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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Sterling Financial Corporation
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF STERLING FINANCIAL CORPORATION]
April 2, 1998
Dear Shareholder:
It is my pleasure to invite you to attend the Annual Meeting of Shareholders
of Sterling Financial Corporation. The Meeting will be held on Tuesday, April
28, 1998, at 10:00 a.m., at the Spokane Agricultural Trade Center.
The formal Notice of Annual Meeting of Shareholders and the Proxy Statement
are attached and describe the proposals to be voted on at this year's Meeting.
The Board of Directors believes the proposals are in the best interests of
Sterling and its Shareholders and, accordingly, recommends that you vote "FOR"
each of the proposals.
It is very important that you be represented at the Annual Meeting regardless
of the number of shares you own or whether you are able to attend the Meeting
in person. We urge you to mark, sign and date your proxy card today and return
it in the envelope provided, even if you plan to attend the Annual Meeting.
This will not prevent you from voting in person but will ensure that your vote
is counted if you are unable to attend.
Your continued support is sincerely appreciated.
Sincerely,
/s/ Harold B. Gilkey
Harold B. Gilkey
Chairman of the Board
<PAGE>
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
The Annual Meeting of Shareholders (the "Annual Meeting") of Sterling
Financial Corporation ("Sterling") will be held in the Conference Theater of
the Agricultural Trade Center (located in the Convention Center), 334 West
Spokane Falls Boulevard, Spokane, Washington, on Tuesday, April 28, 1998, at
10:00 a.m., local time, for the following purposes:
1.To elect three Directors of Sterling for terms ending in the year 2001;
2.To approve the 1998 Long-Term Incentive Plan;
3. To ratify the appointment of Coopers & Lybrand L.L.P. as the
independent public accountants for Sterling for 1998; and
4. To transact such other business as may properly come before the
Annual Meeting or any adjournments thereof.
All of these proposals are more fully described in the Proxy Statement
which follows. Only holders of shares of Sterling's Common Stock of record at
the close of business on February 27, 1998 are entitled to vote at the Annual
Meeting. As of February 27, 1998, there were 7,578,552 shares of Common Stock
outstanding.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN OR
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. EVEN IF YOU EXPECT TO
ATTEND THE ANNUAL MEETING, WE URGE YOU TO COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE.
By Order of the Board of Directors,
/s/ Ned M. Barnes
NED M. BARNES
Secretary
Spokane, Washington
April 2, 1998
<PAGE>
[LOGO OF STERLING FINANCIAL CORPORATION]
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 28, 1998
GENERAL
This Proxy Statement is being furnished to Shareholders in connection with
the solicitation by the Board of Directors of Proxies to be used at the Annual
Meeting of Shareholders to be held on April 28, 1998 (and any adjournments
thereof). This Proxy Statement and the accompanying form of proxy (the
"Proxy"), the Notice of Annual Meeting of Shareholders (the "Notice") and the
Annual Report to Shareholders are being mailed to Shareholders on or about
April 2, 1998. Unless the context clearly suggests otherwise, references in
this Proxy Statement to Sterling include its subsidiaries.
Holders of Common Stock of Sterling are requested to complete, sign and
date the accompanying Proxy and return it promptly in the enclosed postage-
paid envelope.
TIME AND PLACE OF ANNUAL MEETING
The Annual Meeting will be held on Tuesday, April 28, 1998 at 10:00 a.m. in
the Conference Theater of the Agricultural Trade Center (located in the
Convention Center), 334 West Spokane Falls Boulevard, Spokane, Washington.
RECORD DATE
The Board of Directors of Sterling has fixed February 27, 1998 as the
record date (the "Record Date") for the determination of Shareholders of
Sterling who are entitled to receive notice of and to vote at the Annual
Meeting.
VOTING AND REVOCABILITY OF PROXIES
Proxies properly signed and returned in time for the Annual Meeting, unless
subsequently revoked, will be voted in accordance with the instructions
thereon. Persons named in the Proxy to represent Shareholders at the Annual
Meeting are Harold B. Gilkey and William W. Zuppe. If a Proxy is signed and
returned without indicating any voting instructions, the Proxy will be voted
"FOR" the proposals listed in the Notice. Any Proxy given pursuant to this
solicitation may be revoked by the person giving it at any time prior to the
commencement of the Annual Meeting by the filing of a written notice of
revocation or of a duly executed Proxy bearing a later date with the Secretary
of Sterling. All such notices of revocation or Proxies should be addressed to
the Secretary of Sterling in care of Sterling Financial Corporation, 111 North
Wall Street, Spokane, Washington 99201, not less than four business days prior
to the Annual Meeting. After this time, all such notices of revocation or
Proxies should be personally delivered to the Secretary or the Assistant
Secretary of Sterling in the
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meeting room on the day of the Annual Meeting prior to the commencement of the
Annual Meeting. Attendance or voting at the Annual Meeting will not, in and of
itself, constitute revocation of a Proxy. If your shares of Common Stock are
held in the name of a bank, broker or other holder of record, you must obtain
a Proxy, executed in your favor, from the holder of record to be able to vote
at the Annual Meeting.
VOTING SHARES AND REQUIREMENTS
As of the Record Date, there were 7,578,552 shares of Common Stock of
Sterling, par value $1.00 per share (the "Common Stock") outstanding. Each
share of Sterling's Common Stock outstanding on the Record Date is entitled to
one vote on each matter properly submitted at the Annual Meeting. Shares of
Common Stock can be voted only if the owner of record is present to vote or is
represented by Proxy at the Annual Meeting. The holders of a majority of the
shares of Common Stock outstanding on the Record Date, present in person or
represented by Proxy, shall constitute a quorum. Abstentions and broker "non-
votes" are counted as present and entitled to vote for purposes of determining
a quorum. A broker "non-vote" occurs when a nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee
does not have discretionary voting power with respect to that item. The
nominees for election as Directors receiving the largest number of votes cast
at the Annual Meeting will be elected Directors. Abstentions and broker "non-
votes" are not counted for purposes of the election of Directors. The
affirmative vote by the holders of the majority of the Common Stock present in
person or represented by Proxy and entitled to vote is required to approve the
other matters to be acted upon at the Annual Meeting. An abstention is counted
as a vote against and a broker "non-vote" is not counted for purposes of
approving those matters.
SOLICITATION OF PROXIES
The cost of the solicitation of Proxies will be borne by Sterling. Sterling
will, upon request, reimburse persons holding stock for others for their
reasonable expenses in sending proxy materials to their principals and
obtaining their Proxies. In addition to solicitation by mail, Proxies may be
solicited in person, or by telephone, telefax or other types of
communications, by Directors, Officers, and Employees of Sterling or others,
without additional compensation.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of Sterling believes the proposals described herein
are in the best interests of Sterling and its Shareholders and, accordingly,
recommends that the Shareholders vote "FOR" each of the proposals listed in
the Notice.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors currently consists of eight Directors who are
divided into three classes. The members of each class serve three-year terms,
with one class elected annually. The Board of Directors has nominated the
three individuals listed below for election as Directors to serve terms of
three years ending at the Annual Meeting of Shareholders of Sterling in the
year 2001 or when their respective successors have been duly elected and
qualified. The nominees are:
Ned M. Barnes
James P. Fugate
Robert D. Larrabee
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Sterling has no reason to believe that any of the nominees will be unable
to serve; however, should any nominee become unable to serve as a Director for
any reason, the Board of Directors shall designate a substitute nominee.
Unless instructions to the contrary are specified in the Proxy, Proxies will
be voted in favor of the three persons who have been nominated by the Board of
Directors. Sterling expects each nominee for election as a Director at the
Annual Meeting to be able to serve if elected. If any nominee is unable to
serve if elected, Proxies will be voted in favor of the remainder of those
nominated and may be voted for substitute nominees.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" THE NOMINEES
BOARD OF DIRECTORS OF STERLING FINANCIAL CORPORATION
HAROLD B. GILKEY
Mr. Gilkey, 58, has served as Chairman of the Board and Chief Executive
Officer of Sterling since its inception and as Chairman of the Board and Chief
Executive Officer of Sterling Savings Association ("Sterling Savings") since
1981. Mr. Gilkey co-founded Sterling Savings in 1981. Additionally, he is
Chairman of the Board of INTERVEST-Mortgage Investment Company ("INTERVEST"),
Action Mortgage Company ("Action Mortgage") and Harbor Financial Services,
Inc. ("Harbor Financial"), subsidiaries of Sterling Savings. Mr. Gilkey
brought to Sterling Savings over 19 years of commercial and mortgage banking
experience. He served as President of Bancshares Mortgage Company of Spokane,
Washington, an institution servicing $500 million in mortgage loans, and
Senior Vice President of Old National Bank of Spokane, Washington, a $1.6
billion commercial bank. Prior to this, Mr. Gilkey was employed by Bank of
America for twelve years, holding various management positions with
responsibilities for equipment finance and leasing, personnel and training,
and branch operations. Mr. Gilkey is a past Director of the Washington Savings
League and a member of the Savings Association Insurance Fund Industry
Advisory Committee, an advisory committee of the FDIC. Mr. Gilkey received his
degree in Business Administration from the University of Montana in 1962 and
his Master of Business Administration degree from the University of Southern
California in 1970. His term expires in 1999.
WILLIAM W. ZUPPE
Mr. Zuppe, 56, has served as Director, President and Chief Operating
Officer of Sterling since its inception and as Director, President and Chief
Operating Officer of Sterling Savings since 1981. Mr. Zuppe co-founded
Sterling Savings in 1981. Mr. Zuppe is also Vice President and serves as a
Director of INTERVEST, Action Mortgage and Harbor Financial. Mr. Zuppe brought
to Sterling Savings 18 years of mortgage lending experience as Vice President
of Bancshares Mortgage Company and Manager of Loan Administration of Sherwood
& Roberts, Inc. of Walla Walla, Washington, a mortgage-banking company which
serviced in excess of $500 million in mortgage loans. Mr. Zuppe is a member of
the Washington Savings League Board of Directors and its
Legislative/Regulatory Committee. His term expires in the year 2000.
NED M. BARNES
Mr. Barnes, 61, has served as Secretary and a Director of Sterling since
its inception and as Secretary of Sterling Savings since 1981 and a Director
since 1983. Mr. Barnes is also Secretary and serves as a Director of INTERVEST
and Action Mortgage and serves as a Director of Harbor Financial. Mr. Barnes
is a Principal in the law firm of Witherspoon, Kelley, Davenport & Toole, P.S.
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of Spokane, Washington, which he joined in 1965. Mr. Barnes' law practice
emphasizes the areas of real estate and corporate law. Mr. Barnes graduated
from the University of Minnesota in 1958, earning a degree in Business
Administration. He received his Juris Doctorate degree from the University of
Washington in 1961. If elected, his term will expire in 2001.
RODNEY W. BARNETT
Mr. Barnett, 54, has served as a Director of Sterling since its inception
and as a Director of Sterling Savings since 1981. He is a Principal and
General Manager of Carr Sales Company, an electrical supply firm in Spokane,
Washington. Mr. Barnett is also a past Director of the National Association of
Electrical Distributors and is a past Chairman of the Inland Empire Chapter of
that Association. His term expires in the year 2000.
JAMES P. FUGATE
Mr. Fugate, 65, has served as a Director of Sterling since its inception
and as a Director of Sterling Savings since 1989. He is the retired
Superintendent of Auburn School District No. 408 and a member of the Auburn
Economic Development Council. Mr. Fugate is a former Director of Central
Evergreen Savings & Loan Association. If elected, his term will expire in
2001.
ROBERT D. LARRABEE
Mr. Larrabee, 63, has served as a Director of Sterling since its inception
and as a Director of Sterling Savings since 1983. Mr. Larrabee is the former
owner of Merchant Funeral Home in Clarkston, Washington. He is also a former
Director of Laurentian Capital Corporation, a former Director of Lewis and
Clark Savings & Loan Association and a past President of the Board of Regents
of the University of Washington. If elected, his term will expire in 2001.
ROBERT E. MEYERS
Dr. Meyers, 72, has served as a Director of Sterling since its inception
and as a Director of Sterling Savings since 1983. He is a retired dentist from
Clarkston, Washington. Dr. Meyers is a former Director of Lewis and Clark
Savings & Loan Association. His term expires in 1999.
DAVID O. WALLACE
Mr. Wallace, 60, has served as a Director of Sterling since its inception
and as a Director of Sterling Savings since 1981. He is the owner of Startup
Business Planning. Mr. Wallace is a Past Chairman of the Citizens Advisory
Council for School District No. 81 in Spokane, Washington. His term expires in
the year 2000.
COMPENSATION OF DIRECTORS
Directors of Sterling are not paid an annual fee but receive a fee, which
is currently $750, for every meeting attended. Each of the Directors of
Sterling also serves as a Director of Sterling Savings for the same term.
Directors of Sterling Savings are paid an annual fee of $2,000 plus a fee,
which is currently $750, for every meeting attended. Additionally, Directors
who also serve as Directors of the subsidiaries of Sterling Savings receive a
fee, which is currently $100, for each meeting attended. Directors receive
reimbursement for travel and other expenses incurred in connection with Board
business.
Non-Employee Directors of Sterling also receive automatic grants of non-
qualified stock options. The current policy is to award any new Non-Employee
Director of Sterling non-qualified stock options to purchase 2,000 shares of
Common Stock. At each Annual Meeting of Shareholders, Non-Employee Directors
who have served as Non-Employee Directors for a period of at least one year
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and who will continue to serve as Non-Employee Directors immediately following
such Annual Meeting receive non-qualified stock options to purchase 1,000
shares of Common Stock. Such options have an exercise price equal to the fair
market value of the Common Stock on the date of grant, become exercisable in
25 percent cumulative annual installments beginning on the first anniversary
of the date of grant and generally expire ten years from the date of grant. In
the event that a Non-Employee Director is removed from office for cause, all
options granted to such Non-Employee Director pursuant to the automatic grants
of non-qualified stock options described above will expire immediately upon
such removal.
Attendance at Meetings. The Board of Directors of Sterling held 12 meetings
during 1997. The Board of Directors of Sterling Savings also held 12 meetings
during 1997. The Boards of Directors for all Sterling Savings subsidiaries
held an aggregate of 28 meetings during 1997. Aggregating for each incumbent
Director (i) the total number of meetings of the Board of Directors and (ii)
the total number of meetings held by all committees of the Board on which each
Director served, each member of Sterling's Board of Directors attended more
than 75% of such meetings. The total combined attendance at all meetings by
the incumbent Directors was 98%.
COMMITTEES OF THE BOARD OF DIRECTORS
The Boards of Directors of Sterling and Sterling Savings have established
standing Personnel and Audit Committees. Neither Board has established a
standing Nominating Committee.
The Personnel Committees review and make recommendations to the Boards of
Directors with respect to personnel policies which include, but are not
limited to, officer and employee salaries and benefits. The Committees held
three meetings during 1997 and currently consist of Directors Larrabee
(Chairman), Fugate and Meyers.
The Audit Committees oversee the financial reporting process and internal
controls of Sterling and Sterling Savings. The Committees consult with the
internal auditor, Sterling's independent auditors and management regarding
internal accounting controls, the annual audit and regulatory examinations.
The Committees held six meetings during 1997 and currently consist of
Directors Barnett (Chairman), Barnes, Meyers and Wallace.
EXECUTIVE OFFICERS
In addition to Messrs. Gilkey, Zuppe and Barnes, the Executive Officers of
Sterling and its subsidiaries are David P. Bobbitt, Daniel G. Byrne, Stephen
L. Page, Heidi B. Stanley, John M. Harlow, Stanton C. Parrish and Thomas F.
Sackmann. Each Executive Officer has held his or her present position for the
past five years unless otherwise stated.
DAVID P. BOBBITT
Mr. Bobbitt, 50, serves as Executive Vice President-Community Banking of
Sterling Savings. He joined Sterling Savings in March of 1996. Before joining
Sterling Savings, Mr. Bobbitt was with West One Bank for 26 years. He is Past
President of the Idaho Bankers Association and serves as a Director of the
Pacific Coast Banking School and of the Idaho Association of Commerce and
Industry. He is an Advisory Director of the College of Business & Economics at
the University of Idaho. He is a member of the Idaho Bankers Association
Executive Council and the American Bankers Association Government Relations
Council. Mr. Bobbitt is a graduate of North Idaho College, the Pacific Coast
Banking School and Harvard University's Advanced Management Program.
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DANIEL G. BYRNE
Mr. Byrne, 43, has served as Chief Financial Officer, Senior Vice
President-Finance, Treasurer and Assistant Secretary of Sterling since its
inception and joined Sterling Savings in 1983. Mr. Byrne is also the Assistant
Secretary and Treasurer of INTERVEST and Action Mortgage and the Secretary and
Treasurer of Harbor Financial. Before joining Sterling, Mr. Byrne was on the
staff of the accounting firm of Coopers & Lybrand in Spokane, Washington. Mr.
Byrne is a certified public accountant and graduated from Gonzaga University
in 1977.
STEPHEN L. PAGE
Mr. Page, 49, serves as Senior Vice President-Credit Management of Sterling
Savings. He joined Sterling Savings in 1983. Prior to 1983, Mr. Page was
employed by Kiemle and Hagood Company of Spokane, Washington as a Property
Management Leasing Officer. Mr. Page graduated from the University of Utah in
1970 and received a Master of Business Administration degree from the
University of New Mexico in 1973.
HEIDI B. STANLEY
Ms. Stanley, 41, serves as Executive Vice President-Corporate
Administration of Sterling Savings. She joined Sterling Savings in 1985. Ms.
Stanley was formerly employed as a national college recruiter by IBM in San
Francisco, California, and Tucson, Arizona. Ms. Stanley graduated from
Washington State University in 1979 with a degree in Business Administration.
JOHN M. HARLOW
Mr. Harlow, 55, serves as Vice President of Sterling Savings and President
and Director of INTERVEST. He joined Sterling Savings in 1987. Mr. Harlow was
formerly the President of the Mortgage Banking Division of Moore Financial
Services of Portland, Oregon, a mortgage-banking subsidiary of West One
Bancorp, and Senior Vice President of Income Property Lending for Bancshares
Mortgage Company of Spokane, Washington. Mr. Harlow was also a Vice
President/Regional Manager for I.D.S. Mortgage Company in Northern California.
He graduated from the University of Illinois in 1965 and is a Certified
Mortgage Banker.
STANTON C. PARRISH
Mr. Parrish, 47, serves as Vice President of Sterling Savings and President
and Director of Harbor Financial. He joined Sterling Savings in 1983. Prior to
1983, Mr. Parrish was employed by Western Savings Association of Portland,
Oregon. Mr. Parrish is a 1972 graduate of Washington State University.
THOMAS F. SACKMANN
Mr. Sackmann, 45, serves as Vice President of Sterling Savings and
President and Director of Action Mortgage. He joined Sterling Savings in 1988.
Mr. Sackmann was formerly Executive Vice President and Chief Operating Officer
of Moore Financial Services of Boise, Idaho, a mortgage-banking subsidiary of
West One Bancorp, and was responsible for residential lending. Mr. Sackmann is
a 1973 graduate of Linfield College and a 1976 graduate of the University of
Washington School of Law.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of December 31, 1997, information about
the only known beneficial owners of more than five percent of Sterling's
Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ -------------------- -----------------
<S> <C> <C>
Westport Asset Management, Inc.(/1/) 525,500 6.94
253 Riverside Avenue
Westport, CT 06880-4816
</TABLE>
Footnotes:
(1) Based on information provided by Westport Asset Management, Inc., which
states that it has shared dispositive power as to 525,500 shares and
shared voting power as to 525,500 shares.
The following table sets forth, as of January 31, 1998, information
concerning the beneficial ownership of Sterling Common Stock by each Director
and Executive Officer named in the Summary Compensation Table and by all
Directors and Executive Officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------------------------------------------- ----------------- ----------
<S> <C> <C>
Ned M. Barnes...................................... 25,156(/1/) *
Rodney W. Barnett.................................. 21,739(/2/) *
David P. Bobbitt................................... 8,312(/3/) *
James P. Fugate.................................... 10,498(/4/) *
Harold B. Gilkey................................... 144,260(/5/) 1.95
John M. Harlow..................................... 28,499(/6/) *
Robert D. Larrabee................................. 17,780(/4/) *
Robert E. Meyers................................... 33,039(/4/) *
Thomas F. Sackmann................................. 30,212(/7/) *
David O. Wallace................................... 12,291(/8/) *
William W. Zuppe................................... 76,153(/9/) 1.03
All Directors and
Executive Officers as a group (15 persons)......... 534,830(/1//0/) 7.02
</TABLE>
- --------
*Less than 1%
Footnotes:
(1) Includes 987 shares as to which Mr. Barnes has shared voting and
investment power, 14,726 shares held in a self-directed profit-sharing
plan and 6,750 shares issuable pursuant to stock options exercisable
within 60 days. Excludes 1,331 shares owned by the law firm of which Mr.
Barnes is a principal, as to which shares Mr. Barnes disclaims beneficial
ownership.
(2) Includes 5,898 shares owned by a profit-sharing plan, of which Mr.
Barnett is the principal administrator and as to which shares he
disclaims beneficial ownership, and 6,750 shares issuable pursuant to
stock options exercisable within 60 days.
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(3) Includes 7,000 shares issuable pursuant to stock options exercisable
within 60 days and 312 shares held for Mr. Bobbitt's individual account
under the Sterling Savings Association Employee Savings Plan (the
"Savings Plan"). Excludes 54 shares (as of December 31, 1997) held by the
Savings Plan for the benefit of Mr. Bobbitt, as to which shares Mr.
Bobbitt disclaims beneficial ownership.
(4) Includes 6,750 shares issuable to this Director pursuant to stock options
exercisable within 60 days. Excludes 217,142 shares held by Sterling's
Deferred Compensation Plan, which is administered by Sterling's Personnel
Committee of which this Director is a member. This Director disclaims
beneficial ownership of these shares.
(5) Includes 49,000 shares issuable pursuant to stock options exercisable
within 60 days and 5,694 shares held for Mr. Gilkey's individual account
under the Savings Plan. Excludes 95,478 shares held by Sterling's
Deferred Compensation Plan and 3,103 shares (as of December 31, 1997)
held by the Savings Plan for the benefit of Mr. Gilkey, as to which
shares Mr. Gilkey disclaims beneficial ownership.
(6) Includes 24,000 shares issuable pursuant to stock options exercisable
within 60 days. Excludes 13,216 shares held by Sterling's Deferred
Compensation Plan and 1,566 shares (as of December 31, 1997) held by the
Savings Plan for the benefit of Mr. Harlow, as to which shares Mr. Harlow
disclaims beneficial ownership.
(7) Includes 17,350 shares issuable pursuant to stock options exercisable
within 60 days and 2,962 shares held for Mr. Sackmann's individual
account under the Savings Plan. Excludes 12,922 shares held by Sterling's
Deferred Compensation Plan and 1,169 shares (as of December 31, 1997)
held by the Savings Plan for the benefit of Mr. Sackmann, as to which
shares Mr. Sackmann disclaims beneficial ownership.
(8) Includes 6,750 shares issuable pursuant to stock options exercisable
within 60 days.
(9) Includes 53,250 shares issuable pursuant to stock options exercisable
within 60 days and 3,265 shares held for Mr. Zuppe's individual account
under the Savings Plan. Excludes 64,083 shares held by Sterling's
Deferred Compensation Plan and 2,845 shares (as of December 31, 1997)
held by the Savings Plan for the benefit of Mr. Zuppe, as to which shares
Mr. Zuppe disclaims beneficial ownership.
(10) Includes 269,100 shares issuable pursuant to stock options exercisable
within 60 days and 22,144 shares held in individual accounts under the
Savings Plan. Excludes 217,142 shares held by Sterling's Deferred
Compensation Plan and 13,998 shares (as of December 31, 1997) held by the
Savings Plan for the benefit of members of the group, as to which shares
such members disclaim beneficial ownership.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
Sterling seeks to promote a strong pay-for-performance culture by aligning
compensation with Sterling's performance. Sterling's Board of Directors
believes that compensation should:
- - relate to the value created for Shareholders by being directly tied to
the financial performance and condition of Sterling and each Executive
Officer's contribution thereto;
- - reward individuals who help Sterling achieve its short-term and long-term
objectives and thereby contribute significantly to the success of
Sterling;
- - help to attract and retain the most qualified individuals available by
being competitive in terms of compensation paid to persons having similar
responsibilities and duties in other companies in the same and closely-
related industries; and
- - reflect the qualifications, skills, experience and responsibilities of
each Executive Officer.
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The Personnel Committee, which is composed of three nonemployee Directors,
administers the compensation of the Chief Executive Officer (the "CEO") and
the other Executive Officers of Sterling and its subsidiaries ("Executive
Officers"), subject to review and appropriate approval of Sterling's Board of
Directors.
In determining executive compensation, Sterling uses peer group comparisons
as part of its overall analysis. The Personnel Committee believes that
companies operating in the banking and financial services industries are
appropriate to include in its compensation analysis. Additionally, the
Personnel Committee is advised from time to time by outside compensation
consultants on its compensation policies.
Several factors are used to measure the performance of Sterling and its
Executive Officers. In order to measure corporate financial and operating
results, the Personnel Committee examines Sterling's (1) return on equity and
(2) reported earnings per share as compared to the performance of peers.
Individual performance measures are both quantifiable and non-quantifiable and
are designed to be reasonably attainable, under the immediate influence of the
executive and related to the success of the individual.
COMPONENTS OF COMPENSATION
At present, the executive compensation program is comprised of base salary,
annual cash incentive compensation, long-term compensation in the form of
deferred compensation and stock options and benefits typically offered to
executives of similar corporations.
Base Salary. In establishing the base salaries of the CEO and the other
Executive Officers, the Personnel Committee examines competitive peer group
surveys and data in order to determine whether compensation is competitive
with that offered by other companies in the banking and financial services
industries. The Personnel Committee looks primarily at companies which are
similar in terms of their size and the complexity of their operations. The
Personnel Committee also takes into account Sterling's financial and operating
performance as compared with the industry as a whole and considers the diverse
skills required of its executive management to expand its operations while
maintaining good performance. In addition, the Personnel Committee considers
the particular executive's performance, responsibilities, qualifications and
experience in the banking industry.
Annual Cash Incentive Compensation. Sterling maintains an Annual Cash
Incentive Compensation Program. The annual component of this plan is intended
to encourage and reward the achievement of (1) growth in Sterling's reported
earnings and (2) targeted returns on equity. These criteria are deemed by the
Personnel Committee to be critical to increasing Shareholder value. The plan
is also designed to assist in the attraction and retention of qualified
employees, to further link the financial interests and objectives of employees
with those of Sterling, and to foster accountability and teamwork throughout
Sterling.
Deferred Compensation Plan. The Deferred Compensation Plan component of the
overall compensation plan is intended to link compensation to the long-term
performance of Sterling and to provide a strong incentive for increasing
Shareholder value. Since July 1, 1984, Sterling has maintained a nonqualified
Deferred Compensation Plan. The Personnel Committee may, as it has done in the
past, choose additional participants from a group of management employees. As
of January 31, 1998, there were nine participants in the Deferred Compensation
Plan. Contributions to the Plan for
9
<PAGE>
each given year are determined by the Board following recommendations by the
Personnel Committee. Contributions to the accounts maintained for Mr. Gilkey
and Mr. Zuppe are allocated in accordance with their respective employment
agreements, unless such contributions are waived. Accounts are credited with
interest each year at the applicable rate for that year. Participants vest in
an additional 10% of their benefit under the Plan for each year of service
with Sterling, with full vesting after ten years of service and upon death or
disability or retirement at or after age 60. Payment of an account may be in a
lump sum or in installments as determined by the Personnel Committee and
installments may be accelerated by the Committee. Payment must be commenced
within one year of the termination of the participant's employment with
Sterling.
Long-Term Incentive Plans. The Personnel Committee believes that plans such
as the 1998 Long-Term Incentive Plan provide a competitive incentive
opportunity which links the achievement of financial goals and greater
Shareholder value with individual performance. The purpose of these plans is
to encourage the ownership of Common Stock, attract and retain qualified
employees, develop and maintain strong management and employee loyalty and to
give suitable recognition to individuals' material contributions to Sterling's
success.
COMPENSATION OF CEO
During 1997, the compensation of the CEO was based on the general
principles of the executive compensation program and on the CEO's Employment
Agreement. In determining the salary and other forms of compensation for the
Chairman of the Board and CEO, Mr. Gilkey, the Personnel Committee took into
consideration Mr. Gilkey's substantial experience and standing in the industry
in general and with Sterling in particular. The Personnel Committee also
considered the increased responsibilities for Mr. Gilkey as a result of
Sterling's diversification and growth in recent years. The Personnel Committee
believes that Mr. Gilkey's compensation as Chief Executive Officer
appropriately reflects Sterling's performance during 1997 and his
contributions to that performance.
PERSONNEL COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, there were no "interlocking" or cross-board memberships, which
are required to be disclosed under SEC rules.
For a general description of transactions and relationships Directors and
Executive Officers and their associates may have had with Sterling and its
affiliates during the year, see "Interest of Directors and Executive Officers
in Certain Transactions."
Submitted on behalf of the Personnel Committee:
Robert D. Larrabee, Chairman
James P. Fugate
Robert Meyers
10
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation received
from Sterling by each of the named Executive Officers for services in all
capacities to Sterling and its subsidiaries for the last three years and the
transition period.(/1/)
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------ COMPENSATION
NAME AND ---------------------
PRINCIPAL FISCAL OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
POSITION YEAR(/1/) SALARY($) BONUS($) COMP.($)(/2/) OPTIONS(#) COMP.($)(/3/)
- ------------------------ --------- --------- -------- ------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harold B. Gilkey, 1997 240,000 0 35,368 10,000 153,904
Chairman & CEO of 1996.5 120,000 0 15,934 7,000 42,952
Sterling 1996 240,000 0 54,774 36,000 86,789
1995 228,000 0 27,747 6,000 78,816
William W. Zuppe, 1997 180,000 0 32,606 10,000 76,520
President & COO of 1996.5 90,000 0 15,106 6,000 31,284
Sterling 1996 180,000 0 60,258 31,000 37,478
1995 168,000 0 24,567 6,000 48,522
David P. Bobbitt, 1997 110,000 0 N/A 5,000 3,266
Exec. Vice President 1996.5 -- -- -- -- --
of Sterling Savings(/4/) 1996 -- -- -- -- --
1995 -- -- -- -- --
John M. Harlow, 1997 156,000 0 N/A 5,000 18,475
Vice President of 1996.5 78,000 0 N/A 5,000 7,845
Sterling Savings; 1996 144,000 25,000 N/A 23,000 13,903
President of INTERVEST 1995 132,000 40,000 N/A 5,000 15,450
Thomas F. Sackmann, 1997 138,000 0 N/A 4,000 16,275
Vice President 1996.5 69,000 0 N/A 2,500 7,755
of Sterling Savings; 1996 132,000 0 N/A 13,000 14,310
President of Action 1995 132,000 0 N/A 5,000 13,320
Mortgage
</TABLE>
Footnotes:
(1) The transition period is identified as Fiscal Year 1996.5 for purposes of
this Table and includes the period of July 1, 1996-December 31, 1996. In
November 1996, fiscal year-end was changed from June 30 to December 31.
(2) No compensation amounts are provided where the aggregate amounts of
perquisites and other personal benefits do not exceed the lesser of
either $50,000 or 10% of the total of such officer's annual salary and
bonus. Amounts shown for 1997 include Director's fees of $21,300 and auto
allowances of $8,400 each for Messrs. Gilkey and Zuppe, and club dues of
$5,668 and $2,906 for Messrs. Gilkey and Zuppe, respectively.
(3) Includes 1997 vesting of amounts in the Deferred Compensation Plan,
matching contributions under Sterling Savings' Employee Savings Plan and
the value (as projected on an actuarial basis pursuant to
11
<PAGE>
I.R.C. Rev. Rule 55-747 ("PS 58")) of the premium for life insurance
coverage provided for Messrs. Gilkey and Zuppe. Aggregate contributions to
the Deferred Compensation Plan during 1997, the transition period and
fiscal years 1996 and 1995 for the named officers were $77,000, $72,000,
$280,000 and $290,000 respectively.
(4) Mr. Bobbitt joined Sterling Savings in March of 1996 and did not qualify
for inclusion on this Table until 1997.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Sterling has entered into employment agreements (the "Agreements") with
Messrs. Gilkey and Zuppe, which provide for an annual fixed minimum salary of
$240,000 to Mr. Gilkey and $180,000 to Mr. Zuppe. Additionally, the Agreements
provide for incentive bonuses, non-qualified deferred compensation, long-term
incentive compensation including stock options, certain perquisites, split-
dollar life insurance policies and rights to participate in other benefit
programs offered or maintained by Sterling. On July 1, 1995, the effective date
of the Agreements, Sterling granted to Messrs. Gilkey and Zuppe, respectively,
20,000 and 15,000 nonstatutory options under Sterling's 1992 Stock Option Plan.
The Agreements expire on June 30, 2000 and will then be automatically extended
to Mr. Gilkey's 65th birthday and for an additional 5 years for Mr. Zuppe,
unless Sterling gives written notice of non-renewal prior to December 31, 1999.
The Agreements provide for the payment of certain severance benefits to
Messrs. Gilkey and Zuppe upon termination of their employment by Sterling
without cause or following a constructive discharge, a notice of non-renewal or
their permanent disability. Pursuant to these provisions, Mr. Gilkey and Mr.
Zuppe would be entitled to receive their base salary in effect at the time of
termination until the expiration of their Agreements or for a three-year
period, whichever period were longer. In the event Messrs. Gilkey or Zuppe were
discharged within eighteen months following a change in control of Sterling,
they would be entitled to their base salaries and incentive bonuses, at the
highest annual rates during their employment, for a three-year period. In
addition, earned but unpaid base salary and incentive bonus amounts and amounts
held for Messrs. Gilkey and Zuppe in the Deferred Compensation Plan as of the
date of termination would be paid in full. Group hospitalization, health,
dental care, life or other insurance, including travel, accident and disability
insurance and the perquisites set forth in the Agreements would continue
through the end of the applicable period. The options granted pursuant to the
Agreements would become fully exercisable during the applicable period. In the
event any payments received by Messrs. Gilkey and Zuppe in connection with a
change in control were subject to the excise tax imposed upon certain change in
control payments under Federal tax laws, the Agreements provide for an
additional payment sufficient to restore each executive to the same after-tax
position the executive would have been in if the excise tax had not been
imposed.
Sterling is the plaintiff in a lawsuit which is pending in the United States
Court of Federal Claims (the "Lawsuit"). The Lawsuit is an action for damages
arising out of the government's breach of its contracts with Sterling in
connection with Sterling's past acquisitions of certain troubled thrift
associations. In the event that a settlement or judgment amount is received by
Sterling as a result of the Lawsuit, Messrs. Gilkey and Zuppe are entitled by
the terms of the Agreements to receive three percent and two percent,
respectively, of the gross amount received, in recognition of their substantial
contribution in bringing about the settlement or judgment. This provision is
intended to survive the termination of the Agreements.
12
<PAGE>
The following tables set forth information with respect to stock options
("options") granted to and exercised by the Chief Executive Officer of
Sterling and the next four most highly compensated Executive Officers during
1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR ($/SH)(/1/) DATE 5% ($) 10% ($)
- ------------ ---------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Harold B. Gilkey 10,000 13.51 21.3125 12/15/07 134,031 339,664
William W. Zuppe 10,000 13.51 21.3125 12/15/07 134,031 339,664
David P. Bobbitt 1,000 1.35 21.3125 2/28/05 10,175 24,372
4,000 5.41 21.3125 2/28/06 47,000 115,764
John M. Harlow 4,000 5.41 21.3125 2/28/06 47,000 115,764
1,000 1.35 21.3125 2/28/07 13,403 33,966
Thomas F. Sackmann 1,000 1.35 21.3125 2/28/04 8,676 20,219
3,000 4.05 21.3125 2/28/05 30,527 73,118
</TABLE>
Footnotes:
- -------
(1) The Exercise or Base Price is the fair market value of the Common Stock
on the date of grant as listed on the Nasdaq National Market, as
adjusted for stock dividends declared and/or paid.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END ($)(/1/)
SHARES ACQUIRED VALUE ------------------------- --------------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ --------------- ------------ ----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Harold B. Gilkey 0 0 49,000 20,000 489,896 77,123
William W. Zuppe 2,672 29,819 53,250 19,000 586,469 69,592
David P. Bobbitt 0 0 7,000 17,000 54,968 90,468
John M. Harlow 0 0 24,000 19,000 237,459 105,404
Thomas F. Sackmann 1,450 17,432 18,550 9,500 179,109 41,920
</TABLE>
Footnotes:
- -------
(1) Values are adjusted for stock dividends declared and/or paid.
13
<PAGE>
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG STERLING FINANCIAL CORPORATION, NASDAQ FINANCIAL-
INDUSTRY INDEX AND NASDAQ-BROAD MARKET INDEX
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
NASDAQ NASDAQ-
STERLING FINANCIAL- BROAD
Measurement Period FINANCIAL INDUSTRY MARKET
(Fiscal Year Covered) CORPORATION INDEX INDEX
- --------------------- --------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-12/31/1992 $100.00 $100.00 $100.00
FYE 12/31/1993 $131.32 $116.23 $119.95
FYE 12/31/1994 $118.46 $116.50 $125.94
FYE 12/31/1995 $158.91 $169.64 $163.35
FYE 12/31/1995 $163.24 $217.49 $202.99
FYE 12/31/1997 $251.36 $333.81 $248.30
</TABLE>
SHAREHOLDER RETURN COMPARISON
The following chart sets forth a five-year comparison of total Shareholder
return on the Common Stock of Sterling to the Nasdaq National Stock Index (US
Companies) and Nasdaq Financial Stock Index consisting of all financial
companies listed under SIC codes 60 through 67. The chart assumes an investment
of $100 on December 31, 1991 and the reinvestment of all dividends.
The stock price performance shown on the following chart is provided as of
year-end and may not be indicative of current stock price levels or future
stock price performance.
14
<PAGE>
PROPOSAL 2: ADOPTION OF THE 1998 INCENTIVE PLAN
On March 24, 1998, the Board of Directors adopted the 1998 Long-Term
Incentive Plan (the "1998 Incentive Plan"), subject to the approval of the
Shareholders at the Annual Meeting. The Board of Directors believes that it is
desirable for, and in the best interests of, Sterling to adopt the 1998
Incentive Plan and recommends that the Shareholders vote in favor of the
adoption of the 1998 Incentive Plan.
The following summary of the 1998 Incentive Plan is qualified in its
entirety by reference to the complete text of the 1998 Incentive Plan, which
is attached to this Proxy Statement as EXHIBIT A. Capitalized terms not
separately defined below have the meanings set forth in the 1998 Incentive
Plan.
DESCRIPTION OF THE 1998 INCENTIVE PLAN
The purpose of the 1998 Incentive Plan is to: a) foster and promote the
long-term financial success of Sterling and materially increase Shareholder
value; b) enable Sterling to attract, motivate and retain highly-qualified key
employees and directors; and c) encourage key employees and directors to link
their interests with the long-term financial success of Sterling and the
growth of Shareholder value. Under the 1998 Incentive Plan, the following
types of Incentive Awards may be granted: (i) Incentive Stock Options; (ii)
Non-Qualified Stock Options; (iii) Tandem SARs (stock appreciation rights);
(iv) Restricted Stock; (v) Performance Units or Performance Shares; and (vi)
supplemental payments dedicated to payment of any federal income taxes that
may be payable in conjunction with the 1998 Incentive Plan. Non-Employee
Directors, consultants and advisors of Sterling are eligible to participate in
the 1998 Incentive Plan but may not receive Incentive Stock Options or Tandem
SARs. Generally, the Personnel Committee will grant Incentive Awards under the
1998 Incentive Plan to executive and other officers, approximately 50
individuals, although all Employees are eligible to participate. Five Hundred
Thousand shares of Common Stock have been reserved for grants of Incentive
Awards under the 1998 Incentive Plan. Only approximately 500 shares of Common
Stock are available for grant under Sterling's existing 1992 Stock Option
Plan.
The 1998 Incentive Plan will be administered by the Personnel Committee of
the Board of Directors, which must consist of at least two members of the
Board of Directors, each of whom is a Non-Employee Director. The 1998
Incentive Plan provides that the Personnel Committee may make adjustments to
the number of shares and to the exercise price of all or any Incentive Awards.
No Grantee of an Incentive Award may receive during any fiscal year Incentive
Awards covering an aggregate of more than 200,000 shares of Common Stock.
No Incentive Stock Option may be granted with an exercise price per share
less than the Fair Market Value of the Common Stock at the date of grant. Non-
Qualified Stock Options may be granted at any exercise price. The exercise
price of an Option may be paid in cash, by an equivalent method acceptable to
the Personnel Committee, or, at the Personnel Committee's discretion, by
delivery (including constructive delivery by attestation) of already owned
shares of Common Stock having a Fair Market Value equal to the exercise price,
or, at the Personnel Committee's discretion, by delivery of a combination of
cash and already owned shares of Common Stock. However, if the Grantee
acquired the stock to be surrendered directly or indirectly from Sterling, he
or she must have owned the stock to be surrendered for at least six months
prior to tendering such stock for the exercise of an Option.
15
<PAGE>
An eligible Grantee may receive more than one Incentive Stock Option, but
the maximum aggregate Fair Market Value of the Common Stock (determined when
the Incentive Stock Option is granted) with respect to which Incentive Stock
Options are first exercisable by such Grantee in any calendar year cannot
exceed $100,000. In addition, no Incentive Stock Option may be granted to a
Grantee owning directly or indirectly stock possessing more than 10% of the
total combined voting power of all classes of stock of Sterling (a "Ten-
Percent Shareholder"), unless the exercise price is not less than 110% of the
Fair Market Value of the shares subject to such Incentive Stock Option on the
date of grant.
Except as otherwise provided by the Personnel Committee, awards under the
1998 Incentive Plan are not transferable other than as designated by the
Grantee by will or by the laws of descent and distribution. The expiration
date of an Incentive Stock Option is determined by the Personnel Committee at
the time of the grant, but in no event may an Incentive Stock Option be
exercisable after the expiration of 10 years from the date of grant of the
Incentive Stock Option (five years in the case of an Incentive Stock Option
granted to a Ten-Percent Shareholder).
Tandem stock appreciation rights ("Tandem SARs") may be granted under the
1998 Incentive Plan in conjunction with all or part of an Option. The exercise
price of the Tandem SAR shall not be less than the Fair Market Value of the
Common Stock on the date of the grant of the Option to which it relates. The
Tandem SAR will be exercisable only when the underlying Option is exercisable
and once a Tandem SAR has been exercised, the related portion of the Option
underlying the Tandem SAR will terminate. Upon the exercise of a Tandem SAR,
Sterling will pay to the Grantee in cash, Common Stock, or a combination
thereof (the method of payment to be at the discretion of the Personnel
Committee), an amount equal to the excess of the Fair Market Value of the
Common Stock on the exercise date over the option exercise price, multiplied
by the number of Tandem SARs being exercised.
Shares of Restricted Stock may be granted under the 1998 Incentive Plan,
and the provisions attendant to a grant of Restricted Stock may vary among
Grantees. In making an award of Restricted Stock, the Personnel Committee will
determine the periods during which the Restricted Stock is subject to
forfeiture. During the Restriction Period, as set forth in the grant of the
Restricted Stock, the Grantee may not sell, transfer, pledge or assign the
Restricted Stock, but will be entitled to vote the Restricted Stock.
The Personnel Committee may grant Incentive Awards representing a
contingent right to receive cash ("Performance Units") or shares of Common
Stock ("Performance Shares") at the end of a Performance Period. The Personnel
Committee may grant Performance Units and Performance Shares in such a manner
that more than one Performance Period is in progress concurrently. For each
Performance Period, the Personnel Committee shall establish the number of
Performance Units or Performance Shares and the contingent value of any
Performance Units or Performance Shares, which may vary depending on the
degree to which Performance Goals established by the Personnel Committee are
met. The Personnel Committee may modify the Performance Goals as it deems
appropriate.
The basis for payment of Performance Units or Performance Shares for a
given Performance Period shall be the achievement of those financial and
nonfinancial Performance Goals determined by the Personnel Committee at the
beginning of the Performance Period. If minimum performance is not achieved
for a Performance Period, no payment shall be made and all contingent rights
shall cease. If minimum performance is achieved or exceeded, the value of a
Performance Unit or Performance Share
16
<PAGE>
shall be based on the degree to which actual performance exceeded the pre-
established minimum Performance Goals, as determined by the Personnel
Committee. The amount of payment shall be determined by multiplying the number
of Performance Units or Performance Shares granted at the beginning of the
Performance Period by the final Performance Unit or Performance Share value.
Payments shall be made, in the discretion of the Personnel Committee, solely
in cash or Common Stock, or a combination of cash and Common Stock, following
the close of the applicable Performance Period.
The Personnel Committee may provide for Supplemental Payments by Sterling
to Grantees in amounts specified by the Personnel Committee, which amounts
shall not exceed the amounts necessary to pay the federal income tax payable
with respect to Incentive Awards and Supplemental Payments, based on the
assumption that the Grantee is taxed at the maximum effective federal income
tax rate on such amount. The Personnel Committee shall have the discretion to
grant Supplemental Payments that are payable in cash, Common Stock, or a
combination of both, as determined by the Personnel Committee at the time of
payment.
The 1998 Incentive Plan provides that following a Change of Control, except
as otherwise provided in any Incentive Award Agreement, each Option or Tandem
SAR then outstanding shall become vested and exercisable in full, all
restrictions and conditions of all Restricted Stock then outstanding shall be
deemed satisfied and the restriction period shall be deemed to have expired
and, to the extent determined by the Personnel Committee, all Performance
Shares and Performance Units shall become vested, deemed earned in full and
promptly paid. In the event of a Change of Control, however, the Board of
Directors may, after notice to the Grantee, require the Grantee to "cash-out"
his rights by transferring them to Sterling in exchange for their equivalent
"cash value."
If a Grantee's employment is terminated by reason of death, disability or
retirement, any vested Incentive Awards outstanding will remain exercisable as
provided in the 1998 Incentive Plan. If a Grantee is terminated for Cause, all
outstanding Incentive Awards shall immediately terminate as of the date of
termination of employment regardless of the otherwise vested status of the
Incentive Awards.
Under the 1998 Incentive Plan, the Personnel Committee has full power and
authority to: (i) designate Grantees; (ii) determine the Incentive Awards to
be granted to Grantees; (iii) subject to Section 1.4 of the 1998 Incentive
Plan, determine the Common Stock (or securities convertible into Common Stock)
to be covered by Incentive Awards and in connection therewith, to reserve
shares of Common Stock as needed in order to cover grants of Incentive Awards;
(iv) determine the terms and conditions of any Incentive Award; (v) determine
whether, to what extent and under what circumstances Incentive Awards may be
settled or exercised in cash, Common Stock, other securities, or other
property, or may be canceled, substituted, forfeited or suspended, and the
method or methods by which Incentive Awards may be settled, exercised,
canceled, substituted, forfeited or suspended; (vi) interpret and administer
the 1998 Incentive Plan and any instrument or agreement relating to, or
Incentive Award made under, the 1998 Incentive Plan; (vii) establish, amend,
suspend or waive such rules and guidelines as the Personnel Committee deems
necessary or appropriate for administration of the 1998 Incentive Plan; (viii)
appoint such agents as it deems appropriate for the administration of the 1998
Incentive Plan; and (ix) make any other determination and take any other
action that it deems necessary or desirable for such administration, provided,
however, that the Personnel Committee may not delegate any of the power or
authority set forth in (i) through (viii) above. No member of the Personnel
Committee may vote or act upon any matter relating solely to himself or
herself. All designations, determinations, interpretations and other decisions
with respect to the 1998 Incentive
17
<PAGE>
Plan or any Incentive Award are within the sole discretion of the Personnel
Committee and shall be final, conclusive and binding upon all persons,
including Sterling, any Grantee, any holder or beneficiary of any Incentive
Award and any owner of an equity interest in Sterling. No member of the
Personnel Committee will be liable for any action or determination made in
good faith by the Personnel Committee with respect to the 1998 Incentive Plan
or any Incentive Award and, to the fullest extent permitted by Sterling's
Restated Articles of Incorporation and Bylaws, Sterling will indemnify each
member of the Personnel Committee.
TAX CONSEQUENCES
Sterling believes that under present law, the following are the U.S.
federal income tax consequences generally arising with respect to Options. The
grant of an Option will not be a taxable event to the Grantee and Sterling
will not be entitled to a deduction with respect to such grant.
Upon the exercise of a Non-Qualified Stock Option, a Grantee will recognize
ordinary income at the time of exercise equal to the excess of the then Fair
Market Value of the shares of Common Stock received over the exercise price.
The taxable income recognized upon exercise of a Non-Qualified Stock Option
will be treated as compensation income subject to withholding and Sterling
will be entitled to deduct as a compensation expense an amount equal to the
ordinary income a Grantee recognizes with respect to such exercise. When
Common Stock received upon the exercise of a Non-Qualified Stock Option
subsequently is sold or exchanged in a taxable transaction, the holder thereof
generally will recognize capital gain (or loss) equal to the difference
between the total amount realized and the Fair Market Value of the Common
Stock on the date of exercise; the character of such gain or loss as long-term
or short-term capital gain or loss will depend upon the holding period of the
shares following exercise.
The exercise of an Incentive Stock Option will not be taxable to the
Grantee, and Sterling will not be entitled to any deduction with respect to
such exercise. However, to qualify for this favorable tax treatment of
Incentive Stock Options under the Code, the Grantee may not dispose of the
shares of Common Stock acquired upon the exercise of an Incentive Stock Option
until after the later of two years following the date of grant or one year
following the date of exercise. The surrender of shares of Common Stock
acquired upon the exercise of an Incentive Stock Option in payment of the
exercise price of an Option within the required holding period for Incentive
Stock Options under the Code will be a disqualifying disposition of the
surrendered shares. Upon any subsequent taxable disposition of shares of
Common Stock received upon exercise of a qualifying Incentive Stock Option,
the Grantee generally will recognize long-term or short-term capital gain (or
loss) equal to the difference between the total amount realized and the
exercise price of the Incentive Stock Option.
If an Option that was intended to be an Incentive Stock Option under the
Code does not qualify for favorable Incentive Stock Option treatment under the
Code due to the failure to satisfy the holding period requirements, the
Grantee may recognize ordinary income in the year of the disqualifying
disposition. Provided the amount realized in the disqualifying disposition
exceeds the exercise price, the ordinary income a Grantee shall recognize in
the year of a disqualifying disposition shall be the lower of (i) the excess
of the amount realized over the exercise price or (ii) excess of the Fair
Market Value of the Common Stock at the time of the exercise over the exercise
price. In addition, the Grantee shall recognize capital gain on the
disqualifying disposition in the amount, if any, by which the amount realized
in the disqualifying disposition exceeds the Fair Market Value of the Common
Stock at the time of the exercise. Such capital gain shall be taxable as long-
term or short-term capital gain, depending on the Grantee's holding period for
such shares.
18
<PAGE>
Notwithstanding the favorable tax treatment of Incentive Stock Options for
regular tax purposes, as described above, for alternative minimum tax
purposes, an Incentive Stock Option is generally treated in the same manner as
a Non-Qualified Stock Option. Accordingly, a Grantee must generally include in
alternative minimum taxable income for the year in which an Incentive Stock
Option is exercised the excess of the Fair Market Value on the date of
exercise of the shares of Common Stock received over the exercise price. If,
however, a Grantee disposes of shares of Common Stock acquired upon the
exercise of an Incentive Stock Option in the same calendar year as the
exercise, only an amount equal to the Grantee's ordinary income for regular
tax purposes with respect to such disqualifying disposition will be recognized
for the Grantee's calculation of alternative minimum taxable income in such
calendar year.
A Grantee receiving Restricted Stock generally will recognize ordinary
income in the amount of the Fair Market Value of the corresponding Common
Stock at the time the Common Stock is no longer subject to forfeiture, less
any consideration paid for the Common Stock. Sterling will be entitled to a
deduction at the same time and in the same amount. The holding period to
determine whether the Grantee has long-term or short-term capital gain or loss
on a subsequent sale generally begins when the restriction period expires, and
the Grantee's tax basis for such Common Stock will generally equal the Fair
Market Value of such Common Stock on such date.
However, a Grantee may elect, under Section 83(b) of the Code, within 30
days of the grant of the Restricted Stock, to recognize taxable ordinary
income on the date of grant equal to the excess of the Fair Market Value of
the Restricted Stock (determined without regard to the restrictions) over the
price (if any) paid for the Restricted Stock. By reason of such an election,
the Grantee's holding period will commence on the date of grant and the
Grantee's tax basis will be equal to the Fair Market Value of the Common Stock
on that date (determined without regard to restrictions). Likewise, Sterling
generally will be entitled to a deduction at that time in the amount that is
taxable as ordinary income to the Grantee. If the shares of Common Stock are
forfeited after making such an election, the forfeiture shall be treated as a
sale or exchange upon which there is a capital loss equal to the excess of
purchase price of the forfeited shares of Common Stock over any amount
realized on such forfeiture.
No Incentive Awards have been granted or allocated under the 1998 Incentive
Plan. Approval of the 1998 Incentive Plan requires the affirmative vote of the
holders of a majority of shares of Common Stock present and voting at the
Annual Meeting. Such vote will satisfy the shareholder approval requirements
of the Nasdaq Stock Market and Sections 422 and 162(m) of the Code. Sterling
anticipates registering with the Securities and Exchange Commission during
1998 the shares issuable as a result of the adoption of the 1998 Incentive
Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO APPROVE STERLING'S 1998 INCENTIVE PLAN.
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PROPOSAL 3: RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Board of Directors has appointed Coopers & Lybrand L.L.P. to serve as
independent auditors for Sterling and its subsidiaries for the year ending
December 31, 1998, and any interim periods, subject to ratification by the
Shareholders at the Annual Meeting. Coopers & Lybrand L.L.P. has advised
Sterling that it will have in attendance at the Annual Meeting one or more
representatives who will be available to respond to appropriate questions
presented at the Annual Meeting. Such representatives will be given an
opportunity to make a statement at the Annual Meeting if they desire to do so.
If the appointment of Coopers & Lybrand L.L.P. is not ratified by the required
number of votes, the Board will reconsider its selection of independent
auditors for 1998.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO RATIFY THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS THE
INDEPENDENT PUBLIC ACCOUNTANTS FOR STERLING FOR 1998.
OTHER MATTERS
Sterling knows of no other business that will be presented for
consideration at the Annual Meeting other than those items set forth herein.
The enclosed Proxy, however, confers discretionary authority to the Proxy
agents to vote with respect to matters which may be presented at the Annual
Meeting, including the election of any person as a Director in the event a
nominee of the Board of Directors of Sterling is unable to serve. If any such
matters come before the Annual Meeting, the Proxy agents will vote according
to their own judgment.
INTEREST OF DIRECTORS, OFFICERS AND OTHERS
IN CERTAIN TRANSACTIONS
Certain of the Directors and Executive Officers of Sterling and its
subsidiaries were customers of and had transactions with Sterling Savings
during 1997. In addition, certain Directors and Executive Officers are
officers, directors or shareholders of corporations or members of partnerships
which were customers of or had transactions with Sterling Savings during 1997.
All such transactions were in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons,
and did not involve more than the normal risk of collectability or present
other unfavorable features. The law firm of Witherspoon, Kelley, Davenport &
Toole, P.S., of which Ned M. Barnes is a principal, received approximately
$602,365 during 1997 for legal services rendered to Sterling and its
subsidiaries, exclusive of amounts paid by customers.
INDEPENDENT AUDITORS
Sterling's independent public accountant, Coopers & Lybrand L.L.P., has
advised Sterling that it will have a representative at the Annual Meeting. The
representative will have an opportunity to make a statement, if so desired,
and will be available to respond to appropriate questions. As described under
"Proposal 3: Ratification of Appointment of Independent Auditors," the Audit
Committee has recommended and the Board of Directors has approved, subject to
ratification at the Annual Meeting, appointment of Coopers & Lybrand L.L.P. as
the independent public accountants for the year ending December 31, 1998 and
any interim periods.
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SHAREHOLDER PROPOSALS
It is presently anticipated that the next Annual Meeting of Shareholders of
Sterling will be held on Tuesday, April 27, 1999. In order for any Shareholder
proposal to be considered for inclusion in the proxy materials of Sterling for
the 1999 Annual Meeting of Shareholders, such proposal must be submitted, in
accordance with the rules and regulations of the SEC, in writing to the
Secretary of Sterling at Sterling's corporate offices by December 1, 1998.
SECTION 16 OF THE SECURITIES EXCHANGE ACT
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, and
the regulations thereunder, Sterling's Directors, Executive Officers and
beneficial owners of more than 10% of any registered class of Sterling equity
securities are required to file reports of their ownership of Sterling's
securities, and any changes in that ownership, to the SEC. Based solely upon
written representations from certain reporting persons, Sterling believes that
during 1997, such filing requirements were complied with.
ANNUAL REPORT
A copy of Sterling's 1997 Annual Report to Shareholders, which includes
Sterling's Annual Report on Form 10-K as filed with the SEC, is enclosed.
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EXHIBIT "A"
STERLING FINANCIAL CORPORATION
1998 LONG-TERM INCENTIVE PLAN
SECTION 1. GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE AND
BENEFITS
1.1 PURPOSE
The purpose of the Sterling Financial Corporation 1998 Long-Term Incentive
Plan (the "Plan") is to: a) foster and promote the long-term financial success
of Sterling Financial Corporation ("Sterling") and materially increase
Shareholder value; b) enable Sterling to attract, motivate and retain highly-
qualified key employees and directors; and c) encourage key employees and
directors to link their interests with the long-term financial success of
Sterling and the growth of Shareholder value. The Plan provides for payment of
various forms of incentive compensation and, accordingly, is not intended to
be a plan that is subject to the Employee Retirement Income Security Act of
1974, as amended.
1.2 DEFINITIONS
The following terms shall have the meanings set forth below:
(a) APPRECIATION. The difference between the option exercise price per
share of the Option to which a Tandem SAR relates and the Fair Market
Value of a share of Common Stock on the date of exercise of the Tandem
SAR.
(b) BOARD. The Board of Directors of Sterling.
(c) CAUSE. One or more of the following reasons for the termination of
employment:
(i) The willful and continued failure by the Grantee to
substantially perform his or her duties with Sterling (other than
any such failure resulting from the Grantee's Disability or
incapacity due to mental illness) after a written demand for
substantial performance is delivered to the Grantee that
specifically identifies the manner in which Sterling believes that
the Grantee has not substantially performed his or her duties, and
the Grantee's failure to remedy or take substantial steps to remedy
the situation within five business days of receiving such notice;
(ii) The Grantee's conviction for committing a felony (all rights
of appeal having been exhausted); or
(iii) The Grantee's having willfully engaged in gross misconduct
that is materially and demonstrably injurious to Sterling. However,
no act or failure to act on the Grantee's part shall be considered
"willful" unless such act or omission was not in good faith and
without reasonable belief that such action or omission was in the
best interest of Sterling or its Subsidiaries.
Sterling shall notify the Committee if it believes a Grantee's
employment has been terminated for Cause. The Committee shall
determine whether a Grantee's employment has been terminated for
Cause for purposes of the Plan.
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(d) CHANGE IN CONTROL. A change in control shall be deemed to have
occurred at such time as:
(i) any "person" (as that term is used in Section 13(d) and 14(d)
of the Exchange Act) (other than Sterling or an affiliate of
Sterling) becomes, directly or indirectly, the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of securities
representing 25% or more of the then outstanding securities of
Sterling;
(ii) during any period of two (2) consecutive years or less,
individuals who at the beginning of such period constituted the
Board of Sterling cease, for any reason, to constitute at least a
majority of the Board, unless the election or nomination for
election of each new member of the Board was approved by a vote of
at least two-thirds of the members of the Board then still in office
who were members of the Board at the beginning of the period;
(iii) the Shareholders of Sterling approve (A) a plan of complete
liquidation of Sterling; or (B) an agreement for the sale or
disposition of all or substantially all of Sterling's assets; or (C)
a merger or consolidation of Sterling with any other corporation,
other than a merger or consolidation which would result in the
voting securities of Sterling outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), at least
50% of the combined voting power of the voting securities of
Sterling (or such surviving entity) outstanding immediately after
such merger or consolidation.
(e) CODE. The Internal Revenue Code of 1986, as amended.
(f) COMMITTEE. A committee or subcommittee of the Board meeting the
requirements of Rule 16b-3(d)(1) of the rules and regulations of the
Exchange Act and Treasury Regulations Section 1:162-27(e)(3), or any
similar successor rules or regulations, appointed by the Board to
administer this Plan and the programs hereunder or to make specific
Incentive Awards hereunder.
(g) COMMON STOCK. Common Stock, par value $1.00 per share, which
Sterling is authorized to issue or may in the future be authorized to
issue.
(h) DIRECTOR. A member of the Board.
(i) DISABILITY. Any complete and permanent disability as defined in
Section 22(e)(3) of the Code and determined in accordance with the
procedures set forth in the regulations thereunder.
(j) EMPLOYEE. Any person determined by the Committee to be an employee
of Sterling, including a consultant, advisor or Employee Director, or any
person who has been hired to be an employee of Sterling.
(k) EMPLOYEE DIRECTOR. A Director who is also an Employee.
(l) EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
(m) FAIR MARKET VALUE. The closing sales price of the Common Stock as
reported or listed on a national securities exchange or on the Nasdaq
Stock Market on any relevant date for valuation, or, if there is no such
sale on such date, the applicable prices as so reported on the nearest
preceding date upon which such sale took place. In the event the shares
of Common Stock are not listed on a national securities exchange or the
Nasdaq Stock Market, the Fair Market Value of such shares shall be
determined by the Committee in its sole discretion.
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(n) GRANTEE. Any Employee, Non-Employee Director, advisor or
consultant who is eligible to receive an Incentive Award under the Plan.
(o) INCENTIVE AWARD. Any incentive award, individually or
collectively, as the case may be, including any Option, Tandem SAR,
Restricted Stock, Performance Unit, or Performance Share, as well as any
Supplemental Payment, granted under the Plan.
(p) INCENTIVE AWARD AGREEMENT. The written agreement entered into
between Sterling and the Grantee pursuant to which an Incentive Award
shall be made under the Plan.
(q) INCENTIVE STOCK OPTION. A stock option which qualifies as such
under Section 422 of the Code.
(r) NON-EMPLOYEE DIRECTOR. A Director who is not an Employee Director.
(s) NON-QUALIFIED STOCK OPTION. A stock option granted by the
Committee to a Grantee under the Plan, which does not qualify as an
Incentive Stock Option.
(t) OPTION. A Non-Qualified Stock Option or Incentive Stock Option
granted by the Committee to a Grantee under the Plan.
(u) PERFORMANCE GOALS. Goals established by the Committee which may be
based on earnings or earnings growth, sales, returns on assets, equity or
investment, regulatory compliance, satisfactory internal or external
audits, improvements of financial ratings, achievement of balance sheet
or income statement objectives, or any other objective goals established
by the Committee, and may be absolute in their terms or measured against
or in relationship to other companies comparably, similarly or otherwise
situated. Such performance goals may be particular to a Grantee or the
department, branch, Subsidiary or other division in which he or she
works, or may be based on the performance of Sterling generally, and may
cover such period as may be specified by the Committee.
(v) PERFORMANCE PERIOD. A period of time determined by the Committee
over which performance is measured for the purpose of determining a
Grantee's right to and the payment value of any Performance Units or
Performance Shares.
(w) PERFORMANCE SHARE OR PERFORMANCE UNIT. An Incentive Award
representing a contingent right to receive shares of Common Stock (which
may be Restricted Stock) or cash at the end of a Performance Period and
which, in the case of Performance Shares, is denominated in Common Stock,
and, in the case of Performance Units, is denominated in cash values.
(x) PLAN. Sterling Financial Corporation 1998 Long-Term Incentive
Plan, as amended from time to time.
(y) RESTRICTED STOCK. Shares of Common Stock issued or transferred to
a Grantee subject to the Restrictions set forth in Section 3 hereof.
(z) RESTRICTED STOCK AWARD. An authorization by the Committee to issue
or transfer Restricted Stock to a Grantee.
(aa) RESTRICTION PERIOD. The period of time determined by the
Committee during which Restricted Stock is subject to the restrictions
under the Plan.
(bb) RETIREMENT. The termination of employment by Sterling
constituting retirement as determined by the Committee.
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(cc) STERLING. Sterling Financial Corporation, including its
Subsidiaries and any successor corporation.
(dd) SUBSIDIARY. Any corporation (whether now or hereafter existing)
which constitutes a "subsidiary" of Sterling, as defined in Section
424(f) of the Code.
(ee) SUPPLEMENTAL PAYMENT. Any amounts referred to in Sections 1.6,
2.5, 3.5 and/or 4.2 dedicated to payment of any federal income taxes that
are payable on an Incentive Award as determined by the Committee.
(ff) TANDEM SAR. A stock appreciation right granted in connection with
the grant of an Option as described in Section 2.4.
(gg) TEN-PERCENT SHAREHOLDER. A Grantee who (applying the rules of
Section 424(d) of the Code) owns stock possessing more than 10% of the
total combined voting power of all classes of stock of Sterling.
1.3 ADMINISTRATION
(a) COMMITTEE POWERS. The Plan shall be administered by the Committee,
which shall have full power and authority to: (i) designate Grantees; (ii)
determine the Incentive Awards to be granted to Grantees; (iii) subject to
Section 1.4 of the Plan, determine the Common Stock (or securities convertible
into Common Stock) to be covered by Incentive Awards and in connection
therewith, to reserve shares of Common Stock as needed in order to cover
grants of Incentive Awards; (iv) determine the terms and conditions of any
Incentive Award; (v) determine whether, to what extent and under what
circumstances Incentive Awards may be settled or exercised in cash, Common
Stock, other securities, or other property, or may be canceled, substituted,
forfeited or suspended, and the method or methods by which Incentive Awards
may be settled, exercised, canceled, substituted, forfeited or suspended; (vi)
interpret and administer the Plan and any instrument or agreement relating to,
or Incentive Award made under, the Plan; (vii) establish, amend, suspend or
waive such rules and guidelines as the Committee shall deem necessary or
appropriate for administration of the Plan; (viii) appoint such agents as it
shall deem appropriate for the administration of the Plan; and (ix) make any
other determination and take any other action that it deems necessary or
desirable for such administration, provided, however, that the Committee shall
not delegate any of the power or authority set forth in (i) through (vii)
above. No member of the Committee shall vote or act upon any matter relating
solely to himself. All designations, determinations, interpretations and other
decisions with respect to the Plan or any Incentive Award shall be within the
sole discretion of the Committee and shall be final, conclusive and binding
upon all persons, including Sterling, any Grantee, any holder or beneficiary
of any Incentive Award and any owner of an equity interest in Sterling.
(b) NO LIABILITY. No member of the Committee shall be liable for any action
or determination made in good faith by the Committee with respect to this Plan
or any Incentive Award under this Plan, and, to the fullest extent permitted
by Sterling's Restated Articles of Incorporation and Bylaws, Sterling shall
indemnify each member of the Committee.
(c) MEETINGS. The Committee shall designate a chairman from among its
members, who shall preside at all of its meetings, and shall designate a
secretary, without regard to whether that person is a member of the Committee,
who shall keep the minutes of the proceedings and all records, documents, and
data pertaining to its administration of the Plan. Meetings shall be held at
such times and places as shall be determined by the Committee. The Committee
may take any action otherwise
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proper under the Plan by the affirmative vote, taken with or without a
meeting, of a majority of its members.
1.4 SHARES OF COMMON STOCK SUBJECT TO THE PLAN
(a) COMMON STOCK AUTHORIZED. Subject to adjustment under Section 5.5, the
aggregate number of shares of Common Stock available for granting Incentive
Awards under the Plan shall be equal to Five Hundred Thousand (500,000) shares
of Common Stock. If any Incentive Award shall expire or terminate for any
reason, without being exercised or paid, shares of Common Stock subject to
such Incentive Award shall again be available for grant in connection with
grants of subsequent Incentive Awards.
(b) COMMON STOCK AVAILABLE. The Common Stock available for issuance or
transfer under the Plan shall be made available from such shares reserved
thereunder. No fractional shares shall be issued under the Plan; payment for
fractional shares shall be made in cash.
(c) INCENTIVE AWARD ADJUSTMENTS. Subject to the limitations set forth in
Sections 5.8 and 6.8, the Committee may make any adjustment in the exercise
price or the number of shares subject to any Incentive Award, or any other
terms of any Incentive Award. Such adjustment shall be made by amending,
substituting or canceling and re-granting such Incentive Award with the
inclusion of terms and conditions that may differ from the terms and
conditions of the original Incentive Award. If such action is effected by
amendment, the effective date of such amendment shall be the date of the
original grant.
1.5 PARTICIPATION
The Committee shall from time to time designate those Grantees, if any, to
be granted Incentive Awards under the Plan, the type of awards granted, the
number of shares, options, rights or units, as the case may be, which shall be
granted to each such Grantee and any other terms or conditions relating to the
awards as it may deem appropriate, consistent with the provisions of the Plan.
A Grantee who has been granted an Incentive Award may, if otherwise eligible,
be granted additional Incentive Awards at any time. Non-Employee Directors,
advisors and consultants shall be eligible to receive all Incentive Awards
under the Plan except for Incentive Stock Options and Tandem SARs related
thereto.
1.6 INCENTIVE AWARDS
The forms of Incentive Awards under this Plan are Options, Tandem SARs and
Supplemental Payments as described in Section 2, Restricted Stock and
Supplemental Payments as described in Section 3, and Performance Units or
Performance Shares and Supplemental Payments as described in Section 4.
1.7 MAXIMUM INDIVIDUAL GRANTS
No Grantee may receive during any fiscal year of Sterling Incentive Awards
covering an aggregate of more than two hundred thousand (200,000) shares of
Common Stock or the equivalent thereof valued at the time of payment of the
Incentive Award.
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SECTION 2. OPTIONS AND TANDEM SARS
2.1 GRANT OF OPTIONS
The Committee is authorized to grant Options to Grantees in accordance with
the terms and conditions required pursuant to this Plan and with such
additional terms and conditions, not inconsistent with the provisions of the
Plan, as the Committee shall determine.
2.2 OPTION TERMS
(a) EXERCISE PRICE. The exercise price per share of Common Stock under each
Option shall be determined by the Committee; provided, however, that, in the
case of an Incentive Stock Option, such exercise price shall not be less than
100% of the Fair Market Value per share of such stock on the date the Option
is granted, as determined by the Committee (110% in the case of an Incentive
Stock Option granted to a Ten-Percent Shareholder).
(b) TERM. The Committee shall fix the term of each Option which, in the
case of an Incentive Stock Option, shall be not more than ten years from the
date of grant. In the event no term is fixed, such term shall be ten years
from the date of grant. The term shall be five years in the case of an
Incentive Stock Option granted to a Ten-Percent Shareholder.
(c) EXERCISE. The Committee shall determine the time or times at which an
Option may be exercised in whole or in part. The Committee may accelerate the
exercisability of any Option in portion thereof at any time. Notwithstanding
the foregoing, the Committee may, in its sole discretion, provide that all or
part of the Options received by a Grantee upon the exercise of a Non-Qualified
Stock Option shall be Restricted Stock subject to any or all of the
restrictions or conditions set forth in Section 3.2.
2.3 OPTION EXERCISES
(a) METHOD OF EXERCISE. To purchase shares under any Option granted under
the Plan, Grantees must give notice in writing to Sterling of their intention
to purchase and specify the number of shares of Common Stock as to which they
intend to exercise their Option. Upon the date or dates specified for the
completion of the purchase of the shares, the purchase price will be payable
in full. The purchase price may be paid in cash or an equivalent acceptable to
the Committee. At the discretion of the Committee, the exercise price per
share of Common Stock may be paid either i) in cash or its equivalent, ii) by
the assignment and delivery (including constructive delivery by attestation)
to Sterling of shares of Common Stock owned by the Grantee or by a combination
of (i) and (ii). However, if the Grantee acquired the Common Stock to be
surrendered directly or indirectly from Sterling, he or she must have owned
the stock to be surrendered for at least six months prior to tendering such
stock for the exercise of an Option. Any shares so assigned and delivered to
Sterling in payment or partial payment of the purchase price shall be valued
at the Fair Market Value on the exercise date. In addition, at the request of
the Grantee and to the extent permitted by applicable law, Sterling in its
discretion may selectively approve a "cashless exercise" arrangement with a
brokerage firm under which such brokerage firm, on behalf of the Grantee,
shall pay to Sterling the exercise price of the Options being exercised, and
Sterling, pursuant to an irrevocable notice from the Grantee, shall promptly
deliver the shares being purchased to such firm.
(b) INCENTIVE STOCK OPTIONS. In the case of Incentive Stock Options, the
terms and conditions of such grants shall be subject to and comply with
Section 422 of the Code and any rules
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or regulations promulgated thereunder, including the requirement that the
aggregate Fair Market Value (determined as of the date of grant) of the Common
Stock with respect to which Incentive Stock Options granted under this Plan
and all other option plans of Sterling become exercisable by a Grantee during
any calendar year shall not exceed $100,000. To the extent that the limitation
set forth in the preceding sentence is exceeded for any reason (including the
acceleration of the time for exercise of an Option), the Options with respect
to such excess amount shall be treated as Non-Qualified Stock Options.
2.4 TANDEM SARS
(a) GENERAL PROVISIONS. The Committee may, at the time of grant of an
Option, grant Tandem SARs with respect to all or any portion of the shares of
Common Stock covered by such Option. The exercise price per share of Common
Stock of a Tandem SAR shall be fixed in the Incentive Award Agreement and
shall not be less than one hundred percent (100%) of the Fair Market Value of
a share of Common Stock on the date of the grant of the Option to which it
relates. A Tandem SAR may be exercised at any time the Option to which it
relates is then exercisable, but only to the extent the Option to which it
relates is exercisable, and shall be subject to the conditions applicable to
such Option. When a Tandem SAR is exercised, the Option to which it relates
shall terminate to the extent of the number of shares with respect to which
the Tandem SAR is exercised. Similarly, when an Option is exercised, the
Tandem SARs relating to the shares covered by such Option exercise shall
terminate.
(b) EXERCISE. Upon exercise of a Tandem SAR, the holder shall receive, for
each share with respect to which the Tandem SAR is exercised, an amount equal
to the Appreciation. The Appreciation shall be payable in cash, Common Stock,
or a combination of both, at the option of the Committee, and shall be paid
within 30 calendar days of the exercise of the Tandem SAR.
2.5 SUPPLEMENTAL PAYMENT ON EXERCISE OF NON-QUALIFIED STOCK OPTIONS OR TANDEM
SARS
The Committee, either at the time of grant or at the time of exercise of
any Non-Qualified Stock Option or Tandem SAR, may provide for a Supplemental
Payment by Sterling to the Grantee with respect to the exercise of any Non-
Qualified Stock Option or Tandem SAR. The Supplemental Payment shall be in the
amount specified by the Committee, which shall not exceed the amount necessary
to pay the federal income tax payable with respect to both the exercise of the
Non-Qualified Stock Option and/or Tandem SAR and the receipt of the
Supplemental Payment, assuming the holder is taxed at the maximum effective
federal income tax rate applicable thereto. The Committee shall have the
discretion to grant Supplemental Payments that are payable solely in cash or
Supplemental Payments that are payable in cash, Common Stock, or a combination
of both, as determined by the Committee at the time of payment. The
Supplemental Payment shall be paid within 30 calendar days of the date of
exercise of a Non-Qualified Stock Option or Tandem SAR (or, if later, within
30 calendar days of the date on which income is recognized for federal income
tax purposes with respect to such exercise).
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SECTION 3. RESTRICTED STOCK
3.1 AWARD OF RESTRICTED STOCK
(a) GRANT. In consideration of the performance of services by the Grantee,
shares of Restricted Stock may be awarded under this Plan by the Committee on
such terms and conditions and with such restrictions as the Committee may from
time to time approve, all of which may differ with respect to each Grantee.
Such Restricted Stock shall be awarded for no additional consideration or such
additional consideration as the Committee shall determine.
(b) IMMEDIATE TRANSFER WITHOUT IMMEDIATE DELIVERY OF RESTRICTED STOCK. Each
Restricted Stock Award will constitute an immediate transfer of the record and
beneficial ownership of the shares of Restricted Stock to the Grantee in
consideration of the performance of services, entitling such Grantee to all
voting and other ownership rights, but subject to the restrictions hereinafter
referred to. Each Restricted Stock Award may limit the Grantee's dividend
rights during the Restriction Period in which the shares of Restricted Stock
are subject to a substantial risk of forfeiture and restrictions on transfer.
Shares of Common Stock awarded pursuant to a grant of Restricted Stock will be
held by Sterling, in trust or in escrow pursuant to an agreement satisfactory
to the Committee, as determined by the Committee, until such time as the
restrictions on transfer have expired. Any such trust or escrow shall not be
insulated from the claims of the general creditors of Sterling in the event of
bankruptcy or insolvency of Sterling.
3.2 RESTRICTIONS
(a) RESTRICTIVE CONDITIONS. Restricted Stock awarded to a Grantee shall be
subject to the following restrictions until the expiration of the Restriction
Period: (i) the shares of Common Stock of Sterling included in the Restricted
Stock Award shall be subject to one or more restrictions, including without
limitation, a restriction that constitutes a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code and regulations promulgated
thereunder, and to the restrictions on transferability set forth in Section
5.2; (ii) unless otherwise approved by the Committee, the shares of Common
Stock included in the Restricted Stock Award that are subject to restrictions
that are not satisfied at such time the Grantee ceases to be employed by, or
be a Director of, Sterling shall be forfeited and all rights of the Grantee to
such shares shall terminate without further obligation on the part of
Sterling; and (iii) any other restrictions that the Committee may determine in
advance are necessary or appropriate.
(b) FORFEITURE OF RESTRICTED STOCK. If for any reason, the restrictions
imposed by the Committee upon Restricted Stock are not satisfied at the end of
the Restriction Period, any Restricted Stock remaining subject to such
restrictions shall thereupon be forfeited by the Grantee and re-acquired by
Sterling.
(c) REMOVAL OF RESTRICTIONS. The Committee shall have the authority to
remove any or all of the restrictions on the Restricted Stock, whenever it
determines that, by reason of changes in applicable laws or other changes in
circumstances arising after the date of the Restricted Stock Award, such
action is appropriate.
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3.3 RESTRICTION PERIOD
The Restriction Period of Restricted Stock shall commence on the date of
grant and shall be established by the Committee in the Incentive Award
Agreement setting forth the terms of the award of Restricted Stock.
3.4 DELIVERY OF SHARES OF COMMON STOCK
Subject to Section 6.3, at the expiration of the Restriction Period, a
stock certificate evidencing the Restricted Stock (to the nearest full share)
with respect to which the Restriction Period has expired with all restrictions
thereon having been satisfied shall be delivered without charge to the
Grantee, or his or her personal representative, free of all restrictions under
the Plan.
3.5 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK
The Committee, either at the time of grant or at the time of vesting of
Restricted Stock, may provide for a Supplemental Payment by Sterling to the
holder in an amount specified by the Committee, which shall not exceed the
amount necessary to pay the federal income tax payable with respect to both
the vesting of the Restricted Stock and receipt of the Supplemental Payment,
assuming the Grantee is taxed at the maximum effective federal income tax rate
applicable thereto. The Supplemental Payment shall be paid within 30 calendar
days of each date that Restricted Stock vests. The Committee shall have the
discretion to grant Supplemental Payments that are payable solely in cash or
Supplemental Payments that are payable in cash, Common Stock, or a combination
of both, as determined by the Committee at the time of payment.
SECTION 4. PERFORMANCE UNITS AND PERFORMANCE SHARES
4.1 PERFORMANCE BASED AWARDS
(a) GRANT. The Committee is authorized to grant Performance Units and
Performance Shares to Grantees. The Committee may make grants of Performance
Units or Performance Shares in such a manner that more than one Performance
Period is in progress concurrently. For each Performance Period, the Committee
shall establish the number of Performance Units or Performance Shares and the
contingent value of any Performance Units or Performance Shares, which may
vary depending on the degree to which Performance Goals established by the
Committee are met.
(b) PERFORMANCE GOALS. At the beginning of each Performance Period, the
Committee shall (i) establish for such Performance Period specific Performance
Goals; (ii) determine the value of a Performance Unit or the number of shares
under a Performance Share grant relative to Performance Goals; and (iii)
notify each Grantee in writing of the established Performance Goals and
minimum, target, and maximum Performance Unit or Share value for such
Performance Period.
(c) PAYMENT. The basis for payment of Performance Units or Performance
Shares for a given Performance Period shall be the achievement of those
financial and nonfinancial Performance Goals determined by the Committee at
the beginning of the Performance Period. If minimum performance is not
achieved for a Performance Period, no payment shall be made and all contingent
rights shall cease. If minimum performance is achieved or exceeded, the value
of a Performance Unit or Performance Share shall be based on the degree to
which actual performance exceeds the pre-established minimum Performance
Goals, as determined by the Committee. The amount of payment
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shall be determined by multiplying the number of Performance Units or
Performance Shares granted at the beginning of the Performance Period times
the final Performance Unit or Performance Share value. Payments shall be made,
in the discretion of the Committee, solely in cash or Common Stock, or a
combination of cash and Common Stock, following the close of the applicable
Performance Period.
4.2 SUPPLEMENTAL PAYMENT ON VESTING OF PERFORMANCE UNITS OR PERFORMANCE SHARES
The Committee, either at the time of grant or at the time of vesting of
Performance Units or Performance Shares (other than Restricted Stock), may
provide for a Supplemental Payment by Sterling to the holder in an amount
specified by the Committee which shall not exceed the amount necessary to pay
the federal income tax payable with respect to both the vesting of such
Performance Units or Performance Shares and receipt of the Supplemental
Payment, assuming the Grantee is taxed at the maximum effective federal income
tax rate applicable thereto. The Supplemental Payment shall be paid within 30
days of each date that such Performance Units or Performance Shares vest. The
Committee shall have the discretion to grant Supplemental Payments that are
payable in cash, Common Stock, or a combination of both, as determined by the
Committee at the time of payment.
SECTION 5. PROVISIONS RELATING TO PLAN PARTICIPATION
5.1 PLAN CONDITIONS
(a) INCENTIVE AWARD AGREEMENT. Each Grantee to whom an Incentive Award is
granted under the Plan shall be required to enter into an Incentive Award
Agreement with Sterling in a form provided by the Committee, which shall
contain certain specific terms, as determined by the Committee, with respect
to the Incentive Award and shall include provisions that the Grantee (i) shall
not disclose any trade or secret data or any other confidential information of
Sterling acquired during employment by Sterling, or after the termination of
employment or Retirement, (ii) shall abide by all the terms and conditions of
the Plan and such other terms and conditions as may be imposed by the
Committee, and (iii) shall not interfere with the employment of any Sterling
Employee. An Incentive Award may include a noncompetition agreement with
respect to the Grantee and/or such other terms and conditions, including,
without limitation, rights of repurchase or first refusal, not inconsistent
with the Plan, as shall be determined from time to time by the Committee.
(b) NO RIGHT TO EMPLOYMENT. Nothing in the Plan, any Incentive Award
Agreement or any instrument executed pursuant to the Plan shall create any
employment rights (including without limitation, rights to continued
employment) in any Grantee or affect the right of Sterling to terminate the
employment of any Grantee at any time for any reason whether before the
exercise date of any Option or during the Restriction Period of any Restricted
Stock or during the Performance Period of any Performance Unit or Performance
Share or otherwise.
(c) SECURITIES REQUIREMENTS. No shares of Common Stock will be issued or
transferred pursuant to an Incentive Award unless and until all then-
applicable requirements imposed by federal and state securities and other
laws, rules and regulations and by any regulatory agencies having jurisdiction
and by any stock market or exchange upon which the Common Stock may be listed,
have been fully met. As a condition precedent to the issuance of shares
pursuant to the grant or exercise of an Incentive Award, Sterling may require
the Grantee to take any reasonable action to meet such requirements. Sterling
shall not be obligated to take any affirmative action in order to cause the
issuance or transfer of shares pursuant to an Incentive Award to comply with
any law or regulation described in the second preceding sentence.
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5.2 TRANSFERABILITY
(a) NON-TRANSFERABLE AWARD. Unless otherwise provided in an Incentive Award
Agreement, no Incentive Award and no right under the Plan, contingent or
otherwise, other than Restricted Stock as to which restrictions have lapsed,
shall be (i) assignable, saleable, or otherwise transferable by a Grantee
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order, or (ii) subject to any encumbrance, pledge
or charge of any nature. No transfer by will or by the laws of descent and
distribution shall be effective to bind Sterling unless the Committee shall
have been furnished with a copy of the deceased Grantee's will or such other
evidence as the Committee may deem necessary to establish the validity of the
transfer. Any attempted transfer in violation of this Section 5.2 shall be
void and ineffective for all purposes.
(b) ABILITY TO EXERCISE RIGHTS. Only the Grantee or his or her guardian (if
the Grantee becomes Disabled), or in the event of his or her death, his or her
legal representative or beneficiary, may exercise Options, receive cash
payments and deliveries of shares, or otherwise exercise rights under the
Plan. The executor or administrator of the Grantee's estate, or the person or
persons to whom the Grantee's rights under any Incentive Award will pass by
will or the laws of descent and distribution, shall be deemed to be the
Grantee's beneficiary or beneficiaries of the rights of the Grantee hereunder
and shall be entitled to exercise such rights as are provided hereunder.
5.3 RIGHTS AS A SHAREHOLDER
Except as otherwise provided in any Incentive Award Agreement, a Grantee of
an Incentive Award or a transferee of such Grantee shall have no rights as a
shareholder with respect to any shares of Common Stock until such person
becomes a holder of record of such Common Stock. Except as otherwise provided
in Section 5.5, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities, other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued.
5.4 LISTING AND REGISTRATION OF SHARES OF COMMON STOCK
Prior to issuance and/or delivery of shares of Common Stock, Sterling shall
consult with its advisors, as appropriate, regarding compliance with laws,
rules and regulations that apply to such shares. If necessary, Sterling shall
postpone the issuance and/or delivery of the affected shares of Common Stock
upon any exercise of an Incentive Award until completion of such stock
exchange listing, registration, or other qualification of such shares under
any state and/or federal law, rule or regulation as Sterling may consider
appropriate, and may require any Grantee to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares in compliance with applicable laws, rules
and regulations. Sterling shall not be obligated to take any affirmative
action in order to cause the issuance or transfer of shares pursuant to an
Incentive Award to comply with any law, rule or regulation described in the
immediately preceding sentence.
5.5 CHANGE IN STOCK AND ADJUSTMENTS
(a) CHANGES IN CAPITALIZATION. In the event the outstanding shares of the
Common Stock, as constituted from time to time, shall be changed as a result
of a change in capitalization of Sterling or a combination, merger, or
reorganization of Sterling into or with any other corporation or any other
transaction with similar effects, then, for all purposes, references herein to
Common Stock or Restricted Stock shall mean and include all securities or
other property (other than cash) that holders
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of Common Stock are entitled to receive in respect of Common Stock by reason
of each successive aforementioned event, which securities or other property
(other than cash) shall be treated in the same manner and shall be subject to
the same restrictions as the underlying Common Stock or Restricted Stock.
(b) CHANGES IN LAW OR CIRCUMSTANCES. In the event of any change in
applicable laws or any change in circumstances which results in or would
result in any dilution of the rights granted under the Plan, or which
otherwise warrants equitable adjustment because it interferes with the
intended operation of the Plan, then if the Committee shall, in its sole
discretion, determine that such change equitably requires an adjustment in the
number or kind of shares of stock or other securities or property theretofore
subject, or which may become subject, to issuance or transfer under the Plan
or in the terms and conditions of outstanding Incentive Awards, such
adjustment shall be made in accordance with such determination. Such
adjustments may include without limitation changes with respect to (i) the
aggregate number of shares that may be issued under the Plan, (ii) the number
of shares subject to Incentive Awards and (iii) the price per share for
outstanding Incentive Awards. The Committee shall give notice to each Grantee,
and upon notice such adjustment shall be effective and binding for all
purposes of the Plan.
5.6 TERMINATION OF EMPLOYMENT
(a) TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT. If
the employment of a Grantee is terminated by reason of death, Disability or
Retirement, Incentive Awards granted to the Grantee under this Plan may be
exercised only as follows:
(i) Death. If the Grantee's employment is terminated by reason of
death, any outstanding Incentive Awards granted to such Grantee that are
vested as of the date of his or her death shall remain exercisable at any
time prior to their expiration date or for one year after the date his or
her employment terminated, whichever period is shorter. The Incentive
Awards may be exercised by such persons who have acquired the Grantee's
rights under the Incentive Awards by will or by the laws of descent and
distribution or permitted transfer.
(ii) Disability. If the Grantee's employment is terminated by reason
of Disability, any outstanding Incentive Awards granted to such Grantee
that are vested as of the date his or her employment terminates shall
remain exercisable at any time prior to their expiration date or for one
year after the date that his or her Disability is determined by the
Committee to be total and permanent, whichever period is shorter.
(iii) Retirement. If the Grantee's employment is terminated by reason
of Retirement, any outstanding Incentive Awards granted to such Grantee
that are vested as of the effective date of his or her Retirement shall
remain exercisable at any time prior to their expiration date or for
three years after his or her date of Retirement, whichever period is
shorter.
(b) FOR CAUSE. If a Grantee's employment is terminated for Cause, all of
his or her outstanding Incentive Awards shall immediately be cancelled and
surrendered to Sterling and no additional exercise periods shall be allowed,
regardless of the otherwise vested status of the Incentive Awards.
(c) TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Grantee shall terminate for any reason other than the reasons set forth in
this Section or Section 5.7, any nonvested Incentive Awards held by the
Grantee shall vest only if the Committee determines in its sole discretion to
vest all or any portion of such Incentive Awards. Thereafter, all vested
Incentive
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Awards shall remain exercisable at any time prior to their expiration date or
for three months after the date that the Grantee's employment was terminated,
whichever period is shorter. If the Committee does not vest such Incentive
Awards, the Incentive Awards shall be deemed for all purposes to have remained
unvested upon the termination of the Grantee's employment.
(e) CONTINUATION. Subject to the express provisions of the Plan and the
terms of any applicable Incentive Award Agreement, the Committee, in its
discretion, may provide for the continuation of any Incentive Award for such
period and upon such terms and conditions as are determined by the Committee
in the event of the termination of Grantee.
5.7 CHANGE IN CONTROL
(a) CHANGE IN CONTROL. Except as otherwise provided in any Incentive Award
Agreement, in the event of a Change in Control:
(i) All Options and Tandem SARs then outstanding shall become vested
and immediately and fully exercisable, notwithstanding any provision
therein for the exercise in installments;
(ii) all restrictions and conditions of all Restricted Stock then
outstanding shall be deemed satisfied, and the Restriction Period with
respect thereto shall be deemed to have expired, as of the date of the
Change in Control; and
(iii) to the extent determined by the Committee, all Performance
Shares and Performance Units shall become vested, deemed earned in full
and promptly paid to the Grantees without regard to payment schedules and
notwithstanding that the applicable performance cycle or retention cycle
shall not have been completed.
(b) RIGHT OF CASH-OUT. If approved by the Board prior to or within thirty
(30) days after such time as a Change in Control shall be deemed to have
occurred, the Board shall have the right for a forty-five (45) day period
immediately following the date that the Change in Control is deemed to have
occurred to require all, but not less than all, Grantees to transfer and
deliver to Sterling all Incentive Awards previously granted to Grantees in
exchange for an amount equal to the "cash value" (defined below) of the
Incentive Awards. Such right shall be exercised by written notice to all
Grantees. For purposes of this Section 5.7(b), the cash value of an Incentive
Award shall equal the sum of (i) all cash to which the Grantee would be
entitled upon settlement or exercise of such Incentive Award and (ii) the
excess of the "market value" (defined below) per share over the option price,
if any, multiplied by the number of shares subject to such Incentive Award.
For purposes of the preceding sentence, "market value" per share shall mean
the higher of (i) the average of the Fair Market Value per share on each of
the five trading days immediately following the date a Change in Control is
deemed to have occurred or (ii) the highest price, if any, offered in
connection with the Change in Control. The amount payable to each Grantee by
Sterling pursuant to this Section 5.7(b) shall be in cash or by certified
check and shall be reduced by any taxes required to be withheld.
5.8 AMENDMENTS TO INCENTIVE AWARDS
The Committee may waive any conditions or rights with respect to, or amend,
alter, suspend, discontinue, or terminate, any unexercised Incentive Award
theretofore granted, prospectively or retroactively, with the consent of any
relevant Grantee.
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<PAGE>
5.9 EXCHANGE OF INCENTIVE AWARDS
The Committee may, in its discretion, permit Grantees under the Plan to
surrender outstanding Incentive Awards in order to exercise or realize the
rights under other Incentive Awards, or in exchange for the grant of new
Incentive Awards or require holders of Incentive Awards to surrender
outstanding Incentive Awards as a condition precedent to the grant of new
Incentive Awards.
5.10 SUBSTITUTION OF INCENTIVE AWARDS
Anything contained herein to the contrary notwithstanding, Incentive Awards
may, in the discretion of the Committee, be granted under the Plan in
substitution for options or other rights to purchase shares of capital stock
of another corporation which is merged into, consolidated with, or all or a
substantial portion of the property or stock of which is acquired by,
Sterling. The terms and conditions of the substitute Incentive Awards so
granted may vary from the terms and conditions set forth in this Plan to such
extent as the Committee may deem appropriate in order to conform, in whole or
part, to the provisions of the options or other rights in substitution for
which they are granted. Such Incentive Awards shall not be counted toward the
200,000 share limit imposed by Section 1.7, except to the extent it is
determined by the Committee that counting such Incentive Awards is required in
order for grants of Incentive Awards hereunder to be eligible to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code.
SECTION 6. MISCELLANEOUS
6.1 EFFECTIVE DATE AND GRANT PERIOD
This Plan shall be effective as of the date of Board approval, March 24,
1998. Unless sooner terminated by the Board, the Plan shall terminate on March
24, 2008, unless extended. After the termination of the Plan, no Incentive
Awards may be granted under the Plan, but previously granted awards shall
remain outstanding in accordance with their applicable terms and conditions.
6.2 FUNDING
Except as provided under Section 3, no provision of the Plan shall require
Sterling, for the purpose of satisfying any obligations under the Plan, to
purchase assets or place any assets in a trust or other entity to which
contributions are made or otherwise to segregate any assets in a manner that
would provide any Grantee any rights that are greater than those of a general
creditor of Sterling, nor shall Sterling maintain separate bank accounts,
books, records or other evidence of the existence of a segregated or
separately maintained or administered fund if such action would provide any
Grantee with any rights that are greater than those of a general creditor of
Sterling. Grantees shall have no rights under the Plan other than as unsecured
general creditors of Sterling except that insofar as they may have become
entitled to payment of additional compensation by performance of services,
they shall have the same rights as other employees under applicable law.
However, Sterling may establish a "Rabbi Trust" for purposes of securing the
payment pursuant to a Change in Control.
6.3 DEFERRAL OF CERTAIN PAYMENTS
The Committee may, in its sole discretion, permit a Grantee to elect to
defer all or a portion of any earned Restricted Stock, Performance Unit or
Performance Share or gain on any exercised Option or SAR pursuant to the terms
of any deferred compensation plan that Sterling may adopt in the future. The
value so deferred shall be transferred to such plan and held in an account
under that plan established for the benefit of the Grantee.
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<PAGE>
6.4 WITHHOLDING TAXES
Sterling shall have the right to (i) make deductions from any settlement of
an Incentive Award made under the Plan, including the delivery of shares, or
require shares or cash or both be withheld from any Incentive Award, in each
case in an amount sufficient to satisfy withholding of any federal, state or
local taxes required by law, or (ii) take such other action as may be
necessary or appropriate to satisfy any such withholding obligations. The
Committee may determine the manner in which such tax withholding may be
satisfied, and may permit shares of Common Stock (rounded up to the next whole
number) to be used to satisfy required tax withholding based on the Fair
Market Value of any such shares of Common Stock, as of the delivery of shares
or payment of cash in satisfaction of the applicable Incentive Award.
6.5 CONFLICTS WITH PLAN
In the event of any inconsistency or conflict between the terms of the Plan
and an Incentive Award Agreement, the terms of the Plan shall govern.
6.6 NO GUARANTEE OF TAX CONSEQUENCES
Neither Sterling nor the Committee makes any commitment or guarantee that
any federal, state or local tax treatment will apply or be available to any
person participating or eligible to participate hereunder.
6.7 SEVERABILITY
In the event that any provision of this Plan shall be held illegal, invalid
or unenforceable for any reason, such provision shall be fully severable, but
shall not affect the remaining provision of the Plan, and the Plan shall be
construed and enforced as if the illegal, invalid, or unenforceable provision
had never been included herein.
6.8 GENDER, TENSE AND HEADINGS
Whenever the context requires such, words of the masculine gender used
herein shall include the feminine and neuter, and words used in the singular
shall include the plural. Section headings as used herein are inserted solely
for convenience and reference and constitute no part of the Plan.
6.9 AMENDMENT AND TERMINATION
The Plan may be amended or terminated at any time by the Board by the
affirmative vote of a majority of the members in office. The Plan, however,
shall not be amended without prior written consent of each affected Grantee if
such amendment or termination of the Plan would adversely affect any material
vested benefits or rights of such person.
6.10 SECTION 280G PAYMENTS
In the event that the aggregate present value of the payments to a Grantee
under the Plan and any other plan, program, or arrangement maintained by
Sterling constitutes an "excess parachute payment" (within the meaning of
Section 280G(b)(1) of the Internal Revenue Code) and the excise tax on such
payment would cause the net parachute payments (after taking into account
federal, state and local income and excise taxes) to which the Grantee
otherwise would be entitled to be less than what the Grantee would have netted
(after taking into account federal, state and local income taxes)
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<PAGE>
had the present value of his total parachute payments equaled $1.00 less than
three times his "base amount" (within the meaning of Code Section
280G(b)(3)(A)), the Grantee's total "parachute payments" (within the meaning
of Code Section 280G(b)(2)(A)) shall be reduced (by the minimum possible
amount) so that their aggregate present value equals $1.00 less than three
times such base amount. For purposes of this calculation, it shall be assumed
that the Grantee's tax rate will be the maximum marginal federal, state and
local income tax rate on earned income, with such maximum federal rate to be
computed with regard to Code Section 1(g), if applicable. In the event that
the Grantee and Sterling are unable to agree as to the amount of the reduction
described above, if any, the Grantee shall select a law firm or accounting
firm from among those regularly consulted (during the twelve-month period
immediately prior to the change in control that resulted in the
characterization of the payments as parachute payments) by Sterling regarding
federal income tax or employee benefit matters and such law firm or accounting
firm shall determine the amount of such reduction and such determination shall
be final and binding upon the Grantee and Sterling.
6.11 GOVERNING LAW
The Plan shall be construed in accordance with the laws of the State of
Washington, except as superseded by federal law, and in accordance with
applicable provisions of the Code and regulations or other authority issued
thereunder by the appropriate governmental authority.
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[LOGO OF STERLING FINANCIAL CORPORATION]
111 NORTH WALL STREET
SPOKANE, WA 99201
(509) 358-6160
<PAGE>
STERLING FINANCIAL CORPORATION
REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF STERLING, for use at
the Annual Meeting of Shareholders to be held in the Conference Theater of the
Agricultural Trade Center (located in the Convention Center), 334 West Spokane
Falls Boulevard, Spokane, Washington, on Tuesday, April 28, 1998, at 10:00 a.m.
The undersigned hereby appoints Harold B. Gilkey and William W. Zuppe and
each of them, with full power of substitution, as proxies of the undersigned, to
vote at the above-stated Annual Meeting and at all adjournments thereof, all
shares of Sterling Financial Corporation held of record by the undersigned on
the record date for the Meeting upon the following matters and upon any other
matters which may properly come before the Meeting or any adjournment thereof in
their discretion.
(Continued and to be signed on the other side).
See Reverse
Side
. FOLD AND DETACH HERE .
<PAGE>
Please mark
your votes [X]
as indicated
FOR All WITHHOLD AUTHORITY
Nominees to Vote for All Nominees
(1) TO ELECT DIRECTORS FOR A
TERM EXPIRING AT THE ANNUAL [ ] [ ]
MEETING IN 2001.
INSTRUCTION - To withhold authority to vote for any individual nominee,
strike a line through such nominee's name. This proxy will be deemed to
confer authority to vote for each nominee whose name is not stricken.
Ned M. Barnes
James R. Fugate
Robert D. Larrabee
(2) TO APPROVE THE 1998 LONG-TERM INCENTIVE PLAN.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(3) TO RATIFY THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1998 AND ANY INTERIM PERIODS.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(4) IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS
THEREOF.
I plan to attend the meeting. [ ]
PLEASE SIGN, DATE AND RETURN PROMPTLY
--------- Every properly signed proxy will be
| voted in the manner specified hereon
| and in the absence of specification
| will be treated as granting authority
to vote for all nominees in the
election of Directors and for Proposals
(2) and (3) above.
Receipt of Notice of Annual Meeting and
Proxy Statement is hereby acknowledged
BY SHAREHOLDER WHOSE NAME APPEARS ON
LEFT.
Signature(s)___________________________________ Date:______________________
Print Name and Title or Company, if Applicable. You may, if you so desire,
revoke your proxy and vote in person.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
