<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
56,828,614 shares of $.01 par value Common Stock
Outstanding on August 8, 1994
<PAGE>
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1994
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Statement of Income 1
Balance Sheet 2
Statement of Cash Flows 3
Notes 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-15
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
<C> <C> <C> <C> <C>
Revenues
Commissions $131,449 $135,658 $292,434 $279,108
Principal transactions 40,176 39,336 90,465 79,817
Interest revenue, net of interest expense (1) 40,125 28,430 75,987 54,506
Mutual fund service fees 38,677 23,118 72,445 43,696
Other 7,767 5,885 14,768 11,616
- - --------------------------------------------------------------------------------------------------
Total 258,194 232,427 546,099 468,743
- - --------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 106,614 93,438 227,634 188,832
Communications 28,041 22,928 56,180 44,986
Occupancy and equipment 21,749 18,184 42,710 35,139
Depreciation and amortization 13,880 10,759 26,392 20,232
Commissions, clearance and floor brokerage 11,169 10,437 23,695 21,159
Advertising and market development 9,042 10,367 20,838 19,750
Professional services 5,102 3,991 10,668 6,802
Other 9,378 10,350 21,219 18,479
- - --------------------------------------------------------------------------------------------------
Total 204,975 180,454 429,336 355,379
- - --------------------------------------------------------------------------------------------------
Income before taxes on income 53,219 51,973 116,763 113,364
Taxes on income 21,060 20,370 46,414 46,369
- - --------------------------------------------------------------------------------------------------
Net Income $ 32,159 $ 31,603 $ 70,349 $ 66,995
==================================================================================================
Weighted average number of common and
common equivalent shares outstanding 58,353 59,303 58,577 59,144
==================================================================================================
Earnings per Common Equivalent Share $ .55 $ .53 $ 1.20 $ 1.13
==================================================================================================
Dividends Declared per Common Share $ .07 $ .05 $ .14 $ .09
==================================================================================================
(1) Interest revenue is presented net of interest expense. Interest expense for
the three months ended June 30, 1994 and 1993 was $43,100 and $32,178, respectively.
Interest expense for the six months ended June 30, 1994 and 1993 was $78,330 and
$65,830, respectively.
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---- ----
(Unaudited)
-----------
<S> <C> <C>
Assets
Cash and equivalents (including resale agreements of $130,000 in 1994
and $120,000 in 1993) $ 333,694 $ 279,828
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $3,624,962 in 1994
and $3,267,440 in 1993) 3,774,833 3,676,319
Receivable from brokers, dealers and clearing organizations 73,475 71,616
Receivable from customers (less allowance for doubtful accounts
of $2,662 in 1994 and $2,229 in 1993) 2,787,366 2,553,255
Equipment, office facilities and property (less accumulated depreciation
and amortization of $161,864 in 1994 and $143,339 in 1993) 138,173 136,440
Customer lists (less accumulated amortization of $135,213 in 1994
and $130,434 in 1993) 32,335 37,114
Other assets 125,957 141,945
- - -----------------------------------------------------------------------------------------------------------
Total $7,265,833 $6,896,517
===========================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 118,986 $ 123,384
Payable to brokers, dealers and clearing organizations 353,512 303,981
Payable to customers 6,025,465 5,745,783
Accrued expenses 160,673 158,866
Long-term and subordinated borrowings 186,718 185,330
- - -----------------------------------------------------------------------------------------------------------
Total liabilities 6,845,354 6,517,344
- - -----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock--10,000,000 shares authorized; $.01 par value
per share; none issued
Common stock--200,000,000 shares authorized; $.01 par value per share;
59,486,680 shares in 1994 and 1993 595 595
Additional paid-in capital 161,661 161,052
Retained earnings 315,936 253,692
Treasury stock--2,335,366 shares in 1994 and
1,649,478 shares in 1993, at cost (45,184) (23,153)
Note receivable from Profit Sharing Plan (1,467) (13,013)
Unearned ESOP Shares (11,062)
- - -----------------------------------------------------------------------------------------------------------
Stockholders' equity 420,479 379,173
- - -----------------------------------------------------------------------------------------------------------
Total $7,265,833 $6,896,517
===========================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 70,349 $ 66,995
Noncash items included in net income:
Depreciation and amortization 26,392 20,232
Deferred income taxes 8,769 (3,484)
Other 401 262
Change in accrued expenses 4,965 29,225
Change in other assets 6,510 (3,250)
- - ----------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 117,386 109,980
- - ----------------------------------------------------------------------------------------------
Change in customer-related balances:
Payable to customers 279,682 34,934
Receivable from customers (234,544) (308,625)
Drafts payable (4,398) (12,293)
Payable to brokers, dealers and clearing organizations 49,531 68,983
Receivable from brokers, dealers and clearing organizations (1,859) (13,159)
Cash and investments required to be segregated under
Federal or other regulations (98,514) 206,494
- - ----------------------------------------------------------------------------------------------
Net change in customer-related balances (10,102) (23,666)
- - ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 107,284 86,314
- - ----------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (20,615) (40,785)
- - ----------------------------------------------------------------------------------------------
Net cash used by investing activities (20,615) (40,785)
- - ----------------------------------------------------------------------------------------------
Cash flows from financing activities
Purchase of treasury stock (25,865)
Dividends paid (8,042) (5,174)
Repayment of long-term and subordinated borrowings (455) (856)
Proceeds from short-term borrowings 5,000
Other 1,559 706
- - ----------------------------------------------------------------------------------------------
Net cash used by financing activities (32,803) (324)
- - ----------------------------------------------------------------------------------------------
Increase in cash and equivalents 53,866 45,205
Cash and equivalents at beginning of period 279,828 204,290
- - ----------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 333,694 $ 249,495
==============================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include The Charles Schwab Corporation (CSC) and its
subsidiaries (collectively the Company), including Charles Schwab &
Co., Inc. (Schwab) and Mayer & Schweitzer, Inc. (M&S). These
financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in
the opinion of management, reflect all adjustments necessary to
present fairly the financial position, results of operations and
cash flows for the periods presented in conformity with generally
accepted accounting principles. All adjustments were of a normal
recurring nature. All material intercompany balances and
transactions have been eliminated. These financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1993 Annual
Report to Stockholders that are incorporated by reference in the
Company's 1993 Annual Report on Form 10-K, and included in the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994.
Revenues are presented net of interest expense. Certain 1993
revenues and expenses have been reclassified to conform to the 1994
presentation.
Stock Repurchases
During the first six months of 1994, the Company repurchased and
recorded as treasury stock a total of 950,000 shares of its common
stock for $26 million.
Contingent Liabilities
In January 1992, the Company filed a petition in U.S. Tax Court
refuting a claim for additional Federal income tax asserted by the
Internal Revenue Service (IRS) in December 1991. The asserted
additional tax of $28 million, excluding interest, arises from the
IRS' audit of the tax periods ended March 31, 1988 and December 31,
1988. Substantially all the asserted additional tax relates to
deductions claimed by the Company for depreciation and amortization
of tangible and intangible assets received in the Company's 1987
acquisition of Schwab. The contested issues extend to the
Company's taxable years ended December 31, 1989 through 1993.
Of the $28 million additional tax asserted by the IRS against
the Company, approximately $11 million relates to deductions
derived from the amortization of customer lists. In April 1993,
the U.S. Supreme Court ruled in Newark Morning Ledger Co. v. U.S.
that in appropriate circumstances a taxpayer may amortize the cost
of certain intangible assets (such as customer lists) over the
useful life of such assets. While the Supreme Court's decision in
Newark Morning Ledger confirms the Company's ability to amortize
for tax purposes certain of its intangible assets, issues involving
the valuation of these intangible assets remain unresolved in the
Company's case with the IRS.
Management believes that these matters will be resolved without
a material adverse effect on the Company's financial position.
M&S has been named as a defendant and/or one of several
representatives of an alleged defendant class consisting of market
makers for Nasdaq securities in an estimated twenty class actions,
nineteen of which were filed in Federal District Court between May 27,
1994 and July 29, 1994. Each class action purports to be brought on
behalf of certain purchasers and sellers of Nasdaq securities for
varying periods back to 1989 through the date of the complaints. The
complaints generally allege an illegal combination and conspiracy
among the defendant market makers to fix and maintain the spreads between
the bid and ask prices of Nasdaq securities.
None of the complaints sets forth any specific conduct by M&S
and none requests any specific amount of damages, although all
request that the actual damages be trebled where permitted by
statute.
Motions have been filed to consolidate the cases pending in Federal
District Court. The ultimate outcome of these actions cannot currently
be determined and no provision for liability has been made in
these financial statements.
In the normal course of its margin lending activities, Schwab is
contingently liable to the Options Clearing Corporation for the
margin requirement of customer margin securities transactions.
Such margin requirement is secured by a pledge of customers' margin
securities. This contingent liability was $62 million at June 30,
1994.
- 4 -
<PAGE>
Regulatory Requirements
Schwab and M&S are subject to the SEC's Uniform Net Capital Rule
and each computes net capital under the alternative method
permitted by this Rule, which requires the maintenance of minimum
net capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar
amount, which is based on the type of business conducted by the
broker-dealer. The minimum dollar amount for both Schwab and M&S
is $1 million. Under the alternative method, a broker-dealer may
not repay subordinated borrowings, pay cash dividends, or make any
unsecured advances or loans to its parent or employees if such
payment would result in net capital of less than 5% of aggregate
debit balances or less than 120% of its minimum dollar amount
requirement. At June 30, 1994, Schwab's net capital was $314
million (11% of aggregate debit balances), which was $257 million
in excess of its minimum required net capital and $171 million in
excess of 5% of aggregate debit balances. At June 30, 1994, M&S'
net capital was $11 million (183% of aggregate debit balances),
which was $10 million in excess of its minimum required net
capital.
In accordance with the requirements of SEC Rule 15c3-3, Schwab
had a portion of its cash and investments segregated for the
exclusive benefit of customers at June 30, 1994. Under Rule 15c3-
3, M&S had no cash reserve requirement at June 30, 1994.
Cash Flow Information
Certain investing and financing activities of the Company affect
its financial position but do not affect cash flows. The following
table summarizes those transactions (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1994 1993
---- ----
<S> <C> <C>
Equipment, office facilities
and property financed $1,843 $1,490
====== ======
Common stock issued to
Profit Sharing Plan for a
note receivable $15,000
=======
Termination of capital
lease obligation $1,348
======
Transfer of par value on stock
issued on three-for-two
stock dividend $198
====
</TABLE>
Certain additional information regarding the cash flows of the
Company follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1994 1993
---- ----
<S> <C> <C>
Income taxes paid $42,664 $53,949
======= =======
Interest paid:
Customers $69,060 $57,032
Long-term and
subordinated borrowings 5,638 7,137
Other 2,837 1,979
------- -------
Total interest paid $77,535 $66,148
======= =======
</TABLE>
- 5 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide brokerage and
related investment services to 2.8 million active (a) investors,
whose assets entrusted to the Company totaled $105.9 billion at
June 30, 1994. With a network of 204 branch offices, the Company's
principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is
physically represented in 46 states, the Commonwealth of Puerto
Rico and the United Kingdom. Mayer & Schweitzer, Inc. (M&S), a
market maker in Nasdaq securities, provides trade execution
services to institutional clients and broker-dealers.
The Company's business, like that of other securities brokerage
firms, is directly affected by fluctuations in volumes and price
levels in securities markets, which are in turn affected by many
national and international economic and political factors that
cannot be predicted. Transaction-based revenues, primarily
commission and principal transaction revenues, represent the
majority of the Company's revenues. In the short term, most of the
Company's expenses do not vary directly with fluctuations in
securities trading volume and do not increase or decrease quickly,
which could result in the Company experiencing increased
profitability with rapid increases in revenue, or reduced
profitability (or losses) in the event of a material reduction in
revenues.
Due to the factors discussed above, the results of any interim
period are not necessarily indicative of results for a full year,
and it is not unusual for the Company to experience significant
variations in quarterly revenue growth. In addition, these factors
may subject the Company's future earnings and common stock price to
significant volatility.
Three Months Ended June 30, 1994
Compared To Three Months Ended
June 30, 1993
Summary
- - -------
Net income for the second quarter of 1994 totaled $32 million or
$.55 per share compared with net income of $32 million or $.53 per
share for the second quarter of 1993.
Second quarter 1994 revenues were $258 million, up 11% from
$232 million for the second quarter of 1993, primarily due to
increases in mutual fund service fees and net interest revenue,
partially offset by a decrease in commission revenues. Mutual fund
service fees increased 67% due to growth in fund balances. Net
interest revenue increased 41% mainly due to increases in customer
cash balances and margin loans to customers. Commission revenues
decreased 3% due to a decrease in average commission per trade.
Assets in customer accounts totaled $105.9 billion at June 30,
1994, $26.7 billion, or 34%, more than a year ago primarily
resulting from increases in customer assets in Schwab's Mutual Fund
Marketplace (registered trademark) of $10.9 billion and increases
in customers' equity securities of $6.9 billion. Total customer assets
at June 30, 1994 included $24.7 billion in cash and money market
mutual funds compared to $17.4 billion a year earlier.
Total operating expenses excluding interest during the second quarter
of 1994 were $205 million, up 14% from the second quarter of 1993. The
higher expenses primarily related to additional staff and office facilities
to support the Company's expansion and to higher volume-related expenses
such as communications expense. These higher volume-related expenses resulted
from an increase in total Company trading volume, which includes
trades handled through Schwab's Mutual Fund OneSource (trademark) service.
In the second quarter of 1994 total Company trading volume was
(a) Accounts with balances or activity within the preceding twelve months.
- 6 -
<PAGE>
2.9 million trades, up 30% from the second quarter of 1993. Declines in
variable compensation during the second quarter of 1994 partially offset
increases in other expense categories. During the second quarter of 1994,
the Company opened four new branch offices including a branch in the
Commonwealth of Puerto Rico.
The profit margin for the second quarter of 1994 was 12%, down
from 14% for the second quarter of 1993. The decline in profit
margin is mainly due to higher staffing levels relative to customer
trading activity experienced during the period. The annualized
return on stockholders' equity for the second quarter of 1994 was 31%,
down from 40% for the second quarter of 1993, reflecting the Company's
higher equity base in 1994's second quarter.
During the second quarter of 1994, the Company experienced a
decline in customer trading activity relative to that of the first
quarter of 1994. In response to this decline, the Company
instituted reductions in certain staffing and other expenses
relating to customer service capacity.
As the Company enters the third quarter of 1994, it continues to
experience slowed customer trading activity. Average daily retail
agency trading volume for July of 1994 was down approximately 11% from
July of 1993. The Company continues to evaluate cost reduction
measures that could be undertaken without reducing customer service
capacity to levels that are inconsistent with expected customer
trading activity. However, such cost reduction measures are unlikely to
offset completely the impact of continued lower customer trading
volume on profit margins.
Commissions
- - -----------
Schwab executes commission transactions for customers on an
agency basis. Commission revenues totaled $131 million for the
second quarter of 1994, down 3% from the second quarter of 1993.
Retail agency commissions, which include commissions relating to
retail customer accounts handled by financial advisors, constituted
approximately 96% of total commissions. Remaining commissions
represent business done with institutional customers. Commissions
earned on retail agency trades totaled $126 million on an average
daily retail agency trade level of 28,300 trades in the second
quarter of 1994, compared with commission revenue of $130 million
on an average daily retail agency trade level of 27,500 for the
comparable period in 1993. The following table shows a comparison
of certain factors that influence retail agency commission revenues:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------
Three Months
Ended
June 30, Percent
1994 1993 Change
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
Number of retail agency customer
accounts that traded during
the quarter (in thousands) 590 553 7%
Average number of retail agency
transactions per account
that traded 2.98 3.14 (5)
Total number of retail agency
transactions (in thousands) 1,757 1,735 1
Average commission per
retail agency transaction $71.44 $74.92 (5)
Total retail agency commission
revenues (in millions) $ 126 $ 130 (3)
=======================================================================
Note: The above table excludes customer transactions in
Schwab's Mutual Fund OneSource (trademark) service.
</TABLE>
The total number of retail agency transactions executed by
Schwab increased 1% from the second quarter of 1993 as Schwab's
customer base continued to grow. Schwab added 210,000 new customer
accounts during the second quarter of 1994, compared to 175,000 new
accounts during the second quarter of 1993. The number of total
active customer accounts increased 22% from the year-ago level to
2.8 million at June 30, 1994.
Average commission per retail agency trade has declined from the
year-ago level as the proportion of trades in lower commission per
trade products, such as mutual funds, has increased. This is
primarily the result of Schwab's success in
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<PAGE>
attracting customer mutual fund business, as well as strong price
competition, particularly with respect to customer equity
securities transactions, which yield a higher average commission per trade.
In addition, Schwab recently expanded its special services program offered
to customers that meet certain annual thresholds of trading activity.
The expansion of this program, which includes discounts from Schwab's
standard retail commission rates, is intended to attract and retain
customers that trade frequently.
Principal Transactions
- - ----------------------
During the second quarter of 1994, principal transaction
revenues increased $1 million, or 2%, from the comparable period in
1993 to $40 million, primarily due to an increase in trading volume
handled by M&S. As a market maker in Nasdaq securities, M&S
generally executes customer orders as principal. Factors that
influence revenues from principal transactions include the volume
of orders and shares executed, and market price volatility. M&S
processes substantially all Nasdaq security trades originated by
the customers of Schwab.
On July 11, 1994, the Securities and Exchange Commission (SEC)
approved a National Association of Securities Dealers
Interpretation to its Rules of Fair Practice governing the way in
which market makers in over-the-counter securities handle the
execution of limit orders accepted from customers. While this
Interpretation will have an adverse impact on principal transaction
revenues in the short term, management expects to undertake steps that
would mitigate the impact on net income of this Interpretation over
the long term.
Interest Revenue, Net of Interest Expense
- - -----------------------------------------
Interest revenue net of interest expense increased $12 million,
or 41%, to $40 million from the prior year's second quarter as
shown in the following table (in millions):
<TABLE>
<CAPTION>
- - ------------------------------------------------------
Three Months
Ended
June 30,
1994 1993
- - ------------------------------------------------------
<S> <C> <C>
Interest Revenue
Investments, customer-related $38 $27
Margin loans to customers 43 32
Other 2 1
- - ------------------------------------------------------
Total 83 60
- - ------------------------------------------------------
Interest Expense
Customer cash balances 38 28
Long-term and subordinated
borrowings 3 3
Other 2 1
- - ------------------------------------------------------
Total 43 32
- - ------------------------------------------------------
Interest Revenue, Net of
Interest Expense $40 $28
======================================================
</TABLE>
Customer-related average daily balances, interest rates, and
average net interest margin for the second quarters of 1994 and
1993 are summarized in the following table (dollars in millions):
- 8 -
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------
Three Months Ended
June 30,
1994 1993
- - -------------------------------------------------------------------
<S> <C> <C>
Earning Assets (customer-related):
Investments:
Average balance outstanding $4,005 $3,400
Average interest rate 3.79% 3.19%
Margin loans to customers:
Average balance outstanding $2,732 $2,133
Average interest rate 6.38% 6.00%
Average yield on earning assets 4.84% 4.28%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $5,525 $4,602
Average interest rate 2.79% 2.42%
Other interest-bearing sources:
Average balance outstanding $ 339 $ 283
Average interest rate 2.79% 4.36%
Average noninterest-bearing portion $ 873 $ 648
Average interest rate on funding sources 2.43% 2.23%
Summary:
Average yield on earning assets 4.84% 4.28%
Average interest rate on funding sources 2.43% 2.23%
- - -------------------------------------------------------------------
Average net interest margin 2.41% 2.05%
===================================================================
</TABLE>
Interest revenue from customer-related investments increased
$11 million due to an 18% increase in average balances outstanding,
and a 60 basis point increase in the average interest rate earned
on such investments. Interest earned on margin loans to customers
increased $11 million as average margin balances increased 28% and
the average interest rate earned on such balances increased 38 basis
points. Interest expense on customer cash balances increased
$10 million due to a 20% increase in average balances outstanding,
and a 37 basis point increase in average interest rates paid on
these balances.
The average net interest margin pertaining to customer-related
earning assets and related funding sources increased 36 basis
points over that of 1993's second quarter to 2.41%. This is
primarily due to sharper increases in average interest rates with respect
to investments compared to average interest rates on funding sources.
Mutual Fund Service Fees
- - ------------------------
Mutual fund service fees increased $16 million, or 67%, to
$39 million in the second quarter of 1994 from the comparable
period in 1993 primarily due to growth in customer assets. Most of
these fees are earned for services provided by subsidiaries of the
Company to proprietary money market mutual funds. A reduction in the
amount of fees waived by the Company also contributed to the increase
in mutual fund service fees. An increase in revenue earned for
providing record keeping and shareholder services relating to
customer assets purchased through Schwab's Mutual Fund OneSource
(trademark) service also contributed to the increase.
Schwab's proprietary funds, collectively referred to as the
SchwabFunds (registered trademark), include money market funds,
bond funds and equity index funds. Customer assets invested in the
SchwabFunds averaged $19.6 billion during the second quarter of
1994 compared to $13.1 billion during the second quarter of 1993.
During the second quarter of 1994, mutual fund trades placed
through the Mutual Fund OneSource service averaged 14,400 per day,
including 1,100 trades per day in SchwabFunds. Since trades
handled through the Mutual Fund OneSource service do not generate
commission revenue, they are not included in agency trade totals.
Customer mutual fund assets purchased through the Mutual Fund
OneSource service, excluding SchwabFunds, totaled $10.4 billion at
June 30, 1994, up 160% from a year ago.
Expenses Excluding Interest
- - ---------------------------
Total operating expenses excluding interest for the second
quarter of 1994 were $205 million, up 14% over the second quarter of
1993. Compensation and benefits expense for the second quarter of
1994 increased $13 million, or 14%, to $107 million as additional
employees were hired in response to the growth in Schwab's customer
base. The $13 million increase is net of a $5 million decline in
variable compensation reflecting a
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<PAGE>
decline in overall financial performance. Employees, including
full-time, part-time, and temporary employees and persons employed
on a contract basis, totaled approximately 6,100 at June 30, 1994
compared to approximately 5,100 at June 30, 1993.
Communications expense increased $5 million, or 22%, to $28
million from the prior year's second quarter primarily due to
higher customer trading, which contributed to higher telephone,
financial news and securities quotation services expenses.
Increases in postage and printing costs reflect the increase in
customer account openings, servicing costs and promotional
mailings.
Occupancy and equipment expense increased $4 million, or 20%, to
$22 million from the prior year's second quarter primarily due to
19 additional branch offices, one customer telephone service center
and additional equipment rental and software costs.
Depreciation and amortization expense increased $3 million, or
29%, to $14 million from the prior year's second quarter as
additional data processing related assets and leasehold
improvements increased the Company's depreciable fixed asset base
from the year-ago period.
Six Months Ended June 30, 1994
Compared To Six Months Ended
June 30, 1993
Summary
- - -------
Net income for the first half of 1994 totaled $70 million or
$1.20 per share compared with net income of $67 million or $1.13
per share for the first half of 1993.
First half 1994 revenues were $546 million, up 17% from
$469 million for the first half of 1993, due to increases in all
major revenue categories. Mutual fund service fees increased 66%
due to growth in fund balances. Principal transaction revenues
increased 13% and commission revenues increased 5% due to higher
trading volume.
Total operating expenses excluding interest during the first
half of 1994 were $429 million, up 21% from the first half of 1993.
The higher expenses primarily related to additional staff and
office facilities to support the Company's expansion and to higher
volume-related expenses such as communications expense. These higher
volume-related expenses resulted from an increase in total Company
trading volume, which includes trades handled through Schwab's Mutual
Fund OneSource (trademark) service. In the first half of 1994 total
Company trading volume was 6.1 million trades, up 38% from the first
half of 1993. During the first half of 1994, the Company opened six
new branch offices and a customer telephone service center.
The profit margin for the first half of 1994 was 13%, down from
14% for the first half of 1993. The decline in profit margin is
mainly due to higher staffing levels relative to trading volume experienced.
The annualized return on stockholders' equity for the first half of 1994
was 33%, down from 42% for the first half of 1993, reflecting the
Company's higher equity base in the first half of 1994.
Commissions
- - -----------
Commission revenues totaled $292 million for the first half of
1994, up 5% from the first half of 1993. Retail agency commissions,
which include commissions relating to retail customer accounts
handled by financial advisors, constituted approximately 96% of
total commissions. Remaining commissions represent business done
with institutional customers. Commissions earned on retail agency
trades totaled $280 million on an average daily retail agency trade
level of 30,800 trades in the first half of 1994, compared with
commission revenue of $269 million on an average daily retail
agency trade level of 28,400 for the comparable period in 1993.
The following table shows a comparison of certain factors that
influence retail agency commission revenues:
- 10 -
<PAGE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
Six Months
Ended
June 30, Percent
1994 1993 Change
- - --------------------------------------------------------------------
<S> <C> <C> <C>
Number of retail agency customer
accounts that traded during
the period (in thousands) 945 842 12%
Average number of retail agency
transactions per account
that traded 4.08 4.21 (3)
Total number of retail agency
transactions (in thousands) 3,855 3,549 9
Average commission per
retail agency transaction $72.75 $75.76 (4)
Total retail agency commission
revenues (in millions) $ 280 $ 269 4
====================================================================
Note: The above table excludes customer transactions in
Schwab's Mutual Fund OneSource (trademark) service.
</TABLE>
The total number of retail agency transactions executed by
Schwab increased 9% from the first half of 1993 as Schwab's
customer base continued to grow. Schwab added 444,000 new customer
accounts during the first half of 1994, compared to 358,000 new
accounts during the first half of 1993.
Interest Revenue, Net of Interest Expense
- - -----------------------------------------
Interest revenue net of interest expense increased $21 million,
or 38%, to $76 million from the prior year's first six months as
shown in the following table (in millions):
<TABLE>
<CAPTION>
- - ---------------------------------------------------------
Six Months
Ended
June 30,
1994 1993
- - ---------------------------------------------------------
<S> <C> <C>
Interest Revenue
Investments, customer-related $ 69 $ 56
Margin loans to customers 82 61
Other 3 3
- - ---------------------------------------------------------
Total 154 120
- - ---------------------------------------------------------
Interest Expense
Customer cash balances 69 57
Long-term and subordinated
borrowings 6 6
Other 3 2
- - ---------------------------------------------------------
Total 78 65
- - ---------------------------------------------------------
Interest Revenue, Net of
Interest Expense $ 76 $ 55
=========================================================
</TABLE>
When investing cash required to be segregated, the Company must
adhere to SEC regulations that restrict investments to those in
U.S. government securities, participation certificates and mortgage-
backed securities guaranteed by the Government National Mortgage
Association, certificates of deposit issued by U.S. banks and
thrifts, and repurchase agreements collateralized by qualified
securities. Since Company policies set credit quality and maximum
maturity requirements, its policies regarding such investing are
more restrictive than the SEC regulations. Investment information
for the first six months of 1994 and 1993 is as follows:
- 11 -
<PAGE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------
Six Months
Ended
June 30,
1994 1993
- - ---------------------------------------------------------
<S> <C> <C>
Investment composition
(in billions at period end):
Resale agreements $3.6 $3.0
U.S. Treasuries --- .2
Certificates of deposit .1 .1
Average maturity of investments
(in days):
During the six-month period 53 67
At period end 49 75
=========================================================
</TABLE>
Customer-related average daily balances, interest rates, and
average net interest margin for the first six months of 1994 and
1993 are summarized in the following table (dollars in millions):
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------
Six Months Ended
June 30,
1994 1993
- - -----------------------------------------------------------------
<S> <C> <C>
Earning Assets (customer-related):
Investments:
Average balance outstanding $3,934 $3,443
Average interest rate 3.55% 3.29%
Margin loans to customers:
Average balance outstanding $2,667 $2,055
Average interest rate 6.18% 6.00%
Average yield on earning assets 4.61% 4.30%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $5,378 $4,588
Average interest rate 2.60% 2.50%
Other interest-bearing sources:
Average balance outstanding $ 334 $ 262
Average interest rate 2.58% 4.49%
Average noninterest-bearing portion $ 889 $ 648
Average interest rate on funding sources 2.25% 2.30%
Summary:
Average yield on earning assets 4.61% 4.30%
Average interest rate on funding sources 2.25% 2.30%
- - -----------------------------------------------------------------
Average net interest margin 2.36% 2.00%
=================================================================
</TABLE>
Interest revenue from customer-related investments increased
$13 million due to a 14% increase in average balances outstanding,
and a 26 basis point increase in the average interest rate
earned on such investments. Interest earned on margin loans to
customers increased $21 million as average margin balances
increased 30% and the average interest rate earned on such balances
increased 18 basis points. Interest expense on customer cash
balances increased $12 million due to a 17% increase in average
balances outstanding, and a 10 basis point increase in average
interest rates paid on these balances.
The average net interest margin pertaining to customer-related
earning assets and related funding sources increased 36 basis
points over that of 1993's first half to 2.36%. This is primarily
due to sharper increases in average balances outstanding and average
interest rates with respect to earning assets compared to funding sources.
Principal Transactions, Mutual Fund Service Fees, and Expenses
- - -------------------------------------------------------------------
Excluding Interest
- - ------------------
Explanations and fluctuations in principal transactions, mutual
fund service fees, and expenses excluding interest presented in the
three-month results generally explain fluctuations in those
revenues and expenses between the six-month periods.
Income Taxes
- - ------------
The Company's effective income tax rate for the first six months
of 1994 was 39.8% compared to 40.9% for the comparable period in
1993.
In January 1992, the Company filed a petition in U.S. Tax Court
refuting a claim for additional Federal income tax asserted by the
Internal Revenue Service (IRS) in December 1991. The asserted
additional tax of $28 million, excluding interest, arises from the
IRS' audit of the tax periods ended March 31, 1988 and December 31,
1988. Substantially all the asserted additional tax relates to the
deductions claimed by the Company for depreciation and amortization
of tangible and intangible assets received in the Company's 1987
acquisition of Schwab. The issues being contested
- 12 -
<PAGE>
in the Tax Court by the Company with respect to the periods audited
by the IRS extend to the Company's tax years ended December 31, 1989
through 1993.
Of the $28 million additional tax asserted by the IRS against
the Company, approximately $11 million relates to deductions
derived from the amortization of customer lists. In April 1993,
the U. S. Supreme Court ruled in Newark Morning Ledger Co. v. U.S.
that in appropriate circumstances a taxpayer may amortize the cost
of certain intangible assets (such as customer lists) over the
useful life of such assets. While the Supreme Court's decision in
Newark Morning Ledger confirms the Company's ability to amortize
for tax purposes certain of its intangible assets, issues involving
the valuation of these intangible assets remain unresolved in the
Company's case with the IRS.
Management believes that these matters will be resolved without
a material adverse effect on the Company's financial position.
Liquidity and Capital Resources
Liquidity
Schwab
Most of Schwab's assets are liquid, consisting primarily of
short-term (i.e., less than 90 days) investment-grade, interest-
earning investments (a substantial portion of which are segregated
for the exclusive benefit of customers pursuant to regulatory
requirements) and receivables from customers and broker-dealers.
Customer margin loans are demand loan obligations secured by
readily marketable securities. Receivables from and payables to
other brokers, dealers and clearing organizations primarily
represent current open transactions, which usually settle or can be
closed out within a few days.
Liquidity needs relating to customer trading and margin
borrowing activities are met primarily through cash balances in
customer accounts, which totaled $6.0 billion at June 30, 1994, up
5% from the December 31, 1993 level of $5.7 billion. Earnings from
Schwab's operations are the primary source of liquidity for capital
expenditures and investments in new services, marketing and
technology. Management believes that customer cash balances and
operating earnings will continue to be the primary sources of
liquidity for Schwab in the future.
To manage Schwab's regulatory capital position, CSC provides
Schwab with a $180 million subordinated revolving credit facility
maturing in September 1995, of which $108 million was outstanding
at June 30, 1994. At quarter end, Schwab also had outstanding
$25 million in fixed-rate subordinated term loans from CSC maturing
in 1996. For use in its brokerage operations, Schwab also
maintains uncommitted bank credit lines totaling $445 million, of
which $365 million is available on an unsecured basis. Schwab used
such borrowings for 23 days during the first six months of 1994,
with the daily amounts borrowed averaging $46 million. These lines
were unused at June 30, 1994.
M&S
M&S' liquidity needs are generally met through earnings
generated by its operations. Most of M&S' assets are liquid,
consisting primarily of cash and equivalents, receivables from
brokers, dealers and clearing organizations and marketable
securities. M&S may borrow up to $10 million under a subordinated
lending arrangement with CSC. Borrowings under this arrangement
qualify as regulatory capital for M&S. This credit facility has
never been used.
The Charles Schwab Corporation
CSC's liquidity needs are generally met through cash generated
by its subsidiaries. Schwab and M&S are the principal sources of
this liquidity and are subject to regulatory requirements that are
intended to ensure the general financial soundness
- 13 -
<PAGE>
and liquidity of broker-dealers. These regulations would prohibit Schwab
and M&S from repaying subordinated borrowings to CSC, paying
cash dividends, or making any unsecured advances or loans to CSC or
employees if such payment would result in net capital for such subsidiary
of less than 5% of its aggregate debit balances or less than 120% of its
minimum dollar amount requirement of $1 million. At June 30, 1994, Schwab
had $314 million of net capital (11% of aggregate debit balances), which was
$257 million in excess of its minimum required net capital. At June 30,
1994, M&S had $11 million of net capital (183% of aggregate debit
balances), which was $10 million in excess of its minimum required net
capital. Management believes that funds generated by Schwab's and
M&S' operations will continue to be the primary funding source in
meeting CSC's liquidity needs and maintaining Schwab's and M&S' net
capital.
In addition to liquidity needed by the broker-dealer
subsidiaries, CSC has individual liquidity needs that arise from
its long-term debt, which includes $150 million of its Senior
Medium-Term Notes, Series A (Medium-Term Notes). The Medium-Term
Notes have maturities ranging from three to ten years and fixed
interest rates ranging from 4.9% to 6.3% with interest payable
semiannually.
CSC has a $35 million Senior Term Loan due in March 1995. An
interest rate exchange arrangement has been used to convert the
loan's variable interest rate to a fixed rate of 6.9%. The loan
contains covenants, among others, that require CSC to maintain
minimum levels of stockholders' equity, and require Schwab and M&S
to maintain minimum levels of net capital as defined.
In June 1994, CSC renewed its $225 million committed unsecured
credit facility with a group of eleven banks. The funds are
available for general corporate purposes and CSC pays a commitment
fee on the unused balance. The terms of this credit facility
require CSC to maintain minimum levels of stockholders' equity and
Schwab and M&S to maintain minimum levels of net capital as
defined. This credit facility has never been used.
On April 12, 1994, the SEC declared effective a Registration
Statement filed by CSC covering the issuance of up to $100 million
aggregate principal amount of debt securities, which may be issued
by CSC from time to time as senior or senior subordinated debt
securities, and may carry fixed or variable interest rates. The
net proceeds of the sale of the debt securities will be used for
general corporate purposes.
On April 14, 1994, a Prospectus Supplement covering the issuance
of up to $100 million in Senior or Senior Subordinated Medium-Term
Notes, Series A, pursuant to the Registration Statement was filed
with the SEC. At June 30, 1994 there were no securities issued
under this Prospectus. On July 6, 1994, CSC issued a $20 million
Senior Medium-Term Note, Series A, with an interest rate of 7.72%
maturing in July 1999.
Cash Flows
Cash provided by operating activities was $107 million for the
first six months of 1994, up 24% from $86 million for the first six
months of 1993. During the first half of 1994, the Company
invested $21 million in equipment, office facilities and property
as it continued to expand its branch office network and customer
telephone service center facilities and enhance its data processing
and telecommunications systems. The Company opened its fourth
customer telephone service center in January 1994.
During the first six months of 1994, the Company repurchased and
recorded as treasury stock a total of 950,000 shares of its common
stock for $26 million. From July 1, 1994, through July 28, 1994,
the Company repurchased an additional 325,000 shares of its common
stock for $8 million. Currently, the Company has authorization
from its Board of Directors to repurchase a total of 1,000,000
additional shares of its common stock.
In January 1994, the Board of Directors announced an increase in
the quarterly cash
- 14 -
<PAGE>
dividend from $.05 per share to $.07 per share. During the first six months
of 1994, the Company paid common stock cash dividends totaling $8 million,
up from $5 million paid during the first six months of 1993.
Capital Adequacy
The Company's stockholders' equity at June 30, 1994 totaled
$420 million. In addition to its equity, the Company had long-term
borrowings of $187 million that bear interest at a weighted average
rate of 6.0%. These borrowings, together with the Company's
equity, provided total financial capital of $607 million at
June 30, 1994.
The Company monitors its financial leverage and the adequacy of
its capital base relative to the level and composition of its
assets using various financial measures. One of these measures is
the ratio of total assets to total stockholders' equity. At June
30, 1994, the ratio of total assets to total stockholders' equity
was 17 to 1 compared to a ratio of 18 to 1 at December 31, 1993.
Over 90% of the Company's total assets relate to customer activity
(primarily margin loans and segregated investments). Given the
Company's intention of continuing to maintain an appropriate
capital base as customer balances grow, management believes that
the Company's present level of equity could support up to $3.9
billion of additional assets relating to customer activity.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Discussed in Notes to Condensed Consolidated Financial
Statements under Contingent Liabilities in Part I, Item 1, and
under Part I, Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations, under Income Taxes,
and incorporated herein by reference.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 9,
1994, its stockholders voted upon election of directors for the
ensuing year:
<TABLE>
<CAPTION>
Shares Shares
For Against
--- -------
<S> <S> <S>
Election of director:
Charles R. Schwab 49,417,272 139,081
Lawrence J. Stupski 49,416,901 139,452
David S. Pottruck 49,377,324 179,029
Nancy H. Bechtle 49,403,973 152,380
C. Preston Butcher 49,417,375 138,978
Donald G. Fisher 49,391,162 165,191
Anthony M. Frank 49,409,878 146,475
James R. Harvey 49,418,264 138,089
Stephen T. McLin 49,415,026 141,327
Roger O. Walther 49,417,910 138,443
</TABLE>
No shares were withheld, and there were no abstentions or broker
non-votes with respect to the election of directors.
- 15 -
<PAGE>
The results of the voting on the following additional items were
as follows:
Proposal II - Annual Executive Bonus Plan - Amendments to the
- - --------------------------------------------
Annual Executive Bonus Plan to allow for deferral of all or any
portion of amounts payable under the plan until specified date.
<TABLE>
<CAPTION>
Shares Shares Shares Broker
For Against Withheld Non-Vote
--- ------- -------- --------
<C> <C> <C> <C>
37,057,510 2,981,602 560,402 8,956,839
</TABLE>
Proposal III - Long-Term Incentive Plan - Amendments to the Long-
- - ----------------------------------------
Term Incentive Plan III to allow recipients to elect to defer
receipt of all or a portion of payments that otherwise would be
made in 1995 until the earlier of a specified date certain, or date
of participant's termination of employment.
<TABLE>
<CAPTION>
Shares Shares Shares Broker
For Against Withheld Non-Vote
--- ------- -------- --------
<C> <C> <C> <C>
39,003,070 1,147,152 449,299 8,956,832
</TABLE>
Proposal IV - Amendments to the 1992 Stock Incentive Plan -
- - ----------------------------------------------------------------
Amendments to the 1992 Plan to increase number of shares subject to
the plan, place limitations on the maximum number of options that
can be issued to any participant in any year, and permit the
issuance of performance units in tandem with options to certain
participants.
<TABLE>
<CAPTION>
Shares Shares Shares Broker
For Against Withheld Non-Vote
--- ------- -------- --------
<C> <C> <C> <C>
43,727,403 5,371,298 457,652 0
</TABLE>
A total of 49,556,353 shares were present in person or by proxy at
the Annual Meeting.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K:
On July 12, 1994 the Registrant filed a Current Report on Form 8-
K relating to several complaints in which M&S and Schwab were
named as defendants. The complaints generally allege an illegal
combination and conspiracy among the defendant market makers to fix
and maintain the spreads between the bid and ask prices of Nasdaq
securities for varying periods back to 1989 through the date of the
complaints.
(b) The following exhibits are filed as part of this quarterly
report on Form 10-Q.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
10.137 Credit Agreement dated as of June 30, 1994, between the
Registrant and the Banks listed therein.
10.138 Form of Nonstatutory Stock Option Agreement for Non-
Employee Directors (filed as Exhibit 4.4 to the
Company's Registration Statement No. 33-47842 on
Form S-8 and incorporated herein by reference).
10.139 Form of Nonstatutory Stock Option Agreement (filed as
Exhibit 4.5 to the Company's Registration
Statement No. 33-54701 on Form S-8 and incorporated
herein by reference).
10.140 Form of Restricted Shares Agreement (filed as Exhibit
4.6 to the Company's Registration Statement No.
33-54701 on Form S-8 and incorporated herein by
reference).
11.1 Computation of Earnings per Common Equivalent Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
- 16 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: August 12, 1994 A. John Gambs /s/
-----------------------------------
A. John Gambs
Executive Vice President - Finance,
and Chief Financial Officer
- 17 -
</TABLE>
<PAGE>
EXHIBIT 10.137
CREDIT AGREEMENT
dated as of
June 30, 1994
==============
THE CHARLES SCHWAB CORPORATION
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("this Agreement") is entered into as of
June 30, 1994, between The Charles Schwab Corporation, a Delaware corporation
(the "Borrower"), and the Bank named on the signature page hereto (the "Bank").
WHEREAS, the Bank is willing to make revolving credit loans to
the Borrower from time to time through June 29, 1995 on the terms and subject
to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
1. DEFINITIONS
<TABLE>
<S> <C>
Assessment Rate: For any Interest Period for any Advance for which
the CD Rate has been selected, the assessment rate
per annum (adjusted upward, if necessary, to the
nearest 1/100 of 1%) determined by the Confirming
Bank on the first day of such Interest Period for
determining the then current annual assessment
payable by the Bank to the Federal Deposit
Insurance Corporation (or any successor thereto)
for such Corporation's (or successor's) insuring
U.S. dollar time deposits of the Bank in the United
States. The CD Rate shall be adjusted
automatically on and as of the effective date of
any change in the Assessment Rate.
Banking Day: Any Monday, Tuesday, Wednesday, Thursday or
Friday, other than a day on which banks are
authorized or required to be closed in California
or New York.
Borrowing Advice: A written request made by the Borrower with
respect to an Advance specifying the information
required in Paragraph 2.2 hereof and executed by
the Borrower from time to time.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Borrowing Agreement: Any of those separate credit agreements (so long as the
Credit (as defined herein) thereunder has not been
terminated) between the Borrower and any of the Banks
referred to in Schedule I hereto (other than the Bank)
and having terms substantially similar to those
contained in this Agreement. Such Schedule I may from
time to time be amended by the Borrower by Borrower's
delivery to each Bank (including the Bank) of a new
Schedule I, and each such new Schedule I delivered by
the Borrower to each Bank (including the Bank) shall
replace and supersede the then-existing Schedule I and
shall be the Schedule I referred to in this Agreement;
provided, however, that no such newly delivered
Schedule I shall amend or otherwise change the name,
address, or amount of Credit applicable to the Bank on
the initial Schedule I hereto without the prior written
consent of the Bank or as otherwise permitted in
accordance with the terms of this Agreement. Each such
newly delivered Schedule I shall include all of the
then-existing credit agreements between the Borrower
and any Bank having terms substantially similar to
those contained in this Agreement so long as the Credit
(as defined herein) thereunder has not been terminated.
Broker Subsidiary: Charles Schwab & Co., Inc., a California corporation,
and its successors and assigns.
CD Banking Day: Any Banking Day on which dealings in bank certificates
of deposit are conducted by New York City certificate
of deposit dealers.
CD Rate: For any Interest Period for any Advance for which the
CD Rate has been selected or is applicable, the
sum of:
(a) the Assessment Rate for the Interest Period, plus
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
(b) the rate per annum obtained by dividing
(i) the rate of interest per annum
determined by the Confirming Bank to be
(aa) the average (adjusted upward, if
necessary, to the nearest 1/16 of 1%)
rate per annum at which bids are received
by the CD Reference Banks for their
certificates of deposit as at 11:00 a.m.
New York City time (or as soon as
practicable thereafter), on the first day
of an Interest Period from two or more
New York City certificate of deposit
dealers of recognized standing selected
by the Confirming Bank for the purchase
at face value of such certificates of
deposit in an amount comparable to the
Advance for which the CD Rate has been
selected and having a maturity comparable
to such Interest Period or (bb) in the
event the Confirming Bank cannot, without
undue effort, obtain rates from such CD
Reference Banks, the certificate of
deposit rate as reported for the date of
the Borrowing Advice in "Federal Reserve
Statistical Release--Selected Interest
Rates-- H.15(519)," published by the
Board of Governors of the Federal Reserve
System, or any successor publication, under
the caption "CDs (Secondary Market)"
having a maturity most closely
approximating the conclusion of such
Interest Period, by (ii) a percentage
(expressed as a decimal) equal to 1.00
minus the CD Rate Reserve Percentage.
CD Rate Reserve
Percentage: For any Interest Period for any Advance for which the
CD Rate has been selected or is applicable, the
percentage (expressed as a decimal) as calculated by
the Confirming Bank that is in effect on the first day
of such Interest Period, as prescribed by the Board of
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C>
Governors of the Federal Reserve System (or any
successor), for determining the maximum reserve
requirements (including, without limitation, basic,
supplemental, marginal and emergency reserves) for a bank
with deposits exceeding five billion dollars that is a
member of the Federal Reserve System, in respect of new
non-personal time deposits in U.S. dollars in the United
States having maturity comparable to the applicable
Interest Period for said Advance for which the CD Rate
has been selected (such bank's reserve ratio on such
time deposits in effect on June 21, 1994 was 0%). The CD
Rate shall be adjusted automatically on and as of the
effective date of any change in the CD Rate Reserve
Percentage.
CD Reference Banks: Citicorp USA, Inc.
Continental Bank
Change in Law
Affecting Cost: The occurrence of any one of the following events:
(a) the imposition, modification or application of
any reserve, capital adequacy requirement, special
deposit or similar requirement against assets
held by, or deposits in or for the account of, or
commitments, advances or loans by, or any other
acquisition of funds by, the Bank (other than such
requirements described in the Eurodollar Rate
Reserve Percentage section hereof), or the
imposition upon the Bank of any other condition
with respect to the London interbank market or to
this Agreement or any borrowing hereunder,
(b) a change in the basis of taxation of payments to
the Bank of principal,
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
interest or any other amount payable
hereunder (except for changes in
Federal, state or local income tax
rates and their equivalents), or
(c) the adoption or enactment of any
applicable law, treaty, regulation
or directive, or any change therein
or in the interpretation or
application thereof, or compliance
by the Bank with any request
(whether or not having the force of
law) of any relevant government or
corporation entity.
Closing Date: June 30, 1994
Confirming Bank: Citicorp USA, Inc.
Confirming Bank
Agreement: The Confirming Bank Agreement between the
Borrower and Citicorp USA, Inc. dated June
30, 1994, in substantially the form attached
as Exhibit B to the Credit Agreement, as the
same may be amended from time to time.
Controlled Subsidiary: Any corporation 80% of whose voting stock
(except for any qualifying shares) is owned
directly or indirectly by the Borrower.
Federal Funds
Effective Rate: For any day, an interest rate per annum equal
to the weighted average of the rates on
overnight Federal funds transactions with
members of the Federal Reserve System
arranged by Federal funds brokers, as
published for such day (or, if such day is
not a Banking Day, for the next preceding
Banking Day) by the Federal Reserve Bank of
New York; or, if such rate is not published
for any day which is a Banking Day, an
interest rate per annum equal to the
arithmetic mean of the rates on overnight
Federal funds transactions with members of
the Federal
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
Reserve System arranged by Federal funds
brokers on such day, received Reference
Rate Reference Bank from three Federal
funds brokers of recognized standing
selected by each Reference Rate
Reference Bank in its sole discretion.
Interest Period: Any period specified in accordance with Paragraph
2.3 hereof.
Intermediate Parent: Schwab Holdings, Inc. and its successors and
assigns.
Eurodollar Banking Day: Any Banking Day on which dealings in dollar
deposits are conducted by and among banks in the
London Eurodollar Market, or such other
Eurodollar Market as may from time to time be
selected by the Bank with the approval of the
Borrower.
Eurodollar Rate: The rate obtained by dividing (i) the average
rate per annum at which deposits of U.S. dollars
for the selected Interest Period and in the
amount of the Advance for which the Eurodollar
Rate has been selected are offered (a) if at
least two such offered rates appear on the
Reuters Screen LIBO Page as at 11:00 am. (London
time) two Eurodollar Banking Days prior to the
commencement of the relevant Interest Period, the
arithmetic mean (adjusted upward, if necessary,
to the nearest 1/16 of 1%), of such offered rates
as determined in accordance with the provisions
of the Confirming Bank Agreement or (b) if fewer
than two offered rates appear, in immediately
available funds to the Eurodollar Rate Reference
Banks in the London interbank market (adjusted
upward, if necessary, to the nearest 1/16 of 1%)
as at 11:00 a.m. (London time) two Eurodollar
Banking Days prior to the commencement of the
relevant Interest Period, determined in
accordance with the provisions of the Confirming
Bank Agreement, by (ii) a percentage (expressed as
</TABLE>
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<TABLE>
<S> <C>
a decimal) equal to 1.00 minus the Eurodollar Rate
Reserve Percentage.
Eurodollar Rate Reserve
Percentage: For any Interest Period for any Advance for which the
Eurodollar Rate has been selected or is applicable,
the percentage (expressed as a decimal) as calculated
by the Confirming Bank that is in effect on the first
day of such Interest Period, as prescribed by the
Board of Governors of the U.S. Federal Reserve System
(or any successor), for determining reserve
requirements to be maintained by the Bank under
Regulation D (or any successor regulation thereof) as
amended to the date hereof (including such reserve
requirements as become applicable to the Bank
pursuant to phase-in or other similar requirements of
Regulation D at any time subsequent to the date
hereof) in respect of "Eurocurrency liabilities" (as
defined in Regulation D). The Eurodollar Rate shall
be adjusted automatically on and as of the effective
date of any change in the Eurodollar Rate Reserve
Percentage.
Eurodollar Rate
Reference Banks: Bank of Tokyo Trust Company
The Bank of New York
Minimum Stockholder's
Equity: As of the last day of September 1994, and the last
day of each fiscal quarter thereafter, the greater
of:
(a) $225 million, or
(b) $225 million plus 40% of the sum of
cumulative Net Earnings of the Borrower and
its Subsidiaries beginning with July 1, 1994.
MSI: Mayer & Schweitzer, Inc., a New Jersey corporation,
and its successors and assigns.
</TABLE>
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<TABLE>
<S> <C>
Net Capital Ratio: As of the date of determination, that percentage of
net capital to aggregate debit items of any entity
subject to the Net Capital Rule 15c3-1 promulgated
by the Securities Exchange Commissionpursuant to
the Securities Exchange Act of 1934 and any
successor or replacement rule or regulation therefor.
Net Earnings: With respect to any fiscal period, the consolidated
net income of the Borrower and its Subsidiaries,
after taking into account all extraordinary items,
taxes and other proper charges and reserves for the
applicable period, determined in accordance with
U.S. generally accepted accounting principles,
consistently applied.
Reference Rate: For any Interest Period for any Advance for which
the Reference Rate has been selected (or for any
post-Interest Period period covered by clause (ii)
of Paragraph 2.6 hereof), the average daily per annum
rate of interest calculated by the Confirming Bank
during such Interest Period or period, with the rate
on each day being equal to the higher of (i) the
highest per annum rate of interest (adjusted upward,
if necessary, to the nearest 1/16 of 1%) publicly
announced by any of the Reference Rate Reference
Banks on such day as its "prime rate," "prime
commercial lending rate," "reference rate," or "base
rate," as the case may be, and (ii) the highest per
annum Federal Funds Effective Rate available to any
Reference Rate Reference Bank, plus 1/2 of 1%.
Reference Rate
Reference Banks: The First National Bank of Chicago
Chemical Bank
Stockholder's Equity: As of any date of determination, Stockholders'
Equity of Borrower and its Subsidiaries as of that
date determined in accordance with U.S.
</TABLE>
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<TABLE>
<S> <C>
generally accepted accounting principles, consistently applied.
Subsidiary: Any corporation or other entity of which a sufficient number
of voting securities or other interests having power to elect
a majority of the board of directors or other persons
performing similar functions are at the time directly or
indirectly owned by the Borrower.
</TABLE>
2. THE REVOLVING CREDIT FACILITY
The Bank agrees that consistent with the terms and conditions
set forth in this Article 2, it will lend to the Borrower sums which, in the
aggregate principal amount outstanding at any one time, shall not exceed the
dollar amount of the Bank's commitment as specified in Schedule I hereto. Such
amount, as it may from time to time be reduced pursuant to Paragraph 2.10
hereof, shall be referred to as the "Credit."
2.1 The Advances. The Credit shall be a revolving
credit, such that from time to time commencing on June 30, 1994 and ending on
June 29, 1995, the Borrower may borrow, repay at the end of any Interest Period
(or otherwise as permitted by Paragraph 3.2 hereof) and reborrow amounts during
the continuation of the Credit, as the Borrower may see fit, subject to the
applicable provisions of this Agreement. Each such revolving credit loan made
hereunder (an "Advance") shall be in the amount of $1,000,000 or integral
multiples thereof and shall become due and payable on the last day of the
Interest Period for such Advance.
The obligation of the Borrower to repay the aggregate unpaid
principal amount of the Advances shall be evidenced by a promissory note of the
Borrower (the "Revolving Note") in substantially the form attached hereto as
Exhibit A, with the blanks appropriately completed, payable to the order of the
Bank, bearing interest as hereinafter specified. The Revolving Note shall be
dated, and shall be delivered to the Bank, on the date of the execution and
delivery of this Agreement by the Borrower. The Bank shall, and is hereby
authorized by the Borrower to, endorse on the schedule contained on the
Revolving Note, or on a continuation of such schedule attached thereto and made
a part thereof, appropriate notations regarding the Advances evidenced by the
Revolving Note as specifically provided therein; provided, however, that the
failure to make, or error in making, any such notation shall not limit or
otherwise affect the obligations of the Borrower hereunder or under the
Revolving Note.
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2.2 Making of Advances; Notice. Whenever the Borrower
desires the Bank to make an Advance, it shall give the Bank at least one
Banking Day's prior irrevocable notice for Reference Rate Advances, one CD
Banking Day's prior irrevocable notice for CD Rate Advances, or three
Eurodollar Banking Days' prior irrevocable notice for Eurodollar Rate Advances
(each such notice to be in the form of a Borrowing Advice in substantially the
form attached hereto as Exhibit C) setting forth the following information:
(a) The date, which shall be either a Banking Day, a CD
Banking day, or a Eurodollar Banking Day, on which
such Advance is to be made;
(b) The Interest Period selected in accordance with
Paragraph 2.3 hereof;
(c) The interest rate option selected in accordance with
Paragraph 2.4 hereof; and
(d) The aggregate principal amount of the Advance to
which such Interest Period and interest rate shall
apply.
Notice of each Borrowing Advice indicating the selection of an
Interest Period and whether the interest calculation is to be based on the
Eurodollar Rate, the CD Rate or the Reference Rate shall simultaneously be
given to the Confirming Bank by the Borrower. Any notice required pursuant to
this Paragraph 2.2 shall be given no later than 12:00 noon (New York City time)
on the date such notice is required to be given.
With respect to any Advance having an Interest Period ending
on or before June 28, 1995, if prior to the last day of the Interest Period for
such Advance the Borrower fails timely to provide a new Borrowing Advice in
accordance with this Paragraph 2.2, such Advance shall, on the last day of the
then-existing Interest Period for such Advance, automatically convert into a
new Reference Rate Advance with an Interest Period of thirty (30) days (or, in
the event that there are fewer than thirty (30) days remaining to June 29,
1995, an Interest Period of the number of days remaining to June 29, 1995). In
the event of any such automatic conversion, the Borrower on the date of such
conversion shall be deemed to make a representation and warranty to the Bank
that, to the best of the Borrower's knowledge, (i) neither the Broker
Subsidiary nor MSI is in violation of minimum net capital requirements as
described in Paragraph 7.1, (ii) the Borrower's Stockholders' Equity is not
below the Minimum Stockholders' Equity as described in Paragraph 7.2, and (iii)
no amount owing with respect to any Commitment Fee, any outstanding
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Advance, or any interest thereon, or any other amount hereunder, is due and
unpaid.
Each Advance to the Borrower under this Agreement shall be
made by 12:00 noon (New York City time) on the date the Advance is to be made,
and shall be in immediately available funds credited to the account of Borrower
with the Bank or wired to the Borrower's account at Citicorp USA, Inc. (Account
4055-4016) or such other account as may be designated by the Borrower.
The Bank, by notice to the Borrower (to be given not later
than two Banking Days prior to the initial Advance hereunder) may request that
Advances made hereunder for which the interest calculation is to be based on
the Eurodollar Rate be evidenced by separate Revolving Notes substantially in
the form of Exhibit A hereto, payable to the order of such Bank for the account
of its office, branch or affiliate it may designate as its Eurodollar lending
office. Each reference to the Bank in Paragraph 2.5(b) and 3.5 shall include
the Bank's designated Eurodollar lending office; all notices given to the Bank
in accordance with this Agreement shall be deemed to have been given to such
Eurodollar lending office.
2.3 Interest Periods. The Borrower may select the Interest
Period (as defined in the next sentence) for each Advance, it being understood
that the Borrower may request multiple Advances on the same day and may select
a different Interest Period for each such Advance; provided, however, that each
such Advance shall be in the amount of $1,000,000 or an integral multiple
thereof. With respect to any Advance, an Interest Period shall be each period,
as selected by the Borrower in accordance with the terms of this Agreement,
beginning on the day such Advance is made under this Agreement, and ending on
the day specified by the Borrower:
(a) Not more than 180 days thereafter, in the case of any
Interest Period for which the interest is to be based
on the Reference Rate, provided that if the last day
of an Interest Period would be a day that is not a
Banking Day, such Interest Period shall be extended
to the next succeeding Banking Day;
(b) either 30, 60, 90 or 180 days thereafter, in the case
of any Interest Period for which the interest is to
be based on the CD Rate, provided that if the last
day of an Interest Period would be a day that is not
a CD Banking Day, such Interest Period shall be
extended to the next succeeding CD Banking Day; or
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<PAGE>
(c) not less than 7 nor more than 180 days thereafter, in
the case of any Interest Period that is to be based
on the Eurodollar Rate, provided that if the last day
of an Interest Period would be a day that is not a
Eurodollar Banking Day, such Interest Period shall be
extended to the next succeeding Eurodollar Banking
Day, unless such next succeeding Eurodollar Banking
Day is in a different calendar month, in which case
such interest period shall end on the next preceding
Eurodollar Banking Day;
provided, however, that no Interest Period applicable to any Advance shall
extend beyond September 27, 1995.
2.4 Interest Rates. Each Advance, while outstanding, shall
bear interest, payable on the last day of each Interest Period applicable
thereto (provided that (i) if any Advance is based on the Reference Rate,
interest attributable thereto also shall be payable on the last day of each
calendar quarter that occurs before the last day of the applicable Interest
Period, or (ii) if the Interest Period is longer than 90 days, interest with
respect thereto also shall be payable on the Banking Day following the 90th day
from the commencement of the Interest Period) at a rate per annum (based on a
360-day year and actual days elapsed for Eurodollar Rate and CD Rate Advances,
and a 365-day year and actual days elapsed for Reference Rate Advances,
counting the first day but not the last day of any Interest Period) that shall
be equal to one of the following as selected by the Borrower:
(a) Eurodollar Rate, plus 3/8 of 1% per annum,
(b) CD Rate, plus 1/2 of 1% per annum, or
(c) Reference Rate.
2.5 Substitute Rates. If upon receipt by the Bank of a
Borrowing Advice relating to an Advance:
(a) the Confirming Bank shall determine in accordance
with the provisions of the Confirming Bank Agreement
that by reason of changes affecting the New York City
certificate of deposit market and/or the London
interbank market, adequate and reasonable means do
not exist for ascertaining the applicable CD Rate
and/or Eurodollar Rate, respectively, with respect to
any Interest Period; or
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<PAGE>
(b) the Bank shall determine that by reason of any change
since the date hereof in any applicable law or
governmental regulation (other than any such change
in the regulations described in the definition of
Eurodollar Rate Reserve Percentage in Article I
hereof), guideline or order (or any interpretation
thereof), the adoption or enactment of any new law or
governmental regulation or order or any other
circumstance affecting the Bank or the New York City
certificate of deposit market and/or the London
interbank market, the CD Rate and/or Eurodollar Rate,
determined in accordance with the Confirming Bank
Agreement shall no longer represent the effective
cost to the Bank of certificates of deposit and/or of
U.S. dollar deposits, respectively, in the relevant
amount and for the relevant period; or
(c) the Confirming Bank or the Bank shall determine that,
as a result of any change since the date hereof in
any applicable law or governmental regulation or as a
result of the adoption of any new applicable law or
governmental regulation, the applicable CD Rate
and/or Eurodollar Rate, would be unlawful;
then, and in any such event, the Bank and the Borrower shall agree upon a rate
of interest applicable to the Advance that is reasonably judged by them to be
the nearest equivalent of the selected rate; provided, however, that if no such
rate is judged by them to be equivalent to the selected rate, the basis for
determining the rate of interest and the Interest Period shall be the Reference
Rate for an Interest Period of 30 days.
2.6 Interest Upon Default. After the principal amount of any
Advance, accrued interest upon such Advance, Commitment Fee, or any other
amount hereunder shall have become due and payable by acceleration, or
otherwise, it shall thereafter (until paid) bear interest, payable on demand,
(i) until the end of the Interest Period with respect to such Advance at a rate
per annum equal to 1% per annum in excess of the rate or rates in effect with
respect to such Advance and (ii) thereafter, at a rate per annum equal to 1%
per annum in excess of the Reference Rate.
2.7 Commitment Fee. Through June 29, 1995, the Borrower will
pay to the Bank a credit commitment fee (the "Commitment Fee") for each
calendar quarter at a rate per annum (based on a 360 day year and actual days
elapsed) of 100/1000 of 1% of the average daily unused principal amount of the
Credit in effect during such quarter payable on the first Banking Day after the
end of such quarter (or portion of such quarter, if applicable), and upon
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<PAGE>
termination of the Credit; provided, however, that any such payment upon
termination of the Credit during any calendar quarter shall be in lieu of (and
not in addition to) the payment otherwise due for such portion of such quarter
on the first Banking Day after the end of such quarter.
2.8 Facility Fee. On June 30, 1994, Borrower shall pay a
facility fee to the Bank in an amount equal to 50/1000 of 1% of the Bank's
commitment as specified in Schedule I.
2.9 Confirming Bank Fee. On June 30, 1994, the Borrower
shall pay to the Confirming Bank a fee of $10,000.
2.10 Reduction of Credit. The Borrower, from time to time,
upon at least three Banking Days' written notice to the Bank, may permanently
reduce any then-unutilized portion of the Credit in units of $1,000,000 without
penalty or premium; thereafter, during the continuation of the Credit, the
computation of the Commitment Fee and the Bank's obligations for Advances shall
be based upon such reduced Credit. The Borrower, from time to time, upon at
least three Banking Days' written notice to the Bank, may permanently reduce
all or any part of the then-utilized portion of the Credit by making payment to
the Bank on such utilized portion pursuant to Paragraph 2.1 or Paragraph 3.2
hereof, and thereafter, during the continuation of the Credit, the computation
of the Commitment Fee and the Bank's obligations for Advances shall be based
upon such reduced Credit; provided, however, that in order for a payment to
result in a permanent reduction of the Credit under this paragraph, the written
notice required under this paragraph must expressly provide that the payment is
being tendered pursuant to this paragraph and is intended to result in a
permanent reduction of the Credit. Any written notice delivered pursuant to
either of the foregoing two sentences shall be irrevocable unless the Bank
consents in writing to its revocation. In the event the Credit shall be
reduced to zero pursuant to this paragraph, the Credit shall be deemed
terminated, and any Commitment Fee or any other amount payable hereunder then
accrued shall become immediately payable. Such termination of the Credit shall
terminate the Borrower's obligations with respect to the Commitment Fee to the
extent not theretofore accrued and shall terminate the Bank's obligations to
make any further Advances under this Agreement.
3. PAYMENT
3.1 Method of Payment. All payments hereunder and under the
Revolving Note shall be payable in lawful money of the United States of America
and in immediately available funds not later than 12:00 noon (New
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York City time) on the date when due at the principal office of the Bank or at
such other place as the Bank may, from time to time, designate in writing to
the Borrower.
3.2 Optional Prepayment. The Borrower shall be entitled to
prepay the Revolving Note in whole or in part (such part being in integral
multiples of $1,000,000) without premium or penalty. In the case of each such
prepayment (i) the Borrower shall give to the Bank at least three Banking Days'
prior irrevocable notice of the aggregate principal amount of any such
prepayment, (ii) at the time of prepayment, the Borrower shall pay all unpaid
interest accrued on the amount prepaid, and (iii) the Borrower shall pay the
Bank any amount payable to the Bank in accordance with Paragraph 3.4 hereof as
a result of such prepayment.
3.3 Net Payments. All payments by Borrower hereunder and
under the Revolving Note shall be made without set-off or counterclaim and in
such amounts as may be necessary in order that all such payments, after
deduction or withholding for or on account of any present or future taxes,
levies, imposts, duties or other charges of whatsoever nature imposed by any
government or any political subdivision or taxing authority thereof
(collectively, "Taxes"), shall not be less than the amounts otherwise specified
to be paid under this Agreement. Notwithstanding the foregoing, the Borrower
shall not be liable for the payment of any tax on or measured by the net income
of the Bank pursuant to the laws of the jurisdiction where an office of the
Bank making any loan hereunder is located or does business. The Borrower shall
pay all Taxes when due and shall promptly send to the Bank original tax
receipts or copies thereof certified by the relevant taxing authority together
with such other documentary evidence with respect to such payments as may be
required from time to time by the Bank. If the Borrower fails to pay any Taxes
to the appropriate taxing authorities when due or fails to remit to the Bank
any such original tax receipts or certified copies thereof as aforesaid or
other required documentary evidence, the Borrower shall indemnify the Bank for
any taxes, interest or penalties that may become payable by the Bank as a
result of such failure.
3.4 Indemnity for Losses. The Borrower shall indemnify the
Bank for any loss or expense (including, without limitation, any interest paid
by the Bank to lenders of funds borrowed by it to make or maintain any Advance
and any loss incurred by the Bank in connection with the reemployment of funds
obtained by the Bank for the purpose of making or maintaining any Advance
hereunder) which the Bank may sustain as a result of (i) any payment or
prepayment of any Advance on a date other than the last day of any Interest
Period, (ii) any failure of the Borrower to borrow on a date specified in a
Borrowing Advice furnished hereunder or (iii) any failure by the
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Borrower to prepay any amount on the date and in the amount specified in a
notice furnished by the Borrower in accordance with the terms hereof. A
certificate as to any amounts payable pursuant to the foregoing submitted by
the Bank to the Borrower shall, in the absence of manifest error, be
conclusive.
3.5 Change in Law. In the event that the Bank shall become
subject to any increased cost (including, but not limited to, taxes, increases
in reserves and reductions in amounts receivable by the Bank) with respect to
this Agreement or making or maintaining any borrowing hereunder as a result of
any Change in Law Affecting Cost, then as soon as practicable thereafter, the
Bank shall give the Borrower notice of such Change in Law Affecting Cost and a
certificate containing the amount and basis of demand, and the Borrower shall
pay to the Bank additional amounts that will compensate the Bank for such
increased cost or reduced amount receivable and, at the option of the Borrower
on notice to the Bank, the Borrower may either elect to (i) change the basis
for determining interest on outstanding indebtedness for the remainder of the
applicable Interest Period in accordance with Paragraph 2.4 hereof, or (ii)
prepay the principal amount outstanding with accrued interest thereon to the
date of prepayment. If such change or prepayment is made on a day that is not
the last day of an Interest Period, the Borrower shall pay the Bank, upon
request, such amount or amounts as will compensate the Bank for any loss or
expense incurred by the Bank in the redeployment of funds obtained by the Bank
for the purpose of making or maintaining the Advances provided for herein. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence submitted by the Bank to the Borrower shall, in the absence of
manifest error, be conclusive.
4. CONDITIONS
4.1 Conditions Precedent to the Effectiveness of this
Agreement. The Borrower shall deliver to the Bank the following documents
concurrently with the execution of this Agreement:
(a) A written opinion, dated the date hereof, of counsel
for the Borrower, in the form of Exhibit D.
(b) A copy of a resolution or resolutions adopted by the
Board of Directors or Executive Committee of the
Borrower, certified by the Secretary or an Assistant
Secretary of the Borrower as being in full force and
effect on the date hereof, authorizing the execution,
delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby,
and a copy of the
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Certificate of Incorporation and the By-Laws of the
Borrower, similarly certified.
(c) A certificate, signed by the Secretary or an
Assistant Secretary of the Borrower and dated the
date hereof, as to the incumbency of the person or
persons authorized to execute and deliver this
Agreement.
(d) A certificate signed by the Chief Financial Officer
of the Borrower that, as of the date hereof, there
has been no material adverse change in its
consolidated financial condition since December 31,
1993 not reflected on its Quarterly Reports on Form
10-Q filed with the SEC for the period ending March
31, 1994.
(e) A certificate, signed by the Secretary or an
Assistant Secretary of the Borrower and dated the
date hereof, as to the persons authorized to execute
and deliver a Borrowing Advice and the Revolving
Note. The Bank may rely on such certificate with
respect to the Advances hereunder unless and until it
shall have received an up-dated certificate and,
after receipt of such up-dated certificate, similarly
may rely thereon.
4.2 Conditions Precedent to Advances. The Bank shall not be
required to make any Advance pursuant to Article 2 hereof:
(a) when the Credit has been terminated; or
(b) when any of the representations or warranties of the
Borrower set forth in Article 5 hereof shall prove to
have been untrue in any material respect when made,
or when any Event of Default or any event that, upon
lapse of time or notice or both, would become an
Event of Default as defined in Article 8, has
occurred; or
(c) when the Broker Subsidiary or MSI is in violation of
minimum net capital requirements as described in
Paragraph 7.1; or
(d) when the Borrower's Stockholder's Equity is below the
Minimum Stockholders' Equity as described in
Paragraph 7.2.; or
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<PAGE>
(e) when any amount owing with respect to any Commitment
Fee or any outstanding Advance or any interest
thereon or any other amount payable hereunder is due
and unpaid.
Each Borrowing Advice given by the Borrower shall be deemed to
be a representation and warranty by the Borrower to the Bank, effective on and
as of the date of the Advance covered thereby, that (i) the representations and
warranties set forth in Article 5 hereof are true and correct as of such date,
and (ii) no Event of Default, and no event which with the lapse of time or
notice or both would become an Event of Default, has occurred and is
continuing.
5. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants, as of the date of
delivery of this Agreement and as of the date of any Advance, as follows:
5.1 The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the state of Delaware and has
full power, authority and legal right and has all governmental licenses,
authorizations, qualifications and approvals required to own its property and
assets and to transact the business in which it is engaged; and all of the
outstanding shares of capital stock of Borrower have been duly authorized and
validly issued, are fully paid and non-assessable.
5.2 The Borrower has full power, authority and legal right to
execute and deliver, and to perform its obligations under, this Agreement, and
to borrow hereunder, and has taken all necessary corporate and legal action to
authorize the borrowings hereunder on the terms and conditions of this
Agreement and to authorize the execution and delivery of this Agreement, and
the performance of the terms thereof.
5.3 This Agreement has been duly authorized and executed by
the Borrower, and when delivered to the Bank will be a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, except, in each case, as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting enforcement of
creditors' rights or by general equity principles.
5.4 The execution and delivery of this Agreement by the
Borrower and the performance of the terms hereof will not violate any provision
of any law or regulation or any judgment, order or determination of any court
or governmental authority or of the charter or by-laws of, or any
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securities issued by, the Borrower or any provision of any mortgage, indenture,
loan or security agreement, or other instrument, to which the Borrower is a
party or which purports to be binding upon it or any of its assets in any
respect that reasonably could be expected to have a material adverse effect on
the Borrower and its Subsidiaries taken as a whole on a consolidated basis; nor
will the execution and the delivery of this Agreement by the Borrower and the
performance of the terms hereof result in the creation of any lien or security
interest on any assets of the Borrower pursuant to the provisions of any of the
foregoing.
5.5 Except as disclosed in writing by Borrower, no consents
of others (including, without limitation, stockholders and creditors of the
Borrower) nor any consents or authorizations of, exemptions by, or
registrations, filings or declarations with, any governmental authority are
required to be obtained by the Borrower in connection with this Agreement.
5.6 The consolidated financial statements of the Borrower
contained in the documents previously delivered to the Bank have been prepared
in accordance with U.S. generally accepted accounting principles and present
fairly the consolidated financial position of the Borrower.
5.7 The Broker Subsidiary possesses all material licenses,
permits and approvals necessary for the conduct of its business as now
conducted and as presently proposed to be conducted as required by law or the
applicable rules of the SEC and the National Association of Securities Dealers,
Inc.
5.8 The Broker Subsidiary is registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended.
5.9 The Broker Subsidiary is not in arrears with respect to
any assessment made upon it by the Securities Investor Protection Corporation,
except for any assessment being contested by Broker Subsidiary in good faith by
appropriate proceedings and with respect to which adequate reserves or other
provisions are being maintained to the extent required by U.S. generally
accepted accounting principles.
5.10 The Borrower has paid and discharged or caused to be
paid and discharged all taxes, assessments, and governmental charges prior to
the date on which the same would have become delinquent, except to the extent
that such taxes, assessments or charges are being contested in good faith and
by appropriate proceedings by or on behalf of the Borrower and with respect to
which adequate reserves or other provisions are being maintained to the extent
required by U.S. generally accepted accounting principles.
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5.11 The Borrower is in compliance with the provisions of and
regulations under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Internal Revenue Code of 1986, as amended,
applicable to any pension or other employee benefit plan established or
maintained by the Borrower or to which contributions are made by the Borrower
(the "Plans"). The Borrower has met all of the funding standards applicable to
each of its Plans, and there exists no event or condition that would permit the
institution of proceedings to terminate any of the Plans under Section 4042 of
ERISA. The estimated current value of the benefits vested under each of the
Plans does not, and upon termination of any of the Plans will not, exceed the
estimated current value of any such Plan's assets. The Borrower has not, with
respect to any of the Plans, engaged in a prohibited transaction set forth in
Section 406 of ERISA or Section 4975(c) of the Internal Revenue Code of 1986.
5.12 The Borrower will not use any amounts advanced to it
under this Agreement to remedy a default under any mortgage, indenture,
agreement or instrument under which there may be issued any indebtedness of the
Borrower to any bank or bank holding company, or their respective assignees,
for borrowed money. Further, the Borrower will not use any amounts advanced to
it under this Agreement for the immediate purpose of acquiring a company where
the Board of Directors or other governing body of the entity being acquired has
made (and not rescinded) a public statement opposing such acquisition.
5.13 This Agreement contains terms no less favorable to the
Bank than the terms of any Borrowing Agreement.
5.14 The Borrower will not use the proceeds of any loan
provided hereby in such a manner as to result in a violation of Regulations G,
T, U or X of the Board of Governors of the Federal Reserve System.
5.15 The persons named for such purpose in the certificates
delivered pursuant to Paragraph 4.1(e) hereof are authorized to execute
Borrowing Advices.
5.16 Borrower is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement, note
or lease to which the Borrower is a party or by which it may be bound.
5.17 There is no action, suit or proceeding pending against,
or to the knowledge of the Borrower, threatened against or affecting, the
Borrower or any of its Subsidiaries before any court, arbitrator, governmental
body,
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agency or official in which there is a significant probability of an adverse
decision which could materially adversely affect the business or the financial
position of the Borrower.
5.18 The Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
6. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that so long as the Credit
shall continue or any Advance by the Bank remains outstanding and until full
payment of all amounts due to the Bank hereunder, it will, unless and to the
extent the Bank waives compliance in writing:
6.1 Give prompt notice to the Bank, no later than three
Banking Days after becoming aware thereof, of any Event of Default or any event
that, upon lapse of time or notice or both, would become an Event of Default.
6.2 Deliver to the Bank, within ten Banking Days of the
filing thereof with the SEC, a copy of each registration statement filed under
the Securities Act of 1933, a copy of each filing (including exhibits) made by
the Borrower with the SEC under the Securities Exchange Act of 1934, as amended
(but, in the event the Borrower requests an extension of any such filing from
the SEC, promptly (but not later than the second Banking Day following the
filing of such request) deliver a copy of such request to the Bank).
6.3 Maintain and keep in force in adequate amounts such
insurance as is usual in the business carried on by the Borrower.
6.4 Maintain adequate books, accounts and records and prepare
all financial statements required hereunder in accordance with U.S. generally
accepted accounting principles and practices and in compliance with the
regulations of any governmental regulatory body having jurisdiction thereof.
6.5 Advise the Bank, in a timely manner, of material changes
to the nature of business of the Borrower or its Broker Subsidiary as at
present conducted. The Broker Subsidiary is at present engaged in the business
of providing financial services, primarily to individual investors and/or their
advisors.
6.6 With respect to each and any Advance requested by the
Borrower under this Agreement (a "primary Advance"), the Borrower will
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<PAGE>
concurrently request an Advance under each of the Borrowing Agreements (each
such other Advance under each of the Borrowing Agreements being hereinafter
individually referred to as an "other Advance" and collectively referred to as
the "other Advances"), with each such other Advance being requested in an
amount equal to the same percentage of the Credit under the applicable
Borrowing Agreement as the primary Advance constitutes as a percentage of the
Credit under this Agreement. As an illustration of the application of this
Section 6.6 and by way of example only, if the Borrower requests an Advance
under this Agreement that is in an amount equal to 10% of the Credit under this
Agreement, the Borrower shall simultaneously seek an other Advance under each
of the Borrowing Agreements, each of which other Advances shall be requested in
an amount equal to 10% of the Credit under the applicable Borrowing Agreement.
7. NEGATIVE COVENANTS
The Borrower covenants and agrees that so long as the Credit
shall continue or any Advance by the Bank remains outstanding and until full
payment of all amounts due to the Bank hereunder, unless and to the extent the
Bank waives compliance in writing:
7.1 The Borrower will not permit the Broker Subsidiary to
allow (i) the average of two consecutive month-end Net Capital Ratios to be
less than 7%, or (ii) any month-end Net Capital Ratio to be less than 5%. The
Borrower similarly will not permit MSI to allow (i) the average of two
consecutive month-end Net Capital Ratios to be less than 7%, or (ii) any
month-end Net Capital Ratio to be less than 5%.
7.2 The Borrower will not allow Stockholder's Equity to fall
below the Minimum Stockholders' Equity.
7.3 The Borrower will not (i) permit either Broker Subsidiary
or Intermediate Parent to (a) merge or consolidate, unless the surviving
company is a Controlled Subsidiary, or (b) convey or transfer its properties
and assets substantially as an entirety except to one or more Controlled
Subsidiaries; or, (ii) except as permitted by (i) immediately preceding, sell,
transfer or otherwise dispose of any voting stock of Broker Subsidiary or
Intermediate Parent, or permit either Broker Subsidiary or Intermediate Parent
to issue, sell or otherwise dispose of any of its voting stock, unless, after
giving effect to any such transaction, Broker Subsidiary or Intermediate
Parent, as the case may be, remains a Controlled Subsidiary.
7.4 The Borrower will not permit the Broker Subsidiary to
create, incur or assume any indebtedness other than:
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(a) indebtedness incurred in the ordinary course of
business, including but not necessarily limited to,
(i) indebtedness to customers, other brokers or
dealers, clearing houses and like institutions, (ii)
"broker call" credit, (iii) stock loans, (iv)
obligations to banks for disbursement accounts, (v)
trade and other accounts payable, (vi) indebtedness
incurred for the purchase of tangible property on a
non-recourse basis or for the leasing of tangible
property under a capitalized lease; and (vii)
indebtedness incurred for the purchase, installation
or servicing of computer equipment and software;
(b) intercompany indebtedness; and
(c) other indebtedness in the aggregate not exceeding
$50,000,000.
7.5 The Borrower will not, and will not permit any Subsidiary
at any time directly or indirectly to create, assume, incur or permit to exist
any indebtedness secured by a pledge, lien or other encumbrance (hereinafter
referred to as a "lien") on the voting stock of any Subsidiary without making
effective provision whereby the Revolving Note shall be secured equally and
ratably with such secured indebtedness so long as other indebtedness shall be
so secured; provided, however, that the foregoing covenant shall not be
applicable to Permitted Liens (as defined in Paragraph 7.6 below).
7.6 The Borrower will not create, incur, assume or suffer to
exist any lien or encumbrance upon or with respect to any of its properties,
whether now owned or hereafter acquired, except the following (the "Permitted
Liens"):
(a) liens securing taxes, assessments or governmental
charges or levies, or in connection with workers'
compensation, unemployment insurance or social
security obligations, or the claims or demands of
materialmen, mechanics, carriers, warehousemen,
landlords and other like persons not yet delinquent
or which are being contested in good faith by
appropriate proceedings with respect to which
adequate reserves or other provisions are being
maintained to the extent required by U.S. generally
accepted accounting principles;
(b) liens not for borrowed money incidental to the
conduct of its business or the ownership of property
that do not materially detract from the value of any
item of property;
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(c) attachment, judgment or other similar liens arising
in the connection with court proceedings that do not,
in the aggregate, materially detract from the value
of its property, materially impair the use thereof in
the operation of its businesses and (i) that are
discharged or stayed within sixty (60) days of
attachment or levy, or (ii) payment of which is
covered in full (subject to customary and reasonable
deductibles) by insurance or surety bonds; and
(d) liens existing at Closing Date provided that the
obligations secured thereby are not increased.
8. EVENT OF DEFAULT
8.1 The occurrence of any of the following events shall
constitute an "Event of Default":
(a) The Borrower shall fail to pay any interest with
respect to the Revolving Note or any Commitment Fee
in accordance with the terms hereof within 10 days
after such payment is due.
(b) The Borrower shall fail to pay any principal with
respect to the Revolving Note in accordance with the
terms thereof on the date when due or shall fail to
pay when due (after expiration of any applicable
grace periods) any principal or interest with respect
to any advance or other loan under any of the
Borrowing Agreements.
(c) Any representation or warranty made by the Borrower
herein or hereunder or in any certificate or other
document furnished by the Borrower hereunder shall
prove to have been incorrect when made (or deemed
made) in any respect that is materially adverse to
the interests of the Bank or its rights and remedies
hereunder.
(d) Except as specified in (a) and (b) above, the
Borrower shall default in the performance of, or
breach, any covenant of the Borrower with respect to
this Agreement, and such default or breach shall
continue for a period of thirty days after there has
been given, by registered or certified mail, to the
Borrower by the Bank a written notice specifying such
default or breach and requiring it to be remedied.
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<PAGE>
(e) An event of default as defined under any Borrowing
Agreement, or an event of default as defined in any
mortgage, indenture, agreement or instrument under
which there may be issued, or by which there may be
secured or evidenced, any indebtedness for borrowed
money of the Borrower in a principal amount not less
than $20 million, shall have occurred and shall
result in such indebtedness becoming or being
declared due and payable prior to the date on which
it otherwise would become due and payable; provided,
however, that if such event of default shall be
remedied or cured by the Borrower, or waived by the
holders of such indebtedness, within twenty days
after the Borrower has received written notice of
such event of default and acceleration, then the
Event of Default hereunder by reason thereof shall be
deemed likewise to have thereupon been remedied,
cured or waived without further action upon the part
of either the Borrower or the Bank.
(f) A court having jurisdiction in the premises shall
enter a decree or order for relief in respect of the
Borrower or the Broker Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar
official) of the Borrower or Broker Subsidiary or for
any substantial part of its respective properties, or
ordering the winding-up or liquidation of its
affairs, and such decree or order shall remain
unstayed and in effect for a period of 60 consecutive
days.
(g) The Borrower or the Broker Subsidiary shall commence
a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in
effect, or shall consent to the entry of an order for
relief in an involuntary case under such law, or
shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar
official) of the Borrower or Broker Subsidiary or for
any substantial part of its respective properties, or
shall make any general assignment for the benefit of
creditors, or shall fail generally to pay its
respective debts as they become due or shall take any
corporate action in furtherance of any of the
foregoing.
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<PAGE>
(h) A final judgment or judgments for the payment of
money in excess of $10,000,000 in the aggregate shall
be entered against the Borrower by a court or courts
of competent jurisdiction, and the same shall not be
discharged (or provisions shall not be made for such
discharge), or a stay of execution thereof shall not
be procured, within 30 days from the date of entry
thereof and the Borrower shall not, within said
period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal
therefrom and cause the execution thereof to be
stayed during such appeal.
8.2 If an Event of Default occurs and is continuing, then and
in every such case the Bank at its option may terminate the Credit and all
obligations of the Bank to make any further Advances, and declare the
principal, any accrued and unpaid interest, any accrued and unpaid Commitment
Fees, or any other amounts payable under the outstanding Revolving Note, to be
due and payable immediately, by a notice in writing to the Borrower, and upon
such declaration such principal, interest, Commitment Fees, or other amounts
payable hereunder accrued thereon shall become immediately due and payable,
together with any funding losses that may result as a consequence of such
declaration, without presentment, demand, protest or other notice of any kind,
all of which are expressly waived by the Borrower; provided, however, that in
the case of any of the Events of Default specified in subparagraph (f) or (g)
of Paragraph 8.1, automatically without any notice to the Borrower or any other
act by the Bank, the Credit and the Bank's obligations to make any further
Advances shall thereupon terminate and the outstanding principal of the
Revolving Note, any accrued and unpaid interest, any accrued and unpaid
Commitment Fees or any other amounts payable hereunder shall become immediately
due and payable, together with any funding losses that may result as a
consequence thereof, without presentment, demand, protest or other notice of
any kind, all of which are expressly waived by the Borrower.
9. MISCELLANEOUS
9.1 Notices. Any communications between the parties hereto
or notices provided herein shall be effective upon receipt and shall be, unless
otherwise specified, in writing (which may include telex or telecopy
transmission) and shall be given to the Bank at the address specified in
Schedule I hereto and to the Borrower at The Charles Schwab Corporation, Attn:
Treasury Department, 101 Montgomery Street, San Francisco, California 94104,
Fax number (415) 974-7570, or to such other address as either party shall
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<PAGE>
hereafter have indicated to the other party in writing. In the event the
Borrower consents to any assignment by the Bank with respect to this Agreement,
upon receiving written notice from the Bank that such assignment has been
effected, the Borrower thereafter shall give all notices required to be given
under this Agreement to the assignee at the address specified for such assignee
by the Bank or such assignee. Notwithstanding the granting of any
participation by the Bank with respect to this Agreement as permitted by
Paragraph 9.4, all notices required to be given under this Agreement may
continue to be given by the Borrower only to the Bank and shall be effective
upon delivery to the Bank as though no such participation had been granted.
9.2 Waivers. No delay or omission to exercise any right,
power or remedy accruing to the Bank upon any breach or default of the Borrower
under this Agreement shall impair any such right, power or remedy of the Bank,
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. Any amendment,
modification, waiver, permit, consent or approval of any kind or character on
the part of the Bank of any breach or default under this Agreement, or any
waiver on the part of the Bank of any provision or condition of this Agreement,
must be in writing signed by the Bank and shall be effective only to the extent
specifically set forth in writing. All remedies, either under this Agreement
or by law or otherwise afforded to the Bank, shall be cumulative and not
alternative.
9.3 Expenses. The Borrower agrees to pay all reasonable
out-of-pocket expenses of the Bank (including the reasonable fees and expenses
of its counsel) in connection with the negotiation, preparation, execution and
delivery of this Agreement, any amendments or modifications of or supplements
to any of the foregoing and any and all other documents furnished in connection
herewith, as well as, after the occurrence of any event that upon a lapse of
time or notice or both, would become an Event of Default, all costs and
expenses (including reasonable fees and expenses of counsel who may be
employees of Bank) in connection with the enforcement or administration
(including, without limitation, actions taken by the Bank in connection with
litigation or regulatory proceedings as to which this Agreement becomes
relevant) of, or legal advice in respect to the rights and responsibilities or
the exercise of any right or remedy under, any provision of this Agreement, the
Revolving Note, and any amendments or modifications of or supplements to any of
the foregoing.
9.4 Assignment. Except as hereinafter set forth in this
Paragraph 9.4, no rights of the Bank hereunder may be assigned, transferred,
sold,
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<PAGE>
assigned, pledged or otherwise disposed of, and no lien, charge or other
encumbrance may be created or permitted to be created thereon without the
prior written consent of the Borrower.
(a) Transfers to Affiliated Entities and Federal Reserve
Banks. The Bank shall have the right at any time and
from time to time, to transfer any loan hereunder to
any Federal Reserve Bank or to any parent,
subsidiary, affiliate, branch or other related office
of the Bank which is not engaged in the securities
brokerage business or the investment advisory
business, and to grant participations hereunder to
any such Federal Reserve Bank, parent, subsidiary,
affiliate, branch or other related office of the
Bank. In no event shall any such transferee or
participant be considered a party to the Agreement,
and Bank shall continue to service any loan
transferred pursuant to this Paragraph 9.4(a) and
shall remain liable for the performance of all of its
obligations under this Agreement. Notwithstanding
any such transfer or grant of a participation,
Borrower shall continue to make payments required
under this Agreement to Bank unless and until
otherwise notified in writing by Bank, and Bank
agrees to indemnify and hold Borrower harmless from
and against any claims by any transferee or
participant arising out of any payment made to Bank
in accordance with this Paragraph 9.4(a).
(b) Transfers to Unrelated Entities. Subject to the
provisions of this subsection 9.4(b), the Bank may at
any time sell to one or more unrelated financial
institutions not engaged in the securities brokerage
business or the investment advisory business (each a
"Participant") participating interests in any
Advance, the Revolving Note, the Bank's Credit
hereunder or any other interest of the Bank
hereunder. In the event of any such sale by the Bank
to a Participant, the Bank's obligations under this
Agreement shall remain unchanged, the Bank shall
remain solely responsible for the performance hereof,
the Bank shall remain the holder of the Revolving
Note for all purposes under this Agreement, and the
Borrower shall continue to deal solely and directly
with the Bank in connection with the Bank's rights
and obligations under this Agreement. Any agreement
pursuant to which Bank may grant a participation
shall provide that the Bank shall retain the sole
right and responsibility to enforce the obligations
of
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<PAGE>
the Borrower hereunder including, without limitation, the
right to declare an acceleration or default hereunder and
the right to approve any amendment, modification or
waiver of any provision of this Agreement.
The Borrower may not assign this Agreement or any of its
rights hereunder without the prior written consent of the Bank.
The provisions of this Agreement shall be binding upon and
inure to the benefit of the Bank and the Borrower and their respective
successors and assigns, and the term "Borrower" as used in this Agreement shall
include the Borrower and all such successors and assigns.
9.5 Confidentiality. Bank agrees to hold any confidential
information that it may receive from Borrower pursuant to this Agreement in
confidence, except for disclosure: (a) to legal counsel and accountants for
Borrower or Bank; (b) to other professional advisors to Borrower or Bank,
provided that the recipient has delivered to the Bank a written confidentiality
agreement substantially similar to this Section 9.5; (c) to regulatory
officials having jurisdiction over Bank; (d) as required by applicable law or
legal process or in connection with any legal proceeding in which Bank and
Borrower are adverse parties; and (e) to another financial institution in
connection with a disposition or proposed disposition to that financial
institution of all or part of Bank's interests hereunder or a participation
interest in the Revolving Note, each in accordance with Section 9.4 hereof,
provided that the recipient has delivered to Bank a written confidentiality
agreement substantially similar to this Section 9.5. Bank further agrees that
it will not use such confidential information in any activity or for any
purpose other than the administration of credit facilities extended to Borrower
and its Subsidiaries and, without limitation, will take such steps as are
reasonably appropriate to preclude access to any such confidential information
to be obtained by any person employed by Bank, or by an affiliate of Bank, who
is not involved in the administration of credit facilities extended to Borrower
and its Subsidiaries. For purposes of the foregoing, "confidential
information" shall mean any information respecting Borrower or its Subsidiaries
reasonably specified by Borrower as confidential, other than (i) information
filed with any governmental agency and available to the public, (ii)
information published in any public medium from a source other than, directly
or indirectly, Bank, and (iii) information disclosed by Borrower to any person
not associated with Borrower without a written confidentiality agreement
substantially similar to this Section 9.5. Certain of the confidential
information pursuant to this Agreement is or may be valuable proprietary
information that constitutes a trade secret of Borrower or its Subsidiaries;
neither the provision of such confidential information to Bank or the limited
disclosures thereof permitted by
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this Section 9.5 shall affect the status of any such confidential information
as a trade secret of Borrower and its Subsidiaries. Bank, and each other
person who agrees to be bound by this Section 9.5, acknowledges that any breach
of the agreements contained in this Section 9.5 would result in losses that
could not be reasonably or adequately compensated by money damages.
Accordingly, if Bank or any such other person breaches its obligations
hereunder, Bank or such other person recognizes and consents to the right of
Borrower, Intermediate Parent, and/or Broker Subsidiary to seek injunctive
relief to compel such Bank or other Person to abide by the terms of this
Section 9.5.
9.6 Waiver of Jury Trial. The Borrower waives any right it
may have to trial by jury in any action or proceeding to enforce or defend any
rights or remedies arising under this Agreement and the Revolving Note.
9.7 Entire Agreement. This instrument and the exhibits
hereto embody the entire agreement with respect to the subject matter hereof
between the Borrower and the Bank.
9.8 Counterparts. This Agreement may be executed in as many
counterparts as may be deemed necessary or convenient, and by the different
parties hereto on separate counterparts each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same instrument.
9.9 Governing Law. This Agreement and the Revolving Note
shall be deemed to be contracts under, and for all purposes shall be governed
by, and construed and interpreted in accordance with, the laws of the State of
California.
9.10 Notice of Modification of Borrowing Agreements. The
Borrower shall give prior notice to the Bank of any proposed modification in
the terms of any of the Borrowing Agreements and hereby agrees, should the Bank
so request, to make identical modifications in the terms of this Agreement.
9.11 No Priority. Nothing in this Agreement is intended,
or shall be interpreted, to create any priority of any of the banks listed on
Schedule I over any other of such banks with respect to their rights under the
Borrowing Agreements.
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9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
BANK OF AMERICA NATIONAL THE CHARLES SCHWAB
TRUST AND SAVINGS CORPORATION
ASSOCIATION
By /s/ Kurt Cardoza By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
BANK OF NEW YORK THE CHARLES SCHWAB
CORPORATION
By /s/ Lee Stephens III By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
BANK OF TOKYO TRUST THE CHARLES SCHWAB
COMPANY CORPORATION
By /s/ Christopher J. Miraldi By /s/ Christopher V. Dodds
Its Assistant Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
BANQUE NATIONALE DE THE CHARLES SCHWAB
PARIS CORPORATION
By /s/ Judith Dowling By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
By /s/ Katherine Wolfe
Its Vice President
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
CHEMICAL BANK THE CHARLES SCHWAB
CORPORATION
By /s/ Diane M. Leslie By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
CITICORP USA, INC. THE CHARLES SCHWAB
CORPORATION
By /s/ Michael Mauerstein By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
By /s/ Robert V. Masi
Its Vice President
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
CONTINENTAL BANK THE CHARLES SCHWAB
CORPORATION
By /s/ Steven W. Kastenholz By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
CREDIT LYONNAIS SAN THE CHARLES SCHWAB
FRANCISCO BRANCH CORPORATION
By /s/ William J. Fisher By /s/ Christopher V. Dodds
Its Vice President and Manager Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
FIRST NATIONAL BANK OF THE CHARLES SCHWAB
CHICAGO CORPORATION
By /s/ James P. Murray By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
NORWEST BANK OF THE CHARLES SCHWAB
MINNESOTA, N.A. CORPORATION
By /s/ Janet M. Grauer By /s/ Christopher V. Dodds
Its Assistant Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
PNC BANK THE CHARLES SCHWAB
CORPORATION
By /s/ Brenda Peck By /s/ Christopher V. Dodds
Its Vice President Christopher V. Dodds
Senior Vice President and
Treasurer
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<PAGE>
SCHEDULE I
TO CREDIT AGREEMENT DATED AS OF JUNE 30, 1994 BETWEEN
THE CHARLES SCHWAB CORPORATION AND THE BANKS LISTED BELOW
(Dollars in Millions)
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Bank of America National Trust and Savings Association $20
Attn: Kurt Cardoza, Vice President
333 South Hope Street, 10th Floor
Los Angeles, CA 90071
Bank of New York 30
Attn: Lee Stephens III, Vice President
One Wall Street
New York, NY 10286
Bank of Tokyo Trust Company 20
Attn: Christopher J. Miraldi, Assistant Vice President
100 Broadway, Main Floor
New York, NY 10005
Banque Nationale de Paris 10
Attn: Judith Dowling, Vice President
180 Montgomery Street, Suite 400
San Francisco, CA 94104
Chemical Bank 20
Attn: Diane Leslie, Vice President
Four New York Plaza, 2nd Floor
New York, NY 10004-2477
Citicorp USA, Inc. 35
Attn: Michael Mauerstein
399 Park Avenue, 12th Floor, Zone 11
New York, NY 10043
Continental Bank 15
Attn: Steven W. Kastenholz, Vice President
231 South LaSalle Street
Chicago, IL 60697
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Commitment
Amount
----------
<S> <C>
Credit Lyonnais San Francisco Branch $10
Attn: William J. Fischer, Vice President
3 Embarcadero Center, Suite 1640
San Francisco, CA 94111
First National Bank of Chicago 20
Attn: James Murray, Vice President
Mail Suite 0157
Chicago, IL 60670-0157
Norwest Bank of Minnesota, N.A. 15
Attn: Janet Grauer, Assistant Vice President
Norwest Center
Sixth & Marquette
Minneapolis, MN 55479-0085
PNC Bank 30
Attn: Brenda Peck, Vice President
Land Title Building
Broad & Chestnut Streets
Philadelphia, PA 19101
</TABLE>
-33-
<PAGE>
EXHIBIT A
REVOLVING NOTE
Date:
$____________________
For value received, the undersigned The Charles Schwab
Corporation ("Schwab") hereby promises to pay to the order of ________________
(the "Bank") at ______________, the principal amount of each Advance made by
the Bank to Schwab under the terms of a Credit Agreement between Schwab and the
Bank, dated as of June 30, 1994, as amended from time to time (the "Credit
Agreement"), as shown in the schedule attached hereto and any continuation
thereof, on the last day of the Interest Period (as defined in the Credit
Agreement) for such Advance. The undersigned also promises to pay interest on
the unpaid principal amount of each Advance from the date of such Advance until
such principal amount is paid, at the rates per annum, and payable at such
times, as are specified in the Credit Agreement. This Note shall be subject to
the Credit Agreement, and all principal and interest payable hereunder shall be
due and payable in accordance with the terms of the Credit Agreement. Terms
defined in the Credit Agreement are used herein with the same meanings.
Principal and interest payments shall be in money of the
United States of America, lawful at such times for the satisfaction of public
and private debts, and shall be in immediately available funds.
Schwab promises to pay costs of collection, including
reasonable attorney's fees, if default is made in the payment of this Note.
The terms and provisions of this Note shall be governed by the
applicable laws of the State of California.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed by its officers or employees thereunto duly authorized and directed by
appropriate corporate authority.
The Charles Schwab Corporation
By:____________________________
Christopher V. Dodds
Senior Vice President and
Treasurer
-34-
<PAGE>
EXHIBIT B
CONFIRMING BANK AGREEMENT
This Agreement is entered into as of June 30, 1994 between The
Charles Schwab Corporation (the "Borrower") and Citicorp USA, Inc. (the
"Confirming Bank").
WHEREAS, under the terms of separate substantially similar
Credit Agreements (the "Credit Agreements") between the Borrower and each of
the banks (the "Banks") set forth on Schedule I hereto, the Banks have
severally agreed to lend certain amounts to the Borrower on a revolving credit
loan basis through June 29, 1995 and maturing no later than September 27, 1995;
WHEREAS, the Borrower desires the Confirming Bank to calculate
the basis for the rates of interest to be borne by certain of the loans which
may be made by the Banks to the Borrower under the Credit Agreements:
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
1. Terms defined in the Credit Agreements shall bear the
same meanings herein unless the context otherwise requires.
2. Upon the terms and subject to the conditions
hereinafter mentioned, the Confirming Bank shall determine the CD Rate
(including the Assessment Rate and the CD Rate Reserve Percentage), the
Eurodollar Rate (including the Eurodollar Rate Reserve Percentage) or the
Reference Rate which is to serve as the basis for the interest rate of certain
loans made under any of the Credit Agreements.
3. Simultaneously with the giving of a Borrowing Advice
to any of the Banks, the Borrower shall give to the Confirming Bank notice of
such Borrowing Advice (such notice being hereinafter referred to as a "Rate
Request") which shall specify the Bank to which such Borrowing Advice was given
and the principal amount, the Interest Period, and the basis for interest
calculation referred to therein.
4. (a) Upon receipt by the Confirming Bank of a Rate
Request relating to an Interest Period for which the interest calculation is to
be based on the Eurodollar Rate, the Confirming Bank, as soon as practicable,
shall (i) calculate the Eurodollar Rate Reserve Percentage for such Interest
Period, which shall be the percentage (expressed as a decimal) that is in
effect on the first day of such Interest Period, as prescribed by the Board of
Governors of the U.S. Federal Reserve System (or any successor), for
determining the reserve requirements to be maintained by the Bank under
Regulation D (or any successor regulation thereof) as amended to the date
hereof (including such reserve requirements as become applicable to the Bank
pursuant to phase-in or other similar requirements of Regulation D at any time
subsequent to the date hereof) in respect of "Eurocurrency liabilities" (as
defined in
-35-
<PAGE>
Regulation D), (ii) (aa) if there appear on the Reuters Screen LIBO Page as at
11:00 A.M. (London time) two Eurodollar Banking Days prior to the commencement
of the relevant Interest Period at least two rates at which deposits of U.S.
dollars for the selected Interest Period are offered, identify such offered
rates and calculate the Eurodollar Rate to be the arithmetic mean (adjusted
upward, if necessary, to the nearest 1/16 of 1%) of such offered rates or (bb)
if fewer than two offered rates appear, obtain from each of the Eurodollar Rate
Reference Banks information with respect to the average rate per annum
(adjusted upward, if necessary, to the nearest 1/16 of 1%) at which deposits of
U.S. dollars for the selected Interest Period and in the amount specified in
the Rate Request are offered in immediately available funds to such Eurodollar
Rate Reference Bank (without giving effect to reserve requirements described in
the Eurodollar Rate Reserve Percentage section of the Credit Agreement) in the
London interbank market as at 11:00 a.m. (London time) two Banking Days prior
to the commencement of the relevant Interest Period and shall determine the
Eurodollar Rate for the relevant Interest Period to be the average of the rates
so obtained, adjusted upward, if necessary, to the nearest 1/16 of 1%, and
(iii) determine the Eurodollar Rate for the relevant Interest Period to be (aa)
the applicable rate obtained pursuant to paragraph 4(a)(ii)(aa) or (bb) hereof,
divided by a percentage (expressed as a decimal) equal to 1.00 minus the
Eurodollar Rate Reserve Percentage. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in the Eurodollar
Rate Reserve Percentage.
In the event that (x) fewer than two offered rates
appear on the Reuters Screen LIBO Page as described above and fewer than two
Eurodollar Rate Reference Banks shall have provided information with respect to
such offered rates to the Confirming Bank, or (y) the Confirming Bank shall
have determined (which determination shall be conclusive and binding upon the
Borrower and the Banks) that by reason of changes affecting the London
interbank market, adequate and reasonable means do not exist for ascertaining
the Eurodollar Rate for the relevant Interest Period, the Confirming Bank shall
notify the Borrower and the Bank specified in the Rate Request of such fact as
soon as possible (and provide information concerning the basis for any such
determination described in (y) above).
(b) As soon as possible after the determination
of the Eurodollar Rate, the Confirming Bank shall forthwith notify the Borrower
and the Bank specified in the Rate Request of such determination by telephone,
confirmed by written or telegraphic communication. The Confirming Bank shall
simultaneously notify the Borrower and the Bank as to which of the Eurodollar
Rate Reference Banks supplied information used in determining the Eurodollar
Rate and the information supplied by each such bank.
5. (a) Upon receipt by the Confirming Bank of a Rate
Request relating to an Interest Period for which the interest calculation is to
be based on the CD Rate, the Confirming Bank, as soon as practicable, shall:
(i) estimate the Assessment Rate for
such Interest Period, which shall be the assessment rate per annum (adjusted
upward, if necessary, to the nearest 1/100 of 1%) on the first day of such
Interest Period for determining the
-36-
<PAGE>
then current annual assessment payable by the Bank specified in the Rate
Request to the Federal Deposit Insurance Corporation (or any successor thereto)
for such Corporation's (or such successor's) insuring U.S. dollar deposits of
the Bank specified in the Rate Request in the United States;
(ii) calculate the CD Rate Reserve
Percentage for such Interest Period, which shall be the percentage (expressed
as a decimal) that is in effect on the first day of such Interest Period, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor), for determining the maximum reserve requirements (including,
without limitation, supplemental, marginal and emergency reserves) for a bank
with deposits exceeding five billion dollars that is a member of the Federal
Reserve System, in respect of new non-personal time deposits in U.S. dollars in
the United States in the amount specified in the Rate Request having a maturity
comparable to such Interest Period (such bank's reserve ratio on such time
deposits in effect on June 21, 1994 was 0%);
(iii) obtain (aa) from each of the CD
Reference Banks information with respect to the average rate per annum
(adjusted upward, if necessary, to the nearest 1/16 of 1%) at which bids are
received by each such CD Reference Bank for its certificates of deposit for the
selected Interest Period and in the amount specified in the Rate Request as at
11:00 a.m., New York City time (or as soon as practicable thereafter), on the
first day of the relevant Interest Period from two or more New York City
certificate of deposit dealers of recognized standing selected by the
Confirming Bank for the purchase at face value of such certificates of deposit,
and calculate the applicable rate to be the arithmetic mean (adjusted upward,
if necessary, to the nearest 1/16 of 1%) of the average rates per annum of the
CD Reference Banks, or (bb) in the event the Confirming Bank cannot, without
undue effort, obtain rates from such CD Reference Banks the certificate of
deposit rate as reported for the date of the Borrowing Advice, in "Federal
Reserve Statistical Release--Selected Interest Rates--H.15 (519)" published by
the Board of Governors of the Federal Reserve System, or any successor
publication, under the caption "CDs (Secondary Market)" having a maturity most
closely approximating the conclusion of the Interest Period; and
(iv) determine the CD Rate for the
relevant Interest Period to be the sum of (aa) the Assessment Rate for such
Interest Period, plus (bb) the applicable rate obtained pursuant to paragraph
5(a) (iii)(aa) or (bb) hereof (adjusted upward, if necessary, to the nearest
1/16 of 1%) divided by a percentage (expressed as a decimal) equal to 1.00
minus the CD Rate Reserve Percentage. The CD Rate shall be adjusted
automatically on and as of the effective date of any change in the Assessment
Rate and the CD Rate Reserve Percentage.
In the event that (x) fewer than two CD Reference Banks shall
have provided information with respect to such offered rates to the Confirming
Bank, or (y) the Confirming Bank shall have determined (which determination
shall be conclusive and binding upon the Borrower and the Banks) that by reason
of changes affecting the New York City certificate of deposit market, adequate
and reasonable means do not exist for ascertaining the CD Rate for the relevant
Interest Period, the
-37-
<PAGE>
Confirming Bank shall notify the Borrower and the Bank specified in the Rate
Request of such fact as soon as possible (and provide information concerning
the basis for any such determination described in (y) above).
(b) As soon as possible after the determination
of the CD Rate or any adjustment of the CD Rate, the Confirming Bank shall
forthwith notify the Borrower and the Bank specified in the Rate Request of
such determination by telephone, confirmed by written or telegraphic
communication. The Confirming Bank shall simultaneously notify the Borrower
and the Bank as to which of the CD Reference Banks supplied information used in
determining the CD Rate and the information supplied by each such Bank.
6. (a) Upon receipt by the Confirming Bank of a Rate
Request relating to an Interest Period for which the interest calculation is to
be based on the Reference Rate, the Confirming Bank shall:
(i) determine, on a daily basis during
such Interest Period, the higher of (a) the highest per annum rate of interest
(adjusted upward, if necessary, to the nearest 1/16 of 1%) publicly announced
by any Reference Rate Reference Bank as its "prime rate," "prime commercial
lending rate," "reference rate," or "base rate," as the case may be, and (b)
the highest per annum Federal Funds Effective Rate available to any Reference
Rate Reference Bank, plus 1/2 of 1%;
(ii) on the last day of each month
falling within such Interest Period, determine the Reference Rate for the
applicable portion of each month then ending, which shall be equal to the
arithmetic mean of the daily rates of interest with the rate on each day being
equal to the rate determined under (i) above.
(b) At 10:00 a.m. on the first day of the month
following each month for which the Reference Rate has been determined, the
Confirming Bank shall notify the Borrower and the Bank specified in the Rate
Request of such determination by telephone, confirmed by written or telegraphic
communication. The Confirming Bank shall immediately notify the Borrower and
the Bank as to which of the Reference Rate Reference Banks supplied information
used in determining the Reference Rate and the information supplied by each
such bank.
7. The determination of the Eurodollar Rate, the CD Rate
or the Reference Rate by the Confirming Bank shall be final and binding in the
absence of manifest error.
8. The Confirming Bank accepts its obligations herein
set forth, upon the terms and conditions hereof, including the following, to
all of which the Borrower agrees:
(a) The Confirming Bank shall be entitled to the
compensation to be agreed upon with the Borrower for all services rendered by
the Confirming Bank, and the Borrower agrees promptly to pay such compensation
and to reimburse the Confirming Bank for the reasonable out-of-pocket expenses
-38-
<PAGE>
(including reasonable counsel fees) incurred by it in connection with the
services rendered by it hereunder. The Borrower also agrees to indemnify the
Confirming Bank for, and to hold it harmless against, any loss, liability or
expense (including the costs and expenses of defending against any claim of
liability) incurred without gross negligence or willful misconduct, arising out
of or in connection with its acting as Confirming Bank hereunder.
(b) In acting under this Agreement, the
Confirming Bank does not assume any obligation or relationship of agency or
trust for or with any of the Banks.
(c) The Confirming Bank shall be protected and
shall incur no liability for or in respect of any action taken or omitted to be
taken or anything suffered by it in reliance upon any notice (including any
Rate Request), direction, certificate, affidavit, statement or other paper or
document reasonably believed by such Confirming Bank to be genuine and to have
been passed or signed by the proper parties. Under all circumstances, the
Confirming Bank's maximum liability for any error or omission in the
performance of its rate determination and notification obligations under this
Agreement shall be the difference between (1) any erroneous rate it determined
and/or provided notification of in response to a Rate Request from the
Borrower, and (2) the corresponding actual rate it should have determined
and/or provided notification of pursuant to the provisions of this Agreement.
(d) The Confirming Bank, its officers, directors
and employees may engage or be interested in any financial or other transaction
with the Borrower (including the lending of moneys to the Borrower under one of
the Borrowing Agreements), and may act on, or as depositary, trustee or agent
for, any committee or body of holders of notes or other obligations of the
Borrower, as freely as if it were not the Confirming Bank.
(e) The Confirming Bank shall be obligated to
perform such duties and only such duties as are herein specifically set forth,
and no implied duties or obligations shall be read into this Agreement against
the Confirming Bank.
(f) The Confirming Bank may consult with counsel
satisfactory to it and the opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, omitted to be
taken or suffered by it hereunder in good faith and in accordance with the
opinion of such counsel.
(g) Any written order, certificate, notice
(including any Rate Request), request, direction, or other communication, from
the Borrower made or given under any provision of this Agreement shall be
sufficient if signed by a person authorized to execute and deliver a Borrowing
Advice.
9. (a) The Confirming Bank may at any time resign as
such Confirming Bank by giving written notice to the Borrower and the Banks of
such intention on its part, specifying the date on which its desired
resignation shall become
-39-
<PAGE>
effective; provided, however, that no such resignation shall become effective
until a successor Confirming Bank is selected by the Borrower. The Confirming
Bank may be removed at any time by the filing with it of an instrument in
writing signed on behalf of the Borrower and specifying such removal and the
date when it is intended to become effective. Such resignation or removal
shall take effect upon the date of the appointment by the Borrower, as
hereinafter provided, of a successor Confirming Bank (which shall be acceptable
to the Banks) and the acceptance of such appointment by such successor
Confirming Bank. Upon its resignation or removal, the Confirming Bank shall be
entitled to the payment by the Borrower of its compensation for the services
rendered hereunder and to the reimbursement of all out-of-pocket expenses,
including reasonable fees of counsel, incurred in connection with the services
rendered hereunder by the Confirming Bank.
(b) In case at any time the Confirming Bank shall
resign, or shall be removed, or shall become incapable of acting, or shall be
adjudged bankrupt or insolvent, or shall file a voluntary petition in
bankruptcy or make an assignment for the benefit of its creditors or consent to
the appointment of a conservator, liquidator or receiver of all or any
substantial part of its property, or shall admit in writing its inability to
pay or meet its debts as they mature or shall suspend payment thereof, or if an
order of any court shall be entered approving any petition filed by or against
the Confirming Bank under the provisions of any applicable bankruptcy or
insolvency law, or if a liquidator or receiver of it or of all or any
substantial part of its property shall be appointed, or if any public officer
shall take charge or control of it or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation, a successor Confirming
Bank (which shall be acceptable to the Banks) may be appointed by the Borrower
by an instrument in writing, filed with the successor Confirming Bank. Upon
the appointment as aforesaid of a successor Confirming Bank and acceptance by
it of such appointment, the Confirming Bank so superseded shall cease, if not
previously disqualified by operation of law, to be such Confirming Bank
hereunder.
(c) Any successor Confirming Bank appointed
hereunder shall execute, acknowledge and deliver to its predecessor and to the
Borrower (which shall deliver a copy of same to the Banks) an instrument
accepting such appointment hereunder, and thereupon such successor Confirming
Bank, without any further act, deed or conveyance, shall become vested with all
the authority, rights, powers, trusts, immunities, duties and obligations of
such predecessor with like effect as if originally named as such Confirming
Bank hereunder, and such predecessor, upon payment of its charges and
disbursements then unpaid, shall thereupon become obliged to transfer and
deliver, and such successor Confirming Bank shall be entitled to receive,
copies of any relevant information maintained by such predecessor Confirming
Bank.
(d) Any corporation or bank into which the
Confirming Bank may be merged or converted, or any corporation or bank with
which the Confirming Bank may be consolidated, or any corporation or bank
resulting from any merger, conversion or consolidation to which the Confirming
Bank shall be a party, or any corporation or bank to which the Confirming Bank
shall sell or otherwise transfer all or substantially all the assets and
business of such Confirming Bank, shall, to the
-40-
<PAGE>
extent permitted by applicable law and provided that it shall be qualified as
aforesaid, be the successor Confirming Bank under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto. Notice of any such merger, conversion, consolidation or sale
shall forthwith be given to the Borrower and to each of the Barks.
10. The Borrower undertakes that, so long as any
Revolving Note is outstanding under any of the Credit Agreements, there shall
at all times be two Eurodollar Rate Reference Banks, two CD Reference Banks,
and two Reference Rate Reference Banks. The initial Eurodollar Rate Reference
Banks, CD Reference Banks and Reference Rate Reference Banks shall be those
stated in the Credit Agreements.
If any Reference Bank (i.e., any Eurodollar Rate Reference
Bank, any CD Reference Bank or any Reference Rate Reference Bank) or office
thereof is later unable or unwilling to act as such, the Borrower will appoint
another leading bank or office thereof (independent of the Borrower and
acceptable to the Banks) engaged in business in the appropriate market for
determination of applicable rates to replace such Reference Bank in such
capacity. The Borrower shall notify the Confirming Bank and each of the Banks
forthwith upon any change in the identity of any of the Reference Banks.
Pending receipt of any such notification the Confirming Bank shall be entitled
to assume that the Reference Banks are those named in the Credit Agreement as
modified by changes of which notification has already been received by the
Confirming Bank.
11. Except where telephonic instructions or notices are
authorized herein to be given, all notices, demands, instructions and other
communications required or permitted to be given or made upon any party hereto
shall be in writing and shall be personally delivered or sent by registered or
certified mail, postage prepaid, return receipt request, or by prepaid Telex,
TWX or telegram (with messenger delivery specified in the case of a telegram),
or by telecopier, and shall be deemed to be given for purposes of this
Agreement on the day that such writing is delivered to the intended recipient
thereof in accordance with the provisions of this paragraph. Unless otherwise
specified in a notice sent or delivered in accordance with the foregoing
provisions of this paragraph, notices, demands, instructions and other
communications in writing shall be given to or made upon the respective parties
hereto at their respective addresses (or to their respective Telex, TWX or
telecopier numbers) indicated below, and, in the case of telephonic
instructions or notices, by calling the telephone number or numbers indicated
for such party below:
If to the Borrower: The Charles Schwab Corporation
101 Montgomery Street
San Francisco, CA 94104
Attn: Treasury
Telephone: (415) 974-7579
FAX: (415) 974-7570
-41-
<PAGE>
If to the Confirming Bank: Citicorp USA, Inc.
399 Park Avenue, 12th Floor, Zone 11
New York, NY 10043
Attn: Michael Mauerstein & Brenda Killian
Telephone: (212) 559-6985
FAX: (212) 371-6309
If to any of the Banks: To the respective address, telephone number or telex
number set forth opposite the name of such Bank on
Schedule I hereto.
12. Schedule I hereto may be amended from time to time by
the Borrower by the Borrower's delivery to the Confirming Bank of a new
Schedule I. Each such new Schedule I delivered by the Borrower to the
Confirming Bank shall replace and supersede the then-existing Schedule I, and
any such newly delivered Schedule I shall be the Schedule I referred to in this
Agreement. Each such newly delivered Schedule I shall include all of the
then-existing Credit Agreements between the Borrower and any Bank having
substantially similar terms to the Credit Agreements listed on the original
Schedule I hereto.
13. This Agreement shall be deemed to be a contract
under, and for all purposes shall be governed by and construed and interpreted
in accordance with, the laws of the State of California.
14. This Agreement may be executed in as many
counterparts as may be deemed necessary or convenient, and by the parties
hereto on separate counterparts, each of which, when so executed, shall be
deemed an original, but all such counterparts shall constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
CITICORP USA, INC. THE CHARLES SCHWAB CORPORATION
By: ______________________ By: __________________________
Christopher V. Dodds
Its:______________________ Senior Vice President and Treasurer
-42-
<PAGE>
SCHEDULE I
TO CONFIRMING BANK AGREEMENT DATED AS OF JUNE 30, 1994 BETWEEN
THE CHARLES SCHWAB CORPORATION AND CITICORP USA, INC.
(Dollars in Millions)
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Bank of America National Trust and Savings Association $20
Attn: Kurt Cardoza, Vice President
333 South Hope Street, 10th Floor
Los Angeles, CA 90071
Bank of New York 30
Attn: Lee Stephens III, Vice President
One Wall Street
New York, NY 10286
Bank of Tokyo Trust Company 20
Attn: Christopher J. Miraldi, Assistant Vice President
100 Broadway, Main Floor
New York, NY 10005
Banque Nationale de Paris 10
Attn: Judith Dowling, Vice President
180 Montgomery Street, Suite 400
San Francisco, CA 94104
Chemical Bank 20
Attn: Diane Leslie, Vice President
Four New York Plaza, 2nd Floor
New York, NY 10004-2477
Citicorp USA, Inc. 35
Attn: Michael Mauerstein
399 Park Avenue, 12th Floor, Zone 11
New York, NY 10043
Continental Bank 15
Attn: Steven W. Kastenholz, Vice President
231 South LaSalle Street
Chicago, IL 60697
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
Commitment
Amount
------
<S> <C>
Credit Lyonnais San Francisco Branch $10
Attn: William J. Fischer, Vice President
3 Embarcadero Center, Suite 1640
San Francisco, CA 94111
First National Bank of Chicago 20
Attn: James Murray, Vice President
Mail Suite 0157
Chicago, IL 60670-0157
Norwest Bank of Minnesota, N.A. 15
Attn: Janet Grauer, Assistant Vice President
Norwest Center
Sixth & Marquette
Minneapolis, MN 55479-0085
PNC Bank 30
Attn: Brenda Peck, Vice President
Land Title Building
Broad & Chestnut Streets
Philadelphia, PA 19101
</TABLE>
-44-
<PAGE>
EXHIBIT C
BORROWING ADVICE
1. This Borrowing Advice is executed and delivered by
The Charles Schwab Corporation ("Borrower") to [Bank] pursuant to that certain
Credit Agreement dated as of June 30, 1994, entered into by Borrower and [Bank]
(the "Credit Agreement"). Terms defined in the Credit Agreement and not
otherwise defined herein are used herein as defined in the Credit Agreement.
2. Borrower hereby requests that [Bank] make an Advance
for the account of Borrower (at _______________, Account No. ________________)
pursuant to Paragraph 2.2 of the Credit Agreement as follows:
(a) Amount of Advance:_________________
(b) Date of Advance: _________________
(c) Type of Advance (check one only):
________ Reference Rate with ____ - day Interest Period
________ CD Rate with _________- day Interest Period
________ Eurodollar Rate with ________- day Interest Period
3. Following this request for Advance, the aggregate
amount of all Advances under the Revolving Note will not exceed the Credit
amount.
4. This Borrowing Advice is executed on ______________
by the Borrower.
BORROWER:
THE CHARLES SCHWAB CORPORATION
a Delaware Corporation
By ____________________________
[Printed Name and Title]
-45-
<PAGE>
EXHIBIT D
[Howard, Rice Letterhead]
[Date]
[Bank]
Re: Credit Agreement between
The Charles Schwab Corporation and [Bank]
Ladies and Gentlemen:
This opinion is delivered at the request of The Charles Schwab
Corporation to you in your capacity as the Bank under the Credit Agreement
dated as of June 30, 1994 (the "Credit Agreement") between you and The Charles
Schwab Corporation, a Delaware corporation ("Borrower"). This opinion letter
speaks as of close of business on June 30, 1994 (hereafter the "operative
date").
We have acted as special counsel to Borrower in connection
with the Credit Agreement. In such capacity we have examined originals, or
copies represented to us by Borrower to be true copies, of the Credit Agreement
and the Confirming Bank Agreement dated as of June 30, 1994 between Borrower
and Citicorp USA, Inc. (the "Confirming Bank Agreement"); and we have obtained
such certificates of such responsible officials of Borrower and of public
officials as we have deemed necessary for purposes of this opinion. We have
assumed without investigation the genuineness of all signatures on original
documents, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as
photostatic copies of originals, and the accuracy and completeness of all
corporate records certified to us by the Borrower to be accurate and complete.
We have further assumed that the Credit Agreement is binding upon and
enforceable against the Bank, and that the Confirming Bank Agreement is binding
upon and enforceable against Citicorp USA, Inc. As to factual matters, we have
relied upon the
<PAGE>
[Bank]
June __, 1994
P. 2
representations and warranties contained in and made pursuant to the Credit
Agreement.
Capitalized terms not otherwise defined herein have the
meanings given for such terms in the Credit Agreement. For the purpose of this
opinion, "Loan Documents" as used herein means the Credit Agreement and the
Confirming Bank Agreement.
Based upon the foregoing and in reliance thereon, and subject
to the exceptions and qualifications set forth herein, we are of the opinion
that:
5. Borrower is a corporation duly formed, validly
existing, and in good standing under the laws of Delaware.
6. Borrower has all requisite corporate power and
authority to execute, deliver and perform all of its obligations under the Loan
Documents.
7. Each of the two Loan Documents has been duly
authorized, executed and delivered by Borrower. Each of the two Loan Documents
constitutes the legal, valid and binding obligation of Borrower, enforceable
against Borrower in accordance with its terms, except as such validity, binding
nature or enforceability may be limited by:
(a) the effect of applicable federal or state
bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium or
other similar laws and court decisions relating to or affecting creditors'
rights generally;
(b) the effect of legal and equitable principles
upon the availability of creditors' remedies, regardless of whether considered
in a proceeding in equity or at law;
(c) the effect of California judicial decisions
involving statutes or principles of equity which have held that certain
covenants or other provisions of agreements, including without limitation those
providing for the acceleration of indebtedness due under debt instruments upon
the occurrence of events therein described, are unenforceable under
circumstances where it cannot be demonstrated that the enforcement of such
provisions is reasonably necessary for the protection of the lender, has been
undertaken in good faith under the circumstances then existing, and is
commercially reasonable;
(d) the effect of Section 1670.5 of the
California Civil Code, which provides that a court may refuse to enforce a
contract or may limit the
<PAGE>
[Bank]
June __, 1994
P. 3
application thereof or any clause thereof which the court finds as a matter of
law to have been unconscionable at the time it was made;
(e) the unenforceability, under certain
circumstances, of provisions purporting to require the award of attorneys'
fees, expenses, or costs, where such provisions do not satisfy the requirements
of California Civil Code Section 1717 et seq., or in any action where the
lender is not the prevailing party;
(f) the unenforceability, under certain
circumstances, of provisions waiving stated rights or unknown future rights and
waiving defenses to obligations, where such waivers are contrary to applicable
law or against public policy;
(g) the unenforceability, under certain
circumstances, of provisions which provide for penalties, late charges,
additional interest in the event of a default by the borrower or fees or costs
related to such charges;
(h) the unenforceability, under certain
circumstances, of provisions to the effect that rights or remedies are not
exclusive, that every right or remedy is cumulative and may be exercised in
addition to or with any other right or remedy, or that the election of some
particular remedy or remedies does not preclude recourse to one or another
remedy;
(i) the unenforceability of provisions
prohibiting waivers of provisions of either of the Loan Documents otherwise
than in writing to the extent that Section 1698 of the California Civil Code
permits oral modifications that have been executed;
(j) limitations on the enforceability of release,
contribution, exculpatory, or nonliability provisions, under federal or state
securities laws, Sections 1542 and 1543 of the California Civil Code, and any
other applicable statute or court decisions; and
(k) limitations on the enforceability of any
indemnity obligations imposed upon or undertaken by the borrower to the extent
that such obligations do not satisfy the requirements of Sections 2772 et seq.
of the California Civil Code and any judicial decisions thereunder.
The foregoing opinions are subject to the following exceptions
and qualifications:
<PAGE>
[Bank]
June __, 1994
P. 4
a. We have not been requested to verify and have
not verified the validity, accuracy, or reasonableness of any of the factual
representations contained in either or both of the Loan Documents, and we
express no opinion with respect to any of such matters.
b. We are members of the bar of the State of
California and are not admitted to practice in any other jurisdiction.
Accordingly, we are opining herein only concerning matters governed by the
Federal laws of the United States of America, the laws of the State of
California, and the General Corporation Law of the State of Delaware, and only
with respect to Borrower. We express no opinion concerning the applicability
to either or both of the Loan Documents, or the effect thereon, of the laws of
any other jurisdiction. Furthermore, we express no opinion with respect to
choice of law or conflicts of law, and none of the opinions stated herein shall
be deemed to include or refer to choice of law or conflict of law.
c. We express no opinion on any Federal or state
securities laws as they may relate to either or both of the Loan Documents.
d. We express no opinion as to compliance with
the usury laws of any jurisdiction.
The opinions set forth herein are given as of the
operative date. We disclaim any obligation to notify you or any other person
or entity after the operative date if any change in fact and/or law should
change our opinion with respect to any matters set forth herein. This opinion
letter is rendered to you in your capacity as the Bank under the Credit
Agreement and may not be relied upon, circulated or quoted, in whole or in
part, by any other person or entity (other than a person or entity who becomes
an assignee or successor in interest of the Bank or acquires a participation
from the Bank consistent with the terms of the Loan Documents) and shall not be
referred to in any report or document furnished to any other person or entity
without our prior written consent; provided, however, that the foregoing shall
not preclude the Bank from describing or otherwise disclosing the existence or
contents of this letter to (i) any bank regulatory authority having
jurisdiction over the Bank, as required by such authority, (ii) a person or
entity who, in good-faith discussions between the Bank and such person or
entity, is proposed to become an assignee or successor in interest of the Bank
or to acquire a participation
<PAGE>
[Bank]
June __, 1994
P. 5
from the Bank consistent with the terms of the Loan Documents, and (iii)
counsel to the Bank.
Very truly yours,
HOWARD, RICE, NEMEROVSKI, CANADY,
ROBERTSON, FALK & RABKIN
A Professional Corporation
By ______________________________
Jeffrey L. Schaffer
A Director
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
Computation of Earnings per Common Equivalent Share
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $32,159 $31,603 $70,349 $66,995
=================================================================================================
Shares
Weighted average number of common
shares outstanding 56,598 57,504 56,786 57,397
Common stock equivalent shares
related to option plans 1,755 1,799 1,791 1,747
- - -------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 58,353 59,303 58,577 59,144
=================================================================================================
Earnings per Common Equivalent Share $ .55 $ .53 $ 1.20 $ 1.13
=================================================================================================
</TABLE>
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before income taxes $ 53,219 $ 51,973 $116,763 $113,364
- - --------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense - customer 38,387 27,737 69,336 56,982
Interest expense - other 4,713 4,558 8,994 9,018
Interest portion of rental expense 4,194 3,773 8,225 7,437
- - --------------------------------------------------------------------------------------------------------
Total fixed charges (a) 47,294 36,068 86,555 73,437
- - --------------------------------------------------------------------------------------------------------
Earnings before income taxes and fixed charges (b) $100,513 $88,041 $203,318 $186,801
========================================================================================================
Ratio of earnings to fixed charges (b) (divided by) (a)* 2.1 2.4 2.3 2.5
========================================================================================================
Ratio of earnings to fixed charges as adjusted** 7.0 7.2 7.8 7.9
========================================================================================================
* The ratio of earnings to fixed charges is calculated in a manner
consistent with SEC requirements. For such purposes, "earnings"
consist of earnings before income taxes and fixed charges.
"Fixed charges" consist of interest expense incurred on payables to
customers, subordinated borrowings, term debt, capitalized interest,
and one-third of rental expense, which is estimated to be representative
of the interest factor.
** Because interest expense incurred in connection with payables to customers
is completely offset by interest revenue on related investments and margin
loans, the Company considers such interest to be an operating expense.
Accordingly, the ratio of earnings to fixed charges as adjusted reflects
the elimination of such interest expense as a fixed charge.
</TABLE>
