<PAGE> 1
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.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Sunstone Hotel Investors, Inc.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
N/A
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
<PAGE> 2
(4) Proposed maximum aggregate value of transaction:
N/A
- --------------------------------------------------------------------------------
(5) Total fee paid:
N/A
- --------------------------------------------------------------------------------
[ ] 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.
<PAGE> 3
(1) Amount previously paid:
N/A
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
N/A
- --------------------------------------------------------------------------------
(3) Filing Party:
N/A
- --------------------------------------------------------------------------------
(4) Date Filed:
*
- --------------------------------------------------------------------------------
<PAGE> 4
================================================================================
---------------------------------
SUNSTONE HOTEL INVESTORS, INC.
PRELIMINARY PROXY STATEMENT
---------------------------------
================================================================================
<PAGE> 5
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 Friday, April
17, 1998, at 9:00 a.m. Pacific Standard Time. The Annual Meeting will be held at
the Holiday Inn Select, located at One South Grady Way, Renton, Washington
98055.
At the meeting you will be asked to consider and vote upon the following
proposals: (i) the amendment of the Company's Articles of Incorporation to
increase the authorized shares; (ii) the amendment of the Company's Articles of
Incorporation to increase the maximum number of directors; (iii) the election of
three individuals to serve on the Company's Board of Directors until 2001; and
(iv) the amendment of the Company's 1994 Stock Incentive 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 13, 1998
[SIG]
ROBERT A. ALTER
Chairman and President
<PAGE> 6
SUNSTONE HOTEL INVESTORS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 17, 1998
To the Stockholders of Sunstone Hotel Investors, Inc.:
Notice is hereby given that the 1998 Annual Meeting of Stockholders (the
"Annual Meeting") of Sunstone Hotel Investors, Inc. ("Sunstone" or the
"Company"), will be held at the Holiday Inn Select, located at One South Grady
Way, Renton, Washington 98055, commencing at 9:00 a.m. Pacific Standard Time, on
April 17, 1998 for the following purposes:
1. To approve an amendment to the Company's Articles of Incorporation
to increase the number of shares of Common Stock authorized for
issuance thereunder by an additional 50,000,000 to a total of 150,000,000
shares of Common Stock and to increase the number of shares of Preferred
Stock authorized for issuance thereunder by an additional 10,000,000 to a
total of 20,000,000 shares of Preferred Stock;
2. To approve an amendment to the Company's Articles of Incorporation
to increase the maximum number of directors from nine to twelve;
3. To elect three directors to serve for three-year terms until the
2001 Annual Meeting;
4. To approve an amendment to the Company's 1994 Stock Incentive Plan
to increase the number of shares of the Company's common stock
authorized for issuance under such Plan by an additional 1,200,000 shares;
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 9, 1998 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. Only stockholders of record at such
time will be so entitled to vote.
You are cordially invited to attend the Annual Meeting in person. Even if
you plan to attend the Annual Meeting, please promptly complete, sign, date and
return the enclosed proxy card in the enclosed self-addressed, postage pre-paid
envelope. It will assist us in keeping down the expenses of the Annual Meeting
if all stockholders, whether you own a few shares or many shares, return your
signed proxies promptly.
YOUR VOTE IS IMPORTANT
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ENTITLED TO VOTE AT
THE ANNUAL MEETING MUST BE REPRESENTED AT THE ANNUAL MEETING, IN PERSON OR BY
PROXY, IN ORDER TO CONSTITUTE A QUORUM AT THE ANNUAL MEETING. PLEASE RETURN YOUR
PROXY CARD IN ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE
ADDITIONAL COSTS TO THE COMPANY OF ADJOURNING THE ANNUAL MEETING AND
RESOLICITING PROXIES.
By Order of the Board of Directors,
[SIG]
ROBERT A. ALTER
Secretary
San Clemente, California
March 12, 1998
<PAGE> 7
SUNSTONE HOTEL INVESTORS, INC.
115 CALLE DE INDUSTRIAS, SUITE 201
SAN CLEMENTE, CA 92672
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 17, 1998
------------------------
PROXY STATEMENT
------------------------
GENERAL INFORMATION
This Proxy Statement is furnished to stockholders of Sunstone Hotel
Investors, Inc., a Maryland corporation ("Sunstone" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors for use at
the Annual Meeting of Stockholders to be held on Friday, April 17, 1998, 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 Holiday
Inn -- Harbor View, located at 1617 First Avenue, San Diego, California 92101.
These proxy solicitation materials are first being mailed on or about March
16, 1998 to all stockholders entitled to vote at the Annual Meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (sent to the
attention of Robert A. Alter) a written notice of revocation or a duly executed
proxy bearing a later date, or by attending the Annual Meeting and voting in
person. Attendance at the meeting will not, by itself, revoke a proxy.
VOTING AND SOLICITATION
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. In addition, the Company has retained Chase Mellon
Shareholder Services, LLC to act as a proxy solicitor in conjunction with the
Annual Meeting. Under the terms of an agreement dated February 27, 1998, the
Company has agreed to pay $6,000 to Chase Mellon Shareholder Services, LLC for
proxy solicitation services. The Company may conduct further solicitation
personally or telephonically through its officers, directors and regular
employees, none of whom will receive additional compensation for assisting with
the solicitation.
Only stockholders of record at the close of business on March 9, 1998 are
entitled to notice of and to vote at the Annual Meeting. As of February 24,
1998, 37,503,851 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 9, 1998.
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 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
1
<PAGE> 8
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 amendment of the Company Charter to
increase the authorized shares as specified below; 2) the amendment of the
Company Charter to increase the maximum number of directors as specified below;
3) the election of the three nominees listed below; and 4) the amendment of the
1994 Stock Incentive 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 INCREASE IN AUTHORIZED SHARES
The present capital structure of the Company authorizes 100,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock each having a par value
of $.01 per share. The Board of Directors believes this capital structure is
inadequate for the present and future needs of the Company. Therefore, the Board
of Directors has unanimously approved the amendment of the Company's Amended
Articles of Incorporation ("Articles") to increase the authorized number of
shares of Common Stock from 100,000,000 shares to 150,000,000 shares and the
authorized number of shares of Preferred Stock from 10,000,000 shares to
20,000,000 shares. The Board believes this capital structure more appropriately
reflects the present and future needs of the Company and recommends such
amendment to the Company's stockholders for adoption. The undesignated Preferred
Stock may be issued from time to time in one or more series with such rights
preferences and privileges as may be determined by the Board of Directors. On
February 24, 1998, 37,503,851 shares of Common Stock were outstanding and 250,00
shares of Preferred Stock were outstanding.
Authorizing an additional 50,000,000 shares of Common Stock would give the
Board of Directors the express authority, without further action of the
stockholders, to issue such Common Stock from time to time as the Board of
Directors deems necessary. The Board of Directors believes it is necessary to
have the ability to issue such additional shares of Common Stock for general
corporate purposes. The Company, in order to qualify as a REIT, is required to
distribute dividends (other than capital gain dividends) to its stockholders in
an amount at least equal to (1) the sum of (A) 95% of its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. In addition, to
this limitation, the Company may not incur or suffer to exist indebtedness in an
amount in excess of 50% of the Company's investment in hotel properties, at its
cost, on a consolidated basis after giving effect to the Company's use of
proceeds from any indebtedness. Because of the inability to retain earnings due
to its REIT tax status and the limitation on indebtedness, the Company must
issue Common Stock or Preferred Stock to continue to finance its growth
strategy. Potential uses of the additional authorized shares may include
acquisition transactions, equity financings, stock dividends or distributions,
issuance of options pursuant to the Company's 1994 Stock Incentive Plan and
issuances of Common Stock pursuant to the 1994 Directors Plan, each without
further action by the stockholders, unless such action were specifically
required by applicable law or rules of any stock exchange on which the company's
securities may then be listed.
2
<PAGE> 9
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's stockholders depending upon the
exact nature and circumstances of any actual issuances of authorized by unissued
shares. The increase could have an anti-takeover effect, in that additional
shares could be issued (within the limits imposed by applicable law) in one or
more transactions that could make a change in control or takeover of the Company
more difficult. For example, additional shares could be issued by the Company so
as to dilute the stock ownership or voting rights of persons seeking to obtain
control of the Company. Similarly, the issuance of additional shares to certain
persons allied with the Company's management by diluting the stock ownership or
voting rights of persons seeking to cause such removal. In addition, an issuance
of additional shares by the Company could have an effect on the potential
realizable value of a stockholder's investment. In the absence of a
proportionate increase in the Company's earnings and book value, an increase in
the aggregate number of outstanding shares of the Company caused by the issuance
of the additional shares would dilute the earnings per share and book value per
share of all outstanding shares of the Company's Common Stock. If such factors
were reflected in the price per share of Common Stock, the potential realizable
value of a stockholder's investment could be adversely affected. The Common
Stock carries no preemptive rights to purchase additional shares.
The Preferred Stock may be issued in such classes or series as the Board of
Directors may determine and the Board of Directors may establish from time to
time the number of shares of Preferred Stock to be included in any such class or
series and to fix the designation and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of any such class or
series, and such other subjects or matters as may be fixed by resolution of the
Board of Directors. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company or other
transaction in which holders of shares of Common Stock might receive a premium
for such shares over the market price.
The proposed amendment of the Company's Articles was approved by a
unanimous vote of the directors of the Company on January 16, 1998.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE COMPANY'S ARTICLES AUTHORIZING 50,000,000 ADDITIONAL SHARES OF
COMMON STOCK AND 10,000,000 ADDITIONAL SHARES OF PREFERRED STOCK. PURSUANT TO
THE ARTICLES, THE AFFIRMATIVE VOTE OF A MAJORITY OF ALL VOTES ENTITLED TO BE
CAST BY THE STOCKHOLDERS OF THE CORPORATION IS REQUIRED TO APPROVE THE PROPOSED
AMENDMENT.
PROPOSAL 2:
APPROVAL OF CHARTER AMENDMENT
REGARDING MAXIMUM NUMBER OF DIRECTORS
GENERAL
Section 1(a) of Article VI of the Company's Articles currently provides
that the authorized number of directors shall not be less than three (3) nor
more than nine (9). The Board of Directors has adopted, subject to stockholder
approval, an amendment to the Articles that would increase the specified limits
of the authorized number of directors to not be less than nine (9) nor more than
twelve (12), with the exact number of directors to be fixed from time to time by
the stockholders or by the affirmative vote of at least 80% of the Board of
Directors.
The exact number of directors presently authorized is nine (9).
The Board of Directors believes that this proposed amendment will enable
the Board to take timely advantage of the availability of well-qualified
candidates for appointment to the Board, in particular,
3
<PAGE> 10
candidates from outside the Company whose skills and experience will benefit the
Company. Accordingly, it is proposed that Section 1(a) of Article VI of the
Articles of the Company be amended to read as follows:
"Section 1. Number and Qualification of Directors.
(a) Authorized Number. The number of Directors of the Corporation
shall not be less than nine (9) nor more than twelve (12), with the exact
number of Directors to be fixed from time to time by the shareholders or by
the affirmative vote of at least 80% of the Board of Directors but shall
never be less than the minimum number permitted by the General Laws of the
State of Maryland now or hereafter in force. The exact number of directors
presently authorized shall be nine (9) until changed within such specified
limit in manner prescribed above. A director need not be a shareholder."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the stockholders vote FOR the
amendment to the Company's Charter increasing the maximum number of directors to
twelve. Pursuant to the Charter, the affirmative vote of 66 2/3% of the
outstanding shares of each of Common Stock (and Preferred Stock on an as
converted basis) and Preferred Stock, each voting as a class, is required to
approve the proposed amendment.
PROPOSAL 3:
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 1999 (Class III), 2000 (Class II) or 2001 (Class
I) 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 I directors of the
Company until the 2001 Annual Meeting: Messrs. Alter, Gould and Kazilionis. 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. ALTER, GOULD AND KAZILIONIS TO SERVE AS DIRECTORS OF
THE COMPANY UNTIL THE 2001 ANNUAL MEETING, AT WHICH TIME THEIR SUCCESSORS WILL
BE ELECTED AND QUALIFIED.
Certain information about Messrs. Alter, Gould and Kazilionis is set forth
below.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ----------------------------------- --- ----------------------------------- --------------
<S> <C> <C> <C>
Robert A. Alter(1)................. 47 President, Chief Executive 1994
Officer and Secretary
Sunstone Hotel Investors, Inc.
Fredric H. Gould(2)(3)............. 62 General Partner 1995
Gould Investors, L.P.
Paul D. Kazilionis................. 40 Managing Principal of 1997
Westbrook Partners
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
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,
4
<PAGE> 11
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 is President of Riverside Hotel
Partners and a Partner of Southeast Aurora Hotel Venture. Mr. Alter holds a
Bachelor of Science degree in Hotel Administration from Cornell University.
Mr. Gould has served as a director since August 1995. Mr. Gould has served
for the past six years as General Partner of Gould Investors L.P., a master
limited partnership engaged in the ownership and operation of various types of
income-producing real property located throughout the United States and which
holds substantial interests in publicly held real estate investment trusts and
savings and commercial banks. In addition, Mr. Gould is currently the Chairman
of the Board of Trustees of BRT Realty Trust, a publicly-traded mortgage real
estate investment trust, Chairman of the Board of Directors of One Liberty
Properties, Inc., President of REIT Management Corporation, President of
Majestic Property Management Corporation and Chairman of Georgetown Partners,
Inc. Mr. Gould holds a Bachelor of Business Administration from Lehigh
University and an L.L.B. from New York Law School.
Mr. Kazilionis has served as a director since October 1997. From April 1994
until the present, Mr. Kazilionis has been a Managing Principal of Westbrook
Real Estate Partners, L.L.C., a real estate investment management company. Prior
to co-founding Westbrook Partners, Mr. Kazilionis spent 12 years at Morgan
Stanley and Company serving most recently as Managing Director and President of
the General Partner of the Morgan Stanley Real Estate Fund, through which Morgan
Stanley conducted its principal real estate investment activities. Mr.
Kazilionis is also a Director of Berkshire Realty Company, Inc. and Sarakreek
Holding, N.V. Mr. Kazilionis received a Bachelor of Arts degree from Colby
College in 1979 and a Masters in Business Administration degree from the Amos
Tuck School of Business Administration at Dartmouth College in 1982. Mr.
Kazilionis is a member of the Dartmouth College real estate advisory committee.
DIRECTORS CONTINUING TO SERVE UNTIL 1999
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------------- --- ------------------------------------- --------------
<S> <C> <C> <C>
C. Robert Enever..................... 70 Retired 1994
David Lambert(1)(2)(3)............... 45 Executive Vice President, 1995
Preview Travel, Inc.
Edward H. Sondker(2)(3).............. 50 President and 1995
Chief Executive Officer,
Bay View Capital Corporation
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Mr. Enever has served as a director since September 1994. Mr. Enever is
retired but currently manages a portfolio of real estate and securities
investments. From 1971 until his recent retirement, Mr. Enever was engaged in
real estate development management and ownership, through several owned
entities. Before that he had a career in financial analysis, pricing and
international operations with Ford Motor Company. Mr. Enever holds a Bachelor of
Science degree in Economics from the University of London, a C.P.A. from the
State of Illinois and a Masters Degree in Business Administration (with
distinction) in Finance and Accounting from Northwestern University.
Mr. Lambert has served as a director since August 1995. Mr. Lambert also
serves as Chairman of the Compensation Committee. Since June 1995, Mr. Lambert
has served as Executive Vice President of Preview Travel, Inc., a San Francisco
Bay Area company in the online travel business and media production and
5
<PAGE> 12
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 Bay View
Capital, a publicly-traded bank holding company located in the San Francisco Bay
Area. Prior to joining Bay View Capital, Mr. Sondker served from 1990 through
June 1995 as the President and Chief Executive Officer of Independence One Bank
of California. During the fifteen years prior to that time, Mr. Sondker served
in senior executive positions with several independent financial institutions
having assets ranging in size from $200 million to over $1 billion. Mr. Sondker
holds both a Bachelor of Arts and a J.D. degree from Washburn University. Mr.
Sondker currently is a director of Bay Area Council, a public policy forum for
business in San Francisco, California.
DIRECTORS CONTINUING TO SERVE UNTIL 2000
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------------- --- ------------------------------------- --------------
<S> <C> <C> <C>
Charles L. Biederman................. 64 Executive Vice President, 1994
Sunstone Hotel Investors, Inc.,
President Woodstone Homes, Inc.
H. Raymond Bingham(2)(3)............. 53 Executive Vice President and 1995
Chief Financial Officer
Cadence Design Systems
Laurence S. Geller(1)................ 50 President and Chief Executive 1996
Officer of Strategic Hotel
Capital Incorporated
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) 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 served as
Executive Vice President of the Management Company. Mr. Biederman has previously
served as President of Provident Development Group Corporation, a Florida
corporation engaged in the design, development and sale of luxury homes in South
Florida, from 1989 until 1992 and as President and Vice President of Colorado
Home Improvements, Inc., a Colorado corporation engaged in general contracting,
renovation and related services for existing homes in the Denver, Colorado area,
since 1989. From 1974 to 1996, Mr. Beiderman was Vice President of Robert Roose
and Associates, President of NDH. He is currently the President of Woodstone
Homes, Inc., a Colorado corporation engaged in luxury home construction in the
Vail, Colorado area, President of C.L.B., Inc., a director of One Liberty
Properties, Inc., a New York-based real estate investment trust specializing in
the purchase and leasing of single tenant net leased properties throughout the
United States. Mr. Biederman has been engaged in the real estate development
business since 1962. Mr. Biederman holds a Bachelor of Arts degree from Colgate
University and a Bachelor of Architecture and a Masters in Architecture from
Columbia University and is a registered architect.
Mr. Bingham has served as a director since August 1995. Mr. Bingham also
serves as Chairman of the Audit Committee. Mr. Bingham is Chairman of the Board
of Integrated Measurement Systems, a test equipment and manufacturing company, a
member of the Board of Directors of Cadence Design Systems, a publicly traded
computer aided design company, and a member of the Board of Directors of Inotech
6
<PAGE> 13
Corporation. 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.
Laurence Geller has served as a director since November 1996. Since May,
1997, Mr. Geller has been President and Chief Executive Officer of Strategic
Hotel Capital Incorporated. From 1989 to 1997, Mr. Geller was Chairman of Geller
& Co., a hotel-industry consulting firm based in Chicago, Illinois. From 1984
through December 1989, Mr. Geller served as the Executive Vice President and
Chief Operating Officer of Hyatt Development Corporation, a developer of
domestic and international hotels and resorts, and from 1976 to 1981, as a
Senior Vice President of Holidays Inns, Inc. Mr. Geller serves as a consultant
to the Company pursuant to a consulting agreement entered into in July 1996. Mr.
Geller is Chairman and Chief Executive Officer of Sky Games and is a Director of
Vistana and of Eagle Gaming. Mr. Geller is a graduate of the Ealing Technical
College (U.K.) in Hotel Management and Catering.
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 three committees: the Audit Committee, the
Compensation Committee and the Executive Committee. During the 1997 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, other than Mr.
Kazilionis who did not attend the one Board of Directors' meeting held during
1997 after he was appointed to the Board in October 1997.
The Audit Committee, which held four meetings during fiscal 1997, 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 four meetings during fiscal 1997. 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.
The Executive Committee held no meetings during fiscal year 1997. Its
members are Robert A. Alter, David Lambert and Laurence S. Geller. The Executive
Committee has all the right to exercise all powers of the Board of Directors
except those powers, which, by law, or under the Charter or Bylaws of the
Corporation, cannot be delegated to a committee of the Board of Directors.
However, its current function is to review the construction budgets for hotels
being renovated by the Company and analyze whether amendments should be made to
the percentage leases with Sunstone Hotel Properties, as lessee.
DIRECTOR REMUNERATION
Directors who are not employees of the Company or one of its subsidiaries
receive a cash payment of $2,500 for each quarterly Board meeting attended, and
$1,000 for each special Board meeting attended. Directors who are employees will
not receive such a payment in connection with their attendance at any quarterly
or special meeting of the Board. However, the Company reimburses all directors
for their out-of-pocket expenses incurred in connection with their services on
the Board of Directors.
7
<PAGE> 14
Non-employee directors are also eligible to participate in the Company's
1994 Directors Plan (the "Directors Plan"), which consists of two programs: (i)
the Automatic Option Grant Program pursuant to which options to purchase shares
of Common Stock are automatically granted at periodic intervals , and (ii) the
Automatic Stock Issuance Program under which direct issuances of Common Stock
are automatically made at periodic intervals in consideration of the
non-employee director's service on the Board.
Under the Directors Plan, automatic option grants and direct stock
issuances are made upon the occurrence of each of the following three events.
First, following an individual's initial election to serve as a non-employee
Board member, he or she receives an option to purchase 1,500 shares of Common
Stock and a direct issuance of 1,500 shares of Common Stock on the date of the
first Board meeting held after the annual stockholders meeting at which that
individual was elected to the Board of Directors. Second, each continuing
non-employee Board member receives an additional option to purchase 1,500 shares
of Common Stock and an additional issuance of 1,500 shares of Common Stock on
each anniversary of the later of (a) August 10, 1995, or (b) the date on which
the non-employee Board member was first elected or appointed to the Board of
Directors, if such Board member continues to serve on the Board of Directors
through such anniversary date. Third, each individual who ceases to serve as a
Board member but is subsequently re-elected or re-appointed to the Board of
Directors will be granted an option to purchase 1,500 shares of Common Stock and
a direct issuance of 1,500 shares of Common Stock on the date of the first Board
meeting held after the annual stockholders meeting at which that individual is
re-elected, provided that individual continues to serve as a non-employee Board
member through the date of such Board meeting.
Options are granted under the Automatic Option Grant Program at an exercise
price per share equal to the fair market value per share of Common Stock on the
option grant date. Each option has a maximum term of ten years. Each automatic
option grant is immediately exercisable for fully vested shares of Common Stock.
The automatic option grant remains exercisable until the expiration date of such
option, whether or not the optionee continues to serve as a Board member, unless
terminated in connection with an acquisition of the Company by merger or asset
sale.
Each direct stock issuance is subject to a six-month vesting schedule.
Should the non-employee Board member cease to remain in Board service prior to
the expiration of the six-month vesting period, then all shares subject to the
issuance must be surrendered to the Company for cancellation, and the Board
member will have no further rights with respect to those shares.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Automatic Option Grant Program which is not to be
assumed by the successor corporation will terminate and cease to be outstanding
and each outstanding direct stock issuance under the Automatic Stock Issuance
Program will immediately vest in full.
On April 17, 1997, in connection with his initial election to the Board,
Mr. Geller received an option to purchase 1,500 shares of Common Stock at an
exercise price of $12.875 per share, and a direct issuance of 1,500 shares of
Common Stock. In addition, Mr. Geller received 1,500 shares of Common Stock and
was granted an option to purchase 1,500 shares of Common Stock on November 1,
1997, his anniversary date of being elected to the Board, at $17.5625 per share.
On August 10, 1997, Messrs. Gould, Enever, Lambert, Sondker, and Bingham were
each granted an option to purchase 1,500 shares of Common Stock at an exercise
price of $14.50 per share and each received a direct issuance of 1,500 shares of
Common Stock. In addition, on January 2, 1997, Messrs. Bingham, Enever, Gould,
Lambert and Sondker each received a direct issuance of 38 shares of Common Stock
pursuant to the terms of the Directors Plan as in effect prior to its amendment
in 1997.
Neither Mr. Alter nor Mr. Biederman received any compensation as a
director, other than reimbursement for their out-of-pocket expenses incurred in
connection with their attendance at meetings of the Board of Directors.
8
<PAGE> 15
PROPOSAL 4:
APPROVAL OF AMENDMENT TO THE 1994 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve an amendment to the
Company's 1994 Stock Incentive Plan (the "Incentive Plan") that will increase
the maximum number of shares of Common Stock authorized for issuance over the
term of the Incentive Plan by 1,200,000 shares. Stockholder approval of this
Proposal will increase the maximum number of shares of Common Stock reserved for
issuance under the Incentive Plan from 1,200,000 to 2,400,000 shares. 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 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 1,200,000 share increase in the maximum number of
shares of Common Stock authorized for issuance under the Incentive Plan effected
which is the subject of this Proposal was adopted by the Board of Directors on
January 16, 1998.
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 2,400,000 shares of Common Stock have been reserved for issuance
over the ten-year term of the Incentive Plan, assuming stockholder approval of
the 1,200,000-share increase which is the subject of this Proposal. In no event
may any one participant in the Incentive Plan be granted stock options and
separately exercisable stock 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.
9
<PAGE> 16
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 are eligible to participate in the
Incentive Plan.
As of February 24, 1998, seven (7) non-employee Board members, four (4)
executive officers and three (3) other employees, non-executive officers 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 February 24, 1998, the closing selling price per
share was $15.625.
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 has a limited period of time in
which to exercise any outstanding option to the extent exercisable for vested
shares. The Plan Administrator has 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 (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 is
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
10
<PAGE> 17
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 has 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 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, however, has 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
11
<PAGE> 18
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.
12
<PAGE> 19
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 subject to options granted under
the Incentive Plan between the August 10, 1995 effective date of the Incentive
Plan and February 24, 1998, together with the weighted average exercise price
payable per share.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
OPTIONS GRANTED WEIGHTED AVERAGE
NAME (NUMBER OF SHARES) EXERCISE PRICE
- ------------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Robert A. Alter.............................................. 542,600(1) $12.95
President, Chief Financial Officer, Director and Secretary
Charles L. Biederman......................................... 274,400(2) $13.45
Executive Vice President and Director
Kenneth J. Biehl............................................. 15,000 $17.25
Chief Financial Officer
All current executive officers as a group.................... 832,000 $13.29
(4 persons)
C. Robert Enever,............................................ -- --
Director
Fredric H. Gould,............................................ -- --
Director
H. Raymond Bingham,.......................................... -- --
Director
David Lambert,............................................... -- --
Director
Laurence S. Geller,.......................................... 50,000 $13.00
Director and Consultant
Edward H. Sondker,........................................... -- --
Director
Paul D. Kazilionis,.......................................... -- --
Director
All current non-employee directors as a group (7 persons).... 50,000 $13.00
All employees, including current officers who are not 108,000 $16.44
executive officers, as a group (3 persons).................
</TABLE>
As of February 24, 1998, options covering 984,320 shares of Common Stock
were outstanding under the Incentive Plan, 1,368,174 shares remained available
for future option grant, assuming stockholder approval of the 1,200,000-share
increase which is the subject of this Proposal, and 47,506 shares have been
issued under the Incentive Plan.
- ---------------
(1) The Company granted Mr. Alter an option in 1995 for 130,000 shares, an
option in 1996 for 83,600 shares, an option in 1997 for 24,000 shares and an
additional option in January 1998 for 120,000 shares 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 Mr. Biederman an option in 1995 for 10,000 shares,
another option in 1996 for 50,900 shares, an option in 1997 for 6,000 shares
and an additional option in January 1998 for 30,000 shares in order to
provide, at Mr. Biederman's election, a source of payment for the Lessee's
obligations under the SAR Plan.
13
<PAGE> 20
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.
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
14
<PAGE> 21
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 February 24, 1998, no options, performance share awards or direct
stock issuances have been granted to date on the basis of the 1,200,000-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 1,200,000 share increase in the maximum number of shares
authorized for issuance under the Incentive Plan. Should such stockholder
approval not be obtained, then the number of shares authorized for issuance
under the Incentive Plan will not increase by 1,200,000 shares and any options
granted, performance shares awarded, or direct stock issuances made in reliance
upon the 1,200,000-share increase which is the subject 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
AMENDMENT TO THE INCENTIVE PLAN.
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.
15
<PAGE> 22
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 February
24, 1998. 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>
NUMBER OF SHARES
NAME OF INDIVIDUAL OR POSITION WITH OF COMMON STOCK PERCENT
NUMBER OF PERSONS ON GROUP COMPANY BENEFICIALLY OWNED(1) OF CLASS (1)
- ------------------------------------ -------------------------- --------------------- -------------
<S> <C> <C> <C>
Westbrook Real Estate Fund I, 3,983,867(2) 10.6%
L.P. ...............................
Westbrook Real Estate Co-Investment
Partnership I.L.P.
c/o Westbrook Partners
599 Lexington Avenue, Suite 3800
New York, NY 10022
Robert A. Alter..................... President, Secretary, 580,532(3) 1.5
Chief Executive
Officer and Chairman
Charles L. Biederman................ Executive Vice 442,227(4) 1.2
President and
Vice-Chairman
Kenneth J. Biehl.................... Chief Financial Officer 0
H. Raymond Bingham.................. Director 9,038(5) *
C. Robert Enever.................... Director 191,140(6) *
Laurence S. Geller.................. Director 57,250(7) *
Fredric H. Gould.................... Director 9,038 *
David Lambert....................... Director 9,302(8) *
Paul D. Kazilionis.................. Director 3,983,867(2)(9) 10.6
Edward H. Sondker................... Director 10,138(10) *
All current directors and executive 5,292,532(11) 13.7%
officers as a group (10
persons)..........................
</TABLE>
- ---------------
* Less than one percent
(1) Sunstone Hotel Investors, L.P. (the "Partnership") had 39,790,832 units of
partnership interests outstanding as of February 24, 1998, of which 397,908
were owned by the Company, corresponding to the number of shares of Common
Stock outstanding as of that date, and 2,036,981 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 1,699,605 shares of Common Stock initially issuable to the
Westbrook Funds upon conversion of Preferred Stock, subject to adjustment
in certain events.
(3) Includes (i) 96,720 shares of Common Stock underlying stock options granted
pursuant to the Incentive Plan which are currently exercisable or which
will become exercisable within 60 days after February 24, 1998 and (ii)
483,812 Units redeemable pursuant to the Redemption Rights on a one-for-one
basis for shares of Common Stock, including 65,600 Units owned by Riverside
Hotel Partners of which Mr. Alter has an 82% interest and 99,251 Units
owned by Alter Investment Group, Ltd.
(4) Includes (i) 6,500 shares of Common Stock underlying stock options granted
pursuant to the Incentive Plan which are currently exercisable or which
will become exercisable within 60 days after February 24,
16
<PAGE> 23
1998 and (ii) 397,047 Units redeemable pursuant to the Redemption Rights on
a one-for-one basis for shares of Common Stock, including 14,400 Units
owned by Riverside Hotel Partners of which Mr. Biederman has an 18%
interest.
(5) Includes 4,500 shares of Common Stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
will become exercisable within 60 days after February 24, 1998.
(6) Includes (i) 1,500 shares of Common Stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
will become exercisable within 60 days after February 24, 1998, (ii) 61,049
Units redeemable pursuant to the Redemption Rights on a one-for-one basis
for shares of Common Stock, (iii) 100,254 Units owned by Enever Rout
Investment Group Ltd. redeemable on a one-for-one basis for shares of
Common Stock and (iv) 20,799 shares of Common Stock owned by Mr. Enever's
spouse.
(7) Includes 46,750 shares of Common Stock underlying stock options which are
currently exercisable or which will become exercisable within 60 days after
February 24, 1998, of which 43,750 were granted in connection with his
consulting agreement with the Company pursuant to the Incentive Plan and
3,000 were granted pursuant to the Directors Plan.
(8) Includes 4,500 shares of Common Stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
will become exercisable within 60 days after February 24, 1998.
(9) Includes all shares of Common Stock owned by the Westbrook Funds. Mr.
Kazilionis is a Managing Principal of Westbrook Partners, the General
Partner of the Westbrook Funds.
(10) Includes 4,500 shares of Common Stock underlying stock options granted
pursuant to the Directors Plan which are currently exercisable or which
will become exercisable within 60 days after February 24, 1998.
(11) Includes (i) 164,970 shares of Common Stock underlying stock options
granted pursuant to the Incentive Plan and the Directors Plan which are
currently exercisable or which will become exercisable within 60 days after
February 24, 1998 and (ii) 1,042,162 Units redeemable pursuant to the
Redemption Rights on a one-for-one basis for shares of Common Stock. Also
includes the shares deemed to be beneficially owned by Mr. Kazilionis.
17
<PAGE> 24
EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and each of the
executive officers of the Company whose salary and bonus for the 1997 fiscal
year was in excess of $100,000 for services rendered in all capacities to the
Company and its subsidiaries for the fiscal years ended December 31, 1995, 1996,
and 1997. Such individuals will be hereafter referred to as the "Named Executive
Officers."
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
NAME AND PRINCIPAL ---------------------- OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION
- ----------------------- ------ --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter........ 1997 $ 120,000 (3) $ 5,964 124,000 $ 10,793(4)
President, Chief 1996 $ 60,000 $150,000 $ 6,294 113,600 $ 9,186(5)
Financial Officer and 1995 $ 22,500(6) -- $ 4,976 185,000 $ 2,025(5)
Secretary
Charles L. Biederman... 1997 $ 30,000 $400,000 $ 2,988 106,000 $ 8,805(7)
Executive Vice 1996 $ 30,000 $430,325 $ 3,768 50,900 $ 13,795(5)
President 1995 $ 11,250(6) -- $ 5,100 55,000 $ 8,235(5)
Kenneth J. Biehl....... 1997(8) $ 196,596 (9) -- 15,000 $ 1,836(5)
Chief Financial
Officer
</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) The Compensation Committee has not yet determined Mr. Alter's bonus for the
fiscal year ended December 31, 1997.
(4) Represents (i) life insurance premiums in the aggregate amount of $10,293
paid by the Company on behalf of Mr. Alter and (ii) a matching contribution
of $500 made by the Company on behalf of Mr. Alter under the Company's
401(k) Plan.
(5) Represents life insurance premiums paid by the Company on behalf of the
Named Executive Officer.
(6) Represents partial year from August 1995 through the fiscal year end.
(7) Represents (i) life insurance premiums in the aggregate amount of $8,235
paid by the Company on behalf of Mr. Biederman and (ii) a matching
contribution of $570 made by the Company on behalf of Mr. Biederman under
the Company's 401(k) Plan.
(8) Mr. Biehl commenced employment with the Company as of January 16, 1997.
(9) The Compensation Committee has not yet determined Mr. Biehl's bonus for the
fiscal year ended December 31, 1997.
18
<PAGE> 25
STOCK OPTIONS
The following table contains information concerning the grant of stock
options to the Named Executive Officers under the Company's 1994 Stock Incentive
Plan for the fiscal year ended December 31, 1997.
TABLE II
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF TOTAL AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS GRANTED OF STOCK PRICE APPRECIATION
OPTIONS TO EXERCISE OR FOR OPTION TERM(S)(3)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME (#)(1) 1997 ($/SH)(2) DATE 5%($) 10%($)
- ----------------------- ---------- ---------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter........ 24,000 5.88% $ 16.63 10/26/07 $ 251,004 $ 636,094
100,000 24.51% $ 17.25 10/09/07 $1,084,843 $2,749,206
Charles L. Biederman... 6,000 1.47% $ 16.63 10/26/07 $ 62,751 $ 159,024
100,000 24.51% $ 17.25 10/09/07 $1,084,843 $2,749,206
Kenneth J. Biehl....... 15,000 3.68% $ 17.25 10/09/07 $ 162,726 $ 412,381
</TABLE>
- ---------------
(1) The options were granted under the Company's 1994 Stock Incentive Plan. Each
option becomes exercisable in a series of five (5) equal annual installments
measured from the grant date. The options will automatically accelerate in
full in the event of an acquisition of the Company by a merger or asset sale
in which such option is not to be assumed or replaced by the successor
corporation. Each option includes a limited stock appreciation right which
provides the optionee with the right, exercisable upon the successful
completion of a hostile tender offer for more than 50% of the Company's
outstanding voting securities, to surrender the option to the Company, to
the extent the option is exercisable for vested shares, in return for a cash
distribution per surrendered option share equal to the excess of (i) the
fair market value on the surrender date over (ii) the option exercise price
payable per share. Each option has a maximum term of ten years, subject to
earlier termination following the optionee's cessation of service with the
Company.
(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.
19
<PAGE> 26
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named
Executive Officers, concerning the exercise of options during the 1997 fiscal
year and unexercised options held by them at the end of that fiscal year. No
stock appreciation rights were exercised by any such officer during such year
and, except for the stock appreciation rights described in footnote (1) above,
no stock appreciation rights were outstanding on December 31, 1997. 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 EXERCISES AND OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)(2)
SHARES ACQUIRED VALUE --------------------------- ------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------- -------------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter......... -- -- 96,720 325,880 $726,860 $ 1,488,570
Charles L. Biederman.... 38,680 $282,318 0 205,720 -- $ 726,080
Kenneth J. Biehl........ -- -- 0 15,000 -- --
</TABLE>
- ---------------
(1) Based on the market priced of the purchased shares on the exercise date less
the option exercise price paid for those shares.
(2) Based on the fair market value of the option shares at fiscal year-end
($17.25 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 base salary is $120,000 per
year, subject to increases approved by the Compensation Committee. Mr.
Biederman's base salary is $30,000 per year, subject to increase based on
recommendations by the President for performance of special assignments. Mr.
Alter is required to devote substantially all of his time to the business of the
Company, while Mr. Biederman is not. The Company is required to maintain a
comprehensive medical plan, life insurance and other fringe benefits for both
Messrs. Alter and Biederman. Upon a termination without cause, the Company is
required to pay one year's base salary to Mr. Alter and Mr. Biederman.
As Plan Administrator of the Company's 1994 Stock Incentive Plan, the
Compensation Committee of the Board of Directors has the authority to provide
for the accelerated vesting of any outstanding options to purchase shares of the
Company's Common Stock held by the Named Executive Officers under such plan, in
the event their employment were to be terminated (whether involuntarily or
through a forced resignation) following (i) an acquisition of the Company by
merger or asset sale or (ii) a hostile change in control of the Company (whether
by successful tender offer for more than 50% of the outstanding voting stock or
by proxy contest for the election of Board members).
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, 1997, 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.
20
<PAGE> 27
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 1997
fiscal year should be in the form of cash bonuses, based upon the Company's
performance in 1997, and stock options.
COMPENSATION COMPONENTS
Base Salary
For the 1997 fiscal year, the base salary for Mr. Biederman was set at the
same level as those established for the 1996 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 in 1996 to $120,000 per year for fiscal year 1997 to
reflect the growth in the Company's portfolio and increase in Mr. Alter's
responsibilities to manage the larger Company. The Compensation Committee has
not yet determined the appropriate base salary for Mr. Alter for fiscal year
1998. The Committee is awaiting presentation of information by management and a
review of compensation paid to executives of other publicly-held hotel real
estate investment trusts and similar companies.
Cash Bonuses
Mr. Biederman earned a cash bonus during fiscal year 1997 of $400,000
awarded in recognition of his contribution to the renovation and reconstruction
activity he supervised during fiscal year 1997. Four cash bonus awards, each in
the amount of $100,000, were paid based on the construction expenditures for
renovations by the Company of 19 hotels that were renovated during fiscal year
1997. The Compensation Committee has not yet determined what cash bonus to pay
to Mr. Alter for his performance during fiscal year 1997. The Compensation
Committee expects to make such determination during the second quarter of 1998
based on an analysis of Mr. Alter's attainment of the Company's objectives and
goals.
Stock Options
The compensation packages established for the executive officers for the
1997 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 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 base salary and stock option grants for fiscal
1997, 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. As discussed above, the Compensation
Committee has not yet analyzed whether it will increase Mr. Alter's base salary
or to pay a cash bonus and if so in what amount for his
21
<PAGE> 28
performance during fiscal year 1997. It is currently anticipated that the
Committee will make such determination by the end of the first quarter of 1998.
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 1997 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 1998 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
22
<PAGE> 29
STOCK PERFORMANCE GRAPH
The following graph compares the change in the Company's stockholder return
on the Common Stock during 1997 (which is traded on the New York Stock Exchange
under the symbol "SSI") with the changes in (i) the Standard & Poor's 500 Stock
Index (the "S&P 500 Index"), (ii) the National Association of Real Estate Trust
Equity Index ("NAREIT Equity Index") and (iii) a peer group of six issuers with
similar businesses(1) ("Peer Group") for the same period, assuming a base
investment of $100 in the Common Stock in each index for comparative purposes.
SUNSTONE HOTEL INVESTORS, INC.
<TABLE>
<S> <C> <C> <C> <C>
SUNSTONE HOTEL NAREIT EQUITY
INDEX INVESTORS S&P INDEX PEER GROUP
- ----- -------------- ------ ------------- ----------
8/16/95 100.00 100.00 100.00 100.00
9/30/95 101.32 104.68 102.28 107.67
12/31/95 111.71 110.98 106.52 110.32
3/31/96 111.71 116.94 108.94 122.94
6/30/96 121.24 122.17 113.79 117.42
9/30/96 113.90 125.96 121.23 128.67
12/31/96 152.97 136.35 144.09 153.57
3/31/97 155.86 140.01 145.12 156.94
6/30/97 175.38 164.45 152.33 162.27
9/30/97 220.61 176.77 170.34 187.08
12/31/97 219.51 181.86 173.31 176.34
</TABLE>
The foregoing graph is based upon the following data:
<TABLE>
<CAPTION>
INDEX AUG 16, 95 SEP 30, 95 DEC 31, 95 MAR 31, 96 JUN 30, 96 SEP 30, 96 DEC 31, 96 MAR 31, 97
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sunstone Hotel Investors... 100.00 101.32 111.71 111.71 121.24 113.90 152.97 155.86
S&P........................ 100.00 104.68 110.98 116.94 122.17 125.96 136.35 140.01
NAREIT Equity Index........ 100.00 102.28 106.52 108.94 113.79 121.23 144.09 145.12
Peer Group................. 100.00 107.67 110.32 122.94 117.42 128.67 153.57 156.94
<CAPTION>
INDEX JUN 30, 97 SEP 30, 97 DEC 31, 97
- --------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Sunstone Hotel Investors... 175.38 220.61 219.51
S&P........................ 164.45 176.77 181.86
NAREIT Equity Index........ 152.33 170.34 173.31
Peer Group................. 162.27 187.08 176.34
</TABLE>
- ---------------
(1) The peer group companies consist of American General Hospitality
Corporation, Boykin Lodging Company, Equity Inns, Felcor Suite Hotels, Inc.,
Innkeepers, USA Trust and RFS, Inc.
The foregoing price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933, as
amended, (the "Securities Act"), or under the Exchange Act, except to the extent
that the Company specifically incorporates this graph by reference and shall not
otherwise be deemed filed under the Securities Act or Exchange Act.
There can be no assurance that the Company's share performance will
continue into the future with the same or similar trends depicted in the above
graph. The Company will not make or endorse any predictions as to future share
performance.
CERTAIN TRANSACTIONS
The Company, a Maryland corporation, was formed on September 21, 1994, as a
real estate investment trust ("REIT"). The Company completed an initial public
offering (the "Offering") on August 16, 1995 and contributed the net proceeds
therefrom to Sunstone Hotel Investors, L.P. (the "Partnership"). On October 15,
1997, the Company purchased a portfolio consisting of 17 hotels (the "Kahler
Hotels"). In order to qualify as a REIT, neither the Company nor the Partnership
may operate hotels. The Partnership has a
23
<PAGE> 30
portfolio of, as of February 24, 1998, 57 hotels which it leases to Sunstone
Hotel Properties, Inc. (the "Lessee") pursuant to separate percentage leases
which provide for rent payments equal to the greater of (i) fixed based rent and
(ii) percentage rent based on room revenues, Lessee's food and beverage revenues
and sublease and concession rentals (the "Percentage Leases"). The Lessee is
owned by Robert A. Alter, Chairman and President of the Company (80%) and
Charles L. Biederman, Vice Chairman and Executive Vice President of the Company
(20%). The Lessee has entered into a management agreement (the "Management
Agreement") pursuant to which all of the hotels it leases from the Partnership
are managed by Sunstone Hotel Management, Inc. (the "Management Company"), of
which Mr. Alter is the sole shareholder.
The Company and the Partnership have entered into a number of transactions
and agreements with Mr. Alter and Mr. Biederman and certain of their affiliates.
PERCENTAGE LEASES
In order to qualify as a REIT, the Partnership has leased each of its
hotels to the Lessee pursuant to the Percentage Leases. Each Percentage Lease
has been approved by a majority of the Independent Directors. The Percentage
Leases are designed to allow the Company to participate in revenue growth by
providing that (i) between approximately 20% to 50% in the first tier and 60% to
68% in the second tier of room revenues in excess of specified amounts, (ii) 5%
of the Lessee's food and beverage revenues, (iii) 100% of any sublease and
concession rentals, and (iv) other net revenues described in the Percentage
Lease for the applicable hotel in excess of base rent will be paid to the
Partnership as percentage rent. Once such expenses together with all other
operating expenses of each hotel is paid by the Lessee, the Lessee will be
entitled to all of the net income from the hotels. 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 between 1% to 2% of
gross revenue of the hotels and reimbursement of certain direct expenses
incurred by the Management Company for the Lessee. As the sole shareholder of
the Management Company, Mr. Alter would be entitled to the net income of the
Management Company.
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.
THIRD PARTY PLEDGE
Mr. Alter and Mr. Biederman, the stockholders of the Lessee, have through
February 24, 1998 pledged to the Partnership 481,955 Units with a value equal to
approximately $7.5 million, to secure the Lessee's obligations under the
Percentage Leases. Provided no event of default under any Percentage Lease
exists, the pledged Units corresponding to a particular Percentage Lease will be
returned to the pledgors on the third anniversary of such Percentage Lease. The
Independent Directors approved an amendment to the Third Party
24
<PAGE> 31
Pledge Agreement with Mr. Alter and Mr. Biederman to limit the total number of
Units that would be required to be pledged to secure the Lessee's obligations
under the Percentage Leases to four (4) months base rent under each new
Percentage Lease, up to an aggregate of 481,955 Units. The Independent Directors
also approved an amendment to the pledge agreement with Mr. Alter and Mr.
Biederman to limit the total number of Units that would be required to be
pledged to the number currently owned. The Independent Directors also approved
the subordination of the Company's lien in the Units to a lien proposed in favor
of an institutional lender that, as a condition to making a proposed working
capital facility available to the Lessee, has required that Mr. Alter 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. The unit purchase agreement will remain in
effect so long a there is a Percentage Lease in effect.
CONSULTING AGREEMENT WITH MR. GELLER
In July 1996, the Company entered into a consulting agreement with Mr.
Geller, a member of the Board of Directors. Through his company, Geller & Co.,
Mr. Geller provides strategic consulting services to the Company for a two-year
period with an option at the Company's election to extend for an additional
year. The Company will pay Geller & Co.'s expenses in connection with services
rendered to the Company. In consideration for services rendered by Mr. Geller
under the consulting agreement, Mr. Geller has been granted non-qualified
options to purchase 50,000 shares of Common Stock, which will vest in equal
installments each month over 24 months. Of these options, 25,000 are exercisable
at $10.50 per share and 25,000 at $15.50 per share. In addition, Mr. Geller
receives each quarter during the term of the agreement a restricted stock grant
of 1,250 shares of Common Stock.
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.
APPOINTMENT OF INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP, the Company's independent public
accountants for the fiscal year ended December 31, 1997, was selected by the
Board of Directors, upon recommendation of the Audit Committee, to act in the
same capacity for the fiscal year ending December 31, 1998.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting and will be available to respond to appropriate questions and to
make such statements as they may desire.
25
<PAGE> 32
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 1997, all of its officers, directors, and stockholders
owning greater than 10% of the Common Stock of the Company timely complied with
all applicable Section 16(a) filing requirements other than except as set forth
below.
Mr. Alter timely filed a Form 4 in which the transaction amount was not
reported correctly, and subsequently filed a corrective amendment thereto. Mr.
Geller filed a Form 5 in which the transaction amount was not reported
correctly, and subsequently filed a corrective amendment thereto. In addition,
Kenneth J. Biehl did not timely file his Form 3.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by stockholders at the Company's 1999 Annual Meeting must be received by the
Company no later than November 14, 1998 to be included in the proxy statement
and form of proxy relating to the 1999 Annual Meeting.
1997 ANNUAL REPORT
The Company's Annual Report for the fiscal year ended December 31, 1997,
including audited financial statements, is being sent with this Proxy Statement
to all stockholders of record as of March 9, 1998. 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, 1997, the Annual Report is not
incorporated into this Proxy Statement and is not considered proxy solicitation
material.
26
<PAGE> 33
FORM 10-K
Copies of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 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
[SIG]
ROBERT A. ALTER
Secretary
San Clemente, California
March 13, 1998
<PAGE> 34
APPENDIX A
1994 Stock Incentive Plan
<PAGE> 35
SUNSTONE HOTEL INVESTORS, INC.
1994 STOCK INCENTIVE PLAN
(AS AMENDED THROUGH JANUARY 16, 1998)
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 which the Board does not recommend such
stockholders to accept; or
1
<PAGE> 36
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 (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> 37
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.
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.
NON-STATUTORY OPTION: a stock option not intended to meet the
requirements of Code Section 422.
3
<PAGE> 38
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:
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
4
<PAGE> 39
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.
- 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
5
<PAGE> 40
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);
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).
6
<PAGE> 41
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 when 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 2,400,000 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, (ii) an increase of
700,000 shares authorized by the Board on January 16, 1997 and approved by the
stockholders at the 1997 Annual Meeting and (ii) an increase of 1,200,000 shares
authorized by the Board on January 16, 1998, subject to approval by the
stockholders at the 1998 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 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
7
<PAGE> 42
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, direct stock
issuances or other awards 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, all vested shares of Common Stock issued under the Plan and all
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 limitations on 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 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.
8
<PAGE> 43
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
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
9
<PAGE> 44
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.
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
10
<PAGE> 45
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.
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.
11
<PAGE> 46
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 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
12
<PAGE> 47
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 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
13
<PAGE> 48
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.
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
14
<PAGE> 49
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.
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:
15
<PAGE> 50
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.
4. The Plan Administrator shall pre-approve, at the time the
Independent Right is granted, the subsequent exercise of that right in
accordance with the terms of the grant and the provisions of this Section
V.D. Accordingly, no additional approval of the Plan Administrator or the
Board shall be required at the time the Independent Right is exercised.
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
16
<PAGE> 51
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.E. 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.
17
<PAGE> 52
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.
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
18
<PAGE> 53
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.
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
19
<PAGE> 54
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.
20
<PAGE> 55
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,
21
<PAGE> 56
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 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
22
<PAGE> 57
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.
23
<PAGE> 58
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 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
24
<PAGE> 59
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, 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 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.
25
<PAGE> 60
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 were approved by the
stockholders at the 1997 Annual Meeting. 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.
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.
26
<PAGE> 61
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.
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.
27
<PAGE> 62
FORM OF PROXY
SUNSTONE HOTEL INVESTORS
PROXY
ANNUAL MEETING OF STOCKHOLDERS, APRIL 17, 1998
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, 1998 and
the accompanying Proxy Statement, and appoints Robert A. Alter, Charles L.
Biederman, C. Robert Enever, David E. Lambert, H. Raymond Bingham, Laurence S.
Geller, Fredric H. Gould, Edward H. Sondker and Paul D. Kazilionis, and each of
them, the proxy of the undersigned, with full power of substitution, to vote all
shares of the Common Stock of Sunstone Hotel Investors, Inc., which the
undersigned is entitled to vote, either on his own or her own behalf, or on
behalf of an entity or entities, at the Annual Meeting of Stockholders of
Sunstone Hotel Investors, Inc. to be held at the Holiday Inn Select
located at One South Grady Way, Renton, Washington 98055, on April 17, 1998, 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:
- --------------------------------------------------------------------------------
*FOLD AND DETACH HERE*
1
<PAGE> 63
1. To approve an amendment to the Company's Charter to increase the number of
shares of Common Stock authorized for issuance thereunder by an additional
50,000,000 to a total of 150,000,000 shares of Common Stock and to
increase the number of shares of Preferred Stock authorized for issuance
thereunder by an additional 10,000,000 to a total of 20,000,000 shares of
Preferred Stock:
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To approve an amendment to the Company's Charter to increase the maximum
number of directors from nine to twelve:
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To elect the following directors to serve for a term of three years:
(Instruction: To withhold authority to vote for any individual nominee,
strike that nominee's name below.)
WITHHOLD
FOR AUTHORITY TO VOTE
Robert A. Alter [ ] [ ]
Fredric H. Gould
Paul D. Kazilionis
4. To approve an amendment to the Company's 1994 Stock Incentive Plan to
increase the number of shares of the Company's common stock authorized for
issuance under such Plan by an additional 1,200,000 shares:
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, 2
and 4. This Proxy, when properly executed, will be voted as specified above.
THIS PROXY WILL BE VOTED FOR THE
2
<PAGE> 64
NOMINEES LISTED ABOVE AND FOR PROPOSALS 1, 2 AND 4 IF NO SPECIFICATION IS MADE.
PLEASE RETURN YOUR EXECUTED PROXY TO
CHASE MELLON SHAREHOLDER SERVICES
IN THE ENCLOSED SELF-ADDRESSED, POSTAGE PRE-PAID ENVELOPE.
Signature(s) Dated: , 1998
----------------------------------- -----------
(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.
- --------------------------------------------------------------------------------
*FOLD AND DETACH HERE*
