UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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March 22, 2004
Dear Fellow Shareholder:
Chairman of the Board,
President and Chief Executive Officer
______________
NOTICE
OF
ANNUAL MEETING OF SHAREHOLDERS
to be held April 22, 2004
______________
Secretary
Philadelphia, Pennsylvania
March 22, 2004
TABLE OF CONTENTS
Page | ||||||
---|---|---|---|---|---|---|
GENERAL INFORMATION | 1 | |||||
INFORMATION CONCERNING SOVEREIGN’S GOVERNANCE POLICIES, PRACTICES AND PROCEDURES | 3 | |||||
BACKGROUND INFORMATION ON THE BOARD AND BOARD COMMITTEES | 5 | |||||
AUDIT COMMITTEE REPORT | 8 | |||||
ELECTION OF DIRECTORS | 11 | |||||
COMPENSATION PAID TO DIRECTORS | 20 | |||||
EXECUTIVE COMPENSATION | 22 | |||||
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION | 22 | |||||
COMPENSATION PAID TO EXECUTIVE OFFICERS | 28 | |||||
EMPLOYMENT AGREEMENTS | 33 | |||||
PERFORMANCE GRAPHS | 38 | |||||
PROPOSAL TO RATIFY AUDIT COMMITTEE APPOINTMENT OF INDEPENDENT AUDITORS | 40 | |||||
PROPOSAL TO AMEND SOVEREIGN’S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 400,000,000 SHARES TO 800,000,000 SHARES | 41 | |||||
PROPOSAL TO APPROVE THE SOVEREIGN BANCORP, INC. 2004 BROAD-BASED STOCK INCENTIVE PLAN AND THE SOVEREIGN BANCORP, INC. EMPLOYEE STOCK PURCHASE PLAN | 43 | |||||
PROPOSAL TO APPROVE THE SOVEREIGN BANCORP, INC. BONUS RECOGNITION AND RETENTION PROGRAM | 53 | |||||
ADDITIONAL INFORMATION | 57 | |||||
EXHIBIT “A” — AUDIT COMMITTEE CHARTER | A-1 | |||||
EXHIBIT “B” — SOVEREIGN BANCORP, INC. 2004 BROAD-BASED STOCK INCENTIVE PLAN | B-1 | |||||
EXHIBIT “C” — SOVEREIGN BANCORP, INC. EMPLOYEE STOCK PURCHASE PLAN | C-1 | |||||
EXHIBIT “D” — SOVEREIGN BANCORP, INC. BONUS RECOGNITION AND RETENTION PROGRAM | D-1 | |||||
MAP OF SOVEREIGN BANK COMMUNITY BANKING OFFICE LOCATIONS | Back Cover | |||||
DIRECTIONS TO SOVEREIGN BANK ARENA | See Admission Ticket |
SOVEREIGN BANCORP, INC.
______________
PROXY STATEMENT
Annual Meeting of Shareholders
April 22, 2004
______________
GENERAL INFORMATION
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investor@sovereignbank.com. If you are receiving multiple copies of our Annual Report and Proxy Statement, please request householding by contacting Investor Relations in the same manner.
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INFORMATION CONCERNING SOVEREIGN’S GOVERNANCE POLICIES,
PRACTICES AND PROCEDURES
• | Since 1989, Sovereign’s Board has consisted entirely ofnon-management directors, except the CEO. |
• | Since 1989, Sovereign’s Board has maintained an Audit Committee consisting entirely ofnon-management directors. |
• | Since 1989, Sovereign’s Board has maintained a Compensation Committee consisting entirely ofnon-management directors, except the CEO who last served on such Committee in 1992. |
• | Since 1989, Sovereign’s Board has maintained a Nominating Committee consisting entirely ofnon-management directors, except the CEO who last served on such Committee in 2001. |
• | Since 1995, Sovereign has maintained an Ethics and Corporate Governance Committee consisting entirely ofnon-management directors, except the CEO who last served on such Committee in 2002. |
• | Since 1988, Sovereign has maintained awritten Code of Conduct and Ethics, which covers conflicts of interest, breaches of confidentiality, fair dealing, compliance with law, and personal investing and trading in Sovereign’s common stock. |
• | Since 1986, Sovereign’s Board has causedeach of its stock option plans to be approved by Sovereign shareholders. |
• | Since 1998, Sovereign has taken steps to align the interests of its directors and senior executive officers with investors byrequiring its directors and senior executive management to own a specified dollar value of Sovereign stock. |
• | Since 1988, Sovereign’s Board, with the assistance of outside professionals, hasstudied, at least once each calendar year, Sovereign’s strategic alternatives, including sale. |
• | In the third quarter of 2002, Sovereign announced its intent to expense stock options under the expense recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” which was retroactively effective beginning in the first quarter of 2002. Sovereign was the first financial institution, or among the first, to expense stock options. |
• | The Board of Directors reduced to writing and formalized Sovereign’s Corporate Governance Guidelines which Sovereign’s Board had historically operated under, and caused the Guidelines to be posted on Sovereign’s website under Investor Relations atwww.sovereignbank.com in 2002 and updated the Guidelines in 2003. |
• | The Board of Directors, with the assistance of outside legal counsel, evaluated the independence of each of its members under the NYSE’s listing standards in 2002, 2003 and 2004. |
• | The Board of Directors, with the assistance of outside legal counsel, evaluated the independence of each member of the Audit Committee of the Board under the Sarbanes-Oxley Act and the NYSE’s listing standards in 2002, 2003 and 2004. |
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• | The Board of Directors, with the assistance of outside legal counsel, determined that P. Michael Ehlerman qualifies as an “audit committee financial expert” in 2002, 2003 and 2004. |
• | The Board of Directors adopted a revised Code of Conduct and Ethics in 2002 and revised it in 2003. |
• | The Board of Directors, in an effort to assure that its senior officers primarily responsible for gathering and compiling financial information and presenting it to the public on a full, fair and timely basis recognized and accepted such responsibility, adopted a new Code of Ethics for the Chief Executive Officer and Senior Financial Officers in 2002, which was updated in 2003, and such officers pledged to observe the requirements of the Code in 2002, 2003 and 2004. |
• | Each of Sovereign’s Audit Committee, Nominating Committee, Compensation Committee and Ethics and Corporate Governance Committee either reviewed and updated or adopted its charter in 2002 and 2003. |
• | Director Daniel K. Rothermel, who is Chairman of Sovereign’s Nominating Committee, Sovereign’s Executive Committee and Sovereign Bank’s Executive and Strategic Planning Committee, was selected in 2002, 2003 and 2004 to act as Sovereign’s first presiding or “lead director” at sessions of Board meetings held by the Board without management present. |
• | Sovereign’s Audit Committee accepted the responsibility of retaining, compensating, evaluating and overseeing Sovereign’s independent auditors and approving all audit and certain permissible non-audit services in 2002, and has continued to approve all audit and non-prohibited, non-audit services in 2003 and 2004. |
• | The Audit Committee adopted a policy regarding the review of earnings releases and the release of financial information provided to analysts and rating agencies in 2002. |
• | The Audit Committee adopted a policy regarding the anonymous and confidential submission of auditing and accounting concerns in 2002. |
• | The Audit Committee adopted a policy to restrict the hiring of former employees of Sovereign’s independent auditors in 2003. |
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BACKGROUND INFORMATION ON THE BOARD AND BOARD COMMITTEES
• | The Board will consist of at least a majority of independent directors who,in the business judgment of the Board,meet the criteria for independence required by the NYSEand all other applicable legal requirements. |
• | Directors are not entitled to tenure rights. |
• | Directors who materially change non-Sovereign responsibilities they held when they were elected to the Board should volunteer to resign from the Board, and the Board through the Ethics and Corporate Governance Committee should review the continued appropriateness of Board membership under the circumstances. |
• | No director may serve on any other public company boards unless such service is approved by the Board. |
• | Directors are expected to attend annual meetings of shareholders, Board meetings and meetings of committees on which they serve, and to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. |
• | Board members are expected to review in advance of any meeting the information and data distributed in writing to members before the meeting. |
• | Sovereign’s non-management directors meet in executive sessions,and the non-management director, or “lead director,” who presides at these meetings is chosen by a majority of the non-management directors. |
• | The Board meets at least once each calendar year in addition to regular board meetings, with Sovereign’s executive management team to review Sovereign’s business plans, discuss corporate strategy and evaluate Sovereign’s strengths, weaknesses, opportunities and threats, as well as to review Sovereign’s progress against Sovereign’s vision, mission, values and critical success factors. |
• | The Board studies Sovereign’s strategic alternatives including sale, continuing its current strategy, or engaging in a merger of equals at least once each calendar year. |
• | Committee members are recommended by the Nominating Committee and appointed by the Board. |
• | Directors have full and free access to officers and employees of the Company. |
• | The Board, the Audit Committee, the Ethics and Corporate Governance Committee, the Nominating Committee and the Compensation Committee each has the power to hire independent legal, accounting, financial or other advisors, as applicable, at Sovereign’s expense, without the approval of management. |
• | All directors participate in continuing education programs sponsored by Sovereign throughout the year, including programs addressing legal, financial, regulatory and industry specific topics. |
• | The Nominating Committee is required to make an annual report to the Board on succession planning. |
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• | The Nominating Committee is required to receive comments from all directors and report annually to the Board with an assessment of the Board’s performance. |
• | Sovereign’s Audit Committee consists of four directors,each of whom has been determined to be independent by Sovereign’s Board of Directors. Sovereign’s Audit Committee is responsible for the appointment, compensation, oversight and termination of Sovereign independent auditors. The Committee is required to pre-approve audit and permissible non-audit services performed by the independent auditors. The Committee also assists the Board in providing oversight over the integrity of Sovereign’s financial statements, Sovereign’s compliance with applicable legal and regulatory requirements and the performance of Sovereign’s internal audit function. The Audit Committee is responsible also for, among other things, reporting to Sovereign’s Board on the results of the annual audit and reviewing the financial statements and related financial and non-financial disclosures included in Sovereign’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Importantly, from a corporate governance perspective, the Audit Committee also regularly evaluates the independent auditors’ independence from Sovereign and Sovereign’s management, including approving consulting and other legally permitted non-audit services provided by Sovereign’s auditors and the potential impact of the services on the auditors’ independence. The Committee also meets periodically with Sovereign’s independent auditors and Sovereign’s internal auditors outside of the presence of Sovereign’s management, and possess the authority to retain professionals to assist it with meeting its responsibilities without consulting with management. The Committee also reviews and discusses with management earnings releases, including the use of pro forma information, and financial information provided to analysts and rating agencies. The Committee also discusses with management and the independent auditors the effect of critical accounting policies, accounting initiatives and off-balance sheet transactions. The Committee is also responsible for receiving and retaining complaints and concerns relating to accounting and auditing matters. See “Additional Information,” herein. Sovereign’s Audit Committee met 15 times in 2003. |
• | Sovereign’s Nominating Committee consists of five directors,each of whom has been determined to be independent by Sovereign’s Board of Directors. Sovereign’s Bylaws provide for both shareholder and Board nomination of director candidates. The Committee is required to develop and recommend criteria for the selection of new directors to the Board, including but not limited to, diversity, age, skills, experience, time availability (including the number of other boards a director candidate sits on), NYSE listing standards, applicable federal and state laws and regulations, in the context of the needs of the Board and Sovereign and such other criteria as the Committee shall determine to be relevant. The Committee is authorized to identify and recommend to the Board, consistent with Sovereign’s Corporate Governance Guidelines and Board determined criteria, potential nominees for submission to Sovereign’s shareholders for election as directors of Sovereign or for election to fill vacancies on the Board. The Committee strives to identify, review and recommend only those nominees who appear to possess the characteristics, skills, experience, education and background described more specifically below under “Election of Directors-Nominating Committee Process for the Selection of Nominee Candidates.” The Committee’s review of candidates is performed without regard to gender, race or religious affiliation. One of the objectives of this review is to have a Board which consists of members with a mix of diverse backgrounds, skills, experiences and personalities which will foster, not only good decision making, but also the chemistry to create an environment encouraging active, constructive, and informed participation among Board members. The Committee is required to recommend to the Board nominees for appointment to the committees of the Board annually. The Committee is also responsible for the oversight of an annual evaluation of the Board and management. The Committee met seven times in 2003. |
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• | Sovereign’s Ethics and Corporate Governance Committee, which Sovereign has continuously maintained since 1995, consists of four directors,each of whom has been determined to be independent by Sovereign’s Board of Directors. The Committee monitors, oversees and reviews compliance, by Sovereign’s directors, officers and team members with Sovereign’s Code of Conduct and Ethics, as well as certain other corporate governance related policies. Sovereign’s Code of Conduct and Ethics regulates potential conflicts of interest and transactions between Sovereign and its affiliates, the possible misuse or abuse of confidential information by Sovereign affiliates, and trading in Sovereign stock by Sovereign affiliates. When exercising its authority, the Committee is required to consider Sovereign’s mission, vision and values. The Committee also is required to annually review Sovereign’s Code of Conduct and Ethics and to make recommendations to the Board with respect to modification. The Committee also recommended to the Board the Corporate Governance Guidelines adopted by the Board in September 2002 and updated in 2003. The Committee met five times in 2003. |
• | Sovereign’s Compensation Committee consists of five directors,each of whom has been determined to be independent by Sovereign’s Board of Directors. This Committee reviews and approves corporate goals and objectives regarding CEO compensation, evaluates the CEO’s performance in light of those goals and objectives, and determines the CEO’s compensation levels based on this evaluation, and with respect to determining the long-term incentive component of CEO compensation, considers Sovereign’s performance and relative shareholder return, the value of similar incentive awards to CEOs at comparable companies, the awards given to the CEO in past years, and other factors the Committee deems appropriate. The Committee also reviews and determines director compensation. In addition, the Committee makes recommendations to the Board regarding compensation for certain senior executives and reviews Sovereign’s executive compensation structure in an effort to insure that executive compensation (i) is competitive, and (ii) is closely linked to Sovereign’s goals and objectives. The Committee also attempts to assure that such goals and objectives are clearly defined for Sovereign’s management team and that the interests of executive management are aligned, to the extent practicable, with the interests of Sovereign’s shareholders. This Committee met five times in 2003. |
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AUDIT COMMITTEE REPORT
Background
Responsibility
Process
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course of the year, the Audit Committee also reviewed and considered the compatibility of its independent auditors’ performance of certain non-audit services with the maintenance of such auditors’ independence.
Recommendation
Fees of Independent Auditors
December 31, 2003 | ||||||
Audit Fees | $ | 2,264,263 | ||||
Audit-Related Fees | 88,978 | |||||
Tax Fees | 455,692 | |||||
All other fees | 66,296 | |||||
$ | 2,875,229 |
December 31, 2002 | ||||||
Audit Fees | $ | 2,331,655 | ||||
Audit-Related Fees | 304,713 | |||||
Tax Fees | 536,348 | |||||
All other fees | 72,416 | |||||
$ | 3,245,132 |
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Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by Independent Auditors
Appointment of Auditors for Sovereign’s 2004 Audit
Daniel K. Rothermel, Vice Chairman
P. Michael Ehlerman
Andrew C. Hove, Jr.
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ELECTION OF DIRECTORS
Background
Nominating Committee Process for the Selection of Nominee Candidates
• | excellent character and integrity (mandatory); |
• | no real or apparent material conflicts of interest and a willingness to acknowledge that he or she represents all shareholders (mandatory); |
• | experience in the financial services business and “hands on” familiarity with the regulatory relationship between banks and bank holding companies evidenced by prior service on the Board of Sovereign Bank, or service on a board of a bank or bank holding company acquired by Sovereign (mandatory). Persons who the Nominating Committee determines to be otherwise qualified but do not meet this prior experience requirement may be invited to serve on the Board of Directors of Sovereign Bank before becoming eligible to be a nominee for election as a director of Sovereign; |
• | willingness to agree to observe Sovereign’s corporate governance policies, including Sovereign’s Code of Conduct and Ethics, and the principles underlying applicable federal and state banking laws (mandatory); |
• | leadership in his or her field; |
• | a history of achievements that reflect high standards for himself or herself and others; |
• | broad experience and the ability to exercise sound business judgment; |
• | experience as either a CEO, CFO, or COO of a significant business; |
• | the ability to work in a collegial board environment (mandatory); |
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• | the ability to approach others assertively, responsibly and supportively, and a willingness to ask tough questions in a manner that encourages open discussion; |
• | service on no more than one other for-profit public company board and such service does not prevent the individual from devoting adequate time to Sovereign; |
• | the director is “financially literate;” |
• | significant executive, professional, educational or regulatory experience in financial, auditing, accounting, or banking matters; |
• | experience as an audit committee member preferably at a financial services company; |
• | understands and stays current on corporate governance and management “best practices” and their application in complex, rapidly evolving business environments; |
• | the ability and time to perform during periods of both short-term and prolonged crises; |
• | understands and possesses empowerment skills and has a history of motivating high-performing talent; |
• | possesses skills and the capacity to provide strategic insight and direction; |
• | diversity of experience, skills, qualifications, occupations, education and backgrounds; |
• | availability to attend Board meetings; |
• | availability to participate in additional committee meetings which may or may not be held on the date of Board meetings; |
• | availability (by telephone or in person) to participate in special meetings of the Board on an as needed basis; |
• | availability to rigorously prepare prior to a Board and committee meeting (especially by critically reading all materials provided); |
• | capacity to give undivided attention at each Board and committee meeting; and |
• | availability to participate in ongoing director education. |
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Independence of Directors
Beneficial Ownership of Stock
1 | For a loan to be in compliance with Regulation O, the loan (i) must be made in the ordinary course of business, (ii) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by Sovereign Bank with non affiliated parties, except as permitted by applicable federal banking law, and (iii) must not involve more than the normal risk of repayment or present other unfavorable features. Compliance with Regulation O is monitored by the Office of Thrift Supervision, Sovereign Bank’s primary federal regulator, as well as by Sovereign Bank staff. |
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Name | Age | Director Since | Amount and Nature of Beneficial Ownership (1) | Percentage of Common Stock | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
NOMINEES AS CLASS II DIRECTORS TO SERVE UNTIL 2007 | ||||||||||||||||||
Andrew C. Hove, Jr. | 69 | 2001 | 20,299 | — | ||||||||||||||
Daniel K. Rothermel | 65 | 1976 | 262,594 | (2) | — | |||||||||||||
CONTINUING CLASS I DIRECTORS TO SERVE UNTIL 2006 | ||||||||||||||||||
Brian Hard | 57 | 1996 | 102,202 | (3) | — | |||||||||||||
Cameron C. Troilo, Sr. | 65 | 1974 | 788,207 | (4) | — | |||||||||||||
CONTINUING CLASS III DIRECTORS TO SERVE UNTIL 2005 | ||||||||||||||||||
P. Michael Ehlerman | 65 | 2001 | 17,185 | — | ||||||||||||||
Jay S. Sidhu | 52 | 1987 | 3,708,695 | (5) | 1.21 | % | ||||||||||||
EXECUTIVE OFFICERS | ||||||||||||||||||
Joseph P. Campanelli (6) | 47 | N/A | 397,403 | (7) | — | |||||||||||||
John P. Hamill (8) | 63 | N/A | 310,191 | (9) | — | |||||||||||||
James D. Hogan (10) | 59 | N/A | 165,669 | (11) | — | |||||||||||||
Dennis S. Marlo (12) | 61 | N/A | 1,456,606 | (13) | — | |||||||||||||
Lawrence M. Thompson, Jr. (14) | 51 | N/A | 759,733 | (15) | — | |||||||||||||
All Sovereign directors and executive officers as a group (11 persons) | N/A | N/A | 7,988,784 | (16) | 2.58 | % | ||||||||||||
All Sovereign Bank directors (excluding Sovereign directors and the executive officers listed above) and team members of Sovereign Bank as a group | N/A | N/A | 22,660,463 | (17) | 7.02 | % | ||||||||||||
Total aggregate stock ownership of the above persons | N/A | N/A | 30,649,247 | (18)(19) | 9.41 | % | ||||||||||||
FMR Corp. 82 Devonshire Street, Boston, MA 02109 | N/A | N/A | 21,656,611 | (20) | 7.4 | % |
(1) | The table reflects data supplied by each director and executive officer. The table also reflects shares of Sovereign common stock held by the trustee of the Sovereign ESOP which have been allocated to the accounts of the executive officers identified in the table, and as a group. |
(2) | Mr. Rothermel holds shared voting and investment power over 20,939 shares. The number and percentage of shares beneficially owned by Mr. Rothermel include 3,557 shares held by Mr. Rothermel’s spouse with respect to which Mr. Rothermel disclaims beneficial ownership. The number and percentage of shares beneficially owned by Mr. Rothermel also include 120,000 shares subject to vested options. |
(3) | The number and percentage of shares beneficially owned by Mr. Hard include 72,000 shares subject to vested options. |
(4) | Mr. Troilo holds shared voting and investment power over 490,014 shares. The number and percentage of shares beneficially owned by Mr. Troilo include 120,000 shares subject to vested options. |
(5) | Mr. Sidhu holds shared voting and investment power over 760,286 shares. The number and percentage of shares beneficially owned by Mr. Sidhu include 893,848 shares subject to vested options and 31,799 shares held by Sovereign’s 401(k) Retirement Plan that are allocated to Mr. Sidhu’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Sidhu also include 23,263 shares held by the Sovereign ESOP which are allocated to Mr. Sidhu’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Sidhu also include 32,166 shares of Sovereign common stock awarded as restricted stock under Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by |
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Mr. Sidhu also include 366,619 shares purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. |
(6) | Mr. Campanelli is Vice Chairman of Sovereign. |
(7) | The number and percentage of shares beneficially owned by Mr. Campanelli include 278,500 shares subject to vested options and 10,866 shares held by Sovereign’s 401(k) Retirement Plan which are allocated to Mr. Campanelli’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Campanelli also include 2,298 shares held by the Sovereign ESOP that are allocated to Mr. Campanelli’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Campanelli also include 17,751 shares of Sovereign common stock awarded as restricted stock under Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by Mr. Campanelli also include 44,383 shares of Sovereign common stock purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. |
(8) | Mr. Hamill is Chairman and Chief Executive Officer of the Sovereign Bank New England Division of Sovereign Bank. Before joining Sovereign Bank in 2000, he served as President of Fleet National Bank – Massachusetts and President of Shawmut Corporation. |
(9) | The number and percentage of shares beneficially owned by Mr. Hamill include 225,000 shares subject to vested options and 24,435 shares of Sovereign common stock awarded as restricted stock under Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by Mr. Hamill also include 884 shares held by the Sovereign ESOP that are allocated to Mr. Hamill’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Hamill also includes 7,508 shares purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. Mr. Hamill did not participate in the Bonus Recognition and Retention Program prior to 2002. Mr. Hamill has elected not to participate in the Sovereign 401(k) Retirement Plan. |
(10) | Mr. Hogan is Sovereign’s Chief Financial Officer and Executive Vice President. Before joining Sovereign in 2001, he served as Executive Vice President and Controller of Firststar Corporation, formerly Star Bancorp, Inc. |
(11) | The number and percentage of shares beneficially owned by Mr. Hogan include 100,000 shares subject to vested options and 16,453 shares of Sovereign common stock awarded as restricted stock under the Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by Mr. Hogan also include shares subject to vested options and 3,155 shares held by Sovereign’s 401(k) Retirement Plan which are allocated to Mr. Hogan’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Hogan also include 512 shares held by the Sovereign ESOP that are allocated to Mr. Hogan’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Hogan include 24,353 shares of Sovereign common stock purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. |
(12) | Mr. Marlo is Chief Risk Management Officer and Executive Vice President of Sovereign. Mr. Marlo has elected to retire effective April 30, 2004. |
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(13) | Mr. Marlo holds shared voting and investment power over 16,232 shares. The number and percentage of shares beneficially owned by Mr. Marlo include 738,990 shares subject to vested options and 4,879 shares held by Sovereign’s 401(k) Retirement Plan which are allocated to Mr. Marlo’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Marlo also include 2,298 shares held by the Sovereign ESOP that are allocated to Mr. Marlo’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Marlo also include 14,032 shares of Sovereign common stock awarded as restricted stock under Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by Mr. Marlo also include 36,712 shares of Sovereign common stock purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. |
(14) | Mr. Thompson is Vice Chairman and Chief Administrative Officer of Sovereign. He is also Chief Operating Officer and President of the Consumer Banking Division of Sovereign Bank. |
(15) | Mr. Thompson holds shared voting and investment power over 130,657 shares. The number and percentage of shares beneficially owned by Mr. Thompson include 410,605 shares subject to vested options and 9,013 shares held by Sovereign’s 401(k) Retirement Plan which are allocated to Mr. Thompson’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Thompson also include 18,236 shares held by the Sovereign ESOP that are allocated to Mr. Thompson’s account and over which he exercises voting power. The number and percentage of shares beneficially owned by Mr. Thompson also include 26,417 shares of Sovereign common stock awarded as restricted stock under Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by Mr. Thompson include 35,315 shares of Sovereign common stock purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. |
(16) | In the aggregate, these persons hold shared voting and investment power over 1,418,128 shares. The number and percentage of shares beneficially owned by them include 2,958,943 shares subject to vested options and 59,712 shares held by Sovereign’s 401(k) Retirement Plan allocated to the executive officers’ accounts and over which they exercise voting power. The number and percentage of shares beneficially owned by them also include 47,491 shares held by the Sovereign ESOP that are allocated to participant accounts and over which they exercise voting power. The number and percentage of shares beneficially owned by them also include 131,254 shares of Sovereign common stock awarded as restricted stock under Sovereign’s 2001 Stock Incentive Plan. The number and percentage of shares beneficially owned by them also include 514,890 shares purchased under the Sovereign Bonus Recognition and Retention Program, which shares are subject to substantial risk of forfeiture under the terms of such Program. |
(17) | Shares include 2,228,416 shares allocated under Sovereign’s ESOP, 4,081,868 shares allocated under Sovereign’s 401(k) Retirement Plans, 126,129 shares purchased under the Sovereign Bonus and Recognition Program, which shares are subject to substantial risk of forfeiture under the terms of such Program, and approximately 16,157,402 shares subject to the exercise of both vested and nonvested options granted under one or more of Sovereign’s stock plans and restricted stock awarded under Sovereign’s 2001 Stock Incentive Plan, representing approximately 7.02% in the aggregate of Sovereign’s outstanding shares, after giving effect to the applicable vesting of plan shares and the exercise of options and the lapse of restrictions with respect to restricted stock awards. |
(18) | Shares include 2,275,907 shares allocated under Sovereign’s ESOP, 4,141,580 shares allocated under Sovereign’s 401(k) Retirement Plans, 641,019 shares purchased under the Sovereign Bonus and Recognition Program, which shares are subject to substantial risk of forfeiture under the terms of such Program, and approximately 19,247,599 shares subject to the exercise of both vested and non-vested options granted under one or more of Sovereign’s stock plans and restricted stock awarded under Sovereign’s 2001 Stock Incentive Plan, representing approximately 9.41% in the aggregate of Sovereign’s |
16
outstanding shares, after giving effect to the applicable vesting of plan shares and the exercise of options and the lapse of restrictions with respect to restricted stock awards. |
(19) | Under a policy adopted by Sovereign’s Board in January 1998, and amended in December 2002, Sovereign’s non-employee directors, Sovereign’s CEO and Sovereign’s executive management are required to beneficially own shares of Sovereign common stock having a value of $100,000, six times base salary and three times base salary, respectively. Sovereign’s non-employee directors and Mr. Sidhu met the ownership requirement before the applicable deadlines. Members of Sovereign’s executive management met the ownership requirement before the applicable deadline, except for Mr. Hogan who has until December 31, 2006 to achieve his ownership requirement. Shares of Sovereign common stock subject to unexercised stock options, unvested restricted stock awards, unvested Sovereign matching account shares held under the Bonus Recognition and Retention Program, and shares allocated to the account of a Sovereign employee under Sovereign’s ESOP are not considered beneficially owned for purposes of the policy. |
(20) | According to a Schedule 13G, filed on February 17, 2004, with the Securities and Exchange Commission jointly by FMR Corp., Edward C. Johnson 3d, Abigail P. Johnson and Fidelity Management & Research Company (“Fidelity”), Mr. Johnson is chairman and Ms. Johnson is a director of FMR Corp. and may be deemed to be members of a controlling group with respect to FMR Corp. The Schedule 13G indicates that at December 31, 2003, (i) Fidelity, a wholly-owned subsidiary of FMR Corp., was the beneficial owner of 16,214,160 shares of Sovereign’s common stock in its capacity as investment adviser to various registered investment companies (the “Fidelity Funds”) (the power to vote such shares resides solely with the boards of trustees of the Fidelity Funds, while the power to dispose of such shares resides with Mr. Johnson, FMR Corp., Fidelity and the Fidelity Funds); (ii) Fidelity Management Trust Company (“Fidelity Management”), a bank that is wholly-owned by FMR Corp., was the beneficial owner of 2,491,231 shares of Sovereign’s common stock (the power to vote 2,450,631 of these shares and the power to dispose of all 2,491,231 shares resides with Mr. Johnson and FMR Corp. through control of Fidelity Management); (iii) Strategic Advisers, Inc., a wholly-owned subsidiary of FMR Corp., was the beneficial owner of 58,932 shares of Sovereign’s common stock in its capacity as an investment adviser to individuals; and (iv) Fidelity International Limited, as investment adviser of which Mr. Johnson is chairman but which is managed independently from FMR Corp., was the beneficial owner of 2,892,288 shares of Sovereign’s common stock. Mr. Johnson and his family own approximately 39.89% of the voting stock of Fidelity International Limited. FMR Corp. and Fidelity International Limited each disclaim beneficial ownership of common stock beneficially owned by the other. |
17
P. MICHAEL EHLERMAN. Mr. Ehlerman has served as Chairman of Yuasa Battery, Inc. since 2000. Mr. Ehlerman served as Chairman and CEO of Yuasa Battery, Inc. from 2000 through October 1, 2003. From 1998 to 2000 he served as Yuasa’s Vice Chairman and CEO and from 1991 to 1998 as President and COO of a predecessor entity. Mr. Ehlerman also served as Executive Vice President of Finance of Exide Corporation and held other senior executive financial and accounting positions with predecessor entities from 1982 to 1991. During his long career in finance and accounting, Mr. Ehlerman also served on the internal audit staff at General Electric Company and as assistant controller at a unit of United States Gypsum Company. Mr. Ehlerman was elected to Sovereign’s Board on September 18, 2002. He served as a director of Sovereign Bank and as a member of the Audit Committee of Sovereign Bank since January 2001. Mr. Ehlerman serves on Sovereign’s Compensation, Audit and Nominating Committees. He also serves as Chair of Sovereign’s Retirement Savings Plan Committee. The Board, in the exercise of its business judgment, has designated Mr. Ehlerman as the “audit committee financial expert” of the Audit Committee. | |||||
BRIAN HARD. Mr. Hard became Director and President of Penske Truck Leasing in 1988. Penske Truck Leasing is one of the largest transportation services companies in North America, employing 20,000 people and operating more than 200,000 commercial trucks. He was elected to Sovereign’s Board effective November 1, 1999, and has served as a director of Sovereign Bank since 1996. Mr. Hard serves as a member of Sovereign’s Compensation, Ethics and Corporate Governance, Nominating and Retirement Savings Plan Committees. Mr. Hard also serves as Chair of Sovereign’s Audit Committee. | |||||
ANDREW C. HOVE, JR. Mr. Hove joined Sovereign Bank as a Director in 2001 and became a Director of Sovereign in February 2002. Before joining Sovereign, Mr. Hove served as the Vice Chairman and then as the Acting Chairman of the FDIC, Washington, D.C., from 1990 until his retirement in January 2001. Prior to 1990, he served as Chairman and Chief Executive Officer of Minden Exchange Bank & Trust Co., headquartered in Nebraska. Mr. Hove also served as President of the Nebraska Bankers Association and acted as Vice President, American Bankers Association, representing Nebraska. Since March 15, 2002, Mr. Hove has served as a director of Great Western Bancorporation, Inc. (“Great Western”), a bank holding company headquartered in Omaha, Nebraska (formerly known as Spectrum Bancorporation, Inc.). Great Western operates 63 banking locations in Nebraska, South Dakota, Iowa, Missouri and Kansas, and had total assets, total deposits and stockholders’ equity of $2.2 billion, $1.7 billion and $128.2 million, respectively, at September 30, 2003. Mr. Hove also serves as a director of Saline State Bank of Wilber, Nebraska (“Saline”). Saline operates five branching locations in Nebraska and had total assets, total deposits and stockholders’ equity of $87.2 million, $63.3 million and $10.1 million, respectively, at September 30, 2003. Mr. Hove serves as a member of Sovereign’s Executive, Compensation, Audit, Nominating and Retirement Savings Plan Committees and also serves as Chair of Sovereign’s Ethics and Corporate Governance Committee. | |||||
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DANIEL K. ROTHERMEL. Mr. Rothermel became President and Chief Executive Officer of Cumru Associates, Inc., a private holding company in 1989. He retired in 1989 as Vice President, General Counsel and Secretary of Carpenter Technology Corporation, a NYSE listed specialty materials manufacturer, a position he held for more than ten years. Mr. Rothermel serves as Chair of the Nominating and Executive Committees and also serves as a member of Sovereign’s Audit, Compensation, Ethics and Corporate Governance, Mergers and Acquisition and Retirement Savings Plan Committees. Mr. Rothermel acts as presiding or “lead director” at sessions of the non-management members of the Board of Directors and serves as Vice Chair of the Audit Committee. | |||||
JAY S. SIDHU. Mr. Sidhu became President and Chief Executive Officer of Sovereign in November 1989, and was named President and Chief Executive Officer of Sovereign Bank in March 1989. In April 2002, Mr. Sidhu was elected Chairman of Sovereign after the retirement of the former Chairman. Mr. Sidhu previously served as Treasurer and Chief Financial Officer of Sovereign since the organization of Sovereign in 1987. Mr. Sidhu serves as a member of Sovereign’s Executive and Retirement Savings Plan Committees, and also serves as Chair of Sovereign’s Mergers and Acquisition Committee. | |||||
CAMERON C. TROILO, SR. Mr. Troilo is the President and Chief Executive Officer of Cameron C. Troilo, Inc., a holding company for entities engaged in the construction and real estate management businesses. Mr. Troilo previously served as Vice Chairman of Yardley Savings & Loan Association, which was acquired by Sovereign Bank in 1989. He presently serves on the Executive, Ethics and Corporate Governance, Mergers and Acquisition, Nominating and Retirement Savings Plan Committees, and also serves as Chair of Sovereign’s Compensation Committee. | |||||
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COMPENSATION PAID TO DIRECTORS
20
Services Compensation Plan was amended by the Board to clarify that the base for determining the amount of the payment distributed under the Plan includes fees paid while a director of Sovereign Bank.
21
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Compensation Philosophy
• | align the interests of executives with the long-term interests of shareholders through award opportunities based on achievement of predetermined goals and objectives which result in ownership of common stock; |
• | motivate key team members to achieve a superior level of quality performance and financial results by rewarding them for their achievement; |
• | support a pay-for-performance policy that supplements overall company compensation amounts based on company-wide results, team oriented results and individual performance; and |
• | provide the executive with an appropriate level of retirement income through the use of a combination of both qualified and nonqualified deferred compensation programs. |
Components of Compensation
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reflect the competitive salary market and (ii) to modify the performance measures contained in the current incentive plans and programs. In accordance with Sovereign’s policy, base salary levels remain below average compared to other companies within its peer group.
Short-Term Incentive Compensation
23
the close of the plan year. The Compensation Committee may, in circumstances it deems appropriate, waive strict application of any provision of the LIP, including the eligibility for participation. Subject to any legal or NYSE restrictions, any shares of restricted common stock distributed under the LIP may be treasury shares or authorized but previously unissued shares. Messrs. Campanelli, Hamill, Hogan, Marlo and Thompson are among the employees eligible to participate in the LIP.
Long-Term Incentive Compensation
24
the grant of options or awards of restricted stock under the 2001 Plan will be insufficient to support Sovereign’s compensation policy.
25
26
members throughout Sovereign with maximum flexibility and more meaningful long-term incentive compensation opportunities. This was achieved by permitting each team member to directly participate in the determination of his or her respective long-term incentive compensation awards based upon the team member’s individual risk tolerance level and personal wealth creation plan. The Compensation Committee determined that the revised long-term incentive approach will assist Sovereign in continuing to align the interests of its team members with the interests of its shareholders.
P. Michael Ehlerman
Brian Hard
Andrew C. Hove, Jr.
Daniel K. Rothermel
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COMPENSATION PAID TO EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
Annual Compensation | Long-Term Compensation | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Year | Salary ($)(1) | Bonus ($)(2) | Restricted Stock Awards (#)(3) | Securities Underlying Options/ SARs (#)(4) | All Other Compensation ($)(5)(6) | ||||||||||||||||||||
Jay S. Sidhu Chairman, President and Chief Executive Officer | 2003 2002 2001 | $ | 800,000 687,000 663,000 | $ | 750,000 500,000 750,000 | 19,052 19,084 0 | 68,800 150,000 200,000 | (7) | $ | 8,000 8,000 8,594 | ||||||||||||||||
Joseph P. Campanelli (8) Vice Chairman | 2003 2002 2001 | 400,000 325,000 306,000 | 133,333 100,000 91,667 | 8,509 7,117 7,489 | 23,358 50,000 100,000 | (7) | 8,000 8,000 16,140 | |||||||||||||||||||
John P. Hamill Chairman and Chief Executive Officer of Sovereign Bank – New England Division (9) | 2003 2002 2001 | 376,923 300,000 300,000 | 133,333 150,000 183,333 | 17,193 7,117 7,489 | 0 50,000 100,000 | (7) | 0 0 0 | |||||||||||||||||||
James D. Hogan Chief Financial Officer and Executive Vice President (10) | 2003 2002 2001 | 376,923 300,000 210,000 | 150,000 100,000 64,166 | 9,211 7,117 7,489 | 23,358 50,000 50,000 | (7) | 8,000 7,136 7,432 | |||||||||||||||||||
Dennis S. Marlo Chief Risk Management Officer and Executive Vice President (11) | 2003 2002 2001 | 345,385 330,000 330,000 | 175,000 100,000 166,667 | 7,017 7,117 6,808 | 0 50,000 95,000 | (7) | 8,000 8,000 9,450 | |||||||||||||||||||
Lawrence M. Thompson, Jr. Vice Chairman and Chief Administrative Officer (12) | 2003 2002 2001 | 400,000 347,000 330,000 | 300,000 200,000 200,000 | 18,948 7,117 8,170 | 0 75,000 105,000 | (7) | 8,000 7,311 7,028 |
(1) | Effective April 1, 2003, Mr. Hamill’s, Mr. Hogan’s and Mr. Marlo’s salary increased to $400,000, $400,000 and $350,000, respectively. In October 2002, Mr. Thompson’s and Mr. Campanelli’s salary were each increased to $400,000, and Mr. Sidhu’s salary was increased to $800,000. |
(2) | The amounts shown for Mr. Sidhu for 2003, 2002 and 2001 reflect 50% of his Tier I bonuses actually awarded because Mr. Sidhu was required to defer, subject to substantial risk of forfeiture, receipt of 50% of each of his 2003, 2002 and 2001 Tier I bonuses under the Bonus Deferral Program. The amount shown for Mr. Sidhu also reflects 50% of the additional discretionary incentive compensation award for 2003 which required Mr. Sidhu to defer, subject to substantial risk of forfeiture, receipt of 50% of such award. The amounts shown for Mr. Campanelli for 2003, 2002 and 2001 reflect 50% of his cash bonuses actually awarded because Mr. Campanelli elected to defer, subject to substantial risk of forfeiture, receipt of 50% of each of his 2003, 2002 and 2001 cash bonuses under the Bonus Deferral Program. Mr. Hamill elected to not participate in the Bonus Deferral Program in 2001. The amounts shown for Mr. Hamill for 2003 and 2002 reflect 50% and 75%, respectively, of his cash bonuses actually awarded because Mr. Hamill elected to defer, subject to a substantial risk of forfeiture 50% and 25% of his 2003 and 2002 cash bonuses, respectively, under the Bonus Deferral Program. Mr. Hamill elected not to participate in the Bonus Deferral Program in 2001. The amounts shown for Mr. Hogan for 2003, 2002 and 2001 reflect 50%, 50% and 65%, respectively, of his cash bonuses actually awarded |
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because Mr. Hogan elected to defer, subject to substantial risk of forfeiture, receipt of 50%, 50% and 35% of each of his 2003, 2002 and 2001 cash bonuses, respectively, under the Bonus Deferral Program. The amounts shown for Mr. Marlo for 2003 and 2002 reflect 75% and 50%, respectively, of his cash bonuses actually awarded because Mr. Marlo elected to defer, subject to substantial risk of forfeiture, receipt of 25% and 50% of his 2003 and 2002 cash bonuses, respectively, under the Bonus Deferral Program. Mr. Marlo elected not to participate in the Bonus Deferral Program in 2001. Mr. Thompson elected not to participate in the Bonus Deferral program in 2003, 2002 and 2001. Each year, deferred amounts, as well as Sovereign’s matching contribution with respect to such deferrals, are subject to a substantial risk of forfeiture for five years. See the “Proposal to Approve the Sovereign Bancorp, Inc. Bonus Recognition and Retention Program” below for a more complete description of the Bonus Deferral Program. |
(3) | The number of shares of restricted stock shown for Mr. Sidhu for 2003 was determined by dividing his Tier II bonus amount of $250,000 by the $23.75 closing price per share of Sovereign common stock on December 31, 2003 and also includes a long-term incentive award of 8,526 shares of restricted stock. The number of shares of restricted stock shown for Mr. Sidhu for 2002 was determined by dividing his Tier II bonus amount of $250,000 by the $13.10 closing price per share of Sovereign common stock on February 19, 2003, the day the Board of Directors approved Mr. Sidhu’s Tier II Bonus. These restricted shares vest ratably over a three-year period from the date of the award. Mr. Sidhu did not receive an award of restricted stock for 2001. The number of shares of restricted stock shown for Mr. Campanelli and Mr. Hamill for 2003 was determined by dividing $133,333 of his bonus award by the $23.75 closing price per share of Sovereign common stock on December 31, 2003 and also includes, respectively, a long-term incentive award of 2,895 and 11,579 shares of restricted stock. The number of shares of restricted stock shown for Messrs. Hamill Hogan and Thompson for 2003 was determined by dividing $150,000 of each of their respective bonus awards by the $23.75 closing price per share of Sovereign common stock on December 31, 2003 and also includes, respectively, long-term incentive awards of 2,895 and 12,632 shares of restricted stock. The number of shares of restricted stock shown for Mr. Marlo for 2003 was determined by dividing $116,667 of his bonus award by the $23.75 closing price per share of Sovereign common stock on December 31, 2003 and also includes a long-term incentive award of 2,105 shares of restricted stock. The number of shares of restricted stock shown for Messrs. Campanelli, Hamill, Hogan, Marlo and Thompson for 2002 was determined by dividing $100,000 of each of their respective bonus awards by the $14.05 closing price per share of Sovereign common stock on December 31, 2002. The restricted shares awarded to each of Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson with respect to their 2003 bonuses vest ratably over a three-year period from the date of the award. The restricted shares awarded to each of Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson as long-term incentive compensation do not vest unless and until the price of a share of Sovereign common stock trades at or above $30 per share for at least 20 consecutive trading days. In addition, the restricted shares do not vest unless and until, at the end of the fiscal quarter coincident with or immediately preceding the later of the attainment of the aforementioned price requirement or five years having elapsed from the date of grant, Sovereign Bank is “well capitalized” under regulations of the Office of Thrift Supervision in effect as of the date of grant. The restricted shares awarded to Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson for 2002 vest ratably over a three-year period from the date of the award. The restricted shares awarded to Messrs. Campanelli, Hamill, Hogan and Thompson for 2001 vest ratably over a three-year period from the date of the award. Restricted stock awards were made pursuant to the Sovereign 2001 Stock Incentive Plan. |
(4) | The options granted to Messrs. Sidhu, Campanelli and Hogan in 2004 as long-term incentive compensation are not exercisable unless and until the price of a share of Sovereign common stock trades at or above $30 per share for at least 20 consecutive trading days. In addition, the options are not exercisable unless and until, at the end of the fiscal quarter coincident with or immediately preceding the later of the attainment of the aforementioned price requirement or five years having elapsed from the date of grant, Sovereign Bank is “well capitalized” under regulations of the Office of Thrift Supervision in effect as of the date of grant. The options granted to Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo |
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and Thompson in 2003 for 2002 performance are not exercisable unless and until the price of a share of Sovereign common stock trades at or above $20 per share for at least 20 consecutive trading days. In addition, the options are not exercisable unless and until, at the end of the fiscal quarter coincident with or immediately preceding the later of the attainment of the aforementioned price requirement or five years having elapsed from the date of grant, Sovereign Bank is “well capitalized” under regulations of the Office of Thrift Supervision in effect as of the date of grant. The options granted to Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson in 2002 for 2001 performance were not exercisable until the price of a share of Sovereign common stock traded at or above $20 per share or three years elapsed from the date of grant, whichever occurred first. These options are now exercisable. |
(5) | Does not include the value of 280 shares of Sovereign common stock allocated to each of the accounts of Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson respectively, under the terms of Sovereign’s ESOP for 2003. Does not include the value of 480 shares, 330 shares, 320 shares, 238 shares, 330 shares and 444 shares of Sovereign common stock allocated to the accounts of each of Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson, respectively, under the terms of Sovereign’s ESOP for 2002. Does not include the value of 629 shares, 320 shares, 289 shares, 329 shares and 558 shares of Sovereign common stock allocated to the accounts of each of Messrs. Sidhu, Campanelli, Hamill, Marlo and Thompson, respectively, under the terms of Sovereign’s ESOP for 2001. Mr. Hogan was not eligible to participate in the Sovereign ESOP in 2001. |
(6) | Amounts appearing in this column include Sovereign’s contributions on behalf of each named person to the Sovereign Bancorp, Inc. 401(k) Retirement Plan |
(7) | The options granted to Messrs. Sidhu, Campanelli and Hogan in 2004 are part of the long-term incentive compensation approach described in the Report of the Compensation Committee on page 22. The long-term incentive compensation for Messrs. Sidhu, Campanelli and Hogan is a mix of options and restricted shares. Messrs. Hamill, Marlo and Thompson were awarded their entire 2004 long-term incentive compensation in the form of restricted stock. |
(8) | Mr. Campanelli is President and Chief Operating Officer of the Sovereign Bank New England Division of Sovereign Bank and Vice Chairman of Sovereign. |
(9) | Mr. Hamill is Chairman and Chief Executive Officer of Sovereign Bank New England. Before joining Sovereign Bank in 2000, he served as President of Fleet National Bank- Massachusetts and President of Shawmut Corporation. |
(10) | Mr. Hogan joined Sovereign as Chief Financial Officer in April 2001 and has served as Chief Financial Officer and Executive Vice President since April 2002. Prior to that Mr. Hogan served as Executive Vice President and Controller at Firstar Corporation, formerly Star Bancorp, from May 1993 until April 2001, and as Controller of Star Bank from 1987 until 1993. |
(11) | Mr. Marlo joined Sovereign upon completion of Sovereign’s acquisition of ML Bancorp, Inc. where he served as Chairman and Chief Executive Officer. He served as President of the Pennsylvania Division of Sovereign Bank from February 28, 1998 until he was appointed Chief Financial Officer and Treasurer of Sovereign effective May 18, 1998. Mr. Marlo served as Chief Financial Officer and Treasurer of Sovereign until April 2001 when he was appointed to his current position. Mr. Marlo has elected to retire effective April 30, 2004. |
(12) | Mr. Thompson became a Vice Chairman and Chief Administrative Officer of Sovereign in September 2002. Mr. Thompson served as Chief Administrative Officer of Sovereign since 1997. He has been employed by Sovereign in various capacities since 1987. |
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OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Number of Securities Underlying Options Granted | Percent of Total Options Granted to Employees in Fiscal | Exercise or Base Price | Expiration | Potential Realizable Value at Assumed Annual Rates of Price Appreciation For Option Term(4) | |||||||||||||||||||||||
Name | (#)(1) | Year | ($/sh)(2)(3) | Date | 5% ($) | 10% ($) | |||||||||||||||||||||
Jay S. Sidhu | 150,000 | 4.33 | % | $13.10 | 03/18/13 | $ | 1,235,778 | $ | 3,131,704 | ||||||||||||||||||
Joseph P. Campanelli | 50,000 | 1.44 | % | 13.10 | 03/18/13 | 411,926 | 1,043,901 | ||||||||||||||||||||
John P. Hamill | 50,000 | 1.44 | % | 13.10 | 03/18/13 | 411,926 | 1,043,901 | ||||||||||||||||||||
James D. Hogan | 50,000 | 1.44 | % | 13.10 | 03/18/13 | 411,926 | 1,043,901 | ||||||||||||||||||||
Dennis S. Marlo | 50,000 | 1.44 | % | 13.10 | 03/18/13 | 411,926 | 1,043,901 | ||||||||||||||||||||
Lawrence M. Thompson, Jr. | 75,000 | 2.16 | % | 13.10 | 03/18/13 | 617,889 | 1,565,852 |
(1) | Terms of these nonqualified stock options are for a period of ten years and one month from the date the option is granted. |
(2) | The options granted to Messrs. Sidhu, Campanelli, Hamill, Hogan, Marlo and Thompson in 2003 are not exercisable unless and until the price of a share of Sovereign common stock trades at or above $20.00 per share for at least 20 consecutive trading days. In addition, the options are not exercisable unless and until, at the end of the fiscal quarter coincident with or immediately preceding the later of the attainment of the aforementioned price requirement or five years having elapsed from the date of grant, Sovereign Bank is “well capitalized” under the regulations of the Office of Thrift Supervision in effect as of the date of grant. Options are not exercisable following an optionee’s voluntary termination of employment other than by reason of retirement or disability. |
(3) | Under the terms of the 2001 Plan, the exercise price per share must equal the fair market value on the date the option is granted. The exercise price may be paid in cash, in shares of Sovereign common stock valued at fair market value on the date of exercise or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to Sovereign, out of the sale proceeds, an amount equal to the exercise price plus all applicable withholding taxes. |
(4) | The dollar amounts set forth under these columns are the result of calculations made at the 5% and 10% appreciation rates set forth in Securities and Exchange Commission regulations and are not intended to indicate future price appreciation, if any, of Sovereign common stock. |
AGGREGATED OPTIONS EXERCISED IN LAST YEAR
AND DECEMBER 31, 2003 OPTION VALUE
Name | Shares Acquired on Exercise (#) | Value Realized ($) | Number of Securities Underlying Unexercised Options at December 31, 2003 (#) Exercisable/Unexercisable | Value of Unexercised In-the-Money Options at December 31, 2003 ($) Exercisable/Unexercisable | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jay S. Sidhu | 437,066 | $4,097,605 | 813,848/542,500 | $10,866,949/6,476,375 | ||||||||||||||
Joseph P. Campanelli | 6,000 | 100,740 | 269,750/140,000 | 4,020,328/1,539,750 | ||||||||||||||
John P. Hamill | 0 | 0 | 225,000/50,000 | 3,228,000/532,500 | ||||||||||||||
James D. Hogan | 0 | 0 | 100,000/50,000 | 1,316,500/532,500 | ||||||||||||||
Dennis S. Marlo | 64,000 | 1,233,280 | 748,990/127,500 | 12,995,436/1,572,625 | ||||||||||||||
Lawrence M. Thompson, Jr. | 45,044 | 406,232 | 370,605/257,500 | 4,960,101/3,005,275 |
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Equity Compensation Plan Information
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) | Number of securities remaining available for future issuance under plans (excluding securities reflected in the first column) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders | 11,249,756 | (2)(3) | $ | 11.32 | 4,228,078 | (4) | ||||||||
Equity compensation plans not approved by security holders | 50,000 | (5) | $ | 8.40 | 0 | (6) | ||||||||
Total | 11,299,756 | $ | 11.31 | 4,228,078 |
(1) | The information relates exclusively to options; no warrants or rights were granted under any Sovereign equity compensation plan. |
(2) | Consists of securities granted under the following shareholder-approved plans: the 2001 Stock Incentive Plan and the 1996 Stock Option Plan, and the following shareholder-approved plans that have been discontinued: the 1997 Non-Employee Directors’ Stock Option Plan, the 1993 Stock Option Plan, and the 1986 Stock Option Plan. |
(3) | Excludes the Purchase Plan, which has an approved reserve of 1,000,000 shares, as adjusted. Since the number of shares available for issuance under this plan will shortly be exhausted, Sovereign is requesting that shareholders approve the continuation of the plan at the Meeting. If approved, 3,000,000 shares will be available to be issued under the plan, subject to automatic increase by a number of shares equal to 1% of Sovereign’s total outstanding shares each year to a maximum of 20,000,000 shares. See “Proposal to Approve the Sovereign Bancorp, Inc. 2004 Broad-Based Stock Incentive Plan and the Sovereign Bancorp, Inc. Employee Stock Purchase Plan” for a description of the material features of the Purchase Plan. |
(4) | Includes 35,103 and 195,930 shares available for future issuance under the Purchase Plan and the Non-Employee Director Compensation Plan, respectively. The number of shares available for issuance under the Purchase Plan reflects the number of shares remaining for issuance on December 31, 2003. Also includes 1,278,237 restricted shares that were available for award under the 2001 Stock Incentive Plan as of December 31, 2003. |
(5) | Consists of 50,000 options issued to Mr. Hogan prior to his employment with Sovereign. Mr. Hogan began employment with Sovereign approximately two weeks later at which time when the Board of Directors approved the options, Sovereign’s stock price had increased by $1.81 per share. Since no approved plans permit the issuance of stock options whose exercise price is less than the fair market value at the date of grant, these options were granted outside of the plans approved by shareholders. |
(6) | By its terms, the number of shares issuable under the Bonus Deferral Program depends on the amount of any cash bonus deferred by a participant and the price per share of Sovereign common stock on the date both the participant’s deferral and Sovereign’s matching contribution are deposited in the grantor trust. Therefore, the number of securities remaining available for future issuance under the Bonus Deferral Program cannot be determined. Sovereign is requesting that shareholders approve the Bonus Deferral Program at the Meeting. See “Proposal to Approve the Sovereign Bancorp, Inc. Bonus Recognition and Retention Program” for a description of the material terms of the Bonus Deferral Program. |
32
EMPLOYMENT AGREEMENTS
33
extended annually to provide a new term of three years except that, at certain times, notice of nonextension may be given, in which case the agreement will expire at the end of its then current term. No such notice has been given.
34
agreement. The agreement provides a base salary, which, if increased by action of the Board of Directors or the Chief Executive Officer, becomes the new base salary provided thereafter by the agreement. In addition, the agreement provides, among other things, a right to participate in any bonus plan approved by the Board of Directors, and to receive insurance, vacation, pension, reimbursement for relocation, and other fringe benefits.
35
ADDITIONAL INFORMATION REGARDING DIRECTORS AND OFFICERS
Indemnification
36
Indebtedness of Management
Section 16(a) Beneficial Ownership Reporting Compliance
37
PERFORMANCE GRAPHS
38
Source: Factset
39
PROPOSAL TO RATIFY AUDIT COMMITTEE
APPOINTMENT OF INDEPENDENT AUDITORS
40
PROPOSAL TO AMEND SOVEREIGN’S ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 400,000,000 SHARES TO 800,000,000 SHARES
41
Articles of Incorporation will not increase or otherwise affect Sovereign’s authorized preferred stock. As of March 1, 2004, there were no shares of Sovereign’s preferred stock outstanding.
42
PROPOSAL TO APPROVE THE SOVEREIGN BANCORP, INC.
2004 BROAD-BASED STOCK INCENTIVE PLAN AND THE
SOVEREIGN BANCORP, INC. EMPLOYEE STOCK PURCHASE PLAN
2004 Broad-Based Incentive Plan
1. | The change to a greater use of restricted stock, reducing Sovereign’s reliance on stock options. Previously Sovereign utilized stock options as the principal component of the long-term compensation portion of its compensation policy. |
2. | The continuation of many compensation and governance best practices such as no stock option repricings, no discounted stock options, no reload stock options, no loans, and meaningful vesting and performance requirements. |
• | Sovereign contributes its 401(k) plan matching contribution in common stock. |
• | Sovereign established an Employee Stock Ownership Plan in 1990. |
• | Broad-based stock option awards have been made to team members at all levels within Sovereign. |
• | A significant portion of the annual incentive bonus is paid in restricted stock. |
• | The Employee Stock Purchase Plan was introduced in 1987 to give team members the ability to purchase Sovereign common stock at a discount pursuant to salary deductions. |
• | The Bonus Deferral Program was adopted in 1997 to give certain senior officers the opportunity to defer a portion of their bonus and invest it in common stock with a Sovereign matching contribution (also in common stock), both subject to a substantial risk of forfeiture. |
• | Significant stock ownership requirements were implemented for non-employee directors and members of management in 1998. |
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Purpose of 2004 Plan
Key Terms
Key Terms
Plan Effective Date: | April 22, 2004 | |||||
Eligible Participants: | All team members of Sovereign | |||||
Shares Authorized: | 15,000,000 | |||||
Shares Authorized as a Percent of Outstanding Common Stock: | Approximately 5 percent | |||||
Award Types: | (1) Incentive stock options with a term no longer than 10 years; (2) Nonqualified stock options with a term no longer than 10 years and one month; and (3) Restricted stock | |||||
Share Limits Per Person: | Stock options and restricted stock covering no more than 10 percent of authorized shares under the Plan may be issued to any single participant over the life of the Plan | |||||
Incentive Stock Options Authorized: | No more than 5,000,000 shares may be granted as incentive stock options | |||||
Restricted Stock Authorized: | No more than 6,000,000 of total of 15,000,000 shares authorized | |||||
Vesting: | Determined by Compensation Committee | |||||
Performance Criteria: | Determined by Compensation Committee | |||||
Not Permitted: | (1) To increase number of shares authorized under Plan; (2) To grant stock options at a price below fair market value; (3) To authorize repricing of stock options; and (4) To change per person share limit |
Eligibility
Awards
44
Adjustments
Exercise of Stock Options
Vesting of Restricted Stock
Transferability
Change in Control
Termination, Death and Retirement
45
Amendments
(1) | Materially increase the number of shares that may be issued under the Plan; |
(2) | Permit granting of stock options at less than fair market value; |
(3) | Permit the repricing of outstanding stock options; |
(4) | Permit the reload of exercised stock options; and |
(5) | Amend the maximum shares set forth that may be granted as stock options to any team member. |
Tax Consequences
46
exercise price of the option is no less than the fair market value of the shares on the date of grant, or (ii) the option is granted (or exercisable) only upon the achievement (as specified in writing by the Compensation Committee) of an objective performance goal established in writing by the Compensation Committee while the outcome is substantially uncertain, and the option is approved by shareholders. It is Sovereign’s intention to have awards under the 2004 Plan to executive officers constitute “performance-based compensation” in accordance with the provisions of Code Section 162(m).
Other Information
Summary of Benefits
47
Employee Stock Purchase Plan
1. | Encouraging and enabling team members of Sovereign to acquire a proprietary interest in Sovereign through the ownership of shares of Sovereign common stock. |
2. | Continuing to enforce Sovereign’s belief that team members who participate in the Purchase Plan will have a closer identification with Sovereign by virtue of their ability, as shareholders, to participate in Sovereign’s growth and earnings. |
Purpose of the Plan
Key Terms
Plan Term: | The Purchase Plan will remain in effect until all shares of common stock reserved thereunder have been purchased unless terminated earlier by Sovereign’s Board of Directors. | |||||
Eligible Participants: | Each team member who has six months of continuous service and whose customary employment is more than five months in a calendar year and is scheduled to work 20 or more hours per week is eligible to participate once he or she has executed a stock purchase agreement. | |||||
Shares Authorized: | 3,000,000 subject to automatic increase by a number of shares equal to 1% of Sovereign’s total outstanding shares each year up to a maximum number of shares of 20,000,000. |
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Shares Authorized as a Percent of Outstanding Common Stock: | Less than 1% | |||||
Purchase Price: | Shares will initially be purchased at a discount by team members of 7.5% of the fair market value on the date of purchase. | |||||
Share Limits Per Person: | Shares having a fair market value of $25,000 per team member per calendar year. |
Eligibility
Administration of the Purchase Plan
Participation in the Purchase Plan
Purchasing Stock
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Limitations
Written Statement
Withdrawing from the Purchase Plan
Termination and Amendments
Certain Federal Income Tax Consequences of the Purchase Plan
50
capital gain. If the fair market value on the date of the qualifying disposition is less than the purchase price paid for the shares, there will be no ordinary income and any loss will be a long-term capital loss.
Summary of Benefits
New Plan Benefits | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sovereign Bancorp, Inc. Employee Stock Purchase Plan | ||||||||||
Name and Position | | Dollar Value ($) (1)(2) | | Number of Shares | ||||||
Jay S. Sidhu Chairman, President and Chief Executive Officer | $ | 48,141 | 2,027 | |||||||
Joseph Campanelli Vice Chairman | $ | 36,884 | 1,553 | |||||||
John P. Hamill Chairman and Chief Executive Officer of Sovereign Bank – New England Division | $ | 0 | 0 | |||||||
James D. Hogan Chief Financial Officer and Executive Vice President | $ | 41,753 | 1,758 | |||||||
Dennis S. Marlo Chief Risk Management Officer and Executive Vice President of Sovereign | $ | 0 | 0 | |||||||
Lawrence M. Thompson, Jr. Vice Chairman and Chief Administrative Officer | $ | 0 | 0 | |||||||
All Senior Officers (3) | $ | 135,589 | 5,709 | |||||||
Non-Employee Director Group (4) | $ | 0 | 0 | |||||||
Non-Senior Officer Employee Group | $ | 4,545,085 | 191,372 |
(1) | Based on the closing price of Sovereign common stock on the New York Stock Exchange of $23.75 on December 31, 2003, the last business day of the 2003 fiscal year. |
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(2) | This dollar value reflects appreciation in the fair market value of Sovereign common stock purchased each bi-weekly pay period during 2003. |
(3) | Includes those officers, as a group, who are included in Item 4A of Sovereign’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. |
(4) | Non-employee directors are not eligible to participate in the Purchase Plan. |
Recommendation
52
PROPOSAL TO APPROVE THE SOVEREIGN BANCORP, INC.
BONUS RECOGNITION AND RETENTION PROGRAM
1. | Encouraging and enabling management and highly compensated employees of Sovereign and its subsidiaries to acquire a proprietary interest in Sovereign through the ownership of shares of Sovereign common stock. |
2. | Continue to enforce Sovereign’s belief that members of management who participate in the Bonus Deferral Program will have a closer identification with Sovereign by virtue of their ability, as shareholders, to participate in Sovereign’s growth and earnings. |
Purpose of the Plan
Key Terms
Plan Term: | The Bonus Deferral Program will remain in effect until terminated by Sovereign’s Board of Directors. | |||||
Eligible Participants: | A select group of management and highly compensated employees as determined by the Compensation Committee. | |||||
Election to Defer Bonus: | A participant may elect to defer not less than 25% and not more than 50% of such participant’s cash bonus payable for the next year. | |||||
Sovereign Match: | Sovereign will match the amount that the participant elects to defer. | |||||
Deposit to Trust: | The amounts deferred and the Sovereign match are deposited in a grantor trust and invested in Sovereign common stock purchased in the open market by the independent trustee. Earnings on account balances are reinvested in Sovereign common stock. | |||||
Vesting: | Both the deferral portion of the bonus and the Sovereign match vest five years after the date the amounts are deposited in the trust. Vesting is accelerated upon a change in control, death or disability, or retirement. |
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Forfeiture: | A participant forfeits all amounts in such participant’s account if, prior to vesting, the participant voluntarily terminates employment or is terminated for cause. | |||||
Distribution: | A participant may elect, at the time a deferral election is made, to receive a lump sum distribution of vested amounts in such participant’s account either upon vesting or upon termination of employment. |
Eligibility
Administration of the Bonus Deferral Program
Election to Participate
Benefits
Distribution
54
Termination and Amendments
Certain Federal Income Tax Consequences of the Bonus Deferral Program
Other Information
55
Summary of Benefits
New Plan Benefits | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sovereign Bancorp, Inc. Bonus Recognition and Retention Program | ||||||||||
Name and Position | | Dollar Value ($)(1) | | Number of Shares (approximate)(2) | ||||||
Jay S. Sidhu Chairman, President and Chief Executive Officer | $ | 1,500,000 | 66,021 | |||||||
Joseph Campanelli Vice Chairman | $ | 266,667 | 11,737 | |||||||
John P. Hamill Chairman and Chief Executive Officer of Sovereign Bank – New England Division | $ | 266,667 | 11,737 | |||||||
James D. Hogan Chief Financial Officer and Executive Vice President | $ | 300,000 | 13,204 | |||||||
Dennis S. Marlo Chief Risk Management Officer and Executive Vice President of Sovereign | $ | 116,666 | 5,135 | |||||||
Lawrence M. Thompson, Jr. Vice Chairman and Chief Administrative Officer | $ | 0 | 0 | |||||||
All Senior Officers (3) | $ | 2,716,668 | 119,572 | |||||||
Non-Employee Director Group (4) | $ | 0 | 0 | |||||||
Non-Senior Officer Employee Group | $ | 1,053,400 | 46,188 |
(1) | Amount includes Sovereign’s matching contribution under the Bonus Deferral Program. |
(2) | Based on the closing price of Sovereign common stock on the New York Stock Exchange of $22.72 on February 18, 2004, the date bonus amounts were approved and awarded by Sovereign’s Compensation Committee. The number of shares is subject to adjustment by the Bonus Deferral Program’s trustee based upon the price per share of Sovereign common stock when it is acquired. |
(3) | Includes those officers who are included in Item 4A of Sovereign’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. |
(4) | Non-employee directors are not eligible to participate in the Bonus Deferral Program. |
56
ADDITIONAL INFORMATION
2005 Annual Meeting
Shareholder Proposals
Nominations for Election of Directors
Annual Report for 2003
57
Corporate Governance Documents
Waivers of Provisions of Codes of Conduct
Complaints and Concerns
Secretary
58
EXHIBIT “A”
December 2003
SOVEREIGN BANCORP, INC.
AUDIT COMMITTEE CHARTER
Purpose
Committee Membership
Statement of Policy
A-1
Committee Authority and Responsibilities
• | Responsibilities Relating to Retention of Public Accounting Firms — The Committee shall be directly responsible for the appointment, compensation, oversight of the work, evaluation and termination of any accounting firm employed by the Company (including resolving disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report and related work. The accounting firm shall report directly to the Committee. |
• | Preapproval of Services — All auditing services (which may entail providing comfort letters or consents in connection with securities underwritings) and all non-audit services, provided to the Company by the Company’s auditors which are not prohibited by law shall be preapproved by the Committee pursuant to such processes as are determined to be advisable. |
• | Exception — The preapproval requirement set forth above, shall not be applicable with respect to the provision of non-audit services, if: |
• | Delegation — The Committee may delegate to one or more designated members of the Committee the authority to grant required preapprovals. The decisions of any member to whom authority is delegated under this paragraph to preapprove an activity under this subsection shall be presented to the full Committee at its next scheduled meetings. |
• | Complaints — The Committee shall establish and maintain procedures to facilitate: |
Financial Statement and Disclosure Matters
• | Review and discuss with management and the independent auditor the annual audited financial statements, including disclosures made in management’s discussion and analysis of financial condition and results of operation and any other matters required to be communicated to the Committee by the independent auditors under Generally Accepted Auditing Standards, and recommend to the Board whether the audited financial statements should be included in the Company’s Form 10-K. |
A-2
• | Review and discuss with management and the independent auditor the Company’s quarterly financial statements, including the disclosures made in management’s discussion and analysis of financial condition and results of operations prior to the filing of the Company’s Form 10-Q, including the results of the independent auditors’ reviews of the quarterly financial statements and any other matters required to be communicated to the Committee by the independent auditors under Generally Accepted Auditing Standards. |
• | Annually the Committee shall receive a report from the independent auditor prior to the filing of its audit report with the SEC, on (i) any major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, (ii) any major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies, (iii) the development, selection and disclosure of critical accounting estimates, (iv) all material alternative treatments of financial information within GAAP that have been discussed with management, including the ramifications of the use of such alternative treatments and disclosures and treatment preferred by the independent auditor, (v) their judgment about the quality, not just the acceptability, of accounting principles, the reasonableness of significant judgments, and the clarity and adequacy of the disclosures, including financial trends of the financial statements and notes thereto, (vi) the adoption of, or changes to, the Company’s significant auditing and accounting principles and practices; (vii) any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to requested information, or personnel and any significant disagreements with management; (viii) any accounting adjustments that were noted or proposed by the auditor but were “passed” (as immaterial or otherwise); (ix) and any other matters required to be communicated to the Committee by the independent auditors under Generally Accepted Auditing Standards. The report should also include any other formal written communications between the independent auditor and management, including the management letter provided by the independent auditor and the Company’s response to that letter and any schedule of unadjusted differences. |
• | Review the report required to be delivered by the independent auditor in the immediately preceding paragraph and any analyses prepared by management regarding the items covered in the independent auditor’s report. |
• | Discuss with management the Company’s earnings press releases, including the use of “pro forma”, “adjusted” or other non-GAAP information, as well as financial information and earnings guidance provided to analysts and rating agencies. |
• | Discuss with management and the independent auditor the effect of accounting initiatives as well as off-balance sheet structures on the Company’s financial statements. |
• | Discuss with management, the internal auditors and the legal/compliance department the effect of regulatory initiatives on the Company’s financial statements. |
• | Discuss with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies. |
Oversight of the Company’s Relationship with the Independent Auditor
• | Review the experience and qualifications of the senior members of the independent auditor team. |
• | Obtain and review a written report from the independent auditor at least annually regarding (i) the auditor’s internal quality-control procedures, (ii) any material issues raised by the most recent quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years concerning one or more independent audits carried out by the firm, (iii) any steps taken to deal with any such issues, and (iv) all relationships, both direct and indirect, between the independent auditor and the Company. Evaluate the qualifications, |
A-3
performance and independence of the independent auditor, including considering whether the auditor’s quality controls are adequate and the provision of non-audit services is compatible with maintaining the auditor’s independence, and taking into account the opinions of management and the internal auditor. The Committee shall present its conclusions to the Board.
• | Consider whether, in order to assure continuing auditor independence, it is appropriate to adopt a policy of rotating the lead audit partner or even the independent auditing firm itself on a regular basis. |
• | Recommend to the Board policies for the Company’s hiring of employees or former employees of the independent auditor who were engaged on the Company’s account. |
• | Discuss with the independent auditor issues on which the independent auditor communicated with its national office regarding auditing or accounting issues. |
• | Meet with the independent auditor prior to the audit to discuss the planning and staffing of the audit. |
Oversight of the Company’s Internal Audit Function
• | Review the appointment and replacement of the senior internal auditing executive. |
• | Review the significant reports to management prepared by the internal auditing department and management’s responses. |
• | Discuss with the independent auditor the internal audit department responsibilities, budget and staffing and any recommended changes in the planned scope of the internal audit. |
Compliance Oversight
• | Obtain from the independent auditor such assurance as it deems adequate that such auditor has fulfilled its responsibilities under Section 10A of the Securities Exchange Act of 1934. |
• | Obtain reports from management, the Company’s senior internal auditing executive and the regulatory compliance and legal/compliance department relating to the Company’s conformity with applicable legal and regulatory requirements. Review reports and disclosures of insider and affiliated party transactions. |
• | Review with management, the Company’s internal auditors and the Company’s legal/compliance department compliance with laws and regulations. Advise the Board with respect to the Company’s compliance with applicable laws and regulations. |
• | Review with the Office of the Company’s General Counsel, pending material litigation and compliance matters. |
• | The Committee will address and take action, as it deems necessary or appropriate, with respect to any issues regarding the provisions of paragraphs 2 and 3 of the Company’s Code of Ethics for the Chief Executive Officer and Senior Financial Officers to the extent the issue relates to accounting and disclosure and regulations of the SEC, the NYSE, the OTS or other bank regulatory authority, and paragraph 4 of such Code to the extent such misrepresentation or omission relates to financial statements or related financial information. |
• | The Committee will address and take any action, as it deems necessary or appropriate, with respect to any issues relating to inquiries or investigations regarding the quality of financial reports filed by the Company with the SEC or otherwise distributed to the public. |
Miscellaneous Powers and Responsibilities
• | The Committee shall have the power to investigate any matter brought to its attention within the scope of its duties, with the power to retain outside counsel for this purpose if, in its judgment, that is appropriate. |
A-4
• | The Committee shall have the responsibility to submit the minutes of all meetings of the Audit Committee to the Board of Directors. |
• | The Audit Committee shall have the responsibility to prepare the report required to be included in the Company’s annual proxy statement by the rules of the Securities and Exchange Commission and for oversight of the compliance effort with respect to OTS Regulatory Bulletin NO. 32-23 as it relates to the internal audit function and OTS Bulletin 32-25 as it relates to the external audit function. |
• | The Committee shall have the power to access the Company’s counsel without the approval of management, as it determines necessary to carry out its duties. |
• | The Committee shall also have the authority without the consent of management or the Board, at the Company’s expense, to the extent it deems necessary or appropriate, to retain special independent legal, accounting or other consultants to advise the Committee in connection with fulfilling its obligations hereunder. |
• | At the request of the Board, the Committee shall have the responsibility of discussing with management and the independent auditor any significant or material correspondence with regulators or governmental agencies, including all examination reports received from the various supervisory authorities and review management’s replies to such correspondence or reports. The Committee shall have the responsibility of discussing with management and the independent auditor any employee complaints or published reports that raise material issues regarding the Company’s financial statements or accounting policies and review management’s replies to such complaints. |
• | The Committee shall have the responsibility to discuss with the Company’s General Counsel legal matters that may have a material impact on the financial statements or the Company’s compliance policies. |
Meetings
A-5
EXHIBIT “B”
SOVEREIGN BANCORP, INC.
2004 BROAD-BASED STOCK INCENTIVE PLAN
ARTICLE 1 — PURPOSE OF THE PLAN; TYPES OF AWARDS
1.1 Purpose. The Sovereign Bancorp, Inc. 2004 Broad-Based Stock Incentive Plan is intended to provide selected Team Members of Sovereign Bancorp, Inc. and its Subsidiaries with an opportunity to acquire Common Stock of the Corporation. The Plan is designed to help the Corporation attract, retain and motivate Team Members to make substantial contributions to the success of the Corporation’s business and the businesses of its Subsidiaries. Awards will be granted under the Plan based, among other things, on the Participant’s level of responsibility and performance within the Corporation.
1.2 Authorized Plan Awards. Incentive Stock Options, Nonqualified Stock Options, and Restricted Stock may be awarded within the limitations of the Plan herein described.
ARTICLE 2 — DEFINITIONS
2.1 “Agreement.” A written or electronic agreement between the Corporation and a Participant evidencing the grant of an Award. A Participant may be issued one or more Agreements from time to time, reflecting one or more Awards.
2.2 “Award.” The grant of a Stock Option or Restricted Stock.
2.3 “Board.” The Board of Directors of the Corporation.
2.4 “Change in Control.” Except as otherwise provided in an Agreement, the first to occur of any of the following events:
(a) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), except for any of the Corporation’s employee benefit plans, or any entity holding the Corporation’s voting securities for, or pursuant to, the terms of any such plan (or any trust forming a part thereof) (the “Benefit Plan(s)”), is or becomes the beneficial owner, directly or indirectly, of the Corporation’s securities representing 19.9% or more of the combined voting power of the Corporation’s then outstanding securities other than pursuant to a transaction excepted in Clause (c) or (d); |
(b) there occurs a contested proxy solicitation of the Corporation’s shareholders that results in the contesting party obtaining the ability to vote securities representing 19.9% or more of the combined voting power of the Corporation’s then outstanding securities; |
(c) a binding written agreement is executed (and, if legally required, approved by the Corporation’s shareholders) providing for a sale, exchange, transfer or other disposition of all or substantially all of the assets of the Corporation or of Sovereign Bank to another entity, except to an entity controlled directly or indirectly by the Corporation; |
(d) the shareholders of the Corporation approve a merger, consolidation, or other reorganization of the Corporation, unless: |
B-1
(e) a plan of liquidation or dissolution of the Corporation, other than pursuant to bankruptcy or insolvency laws, is adopted; |
(f) during any period of two consecutive years, individuals, who at the beginning of such period, constituted the Board cease for any reason to constitute at least a majority of the Board unless the election, or the nomination for election by the Corporation’s shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or |
(g) the occurrence of a Triggering Event within the meaning of the Rights Agreement dated as of September 19, 1989, as amended by the Amendment to Rights Agreement dated as of September 27, 1995, and as further amended by the Second Amendment to the Rights Agreement dated as of June 21, 2001, between the Corporation and Mellon Investor Services LLC, as rights agent. |
2.5 “Code.” The Internal Revenue Code of 1986, as amended.
2.6 “Code of Conduct.” The following documents: (i) the Sovereign Bancorp, Inc. Code of Conduct and Ethics, (ii) Code of Ethics For the Chief Executive Officer and Senior Financial Officers of Sovereign Bancorp, Inc. and Sovereign Bank, (iii) the Sovereign Bancorp, Inc. Policy on Personal Securities Transactions, and (iv) the policies and procedures related to employment of Team Members by the Corporation or a Subsidiary set forth in the Sovereign Bank Team Member Handbook. The Code of Conduct may be amended and updated at any time. The term “Code of Conduct” shall also include any other policy or procedure that may be adopted by the Corporation or a Subsidiary and communicated to Team Members of the Corporation or a Subsidiary.
2.7 “Committee.” The Compensation Committee of the Board.
2.8 “Common Stock.” The common stock of the Corporation (no par value) as described in the Corporation’s Articles of Incorporation, or such other stock as shall be substituted therefor.
B-2
2.9 “Corporation.” Sovereign Bancorp, Inc., a Pennsylvania corporation.
2.10 “Exchange Act.” The Securities Exchange Act of 1934, as amended.
2.11 “Incentive Stock Option.” A Stock Option intended to satisfy the requirements of Code Section 422(b).
2.12 “Nonqualified Stock Option.” A Stock Option which does not satisfy the requirements of Code Section 422(b).
2.13 “Non-Senior Officer.” A Team Member who is not a Senior Officer.
2.14 “Optionee.” A Participant who is awarded a Stock Option pursuant to the provisions of the Plan.
2.15 “Participant.” A Team Member to whom an Award has been granted and remains outstanding.
2.16 “Performance Criteria.” Any objective determination based on one or more of the following areas of performance of the Corporation, a Subsidiary, or any division, department or group of either which includes, but is not limited to: (a) earnings, (b) cash flow, (c) revenue, (d) financial ratios, (e) market performance, (f) shareholder return, (g) operating profits (including earnings before interest, taxes, depreciation and amortization), (h) earnings per share, (i) return on assets, (j) return on equity, (k) return on investment, (l) stock price, (m) asset quality, (n) expense reduction, (o) systems conversion, (p) special projects as determined by the Committee and (q) integration initiatives. Performance Criteria shall be established by the Committee prior to the issuance of a Performance Grant.
2.17 “Performance Goal.” One or more goals established by the Committee, with respect to an Award intended to constitute a Performance Grant, that relate to one or more Performance Criteria. A Performance Goal shall relate to such period of time, not less than one year (unless coupled with a vesting schedule of at least one year) or more than five years, as may be specified by the Committee at the time of the awarding of a Performance Grant.
2.18 “Performance Grant.” An Award, the vesting or receipt without restriction of which, is conditioned on the satisfaction of one or more Performance Goals.
2.19 “Plan.” The Sovereign Bancorp, Inc. 2004 Broad-Based Stock Incentive Plan.
2.20 “Restricted Stock.” An award of Common Stock pursuant to the provisions of the Plan, which award is subject to such restrictions and other conditions, including achievement of one or more performance goals, as may be specified by the Committee at the time of such award.
2.21 “Retirement.” The termination of a Participant’s employment following the first day of the month coincident with or next following attainment of age 65, as the term “Normal Retirement Date” is defined in the Sovereign Bancorp, Inc. Employee Stock Ownership Plan, or attainment of age 55 and the completion of five (5) years service, as the term “Early Retirement Date” is defined in the Sovereign Bancorp, Inc. Employee Stock Ownership Plan.
2.22 “Securities Act.” The Securities Act of 1933, as amended.
2.23 “Senior Officer.” A Team Member designated as a member of the Office of the Chairman of Sovereign Bank (or other equivalent or successor designation as may be made from time to time).
2.24 “Stock Option” or “Option.” A grant of a right to purchase Common Stock pursuant to the provisions of the Plan.
2.25 “Subsidiary.” A subsidiary corporation, as defined in Code Section 424(f), that is a subsidiary of a relevant corporation.
2.26 “Team Member.” Any common law employee of the Corporation or a Subsidiary. A Team Member does not include any individual who: (i) does not receive payment for services directly from the Corporation’s or a Subsidiary’s payroll; (ii) is employed by an employment agency that is not a Subsidiary; or (iii) who renders services pursuant to a written arrangement that expressly provides that the service provider is not
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eligible for participation in the Plan, regardless if such person is later determined by the Internal Revenue Service or a court of law to be a common law employee.
2.27 “Termination For Cause.” Termination of a Team Member by the Corporation or a Subsidiary after:
(a) the Office of Thrift Supervision or any other government regulatory agency recommends or orders in writing that the Corporation or a Subsidiary terminate the employment of such Team Member or relieve him or her of his or her duties; |
(b) such Team Member is convicted of or enters a plea of guilty ornolo contendere to a felony, a crime of falsehood, or a crime involving fraud or moral turpitude, or the actual incarceration of the Team Member for a period of 45 consecutive days; |
(c) in the determination of the Committee, such Team Member willfully fails to follow the lawful instructions of the Board or any officer of the Corporation or a Subsidiary after such Team Member’s receipt of written notice of such instructions, other than a failure resulting from the Team Member’s incapacity because of physical or mental illness; |
(d) in the determination of the Committee, the willful or continued failure by such Team Member to substantially and satisfactorily perform his duties with the Corporation or a Subsidiary (other than any such failure resulting from the Team Member’s being disabled (within the meaning of Code Section 22(e)(3)) or as a result of physical or mental illness), within a reasonable period of time after a demand for substantial performance or notice of lack of substantial or satisfactory performance is delivered to the Team Member, which demand identifies the manner in which the Team Member has not substantially or satisfactorily performed his duties; or |
(e) in the determination of the Committee, the failure by such Team Member to conform to the Corporation’s Code of Conduct. |
For purposes of the Plan, no act, or failure to act, on a Team Member’s part shall be deemed “willful” unless done, or omitted to be done, by such Team Member not in good faith and without reasonable belief that such Team Member’s action or omission was in the best interest of the Corporation or a Subsidiary.
ARTICLE 3 — ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Compensation Committee of the Board composed of two or more members of the Board, all of whom are (a) “non-employee directors” as such term is defined under the rules and regulations adopted from time to time by the Securities and Exchange Commission pursuant to Section 16(b) of the Exchange Act, and (b) “outside directors” within the meaning of Code Section 162(m). The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board.
3.2 Powers of the Committee.
(a) The Committee shall be vested with full authority to make such rules and regulations as it deems necessary or desirable to administer the Plan and to interpret the provisions of the Plan, unless otherwise determined by a majority of the disinterested members of the Board. Any determination, decision, or action of the Committee in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive, and binding upon all Participants and any person claiming under or through a Participant, unless otherwise determined by a majority of the disinterested members of the Board. |
(b) Subject to the terms, provisions and conditions of the Plan and subject to review and approval by a majority of the disinterested members of the Board, the Committee shall have exclusive jurisdiction to: |
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3.3 Liability. No member of the Board or the Committee shall be liable for any action or determination made in good faith by the Board or the Committee with respect to this Plan or any Awards granted under this Plan.
3.4 Establishment and Certification of Performance Goals. The Committee shall establish, prior to grant, Performance Goals with respect to each Award intended to constitute a Performance Grant. Notwithstanding anything herein to the contrary, no Option that is intended to constitute a Performance Grant may be exercised until the Performance Goal or Goals applicable thereto is or are satisfied, nor shall any share of Restricted Stock that is intended to constitute a Performance Grant be released to a Participant until the Performance Goal or Goals applicable thereto is or are satisfied.
3.5 No Waiver of Performance Goals. Under no circumstances shall the Committee or the Board waive any Performance Goals with respect to the grant of any Award hereunder.
3.6 Performance Grants Not Mandatory. Nothing herein shall be construed as requiring that any Award be made a Performance Grant; provided, however, that any Award granted to a Senior Officer shall be subject to a one or more Performance Goals.
ARTICLE 4 — COMMON STOCK SUBJECT TO THE PLAN
4.1 Common Stock Authorized.
(a) The total aggregate number of shares of Common Stock for which Options may be granted under the Plan or which may be awarded as Restricted Stock under the Plan shall not exceed 15,000,000. The limitation established by the preceding sentence shall be subject to adjustment as provided in Article 10. |
(b) The maximum aggregate number of shares of Common Stock for which Restricted Stock may be awarded under the Plan shall not exceed 6,000,000. The limitation established by the preceding sentence shall be subject to adjustment as provided in Article 10. |
(c) The maximum aggregate number of shares of Common Stock for which Incentive Stock Options may be granted under the Plan shall not exceed 5,000,000. The limitation established by the preceding sentence shall be subject to adjustment as provided in Article 10. |
(d) If any Option is exercised by tendering Common Stock, either actually or by attestation, to the Corporation as full or partial payment in connection with the exercise of such Option under the Plan, or if the tax withholding requirements are satisfied through such tender, only the number of shares of Common Stock issued net of the Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares available for Awards under the Plan. |
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4.2 Shares Available. The Common Stock to be issued under the Plan shall be the Corporation’s Common Stock which shall be made available at the discretion of the Board, either from authorized but unissued Common Stock or from Common Stock acquired by the Corporation, including shares purchased in the open market. In the event that any outstanding Award under the Plan for any reason expires, terminates, or is forfeited, the shares of Common Stock allocable to such expiration, termination, or forfeiture may thereafter again be made subject to an Award under the Plan.
ARTICLE 5 — ELIGIBILITY
5.1 Participation. Awards shall be granted by the Committee only to persons who are Team Members and shall be ratified by a majority of the disinterested members of the Board.
5.2 Incentive Stock Option Eligibility. Notwithstanding any other provision of the Plan to the contrary, an individual who owns more than ten percent of the total combined voting power of all classes of outstanding stock of the Corporation shall not be eligible for the grant of an Incentive Stock Option, unless the special requirements set forth in Sections 6.1 and 7.1 are satisfied. For purposes of this section, in determining stock ownership, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries. “Outstanding stock” shall include all stock actually issued and outstanding immediately before the grant of the Option. “Outstanding stock” shall not include shares authorized for issue under outstanding Options held by the Optionee or by any other person.
ARTICLE 6 — STOCK OPTIONS IN GENERAL
6.1 Exercise Price. The exercise price of an Option to purchase a share of Common Stock shall be, in the case of an Incentive Stock Option, not less than 100% of the fair market value of a share of Common Stock on the date the Option is granted, except that the exercise price shall be not less than 110% of such fair market value in the case of an Incentive Stock Option granted to any individual described in Section 5.2. The exercise price of an Option to purchase a share of Common Stock shall be, in the case of a Nonqualified Stock Option, not less than 100% of the fair market value of a share of Common Stock on the date the Option is granted. The exercise price shall be subject to adjustment pursuant to the limited circumstances set forth in Article 10.
6.2 Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the date an Option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any individual in any calendar year (under the Plan and all other plans maintained by the Corporation and Subsidiaries) shall not exceed $100,000.
6.3 Determination of Fair Market Value.
(a) If the Common Stock is listed on an established stock exchange or exchanges, the fair market value per share of the Common Stock shall be the composite closing sale price for such a share on the relevant day. If no sale of Common Stock has occurred on that day, the fair market value shall be determined by reference to such price for the next preceding day on which a sale occurred. |
(b) In the event that the Common Stock is not traded on an established stock exchange, then the fair market value per share of Common Stock will be the price established by the Committee in good faith. |
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6.4 Limitation on Option Awards. Awards under this Plan (and any other plan of the Corporation or a Subsidiary providing for stock option awards) to a Team Member described in Code Section 162(m)(3) shall not exceed, in the aggregate, Options to acquire 300,000 shares of Common Stock during any period of 12 consecutive months. Such limitation shall be subject to adjustment in the manner described in Article 10.
6.5 Transferability of Options.
(a) Except as provided in Subsection (b), an Option granted hereunder shall not be transferable other than by will or the laws of descent and distribution, and such Option shall be exercisable, during the Optionee’s lifetime, only by him or her. |
(b) An Optionee may, with the prior approval of the Committee, transfer a Nonqualified Stock Option for no consideration to or for the benefit of one or more members of the Optionee’s “immediate family” (including a trust, partnership or limited liability company for the benefit of one or more of such members), subject to such limits as the Committee may impose, and the transferee shall remain subject to all terms and conditions applicable to the Option prior to its transfer. The term “immediate family” shall mean an Optionee’s spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers and grandchildren (and, for this purpose, shall also include the Optionee). |
ARTICLE 7 — TERM, VESTING AND EXERCISE OF OPTIONS
7.1 Term and Vesting. Each Option granted under the Plan shall terminate on the date determined by the Committee, and specified in the Agreement; provided, however, that (i) each intended Incentive Stock Option granted to an individual described in Section 5.2 shall terminate not later than five years after the date of the grant, (ii) each other intended Incentive Stock Option shall terminate not later than ten years after the date of grant, and (iii) each Option granted under the Plan which is intended to be a Nonqualified Stock Option shall terminate not later than ten years and one month after the date of grant. Each Option granted under the Plan shall be fully exercisable (i.e., become 100% vested) only after the earlier of the date on which (i) the Optionee has completed three years of continuous employment with the Corporation or a Subsidiary immediately following the date of the grant of the Option (or such later date as may be specified in an Agreement, including a date that may be tied to the satisfaction of one or more Performance Goals); (ii) unless otherwise provided in an Agreement, a Change in Control occurs; and (iii) unless otherwise provided in an Agreement, the Optionee’s death or being disabled (within the meaning of Code Section 22(e)(3)). An Option may be exercised only during the continuance of the Optionee’s employment, except as provided in Article 8.
7.2 Exercise.
(a) A person electing to exercise an Option shall give notice to the Corporation of such election and of the number of shares he or she has elected to purchase and shall at the time of exercise tender the full exercise price of the shares he or she has elected to purchase. The exercise notice shall be delivered to the Corporation in person, by certified mail, or by such other method (including electronic transmission) and in such form as determined by the Committee. The exercise price shall be paid in full, in cash, upon the exercise of the Option; provided, however, that in lieu of cash, with the approval of the Committee at or prior to exercise, an Optionee may exercise an Option by tendering to the Corporation shares of Common Stock owned by him or her and having a fair market value equal to the cash exercise price applicable to the Option (with the fair market value of such stock to be determined in the manner provided in Section 6.3) or by delivering such combination of cash and such shares as the Committee in its sole discretion may approve; further provided, however, that no such manner of exercise shall be permitted if such exercise would violate Section 402 of the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, Common Stock acquired pursuant to the exercise of an Incentive Stock Option may not be tendered as payment unless the holding period requirements of Code Section 422(a)(1) have been satisfied, and Common Stock not acquired pursuant to the exercise of an Incentive Stock |
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Option may not be tendered as payment unless it has been held, beneficially and of record, for at least six months (or such longer time as may be required by applicable securities law or accounting principles to avoid adverse consequences to the Corporation or a Participant). |
(b) A person holding more than one Option at any relevant time may, in accordance with the provisions of the Plan, elect to exercise such Options in any order. |
(c) At the request of the Participant and to the extent permitted by applicable law, the Committee may, in its sole discretion, selectively approve arrangements whereby the Participant irrevocably authorizes a third party to sell shares of Common Stock (or a sufficient portion of the shares) acquired upon the exercise of an Option and to remit to the Corporation a sufficient portion of the sales proceeds to pay the entire exercise price and any tax withholding required as a result of such exercise. |
7.3 Deferred Delivery of Nonqualified Stock Option Shares. The Committee may approve an arrangement whereby an Optionee may elect to defer receipt of Common Stock otherwise issuable to him or her upon exercise of a Nonqualified Stock Option. Any such arrangement, if approved at all, shall be subject to such terms and conditions as the Committee, in its sole discretion, may specify, which terms and conditions may (but need not) include provision for the award of additional shares to take into account dividends paid subsequent to exercise of the Option.
ARTICLE 8 — EXERCISE OF OPTIONS FOLLOWING TERMINATION OF EMPLOYMENT
8.1 Retirement; Other Termination by Corporation or Subsidiary; Change in Control. In the event of an Optionee’s termination of employment (i) due to Retirement, (ii) by the Corporation or a Subsidiary other than Termination for Cause, or (iii) due to a Change in Control, such Optionee’s Option shall lapse at the earlier of the expiration of the term of the Option or:
(a) in the case of an Incentive Stock Option, three months from the date of such termination of employment; and |
(b) in the case of a Nonqualified Stock Option, up to 24 months from the date of such termination of employment. |
8.2 Death or Total Disability. In the event of an Optionee’s termination of employment due to death or being “disabled” (within the meaning of Code Section 22(e)(3)), such Optionee’s Option shall lapse at the earlier of the expiration of the term of the Option or:
(a) in the case of an Incentive Stock Option, one year from the date of such termination of employment; and |
(b) in the case of a Nonqualified Stock Option, up to 24 months from the date of such termination of employment. |
8.3 Termination For Cause; Other Termination by Optionee. In the event of an Optionee’s Termination For Cause, or in the event of termination of employment at the election of an Optionee, such Optionee’s Option shall lapse upon such termination.
8.4 Special Termination Provisions for Options Granted to Non-Senior Officers.
(a) In the event that a Non-Senior Officer Optionee’s employment is terminated and the Committee deems it equitable to do so, the Committee may, in its discretion and subject to the approval of a majority of the disinterested members of the Board, waive any continuous service requirement for vesting (but not any Performance Goal or Goals) specified in an Agreement pursuant to Section 7.1 and permit exercise of an Option held by such Optionee prior to the satisfaction of such continuous service requirement. Any such waiver may be made with retroactive effect, provided it is made within 60 days following the Optionee’s termination of employment. |
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(b) In the event the Committee waives the continuous service requirement with respect to an Option as set forth in Section 8.4(a) above and the circumstance of an Optionee’s termination of employment is described in Section 8.1 or 8.2, the affected Option will lapse as otherwise provided in the relevant section. |
(c) In the event the Committee waives the continuous service requirement with respect to an Option as set forth in Section 8.4(a) above, such option shall lapse at the earlier of the expiration of the term of the Option or: |
ARTICLE 9 — RESTRICTED STOCK
9.1 In General. Each Restricted Stock Award shall be subject to such terms and conditions as may be specified in the Agreement issued to a Participant to evidence the grant of such Award. Subject to Section 3.6, a Restricted Stock Award shall be subject to a vesting schedule or Performance Goals, or both.
9.2 Minimum Vesting Period for Certain Awards. Each share of Restricted Stock awarded to a Participant shall be fully vested only after the earlier of the date on which (a) the Participant has completed three years of continuous employment with the Corporation or a subsidiary immediately following the date that the Restricted Stock was awarded (or such later date as may be specified in an Agreement, including a date that may be tied to the satisfaction of one or more Performance Goals); (b) unless otherwise provided in an Agreement, a Change in Control occurs; or (c) unless otherwise provided in an Agreement, the Participant’s death or being “disabled” (within the meaning of Code Section 22(e)(3)).
9.3 Waiver of Vesting Period for Certain Restricted Stock Awards to Non-Senior Officers. In the event that a Non-Senior Officer’s employment is terminated and the Committee deems it equitable to do so, the Committee may, in its discretion and subject to the approval of a majority of the disinterested members of the Board, waive any minimum vesting period (but not any Performance Goal or Goals) with respect to a Restricted Stock Award held by such Non-Senior Officer. Any such waiver may be made with retroactive effect, provided it is made within 60 days following such Non-Senior Officer’s termination of employment.
9.4 Limitation on Restricted Stock Awards. Grants under this Plan (and any other plan of the Corporation or a Subsidiary providing for restricted stock awards) to any Team Member described in Code Section 162(m)(3) shall not exceed, in the aggregate, Restricted Stock Awards for 100,000 shares of Common Stock during any period of 12 consecutive months. Such limitation shall be subject to adjustment in the manner described in Article 10.
9.5 Issuance and Retention of Share Certificates By Corporation. One or more share certificates shall be issued upon the grant of a Restricted Stock Award; but until such time as the Restricted Stock shall vest or otherwise become distributable by reason of satisfaction of one or more Performance Goals, the Corporation shall retain such share certificates.
9.6 Stock Powers. At the time of the grant of a Restricted Stock Award, the Participant to whom the grant is made shall deliver such stock powers, endorsed in blank, as may be requested by the Corporation.
9.7 Release of Shares. Within 30 days following the date on which a Participant becomes entitled under an Agreement to receive shares of previously Restricted Stock, the Corporation shall deliver to him or her a certificate evidencing the ownership of such shares, together with an amount of cash (without interest) equal to the dividends that have been paid on such shares with respect to record dates occurring on and after the date of the related Award.
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9.8 Forfeiture of Restricted Stock Awards. In the event of the forfeiture of a Restricted Stock Award, by reason of the termination of employment prior to vesting, the failure to achieve a Performance Goal or otherwise, the Corporation shall take such steps as may be necessary to cancel the affected shares and return the same to its treasury.
9.9 Assignment, Transfer, Etc. of Restricted Stock Rights. The potential rights of a Participant to shares of Restricted Stock may not be assigned, transferred, sold, pledged, hypothecated, or otherwise encumbered or disposed of until such time as unrestricted certificates for such shares are received by him or her.
9.10 Deferred Delivery of Formerly Restricted Stock. The Committee may approve an arrangement whereby a Participant may elect to defer receipt of Restricted Stock beyond the date on which a restriction terminates or a Performance Goal is satisfied with respect thereto. Any such arrangement, if approved at all, shall be subject to such terms and conditions as the Committee, in its sole discretion, may specify, including terms covering the accumulation or distribution of dividends previously paid with respect to the subject shares and those that may thereafter be paid.
ARTICLE 10 — ADJUSTMENT PROVISIONS
10.1 Share Adjustments.
(a) In the event that the shares of Common Stock of the Corporation, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation, or if the number of such shares of Common Stock shall be changed through the payment of a stock dividend, stock split or reverse stock split, then (i) the shares of Common Stock authorized hereunder to be made the subject of Awards, (ii) the shares of Common Stock then subject to outstanding Awards and the exercise price thereof (where relevant), (iii) the maximum number of Awards that may be granted within a 12-month period and (iv) the nature and terms of the shares of stock or securities subject to Awards hereunder shall be increased, decreased or otherwise changed to such extent and in such manner as may be necessary or appropriate to reflect any of the foregoing events. |
(b) If there shall be any other change in the number or kind of the outstanding shares of the Common Stock of the Corporation, or of any stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, and if a majority of the disinterested members of the Board shall, in its sole discretion, determine that such change equitably requires an adjustment in any Award which was theretofore granted or which may thereafter be granted under the Plan, then such adjustment shall be made in accordance with such determination. |
(c) The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, to consolidate, to dissolve, to liquidate or to sell or transfer all or any part of its business or assets. |
10.2 Corporate Changes. A liquidation or dissolution of the Corporation, a merger or consolidation in which the Corporation is not the surviving Corporation or a sale of all or substantially all of the Corporation’s assets, shall cause each outstanding Award to terminate, except to the extent that another corporation may and does, in the transaction, assume and continue the Award or substitute its own awards.
10.3 Fractional Shares. Fractional shares resulting from any adjustment in Awards pursuant to this article may be settled as a majority of the disinterested members of the Board shall determine.
10.4 Binding Determination. To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by a majority of the disinterested members of the Board, whose determination in that respect shall be final, binding and conclusive. Notice of any adjustment shall be given by the Corporation to each holder of an Award which shall have been so adjusted.
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ARTICLE 11 — GENERAL PROVISIONS
11.1 Effective Date. The Plan shall become effective upon the approval of the Plan by the shareholders of the Corporation within 12 months of adoption by the Board.
11.2 Termination of the Plan. Unless previously terminated by the Board, the Plan shall terminate on, and no Award shall be granted after, the day immediately preceding the tenth anniversary of its adoption by the Board.
11.3 Limitation on Termination, Amendment or Modification.
(a) The Board may at any time terminate, amend, modify or suspend the Plan, provided that, without the approval of the shareholders of the Corporation, no amendment or modification shall be made solely by the Board which: |
(b) No amendment, modification, suspension or termination of the Plan shall in any manner affect any Award theretofore granted under the Plan without the consent of the Participant or any person validly claiming under or through the Participant. |
11.4 No Right to Grant of Award or Continued Employment. Nothing contained in this Plan or otherwise shall be construed to (a) require the grant of an Award to an individual who qualifies as a Team Member, or (b) confer upon a Participant any right to continue in the employ of the Corporation or any Subsidiary or limit in any respect the right of the Corporation or of any Subsidiary to terminate the Participant’s employment at any time and for any reason.
11.5 No Obligation. No exercise of discretion under this Plan with respect to an event or person shall create an obligation to exercise such discretion in any similar or same circumstance, except as otherwise provided or required by law.
11.6 Withholding Taxes.
(a) Subject to the provisions of Subsection (b), the Corporation will require, where sufficient funds are not otherwise available, that a Participant pay or reimburse to it any withholding taxes at such time as withholding is required by law. |
(b) With the permission of the Committee, a Participant may satisfy the withholding obligation described in Subsection (a), in whole or in part, by electing to have the Corporation withhold shares of Common Stock (otherwise issuable to him or her) having a fair market value equal to the amount required to be withheld. An election by a Participant to have shares withheld for this purpose shall be subject to such conditions as may then be imposed thereon by any applicable securities law. |
11.7 Listing and Registration of Shares.
(a) No Option granted pursuant to the Plan shall be exercisable in whole or in part, and no share certificate shall be delivered, if at any relevant time a majority of the disinterested members of the Board shall determine in its discretion that the listing, registration or qualification of the shares of Common Stock subject to an Award on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, such Award, until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to a majority of the disinterested members of the Board. |
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(b) If a registration statement under the Securities Act with respect to the shares issuable under the Plan is not in effect at any relevant time, as a condition of the issuance of the shares, a Participant (or any person claiming through a Participant) shall give the Committee a written or electronic statement, satisfactory in form and substance to the Committee, that he or she is acquiring the shares for his or her own account for investment and not with a view to their distribution. The Corporation may place upon any stock certificate for shares issued under the Plan the following legend or such other legend as the Committee may prescribe to prevent disposition of the shares in violation of the Securities Act or other applicable law: |
‘THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (“ACT”) AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THEM UNDER THE ACT OR A WRITTEN OPINION OF COUNSEL FOR THE CORPORATION THAT REGISTRATION IS NOT REQUIRED.’
11.8 Disinterested Director. For purposes of this Plan, a director shall be deemed “disinterested” if such person could qualify as a member of the Committee under Section 3.1.
11.9 Gender; Number. Words of one gender, wherever used herein, shall be construed to include each other gender, as the context requires. Words used herein in the singular form shall include the plural form, as the context requires, andvice versa.
11.10 Applicable Law. Except to the extent preempted by federal law, this Plan document, and the Agreements issued pursuant hereto, shall be construed, administered and enforced in accordance with the domestic internal law of the Commonwealth of Pennsylvania.
11.11 Headings. The headings of the several articles and sections of this Plan document have been inserted for convenience of reference only and shall not be used in the construction of the same.
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EXHIBIT “C”
SOVEREIGN BANCORP, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Effective April 22, 2004)
ARTICLE 1 — PURPOSE AND SCOPE OF THE PLAN
Section 1.1 PURPOSE.
Section 1.2 DEFINITIONS.
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Section 1.3 ADMINISTRATION OF PLAN.
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and to make all other determinations necessary to the administration of the Plan, including appointment of individuals to facilitate the day-to-day operation thereof. The Committee’s determinations as to the interpretation and operation of the Plan shall be final and conclusive.
Section 1.4 EFFECTIVE DATE OF PLAN.
Section 1.5 TERMINATION OF PLAN.
ARTICLE II — PARTICIPATION
Section 2.1 ELIGIBILITY.
Section 2.2 PAYROLL DEDUCTIONS.
Section 2.3 TRANSFER OF PAYROLL DEDUCTIONS.
Section 2.4 LEAVE OF ABSENCE.
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ARTICLE III — PURCHASE OF SHARES
Section 3.1 OPTION PRICE.
Section 3.2 PURCHASE OF SHARES.
Section 3.3 LIMITATIONS ON PURCHASE.
Section 3.4 RESTRICTION ON TRANSFERABILITY.
ARTICLE IV — PROVISIONS RELATING TO COMMON STOCK
Section 4.1 COMMON STOCK RESERVED.
Section 4.2 ADJUSTMENT FOR CHANGES IN COMMON STOCK.
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in its sole discretion, determine that such change equitably requires an adjustment in any offering that was theretofore made or that may thereafter be made under the Plan, that such adjustment shall be made in accordance with such determination.
Section 4.3 INSUFFICIENT SHARES.
Section 4.4 CONFIRMATION OF PURCHASES; REGISTRATION OF SHARES.
Section 4.5 RIGHTS AS SHAREHOLDERS.
Section 4.6 CORPORATE REORGANIZATIONS, LIQUIDATION, ETC.
ARTICLE V — TERMINATION OF PARTICIPATION
Section 5.1 WITHDRAWAL.
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a Participant by satisfying the eligibility requirements and filing a Stock Purchase Agreement as set forth in Section 2.1.
Section 5.2 TERMINATION OF ELIGIBILITY.
Section 5.3 NO INTEREST.
No interest will be credited or paid on cash balances in a Participant’s Stock Purchase Account.
ARTICLE VI — GENERAL PROVISIONS
Section 6.1 TAX WITHHOLDING; INFORMATION RETURNS.
Section 6.2 NOTICES.
Section 6.3 CONDITION OF EMPLOYMENT.
Section 6.4 AMENDMENT OF THE PLAN.
Section 6.5 APPLICATION OF FUNDS.
Section 6.6 LEGAL RESTRICTIONS.
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Section 6.7 NUMBER.
Section 6.8 GOVERNING LAW.
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EXHIBIT “D”
SOVEREIGN BANCORP, INC.
BONUS RECOGNITION AND RETENTION PROGRAM
Effective November 1, 1997
ARTICLE I
PURPOSE
ARTICLE II
DEFINITIONS
2.1 “Annual Deferral Account” means, with respect to an individual who is a Participant for a given Program Year, an account established on his or her behalf within the Trust for the investment and reinvestment of the deferred Bonus, the Matching Amount, and any earnings thereon. Such Annual Deferral Account will be established for each Program Year in which an individual actively participates in the Program.
2.2 “Beneficiary” means the person or persons designated as such under a valid Beneficiary Designation Form. For purposes of the preceding sentence the term “person” shall include an individual, trust and estate. In default of a valid Beneficiary Designation Form, a Participant’s Beneficiary shall be his or her estate.
2.3 “Beneficiary Designation Form” means such form as shall be prescribed from time to time by the Committee for purposes of permitting a Participant to specify who should receive the balance in his or her Annual Deferral Account(s) in the event of his or her death prior to the receipt thereof. No such form shall be valid unless it is signed and filed with the Committee (or its designee) prior to the death of a Participant.
2.4 “Board” means the Board of Directors of the Company.
2.5 “Bonus” means the amount payable in cash to an individual with respect to any relevant calendar year under the Incentive Plan.
2.6 “Cause” means:
(a) the Office of Thrift Supervision or any other government regulatory agency recommends or orders in writing that an Employee’s Employer terminate or relieve him or her of his or her duties; |
(b) an Employee is convicted of or enters a plea ofnolo contendere to a felony, a crime of falsehood, or a crime involving fraud or moral turpitude, or the actual incarceration of an Employee for a period of 45 or more consecutive days; or |
(c) an Employee willfully fails to follow the lawful instructions of the Board after the Employee’s receipt of written notice of such instructions, other than a failure resulting from the Employee’s incapacity because of physical or mental illness. |
2.7 “Change in Control” means the first to occur of any of the following events:
(a) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, except for any of the Company’s employee benefit plans or any entity holding the Company’s voting securities for, or pursuant to, the terms of such plan (or any trust forming a part thereof (the “Benefit Plan(s)”), is or becomes the beneficial owner, directly or indirectly, of the Company’s |
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securities representing 19.9% or more of the combined voting power of the Company’s then outstanding securities other than pursuant to a transaction described in Subsection (d); |
(b) there occurs a contested proxy solicitation of the Company’s shareholders that results in the contesting party obtaining the ability to vote securities representing 19.9% or more of the combined voting power of the Company’s then outstanding securities; |
(c) a binding written agreement is executed (and, if legally required, approved by the Company’s shareholders) providing for a sale, exchange, transfer or other disposition of all or substantially all of the assets of the Company or of Sovereign Bank, to another entity, except to an entity controlled, directly or indirectly, by the Company; |
(d) the shareholders of the Company approve a merger, consolidation or other reorganization of the Company, unless: |
(e) a plan of liquidation or dissolution of the Company, other than pursuant to bankruptcy or insolvency laws, is adopted; |
(f) during any period of two consecutive years, individuals who, at the beginning of such period, constituted the Board cease for any reason to constitute at least a majority of the Board, unless the nomination for election of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; or |
(g) the occurrence of a “Triggering Event” within the meaning of such term in the Rights Agreement, dated as of September 19, 1989, as amended by the Amendment to the Rights Agreement, dated as of September 27, 1995, and as further amended by the Second Amendment to the Rights Agreement, dated as of June 21, 2001, between the Company and Mellon Investor Services LLC, as amended. |
(h) Notwithstanding Subsection (a), a Change in Control shall not be deemed to have occurred if a Person becomes the beneficial owner, directly or indirectly, of the Company’s securities representing 19.9% or more of the combined voting power of the Company’s then outstanding securities solely as a result of an acquisition by the Company of its voting securities which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 19.9% or more of the combined voting power of the Company’s then outstanding securities; provided, however, that if a Person becomes a beneficial |
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owner of 19.9% or more of the combined voting power of the Company’s then outstanding securities by reason of share purchases by the Company and shall, after such purchases by the Company, become the beneficial owner, directly or indirectly, of any additional voting securities of the Company (other than as a result of a stock split, stock dividend or similar transaction), then a Change in Control of the Company shall be deemed to have occurred with respect to such Person under Subsection (a). In no event shall a Change in Control of the Company be deemed to occur under Subsection (a) above with respect to Benefit Plans. |
2.8 “Code” means the Internal Revenue Code of 1986, as amended and as the same may hereafter be amended.
2.9 “Committee” means the Compensation Committee of the Board or such other committee as may be appointed by the Board to administer this Program. Such term also includes the whole Board to the extent it takes action with respect to administrative or operational matters relating to the Program.
2.10 “Common Stock” means the common stock of the Company (no par value), as described in the Company’s Articles of Incorporation, or such other stock as may be substituted therefor.
2.11 “Company” means Sovereign Bancorp, Inc., a Pennsylvania corporation, and any successor thereto.
2.12 “Deferral Election” means an irrevocable election, on a form prescribed by the Committee, by a Participant to defer receipt of a portion of his or her Bonus for a given calendar year.
2.13 “Disability” means a medically determinable physical or mental impairment that is of such permanence and degree that it can be expected to result in death or that a Participant is unable, because of such impairment, to perform any substantial gainful activity for which he is suited by virtue of his experience, training, or education and which would entitle such Participant to benefit under the Employer’s long-term disability plan, if any, or to Social Security disability benefits as evidenced by a disability award letter.
2.14 “Effective Date” means November 1, 1997.
2.15 “Employee” means an individual who is a common law employee of any Employer.
2.16 “Employer” means the Company and/or any Subsidiary of the Company that has been selected by the Board as eligible to have certain of its management and highly compensated personnel participate in the Program.
2.17 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended and as the same may hereafter be amended.
2.18 “Exchange Act” means the Securities Exchange Act of 1934, as amended and as the same may hereafter be amended.
2.19 “Fair Market Value” of a share of Common Stock on any given date means the closing sale price for such shares on that date as listed on the New York Stock Exchange (or any national securities exchange or quotation system on which the Common Stock is then listed or reported). If a closing sale price for the Common Stock for the given date is not listed or reported, or if there is none, the Fair Market Value shall be equal to the closing sale price on the nearest trading day preceding such date. Notwithstanding the foregoing, if, in the Committee’s judgment, there are unusual circumstances or occurrences under which the otherwise determined Fair Market Value of the Common Stock does not represent the actual fair value thereof, then the Fair Market Value of such Common Stock shall be determined by the Committee on the basis of such prices or market quotations as it shall deem appropriate and fairly reflective of the then fair value of such Common Stock.
2.20 “Incentive Plan” means the Sovereign Bank Leaders Incentive Plan. Such term shall also mean any other successor or comparable plan or program as designated by Committee and approved by the Board from time to time.
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2.21 “Matching Amount” means, with respect to the amount of a Bonus deferred for any year by a Participant, an amount equal to 100% of such deferred Bonus amount.
2.22 “Participant” means an individual who (i) has executed and timely filed a Deferral Election Form with the Committee (or its designee) and (ii) remains an Employee or, if not, has a balance standing to his or her credit in one or more Annual Deferral Accounts. Such term also includes a deceased Participant’s Beneficiary, who is entitled to a Program benefit, until such benefit is paid.
2.23 “Payment Election” means an election, on a form prescribed by the Committee, by a Participant as to when the vested balance in one of his or her Annual Deferral Accounts shall be paid.
2.24 “Program” means the Sovereign Bancorp, Inc. Bonus Recognition and Retention Program as evidenced by this document and as the same may hereafter be amended.
2.25 “Program Year” means a calendar year, or such other fiscal year as may be designated by the Board from time to time.
2.26 “Retirement” means the voluntary termination of employment by a Participant on or after any early or normal retirement date specified in the Company’s employee stock ownership plan in effect at the relevant time.
2.27 “Securities Act” means the Securities Act of 1933, as amended and as the same may hereafter be amended.
2.28 “Subsidiary” means a subsidiary corporation, as defined in Code Section 424(f), that is a subsidiary of the corporation to which reference is being made.
2.29 “Trust” means the trust established under an agreement by and between the Trustee, for purposes of facilitating implementation and operation of the Program.
2.30 “Trustee” means Manufacturers and Traders Trust Co., successor to FMB Trust Company, N.A., the trustee under the agreement establishing the Trust, and any successor thereto.
2.31 “Year of Service” means a one-year period of continuous employment by one or more Employers.
ARTICLE III
SELECTION, ELIGIBILITY AND ENROLLMENT
3.1 Selection and Eligibility of Participants. Participation in the Program shall be limited to a select group of management and highly compensated Employees, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, the Employees who shall be eligible to participate in the Program from time to time. The Company’s Chief Executive Officer shall at all times be deemed eligible to participate in the Program.
3.2 Enrollment Requirements. As a condition of Program participation, each selected Employee shall annually (or more frequently) complete and return to the Committee (or its designee) such forms as it may prescribe from time to time. Each Deferral Election shall be filed no later than December 31 prior to the calendar year with respect to which the relevant Bonus may be earned; provided, however, that (i) for the initial short Program Year which begins on the Effective Date, such election shall be made and filed prior to the Effective Date, and (ii) in the event an Employee is hired during a Program Year and is designated as being eligible to participate for such year, such Employee may commence participation for such year by filing a Deferral Election within 30 days of employment or October 31 of such year, whichever occurs first. Each eligible Employee must file a new Deferral Election for each year with respect to which he or she desires to defer receipt of a portion of a Bonus.
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ARTICLE IV
PLAN CONTRIBUTIONS AND INVESTMENTS
4.1 Bonus Deferral. A Participant may elect to defer receipt of not less than 25%, nor more than 50%, of his or her Bonus payable with respect to each year of participation.
4.2 Payment of Deferred Bonus to Trust; Investment of Deferred Bonus. The portion of a Bonus deferred by a Participant shall be deposited by or on behalf of his or her Employer in the Trust as soon as administratively feasible following the date such bonus is paid. Any amount so deposited shall be allocated to an Annual Deferral Account established by the Trustee for the year of deferral. As soon as practicable thereafter, the Trustee shall invest the amount in Common Stock, utilizing such purchasing procedures (i) as are in compliance with any applicable provisions of federal and state securities laws, including the Securities Act and/or the Exchange Act, and (ii) as may be agreed to by the Company and the Trustee from time to time. Such purchasing procedures may include, without limitation, open market purchases, purchases from the Company, and purchase through privately negotiated transactions. The Company (on behalf of itself and any other Employers) may satisfy the Bonus payment requirements of this section, in whole or in part, by depositing Common Stock with a Fair Market Value equal to the amount otherwise required to be so paid. For purposes of the preceding sentence, the Fair Market Value of the Common Stock shall be determined as of the trading date immediately preceding the date of payment to the Trust.
4.3 Additional Payment to Trust; Investment of Additional Payment. On the same day that a deferred Bonus is paid over to the Trust on behalf of a Participant, a Matching Amount shall be paid thereto by or on behalf of his or her Employer. Such Matching Amount shall be allocated to the Participant’s Annual Deferral Account for such year and shall be invested as provided in Section 4.2. Payment of the Matching Amount may be made in Common Stock as provided in Section 4.2.
4.4 Reinvestment of Earnings. Except as provided in the following sentence, all dividend income received in cash on Common Stock held in an Annual Deferral Account shall be invested in additional Common Stock, subject to the provisions of Section 4.2 relating to Common Stock purchases. Cash receipts may be temporarily invested in money market or other cash equivalents as the Trustee deems advisable or practical under the circumstances. Dividends or stock splits received in Common Stock shall be retained in the relevant Annual Deferral Account.
4.5 Effect on Deferral Election Upon Certain Terminations of Employment. In the event a Participant files a Deferral Election and subsequently terminates as an Employee prior to the date Bonuses are paid for the relevant year, the Deferral Election filed for such year shall be administered as provided in this section in lieu of any otherwise applicable provision of the Program. In such event, if (i) under the terms of the Incentive Plan, he or she is entitled to a Bonus notwithstanding such termination and (ii) the termination of employment is described in Section 5.2, 5.3 or 5.5 or occurs following the time described in Section 5.4, then such Bonus and the related Matching Amount shall be (A) distributed to such individual or his or her Beneficiary in cash or (B) invested and so distributed in Common Stock, at the Committee’s election, within 60 days following the date such year’s Bonuses are paid.
ARTICLE V
VESTING
5.1 In General. A Participant shall become 100% vested in an Annual Deferral Account on the fifth anniversary date of the initial funding of such Annual Deferral Account, provided he or she remains continuously employed by an Employer from the date of funding to such anniversary date.
5.2 Death; Disability. Notwithstanding the provisions of Section 5.1, in the event of the death of a Participant or the termination of the Participant’s employment by reason of Disability, he or she will thereupon become 100% vested in each of his or her Annual Deferral Accounts.
5.3 Retirement. Notwithstanding the provisions of Section 5.1, in the event of the Retirement of a Participant, he or she will thereupon become 100% vested in each of his or her Annual Deferral Accounts.
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5.4 Change in Control. Notwithstanding the provisions of Section 5.1, a Participant shall become 100% vested in each of his or her Annual Deferral Accounts upon the occurrence of a Change in Control.
5.5 Involuntary Termination. Notwithstanding the provisions of Section 5.1, in the event a Participant is involuntarily terminated as an Employee, other than for Cause, prior to the attainment of 100% vesting in any of his or her Annual Deferral Accounts, he or she shall become 100% vested in each of the otherwise nonvested Annual Deferral Accounts.
5.6 Termination for Cause; Certain Voluntary Termination. In the event a Participant is terminated as an Employee for Cause or voluntarily terminates as an Employee (other than by reason of Retirement) prior to the attainment of 100% vesting in an Annual Deferral Account, then, in either case, he or she shall forfeit the balance in each such nonvested Annual Deferral Account.
5.7 Disposition of Forfeitures. All Common Stock and other amounts forfeited under this Article shall revert to the entity that is the Participant’s Employer immediately prior to the date he or she terminates as an Employee.
ARTICLE VI
DISTRIBUTION OF BENEFITS
6.1 Distribution In General. Following the occurrence of an event occasioning a distribution, the vested portion of a Participant’s Annual Deferral Account shall be paid to him or her or, in the case of death, his or her Beneficiary. The number of days within which payment shall be made shall be as set forth in Section 6.3.
6.2 Events Occasioning Distribution. For purposes of Section 6.1, each of the following shall be an event occasioning a distribution with respect to a relevant Annual Deferral Account:
(a) If a Participant has in effect a valid Payment Election with respect to such Annual Deferral Account providing for its distribution upon 100% vesting therein and satisfies the provisions of Section 5.1, such event shall be the fifth anniversary of the initial funding of such Annual Deferral Account. |
(b) If a Participant has in effect a valid Payment Election with respect to such Annual Deferral Account providing for its distribution upon termination as an Employee and he or she so terminates after having previously satisfied the provisions of Section 5.1, such event shall be the date of such termination. |
(c) If a Participant dies or terminates employment by reason of Disability, such event shall be the date of termination of employment. |
(d) In the event of the Retirement of a Participant, such event shall be the date of Retirement. |
(e) If a Participant has in effect a valid Payment Election with respect to such Annual Deferral Account providing for its distribution upon 100% vesting therein and a Change in Control occurs, such event shall be the date of the Change in Control. |
(f) If a Participant has in effect a valid Payment Election with respect to such Annual Deferral Account providing for its distribution upon termination as an Employee and he or she so terminates after having previously become 100% vested therein by reason of a Change in Control, such event shall be the date of such termination. |
(g) If a Participant is involuntarily terminated under circumstances described in Section 5.5, such event shall be the date of such termination. |
6.3 Time of Distribution. Distributions of vested benefits from Annual Deferral Accounts shall be made (i) within 30 days following an event described in Section 6.2(a) or (e), and (ii) within 60 days following an event described in Section 6.2(b), (c), (d), (f) or (g).
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6.4 Mode of Distribution. All Program distributions shall be made in one lump sum in Common Stock; provided, however, amounts not yet invested in Common Stock as of the relevant distribution date shall be paid in cash.
ARTICLE VII
ADDITIONAL OPERATIONAL PROVISIONS
7.1 Status of Participants as Creditors. Participants in the Program shall be general unsecured creditors of each relevant Employer with respect to their Program benefits, and they shall have no right to or interest in any specific asset notwithstanding the creation of and contributions to the Trust.
7.2 Status of Trust and Program Under Code and ERISA. Notwithstanding the deposit of cash and/or Common Stock in the Trust from time to time, such Trust is intended to be treated as a grantor trust and, therefore, the Program is intended to be deemed an “unfunded plan” for purposes of the Code and ERISA.
7.3 Voting of Common Stock. To the extent permitted by applicable law, the Participants shall be entitled to direct the Trustee as to the voting of vested and nonvested shares of Common Stock held in their Annual Deferral Accounts. In the event the Participants are not permitted to vote such shares under applicable law, or a Participant fails to direct the Trustee as to shares allocated to his or her account(s), the Trustee shall vote such shares as it deems appropriate under the circumstances.
7.4 Income and Other Tax Withholding. All required tax withholding with respect to an Employee’s participation in the Program shall be his or her responsibility. By agreeing to participate in the Program, each Participant authorizes the Trustee and his or her Employer to make such tax withholdings from wages, bonuses and Program benefits as may be necessary to discharge their tax withholding obligations. Alternatively, Participants may make direct payments of cash to the Trustee and/or their Employers to provide the funds necessary for such withholding. The Employers and the Trustee are authorized to suspend the making of contributions to and distributions from the Program, respectively, until appropriate provisions are made for withholding, including, at the discretion of the Company, the sale of Common Stock to generate funds therefor. Notwithstanding the foregoing, the Trustee is authorized to withhold shares of Common Stock to satisfy a Participant’s withholding obligation under the Program, provided that any such withholding of shares of Common Stock is in accordance with the provisions of Rule 16b-3 promulgated under the Exchange Act.
ARTICLE VIII
ADMINISTRATION
8.1 In General. The Program shall be administered from time to time by the Committee, as determined pursuant to Section 2.9.
8.2 Meetings and Action. The Committee shall hold such meetings at such times as it deems necessary or appropriate for the proper and efficient management and operation of the Program. Notices of meetings shall be given as provided in guidelines adopted by the Committee or as otherwise specified in relevant documents pertaining thereto. Unless otherwise provided in such documents, a majority of the members of the Committee shall constitute a quorum for holding a meeting, and binding action may be taken by a vote of a majority of those Committee members present at such meeting.
8.3 Administration of Program; Interpretation of Program Document. The Committee shall administer the Program in accordance with the terms of this Program document insofar as it is consistent with the provisions of applicable law, including, without limitation, ERISA. In connection with such administration, it may adopt such rules of interpretation as may be necessary or appropriate to facilitate the proper and nondiscriminatory administration of the Program.
8.4 Binding Effect of Committee Actions and Determinations. Unless overridden by the Board, any action taken or determination made by the Committee shall be final and binding on the person affected; provided, however, that, prior to taking any action or making any determination that may be adverse, in whole or in
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part, to any person, the Committee shall accord such person the right to be heard with respect to such matter. The procedures to be followed in connection therewith shall be governed by a claims procedure established for such purpose and consistent with the claims procedure provisions of ERISA.
8.5 Liability of Committee Members. No member of the Committee shall be personally liable for any act or failure to act in connection with the good faith administration of the Program. Unless prohibited by law or the Company’s by-laws, in the event any such member is nonetheless held so liable by a court of competent jurisdiction or otherwise, the Company shall indemnify such member and hold him or her harmless from any and all liability imposed with respect to such administration, including, without limitation, compensatory and punitive damages, professional fees, and other related out-of-pocket expenses.
8.6 Change of Payment Election. A Participant may amend an existing Payment Election by filing a new Payment Election with the Committee (or its designee) prior to the occurrence of an event occasioning a distribution; provided, however, that no such election shall be valid unless at least one year has elapsed from the date of filing to the occurrence of such event.
8.7 Committee Discretion With Respect to Distributions. Notwithstanding the filing of any Payment Election by a Participant, the Committee may, in its sole discretion, make distribution of vested benefits at such time as it may determine. In addition, in the event a Participant shall fail to maintain a valid Payment Election on file with the Committee (or its designee) for any reason, the Committee may, in its sole discretion, determine the time at which distribution of vested benefits shall be made. However, no time so specified by the Committee pursuant to this section shall be later than the latest time otherwise provided under this Program document for the distribution of benefits.
ARTICLE IX
MISCELLANEOUS MATTERS
9.1 Amendment and Termination. The Program may be amended from time to time and may be terminated at any time by appropriate action of the Board; provided, however, that no such action shall be taken which (i) would adversely affect the rights of Participants with respect to their then Annual Deferral Accounts, and (ii) requires shareholder approval under applicable law until such approval is secured. In the event of Program termination or the suspension of Program contributions, Participants may be required to satisfy the Program’s vesting requirements, as set forth herein, as a condition of receiving a distribution from a given Annual Deferral Account.
9.2 No Right to Continued Employment. Participation in the Program shall not give any Participant the right to remain in the employ of his or her Employer or any company affiliated with such Employer, nor shall such participation limit in any respect the right of such Employer to terminate the Participant’s employment at any time and for any reason.
9.3 No Right to Continued Participation. Except in the case of the Company’s Chief Executive Officer, participation in the Program with respect to one Program Year shall not give the Participant the right to participate in the Program in any future year.
9.4 Program Independent of Other Plans, Programs and Arrangements. This Plan is independent of and shall not be affected by (i) any other plans or programs of deferred compensation which may be maintained by the Company or any of its Subsidiaries from time to time or (ii) any deferred compensation arrangements to which a Participant may be a party.
9.5 Certain ERISA Matters. The Company shall file or cause to be filed, on a timely basis, such statements, certificates and documents as may be necessary to secure and maintain the intended limited exemption from certain of the provisions of ERISA for “top hat” plans.
9.6 Certain Securities Law Matters.
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9.7 Captions. The captions of the several articles and sections of this Program document have been inserted for convenience of reference only and shall not be considered in the construction hereof.
9.8 Number. Words used herein in the singular shall include the plural, as clearly appropriate, andvice versa.
9.9 Applicable Law. Except to the extent provided herein or otherwise preempted by federal law, this Program document shall be construed, administered and enforced in accordance with the domestic internal law of the Commonwealth of Pennsylvania.
9.10 Effective Date. This Program shall become effective as of the date specified in Section 2.14.
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SOVEREIGN BANK
COMMUNITY BANKING OFFICE LOCATIONS
NOTICE
OF
ANNUAL MEETING OF SHAREHOLDERS
to be held April 22, 2004
_______________
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders ( the “Meeting”) of Sovereign Bancorp, Inc. (“Sovereign”) will be held on Thursday, April 22, 2004, at 10:00 a.m. (Eastern Time) at the Sovereign Bank Arena, 81 Hamilton Avenue at Route 129, Trenton, New Jersey, for the following purposes:
(1) | To elect two (2) Class II directors of Sovereign to serve for a term of three years and until their successors shall have been elected and qualified; |
(2) | To ratify the appointment by the Audit Committee of Sovereign's Board of Directors of Ernst & Young LLP as Sovereign's independent auditors for the fiscal year ending December 31, 2004; |
(3) | To approve an amendment to Sovereign's Articles of Incorporation to increase the number of authorized shares of common stock from 400 million shares to 800 million shares. |
(4) | To approve Sovereign's 2004 Broad-Based Stock Incentive Plan and the continuation of Sovereign's Employee Stock Purchase Plan. |
(5) | To approve Sovereign's Bonus Recognition and Retention Program. |
(6) | To transact such other business as may properly be presented at the Meeting. |
Shareholders of record at the close of business on March 1, 2004 are entitled to notice of, and to vote at, the Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, IT IS IMPORTANT THAT THE SHARES BE REPRESENTED AND VOTED AT THE MEETING. YOU MAY VOTE ON INTERNET AS DESCRIBED ON THE PROXY CARD OR YOU MAY SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED.
By Order Of The Board Of Directors, |
Philadelphia, Pennsylvania
March 22, 2004
SOVEREIGN BANCORP, INC. I/We hereby appoint James D. Hogan, David A. Silverman and John R. Merva, or any one of them, acting in the absence of the other, as proxyholders, each with the power to appoint his substitute, and hereby authorize them to represent and to vote, as designated on the reverse side, all the shares of Common Stock of Sovereign Bancorp, Inc. ("Sovereign") held of record by me/us on March 1, 2004, at the Annual Meeting of Shareholders to be held on Thursday, April 22, 2004, or any adjournment thereof. This proxy, when properly delivered, will be voted in the manner directed by the shareholder(s). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ELECTION OF CLASS II DIRECTORS,
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FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS SOVEREIGN'S INDEPENDENT AUDITORS FOR 2004, FOR THE AMENDMENT TO SOVEREIGN'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 400 MILLION SHARES TO 800 MILLION SHARES, FOR SOVEREIGN'S 2004 BROAD-BASED STOCK INCENTIVE PLAN AND THE CONTINUATION OF SOVEREIGN'S EMPLOYEE STOCK PURCHASE PLAN AND FOR SOVEREIGN'S BONUS RECOGNITION AND RETENTION PROGRAM. This proxy will be voted, in the discretion of the proxyholders, upon such other business as may properly come before the Annual Meeting of Shareholders, or any adjournment thereof, as provided in the rules of the Securities and Exchange Commission. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. To vote by mail, please vote and sign on the other side. TO VOTE BY MAIL, RETURN PROXY CARD IN ENCLOSED ENVELOPE
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SOVEREIGN BANCORP, INC. 1130 BERKSHIRE BLVD. MC11900IR5 WYOMISSING, PA 19610 | VOTE BY INTERNET - www.proxyvote.com VOTE BY MAIL If you are a shareholder planning to attend the Annual Meeting, please: -retain the admission ticket mailed with the proxy statement and present it at the Annual Meeting; and -promptly complete and return the attendance card mailed with the proxy statement as soon as possible. |
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: | SOVBN1 | KEEP THIS PORTION FOR YOUR RECORDS |
DETACH AND RETURN THIS PORTION ONLY | ||
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. |
SOVEREIGN BANCORP, INC. | |||||||||||
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” MATTER NO. 1, “FOR” MATTER NO. 2, “FOR” MATTER NO. 3, “FOR” MATTER NO. 4 AND “FOR” MATTER NO. 5 | For All | Withhold All | For All Except | To withhold authority to vote for any individual nominee, mark "For All Except" and write the nominee's number on the line below. | |||||||
| o | o | o |
For | Against | Abstain | ||||||
MATTER NO. 2: RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS SOVEREIGN'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2004. | o | o | o | |||||
MATTER NO. 3: APPROVE AN AMENDMENT TO SOVEREIGN'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 400 MILLION SHARES TO 800 MILLION SHARES. | o | o | o | |||||
MATTER NO. 4: APPROVE SOVEREIGN'S 2004 BROAD-BASED STOCK INCENTIVE PLAN AND THE CONTINUATION OF SOVEREIGN'S EMPLOYEE STOCK PURCHASE PLAN. | o | o | o | |||||
| o | o | o | |||||
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. |
Signature [PLEASE SIGN WITHIN BOX] | Date | Signature (Joint Owners) | Date |