outstanding purchase-money note of the Participant attributable to such
surrendered shares.
4. The Plan Administrator may in its discretion
elect to waive the surrender and cancellation of one or more unvested shares of
Common Stock (or other assets attributable thereto) which would otherwise occur
upon the non-completion of the
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<PAGE> 60
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock
as to which the waiver applies. Such waiver may be effected at any time,
whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. Upon the occurrence of any Corporate Transaction, all
unvested shares of Common Stock at the time outstanding under this Stock
Issuance Program shall immediately vest in full and the Corporation's
repurchase rights shall terminate, except to the extent: (i) any such
repurchase right is expressly assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction or (ii) such termination
is precluded by other limitations imposed in the Issuance Agreement.
B. The Plan Administrator shall have the discretionary
authority to provide for the automatic vesting of one or more unvested shares
outstanding under the Stock Issuance Program (and the immediate termination of
the Corporation's repurchase rights with respect to those shares) at the time
of any Change in Control. The Plan Administrator shall also have full power
and authority to condition any such accelerated vesting upon the subsequent
termination of the Participant's Service within a specified period following
the Change in Control.
III. TRANSFER RESTRICTIONS/SHARE ESCROW
A. Unvested shares may, in the Plan Administrator's
discretion, be held in escrow by the Corporation until the Participant's
interest in such shares vests or may be issued directly to the Participant with
restrictive legends on the certificates evidencing those unvested shares.
B. The Participant shall have no right to transfer any
unvested shares of Common Stock issued to him or her under the Stock Issuance
Program. For purposes of this restriction, the term "transfer" shall include
(without limitation) any sale, pledge, assignment, encumbrance, gift or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be cancelled in
accordance with substantially the same procedure in effect under Section I.B.3
of this Article Four, and neither the Participant nor the proposed transferee
shall have any rights with respect to such cancelled shares. However, the
Participant shall have the right to make a gift of unvested shares acquired
under the Stock Issuance Program to his or her spouse or issue, including
adopted children, or to a trust established for such spouse or issue, provided
the donee of such shares delivers to the Corporation a written agreement to be
bound by all the provisions of the Stock Issuance Program and the Issuance
Agreement applicable to the gifted shares.
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ARTICLE FIVE
MISCELLANEOUS
-------------
I. LOANS OR INSTALLMENT PAYMENTS
A. The Plan Administrator may, in its discretion, assist
any Optionee or Participant, to the extent such Optionee or Participant is an
Employee (including an Optionee or Participant who is an officer of the
Corporation), in the exercise of one or more options granted to such Optionee
under the Discretionary Option Grant Program or the purchase of one or more
shares issued to such Participant under the Stock Issuance Program, including
the satisfaction of any Federal, state and local income and employment tax
obligations arising therefrom, by (i) authorizing the extension of a loan from
the Corporation to such Optionee or Participant or (ii) permitting the Optionee
or Participant to pay the exercise price or purchase price for the purchased
shares in installments. The terms of any loan or installment method of payment
(including the interest rate and terms of repayment) shall be upon such terms
as the Plan Administrator specifies in the applicable option or issuance
agreement or otherwise deems appropriate under the circumstances. Loans or
installment payments may be authorized with or without security or collateral.
However, the maximum credit available to the Optionee or Participant may not
exceed the exercise or purchase price of the acquired shares plus any Federal,
state and local income and employment tax liability incurred by the Optionee or
Participant in connection with the acquisition of such shares.
B. The Plan Administrator may, in its absolute
discretion, determine that one or more loans extended under this financial
assistance program shall be subject to forgiveness by the Corporation in whole
or in part upon such terms and conditions as the Plan Administrator may deem
appropriate.
II. AMENDMENT OF THE PLAN AND AWARDS
A. The Board has complete and exclusive power and
authority to amend or modify the Plan (or any component thereof) in any or all
respects whatsoever. However, no such amendment or modification shall
adversely affect rights and obligations with respect to options at the time
outstanding under the Plan, nor adversely affect the rights of any Participant
with respect to outstanding Performance Shares or unvested Common Stock under
the Performance Share or Stock Issuance Programs, unless the Optionee or
Participant consents to such amendment. In addition, certain amendments may
require stockholder approval pursuant to applicable laws or regulations.
B. In no event may Performance Shares be awarded under
Article Three which are in excess of the number of shares of Common Stock then
available for issuance under the Plan. Options to purchase shares of Common
Stock may be granted under
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the Discretionary Option Grant Program, and shares of Common Stock may be
issued under the Stock Issuance Program which are in both instances in excess
of the number of shares then available for issuance under the Plan, provided
any excess shares actually issued under the Discretionary Option Grant Program
or the Stock Issuance Program are held in escrow until stockholder approval is
obtained for a sufficient increase in the number of shares available for
issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess option grants or excess
stock issuances are made, then (i) any unexercised excess options shall
terminate and cease to be exercisable and (ii) the Corporation shall promptly
refund the purchase price paid for any excess shares actually issued under the
Plan and held in escrow, together with interest (at the applicable Short Term
Federal Rate) for the period the shares were held in escrow.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of stock options for such shares or the vesting
of such shares under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding
requirements.
B. The Plan Administrator may, in its discretion and at
any time, provide any or all holders of Non-Statutory Options or unvested
shares of Common Stock under the Plan with the right to use shares of Common
Stock in satisfaction of all or part of the Federal, state and local income and
employment tax liabilities incurred by such holders in connection with the
exercise of their options or the vesting of their shares (the "Taxes"). Such
right may be provided to any such holder in either or both of the following
formats:
Stock Withholding: The holder of the Non-Statutory
Option or unvested shares may be provided with the election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such Non-Statutory Option or the vesting of such shares, a
portion of those shares with an aggregate Fair Market Value to exceed one
hundred percent (100%) of the applicable Taxes.
Stock Delivery: The Plan Administrator may, in its
discretion, provide the holder of the Non-Statutory Option or the unvested
shares with the election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such individual (other than in connection
with the option exercise or share vesting triggering the Taxes) with an
aggregate Fair Market Value not to exceed one hundred percent (100%) of the
Taxes incurred in connection with such option exercise or share vesting.
IV. EFFECTIVE DATE AND TERM OF PLAN
A. This Plan was adopted by the Board on September 23,
1994 and was subsequently approved by the Corporation's sole stockholder. The
Plan became effective
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on August 10, 1995, the date on which the Underwriting Agreement for the
initial public offering of the Corporation's Common Stock was executed and
finally priced.
B. The Plan was amended by the Board on January 16, 1997
to effect the following changes: (i) increase the number of shares of Common
Stock authorized for issuance over the term of the Plan by an additional
700,000 shares, (ii) render the non-employee Board members eligible to receive
option grants, performance share awards and direct stock issuances under the
Plan, (iii) allow unvested shares issued under the Plan and subsequently
repurchased by the Corporation at the option exercise price or issue price paid
per share to be reissued under the Plan and (iv) effect a series of technical
changes to the provisions of the Plan in order to take advantage of the recent
amendments to Rule 16b-3 of the Securities Exchange Act of 1934 which exempts
certain officer and director transactions under the Plan from the short- swing
liability provisions of the federal securities laws. These amendments are
subject to stockholder approval at the 1997 Annual Meeting, and no option
grants made on the basis of the 700,000 share increase shall become exercisable
in whole or in part unless and until the January 1997 amendments are approved
by the stockholders. Should such stockholder approval not be obtained at the
1997 Annual Meeting, then each option grant, performance share award or direct
stock issuance made pursuant to the January 1997 share increase shall terminate
and cease to remain outstanding, and no further grants, awards, or issuances
shall be made on the basis of that share increase. However, the provisions of
the Plan as in effect immediately prior to the January 1997 amendments shall
automatically be reinstated, and option grants, performance share awards and
direct stock issuances may thereafter continue to be made pursuant to the
reinstated provisions of the Plan. All option grants, performance share awards
and direct stock issuances made prior to the January 1997 amendments shall
remain outstanding in accordance with the terms and conditions of the
respective instruments evidencing those options, awards or issuances, and
nothing in the January 1997 amendments shall be deemed to modify or in any way
affect those outstanding options, awards or issuances. Subject to the
foregoing limitations, the Plan Administrator may make option grants,
performance share awards and direct stock issuances under the Plan at any time
before the date fixed herein for the termination of the Plan.
C. The Plan shall terminate upon the earlier of (i)
September 22, 2004 unless sooner terminated by the Board and (ii) the date on
which all shares available for issuance under the Plan shall have been issued
or cancelled pursuant to the exercise of the stock options and stock
appreciation rights granted under the Discretionary Option Grant Program, the
award of Performance Shares under the Performance Share Program or the issuance
of shares (whether vested or unvested) under the Stock Issuance Program. If
the date of termination is determined under clause (i) above, then all stock
options, stock appreciation rights, Performance Shares and stock issuances
outstanding on such date shall thereafter continue to have force and effect in
accordance with the provisions of the instruments evidencing such grants or
issuances.
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V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares pursuant to option grants or stock issuances under the Plan shall be
used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any
stock option or stock appreciation right under the Discretionary Option Grant
Program, the award of any Performance Shares under the Performance Share
Program, the issuance of any shares under the Stock Issuance Program and the
issuance of Common Stock upon the exercise of the stock options or stock
appreciation rights granted hereunder shall each be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the stock options, stock
appreciation rights and Performance Shares granted under it and the Common
Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be
issued or delivered under this Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities
laws and all applicable listing requirements of any securities exchange on
which the Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the
Plan, nor any action taken by the Plan Administrator hereunder, nor any
provision of the Plan shall be construed so as to grant any individual the
right to remain in the Service of the Corporation (or any parent or subsidiary
corporation) for any period of specific duration, and the Corporation (or any
parent or subsidiary corporation retaining the services of such individual) may
terminate such individual's Service at any time and for any reason, with or
without cause.
VIII. MISCELLANEOUS PROVISIONS
A. Except to the extent otherwise expressly provided in
the Plan, the right to acquire Common Stock or other assets under the Plan may
not be assigned, encumbered or otherwise transferred by any Optionee or
Participant.
B. The provisions of the Plan relating to the exercise
of options and the vesting of shares shall be governed by the laws of the State
of California without resort to that State's conflict-of-laws rules, as such
laws are applied to contracts entered into and performed in such State.
28.
<PAGE> 65
C. The provisions of the Plan shall inure to the benefit
of, and be binding upon, the Corporation and its successors or assigns, whether
by Corporate Transaction or otherwise, and the Participants and the Optionees,
the legal representatives of their respective estates, their respective heirs
or legatees and their permitted assignees.
29.
<PAGE> 66
APPENDIX B
----------
1994 Directors Plan
<PAGE> 67
SUNSTONE HOTEL INVESTORS, INC.
1994 DIRECTORS PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
A. This 1994 Directors Plan (the "Plan") is intended to
promote the interests of Sunstone Hotel Investors, Inc., a Maryland corporation
or any successor corporation (the "Corporation"), by offering non-employee
members of the Board the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
B. The Plan will become effective immediately upon the
execution and final pricing of the Underwriting Agreement for the initial
public offering of the Corporation's Common Stock. The execution date of such
Underwriting Agreement is hereby designated as the Effective Date of the Plan.
II. DEFINITIONS
A. For purposes of the Plan, the following definitions
shall be in effect:
BOARD: the Corporation's Board of Directors.
CHANGE IN CONTROL: a change in ownership or control of the
Corporation effected through either of the following transactions:
a. the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders, or
b. a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been
<PAGE> 68
elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election
or nomination.
CODE: the Internal Revenue Code of 1986, as amended.
COMMON STOCK: shares of the Corporation's common stock.
CORPORATE TRANSACTION: any of the following
stockholder-approved transactions to which the Corporation is a party:
a. a merger or consolidation in which the
Corporation is not the surviving entity, except for a transaction the
principal purpose of which is to change the state in which the
Corporation is incorporated;
b. the sale, transfer or other disposition of
all or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation; or
c. any reverse merger in which the Corporation
is the surviving entity but in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities
immediately prior to such merger.
EFFECTIVE DATE: August 10, 1995, the date on which the
Underwriting Agreement for the initial public offering of the Corporation's
Common Stock was executed and finally priced.
EMPLOYEE: an individual who performs services while in the
employ of the Corporation or one or more parent or subsidiary corporations,
subject to the control and direction of the employer entity not only as to the
work to be performed but also as to the manner and method of performance.
EXERCISE DATE: the date on which the Corporation shall have
received written notice of the exercise of an option granted pursuant to the
Automatic Option Grant Program of Article Two.
FAIR MARKET VALUE: the value per share of Common Stock
determined in accordance with the following provisions:
a. If the Common Stock is at the time traded on
the Nasdaq National Market, the Fair Market Value shall be the closing
selling price per share on the date in question, as such price is
reported by the National
2.
<PAGE> 69
Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no reported closing selling price for
the Common Stock on the date in question, then the closing selling
price on the last preceding date for which such quotation exists shall
be determinative of Fair Market Value.
b. If the Common Stock is at the time listed or
admitted to trading on any national securities exchange, then the Fair
Market Value shall be the closing selling price per share on the date
in question on the securities exchange serving as the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
reported sale of Common Stock on such exchange on the date in
question, then the Fair Market Value shall be the closing selling
price on the exchange on the last preceding date for which such
quotation exists.
1933 ACT: the Securities Act of 1933, as amended.
1934 ACT: the Securities and Exchange Act of 1934, as amended
from time to time.
NON-STATUTORY OPTION: a stock option not intended to meet the
requirements of Code Section 422.
OPTIONEE: any person to whom an option is granted under the
Automatic Option Grant Program of Article Two.
PARTICIPANT: any person who receives a direct issuance of
Common Stock under the Automatic Stock Issuance Program of Article Three.
B. The following provisions shall be applicable in
determining the parent and subsidiary corporations of the Corporation:
Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a PARENT of the Corporation, provided each such
corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a SUBSIDIARY of the Corporation, provided each such
corporation in the
3.
<PAGE> 70
unbroken chain (other than the last corporation) owns, at the time of
the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the
other corporations in such chain.
III. STRUCTURE OF THE PLAN
A. Stock Programs. The Plan shall be divided into two
(2) separate components: the Automatic Option Grant Program specified in
Article Two and the Automatic Stock Issuance Program specified in Article
Three. Under the Automatic Option Grant Program, non- employee members of the
Board will automatically receive option grants to purchase shares of Common
Stock at periodic intervals over their period of Board service. Under the
Automatic Stock Issuance Program, non-employee members of the Board will
automatically receive direct issuances of Common Stock at periodic intervals
over their period of Board service.
B. General Provisions. Unless the context clearly
indicates otherwise, the provisions of Articles One and Four shall apply to
both the Automatic Option Grant Program and the Automatic Stock Issuance
Program and shall accordingly govern the interests of all individuals under the
Plan.
IV. ELIGIBILITY
A. Eligible Directors. The individuals eligible to
receive automatic option grants and direct stock issuances pursuant to the
provisions of this Plan shall be limited to (i) those individuals who are
serving as non-employee members of the Board on the Effective Date, (ii) those
individuals who are first elected or appointed as non-employee Board members
after the Effective Date, whether through appointment by the Board or election
by the Corporation's stockholders, (iii) those individuals who continue to
serve as non-employee Board members at one or more annual stockholders
meetings, beginning with the 1995 Annual Meeting, whether or not such
individuals commenced Board service prior to the Effective Date, and (iv) those
individuals who cease to serve as non-employee Board members at any time after
the Effective Date but who are subsequently re-elected as non-employee Board
members, whether through appointment by the Board or election by the
Corporation's stockholders.
With the exception of Mr. C. Robert Enever, a non-employee
Board member shall not be eligible to receive an automatic option grant or
stock issuance under this Plan if such individual is, on the date of the option
grant or direct stock issuance, an Employee of any parent or subsidiary of the
Corporation. Any non-employee Board member eligible to participate in the Plan
pursuant to the foregoing criteria shall be designated an Eligible Director.
4.
<PAGE> 71
V. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for
issuance under the Plan and shall be drawn from either the Corporation's
authorized but unissued shares of Common Stock or from reacquired shares of
Common Stock, including shares repurchased by the Corporation on the open
market. The maximum number of shares of Common Stock which may be issued over
the term of the Plan shall not exceed 150,000 shares, subject to adjustment
from time to time in accordance with the provisions of this Section V.
B. Should the number of shares which remain available
for issuance under the Plan not be sufficient for the automatic option grants
and stock issuances to be made at a particular time, then the available shares
shall be allocated proportionately among all the automatic option grants and
stock issuances to be made at that time.
C. Should one or more outstanding options under the
Automatic Option Grant Program expire or terminate for any reason prior to
exercise in full, then the shares subject to the portion of each option not so
exercised shall be available for subsequent issuance under the Plan. In
addition, unvested shares issued under the Plan and subsequently cancelled
pursuant to the provisions in Section III.B.3 of Article Three, shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. All other
share issuances under the Plan shall reduce on a share-for-share basis the
number of shares of Common Stock available for subsequent issuance under the
Plan. Should the exercise price of an outstanding option under the Automatic
Option Grant Program be paid with shares of Common Stock, then the number of
shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised, and not by the
net number of shares actually issued to the holder of such option.
D. Should any change be made to the Common Stock
issuable under the Plan by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, then appropriate adjustments will be made to (i) the
maximum number and/or class of securities available for issuance under the
Plan, (ii) the number and/or class of securities to be made the subject of each
subsequent automatic option grant and direct stock issuance, (iii) the number
and/or class of securities purchasable under each outstanding option and the
exercise price payable per share and (iv) the aggregate number and/or class of
securities which may be made the subject of automatic option grants and direct
stock issuances in any calendar year. Such adjustments to the outstanding
options are to be effected in a manner which shall preclude the dilution or
enlargement of rights and benefits under such options.
5.
<PAGE> 72
ARTICLE TWO
AUTOMATIC OPTION GRANT PROGRAM
I. GRANT DATES
Option grants shall be made under this Article Two on the
dates specified below:
A. Initial Grant.
1. On the date of the first Board meeting
following the first annual meeting of the Corporation's stockholders held after
the Effective Date, each individual serving as an Eligible Director on the
Effective Date shall automatically be granted on the date of such Board meeting
a Non-Statutory Option to purchase 1,500 shares of Common Stock upon the terms
and conditions of this Article Two, provided such individual continues to serve
as an Eligible Director through the date of such Board meeting.
2. Each individual who first becomes an Eligible
Director after the Effective Date shall automatically be granted, on the date
of the first Board meeting following the annual meeting of the Corporation's
stockholders at which such individual is first elected as a Board member by the
Corporation's stockholders, a Non-Statutory Option to purchase 1,500 shares of
Common Stock upon the terms and conditions of this Article Two, provided such
individual continues to serve as an Eligible Director through the date of such
Board meeting.
B. Annual Grant. On each anniversary of the later of
(i) the Effective Date or (ii) the date on which the Eligible Director was
first elected or appointed as a Board member, such individual shall
automatically be granted a Non-Statutory Option to purchase an additional 1,500
shares of Common Stock upon the terms and conditions of this Article Two,
provided such individual continues to serve as an Eligible Director through
such anniversary date.
C. Re-election Grant. Each Eligible Director who ceases
to serve on the Board at any time after the Effective Date but who is
subsequently re-elected to the Board, whether through appointment by the Board
or election by the Corporation's stockholders, shall automatically be granted,
on the date of the first Board meeting following the annual meeting of the
Corporation's stockholders at which such individual is re-elected as a Board
member by the stockholders, a Non-statutory Option to purchase 1,500 shares of
Common Stock upon the terms and conditions of this Article Two, provided such
individual continues to serve as an Eligible Director through the date of such
Board meeting.
6.
<PAGE> 73
D. The number of shares for which the automatic option
grants are to be made to each newly elected or continuing Eligible Director
shall be subject to periodic adjustment pursuant to the applicable provisions
of Section V.E. of Article One.
II. EXERCISE PRICE
The exercise price per share of Common Stock subject to each
automatic option grant made under this Article Two shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on
the automatic grant date.
III. PAYMENT
The exercise price shall be payable in one of the alternative
forms specified below:
1. full payment in cash or check made payable to
the Corporation's order;
2. full payment in shares of Common Stock held
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date;
3. full payment in a combination of shares of
Common Stock held for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date and cash or check
made payable to the Corporation's order; or
4. full payment through a sale and remittance
procedure pursuant to which the option holder shall provide concurrent
irrevocable written instructions (i) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares
and remit to the Corporation, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate exercise
price payable for the purchased shares and (ii) to the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
IV. OPTION TERM
Each automatic grant under this Article Two shall have a
maximum term of ten (10) years measured from the automatic grant date and shall
accordingly terminate and cease to be outstanding for any option shares at the
close of business on the day
7.
<PAGE> 74
immediately preceding the tenth (10th) anniversary of the automatic grant date,
unless sooner terminated in accordance with the provisions of Section VIII of
this Article Two.
V. EXERCISABILITY/VESTING
Each automatic grant shall be immediately exercisable for any
or all of the option shares and shall remain so exercisable until the
expiration date of such option, whether or not the Optionee continues to serve
as a Board member. The option shares shall be fully vested.
VI. LIMITED TRANSFERABILITY
Each option granted under the Automatic Option Grant Program
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment.
VII. STOCKHOLDER RIGHTS
The holder of an automatic option grant under this Article Two
shall have none of the rights of a stockholder with respect to the shares
subject to that option until such individual shall have exercised the option
and paid the exercise price for the purchased shares.
VIII. CORPORATE TRANSACTION
A. Immediately following the consummation of a Corporate
Transaction, all automatic option grants outstanding under this Article Two
shall terminate and cease to be outstanding, except to the extent assumed by
the successor corporation or its parent company.
B. Each outstanding option under this Article Two which
is assumed in connection with a Corporate Transaction shall be appropriately
adjusted, immediately after such Corporate Transaction, to apply and pertain to
the number and class of securities which would have been issued to the option
holder in consummation of such Corporate Transaction, had such person exercised
the option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share,
provided the aggregate exercise price payable for such securities shall remain
the same. In addition, the class and number of securities available for
issuance under the Plan on both an aggregate and per calendar year basis
following the consummation of the Corporate Transaction shall be appropriately
adjusted.
8.
<PAGE> 75
IX. REMAINING TERMS
The remaining terms and conditions of each automatic option
grant shall be as set forth in the form Automatic Stock Option Agreement
attached as Exhibit A.
9.
<PAGE> 76
ARTICLE THREE
AUTOMATIC STOCK ISSUANCE PROGRAM
I. AWARD DATES
Direct stock issuances shall be made under this Article Three
on the dates specified below:
A. Initial Award.
1. Each individual serving as an Eligible
Director of the Corporation on the Effective Date shall automatically receive
on such date a direct stock issuance of 1,500 shares of Common Stock upon the
terms and conditions of this Article Three (the "Effective Date Awards").
2. Each individual who first becomes an Eligible
Director after the Effective Date, whether through election by the stockholders
or appointment by the Board, shall automatically receive, on the date of the
first Board meeting following the annual meeting of the Corporation's
stockholders at which such individual is first elected as a Board member by the
stockholders, a direct stock issuance of 1,500 shares of Common Stock upon the
terms and conditions of this Article Three, provided such individual continues
to serve as an Eligible Director through the date of such Board meeting.
B. Annual Award. Effective as of the date of the 1997
Annual Meeting, on each anniversary of the later of (i) the Effective Date or
(ii) the date on which the Eligible Director was first elected or appointed as
a Board member, such individual shall automatically receive a direct stock
issuance of an additional 1,500 shares of Common Stock, provided such
individual continues to serve as a Board member through such anniversary date.
C. Award on Re-election. Each Eligible Director who
ceases to serve on the Board at any time after the date of the 1997 Annual
Meeting but who is subsequently re-elected to the Board whether through
appointment by the Board or election by the Corporation's stockholders shall,
on the date of the first Board meeting following the annual meeting of the
Corporation's stockholders at which such individual is first re-elected as a
Board member by the stockholders, automatically receive a direct stock issuance
of an additional 1,500 shares of Common Stock, provided such individual
continues to serve as an Eligible Director through the date of such Board
meeting.
D. The number of shares for which the automatic stock
issuances are to be made to each newly elected or continuing Eligible Director
shall be subject to periodic adjustment pursuant to the applicable provisions
of Section V.E. of Article One.
10.
<PAGE> 77
II. CONSIDERATION
The shares of Common Stock issued under this Article Three
shall be issued in consideration for services rendered the Corporation by the
Participant.
III. VESTING PROVISIONS
A. Effective Date Awards. The shares of Common Stock
issued under this Article Three pursuant to the Effective Date Awards shall be
fully vested upon issuance.
B. Awards Made After the Effective Date.
1. The shares of Common Stock issued under this
Article Three after the Effective Date shall be unvested. Upon completion by
the Participant of six (6) months of service as a Board member following the
award date of the shares, such shares shall become fully vested shares of
Common Stock.
2. Any new, substituted or additional securities
or other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) the escrow provisions of Section V of this Article Three.
3. Should the Participant cease to remain in
Board service prior to the expiration of the six (6)-month period specified in
Section III.B.1 of this Article Three, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further stockholder rights with respect to those shares.
C. Stockholder Rights. The Participant shall have full
stockholder rights with respect to any shares of Common Stock issued to the
Participant under this Article Three whether or not the Participant's interest
in those shares is vested. Accordingly, the Participant shall have the right
to vote such shares and to receive any regular cash dividends paid on such
shares.
IV. CORPORATE TRANSACTION/CHANGE IN CONTROL
In the event of a Corporate Transaction or a Change in
Control, all of the shares of Common Stock issued under this Article Three
shall immediately vest in full.
11.
<PAGE> 78
V. SHARE ESCROW/LEGENDS
Unvested shares shall be held in escrow by the Corporation
until the Participant's interest in such shares vests.
VI. REMAINING TERMS
The remaining terms and conditions of each automatic direct
stock issuance made under this Article Three shall be as set forth in the form
Automatic Direct Stock Issuance Agreements attached as Exhibit B.
12.
<PAGE> 79
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
I. AMENDMENT OF THE PLAN
The provisions of this Plan, together with the automatic
option grants outstanding under Article Two, may not be amended at intervals
more frequently than once every six (6) months, other than to the extent
necessary to comply with applicable requirements of the Federal income tax laws
and regulations. However, no such amendment or modification shall adversely
affect rights and obligations with respect to options on unvested stock
issuances at the time outstanding under the Plan, unless the Optionee consents
to such amendment. In addition, certain amendments may require stockholder
approval pursuant to applicable laws or regulations.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was adopted by the Board on September 23,
1994 and approved by the Corporation's stockholders on August 9, 1995. The
Plan became effective on August 10, 1995, the date on which the Underwriting
Agreement with respect to the initial public offering of the Corporation's
Common Stock was executed and finally priced.
B. On August 9, 1995, the Board approved an amendment to
the Plan to impose a six (6)-month vesting requirement on all shares issued
under the Automatic Stock Issuance Program after the Effective Date.
C. The Plan was amended by the Board on January 16, 1997
to effect the following changes: (i) render the non-employee Board members
eligible to receive option grants, direct stock issuances or any other grant
under any other plan of the Corporation, (ii) allow unvested shares issued
under the Plan and subsequently surrendered to the Corporation to be reissued
under the Plan and (iii) effect a series of technical changes to the provisions
of the Plan (including stockholder approval requirements) in order to take
advantage of the recent amendments to Rule 16b-3 of the Securities Exchange Act
of 1934 which exempts certain officer and director transactions under the Plan
from the short-swing liability provisions of the federal securities laws. Some
of these amendments are subject to stockholder approval at the 1997 Annual
Meeting. Should such stockholder approval not be obtained at the 1997 Annual
Meeting, then the provisions of the Plan as in effect immediately prior to the
January 1997 amendments shall automatically be reinstated, and automatic option
grants and direct stock issuances may thereafter continue to be made pursuant
to the reinstated provisions of the Plan. All automatic option grants and
direct stock issuances made prior to the January 1997 amendments shall remain
outstanding in
13.
<PAGE> 80
accordance with the terms and conditions of the respective instruments
evidencing those options or issuances, and nothing in the January 1997
amendments shall be deemed to modify or in any way affect those outstanding
options or issuances.
D. The Plan shall terminate upon the earliest to occur
of (i) September 22, 2004 unless sooner terminated by the Board and (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise of the automatic option grants made under the
Automatic Option Grant Program of Article Two or the direct issuance of shares
under the Automatic Stock Issuance Program of Article Three (whether vested or
unvested). If the date of termination is determined under clause (i) above,
then any option grants and unvested stock issuances outstanding on such date
shall not be affected by the termination of the Plan and shall continue to have
force and effect in accordance with the provisions of the instruments
evidencing those grants.
III. CASH PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares pursuant to the automatic grants or stock issuances made under the Plan
shall be used for general corporate purposes.
IV. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any
option under the Automatic Option Grant Program, the issuance of Common Stock
upon the exercise of any such option and the issuance of Common Stock under the
Automatic Stock Issuance Program shall each be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the stock options granted under it and the
Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be
issued or delivered under this Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities
laws and all applicable listing requirements of any securities exchange on
which the Common Stock is then listed for trading.
V. NO IMPAIRMENT OF RIGHTS
No provision of the Plan shall in any way be construed or
interpreted so as to affect adversely or otherwise impair the right of the
Corporation or the stockholders to remove any Optionee or Participant from the
Board at any time in accordance with the provisions of applicable law.
14.
<PAGE> 81
VI. MISCELLANEOUS PROVISIONS
A. Except to the extent otherwise expressly provided in
the Plan, the right to acquire Common Stock or other assets under the Plan may
not be assigned, encumbered or otherwise transferred by any Optionee.
B. The provisions of the Plan relating to the exercise
of options shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules, as such laws are applied to
contracts entered into and performed in such State.
C. The provisions of the Plan shall inure to the benefit
of, and be binding upon, the Corporation and its successors or assigns, whether
by Corporate Transaction or otherwise and the Optionees and Participants, the
legal representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.
15.
<PAGE> 82
FORM OF PROXY
SUNSTONE HOTEL INVESTORS
PROXY
ANNUAL MEETING OF STOCKHOLDERS, APRIL 17, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of Annual Meeting of Stockholders To Be Held On April 17, 1997 and the
accompanying Proxy Statement, and appoints Robert A. Alter, Charles L.
Biederman, C. Robert Enever, David Lambert, H. Raymond Bingham, Laurence S.
Geller, Fredric H. Gould and Edward H. Sondker, and each of them, the proxy of
the undersigned, with full power of substitution, to vote all shares of the
Common Stock of Sunstone Hotel Investors, Inc., which the undersigned is
entitled to vote, either on his own or her own behalf, or on behalf of an entity
or entities, at the Annual Meeting of Stockholders of Sunstone Hotel Investors,
Inc. to be held at the Residence Inn Hotel located at 2101 West Vineyard Avenue,
Oxnard, California 93030, on April 17, 1997, at 9:00 a.m. local time, and at any
adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if present thereat. The Shares represented by this
Proxy shall be voted in the following manner:
1. To ratify the amendment of the Company's Charter to change the definition
of "Independent Director":
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To elect the following directors to serve for a term of three years:
WITHHOLD
FOR AUTHORITY TO VOTE
Charles L. Biederman [ ] [ ]
H. Raymond Bingham [ ] [ ]
Laurence S. Geller [ ] [ ]
3. To ratify the amendment of the 1994 Stock Incentive Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To ratify the amendment of the 1994 Directors Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. In their discretion, the proxies are authorized to vote upon matters not
known to the Board of Directors as of the date of the accompanying proxy
statement, approval of minutes of the prior annual meeting, matters
incident to the conduct of the meeting and to vote for any nominee of the
Board whose nomination results from the inability of any of the above
named nominees to serve.
In addition, the proxies are authorized, in their discretion, to vote
upon such other matters as may properly come before the Annual Meeting. The
Board of Directors recommends a vote FOR the nominees listed above and FOR
Proposals 1, 3, and 4. This Proxy, when properly executed, will be voted as
specified above. THIS PROXY WILL BE VOTED FOR THE NOMINEES LISTED ABOVE AND FOR
PROPOSALS 1, 3, AND 4 IF NO SPECIFICATION IS MADE.
<PAGE> 83
Dated: ________________, 1997
- -----------------------------------------------
(Print name(s) as it/they appear on certificates)
- -----------------------------------------------
Please print the name(s) appearing on each share certificate(s) over which you
have voting authority.
PLEASE RETURN YOUR EXECUTED PROXY TO U.S.
STOCK TRANSFER CORPORATION IN THE ENCLOSED
SELF-ADDRESSED, POSTAGE PRE-PAID ENVELOPE.
