<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Number)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock - $0.01 par value New York Stock Exchange, Inc.
The Pacific Stock Exchange Incorporated
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 6, 1995, the aggregate market value of the voting stock
held by nonaffiliates of the registrant was approximately
$1,669,644,563. For purposes of this information, the outstanding
shares of Common Stock owned by directors and executive officers of
the registrant and by the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan were deemed to be shares of Common Stock held by
affiliates.
The number of shares of Common Stock outstanding as of March 6, 1995
was 85,693,972* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information
contained in the registrant's 1994 Annual Report to Stockholders by
reference to portions of that document. Part III of this Form 10-K
incorporates certain information contained in the registrant's
definitive proxy statement for its annual meeting of stockholders to
be held May 8, 1995 by reference to portions of that document.
* Reflects the 1995 three-for-two common stock split.
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THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1994
---------------------------------------
TABLE OF CONTENTS
Part I
------
Item 1. Business-------------------------------------------------------- 1
Item 2. Properties------------------------------------------------------ 10
Item 3. Legal Proceedings----------------------------------------------- 10
Item 4. Submission of Matters to a Vote of Security Holders------------- 11
Item 4a. Executive Officers of the Registrant---------------------------- 11
Part II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters------------------------------------------- 11
Item 6. Selected Financial Data---------------------------------------- 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations----------------- 11
Item 8. Financial Statements and Supplementary Data------------------- 11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure------------------------ 12
Part III
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Item 10. Directors and Executive Officers of the Registrant------------ 12
Item 11. Executive Compensation---------------------------------------- 13
Item 12. Security Ownership of Certain Beneficial Owners
and Management------------------------------------------------ 13
Item 13. Certain Relationships and Related Transactions---------------- 13
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K--------------------------------------------------- 14
Exhibit Index-------------------------------------------- 15
Signatures----------------------------------------------- 20
Index to Financial Statement Schedules------------------ F-1
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PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation
--------------------------------
(CSC) is a holding company engaged, through its subsidiaries, in
securities brokerage and related investment services. CSC's principal
operating subsidiary, Charles Schwab & Co., Inc. (Schwab), serves an
estimated 42% of the discount brokerage market as measured by commission
revenues. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a
market maker in Nasdaq securities, provides trade execution services
to broker-dealers and institutional customers. During 1994, orders
handled by M&S totaled over 5 billion shares, or over 6% of the total
shares traded on Nasdaq. As used herein, the "Company" refers to CSC
and subsidiaries.
Schwab was incorporated in California in 1971 and adopted the name
Charles Schwab & Co., Inc. after Mr. Charles R. Schwab became its
owner and President. In September 1987, the Company raised $123
million in its initial public offering. Since becoming a publicly-
owned entity, the Company has experienced significant growth in
revenues, customer assets and number of accounts. This growth has
been accomplished through investment in technology, product and
service development, marketing programs and customer service delivery
systems. In addition, the Company has broadened its service
capability through the acquisition and development of additional
businesses.
In October 1989, Charles Schwab Investment Management, Inc. (CSIM)
was formed as a subsidiary of CSC. In January 1990, CSIM became the
general investment adviser (employing a sub-adviser to perform
portfolio management for certain funds), as well as the administrator
for three money market funds. Substantially all of the balances
previously invested by Schwab customers in other money market funds
having similar investment objectives were transferred to these money
market funds in January 1990. Schwab subsequently introduced
additional mutual funds. The Company refers to all funds for which
CSIM is the investment adviser as the SchwabFunds (registered
trademark).
In response to the continued growth of customer trading activity in
Nasdaq securities and a desire to secure a capability to execute
customer trades in these and other securities, CSC acquired M&S in
July 1991. Since the acquisition, M&S has executed substantially all
the Nasdaq security trades originated by the customers of Schwab,
which in 1994 accounted for approximately 17% of Schwab's total
trading volume. Principal transaction revenues generated by M&S have
contributed significantly to the Company's operating results.
During July 1992, Schwab introduced nationally its no-transaction-
fee mutual fund service, known as the Mutual Fund OneSource
(trademark) service, which at December 31, 1994, enabled customers to
trade 280 mutual funds in 28 well-known fund families without
incurring brokerage transaction fees.
In March 1992, CSC opened The Charles Schwab Trust Company (CSTC),
which provides custody services for independent investment managers
and serves as trustee for employee benefit plans (primarily 401(k)
plans). CSTC's primary focus is to provide services to fee-based
independent investment managers and 401(k) plan record keepers and
administrators.
Developments During 1994 and Early 1995
During 1994, the Company experienced record revenues, net income and
customer account openings. Net income for 1994 was $135 million, or
$1.54 per share, up from $118 million, or $1.32 per share, in 1993,
after a $.07 per share extraordinary charge for early debt retirement,
and $81 million, or $.92 per share, in 1992. Schwab opened 736,000
new accounts during 1994, which contributed significantly to the $26.8
billion, or 28%, increase in assets held in Schwab customer accounts.
The Company invested $32 million in various capital expenditures
during 1994, including enhancements to its data processing and
telecommunications systems, and a fourth regional customer telephone
service center. The Company also opened 10 branch offices and made
improvements to certain existing office facilities.
Several financing transactions were completed during 1994. The
Company repurchased 2,499,600 shares of its common stock for
$47 million, prepaid its $35 million Senior Term Loan due in March
1995 and terminated a related interest rate exchange arrangement,
issued $20 million in Medium-Term Notes and paid common stock
dividends of $16 million.
During the second half of 1994, Schwab commenced operation of five
specialists' posts on the Pacific Stock Exchange. These posts make
markets in over 240 common stocks. The Company expects to continue to
expand its capacity to provide principal execution services to
customers.
In July 1994, the Securities and Exchange Commission (SEC) approved
a National Association of Securities Dealers, Inc. (NASD)
Interpretation to its Rules of Fair Practice governing the way in
which market makers in Nasdaq securities handle the execution
of limit orders accepted from certain types of customers. M&S
has extended the benefits of the Interpretation to substantially all retail
customer limit orders in Nasdaq securities received from broker-dealers
for which it executes such orders. This Interpretation has caused principal
transaction revenues to decline. Additional rule changes in this
area currently under consideration by the NASD, such as the proposed
Aqcess system, also may adversely impact principal transaction
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revenues. See also "Regulation" below.
In December 1994, a $100 million letter of credit facility was
established by CSC with a commercial bank to issue letters of credit
(LOCs) to three of the SchwabFunds (registered trademark) money market
funds. CSC has agreed to reimburse the bank for any payments made
under the LOCs. At December 31, 1994, LOCs totaling $58.5 million
were outstanding under this facility. See "Commitments, Contingent
Liabilities and Other Information" in the Notes to Consolidated Financial
Statements in the Company's 1994 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report.
In January 1995, the Company's Board of Directors declared a three-
for-two stock split of the Company's common stock, effected in the
form of a 50% stock dividend, payable March 1, 1995 to stockholders of
record February 1, 1995. Share information throughout this report has
been restated to reflect this transaction. Also in January 1995, the
Board increased the Company's quarterly cash dividend 29% to $.060 per
share payable February 15, 1995 to stockholders of record February 1,
1995.
In the first quarter of 1995, Schwab's Mutual Fund OneSource
(trademark) service was expanded and now includes over 335 mutual
funds in 38 well-known fund families. In addition, Schwab introduced
FundMap (trademark), a mutual fund selection software for Windows
(registered trademark).
(b) Financial Information About Industry Segments. The Company
-----------------------------------------------
operates in a single industry segment: securities brokerage and
related investment services. No material part of the Company's
consolidated revenues is received from a single customer or group of
customers, or from foreign operations. As of December 31, 1994,
approximately 28% of Schwab's total customer accounts were located in
California. The next highest geographic concentrations of total
customer accounts were approximately 7% in each of New York and
Florida.
(c) Narrative Description of Business. Schwab provides securities
----------------------------------
brokerage and related investment services to more than 3.0 million
active investor accounts. These accounts held $122.6 billion in
assets at December 31, 1994. M&S operates four offices in four states
offering trade execution services for Nasdaq securities to broker-
dealers, including Schwab, and institutional customers. Schwab's
primary focus is serving retail clients who seek a wide selection of
quality investment services at fees that, in most cases, are
substantially lower than those of full-commission firms. The table on
the following page sets forth on a comparative basis the Company's
revenues for the three years ended December 31, 1994. These revenue
figures reflect developments in, and the composition of, the Company's
business.
Schwab provides its customers, most of whom are retail investors,
with convenient and prompt execution of their orders to purchase and
sell securities, and with rapid access to market-related information.
A key to both the quality and speed of Schwab's service and to its
ability to provide commission discounts is its sophisticated
communications and information processing systems.
Schwab primarily serves investors who wish to conduct their own
research and make their own investment decisions and do not wish to
pay, through brokerage commissions, for research or portfolio
management. To attract and accommodate investors who want research
and portfolio management services, however, Schwab offers a variety of
fee-based (primarily third-party) research and portfolio management
products. This customer segment has become increasingly significant
to Schwab's growth in customer assets and accounts. During 1994,
Schwab customer assets held in customer accounts managed by
independent investment managers increased $9.7 billion (42%) to a
total of $32.6 billion.
Although Schwab does not generally maintain inventories of
securities for sale to its customers or engage in principal
transactions with its customers, it has recently expanded, through the
acquisition of specialists' posts on the Pacific Stock Exchange, its
capability to execute customer orders in listed securities on a
principal basis. Other instances where Schwab acts as principal
include: (1) having temporary positions resulting from execution
errors, unavailability of the various exchanges' automated trade
execution facilities or nonpayment by customers, (2) positioning of
listed securities to accommodate institutional customers, and
(3) engaging in certain riskless principal and other similar
transactions where, in response to a customer order, Schwab will
purchase securities (generally municipal and government securities)
from another source and resell them to customers at a markup.
Schwab's customer service delivery systems reduce dependency on the
need for personal relationships between Schwab's customers and
employees to generate orders. Schwab does not generally assign
customers to individual employees. Each customer-contact employee has
immediate access to the customer account and market-related
information necessary to respond to any customer's inquiries, and for
most customer orders, can enter the order and confirm the transaction.
Customer orders involving certain types of transactions, such as those
in fixed income securities and mutual funds, are handled by separate
groups of registered representatives that specialize in such
transactions. As a result of this approach, the departure of a
registered representative generally does not result in a loss of
customers for the firm.
As a market maker in Nasdaq securities, M&S generally executes
customer trades as principal. M&S business practices call for
competitively priced customer executions generally defined as the
highest bid price on a sell order and the lowest offer price on a buy
order quoted through the network of NASD member firms that are
market makers.
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Sources of Revenues
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1994 1993 1992
-------------------- ------------------ -------------------
Type of Revenue Amount Percent Amount Percent Amount Percent
-------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions
Listed securities $ 278,025 26.1% $ 299,153 31.0% $ 251,453 33.6%
Nasdaq 169,236 15.9% 168,855 17.5% 122,022 16.3%
Mutual funds 59,949 5.6% 47,265 4.9% 35,507 4.7%
Options 38,902 3.7% 36,933 3.8% 32,290 4.3%
Other 157
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Commissions 546,112 51.3% 552,206 57.2% 441,429 58.9%
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Interest revenue
Investments, customer-related 168,485 15.8% 112,944 11.7% 140,428 18.7%
Margin loans to customers 184,871 17.4% 132,471 13.7% 104,337 13.9%
Other 9,588 0.9% 6,816 0.7% 6,266 0.9%
Interest expense (198,236) (18.6%) (132,382) (13.7%) (159,491) (21.3%)
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Interest revevenue, net of
interest expense 164,708 15.5% 119,849 12.4% 91,540 12.2%
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Principal transactions 162,595 15.3% 169,081 17.5% 130,013 17.3%
Mutual fund service fees 156,812 14.7% 98,554 10.2% 63,391 8.5%
Other 34,370 3.2% 25,323 2.7% 23,139 3.1%
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Total $1,064,597 100.0% $ 965,013 100.0% $ 749,512 100.0%
=======================================================================================================
Certain prior years' revenues and expenses have been reclassified to conform to the 1994 presentation.
This table should be read in connection with the Company's consolidated financial statements and notes
in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to
Exhibit No. 13.1 of this report.
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</TABLE>
Customer trades exceeding certain sizes are executed on a negotiated basis.
In the normal course of its market-making activities, M&S maintains
inventories in Nasdaq securities on both a "long" and "short" basis.
While long inventory positions represent M&S' ownership of
securities, short inventory positions represent obligations of M&S
to deliver specified securities at a contracted price, which may differ
from market prices prevailing at the time of completion of the transaction.
Accordingly, long or short inventory positions may result in gains or
losses to M&S as market values of these securities fluctuate.
The securities brokerage industry is directly affected by
fluctuations in volumes and price levels of securities transactions
generally, which are affected by many national and international
economic and political factors that cannot be predicted, including
broad trends in business and finance, legislation and regulation
affecting the United States and international business and financial
communities, currency values, and the level and volatility of interest
rates. Sustained low volumes of retail investment activity or of
securities transactions generally, particularly if accompanied by low
securities prices, could substantially reduce the Company's
transaction-based revenues and could lead to reduced margin account
balances, thus reducing interest revenue as well. Shifts in customer
investment vehicle preferences from individual equity securities to
products that have lower commissions per transaction, such as mutual
funds, could also reduce transaction-based revenues.
In connection with its information processing systems, its branch
office network, its regional customer telephone service centers and
other aspects of its business, the
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Company incurs substantial expenses
that do not vary directly, at least in the short term, with
fluctuations in securities transaction volumes and revenues. In the
event of a material reduction in revenues, the Company may not reduce
such expenses quickly and, as a result, the Company could experience
reduced profitability or losses. Conversely, sudden surges in
transaction volume can result in increased profits and profit margins.
To ensure that it has the capacity to process projected increases in
transaction volumes, the Company has historically made substantial
capital and operating expenditures in advance of such projected
increases, including during periods of low transaction volumes. In
the event that such growth in transaction volumes does not occur, the
expenses related to such investments could, as they have in the past,
cause reduced profitability or losses.
Competition
The Company encounters rigorous competition from full-commission and
discount brokerage firms, as well as from financial institutions,
mutual fund sponsors, market makers in Nasdaq securities and other
organizations. The general financial success within the securities
industry over the past several years has strengthened existing
competitors, and management believes that such success will continue
to attract additional competitors such as banks, insurance companies
and providers of on-line financial and information services. Some of
these competitors are larger, more diversified, have greater capital
resources, and offer a wider range of services and financial products
than the Company. Particularly as financial services and
products proliferate, to the extent such competitors are able to
attract and retain customers on the basis of the convenience of one-
stop shopping, the Company's business or its ability to grow could be
adversely affected. In many instances, the Company is competing with
such organizations for the same customers. Management believes that
the main competitive factors are quality, convenience, price of
services and products offered, and breadth of product line.
Most discount brokerage firms charge commissions lower than Schwab.
Full-commission brokerage firms also offer discounted commissions to
selected retail brokerage customers. Many brokerage firms employ
substantial funds in advertising and direct solicitation of customers
to increase their market share of commission dollars and other
securities-related income. If the well-capitalized brokerage firms
pursue these competitive strategies successfully, Schwab's new account
growth, commission revenues and profit margins could be adversely
affected.
Marketing and Promotion
Advertising plays a crucial role in obtaining new customers, which
have constituted an important source of revenue and revenue growth for
the Company. The Company's advertising and market development expense
for the years ended December 31, 1994, 1993 and 1992 was $36 million,
$41 million and $34 million, respectively. For the same years, the
numbers of new accounts opened were approximately 736,000, 706,000 and
562,000, respectively. New account openings represent a significant
portion of the growth in customer assets, which the Company believes
is critical to growth in revenues. Accounts opened during 1994, 1993
and 1992 generated approximately 14%, 16% and 18% of total commission
revenues during each of those years, respectively.
The branch office network also plays a key role in building Schwab's
business. Many customers prefer to open accounts in person in Schwab
branch offices. With the customer service support of the regional
customer telephone service centers and TeleBroker (registered
trademark), branch personnel are able to focus a significant portion
of their time on business development. Branch training programs and
compensation plans emphasize identifying customer needs that can be
satisfied with Schwab products and services, and increasing customer
assets held in Schwab accounts.
Schwab advertises regularly in financially-oriented newspapers and
periodicals and occasionally in general circulation publications.
Schwab advertisements appear regularly on national and local cable
television and periodically on radio and independent television
stations. Schwab employs volume-buying and other strategies to
minimize the expense of broadcast advertising. Through these
broadcast-buying strategies and by using Schwab employees to produce
and buy print advertising, management believes Schwab realizes savings
on its promotional expenses. Schwab also engages extensively in
targeted direct mail advertising through monthly statement "inserts"
and special mailings. Such efforts have increased Schwab's brand
awareness among investors.
In its advertising, as well as in promotional events such as press
appearances, Schwab has aggressively promoted the name and likeness of
its Chairman, Mr. Schwab. The Company believes there is a substantial
benefit related to Mr. Schwab's association with the Company. The
Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all
service mark, trademark, and trade name rights in his name (and
variations thereon) and likeness.
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Products and Services
Accounts and Features. Each Schwab customer has a
----------------------
brokerage account through which securities may be purchased or sold.
If approved for margin transactions, a customer may borrow a portion
of the price of certain securities purchased through Schwab, or may
sell securities short. Customers must have specific approval to trade
options; as of December 31, 1994, approximately 149,000 accounts
were so approved. To write uncovered options, customers must go
through an additional approval process and must maintain a significantly
higher level of equity in their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic
brokerage accounts, it provides customers with an option to have cash
balances in their accounts automatically swept into certain
SchwabFunds (registered trademark) money market funds. In July 1994,
Schwab instituted a $1,000 cash and/or securities minimum opening
balance requirement for basic brokerage accounts.
A customer may receive additional services by qualifying for and
opening a Schwab One (registered trademark) brokerage account. A
customer may remove available funds from his or her Schwab One account
either with a personal check or a VISA debit card. If a Schwab One
customer is approved for margin trading, which most are, the checks
and debit card also provide access to margin cash available. For cash
balances awaiting investment, Schwab pays interest to Schwab One
customers at a discretionary rate of interest. Alternatively, Schwab
One customers seeking tax-exempt income may elect to have cash
balances swept into one of three tax-exempt SchwabFunds money market
funds. During 1994, the number of active Schwab One accounts
increased 17% and the customer assets in all Schwab One accounts
increased 26%. The Company considers customer accounts with cash
balances, positions or trading activity within the preceding twelve
months to be active.
Schwab acts as custodian, as well as broker, for Individual
Retirement Accounts (IRAs). In Schwab IRAs, cash balances are swept
daily into one of three SchwabFunds money market funds. During 1994,
active IRAs increased 26% and customer assets in all IRAs increased
29%. Schwab also acts as custodian and broker for Keogh accounts.
During 1994, Schwab expanded its Schwab 500 Brokerage (trademark)
service to attract and retain customers who trade frequently. This
service provides discounts from Schwab's standard commission rates as
well as customized services and information resources.
Customer Financing. Customers' securities transactions are effected
-------------------
on either a cash or margin basis. Generally, a customer buying
securities in a cash-only brokerage account is required to make
payment by settlement date, usually five business days after the trade
is executed. However, for purchases of certain types of securities,
such as mutual fund shares, a customer must have a cash or money
market fund balance in his or her account sufficient to pay for the
trade prior to execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the
proceeds, on settlement date. In an account authorized for margin
trading, Schwab may lend its customer a portion of the market value of
certain securities up to the limit imposed by the Federal Reserve
Board, which for most equity securities is initially 50%. Such loans
are collateralized by the securities in the customer's account.
"Short" sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date.
Customers may sell securities "short" in a margin account subject to
minimum equity and applicable margin requirements and the availability
of such securities to be borrowed and delivered.
Interest on margin loans to customers provides an important source
of revenue to Schwab. During the year ended December 31, 1994,
Schwab's outstanding margin loans to its customers averaged
approximately $2.7 billion, up from 1993's average of $2.2 billion.
In permitting a customer to engage in transactions, Schwab takes the
risk of such customer's failure to meet his or her obligations in the
event of adverse changes in the market value of the securities
positions in his or her account. Under applicable rules and
regulations for margin transactions, Schwab, in the event of such an
adverse change, requires the customer to deposit additional securities
or cash, so that the amount of the customer's obligation is not
greater than specified percentages of the cash and market values of
the securities in the account. As a matter of policy, Schwab
generally requires its customers to maintain higher percentages of
collateral values than the minimum percentages required under these
regulations.
Schwab may use cash balances in customer accounts to extend margin
credit to other customers. Under SEC Rule 15c3-3, the portion
of such cash balances not used to extend margin credit (increased or
decreased by certain other customer-related balances) must be held
in segregated investment accounts. The balances in these segregated
investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available
for use by Schwab at interest costs lower than Schwab's costs of
borrowing from alternative sources (e.g., balances in Schwab One brokerage
accounts) or at no interest cost (e.g., balances in other accounts and
outstanding checks that have not yet cleared Schwab's bank), Schwab's
cost of funds is reduced and its net income is enhanced. Such interest
savings contribute substantially to Schwab's profitability and,
if a significant reduction of customer cash balances were to occur,
Schwab's borrowings from other sources would have to increase and such
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<PAGE>
profitability would decline. To the extent Schwab's customers elect to
have cash balances in their brokerage accounts swept into certain
SchwabFunds money market funds, the cash balances available to Schwab
for investments or for financing margin loans are reduced. However,
Schwab receives mutual fund service fees from such funds based on the
daily average invested balances.
See also "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Company's 1994 Annual
Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report, and "Regulation" below.
Mutual Funds. CSIM provides investment advisory and administrative
-------------
services to the SchwabFunds (registered trademark), which consisted
of nine money market funds, including three that were added during
1994, a broad-based equity index fund, an international index fund,
an index fund that attempts to track the performance of common stocks
of the second 1,000 largest United States corporations and six bond funds
at December 31, 1994. Customer assets invested in the SchwabFunds
totaled approximately $23.3 billion at December 31, 1994, a 47% increase
over the prior year. The Company intends to offer additional mutual funds
to its customers in the future.
Through its Mutual Fund Marketplace (registered trademark) program,
Schwab purchases and redeems for its customers shares of over 900
mutual funds in over 100 fund families sponsored by third parties. At
December 31, 1994, the Mutual Fund Marketplace totaled $31.0 billion
in customer assets, including $12.5 billion in the Mutual Fund
OneSource (trademark) service. The Mutual Fund Marketplace program
provides Schwab's customers with the convenience of purchasing and
redeeming mutual fund shares with a single telephone call and of using
margin credit to purchase most mutual fund shares. Schwab charges a
transaction fee on trades placed in the funds included in its Mutual
Fund Marketplace (except as described below). Commissions from
customer transactions in mutual fund shares comprised approximately
11% of Schwab's total commission revenues in 1994, compared to
approximately 9% in 1993 and approximately 8% in 1992.
At December 31, 1994, Schwab's Mutual Fund OneSource service enabled
customers to trade 280 mutual funds in 28 well-known fund families
without incurring brokerage transaction fees. The service is
particularly attractive to investors who execute mutual fund trades
directly with multiple mutual fund companies to avoid brokerage
transaction fees and achieve investment diversity among fund families.
While Schwab does not receive transaction fees (commissions) on
customer transactions in the Mutual Fund OneSource program, it is
compensated directly by the participating funds or their sponsors via
fees received for providing record keeping and shareholder services.
Such compensation is ongoing, based on daily balances of customer
assets invested in the participating funds and held at Schwab.
Market Making In Nasdaq Securities. M&S provides trade execution
------------------------------------
services in Nasdaq securities to broker-dealers and institutional
customers. These services feature highly automated, competitively
priced executions of both Nasdaq and nonNasdaq stocks and warrants.
In most instances, customer orders are routed directly to M&S' trading
system and are executed automatically.
Services for Independent Investment Managers. To attract the
------------------------------------------------
business of accounts managed by fee-based independent investment
managers, Schwab has a dedicated group through which, among other
things, it assigns specific, experienced registered representatives to
individual managers and occasionally provides certain research
materials for the benefit of the managed accounts. Independent
investment managers participating in this program may use SchwabLink
(trademark) to access information in their customers' accounts directly
from Schwab's computer data bases and to enter their customers' trades
on-line. During 1994, Schwab added over 500 independent investment
managers to this program, which at December 31, 1994 totaled more
than 4,700. Schwab's brokerage business generated by independent
investment managers and other professional investors represented
approximately 14% of Schwab's total commission revenues in 1994, 11%
in 1993 and 10% in 1992.
During 1994, CSC acquired Performance Technologies, Inc. (PT), the
developer of Centerpiece (registered trademark), an investment
software for independent investment managers. PT is located in
Raleigh, North Carolina and had 11 employees at December 31, 1994.
Fixed Income. Fixed income investments available through Schwab
--------------
include U.S. Treasuries, zero-coupon bonds, listed and OTC corporate
bonds, municipal bonds, GNMAs, unit investment trusts and bond mutual
funds. Schwab also makes available to its customers certificates of
deposit (CDs) with specific financial institutions located in a
variety of states. Such institutions pay Schwab fees for its services
in making such CDs available and in transmitting funds and performing
certain accounting functions. Schwab's customers do not pay any
commission or fee when they purchase CDs.
Customer Service Delivery Systems
Branch Office Network. Schwab believes that the existence of branch
----------------------
offices is important to increasing new account openings and
maintaining high levels of customer
- 6 -
<PAGE>
satisfaction. At December 31, 1994, the Company maintained a network of
208 branches throughout the United States, including a branch office in the
Commonwealth of Puerto Rico and the United Kingdom. Schwab plans to
continue its branch expansion program in 1995 by opening approximately
20 to 25 new branches. Customers can use branch offices to
obtain market information, place orders, open accounts, deliver and
receive checks and securities, and obtain related customer services in
person, yet most branch activities are conducted by telephone and mail.
Branch offices remain open during normal market hours to service
customers in person and by telephone. Many branch offices offer
extended office hours. Customer calls received during nonbranch hours
are routed to regional customer telephone service centers.
Regional Customer Telephone Service Centers. Schwab's four regional
--------------------------------------------
customer telephone service centers, located in Indianapolis, Denver,
Phoenix and Orlando, handle calls to many of Schwab's toll-free
numbers, customer calls that otherwise would have to wait for
available registered representatives at branches during business
hours, and calls routed from branches after hours and on weekends.
Through the service centers, customers may place orders twenty-four
hours a day, seven days a week, except for certain holidays. Customer
orders placed during nonmarket hours are routed to appropriate markets
the following business day. The capacity of the service centers
allows new branches to be opened and maintained at lower staffing
levels.
Electronic Delivery Services. Schwab provides automated brokerage
-----------------------------
services through which investors may place orders, receive account
information and obtain securities market information. These services
are designed to provide added convenience for customers and minimize
Schwab's costs of responding to and processing routine customer
transactions.
Schwab's TeleBroker Service (registered trademark), which enables
customers to place orders for stocks, options and certain mutual
funds, as well as obtain real-time securities quotes and account
information electronically from any touchtone telephone, was
introduced in 1989 and was made available to customers nationally
during 1991. TeleBroker (registered trademark), which provides
customers with an additional 10% discount on commissions, has become
increasingly important in providing customers access to Schwab,
particularly during periods of heavy customer activity. In 1993,
TeleBroker was enhanced to accommodate Mutual Fund OneSource
(trademark) transactions. In December 1994 and March 1995, Schwab
introduced TeleBroker in Spanish and Mandarin languages, respectively.
On-line access to brokerage and investment information services is
also available through Schwab's on-line trading software, StreetSmart
(trademark) for Windows (trademark) and Macintosh (registered
trademark), introduced in October 1993 and July 1994, respectively.
During 1994, TeleBroker and other on-line brokerage services handled
over half of Schwab's customer calls.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities
transaction is highly automated. Registered representatives equipped
with on-line computer terminals can access customer account
information, obtain securities prices and related information, and
enter orders on-line. Most equity market orders are automatically
executed and the representative is able to confirm execution to the
customer while on the telephone. A written confirmation is generated
automatically and is generally sent to the customer on the next
business day. Under normal circumstances, most customer orders are
executed without any Schwab employee filling out a single piece of
paper.
To support its customer service delivery systems, as well as other
applications such as clearing functions, account administration,
record keeping and direct customer access to investment information,
Schwab maintains a sophisticated computer network connecting all of
the branch offices and regional customer telephone service centers.
Schwab's computers are also linked to the major registered United
States securities exchanges, M&S, the National Securities Clearing
Corporation and The Depository Trust Company.
In 1979, Schwab obtained from Beta Systems, Inc. a non-exclusive
license to use its basic software for executing brokerage functions.
Since that time, Schwab has made substantial additions and
modifications to that program. Schwab's computer systems also support
on-line employee training, management information systems, software
development activities and telecommunication network control
functions.
During periods of exceptionally high trading volume, the Company
takes steps to provide customer service functions with maximum
processing capacity. These steps include rescheduling processing jobs
unrelated to customer trading functions and restricting on-line access
to the Company's mainframe computer functions. The Company's computer
capacity is continuously monitored and efforts are made to achieve an
optimal balance between the costs of additional processing capacity
and the customer service benefits it provides during high-volume
periods.
Failure of Schwab's information processing or communications systems
for a significant period of time could limit Schwab's ability to
process its large volume of transactions accurately and rapidly. This
could cause Schwab to be unable to satisfy its obligations to
customers and other securities firms, and could result in regulatory
- 7 -
<PAGE>
violations. External events, such as an earthquake or power failure,
loss of external information feeds, such as security price
information, as well as internal malfunctions, such as those that
could occur during the implementation of system modifications, could
render part of or all such systems inoperative.
To enhance the reliability of the system and integrity of data,
Schwab maintains carefully monitored backup and recovery functions.
These include logging of all critical files intraday, duplication and
storage of all critical data outside of its central computer site
every 24 hours, and maintenance of facilities for backup and
communications in San Francisco. They also include the maintenance
and periodic testing of a disaster recovery plan that management
believes would permit Schwab to recommence essential computer
operations if its central computer site were to become inaccessible.
To reduce the exposure to system failures caused by external factors,
including earthquakes, the Company relocated its primary data center
in 1993 from San Francisco to a newly constructed and owned site in
Phoenix.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in
customer accounts. These services involve the confirmation, receipt,
execution, settlement and delivery functions involved in securities
transactions. Among other things, performing its own clearing
services allows Schwab to provide margin loans to customers and use
customer cash balances to finance them. During the year ended
December 31, 1994, Schwab processed over 11 million trades.
Schwab clears the vast majority of customer transactions through the
facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as
mutual fund transactions and transactions in securities not eligible
for settlement through a clearing corporation, are settled directly
with the mutual funds or other financial institutions. Schwab is
obligated to settle transactions with clearing corporations, mutual
funds and other financial institutions even if Schwab's customer fails
to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab
takes the risk of the other party's failure to settle the trade. See
"Commitments, Contingent Liabilities and Other Information" in the
Notes to Consolidated Financial Statements in the Company's 1994
Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
Customer securities are typically held by Schwab in its name, on
deposit at one or more of the recognized securities industry
depository trust companies, or in the case of government and certain
other fixed-income securities and other instruments (e.g., certain
limited partnership interests), at a custodial bank. Schwab collects
dividends and interest on securities held in its name, making the
appropriate credits to customer accounts. Schwab also facilitates
exercise of subscription rights on securities held for customers.
Schwab arranges for the transmittal of proxy and tender offer
materials and company reports to customers.
Employees
As of December 31, 1994, the Company had approximately 6,500
employees and contractors. This amount includes full-time employees
and full-time equivalents for part-time and temporary employees, as
well as persons employed on a contract basis. None of the employees
are represented by a union, and the Company believes its relations
with its employees are good.
Regulation
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The SEC is the Federal
agency charged with administration of the Federal securities laws.
Schwab and M&S are registered as broker-dealers with the SEC. Schwab
and CSIM are registered as investment advisers with the SEC.
Much of the regulation of broker-dealers has been delegated to self-
regulatory organizations, principally the NASD and the national
securities exchanges such as the New York Stock Exchange, Inc. (NYSE),
which has been designated by the SEC as Schwab's primary regulator
with respect to its securities activities. The NASD has been
designated as M&S' primary regulator by the SEC with respect to its
securities activities. During 1994, the American Stock Exchange was
Schwab's designated primary regulator with respect to options trading
activities. These self-regulatory organizations adopt rules (subject
to approval by the SEC) governing the industry and conduct periodic
examinations of broker-dealers. Securities firms are also subject to
regulation by state securities authorities in the states in which
they do business. Schwab is registered as a broker-dealer in 50 states,
the District of Columbia and Puerto Rico. M&S is registered as a
broker-dealer in 18 states as of December 1994.
The principal purpose of regulations and discipline of broker-
dealers and investment advisers is the protection of customers and the
securities markets, rather than protection of creditors and
stockholders of broker-dealers and investment advisers. The
regulations to which broker-dealers and investment advisers are
subject cover all aspects of the securities business, including sales
methods, trading practices among broker-dealers, uses and safekeeping
of
- 8 -
<PAGE>
customers' funds and securities, capital structure of securities
firms, record keeping, fee arrangements, disclosure to clients, and
the conduct of directors, officers and employees. Additional
legislation, changes in rules promulgated by the SEC and by self-
regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules may directly affect the method of
operation and profitability of broker-dealers and investment advisers.
The SEC, self-regulatory organizations and state securities authorities may
conduct administrative proceedings which can result in censure, fine, cease
and desist orders, or suspension or expulsion of a broker-dealer or an
investment adviser, its officers, or employees. Schwab and M&S have been
the subject of such administrative proceedings.
The Department of Justice, the SEC and the NASD have during the past
year commenced a series of investigations and regulatory actions involving
the activities of many market makers in Nasdaq securities. M&S is a
significant participant in the Nasdaq market. As a result of such inves-
tigations and actions, and possible future regulatory actions, changes
are occurring in the manner in which this market conducts its business.
Current practices may change as a consequence of rulemaking and improvements
in technology or may be subject to increased disclosure requirements.
New market systems, if approved, could significantly impact the manner in
which business is currently conducted. Schwab and M&S are cooperating with
the various investigations and have and will continue to work with regulators
to respond to questions related to their businesses. These investigations
and regulatory actions may have a material adverse impact on M&S' future
business. The Company anticipates that it will adapt to any new market
environment and intends to promote practices which are designed to benefit
its customers.
As registered broker-dealers and NASD member organizations, Schwab
and M&S are required by Federal law to belong to the Securities
Investor Protection Corporation (SIPC), which provides, in the event
of the liquidation of a broker-dealer, protection for securities held
in customer accounts held by the firm of up to $500,000 per customer,
subject to a limitation of $100,000 on claims for cash balances. SIPC
is funded through assessments on registered broker-dealers. In
addition, in 1994, Schwab has purchased from private insurers
additional account protection of up to $49.5 million per customer, as
defined, for customer securities positions only. This account
protection has increased from 1993's account protection of
$24.5 million. Mutual funds, including money market funds, are
considered securities for the purposes of SIPC coverage and the
additional coverage. Neither SIPC coverage nor the additional
coverage applies to fluctuations in the market value of securities.
Schwab is also authorized by the Municipal Securities Rulemaking
Board to effect transactions in municipal securities on behalf of its
customers and has obtained certain additional registrations with the
SEC and state regulatory agencies necessary to permit it to engage in
certain other activities incidental to its brokerage business. For
example, Schwab is registered with the SEC as a transfer agent in
connection with certain services it provides to the SchwabFunds
(registered trademark).
Margin lending by Schwab and M&S is subject to the margin rules of
the Board of Governors of the Federal Reserve System and the NYSE.
Under such rules, broker-dealers are limited in the amount they may
lend in connection with certain purchases and short sales of
securities and are also required to impose certain maintenance
requirements on the amount of securities and cash held in margin
accounts. In addition, those rules and rules of the Chicago Board
Options Exchange govern the amount of margin customers must provide
and maintain in writing uncovered options.
As a California state-chartered trust company, CSTC is authorized to
conduct business in California, and is primarily regulated by the
California State Banking Department. Since it provides employee
benefit plan trust services, CSTC is also required to comply with the
Employee Retirement Income Security Act of 1974 (ERISA) and,
consequently, is subject to oversight by both the Internal Revenue
Service and Department of Labor. CSTC is required under ERISA to
maintain a fidelity bond for the protection of employee benefit trusts
for which it serves as trustee.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an
arranger with the Securities and Futures Authority in the United
Kingdom, and engages in business development activities on behalf of
Schwab.
Net Capital Requirements
As registered broker-dealers, Schwab and M&S are subject to the
Uniform Net Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net
Capital Rule), which has also been adopted through incorporation by
reference in NYSE Rule 325. Schwab is a member firm of the NYSE and
the NASD, and M&S is a member firm of the NASD. The Net Capital Rule
specifies minimum net capital requirements for all registered broker-
dealers and is designed to measure financial integrity and liquidity.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NYSE and the NASD, certain punitive
actions by the SEC and other regulatory bodies, and ultimately may
require a firm's liquidation. Because CSC itself is not a registered
broker-dealer, it is not subject to the Net Capital Rule. However,
Schwab's failure to maintain specified levels of net capital would
constitute a default by CSC under certain debt covenants.
- 9 -
<PAGE>
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain
deductions that result from excluding assets that are not readily
convertible into cash and from conservatively valuing certain other
assets. These deductions include charges that discount the value of
firm security positions to reflect the possibility of adverse changes
in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals
to be provided to the SEC prior to and subsequent to withdrawals
exceeding certain sizes. Such rule prohibits withdrawals that would
reduce a broker-dealer's net capital to an amount less than 25% of its
deductions required by the Net Capital Rule as to its security
positions. The Net Capital Rule also allows the SEC, under limited
circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to 20 business days.
Schwab and M&S have elected the alternative method of calculation
under paragraph (a)(1)(ii) of the Net Capital Rule, which requires a
broker-dealer to maintain minimum net capital equal to 2% of its
"aggregate debit items," computed in accordance with the Formula for
Determination of Reserve Requirements for Brokers and Dealers (SEC
Rule 15c3-3). "Aggregate debit items" are assets that have as their
source transactions with customers, primarily margin loans. Under the
alternative method of the Net Capital Rule, a broker-dealer may not
(a) pay, or permit the payment or withdrawal of, any subordinated
borrowings or (b) pay cash dividends or permit equity capital to be
removed if, after giving effect to such payment, withdrawal, or
removal, its net capital would be less than 5% of its aggregate debit
items.
Under NYSE Rule 326, Schwab is required to reduce its business if
its net capital is less than 4% of aggregate debit items for more than
15 consecutive business days; NYSE Rule 326 also prohibits the
expansion of business if net capital is less than 5% of aggregate
debit items for more than 15 consecutive business days. The
provisions of NYSE Rule 326 also become operative if capital
withdrawals (including scheduled maturities of subordinated borrowings
during the following six months) would result in a reduction of a
firm's net capital to the levels indicated.
If compliance with applicable net capital rules were to limit
Schwab's or M&S' operations and Schwab's ability to repay its
subordinated debt to the Company, this in turn could limit the
Company's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the
Company's 1994 Annual Report to Stockholders, which is incorporated
herein by reference to Exhibit No. 13.1 of this report.
At December 31, 1994, Schwab was required to maintain minimum net
capital under the Net Capital Rule of $61 million and had total
regulatory net capital of $315 million. At December 31, 1994, the
amounts in excess of 2%, 4% and 5% of aggregate debit items were
$254 million, $194 million and $164 million, respectively.
At December 31, 1994, M&S was required to maintain minimum net
capital under the Net Capital Rule of $1 million and had total
regulatory net capital of $5 million. At December 31, 1994, the
amount in excess of 2% of aggregate debit items exceeded $4 million.
CSTC's capital requirement is established by the California
Superintendent of Banks under the California Financial Code. The Code
requires that CSTC's ratio of contributed capital, as defined, to
accumulated deficit shall exceed 2.5 to 1. At December 31, 1994, the
ratio of contributed capital to accumulated deficit was 2.7 to 1. If
CSTC's capital declines, or if the Superintendent of Banks determines
that additional capital is required for other reasons, CSC could be
required to contribute additional capital to CSTC.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story
building at 101 Montgomery Street in San Francisco. The building
contains approximately 296,000 square feet and is leased by Schwab
under a term expiring in the year 2000. The current rental is
approximately $8.7 million per year, subject to certain increases and
obligations to pay certain operating expenses such as utilities,
insurance and taxes. Schwab has three successive five-year options to
renew the lease at the then market rental value. Schwab also leases
space in other buildings for its San Francisco operations aggregating
approximately 380,000 square feet at year-end 1994. M&S' headquarters
are located in leased office space in Jersey City, New Jersey.
The Company's primary data center is located in Phoenix in a 105,000
square feet facility owned by the Company.
All of Schwab's branch offices and regional customer telephone
service centers and M&S' branch offices are located in leased
premises, generally with lease expiration dates five to ten years from
inception.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is
set forth under the caption "Commitments, Contingent Liabilities and
Other Information" in the Notes to the Consolidated Financial
Statements in the Company's 1994 Annual Report to Stockholders, which
are incorporated herein by reference to Exhibit No. 13.1 of this
report.
- 10 -
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of 1994.
Item 4a. Executive Officers of the Registrant
See Item 10 in Part III of this report.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is listed on the New York and Pacific
Stock Exchanges under the ticker symbol SCH. The number of common
stockholders of record as of February 10, 1995 was 1,909.
The other information required to be furnished pursuant to this item
is set forth under the caption "Quarterly Financial Information
(Unaudited)" in the Company's 1994 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this
report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is
set forth under the captions "Operating Results (for the year),"
"Other (at year end)" and "Other (for the year)" in the Company's 1994
Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required to be furnished pursuant to this item is
set forth under the caption "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Company's 1994
Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1994
and 1993 are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Three Months Ended
December 31,
1994 1993
-------------------------------------------------------------------
<S> <C> <C>
Earning Assets (customer-related):
Investments:
Average balance outstanding $4,040 $3,564
Average interest rate 5.27% 3.23%
Margin loans to customers:
Average balance outstanding $2,855 $2,448
Average interest rate 7.58% 5.97%
Average yield on earning assets 6.23% 4.35%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $5,645 $4,883
Average interest rate 4.21% 2.39%
Other interest-bearing sources:
Average balance outstanding $ 368 $ 329
Average interest rate 3.29% 3.17%
Average noninterest-bearing portion $ 881 $ 800
Average interest rate on funding sources 3.62% 2.11%
Summary:
Average yield on earning assets 6.23% 4.35%
Average interest rate on funding sources 3.62% 2.11%
--------------------------------------------------------------------
Average net interest margin 2.61% 2.24%
====================================================================
</TABLE>
Average net interest margin increased 37 basis points from the fourth
quarter of 1993 to the fourth quarter of 1994. Average balances of
investments increased 13% and margin loans to customers increased 17% over
this same period. The average yield on investments and margin loans to
customers increased 188 basis points from the fourth quarter of 1993
to the fourth quarter of 1994. Over this same period, interest-bearing
customer cash balances increased 16% and the average interest rate paid on
funding sources increased 151 basis points.
Item 8. Financial Statements and Supplementary Data
The information required to be furnished pursuant to this item is
set forth in the Consolidated Financial Statements and under the
caption "Quarterly Financial Information (Unaudited)" in the Company's
1994 Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
- 11 -
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from
portions of the Company's definitive proxy statement for its annual
meeting of stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after December
31, 1994 (the Proxy Statement) under the captions "Election of
Directors" (excluding all information under the subcaption
"Information about the Board of Directors and Committees of the
Board") and "Principal Stockholders."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected
by and serve at the discretion of the Company's Board of Directors.
However, Mr. Schwab has an employment agreement which expires on March
31, 1995. A new employment agreement, which has an initial term of
five years and renews for an additional year at each anniversary, is
scheduled to be submitted to the stockholders for approval at the May
8, 1995 Annual Meeting of Stockholders.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Charles R. Schwab 57 Chairman and Chief Executive Officer, and Director
Lawrence J. Stupski 49 Vice Chairman, and Director
David S. Pottruck 46 President and Chief Operating Officer, and Director
John Philip Coghlan 43 Executive Vice President - Schwab Institutional
A. John Gambs 49 Executive Vice President - Finance and Chief Financial Officer
Dawn Gould Lepore 41 Executive Vice President and Chief Information Officer
Ronald W. Readmond 52 Executive Vice President
Elizabeth Gibson Sawi 43 Executive Vice President - Mutual Funds
Tom Decker Seip 45 Executive Vice President - Retail Brokerage
John N. Tognino 56 Executive Vice President - Capital Markets and Trading
Luis E. Valencia 50 Executive Vice President - Human Resources
</TABLE>
Mr. Schwab has been Chairman and Chief Executive Officer and a
director of the Company since its incorporation in November 1986. Mr.
Schwab was a founder of Schwab in 1971 and has been its Chairman since
1978. Mr. Schwab is currently a director of The Gap, Inc.,
Transamerica Corporation, AirTouch Communications and a trustee of The
Charles Schwab Family of Funds, Schwab Investments, Schwab Capital
Trust and Schwab Annuity Portfolios, all registered investment
companies.
Mr. Stupski has been Vice Chairman of the Company since July 1992
and a director of the Company since its incorporation in November
1986. Mr. Stupski was Chief Operating Officer of the Company from
November 1986 to March 1994 and the Company's President from November
1986 to July 1992. He also served as Chief Executive Officer and
Chief Operating Officer of Schwab from July 1988 to July 1992. He
served as Vice Chairman of Schwab from July 1992 to August 1994.
- 12 -
<PAGE>
Mr. Pottruck has been Chief Operating Officer and a director of the
Company since March 1994, President of the Company and Chief Executive
Officer of Schwab since July 1992, and President of Schwab since July
1988. Mr. Pottruck was Executive Vice President of the Company and
Schwab from March 1987 to July 1992. Mr. Pottruck joined Schwab
in March 1984.
Mr. Coghlan has been Executive Vice President of the Company and
Schwab and General Manager of Schwab Institutional since July 1992.
Mr. Coghlan joined Schwab in January 1986, became a Vice President in
1988 and became Senior Vice President in 1990.
Mr. Gambs has been Executive Vice President and Chief Financial
Officer of the Company and Schwab since he joined the Company in March
1988.
Ms. Lepore has been Executive Vice President and Chief Information
Officer of the Company and Schwab since October 1993. Ms. Lepore
joined Schwab in September 1983 and became Senior Vice President in 1989.
Mr. Readmond has been Executive Vice President of the Company and
Vice Chairman of Schwab since January 1995. From July 1992 to January
1995, he was Senior Executive Vice President of the Company and
Schwab, as well as Chief Operating Officer of Schwab. From the time
that Mr. Readmond joined the Company in August 1989 until July 1992,
he was Executive Vice President - Operations, Trading and Credit of
the Company and Schwab.
Ms. Sawi has been President of Charles Schwab Investment Management,
Inc., Executive Vice President - Mutual Funds of the Company and
Schwab since April 1994. Prior to that, she was Executive Vice
President - Marketing and Advertising of the Company and Schwab from
January 1992 to April 1994. Ms. Sawi joined Schwab in November 1982.
Mr. Seip has been Executive Vice President - Retail Brokerage of the
Company and Schwab since January 1995. From April 1994 to January
1995 he was Senior Executive Vice President - Retail Brokerage of the
Company and Schwab. He was President of Charles Schwab Investment
Management, Inc. (CSIM) from July 1992 to April 1994 and Chief
Operating Officer of CSIM from June 1991 to April 1994. From July
1992 to April 1994, he was Executive Vice President - Mutual Funds and
Fixed Income Products of the Company and Schwab. Mr. Seip joined
Schwab in January 1983. Prior to becoming Senior Vice President of
Schwab and assuming his mutual fund responsibilities in June 1991, Mr.
Seip was the divisional executive in charge of Schwab's retail
branches east of the Mississippi.
Mr. Tognino has been Executive Vice President - Capital Markets and
Trading of the Company and Schwab since October 1993. Prior to
joining the Company in October 1993, Mr. Tognino was a Managing Director
at Merrill Lynch in New York since 1991, and was based in London as
Managing Director of equity products from 1990 to 1991. Mr. Tognino
serves on the NASDAQ (registered trademark) Board of Governors.
Mr. Valencia has been Executive Vice President - Human Resources of
the Company and Schwab since March 1994. Before joining the Company
in March 1994, Mr. Valencia served as a Managing Director of
Commercial Credit Corp., a subsidiary of the Travelers engaged in
consumer finance for the Travelers, from January 1993 to February
1994. From 1975 to 1993, he held various positions with Citicorp,
including President and Chief Executive Officer of Transaction Technology,
a subsidiary of Citicorp, from 1990 to 1993.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under
the captions "Executive Compensation" (excluding all information under
the subcaption "Board Compensation Committee Report on Executive
Compensation" and "Performance Graph") and "Certain Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under
the caption "Principal Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under
the caption "Certain Transactions."
- 13 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) Documents filed as part of this Report
--------------------------------------
1. Financial Statements
The financial statements and independent auditors' report are set
forth in the Company's 1994 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report
and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant
to this item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
-------------------
None filed during the last quarter of 1994.
- 14 -
<PAGE>
(c) Exhibits
--------
The exhibits listed below are filed as part of this annual report on
Form 10-K.
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
-------------------------------------------------------------------------------
<S> <C> <C>
3.3 Restated Certificate of Incorporation, as amended as of
December 1, 1988, of the Registrant, filed as Exhibit 3.3
to the Registrant's Form 10-K for the year ended December
31, 1989 and incorporated herein by reference.
3.4 Amended and Restated By-Laws of the Registrant, as amended
March 25, 1991, filed as Exhibit 3.4 to the Registrant's
Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
10.4 Form of Release Agreement dated as of March 31, 1987 among
BAC, Registrant, Schwab Holdings, Inc., Charles Schwab &
Co., Inc. and former shareholders of Schwab Holdings, Inc. *
10.5 Employment Agreement dated as of March 31, 1987 among
Registrant, Charles Schwab & Co., Inc. and Charles R.
Schwab. * +
10.9 Executive Officer Stock Option Plan (1987) dated as of
March 24, 1987, with form of Non-Qualified Stock Option
Agreement (Executive Officer Stock Option Plan (1987))
attached. * +
10.17 Agreement of Lease dated May 18, 1983 between California
Jones Company and Charles Schwab & Co., Inc. (headquarters,
San Francisco, California). *
10.20 License Agreements dated April 18, 1979 and April 11, 1983
between International Business Machines Corporation and
Charles Schwab & Co., Inc. *
10.22 License Agreement dated as of February 28, 1979 between
Applied Data Research, Inc. and Beta Systems, Inc. and
Assignment, dated February 21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between
Beta Systems, Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between
333 Bush Street Associates and Charles Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between
Registrant and certain members of the Board of Directors of
Registrant, filed as Exhibit 10.34 to the Registrant's Form
10-K for the year ended December 31, 1988 and incorporated
herein by reference.
10.55 Cash Subordination Agreements between Schwab Holdings, Inc.
and Charles Schwab & Co., Inc. with Assignments dated March
31, 1987 by Schwab Holdings, Inc., of all right, title, and
interest in Cash Subordination Agreements to Registrant,
filed as Exhibit 4.20 to Registrant's Registration
Statement No. 33-16192 on Form S-1 and incorporated herein
by reference.
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.57 Registration Rights and Stock Restriction Agreement, dated
as of March 31, 1987, between the Registrant and the
holders of the Common Stock, filed as Exhibit 4.23 to
Registrant's Registration Statement No. 33-16192 on Form
S-1 and incorporated herein by reference.
10.63 Revolving Subordinated Loan Agreement as of September 29,
1988, between the Registrant and Charles Schwab & Co.,
Inc., filed as Exhibit 10.63 to the Registrant's Form 10-K
for the year ended December 31, 1988 and incorporated
herein by reference.
10.72 Restatement of Assignment and License, as amended January
25, 1988, among Charles Schwab & Co., Inc., Charles R.
Schwab and the Registrant, filed as Exhibit 10.72 to the
Registrant's Form 10-K for the year ended December 31, 1989
and incorporated herein by reference.
10.73 1987 Stock Option Plan, as Amended and Restated, as of
April 17, 1989, with form of Non-Qualified Stock Option
Agreement (General Management Plan) attached, filed as
Exhibit 4.1 to Registrant's Registration Statement No. 33-
21582 on Form S-8 and incorporated herein by reference. +
10.83 First Amendment to Revolving Subordinated Loan Agreement,
as of April 18, 1990, between the Registrant and Charles
Schwab & Co., Inc., filed as Exhibit 10.83 to the
Registrant's Form 10-Q for the quarter ended March 31, 1990
and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan, effective November 1, 1990,
dated October 25, 1990, filed as Exhibit 10.87 to the
Registrant's Form 10-Q for the quarter ended September 30,
1990 and incorporated herein by reference.
10.98 Credit Agreement dated as of August 30, 1991, between the
Registrant and the Banks listed therein, filed as Exhibit
10.62 to the Registrant's Form 10-Q for the quarter ended
September 30, 1991 and incorporated herein by reference.
10.99 Second Amendment to Revolving Subordinated Loan Agreement,
as of November 1, 1991, between the Registrant and Charles
Schwab & Co., Inc., filed as Exhibit 10.99 to the
Registrant's Form 10-K for the year ended December 31, 1991
and incorporated herein by reference.
10.101 First Amendment to the Trust Agreement under the Charles
Schwab Profit Sharing and Employee Stock Ownership Plan,
effective January 1, 1992, dated December 20, 1991, filed
as Exhibit 10.101 to the Registrant's Form 10-K for the
year ended December 31, 1991 and incorporated herein by
reference.
10.113 Schwab One Services Agreement dated April 17, 1992 between
Charles Schwab & Co., Inc. and Provident National Bank,
filed as Exhibit 10.113 to the Registrant's Form 10-Q for
the quarter ended March 31, 1992 and incorporated herein by
reference.
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.116 Second Amendment to the Trust Agreement for the Charles
Schwab Profit Sharing and Employee Stock Ownership Plan
effective July 1, 1992, dated June 30, 1992, filed as
Exhibit 10.116 to the Registrant's Form 10-Q for the
quarter ended June 30, 1992 and incorporated herein by
reference.
10.118 Credit Agreement dated as of August 28, 1992, between
Registrant and the banks listed therein, filed as Exhibit
10.118 to the Registrant's Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
10.119 First Amendment to Credit Agreement dated as of August 28,
1992, between Registrant and the banks listed therein,
filed as Exhibit 10.119 to the Registrant's Form 10-K for
the year ended December 31, 1992 and incorporated herein by
reference.
10.120 ESOP Loan Agreement, effective as of January 19, 1993,
between Registrant and The Charles Schwab Profit Sharing
and Employee Stock Ownership Plan and Trust, filed as
Exhibit 10.120 to the Registrant's Form 10-K for the year
ended December 31, 1992 and incorporated herein by
reference. +
10.126 First Amendment dated June 30, 1993 to the Credit Agreement
dated August 28, 1992, between Registrant and the banks
listed therein, filed as Exhibit 10.126 to the Registrant's
Form 10-Q for the quarter ended June 30, 1993 and
incorporated herein by reference.
10.127 Second Amendment dated June 30, 1993 to the Credit
Agreement dated August 30, 1991 as amended by the First
Amendment dated August 28, 1992, between Registrant and the
banks listed therein, filed as Exhibit 10.127 to the
Registrant's Form 10-Q for the quarter ended June 30, 1993
and incorporated herein by reference.
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as
Amended, effective January 1, 1994 (supersedes Exhibit
10.96 to Registrant's Form 10-Q for the quarter ended June
30, 1991). +
10.137 Credit Agreement dated as of June 30, 1994, between the
Registrant and the Banks listed therein, filed as Exhibit
10.137 to the Registrant's Form 10-Q for the quarter ended
June 30, 1994 and incorporated herein by reference.
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). +
10.140 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). +
10.141 The Charles Schwab Corporation 1992 Stock Incentive Plan,
as amended October 18, 1994 (supersedes Exhibit 10.131 to
Registrant's Form 10-K for the year ended December 31,
1993), filed as Exhibit 10.141 to the Registrant's Form 10-Q
for the quarter ended September 30, 1994 and incorporated
herein by reference. +
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.142 The Charles Schwab Corporation Deferred Compensation Plan,
as amended October 18, 1994 (supersedes Exhibit 10.133 to
Registrant's Form 10-K for the year ended December 31,
1993), filed as Exhibit 10.142 to the Registrant's
Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference. +
10.143 Form of Nonstatutory Stock Option Agreement (supersedes
Exhibit 10.139 to Registrant's Form 10-Q for the quarter
ended June 30, 1994), filed as Exhibit 10.143 to the
Registrant's Form 10-Q for the quarter ended September 30,
1994 and incorporated herein by reference. +
10.144 Form of Incentive Stock Option Agreement, filed as Exhibit
10.144 to the Registrant's Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by reference. +
10.145 The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan, restated December 15, 1994, effective
January 1, 1994 (supersedes Exhibit 10.102 to the
Registrant's Form 10-K for the year ended December 31,
1991; Exhibits 10.114 and 10.115 to the Registrant's Form
10-Q for the quarter ended June 30, 1992; and Exhibits
10.135 and 10.136 to the Registrant's Form 10-K for the
year ended December 31, 1993). +
10.146 Annual Executive Individual Performance Plan dated as of
January 1, 1995 (supersedes Exhibit 10.134 to the
Registrant's Form 10-K for the year ended December 31,
1993). +
10.147 Corporate Executive Bonus Plan dated as of January 1, 1995
(formerly the Annual Executive Bonus Plan) (supersedes
Exhibit 10.130 to the Registrant's Form 10-K for the year
ended December 31, 1993). +
10.148 Summary of Individual Bonus Plan effective as of January 1,
1995 with Ronald W. Readmond. +
10.149 Employment Agreement dated as of March 31, 1995 between the
Registrant and Charles R. Schwab. +
10.150 Reimbursement Agreement dated as of December 19, 1994
between the Registrant and Bank of America National Trust
and Savings Association.
11.1 Computation of Earnings per Common Equivalent Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1994 Annual
Report to Stockholders, which have been incorporated herein
by reference. Except for such portions, such annual report
is not deemed to be "filed" herewith.
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
</TABLE>
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as
amended and declared effective on September 22, 1987.
+ Management contract or compensatory plan.
- 19 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
March 24, 1995.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: CHARLES R. SCHWAB /s/
---------------------------
Charles R. Schwab
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated, on March 24, 1995.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
CHARLES R. SCHWAB /s/ Chairman, Chief Executive Officer
--------------------- and Director
Charles R. Schwab (principal executive officer)
LAWRENCE J. STUPSKI /s/ Vice Chairman and Director
-----------------------
Lawrence J. Stupski
DAVID S. POTTRUCK /s/ President, Chief Operating Officer
--------------------- and Director
David S. Pottruck
A. JOHN GAMBS /s/ Executive Vice President - Finance,
----------------- and Chief Financial Officer
A. John Gambs (principal financial and accounting officer)
NANCY H. BECHTLE /s/ Director
--------------------
Nancy H. Bechtle
C. PRESTON BUTCHER /s/ Director
----------------------
C. Preston Butcher
DONALD G. FISHER /s/ Director
--------------------
Donald G. Fisher
ANTHONY M. FRANK /s/ Director
--------------------
Anthony M. Frank
JAMES R. HARVEY /s/ Director
-------------------
James R. Harvey
STEPHEN T. McLIN /s/ Director
--------------------
Stephen T. McLin
ROGER O. WALTHER /s/ Director
--------------------
Roger O. Walther
</TABLE>
- 20 -
<PAGE>
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income and Retained Earnings F-4
Condensed Statement of Cash Flows F-5
Schedule II - Valuation and Qualifying Accounts F-6
</TABLE>
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1994 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
------------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The
Charles Schwab Corporation and subsidiaries (the Company) as of
December 31, 1994 and 1993, and for each of the three years in
the period ended December 31, 1994, and have issued our report
thereon dated February 27, 1995; such consolidated financial
statements and report are included in your 1994 Annual Report to
Stockholders and are incorporated herein by reference. Our
audits also included the financial statement schedules of the
Company and subsidiaries appearing on pages F-3 through F-6.
These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth
therein.
February 27, 1995
F-2
<PAGE>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
Assets
Cash and equivalents $ 63,893
Receivable from subsidiaries 38,006 $ 49,831
Subordinated receivable from subsidiary 124,000 132,728
Investment in subsidiaries, at equity 418,389 384,043
Other assets 4,678 2,512
-------------------------------------------------------------------------------------------------
Total $648,966 $569,114
=================================================================================================
Liabilities and Stockholders' Equity
Accrued expenses $ 11,952 $ 4,941
Long-term borrowings 170,000 185,000
-------------------------------------------------------------------------------------------------
Total liabilities 181,952 189,941
-------------------------------------------------------------------------------------------------
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; 89,230,020 shares in 1994 and 1993* 595 595
Additional paid-in capital 166,103 161,052
Retained earnings 373,161 253,692
Treasury stock - 3,781,995 shares in 1994 and 2,474,217
shares in 1993, at cost* (57,968) (23,153)
Note receivable from Profit Sharing Plan (13,013)
Unearned ESOP shares (10,174)
Unamortized restricted stock compensation (4,703)
-------------------------------------------------------------------------------------------------
Stockholders' equity 467,014 379,173
-------------------------------------------------------------------------------------------------
Total $648,966 $569,114
=================================================================================================
* Reflects the 1995 three-for-two common stock split.
See Notes to Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders,
which are incorporated herein by reference to Exhibit No. 13.1 of this report, for a discussion of
long-term borrowings and contingent liabilities.
</TABLE>
F-3
<PAGE>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income and Retained Earnings
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest revenue $ 14,379 $ 14,952 $ 12,235
Interest expense (12,079) (13,258) (13,570)
-----------------------------------------------------------------------------------------------------
Net interest income (expense) 2,300 1,694 (1,335)
Other revenues 18
Other expenses (8,467) (2,159) (2,132)
-----------------------------------------------------------------------------------------------------
Loss before income tax benefit, equity in earnings
of subsidiaries and extraordinary charge (6,149) (465) (3,467)
Income tax benefit 2,490 472 1,254
-----------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of
subsidiaries and extraordinary charge (3,659) 7 (2,213)
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 30,632 86,821 48,063
Dividends paid by subsidiaries 108,370 37,540 35,378
-----------------------------------------------------------------------------------------------------
Total 139,002 124,361 83,441
Income before extraordinary charge 135,343 124,368 81,228
Extraordinary charge - early retirement of debt (6,700)
-----------------------------------------------------------------------------------------------------
Net income 135,343 117,668 81,228
Dividends on common stock (16,038) (10,946) (8,411)
Stock options and warrants exercised 1,413
Other 164 (198)
Retained earnings:
At beginning of year 253,692 147,168 72,938
-----------------------------------------------------------------------------------------------------
At end of year $373,161 $253,692 $147,168
=====================================================================================================
</TABLE>
F-4
<PAGE>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $135,343 $ 117,668 $ 81,228
Noncash item included in net income:
Equity in undistributed earnings of subsidiaries (30,632) (86,821) (48,063)
Extraordinary charge for early retirement of debt 11,205
Change in accrued expenses 7,011 1,447 681
Change in other assets (2,144) (1,715) (239)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 109,578 41,784 33,607
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Decrease (increase) in receivable from subsidiaries 17,475 (39,118) 894
Collection on subordinated loans to subsidiary 8,728 26,500 10,000
Issuance of subordinated loans to subsidiary (5,000) (48,500)
Increase in net investment in subsidiaries (3,468) (46,179) (5,295)
Purchase of life insurance policies (2,268)
Collection on note receivable from Profit Sharing Plan 1,467 6,241 3,925
---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 21,934 (57,556) (38,976)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from loans on life insurance policies 2,247
Proceeds from long-term borrowings 20,000 150,000 35,000
Repayment of long-term borrowings (35,000)
Repayment of subordinated borrowings (126,933)
Purchase of treasury stock (46,781) (23,227)
Dividends paid (16,038) (10,946) (8,411)
Other 7,953 3,651 2,007
---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (67,619) 15,772 5,369
---------------------------------------------------------------------------------------------------------------------
Change in cash and equivalents 63,893 ---- ----
Cash and equivalents at beginning of year ---- ---- ----
---------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 63,893 $ ---- $ ----
=====================================================================================================================
Prior years' financial statements have been reclassified to conform to the 1994 presentation.
See Notes to the Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders,
which are incorporated herein by reference to Exhibit No. 13.1 of this report, for a discussion of
additional cash flow information.
</TABLE>
F-5
<PAGE>
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at -------------------- Balance at
Beginning Charged End
Description of Year to Expense Other Written off of Year
------- ---------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1994:
Allowance for doubtful accounts $2,229 $ 1,193 $150 $ (368) $3,204
===========================================================
For the year ended
December 31, 1993:
Allowance for doubtful accounts $3,449 $ 336 $ 19 $(1,575) $2,229
===========================================================
For the year ended
December 31, 1992:
Allowance for doubtful accounts $2,769 $ 1,270 $(75) $ (515) $3,449
===========================================================
</TABLE>
F-6
EXHIBIT 3.3
CERTIFICATE OF RETIREMENT OF STOCK
The Charles Schwab Corporation, a
corporation organized and existing under
and by virtue of the General Corporation
Law of the State of Delaware (the
"Company"), DOES HEREBY CERTIFY:
FIRST: That the Certificate of
Incorporation of the Company prohibits the
reissuance of any and all issued and
outstanding shares of the Company's Series
A Preferred Stock, par value $0.01 per
share (the "Series A Shares"), which are
subsequently redeemed by the Company.
SECOND: That the Certificate of
Incorporation authorizes the Company to
issue 60,000 Series A Shares, all of which
have been issued.
THIRD: That the company subsequently
has redeemed and retired 60,000 Series A
Shares, thereby reducing the number of
authorized Series A Shares from 60,000 to
zero and no shares acquired by the Company
by reason of redemption, purchase,
exchange, or otherwise shall be reissued
and all such shares shall be canceled,
retired, and eliminated from the shares
authorized to issue.
FOURTH: That this certificate has
been made pursuant to and in accordance
with the provisions of Section 243(b) of
the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, The Charles
Schwab Corporation has caused this
certificate to be signed and attested by
its duly authorized officers,
this 18th day of November, 1988.
THE CHARLES SCHWAB CORPORATION
By: /s/ Barbara A. Wolfe
Barbara A. Wolfe
Executive Vice President
ATTEST:
/s/ Charmel Huffman RECEIVED FOR RECORD
Charmel Huffman Jan 3 1989
Assistant Corporate Secretary
William H. Honey, Recorder
CERTIFICATE OF CHANGE OF REGISTERED
AGENT AND REGISTERED OFFICE
The Charles Schwab Corporation, a
corporation organized and existing under
and by virtue of the General Corporation
Law of the State of Delaware, DOES HEREBY
CERTIFY:
The present registered agent of the
corporation is Corporation Service Company
and the present registered office of the
corporation is in the county of New
Castle.
The Board of Directors of The Charles
Schwab Corporation adopted the following
resolution on the 18th day of February,
1988.
Resolved, that the registered office
of The Charles Schwab Corporation in the
state of Delaware be and it hereby is
changed to Corporation Trust Center, 1209
Orange Street, in the City of Wilmington,
County of New Castle, and the
authorization of the present registered
agent of this corporation be and the same
is hereby withdrawn, and THE CORPORATION
TRUST COMPANY, shall be and is hereby
constituted and appointed the registered
agent of this corporation at the address
of its registered office.
IN WITNESS WHEREOF, The Charles
Schwab Corporation has caused this
statement to be signed by Barbara A.
Wolfe, its Exec. Vice President and
attested by Pamela Herlich, its Asst.
Corp. Secretary this 18th day of November,
1988.
THE CHARLES SCHWAB CORPORATION
By /s/ Barbara A. Wolfe
Exec. Vice President
ATTEST:
/s/ Pamela E. Herlich
Asst. Corporate Secretary
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
The Charles Schwab Corporation, a
corporation organized and existing under
and by virtue of the General Corporation
Law of the State of Delaware, DOES HEREBY
CERTIFY THAT:
The amendment to the Corporation's
certificate of incorporation set forth in
the following resolution was duly adopted
in accordance with the provisions of
Section 242 of the General Corporation Law
of the State of Delaware:
RESOLVED, that paragraph (C)(7) of
Article TENTH of the Restated Certificate
of Incorporation of The Charles Schwab
Corporation be amended to read as follows:
"(7) The term "Disinterested
Director" with respect to a Business
Combination means any member of the Board
of Directors of this Corporation who (a)
is not an Interested Stockholder involved
in such Business Combination, (b) is not
an Affiliate or Associate of such
Interested Stockholder, (c) is not a party
to any agreement or arrangement with such
Interested Stockholder to act in concert
with such Interested Stockholder to direct
the management or policies of this
Corporation, and (d) either (i) was a
member of the Board of Directors prior to
the time that such Interested Stockholder
became an Interested Stockholder, or (ii)
is a successor of a Disinterested Director
and was nominated to succeed a
Disinterested Director by a majority of
the Disinterested Directors at the time of
his nomination; provided, however, that
any member of the Board of Directors may
be a Disinterested Director with respect
to a Business Combination involving an
Interested Stockholder who was an
Interested Stockholder on the date that
the second Restated Certificate of
Incorporation of this Corporation filed by
the Secretary of State of Delaware was so
filed, notwithstanding the failure of such
member to satisfy the conditions set forth
in clause (d) above. Any reference to
"Disinterested Directors" shall refer to a
single Disinterested Director if there be
but one. Any matter referred to as
requiring approval of, or having been
approved by, a majority of the
Disinterested Directors shall mean the
matter requires the approval of, or has
been approved by, the Board of Directors
of this Corporation without giving effect
to the vote of any Director who is not a
Disinterested Director and with the
affirmative vote of a majority of the
Disinterested Directors."
IN WITNESS WHEREOF, The Charles
Schwab Corporation has caused this
certificate to be signed by its duly
authorized officers, this 21st day of
September, 1987.
THE CHARLES SCHWAB CORPORATION
/s/ Robert W. Fivis
Robert W. Fivis
Executive Vice President
ATTEST:
/s/ Barbara A. Wolfe
Barbara A. Wolfe, Secretary
RESTATED CERTIFICATE OF INCORPORATION
OF
THE CHARLES SCHWAB CORPORATION
(Originally incorporated on November 25, 1986 under the name CL Acquisition
Corporation.)
FIRST. The name of this corporation
(hereinafter called the "Corporation") is
THE CHARLES SCHWAB CORPORATION.
SECOND. The address of the
registered office of this Corporation in
the State of Delaware is 1013 Centre Road,
in the City of Wilmington, County of New
Castle, and its registered agent at that
address is CORPORATION SERVICE COMPANY.
THIRD. The purpose of this
Corporation is to engage in any lawful act
or activity for which corporations may be
organized under the General Corporation
Law of the State of Delaware.
FOURTH.
(A) This Corporation is
authorized to issue two classes of stock,
preferred stock and common stock. The
authorized number of shares of capital
stock is Two Hundred Ten Million
(210,000,000) shares, of which the
authorized number of shares of preferred
stock is Ten Million (10,000,000) and the
authorized number of shares of common
stock is Two Hundred Million
(200,000,000). The stock, whether
preferred stock or common stock, shall
have a par value of one cent ($0.01) per
share.
(B) Shares of preferred stock may
be issued from time to time in one or more
series. The Board of Directors of this
Corporation is hereby authorized to fix or
alter the voting rights, powers,
preferences and privileges, and the
relative, participating, optional or other
rights, if any, and the qualifications,
limitations or restrictions thereof, of
any wholly unissued series of preferred
stock; and to fix the number of shares
constituting any such series and the
designation thereof; and to increase or
decrease the number of shares of any
series of preferred stock (but not below
the number of shares thereof then
outstanding).
(C) The Board of the Corporation
has created a series of preferred stock of
the Corporation which is designated
"Series A Preferred Stock" and which
consists of 60,000 shares. The powers,
designations, preferences, and relative,
participating, optional, or other rights,
and the qualifications, limitations, or
restrictions of the Series A Preferred
Stock, in addition to those set forth
elsewhere in this Restated Certificate of
Incorporation, are as follows:
Section 1. Definitions. As
used in this Paragraph (C) of Article
FOURTH, the following definitions shall
apply. Except as specifically provided
herein, all other capitalized words shall
have the meanings set forth in the
Agreement (hereinafter defined).
(a) "Agreement" shall
mean the Preferred Stock Purchase
Agreement, entered into March 31, 1987,
between the Corporation and Security
Pacific Corporate Funding, Inc., a
Delaware corporation.
(b) "Board" shall mean
the board of directors of the Corporation.
(c) "Commitment Date"
shall mean the Closing Date of the
Agreement.
(d) "Corporation" shall
mean The Charles Schwab Corporation, a
Delaware corporation.
(e) "Common Stock"
shall mean the common stock of the
Corporation.
(f) "Dividend Rate"
shall mean the Eurodollar Rate (using a
six-month Eurodollar Period) plus 3%.
(g) "Initial Date"
shall man the first day of the first full
Fiscal Quarter following the Commitment
Date.
(h) "Loan Agreement"
shall mean the Loan Agreement, entered
into March 31, 1987, between the
Corporation, the banks therein named, and
Security Pacific National Bank, a national
banking association, as Agent.
(i) "Preferred Stock"
shall mean the Series A Preferred Stock of
the Corporation which is set forth in this
paragraph (C) of Article FOURTH.
(j) "Redetermination
Date" shall mean any day that is an
integral multiple of six months after the
Initial Date.
Section 2. Dividends.
(a) Right to Dividends.
The holders of the then outstanding
Preferred Stock shall be entitled to
receive dividends, payable quarterly, on
the last day of each Fiscal Quarter,
whenever funds are legally available and
when and as declared by the Board. Such
dividends shall accrue, for each share of
Preferred Stock, from, and including, the
Commitment Date and from day to day
thereafter as follows:
(i) From, and
including, the Commitment Date to, but not
including, the Initial Date, at an annual
rate equal to ten thousand (10,000)
multiplied by 9% of the par value for one
share of Preferred Stock; and
(ii) From, and
including, the Initial Date, and
thereafter, at ten thousand (10,000)
multiplied by the Dividend Rate multiplied
by the par value for one share of
Preferred Stock, calculated as of the
Initial Date and then recalculated every
six months thereafter as of each
Redetermination Date.
Such dividends shall be cumulative on a
quarterly basis such that if accrued
dividends in respect of any previous or
current quarterly dividend period, at the
rate specified above, shall not have been
paid or declared and a sum sufficient for
the payment thereof set apart, then the
deficiency shall first be fully paid
before any dividend or other distribution
shall be paid or declared and set apart
for the Common Stock.
(b) Priority. Unless
full accrued dividends on the Preferred
Stock for all past dividend periods and
the then current dividend period shall
have been paid: (1) no dividend
whatsoever (other than in Common Stock or
in another class or series of stock
ranking junior to the Preferred Stock as
to dividends and liquidation preference)
shall be paid or declared, and no
distribution shall be made, on any Common
Stock; and (2) no shares of Common Stock
shall be purchased, redeemed, or acquired
by the Corporation, except for repurchase
at the original cost paid for shares of
Common Stock in the case of unvested stock
repurchased from employees, officers,
directors, and independent contractors
whose stock is subject to vesting
arrangements.
(c) Additional
Dividends. The holders of the then
outstanding Preferred Stock shall be
entitled to receive additional dividends,
subject to the terms and conditions of
this Section 2, in amounts as set forth in
Section 3.8 of the Loan Agreement, mutatis
mutandis.
Section 3. Liquidation Rights
of Preferred Stock.
(a) Preference. If
there is any liquidation, dissolution, or
winding up of the Corporation, whether
voluntary of involuntary, after payment or
provision for payment of the debts or
other liabilities of the Corporation, then
the holders of each share of Preferred
Stock then outstanding shall be entitled
to be paid out of the assets of the
Corporation available for distribution to
its shareholders, whether such assets are
capital, surplus, or earnings, before any
payment or declaration and setting apart
for payment of any amount shall be made
pursuant to Section 3(b) herein, an amount
equal to one hundred dollars ($100.00) per
share of the Preferred Stock, plus an
amount equal to all accrued and unpaid
dividends thereon, whether or not
declared, to the date fixed for
distribution, shall be tendered to the
holders of the Preferred Stock with
respect to such liquidation, dissolution,
or winding up. If upon any liquidation,
dissolution or winding up of the
Corporation, whether voluntary of
involuntary, the assets to be distributed
to the holders of the Preferred Stock
shall be insufficient to permit the
payment to such shareholders of the full
preferential amounts aforementioned, then
all of the assets of the Corporation to be
distributed shall be distributed ratably
to the holders of the Preferred Stock
until the full preferential amounts
attributable to the Preferred Stock shall
have been paid in full. Nothing contained
in this Section 3 shall be deemed to
prevent redemption of the Preferred Stock
in the manner provided in Section 4
hereof.
(b) Remaining Assets.
After the payment or distribution to the
holders of the Preferred Stock of the full
preferential amounts aforementioned, the
holders of the Common Stock then
outstanding, and the holders of any other
series of preferred stock of the
Corporation, shall be entitled to receive
all of the remaining assets of the
Corporation to be distributed.
(c) Reorganization.
(i) If there is (A)
any consolidation or merger of the
Corporation with or into any other
corporation or other entity or person, or
any other corporate reorganization in
which, in either event, the Corporation
shall not be the continuing or surviving
entity of such consolidation, merger, or
reorganization, or (B) a sale of all or
substantially all of the assets of the
Corporation, then holders of the Preferred
Stock shall first receive, for each share
of such Preferred Stock, cash or
securities (which may include a series of
preferred stock or other equity
securities) received from the acquiring
corporation, or a combination thereof, at
the closing of any such transaction, in an
amount equal to the liquidation preference
of such share. After the payment or
distribution to the holders of the
Preferred Stock of the full preferential
amounts aforementioned, the holders of the
Common Stock then outstanding, and the
holders of any other series of preferred
stock of the Corporation, shall be
entitled to receive all remaining payments
or distributions.
(ii) Any securities
to be delivered to the holders of the
Preferred Stock pursuant to subsection
3(c)(i) above shall be valued as follows:
If such securities are not publicly
traded as of a particular date set for the
closing of such transaction, then the fair
market value shall be as reasonably
determined by the Corporation, in good
faith, and the Corporation shall deliver
to the holders of the then outstanding
shares of Preferred Stock a written
document setting forth in detail the
calculations made in determining such fair
market value (such determination to be
conclusive if approved by the holders of
not less than a majority of the then
outstanding shares of Preferred Stock).
During such time as such securities are
publicly traded but are not listed upon an
established stock exchange, the fair
market value per share shall be the last
sale price on the business day immediately
prior to such closing date as reported on
the National Market System, or, if such
shares are not then reported on the
National Market System but quotations are
reported on the National Association of
Securities Dealers Automated Quotations
System, the average of the bid and asked
prices on that date, in either event as
such price quotes are listed in The Wall
Street Journal, Western Edition (or, if
not so reported in The Wall Street
Journal, any other listing service or
publication known to the Board). If such
securities are listed upon an established
stock exchange or exchanges, then such
fair market value shall be deemed to be
the closing price of the shares on the
largest such stock exchange upon which
such shares are listed on the business day
immediately prior to such closing date.
(iii) The Corporation
shall give each holder of Preferred Stock
written notice of such impending
transaction at least ten (10) Banking Days
prior to the closing of such transaction,
whichever is earlier, and shall also
notify such holders in writing of the
final approval of such transaction. The
first of such notices shall describe the
material terms and conditions of the
impending transaction and the provisions
of this Subsection 3(c), and the
Corporation shall thereafter give such
holders prompt notice of any material
changes. The transaction shall in no
event take place sooner than ten (10)
Banking Days after the Corporation has
given the first notice provided for herein
or sooner than five (5) Banking Days after
the Corporation has given notice of any
material changes provided for herein;
provided that such periods may be
shortened upon the written consent of the
holders of a majority of the shares of
Preferred Stock then outstanding.
Section 4. Redemption.
(a) Optional
Redemption.
(i) At any time or
from time to time, whenever funds are
legally available, the Corporation may, at
its option, redeem, in cash, the Preferred
Stock, in whole or in part, at the
Redemption Price (defined herein below).
(ii) The Corporation
may, at its option at any time, whenever
funds are legally available, subject to
the terms and conditions of this Section
4(a)(ii), redeem all, but not part, of the
then outstanding shares of Preferred Stock
by exchanging such shares for debt ("Most
Junior Subordinated Debt") in an amount
equal to one hundred dollars ($100.00) per
outstanding share, plus all accrued and
unpaid dividends (whether or not declared)
per share of Preferred Stock to and
including the date set for the exchange,
of Preferred Stock to be exchanged. Such
exchange shall constitute a full and
complete retirement of the shares of
Preferred Stock so exchanged, and all
rights in connection therewith shall be
extinguished. The amount of the Most
Junior Subordinated Debt shall be
allocated pro rata among the holders of
shares of Preferred Stock (individually,
"Holder," collectively, "Holders") based
upon the aggregate number of outstanding
shares of Preferred Stock held by each
Holder. The terms and conditions of the
Most Junior Subordinated Debentures shall
be set forth in an indenture substantially
identical to the indenture covering the
BAC Junior Subordinate Debenture, except
for these changes: (1) such debt shall
bear interest at a fixed interest rate,
determined as of the date on which the
Preferred Stock is exchanged into such
debt ("Exchange Date"), equal to the
Eurodollar Rate (using a six-month
Eurodollar Period) on the Exchange Date
plus 7%, payable on the last day of each
Fiscal Quarter, but not to exceed the
maximum rate permitted under applicable
law; (2) the principal of such debt shall
be due in two installments: (i) 50% of
the amount then outstanding on March 31,
1998; and (ii) the balance on March 31,
2002, including any unpaid interest; (3)
at any time, at the option of the
Corporation, such debt may be prepaid in
full, including any unpaid interest,
without premium; (4) such debt shall be
prepaid, including any unpaid interest,
without premium: (1) upon any public
offering of any of the Company's equity
securities pursuant to an effective
registration statement filed under the
Securities Act of 1933, as amended (but
specifically excluding any registration
statement covering (i) stock issued or to
be issued under any benefit plan
(including, without limitation, any stock
purchase or stock option plan) or (ii) any
grant or exercise of options or warrants
pursuant to such a plan), if such offering
includes a secondary equity offering
(i.e., an offering of the Company's equity
securities by any person other than the
Corporation ("Secondary Sellers")), in an
amount equal to the gross offering
proceeds (net of any underwriters'
discounts or commissions, but not net of
any other offering expenses) to be
received by the Secondary Sellers; or (ii)
upon the payment of any dividends with
respect to the common stock of the
Corporation, if such dividends are in
excess of $1,000,000 (in any Fiscal Year),
in an amount equal to such excess
dividends; provided that any such
prepayment shall not be required to be
made unless and until any such prepayment
may be made without violating or causing
an event of default under the Loan
Agreement or either of the indentures
covering the BAC Junior Subordinated
Debenture and the BAC Senior Subordinated
Debenture, without regard to any
amendments made to such Loan Agreement or
indentures after the Closing Date; (5)
such debt shall be junior and subordinate
to all present and future indebtedness of
the Corporation; (6) the trustee under
such indenture shall be as determined by
the Corporation; (7) such indenture shall
not be required to qualify under the Trust
Indenture Act of 1939, as amended; and (8)
such debt shall be subject to all
restrictions on transfer and rights of
first refusal as are applicable to shares
of Preferred Stock. Sixty (60) days
before the Exchange Date, the Corporation
shall send a written notice to each
Holder, using each Holder's most recent
address as listed in the Company's
records, which shall state: (1) the
Exchange Date; (2) the aggregate amount of
the Most Junior Subordinated Debt to be
issued in exchange for all of the then
outstanding shares of Preferred Stock; and
(3) the number of shares of Preferred
Stock required to be surrendered by the
Holder to the transfer agent (who may be
the Corporation) designated by the
Corporation ("Transfer Agent"). On the
Exchange Date, each Holder shall surrender
certificates representing all of his
shares of Preferred Stock to the Transfer
Agent in exchange for the Most Junior
Subordinated Debt. If such shares are not
surrendered, then, with respect to such
shares, the exchange shall be deemed to
have occurred and such shares of Preferred
Stock shall be automatically exchanged
into debt and such certificates shall be
deemed canceled. All interest and
principal payments on the Most Junior
Subordinated Debt shall be sent to each
Holder's above-referenced address. Unless
full accrued interest on the Most Junior
Subordinated Debt for all past interest
periods and the then current interest
period shall have been paid: (1) no
dividend whatsoever (other than in a
series of stock) shall be paid or
declared, and no distribution shall be
made, on any Common Stock; and (2) no
shares of Common Stock shall be purchased,
redeemed, or acquired by the Corporation,
except for repurchase at the original cost
paid for shares of Common Stock in the
case of unvested stock repurchased from
employees, officers, directors, and
independent contractors whose stock is
subject to vesting arrangements.
(b) Early Mandatory
Redemption.
The Corporation shall redeem the
Preferred Stock at the Redempton Price (i)
upon, or as soon thereafter as funds are
legally available, any public offering of
any of the Company's equity securities
pursuant to an effective registration
statement filed under the Securities Act
of 1933, as amended (but specifically
excluding any registration statement
covering (i) stock issued or to be issued
under any benefit plan (including, without
limitation, any stock purchase or stock
option plan) or (ii) any grant or exercise
of options or warrants pursuant to such a
plan), if such offering includes a
secondary equity offering (i.e., an
offering of the Company's equity
securities by any person other than the
Corporation ("Secondary Sellers")), in an
amount equal to the gross offering
proceeds (net of any underwriters'
discount or commission, but not net of any
other offering expenses) received by the
Secondary Sellers; or (iii) upon, or as
soon thereafter as funds are legally
available, the payment of any dividends
with respect to the Common Stock, if such
dividends are in excess of $1,000,000 (in
any Fiscal Year), in an amount equal to
such excess dividends; provided that any
such redemption shall be subject to the
limitations imposed by the Loan Agreement
and by the indentures covering the BAC
Junior Subordinated Debenture and the BAC
Senior Subordinated Debenture, without
regard to any amendments made to the Loan
Agreement or such indentures after the
Closing Date; and provided further that
any such redemption shall be subject to
the limitations, if any, imposed by any
instrument evidencing senior debt and
entered into between the Corporation and
any person after March 31, 1987, but only
if: (i) the principal amount of such
senior debt is greater than or equal to
$25,000,000; and (ii) the language used to
describe such limitations, if any, is the
exact same language (identical in every
detail) used to describe the redemption
limitations contained in the Loan
Agreement and in the indentures covering
the BAC Junior Subordinated Debenture and
the BAC Senior Subordinated Debenture,
without regard to any amendments made to
the Loan Agreement or such indentures
after the Closing Date.
(c) Ultimate Mandatory
Redemption.
The Corporation shall redeem, as
son as funds are legally available, the
Preferred Stock at the Redemption Price as
follows: (i) 50% of the number of shares
of Preferred Stock then outstanding on
March 31, 1998; and (ii) the balance of
the shares of Preferred Stock on March 31,
2002.
Section 5. Redemption Terms and
Procedures.
Any redemption pursuant to Sections
4(a)(i), 4(b), or 4(c) herein shall be
accomplished in accordance with the
following terms and procedures contained
in this Section 5.
(a) Redemption Notice.
The Corporation shall mail, not less than
thirty (30) days nor more than sixty (60)
days prior to the date for the redemption
of any Preferred Stock ("Redemption
Date"), written notice ("Redemption
Notice"), postage prepaid, to each Holder
at each Holder's address as last shown on
the records of the Corporation. The
Redemption Notice shall state:
(i) The total
number of shares of Preferred Stock to be
redeemed;
(ii) The number of
shares of Preferred Stock held by the
Holder which the Corporation intends to
redeem;
(iii) The Redemption
Date and Redemption Price; and
(iv) The time and
manner in, and place at, which the Holder
is to surrender to the Corporation his
certificate or certificates representing
the shares of Preferred Stock to be
redeemed.
(b) Price. The
redemption price for the Preferred Stock
shall be an amount per share in cash equal
to one hundred dollars ($100.00) per share
of the Preferred Stock, plus all accrued
and unpaid dividends, whether or not
declared, to and including the applicable
Redemption Date ("Redemption Price");
(c) Surrender of Stock.
On or before the Redemption Date, each
Holder shall surrender the certificate or
certificates representing the shares of
Preferred Stock to be redeemed to the
Corporation, in the manner and at the
place designated in the Redemption Notice,
and thereupon the Redemption Price for
such shares shall be payable to the order
of the person whose name appears on such
certificate or certificates as the owner
thereof, and each surrendered certificate
shall be canceled and retired. If less
than all of the shares represented by such
certificate are redeemed, then a new
certificate representing the unredeemed
shares shall be issued to the Holder of
such shares.
(d) Partial Redemption.
If the Corporation redeems only a part of
the shares of Preferred Stock, then the
Corporation shall effect such redemption
pro rata from the Holders according to the
number of shares of Preferred Stock held
of record by each Holder immediately prior
to redemption.
(e) Termination of
Rights. If the Redemption Notice is duly
given, then, notwithstanding the fact that
the certificates evidencing any of the
shares of Preferred Stock so called for
redemption have not been surrendered, the
dividends with respect to such shares
shall cease to accrue after the Redemption
Date; provided that, as of the Redemption
Date, the Corporation has deposited with a
bank or trust company in California having
a capital and surplus of at least
$100,000,000, as a trust fund for the
benefit of the shares called for
redemption, sufficient funds which are
legally available for redemption, with
irrevocable instructions to pay the
Redemption Price upon surrender of the
share certificates representing the shares
called for redemption, and all rights with
respect to such shares shall forthwith
after the Redemption Date cease and
terminate, except only the right of the
holders to receive the Redemption Price
without interest upon surrender of their
certificates therefor.
(f) Breakage Fees or
Escrow Deposit.
(i) If the
Corporation redeems shares of Preferred
Stock, and if the Redemption Date for such
redemption is on a day which is not the
day immediately prior to a Redetermination
Date, then the Corporation shall pay to
each Holder a fee calculated as follows:
(A) one hundred dollars ($100.00) per
share of Preferred Stock, times the number
of days between the Redemption Date and
the next Redetermination Date, divided by
360, times the applicable Interest
Differential; plus (B) all out-of-pocket
expenses incurred by the Holders and
reasonably attributable to such
redemption.
(ii) If the
Corporation redeems shares of preferred
Stock, and if the Redemption Date for such
redemption is on a day which is not the
day immediately prior to a Redetermination
Date, then the Corporation may, at its
option, deposit in escrow with the agent
an amount equal to the total redemption
amount, with interest thereon for the
account of the Corporation equal to the CD
Base Rate, until the next Redetermination
Date, and the date upon which such
redemption shall be made shall be extended
to the day immediately prior to such
Redetermination Date.
Section 6. Voting Rights of the
Preferred Stock.
The Preferred Stock shall be non-
voting, except as required by applicable
law.
Section 7. No Reissuance of
Preferred Stock. No share or shares of
Preferred Stock acquired by the
Corporation by reason of redemption,
purchase, exchange, or otherwise shall be
reissued and all such shares shall be
canceled, retired, and eliminated from the
shares which the Corporation shall be
authorized to issue.
FIFTH. In furtherance and not in
limitation of the powers conferred by
statute, the Board of Directors is
expressly authorized to adopt, amend or
repeal from time to time any or all of the
Bylaws of this Corporation.
SIXTH. The number of directors which
shall constitute the whole Board of
Directors of this Corporation shall be as
specified in the Bylaws of this
Corporation.
SEVENTH. Elections of directors need
not be by written ballot except and to the
extent provided in the Bylaws of this
Corporation.
EIGHTH. No director of this
Corporation shall be personally liable to
the Corporation or its stockholders for
monetary damages for any breach of
fiduciary duty as a director.
Notwithstanding the foregoing sentence, a
director shall be liable to the extent
provided by applicable law (i) for any
breach of the director's duty of loyalty
to the Corporation or its stockholders,
(ii) for acts or omissions not in good
faith or which involve intentional
misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the
General Corporation Law of the State of
Delaware, or (iv) for any transaction from
which the director derived an improper
personal benefit. No amendment to or
repeal of this Article EIGHTH shall apply
to or have any effect on the liability or
alleged liability of any director of the
Corporation for or with respect to any
acts or omissions of such director
occurring prior to such amendment or
repeal.
NINTH. Subject to the provisions of
the next sentence, every stockholder
entitled to vote at any election of
directors may cumulate such stockholder's
votes and give one candidate a number of
votes equal to the number of directors to
be elected multiplied by the number of
votes to which the stockholder's shares
are entitled, or distribute the
stockholder's votes on the same principle
among as many candidates as the
stockholder thinks fit. No stockholder
shall be entitled to cumulate votes (i.e.,
cast for any candidate a number of votes
greater than the number of stockholder's
shares) unless such candidate or
candidates' names have been placed in
nomination prior to the voting and the
stockholder has given notice at the
meeting prior to the voting of the
stockholder's intention to cumulate the
stockholder's votes. If any one
stockholder has given such notice, all
stockholders may cumulate their votes for
candidates in nomination. In any election
of directors, the candidates receiving the
highest number of votes of the shares
entitled to be voted for them up to the
number of directors to be elected by such
shares are elected.
TENTH.
(A) In addition to any
affirmative vote required by law, by this
Restated Certificate of Incorporation, by
a certificate filed under Section 151(g)
of the General Corporation Law of the
State of Delaware, or by the Bylaws, and
except as otherwise expressly permitted in
paragraph (B) of this Article TENTH, a
Business Combination (as hereafter
defined) with, for, or on behalf of, any
Interested Stockholder (as hereafter
defined) or any Affiliate or Associate (as
hereafter defined) of such Interested
Stockholder shall require the affirmative
vote of at least 80% of the votes entitled
to be cast by the holders of all the then
outstanding Voting Stock (as hereafter
defined), voting together as a single
class. Such affirmative vote shall be
required notwithstanding the fact that no
vote may be required, or that a lesser
percentage of a separate class vote may
otherwise be specified, by law or by any
agreement between this Corporation and any
national securities exchange or otherwise.
(B) The provisions of
paragraph (A) of this Article TENTH shall
not be applicable to any particular
Business Combination, and such Business
Combination shall require only such vote,
if any, as is required by law, or by any
other provisions of this Restated
Certificate of Incorporation, or by a
certificate filed under Section 151(g) of
the General Corporation Laws of the State
of Delaware, or by the Bylaws, or by any
agreement between this Corporation and any
national securities exchange, if (i) such
Business Combination shall have been
specifically approved by a majority of the
Disinterested Directors (as hereafter
defined) at the time or (ii) all the
conditions specified in each of the
following subparagraphs (1), (2), (3),
(4), (5) and (6) are satisfied.
(1) The aggregate
amount of cash and the Fair Market Value
(as hereafter defined) as of the
Consummation Date (as hereafter defined)
of any consideration other than cash to be
received per share by holders of Voting
Stock in such Business Combination, shall
be at least equal to the highest amount
determined under clauses (a) and (b)
below:
(a) (if
applicable) the highest per share price
(including any brokerage commissions,
transfer taxes and soliciting dealers'
fees) paid by or on behalf of such
Interested Stockholder for any share of
Voting Stock in connection with the
acquisition by the Interested Stockholder
of Beneficial Ownership (as hereafter
defined) of shares of Voting Stock (i)
within the five-year period immediately
prior to the Announcement Date (as
hereafter defined) or (ii) in the
transaction or series of transactions in
which it became an Interested Stockholder,
whichever is higher, in either case
adjusted for any subsequent stock split,
stock dividend, subdivision or
reclassification with respect to Voting
Stock; or
(b) the Fair
Market Value per share of Voting Stock on
the Announcement Date or the Determination
Date (as hereafter defined), whichever is
higher, as adjusted for any subsequent
stock split, stock dividend, subdivision
or reclassification with respect to Voting
Stock.
(2) The consideration
to be received by holders of a particular
class or series of outstanding Voting
Stock shall be in cash or in the same form
as previously has been paid by or on
behalf of the Interested Stockholder in
connection with its direct or indirect
acquisition of Beneficial Ownership of
shares of such class or series of Voting
Stock. If the consideration so paid for
shares of any class or series of Voting
Stock varied as to form, the form of
consideration for such class or series of
Voting Stock shall either be cash or the
form used to acquire Beneficial Ownership
of the largest number of shares of such
class or series of Voting Stock acquired
by the Interested Stockholder during the
five-year period prior to the Announcement
Date. If non-cash consideration is to be
paid, the Fair Market Value of such non-
cash consideration shall be determined on
and as of the Communication Date.
(3) After the
Determination Date and prior to the
Consummation Date there shall have been
(a) no failure to declare and pay at the
regular date therefor any full quarterly
dividends (whether or not cumulative)
payable in accordance with the terms of
any outstanding Voting Stock; (b) no
reduction in the annual rate of dividends
paid on the Voting Stock (except as
necessary to reflect any split or
subdivision of the Voting Stock), except
as approved by a majority of the
Disinterested Directors; (c) an increase
in such annual rate of dividends (as
necessary to prevent any such reduction)
in the event of any reclassification
(including any reverse stock split or
combination of shares), recapitalization,
reorganization or any similar transaction
that has the effect of reducing the number
of outstanding shares of the Voting Stock,
unless the failure so to increase such
annual rate is approved by a majority of
the Disinterested Directors; and (d) no
transaction by which such Interested
Stockholder has become the Beneficial
Owner of any additional shares of Voting
Stock except as part of the transaction
that results in the Interested Stockholder
becoming an Interested Stockholder and
except in a transaction that, after giving
effect thereto, would not result in any
increase in the Interested Stockholder's
percentage Beneficial Ownership of any
class or series of Voting Stock.
(4) After the
Determination Date, such Interested
Stockholder shall not have received the
benefit, directly or indirectly (except as
a stockholder of this Corporation, in
proportion to its stockholding), of any
loans, advances, guarantees or similar
financial assistance or any tax credits or
tax advantages provided by this
Corporation (collectively, "Financial
Assistance"), whether in anticipation of
or in connection with such Business
Combination or otherwise.
(5) A proxy or
information statement describing the
proposed Business Combination and
complying with the requirements of the
Securities Exchange Act of 1934 and the
rules and regulations thereunder (or any
subsequent provisions replacing such Act,
rules or regulations) shall be mailed to
stockholders of the Corporation at least
30 days prior to the consummation of such
Business Combination (whether or not such
proxy or information statement is required
to be mailed pursuant to such Act, rules
or regulations, or subsequent provisions).
The proxy or information statement shall
contain on the first page thereof, in a
prominent location, any statement as to
the advisability or inadvisability of the
Business Combination that the
Disinterested Directors, or any of them,
may desire to make, and, if deemed
advisable by a majority of the
Disinterested Directors, the proxy or
information statement shall contain the
opinion of an independent investment
banking firm selected by a majority of the
Disinterested Directors as to the fairness
or lack of fairness of the terms of the
Business Combination from a financial
point of view to the holders of the
outstanding shares of Voting Stock other
than the Interested Stockholder and its
Affiliates or Associates, such investment
banking firm to be paid a reasonable fee
for its services by this Corporation.
(6) Such Interested
Stockholder shall not have made any major
change in this Corporation's business or
equity capital structure without the
approval of a majority of the
Disinterested Directors.
(C) The following
definitions shall apply with respect to
this Article TENTH:
(1) The terms
"Affiliate" and "Associate" shall have the
respective meanings ascribed to those
terms in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended, and as
in effect on the date that this provision
of the Restated Certificate of
Incorporation of this Corporation is
approved by the stockholders (the term
"registrant" in said Rule 12b-2 meaning in
this case the Corporation).
(2) The term
"Announcement Date" with respect to any
Business Combination means the date of the
first public announcement of the proposal
of such Business Combination.
(3) A person shall be a
"Beneficial Owner" of, or have "Beneficial
Ownership" of, or "Beneficially Own," any
Voting Stock over which such person or any
of its Affiliates or Associates, directly
or indirectly, through any contract,
arrangement, understanding or
relationship, has or shares or, upon the
exercise of any conversion right, exchange
right, warrant, option or similar interest
(whether or not then exercisable) would
have or share, either (a) voting power
(including the power to vote or to direct
the voting) of such security or (b)
investment power (including the power to
dispose or direct the disposition) of such
security. For the purposes of determining
whether a person is an Interested
Stockholder, the number of shares of
Voting Stock deemed to be outstanding
shall include any shares Beneficially
Owned by such person even though not
actually outstanding, but shall not
include any other shares of Voting Stock
which are not outstanding but which may be
issuable to other persons pursuant to any
agreement, arrangement or understanding,
or upon exercise of any conversion right,
exchange right, warrant, option or similar
interest.
(4) The term "Business
Combination" shall mean:
(a) any merger or
consolidation of this Corporation or any
Subsidiary (as hereafter defined) with (i)
any Interested Stockholder (as hereafter
defined) or (ii) any other corporation
(whether or not itself an Interested
Stockholder) which after such merger or
consolidation would be an Affiliate or
Associate of an Interested Stockholder; or
(b) any sale,
lease, exchange, mortgage, pledge,
transfer or other disposition or security
agreement, investment, loan, advance,
guarantee, agreement to purchase,
agreement to pay, extension of credit,
joint venture participation or other
arrangement (in one transaction or a
series of related transactions) with or
for the benefit of any Interested
Stockholder or any Affiliate or Associate
of any Interested Stockholder, involving
any assets, securities, or commitments of
this Corporation, any Subsidiary or any
INterested Stockholder or any Affiliate or
Associate or any Interested Stockholder
which, together with all other such
arrangements (including all contemplated
future events) have an aggregate Fair
Market Value (as hereafter defined) and/or
involve aggregate commitments of
$5,000,000 or more; or
(c) the issuance
or transfer by this Corporation or any
Subsidiary (in one transaction or series
of related transactions) to an Interested
Stockholder or Associate or Affiliate of
an Interested Stockholder of any
securities of this Corporation or any
Subsidiary in exchange for cash,
securities or other property (or a
combination thereof) having an aggregate
Fair Market Value as of the Announcement
Date of $5,000,000 or more, other than the
issuance of securities upon the conversion
or exchange of securities of this
Corporation in exchange for securities of
any Subsidiary which were acquired by an
Interested Stockholder from this
Corporation or a Subsidiary in a Business
Combination which was approved by a vote
of the shareholders pursuant to this
Article TENTH; or
(d) the adoption
of any plan or proposal for the
liquidation or dissolution of this
Corporation; or
(e) any
reclassification of any securities of this
Corporation (including any reverse stock
split), any recapitalization of the Voting
Stock of this Corporation, any merger or
consolidation of this Corporation with or
into any of its subsidiaries, or any other
transaction (whether or not with or
otherwise involving any Interested
Stockholder) that has the effect, directly
or indirectly, of increasing the
proportionate share of the outstanding
shares of any class of Voting Stock or
series thereof of the Corporation or of
any Subsidiary Beneficially Owned by an
Interested Stockholder or Associate or
Affiliate of any Interested Stockholder or
as a result of which the stockholders of
the Corporation would cease to be
stockholders of a corporation having, as
part of its certificate of incorporation,
provisions to the same effect as this
Article TENTH and the provisions of
Article ELEVENTH of this Restated
Certificate of Incorporation relating to
the provisions of this Article TENTH; or
(f) any agreement,
contract, or other arrangement providing
for one or more of the actions specified
in the foregoing paragraphs (a) through
(e), or any series of transactions which,
if taken together, would constitute one or
more of the actions specified in the
foregoing paragraphs (a) through (e).
(5) The term
"Consummation Date" means the date of the
consummation of a Business Combination.
(6) The term
"Determination Date" in respect to an
Interested Stockholder means the date on
which such Interested Stockholder first
became an Interested Stockholder.
(7) The term
"Disinterested Director" with respect to a
Business Combination means any member of
the Board of Directors of this Corporation
who is not an Interested Stockholder or an
Affiliate or Associate of, and was not
directly or indirectly a nominee of, any
Interested Stockholder involved in such
Business Combination or any Affiliate or
Associate of such Interested Stockholder
and who either (a) was a member of the
Board of Directors prior to the time that
such Interested Stockholder became an
Interested Stockholder, or (b) is a
successor of a Disinterested Director and
was nominated to succeed a Disinterested
Director by a majority of the
Disinterested Directors at the time of his
nomination. Any reference to
"Disinterested Directors" shall refer to a
single Disinterested Director if there be
but one. Any matter referred to as
requiring approval of, or having been
approved by, a majority of the
Disinterested Directors shall mean the
matter requires the approval of, or has
been approved by, the Board without giving
effect to the vote of any Director who is
not a Disinterested Director and with the
affirmative vote of a majority of the
Disinterested Directors.
(8) The term "Fair
Market Value" as of any particular date
means: (a) in the case of cash, the
amount of such cash; (b) in the case of
stock (including Voting Stock), the
highest closing price per share of such
stock during the thirty-day period
immediately preceding the date in question
on the largest United States securities
exchange registered under the Securities
Exchange Act of 1934, as amended, on which
such stock is listed or, if such stock is
not listed on any such exchange, the
highest last sales price as reported by
the National Association of Securities
Dealers, Inc. Automated Quotation System
("NASDAQ") during the thirty-day period
immediately preceding the date in question
if the stock is a National Market System
security or, if such stock is not a
National Market System security, the
highest reported closing bid quotation for
a share of such stock during the thirty-
day period preceding the date in question
on NASDAQ or any successor quotation
reporting system or, if quotations are not
available in such system, as furnished by
the National Quotation Bureau Incorporated
or any similar organization furnishing
quotations, or if no such quotations are
available, the fair market value on the
date in question of a share of such stock
as determined by a majority of the
Disinterested Directors in good faith; and
(c) in the case of stock of any class or
series which is not traded on any
securities exchange or in the over-the-
counter market, or in the case of property
other than cash or stock, or in the case
of Financial Assistance, the fair market
value of such stock, property or Financial
Assistance, as the case may be, on the
date in question as determined by a
majority of the Disinterested Directors in
good faith.
(9) The term
"Interested Stockholder" shall mean any
person, other than this Corporation, any
Subsidiary or any employee benefit plan of
this Corporation or any Subsidiary, who or
which:
(a) is, or has
announced or publicly disclosed a plan or
intention to become, the Beneficial Owner,
directly or indirectly, of shares of
Voting Stock representing 15% or more of
the total votes which all of the then-
outstanding shares of Voting Stock are
entitled to cast in the election of
directors; or
(b) is an
Affiliate or Associate of any person
described in Subparagraph 9(a) at any time
during the five-year period immediately
preceding the date in question; or
(c) acts with any
other person as a partnership, limited
partnership, syndicate, or other group for
the purpose of acquiring, holding or
disposing of securities of this
Corporation, and such group is the
Beneficial Owner, directly or indirectly,
of shares of Voting Stock representing 15%
or more of the total votes which all of
the then-outstanding shares of Voting
Stock are entitled to cast in the election
of directors.
Any reference to a particular
Interested Stockholder involved in a
Business Combination shall also refer to
any Affiliate or Associate thereof, any
predecessor thereto and any other person
acting as a member of a partnership,
limited partnership, syndicate or group
with such particular Interested
Stockholder within the meaning of the
foregoing clause (c) of this subparagraph
(9).
(10) A "person" shall
mean any individual, firm, company,
corporation (which shall include a
business trust), partnership, joint
venture, trust or estate, association or
other entity.
(11) The term
"Subsidiary" in respect of this
Corporation means any corporation or
partnership of which a majority of any
class of its equity securities is owned,
directly or indirectly, by this
Corporation.
(12) The term "Voting
Stock" shall mean all shares of capital
stock that entitle the holder to vote for
the election of directors, including,
without limitation, this Corporation's
common stock.
(D) A majority of the
Disinterested Directors shall have the
power and duty to determine, on the basis
of information known to them after
reasonable inquiry, all facts necessary to
determine compliance with this Article
TENTH, including, without limitation (1)
whether a person is an Interested
Stockholder, (2) the number of shares of
Voting Stock Beneficially Owner by any
person, (3) whether a person is an
Affiliate or Associate of another person,
(4) whether the requirements of paragraph
(B) of this Article TENTH have been met
with respect to any Business Combination,
(5) whether the proposed transaction is
with, or proposed by, or on behalf of an
Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder,
and (6) whether the assets which are the
subject of any Business Combination have,
or the consideration to be received for
the issuance or transfer of securities by
this Corporation or any Subsidiary in any
Business Combination has, an aggregate
Fair Market Value of $5,000,000 or more.
The good faith determination of a majority
of the Disinterested Directors on such
matters shall be conclusive and binding
for all purposes of this Article TENTH.
(E) Nothing contained in
this Article TENTH shall be construed to
relieve any Interested Stockholder from
any fiduciary obligation imposed by law.
(F) The fact that any
Business Combination complies with
paragraph (B) of this Article TENTH shall
not be construed to impose any fiduciary
duty, obligation or responsibility on the
Board of Directors, or any member thereof,
to approve such Business Combination or
recommend its adoption or approval to the
stockholders of this Corporation, nor
shall such compliance limit, prohibit or
otherwise restrict in any manner the
Board, or any member thereof, with respect
to evaluations of or actions and responses
taken with respect to such Business
Combination.
(G) For purposes of this
Article TENTH, a Business Combination or
any proposal to amend, repeal or adopt any
provision of this Restated Certificate of
Incorporation inconsistent with this
Article TENTH (collectively, "Proposed
Action") is presumed to have been proposed
by, or on behalf of, an Interested
Stockholder or an Affiliate or Associate
of an Interested Stockholder or a person
who thereafter would become such if (1)
after the Interested Stockholder became
such, the Proposed Action is proposed
following the election of any director of
this Corporation who, with respect to such
Interested Stockholder, would not qualify
to serve as a Disinterested Director or
(2) such Interested Stockholder,
Affiliate, Associate or person votes for
or consents to the adoption of any such
Proposed Action, unless as to such
Interested Stockholder, Affiliate,
Associate or person, a majority of the
Disinterested Directors makes a good faith
determination that such Proposed Action is
not proposed by or on behalf of such
Interested Stockholder, Affiliate,
Associate or person, based on information
known to them after reasonable inquiry.
ELEVENTH.
(A) This Corporation
reserves the right to any time and from
time to time to amend, alter, change or
repeal any provisions contained herein,
and other provisions authorized by the
laws of the State of Delaware at the time
in force may be added or inserted, in the
manner now or hereafter prescribed by law,
and all rights, preferences, and
privileges of whatsoever nature conferred
upon shareholders, directors, or any other
person whomsoever by or pursuant to the
Restated Certificate of Incorporation in
its present form or as hereafter are
granted, subject to the rights reserved in
this Article ELEVENTH.
(B) In addition to any
requirements of law and other provisions
hereof (and not withstanding the fact that
approval by a lesser vote may be permitted
by law or any other provision hereof), the
affirmative vote of the holders of 80% or
more of the combined voting power of the
then-outstanding shares of Voting Stock,
voting together as a single class, shall
be required to amend, alter or repeal, or
adopt any provision inconsistent with,
this Article ELEVENTH or Article TENTH
hereof.
IN WITNESS WHEREOF, this Restated
Certificate of Incorporation, which only
further amends the provisions of the
Certificate of Incorporation of this
Corporation as heretofore amended or
supplemented or restated, there being no
discrepancies between those provisions and
the provisions of this Restated
Certificate of Incorporation, and it
having been duly adopted by the
Corporation's Board of Directors in
accordance with Section 245 of the General
Corporation Law of the State of Delaware,
has been executed by its duly authorized
officers on this 29th day of July, 1987.
THE CHARLES SCHWAB CORPORATION
By /s/ Charles R. Schwab
President
Attest:
/s/ Barbara A. Wolfe RECEIVED FOR RECORD
Barbara A. Wolfe Aug 6 1987
Secretary
William M. Honey, Recorder
EXHIBIT 10.72
RESTATEMENT OF ASSIGNMENT AND LICENSE
Preamble.
This is a restatement of the Assignment and License
made the 31st day of March, 1987, and the Amendment thereof
made as of July 30, 1987, by and between CL Acquisition
Corporation, a Delaware corporation, The Charles Schwab
Corporation, a Delaware corporation, Charles Schwab & Co.,
Inc., a California corporation, and Charles R. Schwab, an
individual. For purposes of this restatement, the parties
are referred to herein by their present names: The Charles
Schwab Corporation, formerly CL Acquisition ("CS Corp.");
Schwab Holdings, Inc., formerly The Charles Schwab
Corporation ("Holdings, Inc."); Charles Schwab & Co., Inc.
("Schwab, Inc."); and Charles R. Schwab ("Schwab").
The parties hereby agree as follows:
1. Definitions. In this Agreement:
a. "Name" means "Schwab" and each name and
mark based thereon or derived therefrom including without
limitation Schwab, C. Schwab, C. R. Schwab, Charles Schwab,
Charles R. Schwab, Chuck Schwab, Schwab One, Schwab Tech,
CRS, and the corporate names The Charles Schwab Corporation
and Charles Schwab & Co., Inc.
b. "Likeness" means any photograph, portrait,
drawing or other image or likeness of Schwab, however
reproduced, and whether still, single, multiple or moving.
c. "Financial Services Business" means the
business in which Schwab, Inc. is currently engaged and any
additional and related business in which CS Corp., Holdings,
Inc. and/or Schwab, Inc. are permitted to engage from time
to time during the term of this Agreement under applicable
statutes or by the rules, regulations or orders of those
regulatory agencies to which such entities are from time to
time subject.
d. "Permitted Assignees and Licensees" means
persons and entities who have been assigned or licensed the
right to use the Name and/or Likeness as permitted in
Section 9 hereof.
e. "Employment Agreement" means that certain
Employment Agreement of even date with the Assignment and
License under the terms of which Schwab agrees to perform
certain services on behalf of CS Corp.
f. "Involuntary Termination," "Cause" and
"Voluntary Termination" will have the same meaning as
"involuntary termination," "cause," and "voluntary
termination," respectively, in the Employment Agreement.
g. "Loan Agreement" means that certain "Loan
Agreement dated as of March 31, 1987 between CS Corp. as
Borrower, The Banks herein named as the Banks, and Security
Pacific National Bank, as the Agent."
h. "Obligations," "Bank," "Agents," and "Loan
Documents" will all have the same meaning as in the Loan
Agreement.
i. "Restricted Period" means that period
beginning with the date of the Assignment and License and
ending on the earlier of (i) eight years from the date of
the Assignment and License and (ii) the first date when all
Obligations are fully paid.
2. Assignment and License Back. Schwab hereby
assigns to CS Corp. all service mark, trademark and trade
name rights in and to the Name and Likeness as defined below
as well as all good will associated therewith. CS Corp.
hereby grants back to Schwab the perpetual, unrestricted,
ongoing, exclusive, irrevocable license to use the Name and
Likeness throughout the world for activities other than the
Financial Services Business.
3. Reversion. In the event CS Corp. and all
Permitted Assignees and Licensees shall all cease using the
Name while Schwab still lives, all rights granted to CS
Corp. with respect thereto shall revert to Schwab without
further act or deed. In the event CS Corp. and all
Permitted Assignees and Licensees shall all cease using the
Likeness while Schwab still lives, all rights granted to CS
Corp. with respect thereto shall revert to Schwab without
further act or deed.
4. Representations by Schwab. Schwab represents
that, except as provided in this Agreement, no person or
organization is authorized, permitted or licensed by Schwab
to use the Name and/or the Likeness in conjunction with any
Financial Services Business, and Schwab agrees that he will
not directly, nor indirectly through any other person or
organization, use the Name and/or the Likeness in
conjunction with any such business or authorize, permit, or
license any other party to use the Name or the Likeness in
conjunction with any such business, other than as permitted
by Section 5 hereof.
5. Employment; Payment; Expansion of License.
5.1 As used in this Section 5:
a. "Purchase Payment" means three-tenths
of one percent (0.3%) of the Purchase Payment Base.
b. "Purchase Payment Base" means the sum
of the Net Revenues of all of the Included Users.
c. "Net Revenues" of an Included User
means the Gross Revenues of that Included User minus the
Operating Interest Expense of that Included User, in each
case during the Payment Period.
d. "Gross Revenues" of an Included User
means the gross revenues of that Included User during the
Payment Period, determined in accordance with generally
accepted accounting principles, and, to the extent permitted
by such principles in consolidated financial statements of
that Included User, shall include the gross revenues of all
subsidiaries and affiliates of that Included User during the
Payment Period, but excluding nonetheless from the gross
revenues of that Included User and its subsidiaries and
affiliates all gross revenues (i) that would otherwise be
included more than once in the Purchase Payment Base, (ii)
received from other Included Users, or (iii) received from
subsidiaries and affiliates of other Included Users.
e. "Operating Interest Expense" of an
Included User means the operating interest expense of that
Included User during the Payment Period, determined in
accordance with generally accepted accounting principles
and, to the extent permitted by such principles in
consolidated financial statements of that Included User,
shall include the operating interest expense of all
subsidiaries and affiliates of the Included User during the
Payment Period, but excluding nonetheless from the operating
interest expense of that Included User and its subsidiaries
and affiliates all operating interest expense that would
otherwise be deducted more than once in calculating the
Purchase Payment Base.
f. "Included Users" means CS Corp. and
all Permitted Assignees and Licensees except Banks and
Agent.
g. The "Payment Period" begins on the
first day of the month following the termination of Schwab's
employment by CS Corp., whether during or after the
Restricted Period and regardless of the reason for such
termination, unless (x) immediately prior to such
termination Schwab and CS Corp. are parties to an employment
agreement whose term extends beyond the date of termination,
(y) that employment agreement requires CS Corp. to make a
payment or payments in lieu of salary or other payments that
would have been payable under the employment agreement had
Schwab continued to be employed beyond the date of
termination, and (z) CS Corp. makes such payment or payments
or pays a mutually acceptable settlement in lieu thereof.
If (x), (y) and (z) are all true, then the "Payment Period"
shall begin on the first day of the month following the end
of the full term of the employment agreement, provided that
if a written agreement between CS Corp. and Schwab expressly
provides that the payment(s) made or settlement paid as
contemplated by (z) is (are) in lieu of salary or other
payments otherwise payable under the employment agreement
for a term shorter than the entire term of the employment
agreement, then the "Payment Period" shall begin on the
first day of the month following the end of such shorter
term. The "Payment Period" shall end on the earliest of (i)
such time as CS Corp. and all Permitted Assignees and
Licensees shall no longer use the Name and/or Likeness, (ii)
the day before the fifteenth (15th) anniversary of the
beginning of the Payment Period, or (iii) a Disqualifying
Event.
h. A "Disqualifying Event" would occur if
at any time during the Restricted Period, whether or not
Schwab is still employed by CS Corp. and whether or not any
license granted by Section 5.4 has come into effect, Schwab
should serve as a director of, render services to, invest in
or otherwise engage in any business competitive with any
existing or contemplated business of CS Corp., Holdings,
Inc. or Schwab, Inc., and fail to terminate such activity or
investment within sixty (60) days after demand by CS Corp.
Despite the foregoing, a purely passive investment will not
constitute a basis for a Disqualifying Event if it is in (i)
publicly traded securities, provided that Schwab does not
own beneficially or of record more than five percent (5%) of
any class of security or (ii) a professionally managed
venture capital fund, provided that Schwab does not provide
more than five percent (5%) of the capital invested in any
such fund. The determination of the Board of Directors of
CS Corp. that an action or activity is or is not competitive
shall be controlling on Schwab unless Schwab objects to such
determination within thirty (30) days after the demand, in
which case the determination shall be made by arbitration in
accordance with California Code of Civil Procedure Sections
1280 et seq., and that determination shall be binding upon
the parties. Each party shall be entitled to discovery.
The sixty-day opportunity to cure will not be extended by
any actual or requested arbitration, so that if Schwab does
not terminate the specified activity or investment within
the sixty-day period and the arbitration subsequently
determines that it was in fact competitive, Schwab will have
no further opportunity to cure. Both CS Corp. and Schwab
will use their best efforts to complete the arbitration
before the end of the sixty-day period.
5.2 Subject to the provisions of Sections 5.6
and 5.7 below, and in consideration for the assignments made
herein, CS Corp. agrees to pay the Purchase Payment to
Schwab, his executor, successor or assigns. The amount
payable shall be computed and paid on a calendar quarterly
basis, commencing with the end of the first complete
calendar quarter in the Payment Period. CS Corp. agrees to
keep (and to require each Included User to keep) accurate
books of account and records relating to its Net Revenues,
and Schwab and his duly authorized representatives shall
have the right at all reasonable hours of the day to an
examination and audit of such books of account and records
and of all documents and materials in the possession or
under the control of Included Users with respect to Gross
Revenues and Operating Interest Expense. Each book of
account and record shall be kept available for at least two
(2) years after all payments are made with respect to the
revenues and expenses reflected therein.
5.3 Despite anything in Section 5.2, payments
to Schwab shall be limited as follows:
a. As used in this Section 5.3:
(i) The first day of the first calendar
quarter during the Payment Period is the "Base Date."
(ii) Each twelve month period which (x)
begins on the Base Date or an anniversary of the Base Date
and (y) falls entirely within the Payment Period will be a
"Payment Year."
(iii) If the Payment Period begins on any
date other than the first day of a calendar quarter, then
the period beginning on the first day of the Payment Period
and ending the day before Base Date will be the "Initial
Payment Period."
(iv) If the Payment Period ends after the
Base Date and on any date other than the day before an
anniversary of the Base Date, then the period beginning on
the last anniversary of the Base Date during the Payment
Period and ending at the end of the Payment Period will be
the "Final Payment Period."
(v) "Consumer Price Index" means the
Consumer Price Index for All Urban Consumes for the San
Francisco-Oakland-San Jose Metropolitan Area published by
the Bureau of Labor Statistics, as it was constituted for
the month of May 1987. If the Bureau of Labor Statistics
should cease publication of the Consumer Price Index for All
Urban Consumers for the San Francisco-Oakland-San Jose
Metropolitan Area or changes the basis on which it is
constituted, then the parties shall use the index then being
published by the Bureau of Labor Statistics or its successor
agency which most closely approximates the original
"Consumer Price Index."
b. Despite anything to the contrary in
this Agreement, the amount payable to Schwab pursuant to
Section 5.2 of this Agreement with respect to any Initial
Payment Period shall not exceed two million dollars
($2,000,000) multiplied by two fractions. The first
fraction is the number of days in the Initial Payment Period
divided by three hundred sixty-five (365). The second
fraction is the Consumer Price Index for the calendar month
preceding the Base Date divided by the Consumer Price Index
for the same calendar month in 1987.
c. Despite anything to the contrary in
this Agreement, the amount payable to Schwab pursuant to
Section 5.2 of the Agreement with respect to any Payment
Year shall not exceed two million dollars ($2,000,000)
multiplied by a fraction, the numerator of which is the
Consumer Price Index for the calendar month immediately
preceding the first month in the Payment Year and the
denominator of which is the Consumer Price Index for the
same calendar month in 1987.
d. Despite anything to the contrary in
this Agreement, the amount payable to Schwab pursuant to
Section 5.2 of the Agreement with respect to any Final
Payment Period shall not exceed two million dollars
($2,000,000) multiplied by two fractions. The first
fraction is the number of days in the Final Payment Period
divided by three hundred sixty-five (365). The second
fraction is the Consumer Price Index for the calendar month
preceding the beginning of the Final Payment Period divided
by the Consumer Price Index for the same calendar month in
1987.
e. If b, c or d above requires the use of
the Consumer Price Index for a month for which it is not
published, then the Consumer Price Index for the next
preceding month which is published shall be used.
5.4 Subject to the provisions of Section 5.6
below:
a. Effective immediately upon the
termination of Schwab's employment by CS Corp., Schwab shall
have, without further action on his part, a perpetual,
unrestricted, ongoing, non-exclusive, irrevocable license to
use the Likeness throughout the world in the following part
of the Financial Services Business: the sale, distribution,
broadcast and promotion of books, videotapes, lectures,
radio programs and television programs.
b. Any time after termination of Schwab's
employment by CS Corp., Schwab may notify CS Corp. that
Schwab proposes to engage in all or part of that portion of
the Financial Services Business commonly known as financial
planning. The notice shall describe in summary form the
financial planning products and services that Schwab expects
will be offered by the business in which he proposes to
engage. CS Corp. promptly shall grant to Schwab an
immediately effective, perpetual, unrestricted, ongoing,
non-exclusive, irrevocable license to use the Likeness to
engage in the financial planning business described except
that CS Corp. need not grant such a license to the extent
that the business described would be in direct competition
with any Financial Services Business in which CS Corp. or
any Permitted Assignee or Licensee is then engaged or which
CS Corp. or any Permitted Assignee or Licensee plans as of
the date of receipt of Schwab's notice to commence within
three (3) months after receipt of Schwab's notice.
c. Commencing on the date that is two (2)
years from the beginning of the Payment Period, Schwab shall
have a perpetual, unrestricted, ongoing, non-exclusive,
irrevocable license to use the Likeness throughout the world
in the Financial Services Business. This license will
supersede any license previously granted pursuant to Section
5.4.b of this Agreement.
d. The licenses pursuant to this Section
5.4 may not be assigned or sublicensed except that Schwab
may grant sublicenses to use the Likeness in connection with
the sale, distribution, broadcast and promotion of goods,
services and programs that Schwab personally plans a
substantial role in creating.
5.5 It is the understanding and intent of the
parties that when and if any license granted in Section 5.4
of this Agreement comes into effect, Schwab then may engage
in the business covered by the license and use his personal
name, personal initials and personal nicknames in connection
therewith without any restriction imposed by this Agreement
except (i) the restrictions set forth in Sections 6.1, 6.2
and 7 of this Agreement and (ii) the possibility that the
Payment Period might prematurely terminate because engaging
in such a business might constitute a Disqualifying Event.
Further, the restriction described in (ii) would terminate
at the end of the Restricted Period.
5.6 Despite anything in Sections 5.2 and 5.4,
if the termination of Schwab's employment by CS Corp. is an
Involuntary Termination for Cause during the Restricted
Period, or alternatively if such termination is a Voluntary
Termination during the Restricted Period, then Sections 5.2
and 5.4 shall be of no further force or effect.
5.7 Despite anything in Section 5.2, if Banks
or Agent should acquire legal and beneficial ownership of
the Name by virtue of foreclosing a security interest
granted to them in the Loan Documents, then thereafter
Section 5.2 shall be of no further force or effect.
Further, if a third party other than Banks or Agent should
acquire legal and beneficial ownership of the Name by virtue
of a foreclosure of the security interest granted to Banks
and Agent in the Loan Documents and such foreclosure does
not result in an immediate and complete satisfaction of the
Obligations, then the Payment Period shall exclude all time
elapsed between the date when that third party so acquires
tittle and the first date when the Obligations are satisfied
in full.
6. Schwab's Use of the Name.
6.1 Schwab may use all or part of his personal
name, personal initials or personal nicknames in any manner
not prohibited by this Agreement. Despite anything to the
contrary in this Agreement, however, but subject
nevertheless to the provisions of Section 3 of this
Agreement, in exercising that right and the rights granted
to Schwab in Sections 2 and 5.4 of this Agreement, Schwab
may not (i) use or authorize another to use the Name
(including without limitation his personal name, personal
initials or personal nicknames) as a service mark, trademark
or trade name in the Financial Services Business or (ii) use
or authorize another to use the Name or Likeness or both in
a manner that causes confusion as to whether CS Corp. or any
of the Permitted Assignees and Licensees has created,
manufactured, endorsed, sold or otherwise been involved with
any product or service.
6.2 Further, Schwab may not refer or authorize
another to refer to CS Corp. or any of the Permitted
Assignees and Licensees by name in any advertisement, press
release, interview or other written, spoken or visual
material which is intended to promote any product or
service, without first obtaining the written consent of CS
Corp. CS Corp. shall not withhold any consent required by
the previous sentence unless CS Corp. reasonably believes
that the proposed reference would be a breach of Section 6.1
of this Agreement or another term of the Agreement. Should
Schwab request any such consent, Schwab shall provide CS
Corp. with all information that CS Corp. reasonably requests
regarding the proposed reference in order to determine
whether or not such reference would be a breach of Section
6.1 of this Agreement or another term of the Agreement.
7. Quality of Goods and Services. CS Corp.
acknowledges that Schwab has, and Schwab acknowledges that
CS Corp. intends to develop, the highest quality reputation
for the delivery of goods and services in the Financial
Services Business, and each agrees that the goods and
services offered by it or him using the Name or Likeness
shall be of such quality as to be appropriate and suited to
the protection and enhancement of the Name and Likeness and
the good will appurtenant thereto, that such goods and
services will be manufactured, sold, distributed and
performed in accordance with all Federal, state and local
laws that are applicable and material, and that the sale,
distribution, provision of services, and/or exploitation by
it or him shall be of the highest standard and that the same
shall in no manner reflect adversely upon the good name of
the other or the name and/or Likeness. Further, CS Corp.
agrees not to use any Likeness in advertising or as a mark
while Schwab is alive without first obtaining Schwab's
approval of his appearance in the Likeness, but such
approval shall not be unreasonably withheld.
8. Remedies. CS Corp. and Schwab each acknowledge
that the manufacture, sale or distribution of goods or the
provision of services in breach of Section 7 of this
Agreement would result in immediate and irreparable damage
to the other. Each acknowledges and admits that there is no
adequate remedy at law for such manufacture, sale,
distribution or provision and agrees that the other shall be
entitled to equitable relief by way of temporary and
permanent injunctions, without bond, and such other further
relief as any court having jurisdiction shall deem just and
proper. However, such relief may not include an injunction
or other prohibition against use of the Name and Likeness
that is permitted by this Agreement, a rescission of this
Agreement or a reversion of the rights granted to either
party herein.
9. Assignment.
9.1 Subject to compliance with Section 9.2
below, CS Corp. may assign or license any or all rights
granted to it herein: (i) as security under the Loan
Documents; (ii) to Holdings, Inc., to Schwab, Inc. and to
subsidiaries and affiliates of CS Corp., Holdings, Inc. and
Schwab, Inc.; (iii) if Schwab gives his prior written
consent or votes in favor of the assignment in his capacity
as a director of CS Corp., Holdings, Inc., or Schwab, Inc.,
and (iv) after the death of Schwab. In exercise of their
rights under the Loan Documents, the Banks and Agent may
assign or license any and all rights assigned to them
pursuant to the preceding sentence.
9.2 All assignments to Banks or Agent must be
made expressly subject to all the terms and conditions of
this Agreement. In any other assignment or license pursuant
to the other provisions of Section 9.1, all assignees and
licensees must join in all covenants of CS Corp. hereunder
and assume joint and several liability for all obligations
of CS Corp. hereunder, with such joinder and assumption
being made for the express and direct benefit of Schwab. No
assignment or license by CS Corp. shall relieve it of any of
its obligations hereunder.
9.3 Except for assignments and licenses that
both (i) are permitted by Section 9.1 and (ii) conform to
the requirements of Section 9.2, neither CS Corp. nor
Permitted Assignees and Licensees may assign or license any
rights granted to CS Corp. herein, and any purported
assignment or license of such rights that is not permitted
shall be null and void.
9.4 For purposes hereof "assignment" and
"license" shall be construed in their broadest sense and
shall include any purported direct or indirect transfer or
other disposition, voluntary or involuntary, of any of such
rights, including without limitation any distribution upon
dissolution, any merger or other reorganization to which CS
Corp. or a Permitted Assignee or Licensee is a party unless
the shareholders of such entity immediately before the
merger or other reorganization retain the ability to elect a
majority of the board of directors immediately after such
merger or reorganization, any pledge or hypothecation of any
of such rights, or the imposition of any lien upon such
rights which is not fully and finally removed within 30 days
following the date of such imposition, but does not include
the sale of securities for cash or property.
10. Notices. Any notice, demand or other
communication to be given hereunder by any party to another
shall be in writing and delivered personally or sent by
certified mail, postage prepaid, as follows:
CS CORP.: The Charles Schwab Corporation
101 Montgomery Street
San Francisco, CA 94104
Attention: Lawrence J. Stupski, President
SCHWAB: Charles R. Schwab
c/o Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
or to such other persons as may be designated in writing by
the parties, by a notice given as aforesaid.
11. Joint and Several Liability. Holdings, Inc.
and Schwab, Inc. join in all covenants of CS Corp.
hereunder; and CS Corp., Holdings, Inc. and Schwab, Inc.
each agree to be jointly and severally liable for all
obligations of each of the others hereunder. Holdings, Inc.
and Schwab, Inc. each acknowledge that its inclusion in the
class of Permitted Assignees and Licensees is full and fair
consideration for the liability that it is undertaking
hereunder.
12. Miscellaneous. This Agreement shall be
construed in accordance with the laws of California
applicable to agreements made and to be performed entirely
in that state. Section headings used herein are inserted
for convenience only and are not part of this Agreement.
None of the terms of this Agreement may be waived or
modified except by an express agreement in writing signed by
both parties. Nothing contained herein shall be construed
to place the parties in the relationship of partners or
joint venturers, and CS Corp. shall have no power to
obligate or bind Schwab in any manner whatsoever. In any
controversy hereunder the prevailing party shall be entitled
to recover its reasonable attorneys' fees and expenses from
the opposing party or parties. This Agreement constitutes
the entire agreement between the parties with respect to the
subject matter hereof, and shall inure to the benefit of and
shall be binding upon the parties, their respective heirs,
executors, administrators, successors and permitted assigns.
13. Survival of Previous Actions; Effective Date.
13.1 This Agreement supersedes the original
Assignment and License and the Amendment thereof; but all
assignments, licenses, notices, waivers and consents
previously effected by or given pursuant to either the
original Assignment and License or the Amendment thereof, or
both, shall survive and remain in full force and effect.
13.2 The Preamble to this Agreement and this
Section 13 will become effective on the date of execution
hereof as set forth in the paragraph next following.
Sections 5.3, 5.5, 6.1 and 6.2 of this Agreement originated
in the Amendment of the original Assignment and License and
hence became effective as of July 30, 1987. Sections
5.1(a), 5.1(g) and 5.4 of this Agreement were revised in the
Amendment of the original Assignment and License and hence
became effective in their present form as of July 30, 1987,
but the previous versions of those sections were effective
from March 31, 1987 until July 30, 1987. All other portions
of this Agreement became effective on March 31, 1987.
IN WITNESS WHEREOF, the parties hereto have affixed
their signatures on the _____ day of _______________, 1988.
The Charles Schwab Corporation
/s/ Charles R. Schwab by /s/ Lawrence J. Stupski
Charles R. Schwab Lawrence J. Stupski
President
Charles Schwab & Co., Inc. Schwab Holdings, Inc.
by /s/ Lawrence J. Stupski by /s/ Charles R. Schwab
Lawrence J. Stupski Charles R. Schwab
President and Chairman and
Chief Operating Officer Chief Executive Officer
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S.
Providenza, the undersigned Notary Public, personally
appeared Charles R. Schwab, personally known to me or proved
to me on the basis of satisfactory evidence to be the person
who executed the within instrument as Chairman for and on
behalf of Charles Schwab & Co., Inc. and acknowledged to me
that corporation executed it.
WITNESS my hand and official seal.
/s/ Sheila S. Providenza
Notary Public
*************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*************************************
OFFICIAL SEAL
<[PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S.
Providenza, the undersigned Notary Public, personally
appeared Charles R. Schwab, personally known to me or proved
to me on the basis of satisfactory evidence to be the person
whose name is subscribed to the within instruments, and
acknowledged to me that he executed the same.
WITNESS my hand and official seal.
/s/ Sheila S. Providenza
Notary Public
*************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*************************************
OFFICIAL SEAL
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S.
Providenza, the undersigned Notary Public, personally
appeared Lawrence J. Stupski, personally known to me or
proved to me on the basis of satisfactory evidence to be the
person who executed the within instrument as President for
and on behalf of The Charles Schwab Corporation, and
acknowledged to me that corporation executed it.
WITNESS my hand and official seal.
/s/ Sheila S. Providenza
Notary Public
*************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*************************************
OFFICIAL SEAL
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S.
Providenza, the undersigned Notary Public, personally
appeared Lawrence J. Stupski, personally known to me or
proved to me on the basis of satisfactory evidence to be the
person who executed the within instrument as President &
C.O.O. for and on behalf of Schwab Holdings, Inc. and
acknowledged to me that corporation executed it.
WITNESS my hand and official seal.
/s/ Sheila S. Providenza
Notary Public
*************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*************************************
OFFICIAL SEAL
EXHIBIT 10.145
CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
RESTATED EFFECTIVE JANUARY 1, 1994
<PAGE>
CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
RESTATED EFFECTIVE JANUARY 1, 1994
Table of Contents
Section Page
1 Introduction and Purpose 1
2 Definitions 3
3 Participation 15
4 Employer Contributions 17
5 Salary Reduction Agreements and Rollover
Contributions 25
6 Allocation of Contributions 31
7 Special ESOP Provisions 32
8 Investment of Contributions, Valuations and
Participants' Cash Contribution Accounts 39
9 Retirement Dates 41
10 Eligibility for Payment of Accounts and
Vested Interests 42
11 Method of Payment of Accounts and
Withdrawals 46
12 Maximum Amount of Allocation 56
13 Voting Rights 58
14 Designation of Beneficiaries 62
15 Administration of the Plan 63
16 Expenses 66
17 Employer Participation 69
18 Amendment or Termination of the Plan 72
19 Top-Heavy Plan Requirements 75
20 General Limitations and Provisions 80
21 Application to Puerto Rico Employees 89
<PAGE>
CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
RESTATED EFFECTIVE JANUARY 1, 1994
SECTION 1. INTRODUCTION AND PURPOSE
1.1 The Plan Sponsor has established and maintains the
Plan to enable each Participant to benefit, in accordance
with the terms of the Plan, from contributions made by the
Employer and from any increases in the value of the Plan
assets through investment of such assets. The Plan is
comprised of three parts: (i) a Section 401(k) plan, (ii) a
profit sharing plan and (iii) an employee stock ownership
plan. The purpose of the employee stock ownership plan
portion of the Plan is to align Employees' interests with
the interests of shareholders. It is anticipated that
Employer contributions to the employee stock ownership plan
will be invested primarily or entirely in Shares of The
Charles Schwab Corporation, that the employee stock
ownership plan may acquire such Shares of The Charles Schwab
Corporation from time to time with the proceeds of one or
more Exempt Loans, the repayment of which may be secured in
part by a pledge of the Shares of The Charles Schwab
Corporation acquired with those loan proceeds, and that
Employer contributions to the employee stock ownership plan
may be used in full or in substantial part to the payment of
interest on, and retirement of principal of, such Exempt
Loans.
This Plan is a restatement of the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan, which was
initially effective as of October 1, 1983 and was most
recently amended and restated, effective January 1, 1992.
The effective date of this restatement is January 1, 1994.
The rights of any person who terminated employment or who
retired on or before the effective date of this restated
Plan or any provision hereof, including his or her
eligibility for benefits and the time and form in which
benefits, if any, will be paid, shall be determined solely
under the terms of the Plan provisions as in effect on the
date of his or her termination of employment or retirement,
unless such person is thereafter reemployed and again
becomes a Participant. The rights of any other person shall
be determined solely under the terms of this restated Plan,
except as may otherwise be required by law.
The Plan and Trust are intended to qualify as a plan
and trust which are qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code. The Plan is
intended to qualify in part as a profit sharing plan (as
defined in Section 401(a)(27) of the Code) and in part as a
stock bonus plan and an employee stock ownership plan (as
defined by Section 4975(e)(7) of the Code and Section
407(d)(6) of the Act) designed to invest primarily in shares
of stock of the Employer which meet the requirements for
"qualifying employer securities" under Section 4975(e)(8) of
the Code and Section 407(d)(5) of the Act. All provisions
of the Plan and Trust shall be construed accordingly.
All Trust Fund assets acquired under the Plan as a
result of debt incurred to purchase Shares, Employer
contributions, income and other additions to the Trust Fund
shall be administered, distributed, forfeited and otherwise
governed by the provisions of the Plan. It is intended that
the Trust associated with the Plan be exempt from federal
income taxation pursuant to the provisions of Section 501(a)
of the Code. Subject to the provisions of Section 16 of the
Plan, the assets of the Plan shall be applied exclusively
for the purposes of providing benefits to Participants and
Beneficiaries under the Plan and for defraying expenses
incurred in the administration of the Plan and its
corresponding Trust.
SECTION 2. DEFINITIONS
When used herein the following terms shall have the
following meanings:
2.1 "Account" means the account or accounts established
and maintained on behalf of a Participant pursuant to (i)
Section 6.1 with respect to the Participant's Cash
Contribution Account and (ii) Section 7.1 with respect to
the Participant's ESOP Account.
2.2 "Act" means the Employee Retirement Income Security
Act of 1974, as now in effect or as hereafter amended.
2.3 "Actual Deferral Percentage" means the average of
the ratios (calculated separately for each Employee) for
each Plan Year of (a) the amount of Elective Contributions
and Matching Contributions or Qualified Nonelective
Contributions (if the Committee determines to take such
Matching Contributions or such Qualified Nonelective
Contributions into account when calculating Actual Deferral
Percentage) on behalf of each Employee for such Plan Year to
(b) the Employee's compensation (as defined in Treasury
Regulation 1.415-2(d)(10)) while a Participant for such Plan
Year.
2.4 "Affiliated Employer" means any corporation which is
included in a controlled group of corporations (within the
meaning of Section 414(b) of the Code) which includes the
Plan Sponsor, any trade or business (whether or not
incorporated) which is under common control with the Plan
Sponsor (within the meaning of Section 414(c) of the Code),
any organization included in the same affiliated service
group (within the meaning of Section 414(m) of the Code) as
the Plan Sponsor and any other entity required to be
aggregated with the Plan Sponsor pursuant to the Regulations
under Section 414(o) of the Code; except that for purposes
of applying the provisions of Sections 12 and 19 with
respect to the limitations on contributions, Section 415(h)
of the Code shall apply.
2.5 "Beneficiary" means the beneficiary or beneficiaries
designated by a Participant pursuant to Section 14 to
receive the amount, if any, payable under the Plan upon the
death of such Participant.
2.6 "Board of Directors" means the board of directors of
Charles Schwab & Co., Inc.
2.7 "Break in Service" means a Plan Year (or for
purposes of determining membership in the Plan pursuant to
Section 3, the Computation Period) during which an
individual has not completed more than 500 Hours of Service,
as determined by the Committee in accordance with the
Regulations. A Break in Service shall be deemed to have
commenced on the first day of the Plan Year in which it
occurs. Solely for purposes of determining whether a Break
in Service has occurred, an individual shall be credited
with the Hours of Service which such individual would have
completed but for a maternity or paternity absence, as
determined by the Committee in accordance with this Section
2.7 and the Code and Regulations; provided, however, that
the total Hours of Service so credited shall not exceed 501
Hours of Service and that the individual shall timely
provide the Committee with such information as it shall
require. Hours of Service credited for a maternity or
paternity absence shall be credited at eight Hours of
Service per day and shall be credited entirely (i) in the
Plan Year or Computation Period in which the absence began
if such Hours of Service are necessary to prevent a Break in
Service in such Plan Year, or (ii) in the following Plan
Year or Computation Period. For purposes of this Section
2.7, maternity or paternity absence shall mean an absence
from work by reason of the individual's pregnancy, the birth
of the individual's child or the placement of a child with
the individual in connection with adoption of the child by
such individual, or for purposes of caring for a child for
the period immediately following such birth or adoption.
2.8 "Cash Contribution Account" means the account or
accounts established and maintained on behalf of a
Participant pursuant to Section 6.1 with respect to the
Participant's Elective Contributions, Matching
Contributions, Profit Sharing Contributions, Qualified
Nonelective Contributions or Rollover Contributions.
2.9 "Code" means the Internal Revenue Code of 1986, as
now in effect or as hereafter amended. All citations to
sections of the Code are to such sections as they may from
time to time be amended or renumbered.
2.10 "Committee" means the Administrative Committee of
the Employer provided for in Section 15. For purposes of
the Act, the Employer shall be the "named fiduciary" (with
respect to the matters for which it is hereby responsible
under the Plan) of the Plan, and the Employer shall be the
"plan administrator" of the Plan within the meaning of
Section 3(16)(A) of the Act.
2.11 "Compensation" means a Participant's W-2
compensation related to services rendered to the Employer,
excluding (i) living allowances, (ii) travel or commuting
allowances, (iii) reimbursements for financial planning,
(iv) amounts that are paid as a result of participation in
the Employer's Long-Term Incentive Plan, (v) employee
referral awards, (vi) special incentive awards (other than
regular bonus programs), (vii) reimbursements for relocation
expenses, (viii) commissions (other than "dual commissions",
commissions based on trading results that are paid to
traders who are also salaried and commissions where the
Participant's only form of remuneration is commissions),
(ix) income items attributable to the taxable portion of
employee benefits and any cash payments made as a result of
an Employee's election not to receive insured benefits
pursuant to the Company's Pre-Tax Contribution Plan, (x)
amounts paid as short term disability benefits, (xi) any
income items reflecting grants in aid, and (xii)
compensation in excess of $150,000 (adjusted for cost of
living to the extent permitted by Section 401(a)(17) of the
Code and Regulations). For purposes of determining the
whole percentage of Compensation for which a Participant may
make a Salary Reduction Agreement, and not for any other
purposes, subparagraph (ix) hereof shall be disregarded.
Compensation shall be determined prior to reduction for any
contributions pursuant to such Participant's election under
Section 5.1, and any elective contributions made by the
Employer on behalf of the Participant in the Plan Year that
are not includable in gross income under Section 125 of the
Code. Any Compensation paid to any Participant who is a
member of the family of a five percent (5% ) owner or one of
the ten most Highly Compensated Participants, as defined in
Section 414(q)(6) of the Code, shall be treated as if it
were paid to or on behalf of such five percent (5%) owner or
Highly Compensated Participant. For purposes of the
previous sentence, the term "family" means the Participant's
spouse and any of the Participant's lineal descendants who
have not attained age 19 before the end of the Plan Year.
2.12 "Computation Period" means a 12 consecutive month
period beginning on the day an individual first performs an
Hour of Service or first performs an Hour of Service
following a Break in Service. Thereafter, the Computation
Period shall be the Plan Year, commencing with the Plan Year
that includes the day immediately following the last day of
the Computation Period determined pursuant to the first
sentence hereof.
2.13 "Contribution Percentage" means the average of the
ratios (calculated separately for each Participant for each
Plan Year) of (a)(i) Matching Contributions, if any, made by
the Employer on behalf of a Participant and (ii) Elective
Contributions, (if the Committee elects to take into account
Elective Contributions when calculating the Contribution
Percentage) to (b) the Employee's compensation while a
Participant (as defined in Section 1.415-2(d)(10) of the
Regulations) for such Plan Year.
2.14 "Deferred Retirement Date" shall have the meaning
set forth in Section 9.2.
2.15 "Disability" means the inability to engage in any
substantial gainful activity considering the Participant's
age, education and work experience by reason of any
medically determined physical or mental impairment that has
continued without interruption for a period of at least six
months and that can be expected to be of long, continued and
indefinite duration. The determination of the Committee as
to whether a Participant has a Disability shall be final,
binding and conclusive.
2.16 "Effective Date" means October 1, 1983.
2.17 "Elective Contributions" means contributions made
to the Trust Fund pursuant to a Participant's Salary
Reduction Agreement entered into pursuant to Section 5.1,
and which are considered tax deferred under Section 401(k)
of the Code.
2.18 "Elective Contribution Subaccount" means the
account established and maintained on behalf of a
Participant pursuant to Section 6.2(a) with respect to his
or her Elective Contributions and Qualified Nonelective
Contributions.
2.19 "Employee" means any "regular employee" of the
Employer, excluding (i) any person covered by any other
pension, profit sharing or retirement plan to which any
Employer or Affiliated Employer is required to contribute
either directly or indirectly, (ii) any nonresident alien
individual who received no earned income (within the meaning
of Section 911(d)(2)) from the Employer which constitutes
income from sources within the United States and (iii) any
employee who is included in a unit of employees covered by a
negotiated collective bargaining agreement which does not
provide for his or her membership in the Plan. A director
of the Employer is not eligible for membership in the Plan
unless such director is also an Employee. A leased employee
(within the meaning of Section 414(n) of the Code) is not
eligible for membership in the Plan unless the Employer
designates such individual as eligible for membership in the
Plan.
2.20 "Employer" means Charles Schwab & Co., Inc. and any
Participating Employer which adopts this Plan subject to the
approval of the Board of Directors.
2.21 "ESOP Account" means the account established and
maintained on behalf of a Participant pursuant to Section
7.1 with respect to his or her ESOP Contributions.
2.22 "ESOP Contributions" means the Employer
contributions, if any, made to the Plan on behalf of a
Participant pursuant to Section 4.2(c).
2.23 "ESOP/Profit Sharing Entry Date" means January 1
and July 1 of each calendar year.
2.24 "Exempt Loan" means any loan to the Plan or Trust
not prohibited by Section 4975(c) of the Code and Section
406 of the Act because the loan meets the requirements set
forth in Section 4975(d)(3) of the Code, Section 408(b)(3)
of the Act and the Regulations promulgated thereunder, the
proceeds of which loan are used within a reasonable time
after receipt by the Trust Fund only for any or all of the
following purposes: (a) to acquire Shares; (b) to repay the
same Exempt Loan; or (c) to repay any previous Exempt Loan.
2.25 "Highly Compensated Participant" means any
Participant who, during the relevant period is treated as a
highly compensated employee under Section 414(q) of the
Code. For purposes of determining which Employee is a
Highly Compensated Participant, the look-back determination
shall be made on the basis of the calendar year and the
simplified method of Section 414(q)(12) of the Code shall be
used by the Employer to the extent permissible under Code.
The Plan shall comply with the procedures of Treasury
Regulation 1.401(k)-1(f) to the extent applicable. For
purposes of determining which Employee is a Highly
Compensated Participant:
(A) Highly Compensated Participant means a Participant
who performs Service during the determination year and is
described in one or more of the following groups:
(1) An Employee who is a five percent (5%) owner, as
defined in Section 416(i)(1)(A)(iii) of the Code, at any
time during the determination year or the look-back year.
(2) An Employee who receives compensation in excess of
$75,000 (indexed in accordance with Section 415(d) of the
Code) during the look-back year.
(3) An Employee who receives compensation in excess of
$50,000 (indexed in accordance with Section 415(d) of the
Code) during the look-back year and is a Participant of the
"top-paid" group for the look-back year.
(4) An Employee who is an officer, within the meaning of
Section 416(i) of the Code, during the look-back year and
who receives compensation in the look-back year greater than
fifty percent (50%) of the dollar limitation in effect under
Section 415(b)(1)(A) for the calendar year in which the
look-back year begins.
(5) An Employee who is both described in subparagraphs
2, 3, or 4 above when these paragraphs are modified to
substitute the determination year for the look-back year and
one of the 100 employees who receive the most compensation
from the Employer during the determination year.
(B) For purposes of this Section:
(1) The determination year is the Plan Year for
which the determination of who is a Highly Compensated
Participant is being made.
(2) The look-back year is the calendar year ending with
or within the determination year.
(3) The "top-paid" group consists of the top twenty
percent (20%) of Employees ranked on the basis of
compensation received during the past calendar year. For
purposes of determining the number of Employees in the top-
paid group, Employees described in Section 414(q)(8) of the
Code and Q & A 9(b) of Section 1.414(q)-1T of the
Regulations are excluded.
(4) The number of officers is limited to 50 (or, if
lesser, the greater of 3 Employees or ten percent (10%) of
Employees) excluding those Employees who may be excluded in
determining the top-paid group.
(5) When no officer has compensation in excess of fifty
percent (50%) of the Section 415(b)(1)(A) limit, the highest
paid officer is treated as highly compensated.
(6) For purposes of this Section 2.25, the term
"compensation" means compensation as defined in Section
415(c)(3) of the Code and Treasury Regulation Section 1.415-
2(d)(10), determined without reduction for any elective or
salary reduction contributions to a cafeteria plan or cash
or deferred arrangement.
(7) Employers aggregated under Section 414(b), (c), (m),
or (o) of the Code are treated as a single employer.
(8) Highly Compensated Participants include a former
Employee who had a separation year prior to the
determination year and who was a Highly Compensated
Participant for either (A) the determination year in which
the Employee separated from Service or (B) any determination
year ending on or after the Employee's 55th birthday. With
respect to an Employee who separated from Service before
January 1, 1987, an Employee will be included as a Highly
Compensated Participant only if the Employee was a five
percent (5%) owner or received Compensation in excess of
$50,000 during (1) the determination year in which the
Employee separated from Service (or the year preceding such
separation year) or (2) any year ending on or after such
Employee's 55th birthday (or the last year ending before
such Employee's 55th birthday).
2.26 "Hours of Service" means hours during the
applicable Computation Period in which an individual
performs Service or is treated as performing Service and,
except in the case of military service or as otherwise
determined by the Committee, for which the Participant is
directly or indirectly entitled to payment. For all
purposes under the Plan, (i) an individual scheduled to work
more than twenty hours per week shall be credited (under
rules determined by the Committee, uniformly applicable to
all individuals similarly situated and in accordance with
the Regulations) with 190 Hours of Service for each calendar
month in which the individual would otherwise be credited
with one or more Hours of Service and (ii) an individual who
is scheduled to work less than twenty hours per week shall
be credited with Hours of Service for the applicable period
in which such Hours of Service accrue in accordance with
Labor Department Regulation 29 CFR section 2530.200b-2(c), which
regulation is incorporated herein by reference. Hours of
Service for reasons other than the performance of duties
shall be credited in accordance with Labor Department
Regulation 29 CFR section 2530.200b-2(b), which regulation is
incorporated herein by reference.
The term "Service" includes performance of duties (or
periods which are treated as the performance of duties) for
the Employer or for any Affiliated Employer (under rules
determined by the Committee, uniformly applicable to all
individuals similarly situated and in accordance with the
Regulations) for which an individual is entitled to receive
credit for "Service", including (i) vacation, (ii) holiday,
(iii) absence authorized by the Employer for sickness or
incapacity (including disability or leave of absence), (iv)
layoff, (v) jury duty, (vi) if and to the extent required by
the Military Selective Service Act, as amended or any other
federal law, service in the Armed Forces of the United
States and (vii) an approved leave of absence granted by the
Employer to an individual on or after August 5, 1993
pursuant to the Family Medical Leave Act, but only if such
individual returns to work for the Employer at the end of
such approved leave. Service also includes periods of time
for which back pay, irrespective of mitigation of damages,
is awarded or agreed to by the Employer or any Affiliated
Employer; provided that such award or agreement is not
already credited as Service under either of the preceding
two sentences. Service may also include any period of a
Participant's prior employment by an organization upon such
terms and conditions as the Committee may approve and
subject to any required IRS approval. Notwithstanding the
foregoing, (i) Hours of Service credited with respect to an
individual's service with BankAmerica Corporation or a
related corporation between January 11, 1983 and March 31,
1987 shall be considered Service only if such individual was
employed by the Employer prior to November 24, 1993, (ii)
Hours of Service credited with respect to an individual's
service with BankAmerica Corporation or a related
corporation prior to January 11, 1983 shall be considered
Service, but only if such individual was employed by the
Employer prior to April 1, 1987, (iii) Hours of Service
credited with respect to service with Mayer & Schweitzer,
Inc. prior to July 1, 1991 shall be considered Service, and
(iv) Service credited with respect to service with The Rose
Company prior to April 1, 1989 shall be considered Service.
2.27 "IRS" means the United States Internal Revenue
Service.
2.28 "Labor Department" means the United States
Department of Labor.
2.29 "Matching Contribution" means any Employer
contribution, if any, made to the Plan on behalf of a
Participant pursuant to Section 4.2(a).
2.30 "Matching Contribution Subaccount" means the
account established and maintained on behalf of a
Participant pursuant to Section 6.2(b) with respect to the
Participant's Matching Contributions.
2.31 "Normal Retirement Date" shall have the meaning set
forth in Section 9.1.
2.32 "Participant" means any Employee who has satisfied
the eligibility requirements of Section 3 below.
2.33 "Participating Employer" means Charles Schwab &
Co., Inc. or any other Affiliated Employer, the board of
directors or equivalent governing body of which shall adopt
the Plan and Trust Agreement by appropriate action with the
written consent of the Board of Directors. By its adoption
of this Plan, a Participating Employer shall be deemed to
appoint Charles Schwab, & Co., Inc., the Committee and the
Trustee its exclusive agent to exercise on its behalf all of
the power and authority conferred by this Plan upon the
Employer. The authority of Charles Schwab & Co., Inc., the
Committee and the Trustee to act as such agent shall
continue until the Plan is terminated as to the
Participating Employer and the relevant Trust Fund assets
have been distributed by the Trustee as provided in Section
17 of this Plan.
2.34 "Plan" means this Charles Schwab Profit Sharing and
Employee Stock Ownership Plan as the same is stated herein
and as it may be amended from time to time.
2.35 "Plan Sponsor" means The Charles Schwab
Corporation.
2.36 "Plan Year" means the calendar year.
2.37 "Profit Sharing Contribution" means the Employer
contribution, if any, made to the Plan on behalf of a
Participant pursuant to Section 4.2(b)(ii).
2.38 "Profit Sharing Subaccount" means the account
established and maintained on behalf of a Participant
pursuant to Section 6.2(c) with respect to the Participant's
Profit Sharing Contributions.
2.39 "Purchasing Agent" means the agent designated by
the Trustee to enter into certain transactions with respect
to Shares hereunder.
2.40 "Qualified Nonelective Contribution" means the
Employer contribution, if any, made to the Plan on behalf of
a Participant pursuant to Section 4.2(b)(i).
2.41 "Regulations" means the applicable regulations
issued under the Code or the Act by the IRS, the Labor
Department or any other governmental authority and any
temporary rules or releases promulgated by such authorities
pending the issuance of such regulations.
2.42 "Restated Effective Date" shall mean January 1,
1994.
2.43 "Retirement Date" means the Participant's Normal or
Deferred Retirement Date which has become effective pursuant
to Section 9 below.
2.44 "Rollover Subaccount" means the account established
and maintained on behalf of a Participant pursuant to
Section 6.2(d) with respect to the Participant's Rollover
Contributions.
2.45 "Rollover Contribution" means any contribution made
by an Employee pursuant to Section 5.6.
2.46 "Salary Reduction Agreement" means an agreement
between a Participant and the Employer entered into pursuant
to Section 5.1.
2.47 "Section 401(k) Entry Date" means April 1 and
October 1 of each calendar year.
2.48 "Shares" means (i) with respect to Plan assets
acquired with the proceeds of an Exempt Loan, the common
stock issued by The Charles Schwab Corporation or any
successor corporation thereto meeting the requirements of
both Section 4975(e)(8) of the Code and Section 407(d)(5) of
the Act for "qualifying employer securities," and (ii) with
respect to Plan assets other than those acquired with the
proceeds of an Exempt Loan, stock issued by The Charles
Schwab Corporation or any successor corporation thereto, of
any type, kind or class meeting the requirements of Section
407(d)(5) of the Act for "qualifying employer securities".
All valuations of Shares, where such Shares are not readily
tradable on an established securities market and where such
valuations relate to activities carried on by the Plan,
shall be made by one or more independent appraisers retained
by the Committee, who meet the requirements, if any, of the
Code and Regulations. To the extent and in the manner
required by the Code and Regulations, all independent
appraisers, if any, making appraisals pursuant to the
foregoing sentence shall be registered with the IRS.
2.49 "Surviving Spouse" means the survivor of a
Participant to whom such Participant was legally married on
the date of the Participant's death.
2.50 "Suspense Subfund" means the subfund established
under Section 7.3.
2.51 "Taxable Compensation" means the W-2 compensation
paid to an individual for Service during any period under
consideration.
2.52 "Taxable Year" means the calendar year.
2.53 "Total Break in Service" means a period of five or
more consecutive Computation Periods in which a Participant
incurs a Break in Service, with respect to a Participant who
did not have a nonforfeitable right to any portion of his or
her Profit Sharing Subaccount or ESOP Account prior to the
beginning of the first such Computation Period.
2.54 "Trustee" means the Trustee selected by the
Employer to hold the funds contributed by the Employer to
provide benefits under the Plan or any successor or
substitute.
2.55 "Trust Agreement" means the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan Trust Agreement,
as it may from time to time be amended, and such additional
and successor trust agreements as may be executed.
2.56 "Trust Fund" means the funds held by the Trustee
from which payments to the Trustee are made to provide
benefits under the Plan.
2.57 "Valuation Date" means the last day of each Plan
Year or such interim periods as the Committee may designate
from time to time.
2.58 "Vested Interest" means the portion of a
Participant's Account which has become nonforfeitable
pursuant to Section 10.3 below.
2.59 "Year of Eligibility Service" means a Computation
Period during which an Employee completes at least 1,000
Hours of Service.
2.60 "Year of Service" means a Computation Period during
which an individual completed at least 1,000 Hours of
Service or satisfied any alternative requirement, as
determined by the Committee from time to time in accordance
with the Regulations.
SECTION 3. PARTICIPATION
3.1 Commencement of Participation.
(a) An Employee who is a Participant as of the date
immediately preceding the Restated Effective Date shall
continue to be a Participant of the Plan as of the Restated
Effective Date.
(b) An Employee who is not a Participant on the
Restated Effective Date and who (A) is in Service on the
Restated Effective Date or (B) commences Service on or after
the Restated Effective Date shall be eligible to become a
Participant of the Plan for purposes of:
(i) Elective Contributions, Matching
Contributions and Qualified Nonelective Contributions on the
first Section 401(k) Entry Date coincident with or next
following his or her commencement of Service; and
(ii) Profit Sharing Contributions and ESOP
Contributions on the first ESOP/Profit Sharing Entry Date
coincident with or next following the date on which he or
she completes a Year of Eligibility Service.
(c) An Employee who is eligible to become a
Participant, but declines to participate in the Plan, may
become a Participant as of any subsequent Section 401(k)
Entry Date or ESOP/Profit Sharing Entry Date.
(d) An Employee who satisfies the requirements of
Section 3.1(b)(ii) for participation but who terminates
Service prior to becoming a Participant in the Plan and
subsequently becomes an Employee again prior to incurring a
Break in Service will become a Participant in the Plan for
all purposes as of the first day on which such individual
again becomes an Employee.
3.2 Cessation of Participation. A Participant shall
cease to be a Participant upon the earliest to occur of (i)
the Participant's retirement on his or her Retirement Date,
(ii) the Participant's death or Disability or (iii) the
Participant's termination of Service prior to his or her
Retirement Date followed by a Break in Service. A
Participant who, without any Break in Service, ceases to be
an Employee for any reason, shall not cease to be a
Participant, provided that, notwithstanding any other
provision of the Plan, and except as provided in Section
4.3, no contribution shall be made for the benefit of such
Participant, no contributions under the Plan shall be
allocated, added or otherwise credited to the Account of
such Participant, and no contributions, forfeitures or
Shares released from a Suspense Subfund shall be allocated,
added or otherwise credited to the Account of such
Participant on or after the date on which such Participant
ceases to be an Employee and before the first day of the
Plan Year coincident with or preceding the date, if any, on
which such Participant again resumes Service as an Employee.
3.3 Readmission After Cessation of Participation. A
Participant who has incurred a Total Break in Service and
subsequently returns to Service shall be treated as a new
Employee for all purposes of the Plan. In all other cases,
a former Participant who returns to Service following a
Break in Service shall again become a Participant as of the
first date of such former Participant's return to Service,
except that if such former Participant is not then an
Employee, such former Participant shall again become a
Participant as of the first day on which such former
Participant again becomes an Employee.
3.4 Waiver of Participation. An individual who has
satisfied the requirements for participation set forth in
Section 3.1 may permanently waive participation in the Plan,
but only if such individual is on temporary transfer of
employment to a Participating Employer from an Affiliated
Employer that is not a Participating Employer.
SECTION 4. EMPLOYER CONTRIBUTIONS
4.1 Elective Contributions. The Employer shall, subject
to the limitations of Sections 5 and 12, contribute to the
Trust Fund for each Plan Year on behalf of all Participants
the total amount of Elective Contributions designated to be
contributed pursuant to Salary Reduction Agreements under
Section 5.1. Such contributions shall be paid in cash by
the Employer to the Trustee as soon as practicable, but in
no event later than 90 days from the date on which such
amounts otherwise would have been payable to the Participant
in cash.
4.2 Employer Contributions.
(a) Subject to the limitations of Section 12, the
Employer shall contribute Matching Contributions to the
Trust Fund on behalf of all Participants for whom Elective
Contributions have been made equal to a percentage of such
Elective Contributions made for each such Participant. The
percentage (and, if desired, a maximum dollar amount) of
Matching Contributions shall be determined from time to time
by the Board of Directors and communicated to the
Participants.
(b) Subject to the limitations of Section 12, for
any Plan Year, the Board of Directors may designate (i) a
percentage of the aggregate Compensation of all Participants
or a fixed dollar amount to be contributed to the Plan as
Qualified Nonelective Contributions on behalf of certain
Participants who are not Highly Compensated Participants and
may designate (ii) a percentage of the aggregate
Compensation of all Participants or a fixed dollar amount to
be contributed to the Plan as Profit Sharing Contributions
on behalf of all Employees who are or would be Participants
but for their election not to make Elective Contributions.
(c) Subject to the limitations of Section 12, and
the provisions of any applicable loan or contribution
agreement, the Employer shall contribute to the Trust Fund
for each Plan Year as ESOP Contributions such sum as the
Board of Directors may, in its sole discretion, determine,
which sum may be zero. All or any part of the contributions
made under this Section 4.2(c) may be applied to repay any
outstanding Exempt Loan. The Committee may, subject to any
pledge or similar agreement, direct or determine the
proportions of such contributions which are applied to repay
each such Exempt Loan and, with respect to any particular
Exempt Loan, the proportion of such contribution to be
applied to repay principal and interest on such Exempt Loan.
4.3 Allocation of Matching Contributions, Profit Sharing
Contributions and ESOP Contributions. Matching
Contributions shall only be allocated to those Participants
employed on the last day of the Plan Year. Profit Sharing
Contributions and ESOP Contributions shall only be allocated
to Participants who are members of the Allocation Group for
the Plan Year. For purposes of Sections 4 and 7, the term
"Allocation Group" means the group consisting of (i) each
Participant who completed at least One Thousand (1,000)
Hours of Service during the Plan Year and is employed by the
Employer as of the last day of the Plan Year, and (ii) each
Participant whose employment with the Employer terminated
during the Plan Year by reason of Disability, death or
retirement on or after the Participant's Retirement Date.
Profit Sharing Contributions and ESOP Contributions shall be
allocated among the Accounts of Participants who are members
of the Allocation Group for the Plan Year in the same
proportion that a Participant's Compensation during the Plan
Year bears to the total Compensation during the Plan Year of
all Participants who are members of the Allocation Group for
such Plan Year. For purposes of the preceding sentence,
Compensation earned by a Participant prior to the
Participant's entry into the Plan pursuant to Section
3.1(b)(ii) shall not be taken into account.
4.4 Timing of Employer Contributions.
(a) Any Profit Sharing Contributions, Qualified
Nonelective Contributions and ESOP Contributions shall be
deemed made on account of a Taxable Year if (i) the Board of
Directors determines the amount of such contribution by
appropriate action and announces the amount in writing to
its Employees within 30 days after the end of such Taxable
Year, (ii) the Employer designates such amount in writing as
payment on account of such Taxable Year or (iii) the
Employer claims such amount as a deduction on its federal
tax return for such Taxable Year.
(b) Profit Sharing Contributions and, subject to
the provisions of any Exempt Loan, ESOP Contributions for
any particular Taxable Year may be paid to the Trustee in
installments, but in any event such contributions shall be
paid no later than the due date for the Employer's federal
income tax return for such Taxable Year. The Employer may,
during any Taxable Year, make advance payments toward its
contributions for such Taxable Year. Any income, earnings
or appreciation earned by any amount contributed by the
Employer prior to the end of the Plan Year shall be treated
as part of the Profit Sharing Contributions or ESOP
Contributions, as the case may be, for such Plan Year. On
or about the date of such payment the Committee shall be
advised of the amount of such payment upon which its
allocation pursuant to Section 4.3 is to be calculated.
4.5 Forfeitures. Forfeitures of Profit Sharing
Contributions and Shares attributable to ESOP Contributions
(or ESOP Contributions) arising during the Plan Year
pursuant to Section 10 shall be reallocated as Profit
Sharing Contributions or ESOP Contributions, as the case may
be, on the last day of the Plan Year in which such
forfeiture occurs to all Participants entitled to receive
Profit Sharing Contributions or Shares attributable to ESOP
Contributions (or ESOP Contributions), as the case may be,
in the same proportion as contributions are allocated
pursuant to Sections 4.3 and 7.2; provided that forfeitures
shall first be used to fund adjustments to Participants'
Accounts to the extent required to correct operational
errors, to the extent directed by the Committee.
4.6 Contribution Percentage Test.
(a) Participants' Contribution Percentages must satisfy
at least one of the following tests:
(1) The Contribution Percentage for the Highly
Compensated Participants shall not exceed the Contribution
Percentage of all other Participants multiplied by 1.25; or
(2) (A) The excess of the Contribution Percentage
for the Highly Compensated Participants over the
Contribution Percentage of all other Participants shall not
be more than two percentage points and (B) the Contribution
Percentage for Highly Compensated Participants shall not be
more than the Contribution Percentage for all other
Participants multiplied by 2.
(b) All Matching Contributions and Elective
Contributions that are made under two or more plans that are
aggregated for purposes of Sections 401(a)(4) and 410(b) of
the Code (other than Section 410(b)(2)(A)(ii)) are to be
treated as made under a single plan; and if two or more
plans are permissively aggregated such plans shall satisfy
Sections 401(a)(4) and 410(b) as though they were a single
plan in accordance with Section 401(m) of the Code and
Section 1.401(m)-1 of the Regulations. For purposes of this
Section 4.6, Matching Contributions are taken into account
for a Plan Year only if (i) made on account of the
Participant's Elective Contributions for the Plan Year, (ii)
allocated to the Participant's Account during the Plan Year
and (iii) paid to the Trust Fund prior to the end of the
twelfth month following the close of the Plan Year. For
purposes of determining whether the test of this Section 4.6
and Section 5.3 of this Plan are satisfied, the Actual
Deferral Percentage and the Contribution Percentage shall be
determined with reference to Section 1.401(m)-2(b) of the
Regulations. Any excess over the amount permitted by
Section 1.401(m)-2(b) of the Regulations shall be reduced by
treating such excess as an excess Elective Contribution and
by refunding excess Elective Contributions in the manner set
forth in Section 5.5 hereof, but only for all those Highly
Compensated Participants who are eligible for contributions
pursuant to Section 4 and Section 5 hereof.
(c) In applying the tests set forth in subsections (a)
and (b) of this Section 4.6, the following rules shall
apply.
(1) In the case of an Employee who receives no
Matching Contributions, the Matching Contributions that are
to be included in determining the Participant's Contribution
Percentage are zero;
(2) In the case of a Highly Compensated Participant
who is either a five percent (5%) owner or one of the ten
most Highly Compensated Participants and is thereby subject
to the family aggregation rules of Section 414(q)(6) of the
Code, the Contribution Percentage for the "family" (which is
treated as one Highly Compensated Participant) is the
Contribution Percentage determined by combining the
contributions and Compensation of all eligible family
members. Except to the extent taken into account in the
preceding sentence, the contributions and Compensation of
all family members are disregarded in determining the
Contribution Percentages for the Highly Compensated
Participants and non-highly compensated Participants. For
purposes of this Section 4.6, the term "family" means the
spouse, lineal ascendants and descendants (and the spouses
of such lineal ascendants and descendants).
(3) The availability of Matching Contributions
shall not discriminate in favor of Highly Compensated
Participants.
(4) In the case of a Highly Compensated Participant
whose Contribution Percentage is determined under the family
aggregation rules, the determination of the amount of excess
aggregate contributions shall be reduced in accordance with
the "leveling" method described in Section 1.401(m)-1(e)(2)
of the Regulations and the excess aggregate contributions
shall be allocated among the family members in proportion to
the contributions of each family member.
(5) The distribution of excess aggregate
contributions will include the income allocable thereto and
shall be made on the basis of the respective portions of
such amounts attributable to each Highly Compensated
Participant. The income allocable to the excess aggregate
contributions includes income for the Plan Year for which
the excess aggregate contributions were made in accordance
with Section 1.401(m) - 1(e)(3)(ii) of the Regulations.
(6) A Participant shall include any Employee who is
directly or indirectly eligible to receive an allocation of
Matching Contributions and includes (i) an Employee who
would be a Participant but for the failure to make required
contributions and (ii) a Participant whose right to receive
Matching Contributions has been suspended because of an
election (other than certain one-time elections) not to
participate.
4.7 Distribution of Excess Aggregate Contributions.
(a) The Committee shall determine as of the end of the
Plan Year, and at such other time or times in its
discretion, whether one of the Contribution Percentages of
Section 4.6 is satisfied for such Plan Year. If neither of
the tests set forth in Section 4.6 is satisfied, the
Committee shall distribute the excess aggregate
contributions in the manner described in this Section 4.7.
For purposes of this Section 4.7, "excess aggregate
contributions" means, with respect to any Plan Year and with
respect to any Participant, the excess of the aggregate
amount of (i) Matching Contributions (and any earnings and
losses allocable thereto prior to distribution) and (ii) the
Elective Contributions (if the Regulations permit and the
Committee elects to take into account Elective Contributions
when calculating the Participant's Contribution Percentage)
of Highly Compensated Participants for such Plan Year, over
the maximum amount of such contributions that could be made
on behalf of Participants without violating the requirements
of Section 4.6. The amount of each Highly Compensated
Participant's excess aggregate contributions shall be
determined by reducing the Matching Contributions of all
Highly Compensated Participants whose Contribution
Percentage as adjusted by this Section 4.7 are at the
highest percentage rate for the Plan Year on a pro rata
basis by one hundredth of one percent (0.01%). The
Committee shall continue to utilize this procedure until one
of the tests of Section 4.6 is satisfied.
(b) If the Committee is required to distribute excess
aggregate contributions for any Highly Compensated
Participant for a Plan Year in order to satisfy the
requirements of Section 4.6, then the Committee shall
distribute such excess aggregate contributions with respect
to such Highly Compensated Participants to the extent
practicable before April 15th of the Plan Year next
following the Plan Year for which such excess aggregate
contributions were made, but in no event later than the end
of the Plan Year following such Plan Year. For each of such
Participants, the amounts so distributed shall be made in
the following order of priority:
(i) by distributing Matching Contributions and
earnings thereon, to the extent necessary; and
(ii) by distributing Elective Contributions (to the
extent such amounts are included in the Contribution
Percentage), and earnings thereon.
All such distributions shall be made to Highly
Compensated Participants on the basis of the respective
portions of such amounts attributable to each such Highly
Compensated Participant. No spousal consent shall be
required of any married Participant who receives a refund of
excess aggregate contributions.
4.8 Aggregate Limit for Contribution Percentage and
Actual Deferral Percentage.
(a) The sum of the Contribution Percentage and the
Actual Deferral Percentage for Highly Compensated
Participants for the Plan Year shall not exceed the
"aggregate limit" defined in this Section 4.8.
(b) The term "aggregate limit" means the greater of
(1) or (2) below:
(1) The sum of (A) the greater of the Actual
Deferral Percentage for all Participants other than the
Highly Compensated Participants or the Contribution
Percentage for all Participants other than the Highly
Compensated Participants, for the Plan Year multiplied by
1.25 and (B) the lesser of such Actual Deferral Percentage
or Contribution Percentage plus 2, but not greater than 2
multiplied by the lesser of such Actual Deferral Percentage
or Contribution Percentage.
(2) The sum of (A) the lesser of the Actual
Deferral Percentage for all Participants other than the
Highly Compensated Participants or the Contribution
Percentage for all Participants other than the Highly
Compensated Participants, for the Plan Year multiplied by
1.25 and (B) the greater of such Actual Deferral Percentage
or Contribution percentage plus 2, but not greater than 2
multiplied by the greater of such Actual Deferral Percentage
or Contribution Percentage.
(c) If the aggregate limit is exceeded, the Committee
shall determine whether to: (i) make Qualified Nonelective
Contributions to permit the satisfaction of the test set
forth in subsection (a) hereof; (ii) reduce the Contribution
Percentage of the Highly Compensated Participants as set
forth in Section 4.7; or (iii) reduce the Actual Deferral
Percentage of the Highly Compensated Participants as set
forth in Section 5.5.
SECTION 5. SALARY REDUCTION AGREEMENTS
AND ROLLOVER CONTRIBUTIONS
5.1 Salary Reduction Agreements.
(a) A Participant may elect to make Elective
Contributions in any Plan Year by entering into a written
Salary Reduction Agreement with the Employer. Each Salary
Reduction Agreement shall provide that a portion of the
Participant's Compensation shall be paid through payroll
deduction to the Trust Fund as an Elective Contribution
pursuant to Section 4.1 rather than paid currently to the
Participant. The Salary Reduction Agreement shall provide
for Elective Contributions equal to any whole percentage
between one percent (1%) and fifteen percent (15%) of a
Participant's Compensation in any payroll period, not to
exceed the limitation set forth in Section 402(g) of the
Code (adjusted automatically for increases in accordance
with the Regulations). Notwithstanding the foregoing
provisions of this Section 5.1, the Committee may, but need
not, adopt a procedure to enable Participants to make lump
sum Elective Contributions under the Plan through payroll
deductions. No Salary Reduction Agreement shall be
effective unless the Participant has filed a written
investment direction pursuant to Section 8.3.
(b) A Salary Reduction Agreement will be taken into
account for any Plan Year only if it relates to Compensation
that would have been received by the Participant in the Plan
Year (but for the deferral election).
(c) In the event that the aggregate amount of Elective
Contributions by a Participant exceeds the limitation
described in subsection (a) of this Section 5.1, the amount
of such excess, increased by any income and decreased by any
losses attributable thereto, shall be refunded to the
Participant no later than the April 15th of the calendar
year following the calendar year for which the Elective
Contributions were made. If a Participant also
participates, in any calendar year, in any other plans
subject to the limitations set forth in Section 402(g) of
the Code and has made excess deferrals under this Plan when
combined with the other plans subject to such limits, to the
extent the Participant designates, in writing submitted to
the Committee no later than the March 1 of the calendar year
next following the calendar year for which the Elective
Contributions were made, any Elective Contributions under
this Plan as excess deferrals, the amount of such designated
excess, increased by any income and decreased by any losses
attributable thereto, shall be refunded to the Participant
no later than the April 15 of the calendar year next
following the calendar year for which the Elective
Contributions were made.
5.2 Change or Suspension of Salary Reduction Agreements.
Subject to Section 5.1, a Participant may enter into or
change his or her Salary Reduction Agreement on each Section
401(k) Entry Date, effective as of the first day of the
Section 401(k) Entry Date, in accordance with rules
determined by the Committee. In addition, a Participant may
also suspend his or her Salary Reduction Agreement at any
time, in accordance with rules determined by the Committee.
A Participant who suspends his or her Salary Reduction
Agreement in accordance with this Section 5.2 may enter into
a new Salary Reduction Agreement effective as of the next
succeeding Section 401(k) Plan Entry Date.
A Participant's most recent Salary Reduction Agreement
shall continue unchanged from year to year unless the
Participant notifies the Committee in writing of a change in
such Salary Reduction Agreement in accordance with the rules
determined by the Committee
5.3 Actual Deferral Percentage Test.
(a) Participants' Elective Contributions must satisfy at
least one of the following tests:
(1) The Actual Deferral Percentage for the Highly
Compensated Participants shall not exceed the Actual
Deferral Percentage of all other Participants multiplied by
1.25; or
(2) (A) The excess of the Actual Deferral
Percentage for the Highly Compensated Participants over the
Actual Deferral Percentage of all other Participants shall
not be more than two percentage points, and (B) the Actual
Deferral Percentage for the Highly Compensated Participants
shall not be more than the Actual Deferral Percentage for
all other Participants multiplied by 2.
(b) All Elective Contributions that are made under two
or more plans that are aggregated for purposes of Sections
401(a)(4) and 410(b) of the Code (other than Section
410(b)(2)(A)(ii)) are to be treated as made under a single
plan; and if two or more plans are permissively aggregated,
such plans shall satisfy Sections 401(a)(4) and 410(b) as
though they were a single plan in accordance with Section
401(k) and Section 1.401(k)-1 of the Regulations.
(c) In applying the tests set forth in subsections (a)
and (b) of this Section 5.3, the following rules shall
apply:
(1) In the case of a Participant who makes no
Elective Contributions, the Elective Contributions that are
to be included in determining the Participant's Actual
Deferral Percentage are zero;
(2) In the case of a Highly Compensated Participant
who is either a five percent (5%) owner or one of the ten
most Highly Compensated Participants and is thereby subject
to the family aggregation rules of Section 414(q)(6) of the
Code, the Actual Deferral Percentage for the "family" (which
is treated as one Highly Compensated Participant) is the
greater of (1) the Actual Deferral Percentage determined by
combining the contributions and Compensation of all eligible
family members who are highly compensated without regard to
family aggregation, and (2) the Actual Deferral Percentage
determined by combining the contributions and Compensation
of all eligible family members. Except to the extent taken
into account in the preceding sentence, the contributions
and Compensation of all family members are disregarded in
determining the Actual Deferral Percentages for the Highly
Compensated Participants and non-highly compensated
Participants. For purposes of this Section 5.3, the term
"family" means the spouse, lineal ascendants and descendants
(and the spouses of such lineal ascendants and descendants).
(3) In the case of a Highly Compensated Participant
whose Actual Deferral Percentage is determined under the
family aggregation rules, the determination of the amount of
excess contributions shall be reduced in accordance with the
"leveling" method described in Section 1.401(k)-1(f)(2) of
the Regulations and the excess aggregate contributions shall
be allocated among the family members in proportion to the
contributions of each family member.
(4) The distribution of excess contributions will
include the income attributable thereto and shall be made on
the basis of the respective portions of such amounts
attributable to each Highly Compensated Participant. The
income allocable to the excess contributions includes income
for the Plan Year for which the excess contributions were
made in accordance with 1.401(k) - 1(f)(4)(ii) of the
Regulations.
5.4 Amendment or Revocation of Salary Reduction
Agreement by Committee. The Committee shall determine as of
the end of the Plan Year, and at such other time or times in
its discretion, whether one of the Actual Deferral
Percentage tests of Section 5.3 will be satisfied for such
Plan Year. In the event that neither of such Actual
Deferral Percentage Tests is satisfied, the Committee may
amend or revoke the Salary Reduction Agreement of any
Participant at any time if it determines that such an
amendment or revocation is necessary to ensure that at least
one of the Actual Deferral Percentage tests of Section 5.3
will be satisfied for any Plan Year. The determination of
whether it is necessary to amend or revoke any Salary
Reduction Agreement shall be made pursuant to Section 5.3
and the procedure for such amendment or revocation shall be
determined pursuant to Section 5.5(a).
5.5 Distribution of Excess Contributions.
(a) If neither of the tests set forth in Section 5.3 are
satisfied, the Committee shall in its discretion, to the
extent permissible under the Code and the Regulations,
refund the excess contributions in the manner described in
Section 5.5(b). For purposes of this Section 5.5, "excess
contributions" means, with respect to any Plan Year, the
excess of the aggregate amount of Elective Contributions
(and any earnings and losses allocable thereto prior to
distribution) made by Highly Compensated Participants for
such Plan Year, over the maximum amount of such Elective
Contributions that could be made by such Highly Compensated
Participants without violating the requirements of Section
5.3.
(b) If required in order to comply with the provisions
of Subsection 5.3 and the Code, the Committee shall refund
excess contributions for a Plan Year. The distribution of
such excess contributions shall be made to Highly
Compensated Participants, to the extent practicable, before
the March 15th of the Plan Year next following the Plan Year
for which such excess contributions were made, but in no
event later than the end of the Plan Year next following
such Plan Year. Any such distribution shall be made to each
Highly Compensated Participant by reducing the Elective
Contributions of all Highly Compensated Participants whose
Elective Contributions, as amended by this Section 5.5, are
at the highest percentage rate for the Plan Year on a pro
rata basis by one hundredth of one percent (0.01%). The
Committee shall continue to utilize this procedure until one
of the tests of Section 5.3 is satisfied. Matching
Contributions attributable to Elective Contributions
returned to a Participant shall be distributed as provided
in Section 4.6.
5.6 Rollover Contributions.
(a) A Participant may make a Rollover Contribution to
the Plan in accordance with rules established by the
Committee uniformly applied consisting of an eligible
rollover distribution, as defined in Section 11.8(b), from a
plan qualified under Section 401(a) of the Code or an
individual retirement account qualified under Section 408(a)
of the Code (no part of which is attributable to any source
other than an eligible rollover distribution from a
qualified plan under Section 401(a) of the Code); provided
such eligible rollover distribution is in cash and
contributed to the Plan on or before the 60th day after the
day in which such Participant received such eligible
rollover distribution. If a Participant elects to make a
Rollover Contribution, the Committee may require such
evidence, assurances, opinions and certifications, including
a statement from the previous plan that such plan was a
qualified plan, that the Committee may deem necessary to
establish to its satisfaction that the amounts to be
contributed qualify as an eligible rollover distribution and
will not affect the qualification of the Plan or the tax-
exempt status of the Trust under Sections 401(a) and 501(a)
of the Code, respectively. Except as otherwise permitted by
Section 5.7, in no event shall any assets be transferred to
this Plan from any profit sharing, pension or retirement
plan that would cause this Plan to become a "transferee"
plan (within the meaning set forth in Section 401(a)(11)(B)
of the Code).
(b) Any Rollover Contribution shall be allocated to the
appropriate Participant's Rollover Contribution Subaccount
which shall be established and separately accounted for. A
Participant shall have at all times a nonforfeitable right
in the amount credited to his or her Rollover Contribution
Subaccount.
(c) Each request by a Participant to make a Rollover
Contribution shall be subject to review by the Committee
which shall make a case by case determination that each
Rollover Contribution meets the requirements set forth in
Section 5.6(a), and such other requirements or conditions as
the Committee may, from time to time and in its sole
discretion, impose; provided, however, that any
determination made by the Committee pursuant to this Section
5.6 shall not have the effect of discriminating in favor of
Participants who are officers, shareholders or who are
Highly Compensated Participants.
5.7 Trustee-to-Trustee Transfer of Assets.
Notwithstanding anything in Section 5.6 to the contrary, in
the event of an acquisition by the Employer or the Plan
Sponsor of a company which maintains a plan and trust which
are qualified under Sections 401(a) and 501(a) of the Code,
respectively, the Board of Directors may (but shall not be
required to) authorize a "trustee-to-trustee" transfer of
assets from such qualified plan into the Plan and Trust
Fund. The Trustee may require such evidence, assurances,
opinions and certifications, including a statement from the
acquired company's plan that such plan and trust are
qualified under Sections 401(a) and 501(a) of the Code,
which the Trustee may deem necessary to establish to its
satisfaction that the amounts to be transferred will not
affect the qualification of the Plan or the tax-exempt
status of the Trust under Sections 401(a) and 501(a) of the
Code, respectively.
SECTION 6. ALLOCATION OF CONTRIBUTIONS
6.1 Establishment of Cash Contribution Account. The
Committee shall establish and maintain or cause to be
established and maintained with respect to each Participant
a Cash Contribution Account showing his or her interest
under the Plan and in the Trust Fund and all relevant data
pertaining thereto. Each Participant shall be furnished
with a written statement of his or her Cash Contribution
Account at least once annually and upon any distribution to
him or her. In maintaining the Cash Contribution Accounts
under the Plan, the Committee can conclusively rely on the
valuations of the Trust Fund in accordance with the Plan.
The establishment and maintenance of, or allocations and
credits to, the Cash Contribution Account of any Participant
shall not vest in any Participant any right, title or
interest in and to any Plan assets or benefits, except at
the time or times and upon the terms and conditions and to
the extent expressly set forth in the Plan and in accordance
with the terms of the Trust Fund.
6.2 Establishment of Subaccounts. Each Participant's
Cash Contribution Account shall contain each of the
following applicable subaccounts therein:
(a) All Elective Contributions on behalf of a
Participant under Section 4.1 and Qualified Nonelective
Contributions on behalf of a Participant under Section
4.2(b)(i) shall be credited to the Participant's Elective
Contribution Subaccount.
(b) All Matching Contributions on behalf of a
Participant under Section 4.2(a) shall be allocated and
credited to the Participant's Matching Contribution
Subaccount.
(c) All Profit Sharing Contributions on behalf of a
Participant under Section 4.2(b)(ii) shall be allocated and
credited to the Participant's Profit Sharing Subaccount.
(d) All Rollover Contributions on behalf of a
Participant under Section 5.6 shall be allocated and
credited to the Participant's Rollover Contribution
Subaccount.
SECTION 7. SPECIAL ESOP PROVISIONS
7.1 Investment of ESOP Accounts. The ESOP Accounts of
all Participants shall be invested exclusively in Shares,
except for cash or cash equivalent investments held (a) for
the limited purpose of making Plan distributions to
Participants and Beneficiaries, (b) pending the investment
by the Purchasing Agent of contributions or other cash
receipts in Shares, (c) pending use to repay an Exempt Loan,
(d) for purposes of paying, under the terms described in the
Plan or Trust Agreement, fees and expenses incurred with
respect to the Plan or Trust and not paid for by the
Participating Employers or (e) in the form of de minimis
cash balances. Neither any Participating Employer nor the
Purchasing Agent, the Committee or the Trustee shall have
any responsibility or duty to time any transaction involving
Shares in order to anticipate market conditions or changes
in stock value, nor shall any such person have any
responsibility or duty to sell Shares held in the ESOP
Accounts (or otherwise to provide investment management for
Shares held in the ESOP Accounts) in order to maximize
return or minimize loss. Participating Employer
contributions made in cash, and other cash received by the
Trustee, may be used by the Purchasing Agent to acquire
Shares from shareholders of the Employer or directly from
the Employer.
7.2 Allocation to ESOP Accounts.
(a) Subject to the provisions of Section 4, the ESOP
Account maintained for each Participant will be credited as
of the last day of each Plan Year with the Participant's
allocable share of:
(i) Shares purchased by the Purchasing Agent
using cash contributed by or on behalf of the Participating
Employer employing such Participant (or contributed directly
to the Trust Fund) and
(ii) Shares released from the Suspense Subfund
pursuant to Section 7.3 and allocable to the contribution
made by or on behalf of such Participating Employer pursuant
to Section 7.4.
(b) Shares attributable to ESOP Contributions shall be
allocated among the Accounts of Participants who are members
of the Allocation Group for the Plan Year in the same
proportion that a Participant's Compensation during the Plan
Year bears to the total Compensation during the Plan Year of
all Participants who are members of the Allocation Group for
such Plan Year. For purposes of the preceding sentence,
Compensation earned by a Participant prior to the
Participant's entry into the Plan pursuant to Section
3.1(b)(ii) shall not be taken into account.
(c) Shares contributed directly to the Trust Fund for a
Plan Year shall be allocated under Section 7.2(a)(i) in the
same proportion as Shares purchased by the Trust Fund and
allocated under Section 7.2(b).
7.3 Suspense Subfund for ESOP Accounts. Shares acquired
by the Participants' ESOP Accounts through an Exempt Loan
shall be added to and maintained in the Suspense Subfund and
shall thereafter be released from the Suspense Subfund and
allocated to Participants' ESOP Accounts as provided in
Sections 7.3 and 7.4. Shares acquired for the Trust Fund
with the proceeds of an Exempt Loan shall be released from
the Suspense Subfund as the Exempt Loan is repaid, in
accordance with the provisions of this Section 7.3.
(a) For each Plan Year until the Exempt Loan is fully
repaid, the number of Shares released from the Suspense
Subfund shall equal the number of unreleased Shares
immediately before such release for the current Plan Year
multiplied by the "Release Fraction." As used herein, the
term "Release Fraction" shall mean a fraction, the numerator
of which is the amount of principal and interest paid on the
Exempt Loan for such current Plan Year and the denominator
of which is the sum of the numerator plus the principal and
interest to be paid on such Exempt Loan for all future years
during the term of such Exempt Loan (determined without
reference to any possible extensions or renewals thereof).
For purposes of computing the denominator of the Release
Fraction, if the interest rate on the Exempt Loan is
variable, the interest to be paid in subsequent Plan Years
shall be calculated by assuming that the interest rate in
effect as of the end of the applicable Plan Year will be the
interest rate in effect for the remainder of the term of the
Exempt Loan.
Notwithstanding the foregoing, in the event such Exempt Loan
shall be repaid with the proceeds of a subsequent Exempt
Loan (the "Substitute Loan"), such repayment shall not
operate to release all such Shares in the Suspense Subfund,
but, rather, such release shall be effected pursuant to the
foregoing provisions of this Section 7.3(a) on the basis of
payments of principal and interest on such Substitute Loan.
(b) If required by any pledge or similar agreement, or
if permitted by such pledge or agreement and required by the
Committee pursuant to a one-time, irrevocable designation
(which shall be made, if at all, in connection with the
making of an Exempt Loan) by the Committee, then, in lieu of
applying the provisions of Section 7.3(a) hereof with
respect to an Exempt Loan, Shares shall be released from the
Suspense Subfund as the principal amount of such Exempt Loan
is repaid (without regard to interest payments), provided
the following three conditions are satisfied:
(i) The Exempt Loan shall provide for annual
payments of principal and interest at a cumulative rate that
is not less rapid at any time than level annual payments of
such amounts for ten years;
(ii) The interest portion of any payment shall
be disregarded only to the extent it would be treated as
interest under standard loan amortization tables; and
(iii) If the Exempt Loan is renewed, extended
or refinanced, the sum of the expired duration of the Exempt
Loan and the renewal, extension or new Exempt Loan period
shall not exceed ten years.
(c) If at any time there is more than one Exempt Loan
outstanding, then separate accounts may be established under
the Suspense Subfund for each such Exempt Loan. Each Exempt
Loan for which a separate account is maintained may be
treated separately for purposes of the provisions governing
the release of Shares from the Suspense Subfund under this
Section 7.3 (including for purposes of determining whether
Section 7.3(a) or Section 7.3(b) governs the release of
Shares from any particular Suspense Subfund) and for
purposes of the provisions governing the application of
Participating Employer contributions to repay an Exempt Loan
under Section 4.2.
(d) All Shares released from the Suspense Subfund during
any Plan Year shall be allocated among Participants as
prescribed by Section 7.4.
7.4 Disposition of Shares Released from Suspense
Subfund.
(a) Shares released from the Suspense Subfund for a Plan
Year in accordance with Section 7.3 shall be held in the
Trust Fund on an unallocated basis until allocated by the
Committee as of last day of the Plan Year. Shares released
from the Suspense Subfund on account of a payment for a Plan
Year of principal or interest on an Exempt Loan, to the
extent payment is made with contributions for such Plan
Year, shall be allocated under Section 7.2(a)(ii) in the
same proportion as Shares purchased with contributions under
Section 7.2(b).
(b) (i) Shares released from the Suspense Subfund
on account of the payment for a Plan Year of principal or
interest on an Exempt Loan to the extent such payment is
made with dividends paid on Shares allocated to ESOP
Accounts, shall be allocated in the same proportion as
dividends used to pay principal or interest on such Exempt
Loan would have been allocated under Section 7.9(b) had such
dividends not been so used; and
(ii) Subject to Section 4.2, Shares released
from the Suspense Subfund on account of the payment of
principal or interest on an Exempt Loan, to the extent such
payment is made with dividends on Shares not allocated to
Accounts, shall be allocated to those ESOP Accounts and in
the same proportion as Shares released pursuant to Section
7.4(b)(i); provided that Shares so released shall be
otherwise allocated if necessary to satisfy the requirements
of the Code (other than Section 404(k)) and any Regulations
thereunder.
(c) All Shares in the Trust Fund, other than the Shares
held in the Suspense Subfund as of the last day of any Plan
Year, must be allocated to ESOP Accounts as of the last day
of any Plan Year.
7.5 Limitations on Allocations to ESOP Accounts.
Notwithstanding the foregoing provisions of this Section 7:
(a) If more than one-third of all ESOP Contributions for
a Plan Year which are deductible only under Section
404(a)(9) of the Code would be allocated, in the aggregate,
to Participants described in Section 414(q) of the Code,
then the Committee may reduce such allocations pro rata in
an amount sufficient to ensure that such ESOP Contributions
will be deductible with respect to such Plan Year; and
(b) Any contributions which are prevented from being
allocated due to the restriction contained in Section 7.5(a)
shall be allocated as of the last day of the Plan Year
pursuant to Sections 7.2 and 7.4 as though those
Participants described in Section 414(q) of the Code did not
participate in the Plan.
7.6 Acquisition of Shares.
(a) Notwithstanding the foregoing provisions of this
Section 7, in the event that Shares are acquired in a
transaction to which Section 1042 of the Code applies, then,
in accordance with the Regulations, such Shares shall not be
allocated, directly or indirectly, to prohibited individuals
as defined in Section 409(n)(1) of the Code for the duration
of the nonallocation period (as defined in Section
409(n)(3)(C) of the Code).
(b) If Shares are prevented from being allocated due to
the prohibition contained in Section 7.6(a), the allocation
of Shares attributable to ESOP Contributions (or ESOP
Contributions) otherwise provided under Section 7.2 shall be
adjusted to reflect such result.
7.7 Effect of Change in Plan Sponsor's Capitalization.
Any Shares received by the Trustee as a result of a stock
split, dividend, conversion, or as a result of a
reorganization or other recapitalization of the Plan Sponsor
shall be allocated as of the day on which the Shares are
received by the Trustee in the same manner as the Shares to
which they are attributable are then allocated.
7.8 Trustee and Committee Discretion to Engage in
Transactions in Shares. Neither the Purchasing Agent, the
Trustee nor the Committee shall be required to engage in any
transaction, including, without limitation, directing the
purchase or sale of Shares, which it determines in its sole
discretion may subject itself, its Participants, the Plan,
any Participating Employer, or any Participant to liability
under federal or other state laws.
7.9 Valuation of ESOP Accounts.
(a) Subject to the requirements of Section 7.9(b), the
fair market value of the assets of the ESOP Accounts shall
be determined as of each Valuation Date, in accordance with
generally accepted valuation methods and practices
including, but not limited to, in the case of Shares, the
use of one or more independent appraisers.
(b) The value of a Participant's ESOP Account as of any
Valuation Date shall equal the sum of:
(i) The aggregate value (as determined under
Section 7.9(a)) of all Shares and dividends on Shares
previously allocated to such Participant's ESOP Account as
of such Valuation Date; and
(ii) Subject to Section 7.9(c), the aggregate
value (as determined under Section 7.10(a)) of dividends, if
any, received during the Plan Year on Shares allocated to
such Participant's ESOP Account.
(iii) Such Participant's allocable portion
(determined in accordance with the rules set forth in
Section 7.4 for determining Participant's allocable portion
of Shares released from the Suspense Subfund) of the
earnings, if any, on all amounts contributed to the Trust
Fund for purposes other than the repayment of an Exempt
Loan.
(c) Except as provided in Section 7.7, dividends
payable, if any, with respect to Shares held by the
Participant's ESOP Account will be, in the discretion of the
Committee and in conformity with the terms of the Shares on
which such dividends are paid, (i) used for the purpose of
repaying one or more Exempt Loans, (ii) distributed from the
Trust Fund to Participants or their Beneficiaries not later
than 90 days after the close of the Plan Year in which they
are paid to the Trust Fund, (iii) paid directly to such
Participants or their Beneficiaries, (iv) retained in the
Trust Fund and allocated pursuant to Section 7.9(b), or (v)
paid or utilized in a combination of any or all of the
foregoing four options.
(d) The Committee shall establish accounting procedures
for the purpose of making the allocations, valuations and
adjustments to Participant's ESOP Accounts in accordance
with the provisions of the Plan. From time to time, the
Committee may modify its accounting procedures for the
purpose of achieving equitable and nondiscriminatory
allocations among the ESOP Accounts of Participants in
accordance with the provisions of the Plan.
7.10 Role of Purchasing Agent.
(a) All purchases of Shares made by the Trust
Fund shall be made by the Purchasing Agent. The Trustee
shall forward to the Purchasing Agent all amounts
contributed to the employee stock ownership plan, and all
amounts to be invested in Shares pursuant to participant
investment directions given pursuant to Sections 8.3, 8.4
and 8.5. Amounts to be invested in Shares shall be invested
in Shares in the amount, in the manner and at the price
determined by the Purchasing Agent in its sole discretion,
provided such price shall be the fair market value of such
Shares at the time of purchase. The Purchasing Agent shall
in its sole discretion select the broker-dealer through
which the purchase of such Shares shall be executed. The
Purchasing Agent shall also invest any cash dividends
received on any Shares which are allocated to Participants'
Accounts and held as part of the Plan as provided in Section
5.05(c) of the Trust Agreement.
(b) The Purchasing Agent shall sell Shares
only at the direction of the Trustee, which shall issue such
instructions only at the direction of the Committee;
provided that such Committee direction shall not be required
for any sales of Shares required pursuant to the participant
investment directions given pursuant to Sections 8.3, 8.4 or
8.5, or pursuant to the provisions of Section 13.5 or 13.6.
SECTION 8. INVESTMENT OF CONTRIBUTIONS, VALUATIONS
AND PARTICIPANTS' CASH CONTRIBUTION ACCOUNTS
8.1 Delivery of Contributions to Trust Fund. All
monies, securities or other property contributed to
Participants' Cash Contribution Accounts shall be delivered
to the Trustee under the Trust Fund, to be managed,
invested, reinvested and distributed in accordance with the
Plan and the Trust Fund.
8.2 Participants' Right to Select Investments. Each
Participant shall have the right to invest his or her Cash
Contribution Account among one or more investment funds
selected by the Company, which may include a fund
established for investment in Shares.
8.3 Participant Investment Election. As of any date
permitted by the Committee, a Participant may, in accordance
with the rules of the Committee uniformly applied, specify
the percentage (in minimum multiples as may be determined
from time to time by the Committee) of contributions which
are made to the Participant's Cash Contribution Account that
shall be invested in investment funds selected by the
Committee. An investment election may be made separately
with respect to (i) the aggregate of the Participant's
Elective Contribution Subaccount, Matching Contribution
Subaccount, and Rollover Contribution Subaccount and (ii)
the Participant's Profit Sharing Subaccount.
8.4 Change in Investment Election for Future
Contributions. Any investment direction specified by a
Participant shall be deemed to be a continuing direction
until changed. A Participant may change an investment
direction as to future contributions made by such
his or her Cash Contribution Account as of any day permitted
by the Committee in accordance with the rules of the
Committee uniformly applied.
8.5 Change in Investment Election for Prior
Contributions. As of any date permitted by the Committee, a
Participant may change the percentages (in minimum multiples
as may be determined from time to time by the Committee) in
which the investment of the portion of his or her Cash
Contribution Account attributable to prior contributions
shall be allocated among the funds maintained by the
Trustee. Such changes of investment allocation may be made
separately with respect to (i) the aggregate of the
Participant's Elective Contribution Subaccount, Matching
Contribution Subaccount, and Rollover Contribution
Subaccount, and (ii) the Participant's Profit Sharing
Subaccount.
8.6 Valuation of Cash Contribution Accounts.
(a) As of each Valuation Date, Participants' Cash
Contribution Accounts shall be valued pursuant to the terms
of the Plan. Such valuation shall be conclusive and binding
upon all persons having an interest in the Trust Fund.
(b) The Committee shall adjust the value of each
Elective Contribution Subaccount, Matching Contribution
Subaccount, Profit Sharing Subaccount, or Rollover
Contribution Subaccount, as the case may be, maintained
under Participants' Cash Contribution Accounts as of each
Valuation Date to reflect the effect of income received and
accrued, realized and unrealized profits and losses, and all
other transactions of the preceding period. Such
adjustments shall be made with respect to the period since
the next preceding Valuation Date by (i) deducting from each
such Subaccount the total of all payments made from such
Subaccount during such period, (ii) adding to or deducting
from, as the case may be, each such Subaccount such
proportion of each item of income, profit or loss as the
amount in such Subaccount as of the next preceding Valuation
Date bears to the total of the amounts in all of such
Participants' Elective Contribution Subaccount, Matching
Contribution Subaccount, Profit Sharing Subaccount, or
Rollover Contribution Subaccount, as the case may be, as of
the preceding Valuation Date and (iii) adding contributions
to each such Elective Contribution Subaccount, Matching
Contribution Subaccount, Profit Sharing Subaccount, or
Rollover Contribution Subaccount, as the case may be,
pursuant to Sections 4 and 5 of the Plan. In making such
allocations, the Committee can conclusively rely on the
valuations of the Subaccounts by the Trustee in accordance
with the Plan and the Trust.
SECTION 9. RETIREMENT DATES
9.1 Normal Retirement Date. The Normal Retirement Date
of a Participant shall be his or her 65th birthday. Upon
attainment of his or her Normal Retirement Date, a
Participant shall have a nonforfeitable right to 100% of his
or her Account.
9.2 Deferred Retirement Date. A Participant who remains
in Service after his or her Normal Retirement Date may
retire on a Deferred Retirement Date which shall be the
first day of the month coincident with or next following his
or her termination of Service or as specified in a written
application to the Committee.
SECTION 10. ELIGIBILITY FOR PAYMENT OF ACCOUNTS
AND VESTED INTERESTS
10.1 Participants' Right to Account Upon Termination Due
to Retirement, Death or Disability.
(a) A Participant shall have a nonforfeitable right
to his or her Account upon the occurrence of any of the
following events while employed by the Employer:
(i) attainment of his or her Retirement Date;
(ii) his or her death; or
(iii) his or her Disability.
(b) Upon the termination of Service of any Participant
on or after his or her Retirement Date or by reason of his
or her death or Disability ("Terminated Participant"), the
Terminated Participant (or, in the event of the
Participant's death, his or her Beneficiary) shall be
entitled to an amount equal to the Terminated Participant's
Account, including any subsequent contribution allocated to
the Terminated Participant's Account pursuant to Sections 6
or 7 with respect to the Plan Year in which the
Participant's Service is terminated. The Participant's
Account shall be distributable, in accordance with the
methods and rules of distribution described in Section 11,
as soon as practicable following the Participant's
termination of Service. The value of the Participant's
Account shall be determined as of the Valuation Date
coincident with or immediately preceding the date of
distribution of the Participant's Account.
10.2 Participants' Right to Account Upon Other
Termination of Service. Upon the termination of Service of
any Participant prior to his or her Retirement Date for any
reason other than death or Disability, the Terminated
Participant shall be entitled to receive an amount equal to
the sum of (i) 100% of the Participant's Elective
Contribution Subaccount, Matching Contribution Subaccount,
and Rollover Contribution Subaccount and (ii) the
Participant's Vested Interest in his or her Profit Sharing
Subaccount and ESOP Account, including the Participant's
Vested Interest in any subsequent contribution allocated to
the Participant's Account pursuant to Sections 6 or 7 with
respect to the Plan Year in which the Participant's Service
terminated. The Participant's Account shall be
distributable, in accordance with the methods and rules of
distribution described in Section 11, as soon as practicable
following the Valuation Date immediately following the
Participant's termination of Service. The value of the
Participant's Account shall be determined as of the
Valuation Date coincident with or immediately preceding the
date of distribution of the Participant's Account. If such
Terminated Participant's Vested Interest is less than 100
percent, the non-vested balance of such Participant's Profit
Sharing Subaccount and ESOP Account shall be forfeited and
reallocated pursuant to Section 4.5 as of the last day of
the earlier of (i) the Plan Year in which the Participant's
Account is distributed, or (ii) the Plan Year in which the
Participant incurs a Total Break in Service.
10.3 Vesting Schedule for Determining Vested Interests.
For all purposes of this Plan, a Participant's Vested
Interest in his or her Profit Sharing Subaccount and ESOP
Account shall consist of (i) the Participant's percentage of
his or her Profit Sharing Subaccount and (ii) the percentage
of the Participant's ESOP Account, both as determined from
the following vesting schedule on the basis of the number of
Years of Service which the Participant has completed as of
the date of the Participant's termination of Service.
VESTING SCHEDULE
Years of Service Percentage
Less than three years 0%
Three years but less than four years 20%
Four years but less than five years 40%
Five years but less than six years 60%
Six years but less than seven years 80%
Seven years or more 100%
10.4 Breaks in Service. If a Participant's Service is
terminated prior to his or her Retirement Date for any
reason other than the Participant's death or Disability
prior to completing three Years of Service, and such
Participant incurs a Total Break in Service, such
Participant shall not be entitled to any benefit
attributable to amounts allocated to the Participant's
Profit Sharing Subaccount or ESOP Account prior to such
Total Break in Service. If a Participant returns to
Service, Years of Service before such return shall be
counted, in addition to Years of Service following such
return, in determining the Participant's Vested Interest in
the amount credited to the Participant's Profit Sharing
Subaccount or ESOP Account subsequent to the Participant's
return to Service. If such Participant does not complete
one Year of Service following his or her return, then the
Participant shall not be entitled to any further benefit
under the Plan and the non-vested balance of any Profit
Sharing Contribution or ESOP Contributions credited or
recredited to such Participant's Profit Sharing Subaccount
or ESOP Account subsequent to the Participant's return shall
be forfeited and reallocated pursuant to Section 4.5 upon
the Participant's termination of Service. All forfeitures
shall occur in conformity with the ordering rules of Section
54.4975-11(d) of the Regulations.
10.5 Participant's Right to Restoration of Account Upon
Return to Service. If a Terminated Participant who had a
vested interest in such Participant's Profit Sharing
Subaccount or ESOP Account returns to Service prior to
incurring a Total Break in Service, the non-vested balance
of the Terminated Participant's Account, if any, forfeited
pursuant to Section 10.2 shall be recredited to such
Participant's Account, provided that, not later than the
fifth anniversary of the first date on which the Participant
is subsequently employed, such Participant repays the full
amount of any distribution made to the Participant upon his
or her prior termination of Service. Any amount so repaid,
together with any non-vested portion of such Participant's
Account recredited pursuant to this Section 10.5, shall be
invested in the Trust Fund. If such Participant fails to
make a repayment of any distributed amounts pursuant to this
Section 10.5, the non-vested portion of such Participant's
Account, if any, shall not be recredited.
10.6 Participant's Right to Account Upon Death After
Termination of Service. Subject to the provisions of
Section 10, if a Terminated Participant dies before payment
of the full value of his or her Account from the Trust Fund,
an amount equal to the current value of the unpaid portion
of the Participant's Vested Interest in his or her Account,
including any subsequent contribution allocated to the
Terminated Participant's Account pursuant to Sections 6 or 7
with respect to the Plan Year in which the Participant's
Service is terminated, shall be distributable, in accordance
with the methods and rules of distribution described in
Section 11, as soon as practicable following the
Participant's death. The value of the Participant's Account
shall be determined as of the Valuation Date coincident with
or immediately preceding the date of distribution of the
Participant's Account.
10.7 Amendment of Vesting Schedule. If the vesting
schedule contained in Section 10.3 is amended, each
Participant who has completed at least three (3) Years of
Service may elect, during the election period specified in
this Section, to have his or her vested percentage
determined without regard to such amendment. For purposes
of this Section, the election period shall begin as of the
date on which the amendment changing the vesting schedule is
adopted, and shall end on the latest of the following dates:
(i) the date occurring sixty (60) days after the Plan
amendment is adopted; (ii) the date which is sixty (60) days
after the day on which the Plan amendment becomes effective;
(iii) the date which is sixty (60) days after the day the
Participant is issued written notice of the Plan amendment
by the Committee; or (iv) such later date as may be
specified by the Committee. The election provided for in
this Section shall be made in writing and shall be
irrevocable when made.
SECTION 11. METHOD OF PAYMENT OF ACCOUNTS
AND WITHDRAWALS
11.1 Methods of Payment. Any benefit payable under the
Plan, except as otherwise provided in Section 11.2 shall be
payable as soon as practicable following the last day of the
calendar month in which falls a Participant's termination of
Service (or other event requiring a distribution under the
Plan), in one lump sum payment from the Trust Fund, provided
that the Participant may elect to direct the Committee to
directly transfer all or any portion of his or her "eligible
rollover distribution" (as defined in Section 11.8 below) to
another tax-qualified plan pursuant to Section 401(a)(31) of
the Code. A Participant who has no Vested Interest in his
or her Account upon his or her termination of Service will
be deemed to have received a full distribution of his or her
Account as of such date. A Participant may also elect to
receive a distribution of his or her Account as soon as
practicable following the first anniversary of the last day
of the calendar month in which occurs such termination of
Service (or other event requiring a distribution under the
Plan), or as soon as practicable following the Participant's
Normal Retirement Date.
11.2 Commencement of Payment. Notwithstanding any other
provision of the Plan to the contrary, (i) if a Participant
has a Vested Interest in his or her Account with a value of
$3,500 or less it shall be distributed in one lump sum as
soon as is administratively feasible following the last day
of the calendar month in which such Participant's
termination of employment occurs, and (ii) if a Participant
has a Vested Interest in his or her Account with a value of
more than $3,500 it shall not commence to be distributed
without the consent of the Participant before the
Participant's Normal Retirement Date.
In the absence of receipt of such consent by the
Committee, payment of the benefit to such Participant shall
commence as soon as practicable after the Participant's
attainment of his or her Normal Retirement Date, which benefit
shall be in an amount equal to the value of the Participant's
distributable Account as of the Valuation Date coincident with
or immediately following the Participant's attainment of his or
her Normal Retirement Date. In any case where distribution of
any benefit amount from the Participant's Cash Contribution
Account is to be deferred, the Committee shall either (i)
establish or cause to be established a special account for the
benefit of the former Participant, to be invested by the
Trustee in a fixed investment account established by the
Trustee or (ii) cause all amounts in the Participant's Cash Contribution
Account deferred by the Participant to be invested at the
Participant's election in the same manner as the normal Cash
Contribution Accounts maintained for Participants under to the Plan.
11.3 Special Rules For Distribution of Shares.
(a) Distribution of a Participant's Vested Interest
from his or her Account which is invested in Shares will be
made entirely in whole Shares, with the value of any
fractional interest in Shares paid in cash. Any cash or
other property in a Participant's ESOP Account will be used
by the Purchasing Agent to acquire Shares, valued as of the
last day of the calendar month in which occurs (i) the
Participant's election to receive a distribution of his or
her Account pursuant to Section 11.1, (ii) the Participant's
termination of Service, in the case of a distribution
pursuant to Section 11.2(i), or (iii) the Participant's
Normal Retirement Date (or the Participant's death, if
earlier), in the case of a distribution pursuant to Section
11.2(ii) to a Participant who failed to consent to a
distribution prior to his or her Normal Retirement Date (the
"Share Conversion Date"). Notwithstanding the foregoing, if
applicable corporate charter or bylaw provisions restrict
ownership of substantially all outstanding Shares to
Employees or to a plan or trust described in Section 401(a)
of the Code, then any distribution of a Participant's Vested
Interest in the Participant's ESOP Account shall be in cash.
When a distribution consists in whole or in part of Shares,
and if such Shares consists of more than one class of
securities, the distribution of such Shares shall consist of
substantially the same proportion of each such class of
Shares as such classes of Shares represent proportions of
the Participant's Account. If the record date for dividends
payable with respect to Shares distributable to a
Participant occurs following the Share Conversion Date, such
dividends shall not be considered attributable to such
Shares, but shall be considered as earnings of the Fund and
allocated among Participants' Accounts pursuant to Section
8.6(b).
(b) Notwithstanding anything in Section 11 to the
contrary, in the discretion of the Committee, Section 11.1
may not apply to Shares held in a Participant's ESOP Account
until the close of the Plan Year in which any Exempt Loan
used to acquire such Shares is repaid in full.
(c) If at the time of distribution, Shares distributed
from the Trust Fund that were acquired with the proceeds of
an Exempt Loan are not treated as "readily tradable on an
established market" within the meaning of Section 409(h) of
the Code and Regulations, such Shares shall be subject to a
put option in the hands of a Qualified Holder by which such
Qualified Holder may sell all or any part of such Shares to
the Trust. Should the Trust decline to purchase all or any
part of such Shares, the Employer shall purchase those
Shares that the Trust declines to purchase. The put option
shall be subject to the following conditions:
(i) The term "Qualified Holder" shall mean the
Participant or Beneficiary receiving the distribution of
such Shares, any other party to whom the Shares are
transferred by gift or reason of death, or any trustee of an
individual retirement account (as defined under Code Section
408) to which all or any portion of the distributed Shares
is transferred pursuant to a tax-free "rollover" transaction
satisfying the requirements of Sections 402 and 408 of the
Code.
(ii) During the 60-day period following any
distribution of such Shares, a Qualified Holder shall have
the right to require the Trust or the Employer to purchase
all or a portion of the distributed Shares held by the
Qualified Holder. The purchase price to be paid for any
such Shares shall be their fair market value determined as
of the Valuation Date coinciding with or immediately
preceding the exercise of the put option under this Section
11.3(c)(ii), provided that in the case of a transaction
between the Plan and a "disqualified person" within the
meaning of Section 4975(e)(2) of the Code, such fair market
value shall be determined as of the date of the transaction.
(iii) If a Qualified Holder shall fail to exercise
such put option, the put option shall temporarily lapse upon
the expiration of the 60-day period. As soon as practicable
following the last day of the Plan Year in which the 60-day
option period expires, the Employer shall notify the non-
electing Qualified Holder (if he or she is then a
shareholder of record) of the valuation of the Shares as of
that date. During the 60-day period immediately following
receipt of such valuation notice, the Qualified Holder shall
again have the right to require the Employer to purchase all
or any portion of the distributed Shares. The purchase
price to be paid therefor shall be based on the valuation of
the Shares as of the Valuation Date coinciding with or
immediately preceding the exercise of the option under this
Section 11.3(c)(iii), provided that in the case of a
transaction between the Plan and a "disqualified person"
within the meaning of Section 4975(e)(2) of the Code, such
fair market value shall be determined as of the date of the
transaction.
(iv) The foregoing put options under Section
11.3(c)(ii) and (iii) hereof shall be effective solely
against the Employer and shall not obligate the Plan or
Trust in any manner.
(v) Except as otherwise required or permitted by
the Code, the put options under this Section 11.3(c) shall
satisfy the requirements of Section 54.4975-7(b) of the
Treasury Regulations to the extent, if any, that such
requirements apply to such put options.
If a Qualified Holder exercises a put option
under this Section 11.3(c), payment for the Shares shall be
made in substantially equal annual payments over a period
beginning not later than 30 days after the exercise of the
put option and not exceeding five years (provided that
adequate security and reasonable interest are provided with
respect to unpaid amounts).
Except as provided in this Section 11.3(c) or in
Section 11.2, no shares acquired with the proceeds of an
Exempt Loan may be subject to a put, call or other option,
or buy-sell or similar arrangement while held by or
distributed from the Plan. The rights and protections set
forth in this Section 11.3(c) shall be non-terminable.
11.4 Payments to Surviving Spouse or Beneficiary. If a
Participant or former Participant dies before the
commencement of his or her benefits under the Plan, such
Participant's or former Participant's Vested Interest in his
or her Account is payable in full to his or her Surviving
Spouse. If such Participant has no Surviving Spouse, he or
she may designate a Beneficiary pursuant to Section 14. A
Participant may with the written consent of his or her
spouse elect to designate a Beneficiary other than or in
addition to his or her spouse. The written consent of the
spouse must acknowledge the effect of such election and must
be witnessed by a representative of the Plan or a notary
public. Any such election may not be changed without
spousal consent. Such an election or revocation must be
made in accordance with the procedures developed by the
Committee in accordance with the Code and Regulations.
11.5 Latest Date for Commencement of Benefits.
(a) Payments will commence no later than 60 days
following the latest of the close of the Plan Year in which:
(i) the Participant attains his or her Normal
Retirement Date,
(ii) occurs the 10th anniversary of the year in
which the Participant commenced participation in the Plan
or
(iii) the Participant terminates his or her Service
with the Employer.
(b) Notwithstanding the provisions of the foregoing
sentence, if the amount payable cannot be ascertained, or,
subject to the provisions of Section 20.6, the Participant
cannot be located after reasonable efforts, a payment
retroactive to the date determined under the foregoing
sentence may be made not later than 60 days after the
earliest date on which the amount of such payment can be
ascertained under the Plan or the date on which the
Participant is located (whichever is applicable).
(c) Notwithstanding any other provision of the Plan,
benefits payable to a Participant shall commence no later
than the later of April 1st of the calendar year following
the calendar year in which such Participant attains age 70 1/2.
(d) If a Participant dies before benefits have
commenced, distributions to any Surviving Spouse or
Beneficiary shall be made as soon as administratively
feasible, but not later than five years after such
Participant's death. In the event that payment is made to
the Participant's Surviving Spouse, such distribution shall
not commence later than the date on which such Participant
would have attained age 70 1/2 (or, in either case, on any
later date prescribed by Regulations). If the Participant's
Surviving Spouse dies after such Participant's death but
before distribution has been made to such Surviving Spouse,
this Section 11.5(d) shall be applied to require payment of
any benefits as if such Surviving Spouse were the
Participant.
(e) Pursuant to Regulations, any benefit paid to a child
shall be treated as if paid to a Participant's Surviving
Spouse if such amount would become payable to such Surviving
Spouse on the child's attaining majority, or other
designated event permitted by Regulations.
11.6 Redirection of Investment of ESOP Account.
Effective March 1, 1990, upon both attaining age 50 and
completing five Years of Service, a Participant shall be
permitted to direct the Plan to transfer all or any portion
of the Vested Interest in the Participant's ESOP Account to
the Participant's Cash Contribution Account. Under rules
prescribed by the Committee, such directions shall be
permitted during semi-annual periods, to be determined by
the Committee, effective as soon as administratively
feasible, but not later than 30 days from the date on which
such direction is given (except that, in the case of an
individual who is subject to Section 16 of the Securities
Exchange Act of 1934, as amended, such direction shall be
effective as of the first day of the seventh month next
following the month in which such direction is given), and
shall be made in ten percent (10%) increments of the
Participant's Vested Interest in his or her ESOP Account.
In the event that the Participant's Account does not provide
at least three investment options to the Participant other
than investment in Shares, the Committee shall provide
diversification options to any Participant required to be
given such diversification options under Section
401(a)(28)(B) of the Code in a manner consistent with the
Code. Notwithstanding the foregoing, the ability to make
transfers may be restricted by the Committee to the extent
necessary to comply with any applicable federal securities
laws (including Rule 144); provided, however, that in no
event shall a Participant be prevented from transferring any
amount necessary in order to meet the diversification
requirements set forth in Section 401(a)(28)(B) of the Code.
11.7 Hardship Withdrawals.
(a) A Participant who is an Employee may elect to
withdraw all or any portion of the Vested Interest in his or
her Cash Contribution Account attributable to Elective
Contributions (but excluding any earnings on Elective
Contributions accruing after December 31, 1988), Profit
Sharing Contributions (if, and only if, the withdrawal is
occasioned by a life threatening illness to the Participant)
by giving written notice thereof to the Committee specifying
such date, which shall not be less than 30 days following
the date such notice is given to the Committee. Such notice
shall designate that the hardship withdrawal shall be
withdrawn from the investment funds in which the Participant
has directed investment of the Participant's Cash
Contribution Account.
(b) The Committee may authorize a hardship withdrawal
only for:
(i) medical expenses described in Section 213(d) of
the Code incurred or immediately anticipated by the
Participant, the Participant's spouse, or any dependents of
the Participant (as defined in Section 152 of the Code);
(ii) the purchase (excluding mortgage payments) of a
principal residence of the Participant;
(iii) the payment of tuition and related educational
fees for the next 12 months of post-secondary education for
the Participant or the Participant's spouse, children, or
dependents; or
(iv) the need to prevent the eviction of the
Participant from the Participant's principal residence or
foreclosure on the mortgage of the Participant's principal
residence.
(c) A hardship withdrawal may be authorized only to the
extent necessary to satisfy the hardship. A distribution
will be deemed to be necessary to satisfy the hardship only
if the distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant and
such Participant's tax obligations as a result of such
distribution and the Employee certifies in writing that such
a hardship exists (and the Committee has no knowledge to the
contrary); provided that the Committee may set stricter
standards for making such determination on a
nondiscriminatory basis; and provided further that the
Participant must obtain the written consent of his or her
spouse to the extent required by law. The Committee's
decision shall be final and binding on the Participant.
(d) In the event that a Participant's Vested Interest is
less than 100% at the time of making a withdrawal from his
Profit Sharing Subaccount pursuant to Section 11.7(a), the
Participant's Vested Interest in his or her Profit Sharing
Subaccount at any relevant time thereafter shall be equal to
an amount ("X") determined by the following formula: X = P
[AB + (R x D)] - (R x D). For purposes of applying the
formula: P is the Participant's Vested Interest at the
relevant time, AB is the balance of the Participant's Profit
Sharing Subaccount at the relevant time; D is the amount
distributed to the Participant pursuant to Section 11.7(a);
and R is the ratio of the Participant's Profit Sharing
Subaccount balance at the relevant time to the Participant's
Profit Sharing Subaccount balance immediately after the
distribution pursuant to Section 11.7(a).
11.8 Direct Rollovers to Another Qualified Plan or IRA.
(a) This Section 11.8 applies to distributions made on
or after January 1, 1993. Notwithstanding any provision of
the Plan to the contrary that would otherwise limit a
distributee's election under this Section 11.8, a
distributee may elect, at the time and in the manner
prescribed by the Committee, to have any portion of an
eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct
rollover.
(b) An eligible rollover distribution is any
distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover
distribution does not include: any distribution that is one
of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint
life expectancies) of the distributee and the distributee's
designated Beneficiary, or for a specified period of ten
years or more; any distribution to the extent such
distribution is required under Section 401(a)(9) of the
Code; and the portion of any distribution that is not
includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
employer securities).
(c) An eligible retirement plan is an individual
retirement account described in section 408(a) of the Code,
an individual retirement annuity described in section 408(b)
of the Code, an annuity plan described in section 403(a) of
the Code or a qualified trust described in section 401(a) of
the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or individual
retirement annuity.
(d) A distributee includes a Participant or former
Participant. In addition, the Participant's or former
Participant's Surviving Spouse and the Participant's or
former Participant's spouse or former spouse who is the
alternate payee under a qualified domestic relations order,
as defined in Section 414(p) of the Code, are distributees
with regard to the interest of the Surviving Spouse, spouse
or former spouse.
(e) A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
(f) If a distribution is one to which Sections
401(a)(11) and 417 of the Code do not apply, such
distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Regulations is
given, provided that:
(1) the Committee clearly informs the Participant
that the Participant has a right to a period of at least 30
days after receiving the notice to consider the decision of
whether or not to elect a distribution (and, if applicable,
a particular distribution option), and
(2) the Participant, after receiving the notice,
affirmatively elects a distribution.
11.9 Certain Securities Law Restrictions. Any
distribution of Shares pursuant to this Section 11 shall be
subject to all applicable laws, rules and regulations and to
such approvals by stock exchanges or governmental agencies
as may be deemed necessary or appropriate by the Board of
Directors. Each distributee may be required to give the
Employer a written representation that such distributee will
not be involved in a violation of state or federal
securities laws, including the Securities Act of 1933, as
amended; the form of such written representation will be
prescribed by the Board of Directors.
SECTION 12. MAXIMUM AMOUNT OF ALLOCATION
12.1 Section 415 Limitations. Annual additions to a
Participant's Account with respect to any Plan Year may not
exceed the limitations set forth in Section 415 of the Code,
which are incorporated herein by reference. For these
purposes, (i) "annual additions" shall have the meaning set
forth in Section 415(c)(2) of the Code, as modified
elsewhere in the Code and the Regulations, (ii) the
limitation year shall mean the Plan Year unless any other
twelve consecutive month period is designated pursuant to a
written resolution adopted by the Employer, (iii)
"compensation" shall have the meaning set forth in Section
1.415-2(d)(11)(ii), and (iv) "annual additions" shall
include annual additions under all other defined
contribution plans maintained by the Employer or any
affiliated Employer. If the requirements of Section 7.5(a)
are satisfied, the term "annual additions" shall not include
any amounts credited to the Participant's Account (i)
resulting from rollover contributions, (ii) due to
Participating Employer contributions relating to interest
payments on an Exempt Loan deductible under Section
404(a)(9)(B) of the Code, or (iii) attributable to a
forfeiture of Shares acquired with the proceeds of an Exempt
Loan.
If a Participant in the Plan also participates in any
defined benefit plan (as defined in Sections 414(j) and
415(k) of the Code) maintained by the Employer or any
Affiliated Employer, in the event that in any Plan Year the
sum of the Participant's Defined Benefit Fraction (as
defined in Section 415(e)(2) of the Code) and the
Participant's Defined Contribution Fraction (as defined in
Section 415(e)(3) of the Code) exceed 1.0, the benefit under
such defined benefit plan or plans shall be reduced in
accordance with the provisions of that plan or those plans,
so that the sum of such fractions with respect to the
Participant will not exceed 1.0. If this reduction does not
ensure that the limitation set forth in this Section 12.1 is
not exceeded, then the Annual Addition to any defined
contribution plan, other than the Plan, shall be reduced in
accordance with the provisions of that plan but only to the
extent necessary to ensure that such limitation is not
exceeded.
12.2 Refund or Forfeiture of Amounts in Excess of
Section 415 Limits.
(a) In the event that amounts which would otherwise be
allocated to a Participant's Account under the Plan must be
reduced by reason of the limitations of Section 12.1, then
such reduction shall be made in the following order or
priority, but only to the extent necessary:
(i) first the Participant's Profit Sharing
Contributions shall be forfeited and reallocated pursuant to
this Section 12.2; and then
(ii) the Participant's Matching Contributions shall
be forfeited and reallocated pursuant to this Section 12.2;
and then
(iii) the Participant's Elective Contributions shall
be refunded to the Participant; and then
(iv) Shares allocated to the Participant's Account
attributable to ESOP Contributions shall be forfeited and
reallocated pursuant to this Section 12.2.
(b) Forfeitures arising under the Plan and allocable to
such Participant in respect of such Plan Year shall be
reallocated to the Accounts of other Participants as of the
end of the Plan Year for which such reduction is made in the
manner provided under Section 4.5 above.
(c) If, with respect to any Plan Year, there is an
excess contribution on account of the limitations contained
in this Section 12.2, and such excess cannot be fully
allocated in accordance with Section 12.2(b) because of the
limitations prescribed in this Section 12, the amount of
such excess which cannot be so allocated shall be held in
suspense and allocated in the succeeding Plan Year prior to
any other contributions by the Employer for such Plan Year.
SECTION 13. VOTING RIGHTS
13.1 Voting of Shares in General. Except as otherwise
required by the Act, the Code and the Regulations, all
voting rights of Shares held in Participants' Accounts shall
be exercised by the Purchasing Agent only as directed by the
Participants or their Beneficiaries in accordance with the
provisions of this Section 13.
13.2 Voting of Allocated Shares.
(a) If any Participating Employer has a registration-
type class of securities (as defined in Section 409(e)(4) of
the Code or any successor statute thereto), then, with
respect to all corporate matters submitted to shareholders,
all Shares (including fractional interests in Shares)
allocated and credited to the Accounts of Participants shall
be voted only in accordance with the directions of such
Participants as given to the Purchasing Agent. Any
allocated Shares with respect to which Participants are
entitled to vote pursuant to this Section 13.2 and for which
such directions are not received by the Purchasing Agent
shall not be voted by the Purchasing Agent.
(b) If no Participating Employer has a registration-type
class of securities (as defined in Section 409(e)(4) of the
Code or any successor statute thereto), then, only with
respect to corporate matters relating to a corporate merger
or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets
of a trade or business, or such other similar transaction
that Regulations require, all Shares allocated and credited
to the Accounts of Participants shall be voted only in
accordance with the directions of such Participants as given
to the Purchasing Agent. Any allocated Shares with respect
to which Participants are entitled to vote pursuant to this
Section 13.2 and for which such directions are not received
by the Purchasing Agent shall not be voted by the Purchasing
Agent. The Purchasing Agent shall vote all Shares held in
the Trust Fund allocated to the Accounts of Participants
from whom voting instructions are not required to be
solicited under Section 13.2 only as the Purchasing Agent
directs in the Purchasing Agent's sole discretion in
accordance with the Act, after the Purchasing Agent
determines such action to be in the best interests of the
Participants and their Beneficiaries.
13.3 Mechanics of Voting Allocated Shares. If
Participants are entitled under Section 13.2 to direct the
vote with respect to allocated Shares, then, at least 30
days before each annual or special shareholders' meeting of
the Employer (or, if such schedule cannot be met, as early
as practicable before such meeting), the Committee shall
furnish to each Participant a copy of the proxy solicitation
material sent generally to shareholders, together with a
form requesting confidential instructions concerning the
manner in which the Shares allocated to such Participant's
Account (including fractional Shares to 1/1000th of a Share)
are to be voted. Upon timely receipt of such instructions,
the Purchasing Agent (after combining votes of fractional
Shares to give effect to the greatest extent possible to
Participants' instructions) shall vote the Shares as
instructed. The instructions received by the Purchasing
Agent from each Participant shall be held by the Purchasing
Agent in strict confidence and shall not be divulged or
released to any person, including, without limitation, any
officers or Employees of any Participating Employer, or of
any other Employer. The Trustee, the Employer, the
Purchasing Agent and the Committee shall not make
recommendations to Participants on whether to vote or how to
vote. If voting instructions for Shares allocated to any
Participants are not timely received for a particular
shareholders' meeting, such Shares shall not be voted.
13.4 Voting of Unallocated Shares. The Purchasing Agent
shall vote unallocated Shares held in the Trust Fund in the
same proportions as the Shares for which Participant voting
has been received, provided the Purchasing Agent determines
that such action is consistent with its fiduciary
obligations under the Act.
13.5 Tender or Exchange of Allocated Shares. The
Committee shall notify each Participant of each tender or
exchange offer for the Shares and utilize its best efforts
to distribute or cause to be distributed to each Participant
in a timely manner all information distributed to
shareholders of the Employer in connection with any such
tender or exchange offer. Each Participant shall have the
right from time to time with respect to the Shares allocated
to the Participant's Account (including fractional Shares to
1/1000th of a Share) to instruct the Purchasing Agent in
writing as to the manner in which to respond to any tender
or exchange offer which shall be pending or which may be
made in the future for all Shares or any portion thereof. A
Participant's instructions shall remain in force until
superseded in writing by the Participant. The Purchasing
Agent shall tender or exchange whole Shares only as and to
the extent so instructed. If the Purchasing Agent does not
receive instructions from a Participant regarding any tender
or exchange offer for Shares, the Purchasing Agent shall
have no discretion in such matter and shall not tender or
exchange any such Shares in response thereto. Unless and
until Shares are tendered or exchanged, the individual
instructions received by the Purchasing Agent from
Participants shall be held by the Purchasing Agent in strict
confidence and shall not be divulged or released to any
person, including, without limitation, any officers or
Employees of any Participating Employer, or of any other
Employer; provided, however, that the Purchasing Agent shall
advise the Employer, at any time upon request, of the total
number of Shares not subject to instructions to tender or
exchange.
13.6 Tender or Exchange of Unallocated Shares. The
Purchasing Agent shall tender unallocated Shares held in the
Trust Fund in proportion to the ratio that (A) the number of
Shares with respect to which Participant instructions in
favor of the tender have been received bears to (B) the
number of shares with respect to which Participant
instructions for or against the tender have been received,
provided the Purchasing Agent determines that such action is
consistent with its fiduciary obligations under the Act.
Neither the Purchasing Agent, the Committee nor the Trustee
shall have the discretion or power to sell, convey or
transfer any unallocated Shares held in the Participant's
Accounts in response to a tender or exchange offer unless a
court of competent jurisdiction determines that the
Purchasing Agent is authorized to sell, convey or transfer
any unallocated Shares held in the Accounts in response to
any tender or exchange offer. In exercising any discretion
or power, the Purchasing Agent shall consider, to the extent
permitted by applicable law, including the Regulations, not
only the potential increase in value, if any, in the
Accounts of the Participants as a result of a tender or
exchange of the unallocated Shares, but also the impact of
any change in the management or control of the Employer in
the long run, including but not limited to whether
Participants will receive larger or smaller employee
benefits than at present under the Plan.
13.7 Voting of Deceased Participant's Shares. If this
Section 13 applies to Shares allocated to the Account of a
deceased Participant, such Participant's Beneficiary shall
be entitled to direct the manner in which to respond to any
tender or exchange offer as if such Beneficiary were the
Participant.
SECTION 14. DESIGNATION OF BENEFICIARIES
14.1 Designation of Beneficiary. Each Participant shall
file with the Committee a written designation of one or more
persons as the Beneficiary who shall be entitled to receive
the amount, if any, payable under the Plan upon his or her
death. A Participant may from time to time revoke or change
his or her Beneficiary designation without the consent of
any prior Beneficiary by filing a new designation with the
Committee. The last such designation received by the
Committee shall be controlling; provided, however, that no
designation, or change or revocation thereof, shall be
effective unless received by the Committee prior to the
Participant's death, and in no event shall it be effective
as of a date prior to such receipt. A Participant's
Beneficiary designation shall not be effective to the extent
that payments to the Surviving Spouse are required pursuant
to Section 11, and in no event shall it be effective as of a
date prior to such receipt.
14.2 Failure to Designate Beneficiary. If no such
Beneficiary designation is in effect at the time of a
Participant's death, or if no designated Beneficiary
survives the Participant, the payment of the amount, if any,
payable under the Plan upon his or her death shall be made
to the Participant's Surviving Spouse, if any; or if the
Participant has no Surviving Spouse, then to the
Participant's children, if any, in equal shares; or if the
Participant has no children, to the Participant's parents,
if any, in equal shares; or if the Participant has no
parents, to the Participant's brothers and sisters, if any,
in equal shares. If the Participant has no brothers or
sisters, payment shall be made to the Participant's estate.
If the Committee is in doubt as to the right of any person
to receive such amount, the Committee may direct the Trustee
to retain such amount, without liability for any interest
thereon, until the rights thereto are determined, or the
Committee may direct the Trustee to pay such amount into any
court of appropriate jurisdiction and such payment shall be
a complete discharge of the liability of the Plan and the
Trust Fund therefor.
SECTION 15. ADMINISTRATION OF THE PLAN
15.1 The Committee. The Committee shall have general
responsibility for the administration, interpretation and
construction of the Plan. The Committee shall be
responsible for establishing and maintaining Plan records,
including responsibility for compliance with the Actual
Deferral Percentage and Actual Contribution Percentage tests
described in Sections 4.6 and 5.3, and the Committee shall
be responsible for complying with the reporting and
disclosure requirements of the Act. The Committee shall
report to the Board of Directors, or to a committee of the
Board of Directors designated for that purpose, periodically
as shall be specified by the Board of Directors or such
designated committee, with regard to the matters for which
it is responsible under the Plan.
15.2 The Trustee. Except as otherwise provided in the
Trust Agreement or the Plan, the Trustee may act only as
directed by the Committee, the Employer or any other party,
as applicable. The Trustee shall have responsibility under
the Plan for the management and control of the assets of the
Plan. The Committee shall periodically review the
performance and methods of the Trustee. The Employer or the
Committee shall have the power to appoint, remove or change
the Trustee and, to the extent that the Trust Fund is
invested in assets other than Shares, shall have the power
to appoint or remove one or more investment advisers and to
delegate to such adviser authority and discretion to manage
(including the power to acquire and dispose of) the assets
of the Plan, provided that (i) such adviser with such
authority and discretion shall be either a bank or a
registered investment adviser under the Investment Advisers
Act of 1940, and shall acknowledge in writing that it is a
fiduciary with respect to the Plan and (ii) the Committee
shall periodically review the investment performance and
methods of each adviser(s) with such authority and
discretion. The Committee shall establish investment
standards and policies and communicate the same to the
Trustee. If annuities are to be purchased under the Plan,
the Committee shall determine what contracts should be made
available to terminated Participants or purchased by the
Trust Fund.
15.3 Committee's Responsibility for Entering into Exempt
Loans and Valuation of Shares. The Committee shall have
responsibility for directing the Trustee as to whether and
under what terms it shall enter into an Exempt Loan and for
directing the Purchasing Agent whether and under what terms
it shall purchase or otherwise dispose of Shares. In the
event that there is no generally recognized market for
Shares, the Committee shall be the named fiduciary with
responsibility for determining the fair market value of the
Shares, provided, that any such determination shall be in
accordance with applicable Regulations, if any, and the
Committee shall, in making such determination, retain an
independent appraiser to make such valuation on behalf of
the Committee in accordance with Section 7.9.
15.4 Committee's Power to Engage Outside Experts. The
Committee may arrange for the engagement of such legal
counsel, who may be counsel for the Employer, and make use
of such agents and clerical or other personnel as they each
shall require or may deem advisable for purposes of the
Plan. The Committee may rely upon the written opinion of
such counsel and the accountants engaged by the Committee
and may delegate to any such agent of said Committee its
authority to perform any act hereunder, including without
limitation, those matters involving the exercise of
discretion, provided that such delegation shall be subject
to revocation at any time at the discretion of said
Committee. The Committee shall engage such certified public
accountants, who may be accountants for the Employer, as it
shall require or may deem advisable for purposes of the
Plan.
15.5 Composition of Committee. The Committee shall
consist of at least three members, each of whom shall be
appointed by, shall remain in office at the will of, and may
be removed, with or without cause, by the Board of
Directors. Any member of said Committee may resign at any
time. No member of said Committee shall be entitled to act
on or decide any matter relating solely to himself or any of
his or her rights or benefits under the Plan. The members
of the Committee shall not receive any special compensation
for serving in their capacities as members of such Committee
but shall be reimbursed for any reasonable expenses incurred
in connection therewith. Except as otherwise required by
the Act, no bond or other security need be required of the
Committee or any member thereof in any jurisdiction. Any
member of the Committee, or any agent to whom said Committee
delegates any authority, and any other person or group of
persons, may serve in more than one fiduciary capacity
(including service both as a Trustee and administrator) with
respect to the Plan.
15.6 Actions of Committee. The Committee shall elect or
designate its own chairman, establish its own procedures and
the time and place for its meetings and provide for the
keeping of minutes of all meetings. A majority of the
members of the Committee shall constitute a quorum for the
transaction of business at a meeting of the Committee. Any
action of the Committee may be taken upon the affirmative
vote of a majority of the members of the Committee at a
meeting or, at the direction of its Chairman, without a
meeting, by mail, telephone or facsimile, provided that all
of the members of the Committee are informed by mail or
telephone of their right to vote on the proposal and of the
outcome of the vote thereon.
15.7 Disbursement of Plan Funds. The Committee shall
cause to be kept full and accurate accounts of receipts and
disbursements of the Plan, shall cause to be deposited all
funds of the Plan to the name and credit of the Plan in such
depositories as may be designated by the Committee, shall
cause to be disbursed the monies and funds of the Plan when
so authorized by the Committee and shall generally perform
such other duties as may be assigned to them from time to
time by the Committee.
15.8 Application for Benefits. Each Participant or
Beneficiary believing himself eligible for benefits under
the Plan shall apply for such benefits by completing and
filing with the Committee an application for benefits on a
form supplied by the Committee. Before the date on which
benefit payments commence, each such application must be
supported by such information and data as the Committee
deems relevant and appropriate. Evidence of age, marital
status (and, in the appropriate instances, health, death or
disability) and location of residence shall be require of
all applicants for benefits. All claims for benefits under
the Plan shall, within a reasonable period of time, be
decided by one or more persons designated in writing by the
chairman of the Committee.
15.9 Denied Claims for Benefits. In the event that any
claim for benefits is denied in whole or in part, the
Participant or Beneficiary whose claim has been so denied
shall be notified of such denial in writing by the
Committee. The notice advising of the denial shall specify
the reason or reasons for denial, make specific reference to
pertinent Plan provisions, describe any additional material
or information necessary for the claimant to perfect the
claim (explaining why such material or information is
needed) and shall advise the Participant or Beneficiary, as
the case may be, of the procedure for the appeal of such
denial. All appeals shall be made by the following
procedure:
(a) The Participant or Beneficiary whose claim has been
denied shall file with the Committee a notice of desire to
appeal the denial. Such notice shall be filed within sixty
(60) days of notification by the Committee of claim denial,
shall be made in writing and shall set forth all of the
facts upon which the appeal is based. Appeals not timely
filed shall be barred.
(b) The Committee shall, within thirty (30) days of
receipt of the Participant's or Beneficiary's notice of
appeal, establish a hearing date on which the Participant or
Beneficiary may make an oral presentation to the Committee
in support of his or her appeal. The Participant or
Beneficiary shall be given not less than ten (10) days'
notice of the date set for the hearing.
(c) The Committee shall consider the merits of the
claimant's written and oral presentations, the merits of any
facts or evidence in support of the denial of benefits and
such other facts and circumstances as the Committee shall
deem relevant. If the claimant elects not to make an oral
presentation, such election shall not be deemed adverse to
the claimant's interest, and the Committee shall proceed as
set forth below as though an oral presentation of the
contents of the claimant's written presentation had been
made.
(d) The Committee shall render a determination upon the
appealed claim which determination shall be accompanied by a
written statement as to the reasons therefor. The
determination so rendered shall be binding on all parties.
(e) For all purposes under the Plan, such decisions on
claims (where no review is requested) and decisions on
review (where review is requested) shall be final, binding
and conclusive on all interested persons as to participation
and benefit eligibility, the Employee's amount of
Compensation and any other matter of fact or interpretation
relating to the Plan.
15.10 Indemnification. To the maximum extent permitted
by law, no member of the Committee shall be personally
liable by reason of any contract or other instrument
executed by such member of the Committee or on his or her
behalf in the Committee member's capacity as a member of
such Committee nor for any mistake of judgment made in good
faith, and the Employer shall indemnify and hold harmless,
directly from its own assets (including the proceeds of any
insurance policy the premiums of which are paid from the
Employer's own assets), each member of the Committee and
each other officer, employee or director of the Employer to
whom any duty or power relating to the administration or
interpretation of the Plan or to the management and control
of the assets of the Plan may be delegated or allocated,
against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim
with the approval of the Employer) arising out of any act or
omission to act in connection with the Plan unless arising
out of such person's own fraud or willful misconduct. The
Employer shall advance funds for legal expenses to the
extent permitted by the Act.
15.11 Agent for Service of Process. The Committee or
such other person as may from time to time be designated by
the Committee shall be the agent for service of process
under the Plan.
SECTION 16. EXPENSES
16.1 Payment of Plan Expenses. The expenses incurred in
the management and administration of the Plan shall be paid
from the Trust Fund, except to the extent the Employer, in
its sole discretion, may choose to pay such expenses from
time to time; provided that any Trustee expenses paid to The
Charles Schwab Trust Company shall be payable solely by the
Employer. Such expenses shall include (i) the fees and
expenses of any employee and of the Trustee for the
performance of their duties under the Plan and Trust Fund
(including but not limited to obtaining investment advice,
record keeping services and legal services), (ii) the
expenses incurred by the members of the Committee in the
performance of their duties under the Plan (including
reasonable compensation for any legal counsel, certified
public accountants, consultants and agents, and cost of
services rendered with respect to the Plan) and (iii) all
other proper charges and disbursements of the Trustee or the
members of the Committee (including settlements of claims or
legal actions approved by counsel to the Plan).
16.2 Expenses Attributable to Investment of Plan Assets
and Taxes. Brokerage fees, transfer taxes and any other
expenses incident to the purchase or sale of securities by
the Trustee shall be deemed to be part of the cost of such
securities, or deducted in computing the proceeds therefrom,
as the case may be. Expenses attributable to investments of
the Trust Fund shall be paid out of the Trust Fund, except
to the extent the Employer, in its sole discretion, may
choose to pay such expenses from time to time; provided that
expense entirely attributable to any one investment or to
any one investment fund shall be allocated pro rata in
accordance with Account balances among Accounts invested in
such investment or investment fund. Taxes, if any, of any
and all kinds whatsoever which are levied or assessed on any
assets held or income received by the Trustee shall be paid
out of the Trust Fund.
SECTION 17. EMPLOYER PARTICIPATION
17.1 Adoption of Plan by Affiliated Employer. Any
Affiliated Employer may adopt the Plan and the Trust Fund by
resolution of its board of directors or equivalent governing
body provided that (i) the Board of Directors has not
expressly disallowed participation by such Affiliated
Employer in the Plan; (ii) the Affiliated Employer has not
previously expressly declined to participate in the Plan; or
(iii) the Affiliated Employer is not precluded from
participating in the Plan by a legally binding written
document that precludes such participation; and provided
further that the Board of Directors consents to such
adoption. Any Affiliated Employer which so adopts the Plan
shall be deemed to appoint Charles Schwab & Co., Inc., the
Committee and the Trustee its exclusive agents to exercise
on its behalf all of the power and authority conferred under
the Plan or the Trust Agreement. This authority shall
continue until the Plan is terminated and the relevant Trust
Fund assets have been distributed.
17.2 Termination of Participation by Participating
Employer. A Participating Employer may terminate its
participation in the Plan by giving the Committee prior
written notice specifying a termination date which shall be
the last day of a month at least 60 days subsequent to the
date such notice is received by the Committee. The Board of
Directors may terminate any Participating Employer's
participation in the Plan, as of any termination date
specified by the Committee, for the failure of the
Participating Employer to make proper contributions or to
comply with any other provision of the Plan.
17.3 Effect of Termination of Participation by
Participating Employer. Upon termination of the Plan as to
any Participating Employer, such Participating Employer
shall not make any further contributions under the Plan and
no amount shall thereafter be payable under the Plan to or
with respect to any Participants then employed by such
Participating Employer, except as provided in this Section
17. To the maximum extent permitted by the Act, any rights
of Participants no longer employed by such Participating
Employer and of former Participants and their Beneficiaries
and Surviving Spouses and other eligible survivors under the
Plan shall be unaffected by such termination and any
transfer, distribution or other disposition of the assets of
the Plan as provided in this Section 17 shall constitute a
complete discharge of all liabilities under the Plan with
respect to such Participating Employer's participation in
the Plan and any Participant then employed by such
Participating Employer.
The interest of each such Participant who is in
Service with such Participating Employer as of the
termination date is the amount, if any, credited to his or
her Account after payment of or provision for expenses and
charges and appropriate adjustment of the Accounts of all
such Participants for expenses and charges as described in
Section 16, and all forfeitures shall be nonforfeitable as
of the termination date, and upon receipt by the Committee
of IRS approval of such termination, the full current value
of such amount shall be paid from the Trust Fund in the
manner described in Section 17.4 or transferred to a
successor employee benefit plan which is qualified under
Section 401(a) of the Code; provided, however, that in the
event of any transfer of assets to a successor employee
benefit plan the provisions of Section 17.4 will apply. No
advances against such payments shall be made prior to such
receipt of approval, but after such receipt the Committee,
in its sole discretion, may direct the Trustee to make one
or more advances in accordance with Section 11.1.
All determinations, approvals and notifications
referred to above shall be in form and substance and from a
source satisfactory to the Committee. To the maximum extent
permitted by the Act, the termination of the Plan as to any
Participating Employer shall not in any way affect any other
Participating Employer's participation in the Plan.
17.4 Limitations on Transfer of Plan Assets to Successor
Plan. No transfer of the Plan's assets and liabilities to a
successor employee benefit plan (whether by merger or
consolidation with such successor plan or otherwise) shall
be made unless each Participant would, if either the Plan or
such successor plan then terminated, receive a benefit
immediately after such transfer which (after taking account
of any distributions or payments to such Participants as
part of the same transaction) is equal to or greater than
the benefit such Participant would have been entitled to
receive immediately before such transfer if the Plan had
then been terminated. The Committee may also request
appropriate indemnification from the employer or employers
maintaining such successor plan before making such a
transfer.
17.5 Shares Allocated to Suspense Fund Excluded from
Transfer of Plan Assets to Successor Plan. Notwithstanding
any provision of this Section 17 to the contrary, any Shares
allocated to a Suspense Subfund shall not be transferred to
a successor employee benefit plan except as is required or
permitted by the Committee in accordance with the terms of
an Exempt Loan and the Regulations.
SECTION 18. AMENDMENT OR TERMINATION OF THE PLAN
18.1 Amendment, Suspension or Termination of Plan.
(a) Subject to the provisions of Section 18.1(b) and (c)
hereof, the board of directors of the Plan Sponsor reserves
the right at any time to suspend or terminate the Plan, any
contributions thereunder, or any other agreement or
arrangement forming a part of the Plan, in whole or in part
and for any reason, and to adopt any amendment or
modification thereto, all without the consent of any
Participating Employer, Participant, Beneficiary, Surviving
Spouse or other eligible survivor. Subject to the
provisions of Section 18.1(b) and (c) hereof, the Board of
Directors reserves the right at any time to amend or modify
the Plan. Each Participating Employer by its adoption of
the Plan shall be deemed to have delegated this authority to
the Board of Directors.
(b) The Board of Directors shall not make any amendment
or modification which would (i) retroactively impair any
rights to any benefit under the Plan which any Participant,
Beneficiary, Surviving Spouse or other eligible survivor
would otherwise have had at the date of such amendment by
reason of the contributions theretofore made or (ii) make it
possible for any part of the funds of the Plan (other than
such part as is required to pay taxes, if any, and
administration expenses as provided in Section 16) to be
used for or diverted to any purposes other than for the
exclusive benefit of Participants and their Beneficiaries
and Surviving Spouses and other eligible survivors under the
Plan prior to the satisfaction of all liabilities with
respect thereto.
(c) The Board of Directors shall not amend Sections
4.2(b)(ii) and 4.2(c) of the Plan more than once every six
months, other to comport with changes in the Code, the Act
or the rules thereunder.
18.2 Power to Retroactively Amend, Suspend or Terminate
Plan Provisions. Subject to the provisions of Section 18.1,
any amendment, modification, suspension or termination of
any provision of the Plan may be made retroactively if
necessary or appropriate to qualify or maintain the Plan as
a plan meeting the requirements of Sections 401(a) of the
Code or any other applicable provision of law (including the
Act) as now in effect or hereafter amended or adopted and
the Regulations issued thereunder.
18.3 Notice of Amendment, Suspension or Termination.
Notice of any amendment, modification, suspension or
termination of the Plan shall be given by the Board of
Directors or the board of directors of the Plan Sponsor, as
the case may be, to the Trustee and all Participating
Employers.
18.4 Effect of Termination of Plan. Upon termination of
the Plan, no Participating Employer shall make any further
contributions under the Plan and no amount shall thereafter
be payable under the Plan to or with respect to any
Participant except as provided in this Section 18, and to
the maximum extent permitted by the Act, transfers or
distributions of the assets of the Plan as provided in this
Section 18 shall constitute a complete discharge of all
liabilities under the Plan. The provisions of the Plan
which are necessary for the operation of the Plan and the
distribution or transfer of the assets of the Plan shall
remain in force.
Upon receipt by the Committee of IRS approval of such
termination, the full current value of such adjusted amount,
and the full value of each account described in Sections
6.2 and 7.1 above, shall be paid from the Trust Fund to each
Participant and former Participant (or, in the event of the
death of a Participant or former Participant, to the
Surviving Spouse or Beneficiary thereof) in any manner of
distribution specified in Section 11 above, including
payments which are deferred until the Participant's
termination of Service, as the Committee shall determine.
Without limiting the foregoing, any such distribution may be
made in cash or in property, or both, as the Committee in
its sole discretion may direct.
All determinations, approvals and notifications referred to
above shall be in form and substance and from a source
satisfactory to the Committee.
18.5 Partial Termination of Plan. In the event that any
governmental authority, including without limitation the
IRS, determines that a partial termination (within the
meaning of the Act) of the Plan has occurred or if there is
a complete discontinuance of Employer contributions then (i)
the interest of each Participant affected thereby in his or
her Account shall become nonforfeitable as of the date of
such partial termination or complete discontinuance of
contributions and (ii) the provisions of Sections 18.2, 18.3
and 18.4 above, which in the opinion of the Committee are
necessary for the execution of the Plan and the allocation
and distribution of the assets of the Plan, shall apply.
18.6 Trust for Exclusive Benefit of Participant. In no
event shall any part of the Trust Fund (other than such part
as is required to pay taxes, if any, and administration
expenses as provided in Section 16 above) be used for or
diverted to any purposes other than for the exclusive
benefit of Participants and their Beneficiaries and
Surviving Spouses under the Plan.
SECTION 19. TOP-HEAVY PLAN REQUIREMENTS
19.1 Top-Heavy Plan - In General. For any Plan Year for
which this Plan is a Top-Heavy Plan, the provisions of this
Section 19 shall apply notwithstanding any other provisions
of the Plan.
19.2 Effect of Top-Heavy Status. Each Participant who
(i) is a Non-Key Employee and (ii) is employed on the last
day of the Plan Year, shall be entitled to have
contributions allocated to his or her Account of not less
than three percent (3%) of the Participant's Compensation
(the "Minimum Contribution Percentage") regardless of (i)
whether such Non-Key Employee has completed a Year of
Service, and (ii) the amount of such Non-Key Employee's
Compensation; provided, however, that the minimum
contribution percentage for any Plan Year shall not exceed
the percentage at which contributions are made under the
Plan for the Plan Year for the Key Employee for whom such
percentage is the highest for such Plan Year. For this
purpose, such percentage shall be determined by dividing the
contributions made for such Key Employee by so much of his
or her Compensation (which solely for this purpose includes
Elective Contributions made by the Employer for the Key
Employee) for the Plan Year as does not exceed $150,000
(adjusted automatically for increases in accordance with the
Regulations).
Contributions taken into account under this Section 19.2
shall include contributions under this Plan and under all
other defined contribution plans (as defined in Section
414(i) of the Code) required to be included in an
Aggregation Group; provided, however, that such
contributions shall not include (i) contributions to any
defined contribution plan in the required aggregation group
if such contributions enable such a defined contribution
plan to meet the requirements of Sections 401(a)(4) or 410
of the Code or (ii) contributions under the Social Security
Act or any other federal or state law.
19.3 Maintenance of Defined Benefit Plan in Addition to
Plan. In the event that the Plan is a Top-Heavy Plan for
any Plan Year and the Employer also maintains a defined
benefit plan (within the meaning of Section 414 of the Code)
which provides benefits on behalf of Participants, then one
of the two following provisions shall apply:
(1) If the Plan is a Top-Heavy Plan for any Plan
Year but would not be a "Top-Heavy Plan" for the Plan Year
if "90 percent" were substituted for "60 percent" in Section
19.4(a), then Section 19.2 shall be applied for such Plan
Year by substituting "four percent" for "three percent."
(2) If a Top-Heavy Plan would continue to be a
"Top-Heavy Plan" for the Plan Year if "90 percent" were
substituted for "60 percent", then the denominator of the
defined contribution plan fraction shall be calculated for
such Plan Year by substituting "1.0" for "1.25", except with
respect to any Participant who is not entitled to an
allocation of Employer contributions and does not receive
any accruals under any defined benefit plan (within the
meaning of Section 414(j) of the Code) maintained by the
Employer.
In the event that another defined contribution
plan or a defined benefit plan maintained by the Employer
provides contributions or benefits on behalf of
Participants, the Committee shall take such other plan into
account as a part of this Plan to the extent required by the
Code and in accordance with the Regulations.
In addition, in the event that the Plan is a Top-
Heavy Plan (irrespective of whether (1) or (2) applies), all
contributions shall be vested according to the vesting
schedule in Section 10.3 hereof.
19.4 Definitions.
(a) "Top-Heavy Plan" means this Plan for any
Plan Year if, as of the Determination Date, (i) the present
value of the Accounts of all Participants who are Key
Employees (excluding former Key Employees) exceeds 60
percent of the present value of all Participants' Accounts
(excluding former Key Employees) or (ii) the Plan is
required to be in an Aggregation Group which for such Plan
Year is a Top-Heavy Group. In determining whether the Plan
constitutes a Top-Heavy Plan, the Committee shall make the
following adjustments:
(i) When more than one plan is aggregated, the
Committee shall determine separately for each plan as of any
Determination Date, the present value of accrued benefits of
all Participants and the value of Accounts of all
Participants.
(ii) Any such determination shall include the present
value of distributions made to former Participants under the
applicable plan (including a terminated plan) during the
five-year period ending on the Determination Date, unless
reflected in the value of the accrued benefits or the
Accounts of such former Participants as of the Determination
Date.
(iii) Any such determination shall include any
Rollover Contribution from any other plan as follows:
(A) If the Rollover Contribution is initiated
by the Employee and made to or from a plan maintained by a
corporation which is not an Affiliated Employer, the plan
providing the distribution shall include such distribution
in the value of such accrued benefit or Account.
(B) If the Rollover Contribution is not
initiated by the Employee or made from a plan maintained by
an Affiliated Employer, the plan accepting the distribution
shall include such distribution in the value of such accrued
benefit or Account.
(b) "Determination Date" means for any Plan Year the
last day of the next preceding Plan Year.
(c) "Aggregation Group" means all plans maintained by
the Employer or any Affiliated Employer which are required
to be aggregated or permitted to be aggregated. For
purposes of this Section 19.4(c),
(i) The group of plans that are required to be
aggregated (the "required aggregation group") includes each
plan of the Employer or any Affiliated Employer in which a
Key Employee is a Participant, and each other plan of the
Employer or any Affiliated Employer which enables a plan in
which a Key Employee is a Participant to meet the
requirements of Sections 401(a)(4) or 410 of the Code; and
(ii) The group of plans that are permitted to be
aggregated (the "permissive aggregation group") includes the
required aggregation group plus one or more plans of the
Employer or any Affiliated Employer that is not part of the
required aggregation group and that the Committee certifies
as constituting a plan within the permissive aggregation
group. Such plan or plans may be added to the permissive
aggregation group only if the permissive aggregation group
would continue to meet the requirements of Sections
401(a)(4) and 410 of the Code.
(d) "Top Heavy Group" means the Aggregation Group, if as
of any Determination Date, the sum of (i) the present value
of the accrued benefits of all Participants who are Key
Employees under all defined benefit plans (within the
meaning of Section 414(j) of the Code) included in the
Aggregation Group plus (ii) the aggregate value of the
Accounts of all Participants who are Key Employees under all
defined contribution plans (within the meaning of Section
414(i) of the Code) included in the Aggregation Group
exceeds 60 percent of the sum of (i) the present value of
the accrued benefits for all Participants (excluding former
Key Employees), under all such defined benefit plans plus
(ii) the aggregate value of the Accounts of all Participants
(excluding former Key Employees) under all such defined
contribution plans. If the Aggregation Group that is a Top-
Heavy Group is a required aggregation group, each plan in
the Aggregation Group will be a Top-Heavy Plan. If the
Aggregation Group that is a Top-Heavy Group is a permissive
aggregation group, only those plans that are part of the
required aggregation group will be treated as a Top-Heavy
Plan. If the Aggregation Group is not a Top-Heavy Group, no
plan within such Aggregation Group will be a Top-Heavy Plan.
For purposes of Section 19.4(a), the present value
of accrued benefits under any defined benefit plan and the
value of Accounts under any defined contribution plan shall
be determined as of the Valuation Date that is coincident
with the Determination Date in accordance with the
Regulations.
(e) "Key Employee" means any Employee or former Employee
who, at any time during the Plan Year preceding the
Determination Date or during any of the four preceding Plan
Years, is or was one of the following:
(i) An officer of the Employer or any Affiliated
Employer having annual compensation (within the meaning of
Section 414(q)(7)) greater than 50 percent of the amount in
effect under Section 415(b)(1)(A) of the Code for any Plan
Year (as adjusted for increases in the cost of living in
accordance with the Regulations). For purposes of the
preceding sentence there shall be treated as officers for
any such Plan Year no more than the lesser of:
(A) 50 Employees, or
(B) the greater of three Employees or 10
percent of the Employees of the Employer or any Affiliated
Employer;
(ii) One of the ten Employees owning (or considered
as owning within the meaning of Section 318 of the Code)
more than a five percent (5%) interest and one of the
largest interests in the Employer or any Affiliated
Employer. An Employee will not be considered such an owner
for any Plan Year if the Employee's compensation (within the
meaning of Section 414(q)(7)) is less than $30,000 (as
adjusted for increases in the cost of living in accordance
with the Regulations); for purposes of determining ownership
pursuant to Section 19.4(e)(ii) the aggregation rules of
Section 4.14(b), (c) and (m) of the Code apply.
(iii) Any person who owns (or considered as owning
within the meaning of Section 318 of the Code) more than a
five percent interest in the Employer;
(iv) Any person having compensation (within the
meaning of Section 414(q)(7)) of more than $150,000, and
owning (or considered as owning within the meaning of
Section 318 of the Code) more than a one percent interest in
the Employer. For purposes of this Section 19.4(e), a
Beneficiary of a Key Employee shall be treated as a Key
Employee and the interests inherited by such Beneficiary
shall be treated the same as if owned by the Key Employee.
(f) "Non-Key Employee" means any "Non-Key Employee" as
defined in Section 416(i)(2) of the Code and the Regulations
promulgated thereunder.
SECTION 20. GENERAL LIMITATIONS AND PROVISIONS
20.1 Exclusive Benefit of Participants and
Beneficiaries. In no event shall any part of the funds of
the Plan be used for or diverted to any purposes other than
for the exclusive benefit of Participants and their
Beneficiaries under the Plan except as permitted under
Section 403(c) of the Act. Upon the transfer by a
Participating Employer of any money to the Trustee, all
interest of the Participating Employer therein shall cease
and terminate.
20.2 No Rights to Continued Employment. Nothing
contained in the Plan shall give any employee the right to
be retained in the employment of the Employer or any
Affiliated Employer or affect the right of the Employer or
any Affiliated Employer to dismiss any employee. The
adoption and maintenance of the Plan shall not constitute a
contract between the Employer and any employee or be
consideration for, or an inducement to or condition of, the
employment of any employee.
20.3 Trust Sole Source of Benefits. The Trust Fund
shall be the sole source of benefits under the Plan and,
except as otherwise required by the Act, the Employer and
the Committee assume no liability or responsibility for
payment for such benefits, and each Participant, Surviving
Spouse, Beneficiary or other person who shall claim the
right to any payment under the Plan shall be entitled to
look only to the Trust Fund for such payment and shall not
have any right, claim or demand therefor against the
Employer, the Committee, or any Participant thereof, or any
employee or director of the Employer.
20.4 Risk of Decrease in Assets. Each Participant,
Beneficiary and Surviving Spouse shall assume all risk in
connection with any decrease in the value of the assets of
the Trust Fund and the Participants' Accounts or special
accounts and neither the Employer nor the Committee shall be
liable or responsible therefor.
20.5 Incapacity of Participant or Beneficiary. If the
Committee shall find that any person to whom any amount is
payable under the Plan is unable to care for his or her
affairs because of illness or accident, or is a minor, or
has died, then any payment due such person or his or her
estate shall be made to his or her duly appointed legal
representative. Any such payment shall be a complete
discharge of the liability of the Plan and the Trust Fund
therefor.
20.6 Antialienation; Qualified Domestic Relations Orders.
(a) Except insofar as may otherwise be required by law
or pursuant to the terms of a Qualified Domestic Relations
Order, as set forth in this Section 20.5, no amount payable
at any time under the Plan and the Trust Fund shall be
subject in any manner to alienation by anticipation, sale,
transfer, assignment, bankruptcy, pledge, attachment, charge
or encumbrance of any kind nor in any manner be subject to
the debts or liabilities of any person, and any attempt to
so alienate or subject any such amount, whether presently or
thereafter payable, shall be void. If any person shall
attempt to, or shall, alienate, sell, transfer, assign,
pledge, attach, charge or otherwise encumber any amount
payable under the Plan and Trust Fund, or any part thereof,
or if by reason of his or her bankruptcy or other event
happening at any such time such amount would be made subject
to his or her debts or liabilities or would otherwise not be
enjoyed by such person, then the Committee, if it so elects,
may direct that such amount be withheld and that the same or
any part thereof be paid or applied to or for the benefit of
such person.
(b) Upon receipt of notification of any judgment, decree
or order (including approval of a property settlement
agreement) which relates to the provision of child support,
alimony payments, or marital property rights of a spouse,
former spouse, child, or other dependent of a Participant
and which is made pursuant to a state domestic relations law
(including a community property law) (herein referred to as
a "domestic relations order"), the Committee shall (i)
notify the Participant and any prospective Alternate Payee
named in the order of the receipt and date of receipt of
such domestic relations order and of the Plan's procedures
for determining the status of the domestic relations order
as a Qualified Domestic Relations Order, and (ii) within a
reasonable period after receipt of such order, determine
whether it constitutes a Qualified Domestic Relations Order.
The Plan's procedures for the determination of whether a
domestic relations order constitutes a Qualified Domestic
Relations Order shall be set forth by the Committee in
writing, shall provide for the notification of each person
specified in that order as entitled to payment of benefits
under the Plan (at the address included in the domestic
relations order) of such procedures promptly upon receipt by
the Committee of such domestic relations order, and shall
permit the prospective Alternate Payee to designate a
representative for receipt of copies of notices that are
sent to the prospective Alternate Payee with respect to a
domestic relations order.
(c) During any period in which the issue of
whether a domestic relations order is a Qualified Domestic
Relations Order is being determined (by the Committee, by a
court of competent jurisdiction, or otherwise), including
the period beginning on the date of the Committee's receipt
of the order, the Committee shall segregate in a separate
account in the Plan or in an escrow account held by a
Trustee the amounts, if any, which would have been payable
to the Alternate Payee during such period if the order had
been determined to constitute a Qualified Domestic Relations
Order, provided that if no payments would otherwise be made
under the Plan to the Alternate Payee or to the Participant
or a Beneficiary of the Participant while the status of the
order as a Qualified Domestic Relations Order is being
determined, no segregation into a separate or escrow account
shall be required. If a domestic relations order is
determined to be a Qualified Domestic Relations Order within
eighteen (18) months of the date of its receipt by the
Committee (or from the beginning of any other period during
which the issue of its being a Qualified Domestic Relations
Order is being determined by the Committee) the Committee
shall cause to be paid to the persons entitled thereto the
amounts, if any, held in the separate or escrow account
referred to above in one lump sum. If a domestic relations
order is determined not be a Qualified Domestic Relations
Order, or if the status of the domestic relations order as a
Qualified Domestic Relations Order is not finally resolved
within such eighteen month period, the Committee shall cause
the separate account or escrow account balance to be
returned, with interest thereon, to the Participant's
Account or to be paid to the person or persons to whom such
amount would have been paid if there had been no such
domestic relations order, whichever shall apply. Any
subsequent determination that such domestic relations order
is a Qualified Domestic Relations Order shall be prospective
in effect only.
(d) (i) Benefits payable to an Alternate Payee shall
be payable in one lump sum and in no event shall such
benefits continue beyond the lifetime of the Alternate
Payee. Such payment may be made at the time specified in
the Qualified Domestic Relations Order irrespective of
whether the Participant has attained the "earliest
retirement age" (within the meaning of Section 414(p)(4)(B)
of the Code). In particular, no Alternate Payee shall have
the right with respect to any benefit payable by reason of a
Qualified Domestic Relations Order to (A) designate a
beneficiary with respect to amounts becoming payable under
the Plan, (B) elect a method of benefit distribution
providing for benefits continuing beyond the Alternate
Payee's lifetime, (C) provide survivorship benefits to a
spouse or dependent of such Alternate Payee or to any other
person, spouse, dependent or other person, or (D) transfer
rights under the Qualified Domestic Relations Order by will
or by state law of intestacy.
(ii) None of the payments, benefits or
rights of any Alternate Payee shall be subject to any claim
of any creditor, and, in particular, to the fullest extent
permitted by law, all such payments, benefits and rights
shall be free from attachment, garnishment, trustee's
process, or any other legal or equitable process available
to any creditor of such Alternate Payee. No Alternate Payee
shall have the right to alienate, anticipate, commute,
pledge, encumber or assign any of the benefits or payments
which he or she may expect to receive, contingently or
otherwise, under the Plan.
(iii) Alternate Payees shall not have any right to
(A) borrow money under any Participant loan provisions under
the Plan, (B) exercise any Participant investment direction
rights or privileges under the Plan, (C) exercise any other
election, privilege, option or direction rights of the
Participant under the Plan except as specifically provided
in the Qualified Domestic Relations Order, or (D) receive
communications with respect to the Plan except as
specifically provided by law, regulation or the Qualified
Domestic Relations Order.
(iv) Each Alternate Payee shall advise the
Committee in writing of each change of his or her name,
address or marital status, and of each change in the
provisions of the Qualified Domestic Relations Order or any
circumstance set forth therein which may be material to the
Alternate Payee's entitlement to benefits thereunder or the
amount thereof. Until such written notice has been provided
to the Committee, the Committee shall be (A) fully protected
in not complying with, and in conducting the affairs of the
Plan in a manner inconsistent with, the information set
forth in the notice, and (B) required to act with respect to
such notice prospectively only, and then only to the extent
provided for in the Qualified Domestic Relations Order. The
Committee shall not be required to modify or reverse any
payment, transaction or application of funds occurring
before the receipt of any notice that would have affected
such payment, transaction or application of funds, nor shall
the Committee or any other party be liable for any such
payment, transaction or application of funds.
(v) Except as specifically provided for in the
Qualified Domestic Relations Order, an Alternate Payee shall
have no right to interfere with the exercise by the
Participant or by any Beneficiary of their respective
rights, privileges and obligations under the Plan.
(e) For purposes of this Plan, a Qualified Domestic
Relations Order means any judgment, decree, or order
(including approval of a property settlement agreement)
which has been determined by the Committee in accordance
with procedures established under the Plan, to constitute a
qualified domestic relations order within the meaning of
Section 414(p)(1) of the Code and Alternate Payee means any
person entitled to current or future payment of benefits
under the Plan pursuant to a Qualified Domestic Relations
Order.
20.7 Inability to Locate Participant or Beneficiary. If
the Committee cannot ascertain the whereabouts of any person
to whom a payment is due under the Plan, and if, after five
years from the date such payment is due, a notice of such
payment due is mailed to the last known address of such
person, as shown on the records of the Committee or the
Employer, and within three months after such mailing such
person has not made written claim therefor, the Committee,
if it so elects, may direct that such payment and all
remaining payments otherwise due to such person be canceled
on the records of the Plan and the amount thereof applied to
reduce the contributions of the Employer, and upon such
cancellation, the Plan and the Trust Fund shall, to the
maximum extent permitted by the Act, have no further
liability therefor except that, in the event such person
later notifies the Committee of his or her whereabouts and
requests the payment or payments due to such person under
the Plan, the amount so applied shall be paid to him or her
as provided in Section 11. All elections, designations,
requests, notices, instructions, and other communications
from the Employer, a Participant, Beneficiary, Surviving
Spouse or other person to the Committee required or
permitted under the Plan shall be in such form as is
prescribed from time to time by the Committee, shall be
mailed or delivered to such location as shall be specified
by the Committee, and shall be deemed to have been given and
delivered only upon actual receipt thereof by the Committee
at such location.
20.8 Failure to Receive IRS Approval. Notwithstanding
any other provision herein, if this Plan shall not be
approved by the IRS under the provisions of the Code and the
Regulations for any reason (including failure to comply with
any condition for such approval imposed by the IRS)
contributions made after the restatement of this Plan and
prior to such denial shall be returned, without any
liability to any person, within one year after the date of
denial of such approval.
20.9 Contributions Conditioned on Deductibility.
Notwithstanding any other provision herein, all
contributions to the Trust Fund are expressly conditioned
upon their deductibility under Section 404 of the Code and
the Regulations, and in the event of the final disallowance
of the deduction for any contribution, in whole or in part,
then such contribution (to the extent the deduction is
disallowed) shall upon direction of the Committee, which
shall be given in conformity with the provisions of the Act,
be returned, without liability to any person, within one
year after such final disallowance.
20.10 Mistake of Fact. Notwithstanding any other
provisions herein, if any contribution is made by a mistake
of fact, such contribution shall upon the direction of the
Committee, which shall be given in conformity with the
provisions of the Act, be returned, without liability to any
person, within one year after the payment of such
contribution.
20.11 Communications with Committee. All elections,
designations, requests, notices, instructions, and other
communications from the Employer, a Participant,
Beneficiary, Surviving Spouse or other person to the
Committee required or permitted under the Plan shall be in
such form as is prescribed from time to time by such
Committee, shall be mailed by first-class mail or delivered
to such location as shall be specified by such Committee,
and shall be deemed to have been given and delivered only
upon actual receipt thereof by such Committee at such
location.
20.12 Communications with Participants and
Beneficiaries. All notices, statements, reports and other
communications from the Employer or the Committee to any
Employee, Participant, Surviving Spouse, Beneficiary or
other person required or permitted under the Plan shall be
deemed to have been duly given when delivered to, or when
mailed by first-class mail, postage prepaid and addressed
to, such Employee, Participant, Surviving Spouse,
Beneficiary or other person at his or her address last
appearing on the records of the Committee.
20.13 Prior Service Credit. Upon such terms and
conditions as the Committee may approve, and subject to any
required IRS approval, benefits may be provided under the
Plan to a Participant with respect to any period of the
Participant's prior employment by any organization, and such
benefits (and any Service credited with respect to such
period of employment under Section 2.25) may be provided
for, in whole or in part, by funds transferred, directly or
indirectly (including a rollover from an individual
retirement account), to the Trust Fund from an employee
benefit plan of such organization which qualified under
Section 401(a) of the Code.
20.14 Gender and Number. Except where otherwise
required by the context, whenever used in the Plan the
masculine gender includes the feminine and the singular
shall include the plural.
20.15 Headings. The captions preceding the
Sections of the Plan have been inserted solely as a matter
of convenience and in no way define or limit the scope or
intent of any provisions of the Plan.
20.16 Governing Law. The Plan and all rights
thereunder shall be governed by and construed in accordance
with the Act and, to the extent not inconsistent therewith,
the laws of the State of California.
20.17 Severability of Provisions. If any provision of
the Plan shall be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other
provisions hereof, and the Plan shall be construed and
enforced as if such provisions had not been included.
20.18 Heirs, Assigns and Personal Representatives. The
Plan shall be binding upon the heirs, executors,
administrators, successors and assigns of the parties,
including each Participant and Beneficiary, present and
future and all persons for whose benefit there exists any
QDRO with respect to any Participant (except that no
successor to the Plan Sponsor shall be considered a Plan
Sponsor unless that successor adopts the Plan).
20.19 Reliance on Data and Consents. The Plan Sponsor,
the Employer, each participating Employer, the Board of
Directors, the Committee, the Trustee, all fiduciaries with
respect to the Plan, and all other persons or entities
associated with the operation of the Plan, the management of
its assets, and the provision of benefits thereunder, may
reasonably rely on the truth, accuracy and completeness of
all data provided by any Participant, Surviving Spouse,
Beneficiary, and Alternate Payee, including, without
limitation, data with respect to age, health and marital
status. Furthermore, the Plan Sponsor, the Employer, each
participating Employer, the Board of Directors, the
Committee, the Trustee, and all fiduciaries with respect to
the Plan may reasonably rely on all consents, elections and
designations filed with the Plan or those associated with
the operation of the Plan and its corresponding Trust by any
Participant, Surviving Spouse, Beneficiary, Alternate Payee,
or any representative of any such person, without duty to
inquire into the genuineness of any such consent, election
or designation. None of the aforementioned persons or
entities associated with the operation of the Plan, its
assets and the benefits provided under the Plan shall have
any duty to inquire into any such data, and all may rely on
such data being current to the date of reference, it being
the duty of the Participants, Surviving Spouses,
Beneficiaries and Alternate Payees to advise the appropriate
parties of any change in such data.
SECTION 21. APPLICATION TO PUERTO RICO EMPLOYEES
21.1 Modifications Applicable to Puerto Rico. The
provisions of this Section shall govern the application of
the provisions of the Plan to Participants who are employed
by the Company in and are residents of the Commonwealth of
Puerto Rico ("Puerto Rico Participants"):
(a) Notwithstanding Section 2.25, the definition of
"Highly Compensated Participant" shall be a Puerto Rico
Participant employed by the Company who receives
Compensation that exceeds the Compensation paid to two
thirds of the Puerto Rico Participants, as provided in
Section 165(e) of the Puerto Rico Income Tax Act;
(b) The following shall apply in lieu of the second
sentence of Section 5.1(a) hereof: The Salary Reduction
Agreement shall provide for Elective Contributions equal to
any whole percentage between one percent (1%) and ten
percent (10%) of a Participant's Compensation in any payroll
period, not to exceed $7,000 in any calendar year;
(c) The Actual Deferral Percentage Test set forth in
Section 5.3 shall be applied separately with respect to
Puerto Rico Participants. For purposes of applying the
Actual Deferral Percentage Test to Puerto Rico Participants,
the definition of Highly Compensated Employee contained in
subparagraph (a) hereof shall be used; and
(d) For purposes of applying subparagraphs (b) and (c)
of this Section 21.1, the definition of Compensation
contained in Section 2.11 shall be applied without regard to
clause (xii) thereof.
In all other respects, the terms of this Plan shall apply to
Puerto Rico Participants.
EXHIBIT 10.146
ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
The Annual Executive Individual Performance Plan provides for
discretionary bonuses to executive officers (other than the Chairman, Vice
Chairman and President) based on their individual contribution to the
attainment of the Company's performance objectives. Such payments will be
determined by the Compensation Committee of the Board of Directors (the
"Committee") upon the recommendation of the Chairman and President. The
amount available for payments under the Plan will be equal to the sum of the
target bonuses for each Participant determined pursuant to the Corporate
Executive Bonus Plan, multiplied by a percentage determined pursuant to a
Corporate Performance Funding Matrix to be determined by the Committee, less
all payments made under the Corporate Executive Bonus Plan for such year
(other than payments made to the President and the Vice Chairman).
The Committee has the discretion to pay out less than the total
amount funded under the Plan, and, in determining corporate performance for
purposes of applying the Funding Matrix, has the discretion to exclude items
of income and expense that the Committee determines, in its discretion, to be
extraordinary (such as the impact of mergers and acquisitions during the year
and other one-time nonoperating items).
Amounts payable pursuant to the Plan are generally paid in the year
following the year in which they are earned; however, a recipient who is
eligible to participate in The Charles Schwab Corporation Deferred
Compensation Plan may defer payments pursuant to the terms of that plan. The
Plan is administered by the Committee, which makes all decisions regarding the
operation of the Plan and payments thereunder. The Committee may amend or
terminate the Plan at any time and for any reason without stockholder
approval.
EXHIBIT 10.147
THE CHARLES SCHWAB CORPORATION
CORPORATE EXECUTIVE BONUS PLAN
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THE CHARLES SCHWAB CORPORATION
CORPORATE EXECUTIVE BONUS PLAN
I. Purposes
The purposes of this Corporate Executive Bonus Plan (the "Plan") are: (a) to
provide greater incentive for key executives continually to exert their best
efforts on behalf of The Charles Schwab Corporation (the "Company") by
rewarding them for services rendered with compensation that is in addition to
their regular salaries; (b) to attract and to retain in the employ of the
Company persons of outstanding competence; and (c) to further the identity of
interests of such employees with those of the Company's shareholders through a
strong performance-based reward system.
II. Form of Awards
1. Incentive compensation awards under this Plan shall be granted in cash,
less any applicable withholding taxes.
III. Determination of Awards
1. Incentive awards for participants other than the President shall be
determined quarterly according to a Corporate Performance Payout Matrix that
shall be adopted at the beginning of each year by the Compensation Committee
of the Board of Directors (the "Committee"). The Management Committee
Corporate Performance Payout Matrix shall use net revenue growth and
consolidated pretax profit margin as the financial performance criteria to
determine awards. Awards shall be defined by reference to a target percentage
of base salary determined, from time to time, by the Committee. Payouts
described in this subsection shall be calculated and paid on a quarterly
basis, based on year-to-date performance compared with the comparable period
in the preceding year.
2. With respect to payments made pursuant to Section III.1, the amount of
base salary included in the computation of incentive awards shall not exceed
250% of the base salary in effect for the officer holding the same or
substantially similar position on March 31, 1995. In addition, the maximum
target incentive percentage shall be 100% of base salary for the Vice Chairman
and 50% of base salary for the remaining participants (other than the
President), and the maximum award for such individuals shall be 300% of the
individual's target award.
3. Incentive awards for the President shall be determined in accordance
with a Corporate Performance Payout Matrix that shall be adopted at the
beginning of each year by the Committee. The Committee shall determine the
President's award each year, up to the maximum amount defined by the matrix
for a given level of performance. This matrix may, if the Committee deems
appropriate, differ from that described in Subsection III.1. However, the
performance criteria shall be the same as referred to above. Payouts for the
President shall be made on an annual basis, based on the Company's results for
the full year.
4. The maximum award payable for the President under this plan shall be no
more than 500% of his target incentive award. The target incentive amount
shall be determined each year by the Committee, but may not exceed 300% of
base salary. The amount of base salary taken into account for purposes of
computing the target incentive award may not exceed 250% of the President's
base salary as of March 31, 1995.
IV. Administration
1. Except as otherwise specifically provided, the Plan shall be
administered by the Committee. The Committee members shall be appointed
pursuant to the Bylaws of the Company, and the members thereof shall be
ineligible for awards under this Plan for services performed while serving on
said Committee.
2. The decision of the Committee with respect to any questions
arising as to interpretation of the Plan, including the severability of any
and all of the provisions thereof, shall be, in its sole and absolute
discretion, final, conclusive and binding.
V. Eligibility for Awards
1. Awards under the Plan may be granted by the Committee to those
employees who have contributed the most in a general way to the Company's
success by their ability, efficiency, and loyalty, consideration being given
to ability to succeed in more important managerial responsibility in the
Company. This is intended to include the President and Chief Operating
Officer, Vice Chairman, Executive Vice Presidents, and from time to time,
certain other officers having comparable positions.
No award may be granted to a member of the Company's Board of Directors except
for services performed as an employee of the Company.
2. Except in the event of retirement, death, or disability, to be eligible
for an award an employee shall be employed by the Company as of the date
awards are calculated and approved by the Committee under this Plan.
3. For purposes of this Plan, the term "employee" shall include an
employee of a corporation or other business entity in which this Company shall
directly or indirectly own 50% or more of the outstanding voting stock or
other ownership interest.
VI. Awards
1. The Committee shall determine each year the payments, if any, to
be made under the Plan. Awards for any calendar year shall be granted not
later than the end of the first quarter of the calendar year, and payments
pursuant to the Plan shall be made as soon as practicable after the close of
each calendar quarter (or, in the case of the President, as soon as
practicable after the close of each calendar year).
2. Upon the granting of awards under this Plan, each participant
shall be informed of his or her award by his or her direct manager and that
such award is subject to the applicable provisions of this Plan.
VII. Deferral of Awards
1. A participant in this Plan who is also eligible to participate in
The Charles Schwab Corporation Deferred Compensation Plan may elect to defer
payments pursuant to the terms of that plan.
VIII. Recommendations and Granting of Awards
1. Recommendations for awards shall be made to the Committee by the
Chief Executive Officer and, with respect to participants other than the
President and Vice Chairman, the President.
2. Any award shall be made in the sole discretion of the Committee,
which shall take final action on any such award. No person shall have a right
to an award under this Plan until final action has been taken granting such
award.
IX. Amendments and Expiration Date
While it is the present intention of the Company to grant awards annually, the
Committee reserves the right to modify this Plan from time to time or to
repeal the Plan entirely, or to direct the discontinuance of granting awards
either temporarily or permanently; provided, however, that no modification of
this plan shall operate to annul, without the consent of the beneficiary, an
award already granted hereunder; provided, also, that no modification without
approval of the stockholders shall increase the maximum amount which may be
awarded as hereinabove provided.
X. Miscellaneous
All expenses and costs in connection with the operation of this Plan shall be
borne by the Company and no part thereof shall be charged against the awards
anticipated by the Plan. Nothing contained herein shall be construed as a
guarantee of continued employment of any participant hereunder. This Plan
shall be construed and governed in accordance with the laws of the State of
California.
EXHIBIT 10.148
SUMMARY OF INDIVIDUAL BONUS PLAN FOR
RONALD W. READMOND
For 1995, in addition to participation in the Corporate Executive Bonus
Plan and the Annual Executive Individual Performance Plan, Mr. Readmond,
Executive Vice President of the Corporation will have the opportunity to
receive an additional bonus, which may not exceed 166.66 percent of base
salary, depending upon the satisfaction of objectives described in
Mr. Readmond's 1995 business plan, as determined by the Compensation
Committee of the Board of Directors, based on the recommendation of the
Chairman and the President.
EXHIBIT 10.149
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of March 31, 1995 by and
between The Charles Schwab Corporation, a Delaware Corporation (hereinafter
referred to as the "Company"), and Charles R. Schwab, an individual
hereinafter referred to as the "Executive") effective March 31, 1995.
WITNESSETH:
WHEREAS, the Company desires to reward the Executive for his continuing
contribution to the Company and provide additional security for the Executive
and to provide an inducement to the Executive to remain with the Company and
not to engage in competition with it.
NOW THEREFORE, in consideration of the mutual obligations herein
contained, the parties hereto, intending to be legally bound hereby, covenant
and agree as follows:
1. EMPLOYMENT
(a) The Company hereby employs the Executive to render services to
the Company in the positions of Chairman of the Board and Chief Executive
Officer, in the capacity defined in the By-laws of the Company, as may be
amended from time to time. The Executive shall perform such duties
commensurate with his position and shall have full authority and
responsibility, subject to the control of the Board of Directors, for the
overall strategic direction, management, and leadership of the Company.
(b) Throughout the term of this Agreement, the Executive shall devote
his full business time and undivided attention to the business and affairs of
the Company and its subsidiaries, except for reasonable vacations and except
for illness or incapacity, but nothing in the Agreement shall preclude the
Executive from devoting reasonable periods required for serving, as
appropriate, on Boards of Directors of other companies, and from engaging in
charitable and public service activities provided such activities do not
materially interfere with the performance of his duties and responsibilities
under this Agreement.
2. TERM
This Agreement shall commence on March 31, 1995, and shall continue through
March 31, 2000, subject to the terms and conditions herein set forth.
Beginning on March 31, 1996, and on each subsequent anniversary of this date,
one year shall be added to the term of the Agreement, unless, prior to such
anniversary, the Company or the Executive has notified the other party hereto
that such extension will not become effective.
3. COMPENSATION
For services rendered by the Executive during the term of this Agreement, and
for his performance of all additional obligations of employment, the Company
agrees to pay the Executive and the Executive agrees to accept the following
salary, other compensation, and benefits:
(a) Base Salary. During the term of this Agreement, the Company
shall pay the Executive in periodic installments, a base salary at the annual
rate of $800,000, such base salary to be reviewed on March 31, 1996, and on
each subsequent anniversary, taking into account, among other things,
individual performance, competitive practice, and general business conditions.
(b) Annual Incentive. In addition to the base salary provided in
Section 3(a) above, the Executive shall be eligible to receive an annual
incentive award based upon the Company's attainment of pre-established
performance targets relative to specified performance standards. The
performance standards upon which annual incentive payments will be earned
shall be defined to include consolidated pretax profit margin (defined as net
income before taxes, divided by net revenue) and annual net revenue percentage
growth of the Company.
For each fiscal year during the term of this Agreement, the Executive's
incentive opportunity shall be computed as the amount of total cash
compensation earned pursuant to the formula-based matrix, which shall be
adopted each year by the Compensation Committee of the Board of Directors of
the Company, minus the Executive's actual base salary paid during that year.
For the 1995 fiscal year, the target total annual cash compensation amount
(including base salary) is $3,500,000; therefore, the incentive target is
$2,700,000 for achieving specified pretax profit margin and revenue growth
objectives.
The formula-based matrix, as amended at the sole discretion of the Board of
Directors, shall be the sole basis for determining the Executive's annual
incentive award. For each calendar year for which this Agreement is in
effect, beginning with the calendar year 1996, the interior values in the
formula-based matrix shall be increased by a fraction, based on the U.S.
Consumer Price Index (for all consumers, as published by the Bureau of Labor
Statistics); provided that no interior value shall be increased above $12
million. The fractional increase shall be the CPI for that year divided by
the CPI for calendar year 1995. The Compensation Committee of the Board shall
annually review and approve the performance standards and targets with respect
to the Executive's incentive opportunity, which review and approval shall be
completed no later than the 90th day of the Company's fiscal year for which
such incentive opportunity may be earned.
(c) Long-Term Incentive. The Executive will be considered for stock
options in accordance with the Company's 1992 Stock Incentive Plan, as amended,
or any successor thereto ("Stock Option Program") and any other long-term
incentives offered to other executives of the Company from time to time during
the term of this Agreement.
(d) Benefits. The Executive shall be entitled to participate, as
long as he is an employee of the Company, in any and all of the Company's
present or future employee benefit plans, including without limitation pension
plans, thrift and savings plans, insurance plans, and other benefits that are
generally applicable to the Company's executives; provided, however, that the
accrual and/or receipt by the Executive of benefits under and pursuant to any
such present or future employee benefit plan shall be determined by the
provisions of such plan.
(e) Perquisites. The Executive will be provided such additional
perquisites as are customary for senior level executives of the Company
provided that each perquisite is approved by the Board of Directors.
(f) Business Expenses. The Executive will be reimbursed for all
reasonable expenses incurred in connection with the conduct of the Company's
business upon presentation of evidence of such expenditures, including but not
limited to travel expenses incurred by the Executive in the performance of his
duties, security for the Executive, his family, and principal residence,
professional organization dues, and club initiation fees, dues and expenses.
(g) Any annual incentive award earned by Executive under this Section
3 shall be paid as soon as reasonably practical after the end of the Company's
fiscal year end; provided, however, that if any such payment would be
nondeductible to the Company under Internal Revenue Code Section 162(m), then
any nondeductible amounts shall be deferred from year to year until the
payment of such amounts is deductible by the Company.
4. TERMINATION OF EMPLOYMENT
(a) Resignation. Notwithstanding Section 2 hereof, this Agreement
may be terminated by the Executive at any time upon six (6) months written
notice of resignation by the Executive to the Company, and in such event any
payments pursuant to Section 3 and 4 of this Agreement shall automatically
terminate (except for the Company's obligations relating to voluntary
termination under its compensation and benefit plans, as specified in the
various plan documents, and the Executive's obligations set forth in Section
5). Subsequent payments may be made to the Executive as provided pursuant to
Section 6 of this Agreement.
(b) Termination by the Company Other Than for Cause. Termination of
executive by the Company other than for Cause, as defined in Section 4(c)
below, shall cause the Company to make payments to the Executive
hereunder pursuant to the provisions of this Section 4(b). Such a termination
shall require at least sixty (60) business days' prior notice and must be
signed by at least three-fourths (3/4) of all the non-employee members of the
Board of Directors.
Notwithstanding anything to the contrary contained in the Stock Option Program
or any agreement or document related thereto, the Executive's total
outstanding and unvested shares and/or options under the Stock Option Plan
shall at the date of termination be deemed to be 100% vested. No further
grants of stock or options shall be made under the Plan after such
termination.
With respect to base salary and annual incentive compensation, the Company's
obligation shall be to pay the Executive, according to the terms of this
Agreement and for a period of thirty-six (36) months, an amount equal to the
annual salary and incentive paid to the Executive [at the bonus level for the
year prior to which such termination occurs unless performance of the Company
as defined in the matrix referenced in Section 3(b) is better in the year of
termination, in which event such bonus shall be based on the matrix
calculation as described in Section 3(b)], such annual amounts to be paid in
equal monthly installments.
During the 36-month severance payment period, the Executive shall be entitled
to all payments, benefits and perquisites as provided for in this Agreement,
and office space and secretarial support comparable to that provided to the
Executive during his employment by the Company. The Executive shall be
entitled to all payments and benefits as provided for in this Section for a
period of thirty-six (36) months.
If the Board of Directors fails to reelect the Executive to a position
comparable to that described in Section 1(a) of this Agreement or, without
terminating the Executive's employment, removes the Executive from his
position for reasons other than Cause, substantively reduces the Executive's
duties and responsibilities, reduces his pay and/or benefits, forces
relocation, or requires excessive travel, then the Executive may, by notice to
the Company, treat such action or removal as a termination of the Executive by
the Company pursuant to this Section 4(b).
In the event of the Executive's death before the completion of the payments
pursuant to this Section 4(b), the remaining payments hereunder shall be made
to the beneficiary or beneficiaries designated by the Executive to the Company
in writing or, absent such a designation, to his estate.
(c) Termination by the Company for Cause. The Company may terminate
the Executive's employment for Cause if the Executive has committed a
felonious act, or the Executive, in carrying out his duties hereunder has been
willfully and grossly negligent or has committed willful and gross misconduct
resulting, in either case, in material harm to the Company. An act or
omission shall be deemed "willful" only if done, or omitted to be done, in bad
faith and without reasonable belief that it was in the best interest of the
Company. In the event of termination of the Executive by the Company for
Cause, the Executive shall no longer be entitled to receive any payments or
any other rights or benefits under this Agreement.
(d) Disability. In the event the Executive's employment terminates
due to total and permanent disability (for the purposes of this Agreement
"disability" shall have the same meaning as applies under the Company's Long-
Term Disability Plan), he will continue to receive the same base salary and
benefits which he was receiving prior to such disability for 36 months, offset
by payments under the Company's Long-Term Disability Plan. In addition, he
shall receive a pro-rated annual incentive payment for the year in which his
employment is terminated, based on the formula described in Section 3(b).
(e) Death. In the event of the death of the Executive during the
term of this Agreement, the rights and benefits under employee benefit plans
and programs of the Company, including life insurance, will be determined in
accordance with the terms and conditions of such plans and programs as in
effect on his date of death. In such event, the Company shall pay in a lump
sum to the Executive's estate an amount equal to five times the then current
rate of the Executive's base salary, and no further payments shall be required
pursuant to this Agreement.
(f) Change in Control. In the event of a change in control of the
Company, as set forth below, the Executive may at any time and in his complete
discretion during a 24-month period following a change in control, elect to
terminate his employment with the Company. For purposes of this Agreement, a
"change in control" shall mean a change in ownership of the Company that would
be required to be reported in response to Item 1(a) of a Current Report on
Form 8-K pursuant to the Securities and Exchange Act of 1934 ("Exchange Act"),
as in effect on the date hereof, except that any merger, consolidation or
corporate reorganization in which the owners of the capital stock entitled to
vote in the election of directors of the Employer or the Company ("Voting
Stock") prior to said combination, own 75% or more of the resulting entity's
Voting Stock shall not be considered a change in control for the purposes of
this Agreement; provided that, without limitation, such a change in control
shall be deemed to have occurred if (i) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act), other than a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company is or becomes the beneficial owners (as that is used in Section 13(d)
of the Exchange Act), directly or indirectly, of 30% or more of the Voting
Stock of the Company or its successor; or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company ("Incumbent Board") cease for any
reason to constitute at least a majority thereof; provided, however, that any
person becoming a director of the Company after the beginning of the period
whose election was approved by a vote of at least three-quarters of the
directors comprising the incumbent Board shall, for the purposes hereof, be
considered as though he were a member of the incumbent Board; or (iii) there
shall occur the sale of all or substantially all of the assets of the Company.
Notwithstanding anything in the foregoing to the contrary, no change in
control of the Company shall be deemed to have occurred for purposes of this
Agreement by virtue of any transaction which results in the Executive, or a
group of persons which includes the Executive acquiring, directly or
indirectly, more than 30 percent of the combined voting power of the Company's
outstanding securities. If any of the events constituting a change in control
shall have occurred during the term hereof, the Executive shall be entitled to
the privilege provided in subparagraph (f) herein to terminate his employment.
Any termination by the Executive pursuant to this Section shall be
communicated by a written "Notice of Termination."
If, following a change in control, the Executive shall for any reason
voluntarily terminate his employment during the 24-month period following a
change in control, then the Company shall pay base salary up to the date of
termination and a prorated annual incentive award based on the calculated
bonus for the year in which termination occurred, as defined in Section 3(b),
in a lump sum on the thirtieth (30th) day following the Date of Termination.
5. COVENANT NOT TO COMPETE
(a) As a material inducement to the Company's entering into this
Agreement, the Executive agrees that during the term of this Agreement, he
will not become associated with, render service to or engage in any other
business competitive with any existing or contemplated business of the Company
or its subsidiaries, except that the Executive may serve as a member of the
board of directors of other companies or organizations, provided that he
provides written notice to the Board of each significant activity, and that he
will do nothing inconsistent with his duties and responsibilities to the
Company.
(b) If the Executive voluntarily resigns from the employ of the
Company prior to the expiration of the term of this Agreement, he specifically
agrees that for a period of five (5) years commencing with the date of his
voluntary resignation he will not engage in or perform any services either on
a full-time or a part-time or on a consulting or advisory basis for any
business organization that is in competition with the Company at the time such
services are being performed by Executive, with the exception that this
Section 5(b) shall not apply in the event the Executive resigns voluntarily
following a change in control of the Company as defined in Section 4(f).
(c) The Executive will not at any time, whether while employed by the
Company or after voluntary or involuntary termination or after retirement,
reveal to any person, firm or entity any trade or business secrets or
confidential, secret, or privileged information about the business of the
Company or its subsidiaries or affiliates except as shall be required in the
proper conduct of the Company's business.
6. CONSULTING ARRANGEMENT
Following a voluntary termination of employment pursuant to Section 4(a) and
4(f), or an involuntary termination subsequent to a change in control of the
Company, for any reason but during a 24-month period following a change in
control as defined in Section 4(f), after the Executive ceases to render
services as the Chief Executive Officer, he may in his sole discretion elect
to act as a consultant to the Company for a period of five (5) years. During
this period of consulting services, the Executive shall, at reasonable times
and places, taking into account any other employment or activities he may then
have, hold himself available to consult with and advise the officers,
directors, and other representatives of the Company. As compensation
therefore, the Executive shall be entitled to receive, and Company shall pay,
an annual amount equal to seventy-five percent (75%) of his annual base salary
rate in effect immediately prior to his termination of employment, but in no
event an annual amount to exceed $1,000,000, for each year of such period,
payable in equal monthly installments.
7. WITHHOLDING
All amounts payable hereunder which are or may become subject to withholding
under pertinent provisions of law or regulation shall be reduced for
applicable income and/or employment taxes required to be withheld.
8. MISCELLANEOUS
(a) This Agreement supersedes any prior agreements or understandings,
oral or written, with respect to employment of the Executive and constitutes
the entire Agreement with respect thereto; provided, however, that nothing
contained herein shall supercede that certain Assignment and License Agreement
entered into as of March 31, 1987, as amended. This Agreement cannot be
altered or terminated orally and may be amended only by a subsequent written
agreement executed by both of the parties hereto or their legal
representatives, and any material amendment must be approved by a majority of
the voting shareholders of the Company.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
(c) This Agreement shall be binding upon and shall inure to the
benefit of the Company and its successors and assigns. In that this
constitutes a personal service agreement, it may not be assigned by the
Executive and any attempted assignment by the Executive in violation of this
covenant shall be null and void.
(d) For the purpose of this Agreement, the phrase "designated
beneficiary or beneficiaries" shall include the estates of such beneficiaries
in the event of their death before the receipt of all payments under this
Agreement and shall also include any alternate or successor beneficiaries
designated in writing to the Company by the Executive.
(e) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions, which shall remain in full force and effect.
(f) The Section and Paragraph headings contained herein are for
reference purposes only and shall not in any way affect the meanings or
interpretation of this Agreement.
(g) Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of arbitrators in accordance with the rules of the American Arbitration
Association then in effect. Judgement may be entered on the arbitrators award
in any court having jurisdiction. The expense of such arbitration shall be
borne by the Company.
(h) Any notices, requests or other communications provided for by
this Agreement shall be sufficient if in writing and if sent by registered or
certified mail to the Executive at the last address he has filed in writing
with the Company or, in the case of the Company, at its principal offices.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
Company:
ATTEST THE CHARLES SCHWAB CORPORATION
By: /s/ Mary B. Templeton By: /s/ Luis E. Valencia
--------------------- ------------------------------
Corporate Secretary
Title: Executive Vice President - Human Resources
------------------------------------------
Executive: /s/ Charles R. Schwab
------------------------------
Charles R. Schwab
Exhibit 10.150
REIMBURSEMENT AGREEMENT
THIS AGREEMENT is made as of December 19, 1994 between THE CHARLES SCHWAB
CORPORATION, a Delaware corporation (the "Company"), and BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association (the
"Bank"), as letter of credit issuing bank (hereinafter, together with any
successor thereto in such capacity, called the "Issuing Bank").
WITNESSETH:
WHEREAS, the Company is desirous that the Issuing Bank from time to time
issue irrevocable Letters of Credit in accordance with the terms of each
Application delivered by the Company to the Issuing Bank, as defined below,
in an aggregate amount not to exceed $100,000,000, for the account of the
Company and for the benefit of certain investment funds (each a "Beneficiary"),
the assets of which are managed by a Company affiliate;
WHEREAS, the Company has no equity investment interest in any Beneficiary;
WHEREAS, notwithstanding that the Company will not receive any direct
benefit or other recompense from any Beneficiary as consideration for
providing financial support and credit enhancement to, or for the benefit of,
such Beneficiary so as to conserve, protect and/or restore the capital
position of such Beneficiary, the Company believes it is in its best interest
to provide the support and credit enhancements as contemplated in this
Agreement, in order to preserve and retain its
goodwill and favorable business reputation;
WHEREAS, the Issuing Bank is willing to issue the Letters of Credit on the
terms and conditions set forth herein and on the further condition that the
representations, warranties, covenants, and events of default contained in
those certain Credit Agreements, each dated as of June 30, 1994, (the form of
which as set forth in Exhibit A) among the Company and certain commercial
lending institutions (as amended, modified or supplemented from time to time
collectively the "Credit Agreements") be incorporated by reference herein;
NOW THEREFORE, in consideration of the foregoing and for other valuable
consideration, the parties hereto agree as follows:
1. DEFINITIONS; FINANCIAL TERMS.
1.1 Definitions. In addition to the terms defined elsewhere in
this Agreement, the following terms shall have the meanings indicated for
purposes of this Agreement (such meanings to be equally applicable to both
the singular and plural forms of the terms defined):
"Affiliate" and "Affiliates" mean, when used with respect to any Person,
respectively, (a) any Person which, directly or indirectly, controls, is
controlled by, or is under common control with, such first person, and (b)
all such Persons. As used herein, "control" means possession, directly or
indirectly, of power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or
otherwise).
"Agreement" means this Agreement, as the same may at any time be
amended or modified and in effect.
"Application" means an Application and Agreement for Standby Letter
of Credit in the form attached hereto as Exhibit B.
"Availability" shall have the meaning assigned to such term under
Section 7.1 of this Agreement.
"Beneficiary" has the meaning given to that term in the preamble.
"Business Day" means any day on which banks are open for business in
California.
"Cash Collateral" means cash, certificates of deposit issued by the
Issuing Bank and money market deposits deposited by the Company with the
Issuing Bank.
"Credit Agreements" has the meaning given such term in the preamble.
"Company" has the meaning given to that term in the preamble hereto.
"Effective Date" has the meaning given to that term in Section 8.
"Event of Default" means any of the events described in Section 9.
"Expiry Date" has the meaning given to that term in Section 2.1(a).
"Extended Expiry Date" has the meaning given to that term in Section
2.1(b).
"Issuance Date" has the meaning given such term in Section 2.1(a).
"Issuing Bank" has the meaning given to that term in the preamble hereto.
"Letter(s) of Credit" means the Letters of Credit issued by the Issuing
Bank pursuant to clause (a) of Section 2.1 and each Substitute Letter of Credit.
"Letter of Credit Availability" means, at any time, the excess of (i) the
Letter of Credit Commitment over (ii) the sum of (a) the then Letters of Credit
Outstanding plus (b) the aggregate amount of all Reimbursement Obligations
paid by the Company to the Issuing Bank prior to such time pursuant to this
Agreement.
"Letters of Credit Commitment" means the Issuing Bank's aggregate
commitment in an amount equal to $100,000,000 under this Agreement to make
credit available to the Company by means of the issuance of Letters of Credit.
"Letter of Credit Fee" means the Letter of Credit fee payable by a
Beneficiary as provided in the letter agreement between the Issuing Bank and
each Beneficiary of a Letter of Credit.
"Letters of Credit Outstanding" means, at any time, an amount equal to
the sum of
(a) the aggregate Stated Amount at such time of all Letters of
Credit then outstanding and undrawn (as such aggregate Stated Amount shall
be adjusted, from time to time, as a result of drawings, the issuance of
Letters of Credit, the cancellation or reduction of Letters of Credit, or
otherwise),
plus
(b) the then aggregate amount of all unpaid and outstanding
Reimbursement Obligations.
"Obligations" means all obligations of the Company to the Issuing Bank
under or in connection with this Agreement or any other documents executed
pursuant hereto, including the Reimbursement Obligation, howsoever created,
arising or evidenced, whether direct or indirect, absolute or contingent, or
now or hereafter existing, or due or to become due.
"Payment Demand" means any demand for payment including, without
limitation, any draft and any other documents presented under and as
required by the terms of a Letter of Credit.
"Person" and "Persons" mean, respectively, (a) an individual or a
corporation, partnership, trust (including a business trust), incorporated or
unincorporated association, joint venture, joint stock company, government
(or an agency or political subdivision thereof) or other entity of any kind,
and (b) any two or more of any of the foregoing, collectively.
"Reference Rate" means, at any time, the rate of interest then most
recently announced by the Issuing Bank at San Francisco, California as its
Reference Rate. The Reference Rate is set by the Issuing Bank based on
various factors, including the Bank's costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some credits. Each change in the Reference Rate shall take effect
at the opening of business on the day specified in Bank's public
announcement of a change in the its Reference Rate.
"Reimbursement Account" has the meaning given to that term in Section 2.2
hereof.
"Reimbursement Obligation(s)" has the meaning given to such term in
Section 2.2.
"Relevant Taxes" means all taxes other than taxes on the net income of the
Issuing Bank.
"SEC" means the Securities and Exchange Commission.
"Stated Amount" means the "Stated Amount" as defined in each Letter of
Credit.
"Stated Expiry Date" means the Expiry Date stated in each Letter of Credit.
"Substitute Letter of Credit" means a Letter of Credit issued by the
Issuing Bank pursuant to clause (c) of Section 2.1 hereof in substitution for
any Letter of Credit previously issued by the Issuing Bank pursuant hereto,
as amended from time to time in accordance herewith.
"Termination Date" means August 1, 1995.
"Unmatured Event of Default" means any event or condition which with
the lapse of time or giving of notice to the Company, or both, would
constitute an Event of Default.
"Upfront Fee" means the Upfront Fee payable by a Beneficiary as provided
in the letter agreement between the Issuing Bank and each Beneficiary of a
Letter of Credit.
1.2 Financial Terms. Unless otherwise defined or the context
otherwise requires, all financial and accounting terms shall be defined in
accordance with generally accepted accounting principles.
2. LETTER OF CREDIT.
2.1 (a) Issuance of Letter of Credit. The Company may
request at any time and from time to time prior to the Termination Date,
subject to the terms and conditions of this Agreement, by delivery to the
Issuing Bank of a completed Application for each Letter of Credit, that, the
Issuing Bank issue and the Issuing Bank agrees to issue Letters of Credit in
such form as may be requested by Company and approved by the Issuing Bank
(the date of each such issuance is called an "Issuance Date"). Each Letter
of Credit shall be effective immediately upon the delivery thereof to the
respective Beneficiary and shall expire on the date (the "Expiry Date")
which is the earlier of (i) the Stated Expiry Date of each Letter of Credit,
(ii) 4:00 p.m. (Los Angeles time) on the Termination Date or
(iii) the date on which the Issuing Bank honors a drawing thereunder for the
then Stated Amount of such Letter of Credit. Each Letter of Credit requested
shall by its terms:
(i) be issued in a Stated Amount which does not exceed (or
would not exceed) the then Letter of Credit Availability;
(ii) be stated to expire on its Stated Expiry Date which
shall be no later than the Termination Date; and
(iii) prior to its Stated Expiry Date
(i) terminate immediately upon notice to the Issuing Bank
thereof from the Beneficiary thereunder that all obligations covered thereby
have been terminated, paid, or otherwise satisfied in full, or
(ii) reduce in part immediately and to the extent the
Beneficiary thereunder has notified the Issuing Bank thereof that the
obligations covered thereby have been paid or otherwise satisfied in part.
So long as no Event of Default has occurred and is continuing and prior to the
Termination Date, the Company may request the Issuing Bank, in accordance
with the terms of Section 2.1(b) of this Agreement, to extend the Stated
Expiry Date of a Letter of Credit for an additional period not to exceed the
Termination Date.
(b) Extensions of Letters of Credit. The Company shall have the right to
request that the Issuing Bank extend the then current Stated Expiry Date
(the "Extended Expiry Date"), which request may be conditioned upon terms
and conditions which are different from the terms and conditions of this
Agreement in effect on the Issuance Date. The Company shall make such
extension request no later than the earlier of 20 days prior to the Stated
Expiry Date of the applicable Letter of Credit and the Expiration Date. The
Issuing Bank shall, no later than 15 Business Days after receiving such
request, notify the Company of its acceptance or rejection of such
request, which acceptance may be conditioned upon terms and conditions which
are different from the terms and conditions of this Agreement in effect on
the Issuance Date or the terms and conditions proposed by the Company in
making an extension request. No extension of the Stated Expiry Date shall be
effective without the express written consent of the Bank. The Company
acknowledges and agrees that the Issuing Bank may grant or deny any request
for an extension of the Expiry Date as the Issuing Bank, in the Issuing
Bank's sole and unfettered discretion, deems appropriate.
(c) Delivery of Amendment and Substitute Letters of Credit. Provided that
the Company and the Issuing Bank have agreed to the extension of the initial
or Extended Expiry Date, all as set forth in clause (b) of this Section 2.1,
the Issuing Bank shall deliver to the Beneficiary either (x) an amendment to
the then outstanding Letter of Credit, extending the term of the then
outstanding Letter of Credit to the relevant Extended Expiry Date, or (y) in
exchange for the then outstanding Letter of Credit, a Substitute Letter of
Credit, dated the date of issuance thereof, in an amount equal to the amount
of the then outstanding Letter of Credit, and having a term expiring (unless
sooner surrendered pursuant to the provisions of this Section 2.1) on the
relevant Extended Expiry Date.
2.2 Letter of Credit Drawings. The Company hereby authorizes the
Issuing Bank to honor and pay Payment Demands under, or purporting to be
under, and conforming with the terms of each Letter of Credit. The Company
agrees to reimburse the Issuing Bank on the later of either four days after,
or upon demand of, any payment made by the Issuing Bank under the Letters of
Credit pursuant to any such Payment Demand, with interest on the amount so
paid by the Issuing Bank from and including the date paid by the Issuing Bank
to but not including the date the Issuing Bank is reimbursed therefor, at a
rate per annum equal to the Reference Rate in effect from time to time plus
two percent (2.00%); provided, however, that if any payment shall be
reimbursed to the Issuing Bank on the same date payment is made by the
Issuing Bank, interest at the rate herein provided shall be payable on
the amount so paid for one (1) day. Such reimbursement to the Issuing Bank
shall be made by a transfer of immediately available funds into an account
(No. 1233183980) maintained at the Issuing Bank (the "Reimbursement
Account"). The Company's obligations under this Section 2.2 shall be
referred to as the "Reimbursement Obligation."
2.3 Unconditional Reimbursement Obligations. Subject to the
proviso in Section 2.4, the payment by the Company of the Reimbursement
Obligation under this Agreement shall be absolute, unconditional, and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement, under all circumstances whatsoever, including, without limiting
the generality of the foregoing, the following circumstances:
(a) any lack of validity or enforceability of the Letter of Credit, this
Agreement, or any other instrument, document, or agreement issued or entered
into in connection therewith;
(b) the existence of any claim, set off, defense or other right of the
Company against the Issuing Bank or any other person or entity, whether in
connection with this Agreement or otherwise; or
(c) any statement, certification, or other document presented under the
Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect whatsoever, except where any circumstance described in this
subsection (c) involves a fraudulent Payment Demand under a Letter of Credit
made by any employee or person under the direct control of the Issuing Bank.
2.4 Correspondence at Company's Risk. All directions and
correspondence relating to the Letter of Credit are to be sent at the Company's
risk and the Issuing Bank does not assume any responsibility for any
inaccuracy, interruption, error, or delay in transmission or delivery by
mail, telegraph or cable, provided that the Company shall not bear the risk
of any such inaccuracy, interruption, error, or delay which occurs while any
such correspondence is under the direct control of the Issuing Bank.
2.5 Law Governing the Letter of Credit. Subject to the laws,
customs and practices of the trade in the area where the Beneficiary is
located, the Letter of Credit will be subject to, and performance under the
Letter of Credit by the Issuing Bank, its correspondents and the Beneficiary
will be governed by the Uniform Customs and Practice for Documentary Credits
(1993 Revision), International Chamber of Commerce Publication No. 500, as
may be amended or replaced from time to time by subsequent Congresses of the
International Chamber of Commerce. The Application and this Agreement shall
be governed by and construed under the laws of the State of California.
2.6 Trustee in Bankruptcy; Receiver. The Issuing Bank may
receive, accept and pay, as complying with the terms of the Letter of Credit,
any Payment Demand, otherwise in order, which may be signed by the trustee in
bankruptcy, or the receiver for any of the property of, the Beneficiary.
3. FEES; LOAN ACCOUNT.
3.1 Upfront Fee. In consideration of the Issuing Bank's
issuance of the Letter of Credit, the Issuing Bank shall receive from the
Beneficiary the Upfront Fee.
3.2 Letter of Credit Fee. In consideration of the Issuing Bank's
issuance of the Letter of Credit, the Issuing Bank shall receive from the
Beneficiary the Letter of Credit Fee.
3.3 Method of Calculating Fees. The Letter of Credit Fee shall
be computed on the basis of a year consisting of 360 days and paid for actual
days elapsed.
3.4 Loan Account. Principal and interest due and owing in
connection with any Reimbursement Obligation pursuant to Section 2.2, and
all other sums owing to the Issuing Bank hereunder shall be evidenced by
entries in the books and records maintained by the Issuing Bank. Each
payment on and any other credits with respect to principal, interest and all
other sums owing to the Issuing Bank hereunder shall be evidenced by entries
in such books and records. The Company hereby agrees that such records shall
be presumptive evidence of the amounts owed, absent manifest error on the
part of the Issuing Bank. The Issuing Bank will provide the Company with
written advices of credit and debit, together with quarterly summary
statements, showing calculation of any amounts due.
4. LETTER OF CREDIT - ISSUING BANK'S INDEPENDENT OBLIGATION. The
Issuing Bank's obligation to honor a conforming Payment Demand under each
outstanding Letter of Credit is a separate obligation of the Issuing Bank and
is independent of the Company's obligations to the Issuing Bank with respect
to the Letters of Credit Outstanding including, without limitation, the
Company's obligations under Sections 2.2 and 2.3 hereof.
5. PAYMENTS.
5.1 General Payment Procedures. Except as otherwise provided in
this Agreement, all payments to be made by the Company to the Issuing Bank,
whether on account of a Reimbursement Obligation or other amounts at any time
owing hereunder or in connection herewith, shall be made to the Issuing Bank
at its address specified in or for the purpose of this Agreement, for the
account of the Issuing Bank, in immediately available funds. All payments
to be made by the Company to the Issuing Bank in respect of payments made
under or in respect of the outstanding Letters of Credit, including, without
limitation, interest thereon pursuant to Section 2.2, shall be made to the
Issuing Bank by payment in immediately available funds into the Reimbursement
Account. All amounts payable by the Company to the Issuing Bank shall be
made to the Reimbursement Account not later than noon, San Francisco time,
on the date due and funds received on any day after the time specified
herein shall be deemed to have been received by the Issuing Bank on the
next succeeding Business Day.
5.2 Net Payments. All payments by the Company of any amounts in
respect of a payment or disbursement made by the Issuing Bank in respect
of the outstanding Letters or Credit, including interest thereon, and in
respect of all other amounts payable hereunder shall be made free without
setoff of counterclaim and free and clear of and without withholding or
deduction for any taxes, fees or other charges of any nature whatsoever
imposed by any taxing authorities.
5.3 Setoff. Upon the occurrence of any Event of Default, the
Issuing Bank is hereby authorized at any time and from time to time without
notice to the Company (any such notice being expressly waived by the Company)
and, to the fullest extent permitted by law, to set off, to exercise any
banker's lien or any right of attachment or garnishment and apply any and all
balances, credits, deposits (general or special, time or demand, provisional
or final), accounts or monies at any time held and other indebtedness at any
time owing by the Issuing Bank to or for the account of the Company (and not
its Affiliates) against any and all of the obligations of the Company now or
hereafter existing under or in connection with this Agreement or the
outstanding Letters of Credit. The rights of the Issuing Bank under this
Section 5.3 are in addition to, in augmentation of, and do not derogate
from or impair other rights and remedies (including, without limitation,
other rights of setoff) which any such party may have.
6. REPRESENTATION AND WARRANTIES.
6.1 Incorporation by Reference. As of any Issuance Date and
so long as the Letter of Credit Commitment hereunder remains in full force
and effect, the Company hereby makes all the representations and warranties
contained in Paragraph 5 of the Credit Agreements. All of such
representations and warranties together with related definitions and
ancillary provisions are incorporated into this Agreement by reference as if
such terms were set forth in this Agreement in full, without regard to any
expiration of any commitment thereunder and without regard to the
final payment in full of any obligations of the Company thereunder. The
following terms in the Credit Agreements shall have the meanings specified
below for purposes of this Agreement, including without limitation,
Sections 6, 7 and 9 hereof.
"Advance" means each Letter of Credit and/or Reimbursement Obligation.
"Agreement" means this Agreement, each Application, each Letter of Credit, any
Substitute Letter of Credit, and any other document delivered in connection
with this Reimbursement Agreement.
"Bank" means the Issuing Bank.
"Borrower" means the Company.
"Borrowing Advice" means the Application.
"Credit" shall mean the Letter of Credit Commitment under the Reimbursement
Agreement.
"Date of Advance" means Issuance Date.
"Loan" shall mean the Reimbursement Agreement, the Letter of Credit, any
Substitute Letter of Credit under the Reimbursement Agreement and other
documents delivered in connection with the Reimbursement Agreement.
6.2 Investment Company Act. The Company represents and
warrants to the Issuing Bank that the execution of this Agreement by the
Company and performance of its obligations hereunder do not violate Section
17(a) and 17(d) of the Investment Company Act of 1940, as amended.
7. INCORPORATION BY REFERENCE OF COVENANTS. The Company covenants and
agrees that, from and after the date hereof and thereafter until all
obligations of the Company hereunder are paid in full and this Agreement is
terminated, it will:
7.1 Available Credit. As long as there are any outstanding
Reimbursement Obligations or Letters of Credit Outstanding, maintain aggregate
unutilized Credit, as defined in the Credit Agreements, or in lieu thereof,
under any other credit facility or maintain cash balances (which other
facility or balance requirement must be reasonably acceptable to the Issuing
Bank) in an amount not less than $100,000,000 or such reduced amount equal
at all times to the Letters of Credit Outstanding, as agreed by the Issuing
Bank and the Company ("Availability").
7.2 SEC Reporting. The Company will provide Issuing Bank with a
Memorandum prepared by counsel to the Beneficiaries describing the content of
conversations between such counsel and the staff of the Securities and Exchange
Commission, subject to the condition that the Issuing Bank treat the
Memorandum as a confidential document that should not be given any
distribution or dissemination other than as may be required to effect the
transactions contemplated under this Agreement, the Letter of Credit and
related documents.
7.3 Incorporation by Reference. Duly keep, perform and observe
each and every covenant set forth in Paragraph 6 and Paragraph 7 of the Credit
Agreements. To the extent Paragraph 6 or 7 of the Credit Agreements is
hereafter amended the Issuing Bank reserves the right to consent to such
Amendment's incorporation herein by reference. In the absence of the Bank's
consent, such covenant as in effect on the Effective Date shall remain in
full force and effect. All of such covenants, together with related
definitions and ancillary provisions, are hereby incorporated into this
Agreement by reference, mutatis mutandis, as if such terms were set forth
in this Agreement in full, without regard to any termination of such Credit
Agreements, without regard to any expiration of any commitment thereunder
and without regard to the final payment in full of any obligations of the
Company or any other person or entity thereunder. If an event is the subject
of both a covenant incorporated herein by reference and another covenant set
forth in this Agreement, the Company shall comply with the covenant
which imposes on it the stricter requirement. To the extent that any covenant
incorporated herein by reference is inconsistent with the other terms of this
Agreement, the terms of this Agreement shall control. If the Credit Agreements
terminates, any commitment thereunder expires or any obligations of the Company
thereunder are paid in full and any covenant incorporated herein by reference
requires the Company to obtain the consent of any agent, lender or lenders,
then, for the purpose of this Agreement, the Company shall be required to
obtain the consent of the Issuing Bank.
8. CONDITIONS PRECEDENT
8.1 Effective Date. This Agreement shall become effective upon
satisfaction of each of the following conditions precedent (the "Effective
Date"):
(a) Default. No Event of Default or Unmatured Event of Default shall have
occurred and be continuing.
(b) Warranties. The warranties contained in Section 6 hereof shall be
true and correct.
(c) Certification. The Company shall have delivered to the Issuing Bank a
certificate of the Company's president or chief financial officer as to the
matters set out in Sections 8.1(a) and (b).
(d) Delivery of Documents. The Company shall have delivered or caused to
be delivered to the Issuing Bank:
(i) Company Resolutions. A copy, duly certified by the Company's
secretary or assistant secretary, of (i) the resolutions of the Company's
Board of Directors authorizing the Company's application for the letters of
credit and the execution and delivery of agreements to effectuate such
authorization, (ii) all documents evidencing other corporate action, and
(iii) all approvals or consents, if any, with respect to this Agreement.
(ii) Company Incumbency. A certificate of the Company's secretary or
assistant secretary, dated the Issuance Date, certifying the names of the
Company's officers authorized to sign this Agreement and all other documents
or certificates to be delivered hereunder, together with the true signatures
of such officers.
(iii) Legal Opinion. An opinion of Howard, Rice, Nemerovski, Canady,
Robertston, Falk & Rabkin, counsel to the Company, in the form of Exhibit C
attached hereto, addressed to the Issuing Bank and dated the date hereof.
(iv) Legal Opinion regarding Investment Company Act of 1940. An
opinion of Mary B. Templeton, General Counsel, Senior Vice President and
Corporate Secretary to the Company, in the form of Exhibit D attached hereto,
addressed to the Issuing Bank, and dated the date hereof.
(v) Beneficiary Approval. A copy, duly certified by each
Beneficiary's secretary or assistant secretary of resolutions authorizing
the use of a Letter of Credit as contemplated herein, and the payment of the
Upfront Fee and Letter of Credit Fee.
(e) Upfront Fee. Each Beneficiary will have executed and delivered a
letter agreement agreeing to pay the Upfront Fee and Letter of Credit Fee and
the Issuing Bank shall have received from each Beneficiary the Upfront Fee.
8.2 Issuance Date. The obligation of the Issuing Bank to issue a
Letter of Credit is subject, to the satisfaction of each of the following
conditions on each Issuance Date:
(a) Effective Date. The Effective Date shall have occurred.
(b) Default. No Event of Default or Unmatured Event of Default shall have
occurred and be continuing.
(c) Warranties. The warranties contained in Section 6 hereof shall be
true and correct.
8.3 Condition Subsequent. As a condition subsequent, the Company
shall deliver within 20 Business Days of the Effective Date resolutions of
the Company ratifying Company's (i) delivery of Applications for Letters of
Credit under this Agreement to the Issuing Bank; and (ii) execution of and
performance under this Agreement.
9. EVENTS OF DEFAULT AND REMEDIES. Each of the following shall
constitute an Event of Default under this Agreement:
9.1 Non-Payment of Reimbursement Obligation. Default in the
payment when due of a Reimbursement Obligation.
9.2 Credit Agreements. The Credit Agreements shall be
terminated or cease to be enforceable against the Company unless another
credit facility has been established or the Company maintains sufficient
cash balances equivalent in amount to Letters of Credit Outstanding which
facility or balance requirement is reasonably acceptable to Issuing Bank.
9.3 Availability. The Company shall fail to maintain the
Availability under the Credit Agreements, or under any other credit facility or
maintain cash balances in an amount equivalent to Letters of Credit Outstanding
which other facility or balance requirement is reasonably acceptable to the
Issuing Bank.
9.4 Incorporation By Reference of Events of Default. The
occurrence of any event of default set forth in the Credit Agreements shall
constitute an Event of Default hereunder with respect to the Company. All of
such events of default, together with related definitions and ancillary
provisions, are hereby incorporated into this Agreement by reference,
mutatis mutandis, as if such terms were set forth in this Agreement in full,
without regard to any termination of such Credit Agreements, without regard
to any expiration of any commitment thereunder and without regard to the
final payment in full of any obligations of the Company or any other person
or entity thereunder. To the extent that any Event of Default incorporated
herein by reference is inconsistent with the other terms of this Agreement,
the Issuing Bank shall not be deemed to have waived any rights hereunder
by virtue of such inconsistency.
9.5 Action if Event of Default. If any Event of Default shall
occur and be continuing, the Issuing Bank may take one or more of the
following actions:
(a) declare the Letter of Credit Commitment to be terminated, whereupon the
Letter of Credit Commitment shall forthwith terminate; or
(b) enforce the Company's Reimbursement Obligations under Section 2.2; or
(c) demand that Company deposit with the Issuing Bank an amount equal to all
or any part of the then Stated Amount of the Letters of Credit in immediately
available funds or in similar Cash Collateral acceptable to the Issuing Bank,
pledged to the Issuing Bank, provided such payment of Cash Collateral is
permissible in accordance with the terms of the Credit Agreements. Any Cash
Collateral shall be held by the Issuing Bank in an interest bearing cash
collateral account and shall be applied to reimbursement of amounts to be
paid by the Issuing Bank under the Letter of Credit and to payment of such
other Obligations in such order of application, as the Issuing Bank shall
determine with any excess amount returned to the Company. The Company
acknowledges and agrees that the Issuing Bank would not have an adequate
remedy at law for failure by the Company to immediately pay the Bank the
amount provided under this Section 9.5 and that the Issuing Bank
shall have the right to require the Company to specifically perform such
undertaking whether or not any drawings have been made under the Letter of
Credit; provided, however, that upon the occurrence of any bankruptcy Event
of Default, the Letter of Credit Commitment shall forthwith terminate, and
all sums then owing by the Company hereunder and under each document executed
pursuant hereto shall become and be immediately due and payable without
further action on the part of any Person and without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived by
the Company.
10. MISCELLANEOUS.
10.1 No Waiver; Modifications in Writing.
(a) No failure or delay on the part of the Issuing Bank in exercising any
right, power or remedy hereunder, and no course of dealing between the
Company and the Issuing Bank, shall operate as a waiver of any such right,
power or remedy, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to the Issuing Bank at law, in equity or otherwise.
(b) No amendment, modification, supplement, termination or waiver of or to any
provision of this Agreement, or any other document executed pursuant hereto,
nor consent to any departure by the Company therefrom, shall be effective
unless the same shall be in writing and signed by the Issuing Bank.
(c) Any waiver pursuant to this Section 10.1 shall not affect the
obligations of the Company or the rights of the Issuing Bank under any
provision of this Agreement or any document, except to the extent set forth
in this Section 10.1 and in such waiver. Any waiver of any provision of
this Agreement, and any consent to any departure by the Company from the
terms of any provision of this Agreement, shall be effective only in the
specific instance and for the specific purpose for which given. No notice
to or demand on the Company in any case shall entitle the Company
to any other or further notice or demand in similar or other circumstances.
10.2 Further Assurances. The Company agrees to do such further
acts and things and to execute and deliver to the Issuing Bank such
additional assignments, agreements, powers and instruments, as the Issuing
Bank may reasonably require or deem advisable to carry into effect the
purposes of this Agreement or to better assure and confirm unto the Issuing
Bank its rights, powers and remedies hereunder.
10.3 Notices, etc. 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 to or made upon
any party hereto or any other Person shall be in writing and shall be
personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by telecopier, or by prepaid courier,
and shall be deemed to be given for purposes of this Agreement on the day
that such writing is delivered (in the case of personal delivery) or sent to
the intended recipient thereof (or, in the case of (i) any notice which is
sent by mail, five days after the deposit thereof, postage prepaid, in the
mail and (ii) any notice which is sent through a public courier company, on
the next Business Day after the day on which such notice is delivered to such
courier company) in each case in accordance with the provisions of this Section
10.3. Unless otherwise specified in a notice sent or delivered in accordance
with the foregoing provisions of this Section 10.3, notices, demands,
instructions and other communications in writing shall be given to or made
upon any party at its address (or to its telex or telecopier numbers)
indicated next to its signature on the signature pages hereof and, in the
case of telephonic instructions or notices, by calling the telephone number
or numbers indicated for such Person next to its signature on the signature
pages hereof, or to such address, telex, telecopier or telephone number from
time to time notified by any recipient to the other parties hereto. Anything
herein to the contrary notwithstanding, any notice from the Company pursuant
to clause (a) of Section 2.1 hereof shall be effective, for purposes of this
Agreement, only when actually received by all Persons to whom such notices
are required to be sent or given.
10.4 (a) Costs, Expenses and Taxes. The Company agrees to pay all
reasonable costs and expenses of the Issuing Bank in connection with the
negotiation, preparation, reproduction, execution and delivery of this
Agreement and each other document executed pursuant hereto or thereto, any
amendments or modifications of (or supplements to) any of the foregoing and
any and all other documents furnished pursuant hereto or thereto or in
connection herewith or therewith, including the reasonable fees and
out-of-pocket expenses of Mayer, Brown & Platt, counsel to the Issuing Bank,
and the allocated cost of internal legal counsel to the Issuing Bank. The
Company further agrees to pay all costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses and the allocated
expense of internal counsel), if any, of the Issuing Bank in connection with
the enforcement of this Agreement or any other document executed pursuant
hereto or thereto or in connection herewith or therewith. In addition,
the Company shall pay any and all stamp or transfer taxes and other Relevant
Taxes payable or determined to be payable in connection with the execution
and delivery or enforcement of this Agreement or any other documents executed
pursuant hereto or thereto and agrees to save and hold Issuing Bank harmless
from and against any and all liabilities with respect to or result from any
delay in paying or omission to pay such Relevant Taxes.
(b) Indemnity. The Company shall pay, and shall protect, indemnify and
save harmless the Issuing Bank and its respective officers, directors,
shareholders, employees, agents and servants (herein called the "Indemnified
Parties") from and against, any and all losses, liabilities (including
liabilities for penalties), actions, suits, judgments, demands, damages,
costs or expenses including, without limitation, reasonable attorneys' fees
and expenses (herein called the "Indemnified Liabilities") of any nature
arising from or relating to this Agreement or any other document executed
pursuant hereto or thereto, except that no Indemnified Party shall be
entitled to indemnification under this clause (b) for any loss, liability,
action, suit, judgment, demand, damage, cost or expense which is directly
caused by such Indemnified Party's gross negligence or willful misconduct.
If any action, suit or proceeding arising from any of the foregoing is
brought against any Indemnified Party or any other Person indemnified or
intended to be indemnified pursuant to this Section 10.4, the Company, to
the extent and in the manner reasonably directed by the Issuing Bank, will
resist and defend such action, suit or proceeding or cause the same to be
resisted and defended by counsel designated by the Company (which counsel
shall be satisfactory to the Person or Persons indemnified or intended to be
indemnified). If and to the extent that the foregoing provisions of this
Section 10.4 may be unenforceable for any reason, the Company hereby agrees
to make the maximum contribution to payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law.
(c) Issuing Bank may Perform. If the Company shall fail to do any act or
thing which it has covenanted to do hereunder or any representation or
warranty on the part of the Company contained herein or in any other document
executed in connection herewith shall be breached, the Issuing Bank may (but
shall not be obligated to), after two days' notice to the Company, do the
same or cause it to be done or remedy any such breach, and may expend its
funds for such purpose; provided, however, that no such action by the Issuing
Bank shall relieve the Company of any liability in connection with such
failure or breach or be deemed to constitute a waiver of any default under
this Agreement, or such other document. Any and all amounts so expended by
the Issuing Bank shall be repayable to it by the Company immediately upon
the Issuing Bank's demand therefor, provided such demand shall be made within
180 days of the Issuing Bank's incurring such expense, with interest at a
rate per annum (computed for the actual number of days elapsed on the
basis of a year consisting of 360 days) equal to 2% plus the Reference Rate in
effect from time to time during the period from and including the date so
expended by the Issuing Bank to the date of repayment.
(d) Survival of Obligations. The obligations of the Company under this
Section 10.4 shall survive the termination of this Agreement and the
discharge of the Company's Obligations hereunder for a period of four years
from the date of such termination or discharge.
10.5 Binding Effect; Assignment. This Agreement shall be binding
upon, and inure to the benefit of, the Company, the Issuing Bank, and their
respective successors and assigns; provided, however, that the Company may
not assign its rights hereunder or in connection herewith or any interest
herein (voluntarily, by operation of law or otherwise), so long as any
Letters of Credit are outstanding or Reimbursement Obligations exist or the
Letter of Credit Commitment remains in full force and effect, without the
prior written consent of the Issuing Bank. The Issuing Bank may assign all
or a part of their respective interests with the written consent of the
Company, provided, however, that such consent shall not be unreasonably
withheld.
10.6 Waiver of Jury Trial. THE COMPANY AND THE ISSUING BANK EACH
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY INSTRUMENT EXECUTED
PURSUANT HERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OR ANY SUCH PARTIES. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE ISSUING BANK TO ENTER INTO THIS AGREEMENT.
10.7 Liability of the Issuing Bank. The Company hereby assumes all
risks for the acts or omissions of the Beneficiary thereof with respect to
its use of the Letter of Credit. Neither the Issuing Bank nor any of its
officers or directors shall be liable or responsible for (i) the use which
may be made of the Letter of Credit or for any acts or omissions of the
Beneficiary and any transferee in connection therewith; (ii) the validity or
genuineness of documents, or of any endorsement(s) thereon, even if such
documents should in fact prove to be in any or all respect invalid,
fraudulent or forged; (iii) any of the circumstances whatsoever in making or
failing to make payment under any Letter of Credit, except only that the
Company shall have a claim against the Issuing Bank, and the Issuing
Bank shall be liable to the Company, to the extent, but only to the extent,
of any direct, as opposed to consequential, damages suffered by the Company
which the Company provides were caused by the Issuing Bank's willful
misconduct or gross negligence in determining whether documents presented
under the Letter of Credit comply with the terms of such Letter of Credit.
In furtherance and not in limitation of the foregoing, the Issuing Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any information to
the contrary.
10.8 Severability. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of
such provision in any other jurisdiction.
10.9 Governing Law; Arbitration. This Agreement and each other
document executed pursuant hereto shall be governed by, and construed in
accordance with, the law of the State of California. Any controversy among
the parties arising out of or relating to this Agreement or a Letter of
Credit shall at the request of any party be determined by arbitration. The
arbitration shall be conducted in San Francisco, California, under the laws
of the United States Arbitration Act (Title 9, U.S. Code), notwithstanding
any choice of law provision in this Agreement or the Letter of Credit and
pursuant to the Commercial Rules of the American Arbitration Association.
The arbitrators shall give effect to statutes of limitation in determining
any claim. Any controversy concerning whether an issue is arbitrable
shall be determined by the arbitrators. Judgment upon the arbitration award
may be entered in any court having jurisdiction. This Paragraph shall not
limit the right of any party to this Agreement or a Letter of Credit to
exercise lawful self-help remedies or to obtain provisional or ancillary
remedies from a court of competent jurisdiction before, during, or after the
pendency of any arbitration. The seeking, obtaining or exercising of such a
remedy does not waive the right of any party, including the party who sought
such remedy, to resort to arbitration. Notwithstanding the foregoing, no
controversy shall be submitted to arbitration under this Paragraph without
the consent of all parties if, at the time of the proposed submission, such
controversy arises from or relates to an obligation to Bank which is secured
by real property collateral.
10.10 Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose.
10.11 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and
shall be binding upon the parties, their successors and permitted assigns.
10.12 Reserve Requirements. If reserve, special deposit, or
similar requirements or any similar restrictions, or any other requirements
of law not presently applicable to the Issuing Bank, are hereafter imposed
upon or determined by the Issuing Bank or held to be applicable to the
Issuing Bank at any time and from time to time, which would materially
increase the costs to the Issuing Bank of continuing the Letter of Credit
financing hereunder or materially affect the profitability (on an after-tax
basis) to the Issuing Bank of the Letter of Credit transactions contemplated
hereby, then the Issuing Bank may give thirty days' written notice to the
Company of such requirement or restriction and of the additional costs, or
loss or prospective loss of profitability, resulting from the imposition or
application of such requirement or restriction to the Issuing Bank. Upon
such notice the Company shall compensate the Issuing Bank for all additional
costs, or for any loss of profit, accruing to the Issuing Bank from and
including the date of such imposition, imposition or holding to but not
including the expiration of the Letter of Credit.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
caused it to be executed and delivered by their duly authorized officers, all
as of the day and year first above written.
THE CHARLES SCHWAB CORPORATION
By:
A. John Gambs
Title: Executive Vice President,
Chief Financial Officer
Address: 101 Montgomery Street
San Francisco, CA 94104
Telecopy: 415-296-5187
c/o General Counsel
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
Vice President
Address: 1850 Gateway Boulevard
Concord, California 94520
Attention: Jeffrey Donahue
Telecopy:
Copy: Jack Williams
Bank of America
231 South LaSalle Street
Chicago, Illinois 60697
LIST OF EXHIBITS
EXHIBIT A - Credit Agreements (See Fourth Whereas Clause of Preamble)
EXHIBIT B - Application (1.1)
EXHIBIT C - Legal Opinion (8.1(d)(iii))
EXHIBIT D - Legal Opinion (Investment Company Act of 1940) (8.1(d)(iv))
<PAGE>
<LOGO> Bank of America
INTERNATIONAL TRADE BANK #2621
333 SOUTH BEAUDRY AVENUE, 19TH FLOOR
LOS ANGELES, CA 90017
DATE: December 19, 1994
IRREVOCABLE STANDBY LETTER OF CREDIT NO. LASB-( )
--------------------------------------------------------------
Customer:
The Charles Schwab Corporation
101 Montgomery Street
San Francisco, CA 94104
Beneficiary:
( NAME OF FUND )
------------------------------------------------
a series of shares of beneficial interest of The Charles Schwab Family of Funds
101 Montgomery Street, San Francisco, CA 94104
Attention: William J. Klipp
Ladies and Gentlemen:
1. We are hereby established at the request of and for the account
of our customer (the "Account Party"), our Irrevocable Standby Letter of
Credit No. LASB-( ) (the "Letter of Credit") in favor of (NAME OF FUND), a
series of shares of beneficial interests of The Charles Schwab Family of
Funds, a Massachusetts business trust registered under the Investment Company
Act of 1940 ("Beneficiary") and we hereby irrevocably authorize the
Beneficiary to make demand for payment from us, the Bank of America National
Trust and Savings Association (the "Bank") under this Letter of Credit. We
are advised that this Letter of Credit has been issued pursuant to the terms
of the Reimbursement Agreement, dated as of December 19, 1994, by and between
the Bank and the Account Party (the "Reimbursement Agreement"), and is
available upon the terms and conditions hereinafter set forth, in an
aggregate amount not exceeding $( Dollar Amount ) (the "Stated Amount").
No payment hereunder shall exceed an amount equal to (i) the Stated Amount
available on the date of such demand, minus (ii) the aggregate amount of any
demand previously honored hereunder. Unless otherwise defined in
this Letter of Credit, capitalized terms used herein shall have the
respective meanings assigned to such terms in Section 8.
2. Funds under this Letter of Credit are available to the Beneficiary
against a Certificate, signed by a duly authorized officer of the
Beneficiary, in the form attached hereto as Exhibit B (the "Payment Demand
Certificate"), appropriately completed and presented to the Bank as provided
in paragraph 3 hereof.
Multiple Payment Demand Certificates may be hereunder at any time on or
before to the Stated Expiry Date.
3. All documents presented during regular business hours on a
Business Day to the Bank in connection with any demand for payment under
this Letter of Credit, as well as all notices and other communications to the
Bank in respect hereof, shall be in writing, shall make specific reference to
this Letter of Credit by number, shall be to the attention of the Bank's
Standby Letter of Credit Department and shall either (i) be
(Continued on Page Two)
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
<PAGE>
personally delivered to the Bank at its office located at 333 South Beaudry
Avenue, 19th Floor, Los Angeles, California 90017, (or at any other office of
the Bank in the continental United States designed by the Bank by written
notice delivered to the Beneficiary) or (ii) be sent to the Bank by tested
telex or by facsimile transmission to the following number(s) (or to any
number(s) designated by the Bank by written notice delivered to the
Beneficiary), as applicable:
Telex No. MCI 67652 (Answerback: BANKAMER SFO)
Facsimile No. (213) 345-6694
4. The Bank hereby agrees that demands for payment made under and in
compliance with the terms of this Letter of Credit will be duly honored by
the Bank (from the Bank's own funds and not directly or indirectly from funds
or other assets of the Account Party or any affiliate of the Account Party)
upon presentation of the certificate specified in paragraph 2 hereof to the
Bank as provided in paragraph 3 hereof on or before the Stated Expiry Date
(as defined in paragraph 7 hereof) or such earlier termination of this Letter
of Credit. The Stated Amount of this Letter of Credit at any time may be
less than the aggregate amount owed in connection with a Payment Event to
Beneficiary on any Security or Securities as calculated under the definition
of "Payment Amount" under Section 8 of this Letter of Credit. If the Payment
Amount requested at any time on or before to the Stated Expiry Date under any
demand for payment by Beneficiary under this Letter of Credit exceeds, at the
time of such demand for payment, the then Stated Amount available under this
Letter of Credit then the Bank, provided such demand is in compliance with
the terms of this Letter of Credit and subject to the terms of this Letter
of Credit, shall pay such demand in an amount equal only to the then
available Stated Amount of this Letter of Credit. If a demand for payment
is made by the Beneficiary hereunder at or prior to 9:00 a.m. Los Angeles
time, on a Business Day (as hereinafter defined), and if such demand for
payment conforms to the terms and conditions hereof, payment shall be made
for the lesser of the amount specified or the then Stated Amount available,
in immediately available funds, by 5:00 p.m. Los Angeles time, on that
Business Day of such presentation. If a demand for payment is made by the
Beneficiary hereunder on a Business Day after 9:00 a.m., Los Angeles time,
and if such demand for payment conforms to the terms and conditions hereof,
payment shall be made for the less of the amount specified or the then
Stated Amount available, in immediately available funds, by 1:00 p.m., Los
Angeles time, on the following Business Day. Payment under this Letter of
Credit shall be made by wire transfer or deposit to the (Name of Beneficiary)
in the accounts specified in the certificate(s) delivered pursuant to
paragraph 2 hereof. As used in this Letter of Credit, "Business Day" shall
mean a day on which banks located in Los Angeles, California, are not
required or authorized to remain closed. To the extent practical, the
Beneficiary shall give the Bank at least one Business Day's advance written
notice (such notice to be sent by facsimile transmission to the number set
forth in paragraph 3 above) of the amount of each demand for payment, but
failure of the Beneficiary to give such notice or any discrepancies between
the amount or other information set forth in such notice from the amount or
other information set forth in the certificate actually presented to the Bank
shall in no way relieve, diminish or otherwise change the obligation of
the Bank to honor properly submitted demands for payment under this Letter of
Credit.
(Continued on Page Three)
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
<PAGE>
5. Only the Beneficiary may make demands for payment under this
Letter of Credit, and demands for payment under this Letter of Credit shall
be presented directly to the Bank and not negotiated. Upon payment made
hereunder of the lesser of the amount specified in a demand for payment or
the then Stated Amount available, the Bank shall be fully discharged of its
obligation under this Letter of Credit with respect to such demand for
payment and the Bank shall not thereafter be obligated to make any further
payments under this Letter of Credit in respect of such demand for payment.
By paying the Beneficiary an amount demanded in accordance with this Letter
of Credit, the Bank makes no representation as to the correctness of the
amount demanded or of the calculations and representations of the
Beneficiary. required by this Letter of Credit.
6. The Stated Amount shall be automatically reduced from time to
time as follows:
a. Upon demand for payment honored and paid by the Bank under
this Letter of Credit, the Stated Amount shall be reduced by an amount equal
to the amount of such demand; and
b. Upon receipt by the Bank of the certificate of the
Beneficiary in the form of Exhibit C hereto, the Stated Amount shall be
permanently reduced by an amount equal to the amount specified in such
certificate.
7. This Letter of Credit shall automatically terminate upon the
earliest of (i) August 1st, 1995 (being called the "Stated Expiry Date),
(ii) on the date that the Bank receives notification from the Beneficiary
that this Letter of Credit has been replaced by a substitute letter of
credit, or (iii) the Bank has paid a demand for payment accompanied by a
certificate in the form of Exhibit B hereto where there will be no
outstanding amount available under this Letter of Credit. Upon the
expiration or termination of this Letter of Credit, the Beneficiary shall
promptly return this Letter of Credit to the Bank for cancellation.
Pursuant to the terms of the Reimbursement Agreement, the Bank, at the
request of the Account Party, may give its written consent to periodic
extensions of the Stated Expiry Date. The Bank shall deliver to the
Beneficiary a certificate in the form of Exhibit D hereto evidencing such
extension of the Stated Expiry Date.
8. As used in this Letter of Credit and the Certificates in the
forms of Exhibit A through D hereto, the following capitalized terms shall
have the following meanings:
"Issuer" means the issuer or any successor to such issuer of any Security.
"Par Amount" shall mean, with respect to any Security, an amount
determined by multiplying the Par Amount the Par Amount of a particular
Security by the Upper Limit Percentage and subtracting therefrom an amount
equal to the greater of (i) either the amount of proceeds received by
Beneficiary from the sale of a Security of Securities or the amount equal to
the value resulting from a disposition through exchange, restructuring or
other disposition of such Security or Securities or (ii) the Par Value of
such Security multiplied by the Lower Limit Percentage.
(Continued on Page Four)
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange
for an amendment. This procedure will facilitate prompt handling when
documents are presented.
<PAGE>
"Payment Event" shall mean (i) a default in repayment to the Beneficiary
of the principal amount on the original maturity of any Security by the Issuer
thereof, and (ii) the Beneficiary's sale or disposition through exchange,
restructuring or other disposition of any Security.
"Lower Limit Percentage" shall mean, with respect to any Security, the
percentage stated as the "Lower Limit Percentage" for any Security listed in
Exhibit A.
"Security" or "Securities" means any and all Securities listed in
Exhibit A attached hereto.
"Upper Limit Percentage" shall mean, with respect to any Security, the
percentage stated as the "Upper Limit Percentage" for any Security listed in
Exhibit A.
9. This Letter of Credit is subject to the Uniform Customs and
Practice of Documentary Credits (1993 Revision), International Chamber of
Commerce, Publication No. 500 (the "Uniform Customs"); provided, however,
that Article 41 of the Uniform Customs shall be disregarded. This Letter of
Credit shall be deemed to be a contract made under the laws of the State of
California, including without limitation, Article 5 of the Uniform Commercial
Code as in effect in the State of California, and shall, as to matters not
governed by the Uniform Customs, be governed by and construed in accordance
with the Laws of the State of California, without regard to principles of
conflicts of law.
10. This Letter of Credit sets forth in full the undertaking of the
Bank, and such undertaking shall not be deemed in any way to be modified,
amended amplified or otherwise affected by any document, instrument or
agreement referred to herein except only the Uniform Customs and the
certificate(s) provided for herein, and any such reference shall not be
deemed to incorporate herein by reference any such document, instrument or
agreement.
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
<PAGE>
Exhibit A
to
Irrevocable Letter
of Credit
No. LASB-( )
---------------
<TABLE>
LIST OF SECURITIES
<CAPTION>
<S> <C> <C> <C>
Security Par Amount Upper Limit Lower Limit
Percentage Percentage
AS PER ATTACHED.
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
<FN>
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
</FN>
<PAGE>
Schwab Money Market Fund Exhibit A
to Irrevocable Letter of Credit
No. LASB 222-63-0
</TABLE>
<TABLE>
EXHIBIT A
LIST OF SECURITIES
<CAPTION>
Upper Limit Lower Limit
Security Par Amount Percentage Percentage
<S> <C> <C> <C>
City of Irvine (Orange County, California) $47,455,000 98 65
Taxable Notes Series 1994 CUSIP#464607CE9
Final Maturity: 7/26/95
Orange County, California $41,500,000 65 40
Taxable Notes Series 1994-1995
CUSIP#684201EL6
Final Maturity: 7/10/95
Irvine Unified School District $46,375,000 90 65
1994 Taxable Notes CUSIP#463610HG3
Final Maturity: 6/13/95
Newport Mesa Unified School District $24,960,000 90 65
1994 Taxable Notes CUSIP#652113QU8
Final Maturity: 6/13/95
North Orange County Community College District $47,785,000 90 65
1994 Taxable Notes CUSIP#661334AE2
Final Maturity: 6/13/95
Orange County Board of Education $35,880,000 90 65
1994 Taxable Notes CUSIP#684215AJ5
Final Maturity: 6/13/95
Orange County Flood Control District 94-95 $46,375,000 95 65
CUSIP#684252EF2
Final Maturity: 8/1/95
City of Anaheim $55,000,000 98 65
Taxable Notes Series CUSIP#032537GN6
Final Maturity: 4/4/95 Fixed Coupon: 5%
</TABLE>
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
<PAGE>
Schwab California Tax-Exempt Money Fund
Exhibit A
to Irrevocable Letter of Credit
No. LASB 222-63-1
<TABLE>
EXHIBIT A
LIST OF SECURITIES
<CAPTION>
Upper Limit Lower Limit
Security Par Amount Percentage Percentage
<S> <C> <C> <C>
Orange County, California $39,890,000 95 65
Pooled Tax and Revenue Anticipation Notes
Series 1994-95 CUSIP#684201EJ1
Fixed Coupon: 4.5% 7/28/95
</TABLE>
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
[/FN]
<PAGE>
Schwab Tax-Exempt Money Fund
Exhibit A
to Irrevocable Letter of Credit
No. LASB 222-63-2
<TABLE>
EXHIBIT A
LIST OF SECURITIES
<CAPTION>
Upper Limit Lower Limit
Security Par Amount Percentage Percentage
<S> <C> <C> <C>
Orange County, California $74,160,000 90 65
Pooled Tax and Revenue Anticipation Notes
Series 1994-95 CUSIP#684201FJ1
Fixed Coupon: 4.5% 7/28/95
</TABLE>
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
<PAGE>
Exhibit B
to
Irrevocable Letter
of Credit
No. LASB-(_________)
FORM OF
PAYMENT DEMAND CERTIFICATE
TO: Bank of America National Trust and
Savings Institution
333 S. Beaudry Ave., Los Angeles, Ca 90017
Attention: Standby Letter of Credit Department
Re: Irrevocable Letter of Credit No. LASB-(_________)
The undersigned hereby certificates to Bank of America National Trust and
Savings Association (the "Bank"), with reference to Irrevocable Letter of
Credit No. LASB-(________) (the "Letter of Credit") issued by the Bank in
favor of (NAME OF FUND), a series of shares of beneficial interest of The
Charles Schwab Family of Funds (the "Beneficiary") and for the account of
your customer (the "Account Party"), that the undersigned is a duly
authorized officer of the Beneficiary, that any capitalized term used but
not defined herein shall have its respective meaning set forth in the Letter
of Credit and that:
1. (NAME OF FUND), a series of shares of beneficial interest of
The Charles Schwab Family of Funds is the Beneficiary under this Letter of
Credit.
2. The Beneficiary hereby makes a demand for payment under the
Letter of Credit in a Payment Amount equal to $__________.
3. The Beneficiary is demanding payment under the Letter of
Credit because a Payment Event has occurred, specifically (Check One) ____
the Issuer has defaulted in the repayment of the principal amount at the
original maturity of the Security or Securities; or ______ the Beneficiary
has sold or disposed through an exchange, restructuring, or other disposition
of the Security or Securities (Choose One) The amount received from such sale
of the Security or Securities equals $_____ [or] The value of such Security
or Securities at the time of such exchange, restructuring or disposition
equals $_______.
4. The Payment Amount hereby demanded was computed in
accordance with the terms and conditions of the Letter of Credit, but, in any
event, the Payment Amount does not include any interest due and owing on any
Security or Securities.
5. The Beneficiary hereby directs you to make payment of the
payment Amount demanded hereunder [by deposit] [by wire transfer] to [Name of
Beneficiary], ABA Number ______, Account Number _______, Attention: _______.
In Witness whereof, the Beneficiary has executed and delivered this
Certificate as of the _____ day of ____________.
(NAME OF FUND), a
series of shares of beneficial
interest of The Charles Schwab Family
of Funds
By: ----------------------
Title:
/s/ Ben Cortes /s/ Frantz Bellevue
AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE
PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform
Customs and Practice for Documentary Credits, 1993 revision, International
Chamber of Commerce Publication No. 500.
Please examine this instrument carefully. If you are unable to comply with the
terms or conditions, please communicate with the account party to arrange for
an amendment. This procedure will facilitate prompt handling when doucments
are presented.
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
Computation of Earnings per Common Equivalent Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income before extraordinary charge $135,343 $124,368 $81,228
Extraordinary charge - early retirement of debt 6,700
------------------------------------------------------------------------------------------------
Net Income $135,343 $117,668 $81,228
================================================================================================
Shares*
Weighted average number of common
shares outstanding 84,977 86,337 86,054
Common stock equivalent shares
related to option plans 2,626 2,838 1,798
------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 87,603 89,175 87,852
================================================================================================
Earnings per Common Equivalent Share*
Income before extraordinary charge $1.54 $1.39 $.92
Extraordinary charge - early retirement of debt .07
------------------------------------------------------------------------------------------------
Earnings per common equivalent share $1.54 $1.32 $.92
================================================================================================
</TABLE>
* Reflects the 1995 three-for-two common stock split.
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings before taxes on income
and extraordinary charge $224,343 $206,272 $146,228 $ 88,097 $ 29,109
--------------------------------------------------------------------------------------------------------------
Fixed charges
Interest expense 198,236 132,552 159,531 225,558 238,497
Interest portion of rental expense 17,102 15,428 13,314 10,531 8,855
--------------------------------------------------------------------------------------------------------------
Total fixed charges (a) 215,338 147,980 172,845 236,089 247,352
--------------------------------------------------------------------------------------------------------------
Earnings before taxes on income,
extraordinary charge and fixed
charges (b) $439,681 $354,252 $319,073 $324,186 $276,461
==============================================================================================================
Ratio of earnings to fixed charges
(b) divided by (a)* 2.0 2.4 1.8 1.4 1.1
==============================================================================================================
Ratio of earnings to fixed charges
as adjusted** 7.0 7.2 5.6 3.9 2.2
==============================================================================================================
* The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements. For such purposes,
"earnings" consist of earnings before taxes on income, extraordinary charge 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>
<PAGE>
EXHIBIT 13.1
The Charles Schwab Corporation
1994 Annual Report to Stockholders
(only those portions specifically incorporated by reference
into The Charles Schwab Corporation 1994 Annual Report on Form 10-K)
The Charles Schwab Corporation
Quarterly Financial Information (Unaudited)
(In Millions, Except Per Share Data and Ratios)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Weighted Earnings Dividends
Average per Declared Range Range
Expenses Common Common per of Common of Price/
Excluding Net Equivalent Equivalent Common Stock Price Earnings
Revenues (a) Interest Income Shares Share Share per Share (b) Ratio (c)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 by Quarter
Fourth $270.4 $214.4 $33.8 87.6 $.38 $.047 $24.67 - $18.42 16 - 12
Third 248.1 196.5 31.2 87.1 .36 .047 20.58 - 16.92 14 - 11
Second 258.2 205.1 32.1 87.5 .37 .047 22.58 - 16.50 16 - 12
First Dividend Increase 287.9 224.3 38.2 88.2 .43 .047 22.00 - 17.33 16 - 13
------------------------------------------------------------------------------------------------------------------------------------
1993 by Quarter
Fourth $257.5 $212.3 $28.5 89.8 $.32 $.033 $25.58 - 19.17 19 - 15
Third 238.8 191.1 22.2 (d) 89.5 .25 (d) .033 24.75 - 17.83 18 - 13
Second Dividend Increase/
Stock Split 232.4 180.4 31.6 89.0 .35 .033 19.33 - 13.61 17 - 12
First 236.3 174.9 35.4 88.5 .40 .027 16.56 - 11.06 17 - 11
------------------------------------------------------------------------------------------------------------------------------------
1992 by Quarter
Fourth $193.5 $148.2 $25.2 86.7 $.29 $.027 $12.39 - 7.39 13 - 8
Third 159.3 144.3 7.8 87.4 .09 .027 11.56 - 7.44 14 - 9
Second Dividend Increase 176.8 143.8 18.5 88.6 .21 .027 15.39 - 9.06 18 - 10
First 219.9 167.0 29.7 88.7 .33 .018 16.78 - 12.94 22 - 17
------------------------------------------------------------------------------------------------------------------------------------
1991 by Quarter
Fourth Dividend Increase/
Stock Split $167.3 $138.6 $16.1 88.4 $.18 $.018 $14.94 - 8.82 26 - 16
Third Dividend Increase 147.4 122.9 13.2 88.1 .15 .015 9.26 - 7.37 23 - 19
Second 128.9 112.3 9.5 87.7 .11 .012 7.37 - 5.26 23 - 16
First 126.1 107.7 10.6 87.5 .12 .012 6.07 - 3.37 23 - 13
------------------------------------------------------------------------------------------------------------------------------------
1990 by Quarter
Fourth Dividend Increase $ 93.9 $ 92.1 $ 1.0 87.7 $.01 $.012 $ 4.04 - 3.37 22 - 18
Third 103.9 91.3 7.2 90.2 .08 .009 4.89 - 3.15 21 - 13
Second 96.7 88.4 4.8 92.8 .05 .009 5.15 - 4.37 25 - 21
First 92.9 86.5 3.7 92.5 .04 .009 5.30 - 3.93 26 - 20
====================================================================================================================================
All share and per share data have been restated to reflect the 1995, 1993 and 1991 three-for-two common stock splits.
(a) Revenues are presented net of interest expense.
(b) Represents New York Stock Exchange high and low range of common stock price per share.
(c) Price/Earnings Ratio is computed by dividing the high and low market prices by earnings per share for the 12-month period ended
on the last day of the quarter presented. The extraordinary charge in 1993 (described below) has been excluded.
(d) Net income and earnings per share are net of the effect of a $6.7 million ($.07 per share) extraordinary charge on the early
retirement of debt.
</TABLE>
1
<PAGE>
The Charles Schwab Corporation
Selected Financial and Operating Data
(In Millions, Except Per Share Amounts and as noted)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Growth Rates (1)
---------------------
Compounded Annual
---------- ------
5-Year 1-Year
1989-1994 1993-1994 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results (for the year)
Revenues
Commissions 19% (1%) $ 546 $ 552 $441 $349 $244
Interest revenue, net of interest expense (2) 20% 37% 165 120 92 77 71
Principal transactions (3) (4%) 163 169 130 63 4
Mutual fund service fees 40% 59% 157 99 63 54 46
Other 11% 36% 34 25 24 27 22
------------------------------------------------------------------------------------------------------------------------------
Total 25% 10% 1,065 965 750 570 387
------------------------------------------------------------------------------------------------------------------------------
Expenses excluding interest
Compensation and benefits 27% 11% 437 393 307 234 155
Communications 23% 13% 107 94 76 57 42
Occupancy and equipment 21% 14% 88 77 65 51 43
Depreciation and amortization 1% 23% 55 44 40 52 49
Other 22% 3% 154 150 116 88 69
------------------------------------------------------------------------------------------------------------------------------
Total 22% 11% 841 758 604 482 358
------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income
and extraordinary charge 47% 9% 224 207 146 88 29
Taxes on income 44% 9% 89 82 65 39 12
------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 48% 9% 135 125 81 49 17
Extraordinary charge - early retirement of debt 7
------------------------------------------------------------------------------------------------------------------------------
Net income 48% 15% $ 135 $ 118 $ 81 $ 49 $ 17
==============================================================================================================================
Earnings per common equivalent share (4)
Income before extraordinary charge 50% 11% $1.54 $1.39 $.92 $.56 $.18
Extraordinary charge - early retirement of debt .07
------------------------------------------------------------------------------------------------------------------------------
Earnings per common equivalent share 50% 17% $1.54 $1.32 $.92 $.56 $.18
==============================================================================================================================
Dividends declared per common share (4) 47% 49% $.188 $.126 $.099 $.057 $.039
==============================================================================================================================
Other (at year end)
Total assets 18% 15% $7,918 $6,897 $5,905 $5,026 $4,188
Long-term and subordinated borrowings 6% (8%) 171 185 152 119 126
Stockholders' equity 22% 23% 467 379 259 200 154
Book value per common share (4) 22% 25% 5.47 4.37 3.04 2.31 1.87
==============================================================================================================================
Other (for the year)
Return on stockholders' equity (1) 32% 37% 35% 29% 10%
Revenue growth 10% 29% 32% 47% 12%
Pre-tax profit margin 21% 21% 20% 15% 8%
After-tax profit margin 13% 12% 11% 9% 4%
Effective income tax rate 40% 40% 44% 44% 42%
==============================================================================================================================
Weighted average number of common and
common equivalent shares (4) 88 89 88 88 91
==============================================================================================================================
(1) Growth rates and return on stockholders' equity are not presented in cases where deemed not
meaningful.
(2) Interest revenue is presented net of interest expense. Interest expense for 1990 through 1994 was (in
millions): $238, $225, $159, $132 and $198, respectively.
(3) On July 1, 1991, the Company acquired Mayer & Schweitzer, Inc., whose operating results have been
consolidated with those of the Company since the acquisition.
(4) All share and per share data have been restated to reflect the 1995, 1993 and 1991 three-for-two common
stock splits.
Certain prior years' revenues and expenses have been reclassified to conform to the 1994 presentation.
</TABLE>
2
<PAGE>
Management's Discussion and Analysis
of Results of Operations and Financial Condition
DESCRIPTION OF BUSINESS
The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide brokerage and
related investment services to customers with 3.0 million
active (a) accounts and assets that totaled $122.6 billion at
December 31, 1994. CSC's principal subsidiary, Charles Schwab &
Co., Inc. (Schwab), serves an estimated 42% of the discount
brokerage market as measured by commission revenues. Mayer &
Schweitzer, Inc. (M&S), a market maker in Nasdaq securities
acquired by CSC in 1991, provides trade execution services to
broker-dealers and institutional customers. During 1994, orders
handled by M&S totaled over 5 billion shares, or over 6% of the
total shares traded on Nasdaq.
With a network of 208 branch offices, Schwab is physically
represented in 46 states, the Commonwealth of Puerto Rico and the
United Kingdom. Schwab maintains four regional customer telephone
service centers that handle customer calls and orders. Schwab's
touch-tone telephone trading service, TeleBroker (registered
trademark), provides customers access to Schwab on a 24-hour
basis. These complementary customer service delivery systems -
branches, telephone centers and on-line services - allow Schwab
to achieve its customer service quality standards in a cost-
competitive manner. Collectively, these systems handled over 68
million calls and over 11 million trades during 1994.
The Company has historically used discount pricing as a tactic
in its efforts to gain market share and enhance the value of its
services. In recent years, Schwab has introduced additional price-
competitive product offerings such as its No-Annual-Fee IRA, its
Mutual Fund OneSource (trademark) service and its Schwab 500
Brokerage (trademark) service, which includes commission
discounts from Schwab's standard rates. Management expects to
continue to use this value-pricing philosophy in the marketing of
new products and services.
Environmental factors influencing the Company's performance
include fundamentally cyclical financial markets, and heavy
competition from full commission and discount brokerage firms, as
well as from mutual fund companies. Increasingly, competition has
come from institutions other than brokerage firms as banks,
insurance companies and others expand their product lines. Such
competition may negatively impact the Company's ability to
maintain historic profit margins and increase market share.
The significant growth during 1994 of asset-based revenues such
as mutual fund service fees and net interest revenue has enhanced
the consistency of the Company's revenue streams and provided an
ability to cover a greater proportion of fixed expenses. However,
transaction-based revenues continue to represent the majority of
the Company's revenues. Since these revenues are heavily
influenced by fluctuations in the volume of securities
transactions, it is not unusual for the Company to experience
significant variations in quarterly revenue levels. Most of the
Company's expenses do not vary directly, at least in the short
term, with fluctuations in securities trading volume. This
combination of primarily variable revenue streams and a primarily
nonvariable cost structure can result in increased profitability
with rapid increases in revenue and reduced profitability (or
losses) with rapid reductions in revenue. These factors, along
with the environmental factors discussed above, may subject the
Company's future earnings and common stock price to significant
volatility.
The Company's long-term performance objectives call for
profitable growth within several markets of the financial
services industry - retail brokerage, mutual funds, equity
securities market-making and support services for independent
investment managers. The Company's strategy for achieving its
objectives continues to be effective investment in technology,
product development, marketing programs and customer service
delivery systems. It is management's goal to increase the value
of the Company by achieving over the long term a 20% annual
revenue growth rate while maintaining a 10% after-tax profit
margin and a 20% return on stockholders' equity.
(CHART OMITTED)
RESULTS OF OPERATIONS
SUMMARY
The financial markets experienced significant volatility during
1994, creating a difficult environment for investors. The Federal
Reserve repeatedly increased short-term interest rates, which
contributed to the largest single year decline in bond values in
a decade. The Standard & Poor's 500 Index reached a record high
of 482 in February, a low of 439 in April and ended the year down
2%. The combined daily average share volume of the New York Stock
Exchange and Nasdaq increased 11% from 1993 to 586 million
shares.
(CHART OMITTED)
Despite these factors, trading activity at Schwab reached record
levels during 1994, with daily average retail trades, which
include Mutual Fund OneSource (trademark) trades, reaching
43,500, an increase of 23% over 1993. Revenues of $1.1 billion in
1994 represent the Company's fifth consecutive year of record
revenues, up 10% from 1993. This increase reflects gains in
mutual fund service fees and net interest revenue, partially
offset by decreases in
(a) Accounts with balances or activity within the preceding twelve months.
3
<PAGE>
commission and principal transaction
revenues. The Company's annual revenue growth was less than
management's long-term goal of 20%. In response to this slowed
revenue growth, management implemented certain cost reduction
measures that mitigated the impact of slowed revenue growth on
net income. The Company's strong performance was also reflected
in a $26.8 billion, or 28%, increase in customer assets.
Earnings in 1994 were $135 million, or $1.54 per share, up from
$118 million, or $1.32 per share, in 1993, after a $.07 per share
extraordinary charge for early debt retirement, and $81 million,
or $.92 per share, in 1992. Share information throughout this
report has been restated to reflect the three-for-two common
stock split, effected in the form of a 50% stock dividend,
declared January 17, 1995 and payable March 1, 1995 to
stockholders of record February 1, 1995. The after-tax profit
margin for 1994 was 13%, which exceeded the Company's long-term
goal of 10%. Return on stockholders' equity was 32% in 1994, well
above the Company's long-term goal of 20%. Reflecting these
strong results, the Company's Board of Directors declared a cash
dividend increase during January 1995, raising the effective
annual dividend rate 29% to $.240 per share from the $.188 per
share rate established in January 1994.
(CHART OMITTED)
During 1994, the Company continued to invest in technology,
product and service enhancements, marketing programs and new
customer service facilities. This contributed to an 11% increase
in noninterest expenses, which totaled $840 million. With
customer trading activity up 23% over 1993, the Company increased
its servicing capacity by opening 10 branch offices, including
its first branch office in the Commonwealth of Puerto Rico, and
its fourth regional customer telephone service center. In
addition, Schwab commenced operation of five specialists' posts
on the Pacific Stock Exchange. These posts make markets in over
240 common stocks. The Company expects to continue to expand its
capacity to provide principal execution services to customers.
(CHART OMITTED)
REVENUES
Commissions
Commission revenues were $546 million in 1994, compared to
$552 million in 1993 and $441 million in 1992. Commission
revenues are affected by the number of customer accounts that
traded, the average number of transactions per account that
traded and the average commission per transaction. Schwab
operates in an agency capacity when executing commission
transactions.
(CHART OMITTED)
Retail agency commission revenues constituted over 95% of total
commissions in each of the last three years. Remaining
commissions represent business done with institutional customers.
Commissions earned on retail agency trades totaled $523 million
in 1994, compared to $531 million in 1993 and $427 million in
1992. The daily average retail agency trade level for such
commissions was 28,900 in 1994, 27,700 in 1993 and 22,000 in
1992. The following table shows a comparison of certain factors
that influence retail agency commission revenues:
<TABLE>
<CAPTION>
----------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Number of customer accounts
that traded during the year
(in thousands) 1,352 1,227 1,046
Average number of retail agency
transactions per account
that traded 5.4 5.7 5.4
Total number of retail agency
transactions (in thousands) 7,282 7,003 5,599
Average commission per retail
agency transaction $71.88 $75.89 $76.30
Total retail agency commission
revenues (in millions) $523 $531 $427
----------------------------------------------------------------
</TABLE>
Note: The above table excludes customer transactions in Schwab's
Mutual Fund OneSource (trademark) service.
From 1992 to 1994, the total number of retail agency
transactions executed by Schwab has increased as Schwab's
customer base has grown. From 1993 to 1994, average commission
per retail agency transaction decreased $4.01 as the proportion
of trades in lower commission per transaction products, such as
mutual funds, has increased. This was primarily the result of
Schwab's success in attracting customer mutual fund business.
Strong price competition, particularly with respect to customer
equity securities transactions, which yield a higher average
commission per trade also contributed to the decrease. The effect
of the increase in the total number of retail agency transactions
on retail agency commission revenues for 1994 was offset entirely
by the decrease in average commission per retail agency
transaction.
From 1992 to 1993, average commission per retail agency
transaction decreased $.41 primarily due to a higher proportion
of mutual fund transactions, and a higher proportion of trades
placed through TeleBroker (registered trademark), which provides
users a 10% commission discount. The effect of the increase in
the total number of retail agency transactions on retail agency
commission revenues for 1993 was offset partially by the decrease
in average commission per retail agency transaction.
4
<PAGE>
Attracting new customer accounts is important in generating
commission revenues. Schwab opened 736,000 new customer accounts
during 1994, up 4% and 31%, respectively, over account openings
of 706,000 in 1993 and 562,000 in 1992.
Interest Revenue, Net of Interest Expense
The Company presents interest revenue net of interest expense in
its financial statements. This presentation eliminates the impact
of market interest rate fluctuations on total revenues, thereby
providing a clearer view of the Company's performance in the
areas of attracting and investing customer cash balances and
managing its balance sheet.
In performing its role as clearing broker for its customers'
trading activity, Schwab holds cash balances payable to
customers. In most cases, Schwab pays its customers interest on
such cash balances awaiting investment, and may invest these
funds and earn interest revenue. Schwab also may lend these funds
to customers on a secured basis to purchase qualified securities
- a practice commonly known as "margin lending." Pursuant to
Securities and Exchange Commission (SEC) regulations, customer
cash balances that are not used for margin lending are segregated
into investment accounts that are maintained for the exclusive
benefit of customers.
When investing segregated customer cash balances, the Company
must adhere to SEC regulations that restrict investments to 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 resale agreements collateralized by qualified
securities. The Company's policies for credit quality and maximum
maturity requirements are more restrictive than these SEC
regulations. Investment information for the last three years is
as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------
<S> <C> <C> <C>
Investment composition
(in billions at year end)
Resale agreements $3.8 $3.3 $3.0
Certificates of deposit .2 .2 .2
U.S. Treasuries .1 .3
Average maturity of investments
(in days)
During the year 54 71 78
At year end 37 69 53
-----------------------------------------------------------
</TABLE>
Interest revenue net of interest expense reached a record $165
million in 1994, compared to $120 million in 1993 and $92 million
in 1992 as shown in the following table (in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C>
Interest Revenue
Investments, customer-related $168 $113 $140
Margin loans to customers 185 132 104
Other 10 7 7
----------------------------------------------------------
Total 363 252 251
----------------------------------------------------------
Interest Expense
Customer cash balances 178 115 141
Long-term and subordinated
borrowings 12 12 13
Other 8 5 5
----------------------------------------------------------
Total 198 132 159
----------------------------------------------------------
Interest Revenue, Net of
Interest Expense $165 $120 $ 92
==========================================================
</TABLE>
The Company's interest-earning assets (principally investments
and margin loans to customers) are financed primarily by interest-
bearing customer cash balances. Other funding sources include
noninterest-bearing customer cash balances, proceeds from stock
lending activities, long-term borrowings and stockholders'
equity. Average balances and interest rates on customer-related,
interest-earning assets and related funding sources are
summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Earning Assets (customer-related):
Investments:
Average balance outstanding $3,957 $3,469 $3,460
Average interest rate 4.26% 3.25% 4.05%
Margin loans to customers:
Average balance outstanding $2,742 $2,212 $1,619
Average interest rate 6.74% 5.99% 6.45%
Average yield on earning assets 5.28% 4.32% 4.82%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $5,472 $4,693 $4,313
Average interest rate 3.25% 2.44% 3.27%
Other interest-bearing sources:
Average balance outstanding $ 353 $ 275 $ 206
Average interest rate 2.94% 3.30% 4.93%
Average noninterest-bearing portion $ 874 $ 713 $ 560
Average interest rate on funding sources 2.81% 2.18% 2.97%
Summary:
Average yield on earning assets 5.28% 4.32% 4.82%
Average interest rate on funding sources 2.81% 2.18% 2.97%
----------------------------------------------------------------------------
Average net interest margin 2.47% 2.14% 1.85%
============================================================================
</TABLE>
Interest revenue from customer-related investments increased $55
million from 1993 to 1994 due to a 101 basis point increase in
the average interest rate earned on such investments. This
increase was slightly greater than the 100
5
<PAGE>
basis point increase
in the Donoghue Taxable Money Fund Average (the Donoghue Average)
during 1994. Interest revenue from customer-related investments
decreased $27 million from 1992 to 1993 as a result of an 80
basis point decline in the average interest rate earned on such
investments. This decline was greater than the 67 basis point
decline in the Donoghue Average during 1993.
Interest earned on margin loans to customers increased $53
million from 1993 to 1994 as average margin loan balances
increased 24% and the average interest rate earned on such
balances increased 75 basis points. Despite a 46 basis point
decline in the average interest rate earned on margin loans to
customers, interest earned on such balances increased $28 million
from 1992 to 1993 as average margin loan balances increased 37%.
The growth in margin loan balances from 1992 to 1994 is
attributable to a more active trading environment and an increase
in the number of customer margin accounts.
During 1994, interest expense on customer cash balances
increased $63 million due to an 81 basis point increase in the
average interest rate paid on these balances and a 17% increase
in the average balance outstanding. Interest expense on customer
cash balances decreased $26 million during 1993 as a result of an
83 basis point decline in the average interest rate paid on such
balances, partially offset by a 9% increase in the average
balance outstanding.
Principal Transactions
Principal transactions include net gains from market-making
activities in Nasdaq securities and markups on customer fixed
income security trades. Factors that influence principal
transactions include the volume of customer trades and market
price volatility. During 1994, a record 74 billion shares traded
on Nasdaq and the Nasdaq Composite Index decreased 3%.
Revenues from principal transactions were $163 million in 1994,
compared to $169 million in 1993 and $130 million in 1992. The
4% decrease from 1993 to 1994 was due to a lower average revenue
per principal transaction from market-making activities in 1994.
A portion of this decrease is attributable to the impact of the
July 1994 National Association of Securities Dealers (NASD)
Interpretation to its Rules of Fair Practice governing the
execution of limit orders accepted from certain types of
customers. M&S has extended the benefits of the Interpretation to
substantially all retail customer limit orders in Nasdaq
securities received from broker-dealers for which it executes
such orders. The 30% increase from 1992 to 1993 was primarily due
to an increase in trading volume handled by M&S.
As a market maker in Nasdaq securities, M&S generally executes
customer trades as principal. M&S business practices call for
competitively priced customer executions, generally defined as
the highest bid price on a sell order and the lowest offer price
on a buy order available through NASD member firms. Customer
trades exceeding certain sizes are executed on a negotiated
basis. Substantially all Nasdaq security trades originated by the
customers of Schwab are directed to M&S.
Mutual Fund Service Fees
The Company earns mutual fund service fees for providing
services, such as reporting of share ownership and dividend
activity, administration and investment management, to its
proprietary and certain third-party mutual funds. These fees are
based upon daily balances of customer assets invested in the
funds. Revenues received from customer purchase and sale
transactions of mutual funds are included in commission revenues.
The Company currently does not charge commissions on purchases
and sales of its proprietary funds.
Mutual fund service fees were $157 million in 1994, compared to
$99 million in 1993 and $63 million in 1992. The increases from
1992 to 1994 were primarily attributable to significant increases
in customer assets in Schwab's proprietary funds, collectively
referred to as the SchwabFunds (registered trademark), and
customer assets in funds purchased through Schwab's Mutual Fund
OneSource (trademark) service.
The SchwabFunds include money market funds, bond funds and
equity index funds. Schwab customers may elect to have cash
balances in their brokerage accounts automatically invested in
certain SchwabFunds money market funds. This feature provides a
significant competitive advantage to SchwabFunds money market
funds as uninvested customer cash is swept into these funds on a
regular basis. Customer assets invested in the SchwabFunds, the
majority of which are in SchwabFunds money market funds, were
$23.3 billion at the end of 1994, $15.8 billion at the end of
1993 and $11.4 billion at the end of 1992.
During July 1992, Schwab introduced nationally its no-
transaction-fee mutual fund service, known as the Mutual Fund
OneSource service, which at December 31, 1994, enabled customers
to trade 280 mutual funds in 28 well-known fund families without
incurring transaction fees. The service is particularly
attractive to investors who execute mutual fund trades directly
with multiple mutual fund companies to avoid brokerage
transaction fees and achieve investment diversity among fund
families. Fees received by Schwab via the Mutual Fund OneSource
program are based on daily balances of customer assets invested
in the participating funds through Schwab and are paid by the
funds and/or fund sponsors. Customer assets held by Schwab that
have been purchased through the Mutual Fund OneSource service,
excluding Schwab's proprietary funds, totaled $12.5 billion at
December 31, 1994, $8.3 billion at December 31, 1993 and $1.8
billion at December 31, 1992.
Other Revenues
Other revenues include IRA maintenance fees, other brokerage
fees, sales and usage fees and revenues relating to Schwab's
affinity credit card arrangement. These revenues totaled $34
million during 1994, compared to $25 million in 1993 and $23
million in 1992. The 36% increase from
6
<PAGE>
1993 to 1994 represented
higher IRA maintenance fees and increased sales of StreetSmart
(trademark) and Equalizer (registered trademark), Schwab's on-
line trading software products, partially offset by a decrease in
revenues from Schwab's affinity credit card arrangement. During
1993, Schwab terminated its affinity credit card arrangement with
a bank service provider and entered into a new affinity credit
card arrangement with another provider. Schwab received a payment
in connection with the termination of the arrangement in 1993,
which represented substantially all of the increase in other
revenues from 1992 to 1993.
During 1992, the Company introduced its No-Annual-Fee IRA,
which is available to existing and prospective customers with IRA
balances of $10,000 or more. The Company had previously charged
an annual account fee on virtually all IRAs. Management believes
that, over the long term, increases in commissions, principal
transactions and mutual fund service fees generated by new
customer accounts and assets attracted by the IRA program will
eventually exceed the related foregone annual-fee revenue. IRA
openings increased 6% in 1994 and 43% in 1993 over the respective
preceding year's level.
(CHART OMITTED)
EXPENSES
Compensation and Benefits
Compensation and benefits expense includes salaries and wages,
variable compensation, and related employee benefits and taxes.
The Company provides its employees with compensation programs
that contain variable pay components that are tied to the
achievement of the Company's financial objectives and growth in
customer assets and, therefore, a portion of compensation and
benefits expense will fluctuate with these measures.
Compensation and benefits expense was $437 million for 1994,
compared to $393 million in 1993 and $307 million in 1992. The
Company had approximately 6,500 employees and contractors at the
end of both 1994 and 1993, and 4,600 at the end of 1992. These
amounts include full-time employees and full-time equivalents for
part-time and temporary employees, as well as persons employed on
a contract basis. Increases in compensation and benefits expense
between 1992 and 1994 were generally the result of increases in
salaries and wages due to the larger average number of employees
necessary to support expansion of the Company's branch office
network, regional customer telephone service centers, technology
and marketing programs, and the development of new products and
services. In 1994, the increase in salaries and wages was offset
partially by a decline in variable compensation. In 1993, an
increase in variable compensation also contributed to the overall
increase in compensation and benefits.
The Company encourages and provides mechanisms for employee
ownership of the Company's common stock through its profit
sharing and employee stock ownership plan, its stock option plans
and an automatic investment plan. The Company's overall
compensation structure is intended to attract, retain and reward
highly qualified employees and to align the interests of
employees with those of stockholders. Management, employees and
their families own directly and through the Company's profit
sharing and employee stock ownership plan approximately 45% of
the Company's outstanding common stock at December 31, 1994. In
addition, management and employees held options to purchase
common stock, which are not considered outstanding for ownership
purposes, representing an additional 10% of the Company's
outstanding common stock at December 31, 1994.
(CHART OMITTED)
Communications
Communications expense, including telephone, postage, and news
and quotation charges, was $107 million for 1994, $94 million in
1993 and $76 million in 1992. The increase in communications
expense between 1992 and 1994 primarily resulted from higher
customer transaction volumes. Increases in customer use of toll-
free telephone numbers, reflecting a higher proportion of
incoming calls handled by TeleBroker (registered trademark) and
regional customer telephone service centers, also contributed to
higher telephone expenses over this period.
Occupancy and Equipment
Occupancy and equipment expense includes the costs of leasing
and maintaining the Company's headquarters, four regional
customer telephone service centers, a primary data center and 208
branch offices. It also includes lease and rental expenses on
computer and other equipment. Occupancy and equipment expense was
$88 million for 1994, compared to $77 million in 1993 and $65
million in 1992. This trend reflects the Company's continued
growth and expansion. The Company opened a regional customer
telephone service center in each of 1994 and 1992 while, in 1993,
it opened its new primary data center in Phoenix. Schwab opened
10 new branch offices in 1994, 23 in 1993 and 17 in 1992.
Depreciation and Amortization
Depreciation and amortization expense includes that relating to
equipment and office facilities, property, leasehold
improvements and customer lists. Such expenses were $55 million
for 1994, compared to $44 million in 1993 and $40 million in
1992. The increases from 1992 to 1994 were primarily due to newly
acquired data processing related assets and leasehold
improvements which increased the Company's customer service
capacity and fixed asset base from the respective preceding
year's level.
Commissions, Clearance and Floor Brokerage
Commissions, clearance and floor brokerage expense includes fees
paid to stock and option exchanges for trade
7
<PAGE>
executions, fees
paid by M&S to broker-dealers for orders received for execution
and fees paid to clearing entities for trade processing.
Commissions, clearance and floor brokerage expense was $49
million in 1994, $43 million in 1993 and $32 million in 1992. The
increases from 1992 to 1994 were primarily attributable to
increases in the number of trades processed by Schwab and M&S and
increases in the average per share paid for orders received.
Advertising and Market Development
Advertising builds the image and awareness of the firm and plays
a crucial role in obtaining new customer accounts, which have
represented an important source of revenue and revenue growth for
the Company. Advertising and market development expense includes
television, print and direct mail advertising expenses and
related production, printing and postage costs. Such expenses
totaled $36 million in 1994, $41 million in 1993 and $34 million
in 1992. The 11% decrease from 1993 to 1994 was primarily a
result of the Company's reduced spending on network and cable
television advertising and printed marketing materials. The 20%
increase from 1992 to 1993 was a result of increases in the
Company's promotional spending for its brand image and costs
relating to new product offerings such as Schwab's No-Annual-Fee
IRA and Mutual Fund OneSource (trademark) service.
Professional Services
Professional services expense was $22 million in 1994, $22
million in 1993 and $14 million in 1992. This category includes
the cost of consultants engaged to support product, service and
systems development, and legal and accounting fees. The 55%
increase in professional services expense from 1992 to 1993 was
primarily due to increases in consulting fees relating to various
company development projects - including those involving data
processing, business processes and marketing research.
Other Expenses
Other expenses were $47 million for 1994, $44 million in 1993
and $35 million in 1992. Other expenses include travel and
entertainment, errors and bad debts, bank service charges
(primarily relating to costs of processing checks written by
customers), registration fees for employees and other
miscellaneous expenses. The increase in these expenses from 1992
to 1993 was primarily attributable to a combination of higher
staffing levels required to support the Company's growth and to
higher transaction volumes.
Taxes on Income
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 - Accounting for Income
Taxes. The adoption of this accounting standard did not have a
material impact on the Company's financial position or results of
operations.
The Company's effective income tax rate was 39.7% in both 1994
and 1993, and 44.5% in 1992. The decline in the effective income
tax rate during 1993 was primarily due to changes in the
anticipated tax effects of the amortization of certain intangible
assets (see discussion below).
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). A trial is scheduled for
August 1995. The asserted additional tax of $19 million (after
initial settlement stipulations), excluding interest, arises from
the IRS' audit of the tax periods ended March 31, 1988 and
December 31, 1988. The majority of the asserted additional tax
relates to the deductions claimed by the Company for amortization
of intangible assets received in the Company's 1987 acquisition
of Schwab. The resolution of the contested issues may also affect
the Company's taxable years ended December 31, 1989 through 1994.
Of the $19 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 or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
CSC is operated as a holding company, conducting virtually all
business through its wholly owned subsidiaries. The capital
structure among CSC and its subsidiaries is designed to provide
each entity with capital and liquidity consistent with its
operating plan. A description of significant aspects of this
structure for CSC and its two principal subsidiaries, Schwab and
M&S, follows.
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 (the majority of which are segregated for the
exclusive benefit of customers pursuant to regulatory
requirements) and receivables from customers and brokers.
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 business days.
Liquidity needs relating to customer trading and margin
8
<PAGE>
borrowing activities are met primarily through cash balances in
customer accounts, which totaled $6.7 billion in 1994, $5.7
billion in 1993 and $5.1 billion in 1992. 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 1996, of which $99 million was outstanding
at December 31, 1994. At year end, Schwab also had outstanding
$25 million in fixed-rate subordinated term loans from CSC
maturing in 1996. In January 1995, the maturity date for $15
million of the $25 million debt scheduled to mature in 1996 was
extended to 1997. Borrowings under these subordinated lending
arrangements qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintains
uncommitted bank credit lines totaling $480 million, of which
$400 million is available on an unsecured basis. The need for
short-term borrowings arises primarily from timing differences
between cash flow requirements and the scheduled liquidation of
interest-bearing investments, or, if applicable, the release of
funds from required regulatory reserves. Schwab used such
borrowings for 29 days in 1994, 25 days in 1993 and 42 days in
1992, with the daily amounts borrowed averaging $43 million, $19
million and $24 million, respectively. These lines were unused at
December 31, 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 receivables from brokers, dealers and
clearing organizations, cash and equivalents 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 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 and
liquidity of broker-dealers. These regulations would prohibit
Schwab and M&S from repaying subordinated borrowings to CSC,
paying cash dividends, or making unsecured advances or loans to
their parent or employees if such payment would result in net
capital of less than 5% of aggregate debit balances or less than
120% of their minimum dollar amount requirement of $1 million. At
December 31, 1994, Schwab had $315 million of net capital (10% of
aggregate debit balances), which was $254 million in excess of
its minimum required net capital. At December 31, 1994, M&S had
$5 million of net capital (206% of aggregate debit balances),
which was $4 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.
CSC has individual liquidity needs that arise from its $170
million Senior Medium-Term Notes, Series A (Medium-Term Notes).
In 1993, CSC used proceeds from certain of the Medium-Term Notes
to prepay its 10% Senior and 9% Junior Subordinated Debentures
totaling $116 million and to pay a related prepayment premium of
approximately $11 million. The 10% Senior and 9% Junior
Subordinated Debentures had been due in 1998 and 2002,
respectively. The remaining proceeds were used for general
corporate purposes. The Medium-Term Notes have maturities ranging
from two to nine years and fixed interest rates ranging from
4.95% to 7.72% with interest payable semiannually.
In April 1994, a prospectus supplement covering the issuance of
up to $100 million in Senior or Senior Subordinated Medium-Term
Notes, Series A, pursuant to a registration statement, was filed
with the SEC. Currently, $80 million in securities remain
unissued under the registration statement.
In October 1994, CSC prepaid its $35 million Senior Term Loan
due in March 1995 using working capital funds. When the loan was
prepaid, a related interest rate exchange arrangement was
terminated.
CSC may borrow under its $225 million committed unsecured credit
facility with a group of eleven banks through June 1995. The
funds are available for general corporate purposes and CSC pays a
commitment fee on the unused balance. The terms of this 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 facility has never been used.
In December 1994, a $100 million letter of credit facility was
established by CSC with a commercial bank to issue letters of
credit (LOCs) to three of the SchwabFunds (registered trademark)
money market funds in connection with the bankruptcies of Orange
County, California and the Orange County investment pool. CSC has
agreed to reimburse the bank for any payments made under the
LOCs, and to leave unutilized as much as $100 million of its $225
million credit facility. The LOC facility was voluntarily
established by CSC as a precautionary measure to provide
independent support for the valuation of certain securities held
by the funds. These securities were issued by municipalities that
participated in the investment pool maintained by Orange County
and, in one case, represent a direct obligation of Orange County.
Although the issuers, other than Orange County, have not filed
for bankruptcy, their ability to repay obligations in a timely
manner may be affected by shortfalls, if any, of
9
<PAGE>
amounts scheduled to be received from investments in the Orange County
investment pool.
At December 31, 1994, LOCs totaling $58.5 million were
outstanding under this facility. The funds may make demands for
payments under the LOCs if the issuers of certain municipal
securities held by the funds fail to pay a specified percentage
of the principal amount of the securities when due or if the
proceeds received by the funds in the disposition of any such
securities are less than a specified percentage of the principal
amount of the securities. The funds will absorb losses of
principal amounts of the securities, if any, at disposition or
maturity for each security up to a specified percentage. The LOCs
expire and the securities mature on or before August 1, 1995 and
pertain to securities held by each of the three money market
funds at December 31, 1994 as follows: for the first fund, $340.0
million aggregate principal amount, representing 3.01% of the
fund's net assets, is covered in part by a $28.0 million LOC; for
the second fund, $74.2 million aggregate principal amount,
representing 2.44% of the fund's net assets, is covered in part
by an $18.5 million LOC; for the third fund, $39.9 million
aggregate principal amount, representing 3.06% of the fund's net
assets, is covered in part by a $12.0 million LOC. To date, the
LOCs have not been needed to maintain the funds' $1 per share net
asset values.
At December 31, 1994, had the funds disposed of all the
specified securities at values provided by the funds' pricing
service, the funds would have had the right to make demands for
payments on the bank totaling approximately $9 million. These
values may not be representative of market values in effect at
December 31, 1994. Whether, or to what extent, the funds would
make any demands for payments under the LOCs is dependent upon
factors such as the issuers' cash flows, the issuers' capacity
for the normal financing of their operations and the timely
resolution of the obligations of Orange County and the Orange
County investment pool. Accordingly, management is currently
unable to determine whether, or to what extent, the funds would
make any demands for payment under the LOCs.
(CHART OMITTED)
Cash Flows
Net cash provided by operating activities was $206 million
during 1994, up from $132 million in 1993, allowing the Company
to finance the majority of its growth with internally generated
funds. During 1994, the Company invested $32 million in various
capital expenditures including a fourth regional customer
telephone service center and enhancements to its data processing
and telecommunications systems. The Company also opened 10 branch
offices and made improvements to certain existing office
facilities.
In addition, during 1994, the Company:
- Issued $20 million in Medium-Term Notes.
- Prepaid its $35 million Senior Term Loan due in March 1995.
- Repurchased 2,499,600 shares of its common stock for $47
million. As of December 31, 1994, authorization granted by the
Company's Board of Directors allowed for the repurchase of up
to 912,900 additional shares. The Company will continue to
monitor opportunities to repurchase common stock in cases
where stockholder value would be enhanced.
- Paid common stock dividends of $16 million.
Capital Adequacy
The Company's stockholders' equity at December 31, 1994 totaled
$467 million. In addition to its equity, the Company had long-
term borrowings of $171 million that bear interest at a weighted
average rate of 6.04%. These borrowings, together with the
Company's equity, provided total financial capital of $638
million at December 31, 1994.
(CHART OMITTED)
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
December 31, 1994, such ratio was 17 to 1 compared to 18 to 1 at
December 31, 1993. Over 96% 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
stockholders' equity could support up to $4.9 billion of
additional assets relating to customer activity.
LOOKING AHEAD
The general financial success within the securities industry
over the past several years has strengthened existing competitors
and attracted new competitors such as banks and insurance
companies. Management expects intense competition to continue in
1995. The Company will respond to such competition by continuing
to invest heavily in technology, customer service facilities and
product development. To help ensure effective use of resources,
the Company will continue to focus on improving its internal
business processes with the goal of enhancing customer service
quality and the Company's cost structure.
The Company will continue to leverage cross-marketing
opportunities within its existing customer base and develop new
products and services consistent with evolving customer needs and
its competitive-pricing philosophy. The Company will continue to
support its products and services with aggressive marketing and
promotional efforts. In
10
<PAGE>
1994's challenging environment, the
Company added over $26 billion in customer assets and plans to do
as well in 1995. The Company intends to enhance customer service
capacity by adding 20 to 25 branch offices and by adding
additional staff and equipment to existing regional customer
telephone service centers.
While these activities require significant operating expense
outlays and, during certain years, significant capital
expenditures, they are important investments for the Company's
long-term profitable growth. Management's financial goals are to
achieve over the long term a 20% annual revenue growth rate while
maintaining a 10% after-tax profit margin and a return on
stockholders' equity of 20%.
11
<PAGE>
The Charles Schwab Corporation
Consolidated Statement of Income
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Commissions $ 546,112 $552,206 $ 441,429
Interest revenue, net of interest
expense of $198,236 in 1994, $132,382
in 1993 and $159,491 in 1992 164,708 119,849 91,540
Principal transactions 162,595 169,081 130,013
Mutual fund service fees 156,812 98,554 63,391
Other 34,370 25,323 23,139
--------------------------------------------------------------------------------------------------------
Total 1,064,597 965,013 749,512
--------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 437,064 392,768 306,615
Communications 106,682 94,348 75,854
Occupancy and equipment 87,641 76,668 65,241
Depreciation and amortization 54,556 44,433 40,490
Commissions, clearance and floor brokerage 49,344 43,039 32,116
Advertising and market development 36,401 40,726 33,810
Professional services 21,928 22,385 14,448
Other 46,638 44,374 34,710
--------------------------------------------------------------------------------------------------------
Total 840,254 758,741 603,284
--------------------------------------------------------------------------------------------------------
Income before taxes on income and extraordinary charge 224,343 206,272 146,228
Taxes on income 89,000 81,904 65,000
--------------------------------------------------------------------------------------------------------
Income before extraordinary charge 135,343 124,368 81,228
Extraordinary charge - early retirement of debt 6,700
--------------------------------------------------------------------------------------------------------
Net Income $ 135,343 $117,668 $ 81,228
========================================================================================================
Weighted average number of common and
common equivalent shares outstanding* 87,603 89,175 87,852
========================================================================================================
Earnings per Common Equivalent Share*
Income before extraordinary charge $ 1.54 $ 1.39 $ .92
Extraordinary charge - early retirement of debt .07
--------------------------------------------------------------------------------------------------------
Earnings per Common Equivalent Share $ 1.54 $ 1.32 $ .92
========================================================================================================
Dividends Declared per Common Share* $ .188 $ .126 $ .099
========================================================================================================
</TABLE>
* Reflects the 1995 three-for-two common stock split.
See Notes to Consolidated Financial Statements.
(Chart Omitted) (Chart Omitted)
12
<PAGE>
The Charles Schwab Corporation
Consolidated Balance Sheet
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
December 31, 1994 1993
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents (including resale agreements of $242,500
in 1994 and $120,000 in 1993) $ 380,616 $ 279,828
Cash and investments required to be segregated under Federal
or other regulations (including resale agreements of $3,787,984
in 1994 and $3,267,440 in 1993) 4,206,466 3,676,319
Receivable from brokers, dealers and clearing organizations 86,028 71,616
Receivable from customers (less allowance for doubtful
accounts of $3,204 in 1994 and $2,229 in 1993) 2,923,867 2,553,255
Equipment, office facilities and property (less accumulated
depreciation and amortization of $162,474 in 1994 and $143,339 in 1993) 129,105 136,440
Customer lists (less accumulated amortization of $140,860 in 1994
and $130,434 in 1993) 26,813 37,114
Other assets 164,967 141,945
-------------------------------------------------------------------------------------------------------------------
Total $7,917,862 $6,896,517
===================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 117,383 $ 123,384
Payable to brokers, dealers and clearing organizations 296,420 303,981
Payable to customers 6,670,362 5,745,783
Accrued expenses 195,320 158,866
Long-term borrowings 171,363 185,330
-------------------------------------------------------------------------------------------------------------------
Total liabilities 7,450,848 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; 89,230,020 shares in 1994 and 1993* 595 595
Additional paid-in capital 166,103 161,052
Retained earnings 373,161 253,692
Treasury stock--3,781,995 shares in 1994 and 2,474,217
shares in 1993, at cost* (57,968) (23,153)
Note receivable from Profit Sharing Plan (13,013)
Unearned ESOP shares (10,174)
Unamortized restricted stock compensation (4,703)
-------------------------------------------------------------------------------------------------------------------
Stockholders' equity 467,014 379,173
-------------------------------------------------------------------------------------------------------------------
Total $7,917,862 $6,896,517
===================================================================================================================
</TABLE>
* Reflects the 1995 three-for-two common stock split.
See Notes to Consolidated Financial Statements.
(Chart Omitted)
13
<PAGE>
The Charles Schwab Corporation
Consolidated Statement of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 135,343 $ 117,668 $ 81,228
Noncash items included in net income:
Depreciation and amortization 54,556 44,433 40,490
Deferred income taxes 3,781 (5,352) (7,141)
Other 3,699 (1,074) 1,370
Extraordinary charge - early retirement of debt 11,205
Change in accrued expenses 40,908 43,653 20,616
Change in other assets (27,215) (37,625) (11,163)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 211,072 172,908 125,400
-----------------------------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Payable to customers 924,579 670,276 693,737
Receivable from customers (371,587) (648,548) (601,352)
Drafts payable (6,001) 21,052 23,891
Payable to brokers, dealers and clearing organizations (7,561) 105,483 73,389
Receivable from brokers, dealers and clearing organizations (14,412) (23,250) (757)
Cash and investments required to be segregated under
Federal or other regulations (530,147) (166,170) (193,574)
-----------------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (5,129) (41,157) (4,666)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 205,943 131,751 120,734
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (31,534) (77,127) (53,538)
Purchase of life insurance policies (41,684)
Other (606) 6,241 3,925
-----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (73,824) (70,886) (49,613)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from loans on life insurance policies 41,299
Repayment of short-term borrowings (20,000)
Proceeds from long-term borrowings 20,000 150,000 35,000
Repayment of long-term and subordinated borrowings (35,916) (128,032) (2,676)
Purchase of treasury stock (46,781) (23,227)
Dividends paid (16,038) (10,946) (8,411)
Other 6,105 3,651 2,007
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (31,331) 14,673 (17,307)
-----------------------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 100,788 75,538 53,814
Cash and equivalents at beginning of year 279,828 204,290 150,476
-----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 380,616 $ 279,828 $ 204,290
=============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
The Charles Schwab Corporation
Consolidated Statement of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Note
Receivable Unamortized
Common Stock Additional From Profit Unearned Restricted
------------ Paid-In Retained Treasury Sharing ESOP Stock
Shares* Amount Capital Earnings Stock Plan Shares Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 86,646 $392 $141,881 $ 72,938 $ (7,225) $ (8,179) $199,807
Net income 81,228 81,228
Dividends declared on
common stock (8,411) (8,411)
Purchase of treasury stock (2,490) (23,227) (23,227)
Stock options exercised 857 1,413 4,008 5,421
Collection on note receivable
from Profit Sharing Plan 3,925 3,925
Other 65 65
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 85,013 392 141,946 147,168 (26,444) (4,254) 258,808
------------------------------------------------------------------------------------------------------------------------------------
Net income 117,668 117,668
Dividends declared on
common stock (10,946) (10,946)
Stock options exercised
and restricted stock
compensation awards 654 4,005 3,291 7,296
Three-for-two stock split
effected in the form of
a 50% stock dividend 198 (198)
Common stock issued to Profit
Sharing Plan for a note
receivable 1,089 5 14,995 (15,000)
Collection on note receivable
from Profit Sharing Plan 6,241 6,241
Other 106 106
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 86,756 595 161,052 253,692 (23,153) (13,013) 379,173
------------------------------------------------------------------------------------------------------------------------------------
Net income 135,343 135,343
Dividends declared on
common stock (16,038) (16,038)
Purchase of treasury stock (2,500) (46,781) (46,781)
Stock options exercised
and restricted stock
compensation awards 1,192 4,293 11,966 $(4,892) 11,367
Amortization of restricted
stock compensation awards 189 189
Collection on note receivable
from Profit Sharing Plan 1,467 1,467
Reclassification of note
receivable from Profit
Sharing Plan 11,546 $(11,546)
ESOP shares released for
allocation 758 164 1,372 2,294
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 85,448 $595 $166,103 $373,161 $(57,968) $(10,174) $(4,703) $467,014
====================================================================================================================================
* Share amounts are presented net of treasury shares and have been restated to reflect the 1995 three-for-two common stock split.
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
The Charles Schwab Corporation
Notes to Consolidated Financial Statements
Basis of Presentation
The consolidated financial statements include The Charles Schwab
Corporation (CSC) and its subsidiaries (collectively the
Company), including Charles Schwab & Co., Inc. (Schwab), a
securities broker-dealer, Mayer & Schweitzer, Inc. (M&S), a
market maker in Nasdaq securities, and other subsidiaries.
Revenues are presented net of interest expense. Prior years'
financial statements have been reclassified to conform to the
1994 presentation. All material intercompany balances and
transactions have been eliminated.
Significant Accounting Policies
Securities transactions recorded by Schwab and the related
revenues and expenses are recorded on settlement date, which is
generally five business days after trade date. Revenues and
expenses on a settlement date basis for Schwab are not materially
different from trade date. M&S records principal transactions and
the related revenues and expenses on a trade date basis.
Cash and investments required to be segregated under Federal or
other regulations consist primarily of securities purchased under
agreements to resell (Resale Agreements), U.S. Treasury
securities, certificates of deposit and commercial paper. Resale
Agreements are accounted for as collateralized financing
transactions and are recorded at the amount for which the
securities will be resold. U.S. Treasury securities are stated at
market. Certificates of deposit and commercial paper are stated
at cost, which approximates market.
Depreciation and amortization - Equipment and office facilities
are depreciated on a straight-line basis over their estimated
useful lives, generally three to seven years. Property is
depreciated on a straight-line basis over twenty years. Leasehold
improvements are amortized over the lesser of their useful life
or the life of the lease. Customer lists and other intangibles
are amortized on a straight-line basis over periods from three to
fifteen years.
Earnings per common equivalent share are calculated by dividing
net income by the sum of the weighted average number of common
shares outstanding during the period plus common share
equivalents. Common share equivalents result from the dilutive
effect of stock options. Information presented in the
Consolidated Financial Statements and notes thereto regarding
share and per share amounts, stock option data and market prices
give effect to the 1995 three-for-two common stock split,
effected in the form of a 50% stock dividend.
Cash equivalents - For purposes of reporting cash flows, the
Company considers all highly liquid investments (including Resale
Agreements) with original maturities of three months or less that
are not required to be segregated under Federal or other
regulations to be cash equivalents.
Income taxes - Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109 -
Accounting for Income Taxes - on a prospective basis. The
adoption of SFAS No. 109 changed the Company's method of
accounting for income taxes from the deferred method previously
required by Accounting Principles Board (APB) Opinion No. 11 to
an asset and liability approach, which requires the recognition
of deferred tax assets and liabilities at tax rates expected to
be in effect when these balances reverse. Future tax benefits
attributable to temporary differences are recognized currently to
the extent that realization of such benefits is more likely than
not. The adoption of this accounting standard did not have a
material impact on the Company's financial position or results of
operations.
Estimated fair value of financial instruments - The Company
considers the amounts presented for financial instruments on the
consolidated balance sheet to be reasonable estimates of fair
value except for long-term borrowings and certain off-balance
sheet financial instruments. Disclosure of the fair value of
these instruments, determined by the Company using available
market information and appropriate valuation methodologies, is
presented under the "Long-Term Borrowings" note. Considerable
judgment is necessarily required in interpreting market data to
develop the estimates of fair value and accordingly, the
estimates are not necessarily indicative of the amounts that the
Company could realize in a current market transaction.
Short-Term Funding
The principal source of financing for Schwab's margin lending is
cash balances in customer Schwab One (registered trademark)
brokerage accounts. At December 31, 1994, Schwab was paying
interest at 4.7% on $5.8 billion of cash balances in Schwab One
brokerage accounts, which were included in amounts payable to
customers. At December 31, 1993, Schwab was paying interest at
2.4% on $5.0 billion of such cash balances. For use in its
brokerage operations, Schwab maintains uncommitted bank credit
lines totaling $480 million, of which $400 million is available
on an unsecured basis at December 31, 1994. Schwab's uncommitted
bank credit lines totaled $390 million, of which $310 million was
available on an unsecured basis at December 31, 1993. There were
no borrowings outstanding
16
<PAGE>
under these lines at December 31, 1994 and 1993.
Long-Term Borrowings
Long-term borrowings at December 31, 1994 and 1993 consist of
the following (in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------
<S> <C> <C>
Senior Medium-Term Notes $170,000 $150,000
Senior Term Loan 35,000
Other (principally equipment financing) 1,363 330
---------------------------------------------------------------------
Total $171,363 $185,330
=====================================================================
</TABLE>
CSC has $170 million aggregate principal amount of Senior Medium-
Term Notes, Series A (Medium-Term Notes), with fixed interest
rates ranging from 4.95% to 7.72% and maturities as follows: 1996
- $26 million; 1997 - $28 million; 1998 - $30 million; and
thereafter - $86 million. The Medium-Term Notes carry a weighted
average interest rate of 6.04%. Proceeds from certain of the
Medium-Term Notes were used in 1993 to prepay CSC's $50 million
10% Senior Subordinated Debentures and $66 million 9% Junior
Subordinated Debentures, which were due in 1998 and 2002,
respectively, and to pay a related prepayment premium of
approximately $11 million. The remaining proceeds were used for
general corporate purposes. The fair value of the Medium-Term
Notes is estimated to be $156 million and $148 million at
December 31, 1994 and 1993, respectively, based on estimates of
market rates for debt with similar terms and remaining
maturities.
In April 1994, a prospectus supplement covering the issuance of
up to $100 million in Senior or Senior Subordinated Medium-Term
Notes, Series A, pursuant to a registration statement, was filed
with the Securities and Exchange Commission (SEC). Currently, $80
million in securities remain unissued under the registration
statement.
In October 1994, CSC prepaid its $35 million Senior Term Loan
due in March 1995 using working capital funds. When the loan was
prepaid, a related interest rate exchange arrangement was
terminated. The fair value of such arrangement was estimated to
be $1 million at December 31, 1993 based on the estimated amount
CSC would have needed to pay to terminate the arrangement.
CSC may borrow under its $225 million committed unsecured credit
facility with a group of eleven banks through June 1995. The
funds are available for general corporate purposes and CSC pays a
commitment fee on the unused balance. The terms of this 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 facility has never been used. CSC has agreed to
maintain availability under this facility to repay any
obligations arising under the $100 million letter of credit
facility. (The fair value of such obligations are estimated to be
$9 million at December 31, 1994 - see the "Commitments,
Contingent Liabilities and Other Information" note).
Taxes on Income
Income tax expense, including the tax benefit related to the
extraordinary charge, is as follows (in thousands):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Year Ended December 31,
1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $72,157 $72,362 $58,452
State 13,062 14,894 13,689
-------------------------------------------------------------------------
Total current 85,219 87,256 72,141
-------------------------------------------------------------------------
Deferred:
Federal 3,221 (4,477) (6,267)
State 560 (875) (874)
-------------------------------------------------------------------------
Total deferred 3,781 (5,352) (7,141)
-------------------------------------------------------------------------
Taxes on income before
extraordinary charge 89,000 81,904 65,000
Current tax benefit - extraordinary
charge (4,504)
-------------------------------------------------------------------------
Total taxes on income $89,000 $77,400 $65,000
=========================================================================
</TABLE>
The temporary differences which created deferred tax assets and
liabilities, included as net deferred tax assets in other assets,
are detailed below (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------------
At
December 31,
1994 1993
----------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation $ 8,086 $13,389
Reserves and allowances 8,321 5,336
Depreciation and amortization 3,386 3,602
State and local taxes 1,325 2,367
----------------------------------------------------------------
Total deferred assets 21,118 24,694
----------------------------------------------------------------
Deferred Tax Liabilities:
Asset valuation differences (7,870) (7,177)
Other (1,534) (1,173)
----------------------------------------------------------------
Total deferred liabilities (9,404) (8,350)
----------------------------------------------------------------
Net deferred tax asset $11,714 $16,344
================================================================
</TABLE>
During 1994, the Company purchased certain assets which resulted
in the establishment of a deferred tax liability of $849,000.
Recognition of such liability did not
17
<PAGE>
impact income tax expense during 1994.
There was no valuation allowance associated with deferred tax
assets at December 31, 1994 and 1993.
The principal components of the deferred income tax benefit for
the year ended December 31, 1992, under APB Opinion No. 11, were
deferred compensation and unrealized gains and losses on
investments held.
The effective income tax rate differs from the amount computed
by applying the Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Year Ended December 31,
1994 1993 1992
-----------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 34.0%
State income taxes, net of
Federal tax benefit 4.0 4.5 5.8
Amortization of intangibles 4.5
Other .7 .2 .2
-----------------------------------------------------------------
Effective income tax rate 39.7% 39.7% 44.5%
=================================================================
</TABLE>
Stock Options, Restricted Stock Awards and Performance Units
The Company's stock option plans provide for granting to
officers, directors and other key employees options for the
purchase of shares of common stock at not less than market value
on the date of grant, restricted stock and performance units.
Certain options are immediately exercisable and all options
expire within either eight or ten years from the date of grant.
The options and shares acquired upon exercise of each option
generally vest over a four or five-year period from the date of
grant of the option. The Company may repurchase unvested shares
related to certain options at the exercise price from any
participant who ceases to be an employee or director of CSC or
any of its subsidiaries. A summary of option activity follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Number Option Price
of Shares Per Share
------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1991 4,362,330 $ .38 - 5.96
------------------------------------------------------------------------
Granted 4,406,900 8.72 - 16.22
Exercised (856,705) .38 - 4.37
Canceled (81,167) .38 - 4.37
------------------------------------------------------------------------
Outstanding at December 31, 1992 7,831,358 .38 - 16.22
------------------------------------------------------------------------
Granted 960,171 13.83 - 23.08
Exercised (655,292) .38 - 20.83
Canceled (215,412) 2.89 - 8.72
------------------------------------------------------------------------
Outstanding at December 31, 1993 7,920,825 .38 - 23.08
------------------------------------------------------------------------
Granted 2,075,554 17.00 - 21.58
Exercised (1,191,859) .38 - 21.58
Canceled (77,334) 3.89 - 22.33
------------------------------------------------------------------------
Outstanding at December 31, 1994 8,727,186 $ .38 - 23.08
========================================================================
</TABLE>
At December 31, 1994, options to purchase 3,995,438 shares were
vested, 2,972,596 shares were available for future grants and
4,731,748 shares were unvested.
In 1994 and 1993, the Company granted 228,000 and 38,850 shares
of common stock, respectively, to certain officers of the
Company. The 1994 and 1993 common stock grants had aggregate fair
market values of $5 million and $.8 million, respectively, at
their grant dates. Shares granted in the 1994 stock grants are
restricted from sale for five years, and have a five-year
amortization and vesting period. The 1993 stock grants are
restricted from sale for four years and vest immediately.
In 1994, the Company granted 448,275 performance units in tandem
with stock options on a one-to-one basis to certain officers and
key employees of the Company. In lieu of exercising the related
stock option, each unit gives the participant the right to
receive an amount in cash, based upon achieving a certain level
of annual after-tax net income. For financial statement purposes,
the Company assumes a portion of these units will be redeemed for
cash. The units and options vest over a five-year period.
Employee Benefit Plans
The Company has a profit sharing and employee stock ownership
plan (the Profit Sharing Plan), including a 401(k) salary
deferral program, for eligible employees who have met certain
service requirements. The Company matches certain employee
contributions; additional contributions to this plan are at the
discretion of the Company. Total Company contribution expense was
$14 million for 1994, $16 million for 1993 and $11 million for
1992. In 1992, The Charles Schwab Trust Company, a subsidiary of
CSC, became trustee of the plan.
Effective January 1, 1994, the Company adopted Statement of
Position (SOP) No. 93-6 - Employers' Accounting for Employee
Stock Ownership Plans (the Statement). The Statement requires
income statement recognition of the fair value of common stock
released for allocation to employees through an Employee Stock
Ownership Plan (ESOP). The adoption of the Statement did not have
a material impact on the Company's financial position, results of
operations or earnings per share.
In January 1993, the Profit Sharing Plan borrowed $15 million
from the Company to purchase 1,088,708 newly issued shares of the
Company's common stock. The note receivable from the plan bears
interest at 7.9% and is due in annual installments through 2007.
Upon implementation of the Statement, the note from the plan was
reclassed from note receivable to unearned ESOP shares on the
consolidated balance sheet. As the note is repaid, shares are
released for allocation to eligible employees based on the
proportion of debt service paid during the year and the
18
<PAGE>
allocated shares become outstanding for earnings per share computations.
Dividends on allocated shares and unallocated shares are charged
to retained earnings and compensation and benefits expense,
respectively.
Under the "grandfather" provisions of the Statement, the Company
did not apply the Statement to shares purchased by the ESOP prior
to December 31, 1992. Previously, the accounting rules provided
for the cost basis of shares released for allocation through ESOP
plans to be recognized as expense and all ESOP shares to be
considered outstanding for earnings per share computations. At
December 31, 1993, unreleased ESOP shares of 879,916 were
considered outstanding for earnings per share computations that
would not have been considered outstanding under the Statement.
Dividends on all "grandfather" shares are used to pay debt
service. ESOP information is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Shares Purchased Shares Purchased
in 1993 Prior to 1993
-------------------------------------------------------------------------------------
<S> <C> <C>
Number of shares purchased 1,088,708 2,231,405
Shares released for allocation
prior to 1994 (208,791) (1,752,978)
Shares released for allocation in 1994 (141,584) (478,427)
-------------------------------------------------------------------------------------
Unreleased shares at
December 31, 1994 738,333
=====================================================================================
Fair value of unreleased shares
at December 31, 1994 $17,166,242
=====================================================================================
Compensation and benefits
expense during 1994 $ 2,675,000 $1,532,000
=====================================================================================
</TABLE>
In January 1991, the Company implemented a long-term cash
incentive plan for certain officers and key employees. Payments
under this plan are based upon achieving a certain level of pre-
tax income, as defined, over the four-year period ended December
31, 1994. Related compensation expense, accrued as pre-tax income
reached certain targeted levels, was $18 million for 1994,
$16 million for 1993 and $11 million for 1992.
During 1994, the Company implemented a life insurance program
covering substantially all employees. Under the program,
investment in insurance policies is recorded net of policy loans
in other assets. At December 31, 1994, policy loans with an
interest rate of 10.3% totaled $41 million. Interest incurred on
policy loans is tax deductible, while the increase in the cash
value of the policies and death benefit proceeds are not subject
to tax.
Regulatory Requirements
Schwab and M&S are subject to the SEC's Uniform Net Capital Rule
and each compute 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 December 31, 1994, Schwab's net capital
was $315 million (10% of aggregate debit balances), which was
$254 million in excess of the minimum required net capital and
$164 million in excess of 5% of aggregate debit balances. At
December 31, 1994, M&S' net capital was $5 million (206% of
aggregate debit balances), which was $4 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 December 31, 1994. Under Rule
15c3-3, M&S had no cash reserve requirement at December 31, 1994.
Commitments, Contingent Liabilities and
Other Information
The Company has noncancelable operating leases for office space
and equipment. Future minimum rental commitments under these
leases at December 31, 1994 are as follows (in thousands):
<TABLE>
<S> <C>
-----------------------------------------------------------
1995 $54,700
1996 46,775
1997 38,913
1998 31,701
1999 25,415
Thereafter 44,241
===========================================================
Certain leases contain provisions for renewal options and rent
escalations based on increases in certain costs incurred by the
lessor. Rent expense was $64 million for 1994, $56 million for
1993 and $48 million for 1992.
The Company has entered into certain agreements with its
Chairman that provide compensation for employment through March
1995 and for the use of his name and likeness subsequent to his
employment. The agreements can be terminated only under limited
circumstances. Aggregate amounts paid pursuant to the name and
likeness agreement cannot exceed $2 million per year (subject to
adjustment for changes in the cost of living since 1987) for a
maximum of 15 years after compensation under the employment
agreement ceases. A new employment agreement with the
19
<PAGE>
Company's Chairman is scheduled to be submitted to the stockholders for
approval at the May 8, 1995 Annual Meeting of Stockholders.
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 $81 million at
December 31, 1994.
Through its broker-dealer subsidiaries, the Company loans
securities temporarily to other brokers in connection with its
security lending activities. The Company receives cash as
collateral for the securities loaned. Increases in security
prices may cause the market value of the securities loaned to
exceed the amount of cash received as collateral. In the event
the counterparty to these transactions does not return the loaned
securities, the Company may be exposed to the risk of acquiring
the securities at prevailing market prices in order to satisfy
its customer obligations. The Company controls this risk by
requiring credit approvals for counterparties, by monitoring the
market value of securities loaned on a daily basis and by
requiring additional cash as collateral when necessary.
The Company is obligated to settle transactions with brokers and
other financial institutions even if its customers fail to meet
their obligations to the Company. Customers are required to
complete their transactions on settlement date, generally five
business days after trade date. If customers do not fulfill their
contractual obligations, the Company may incur losses. The
Company has established procedures to reduce this risk by
requiring deposits from customers for certain types of trades.
As customers write option contracts or sell securities short,
the Company may incur losses if the customers do not fulfill
their obligations and the collateral in customer accounts is not
sufficient to fully cover losses which customers may incur from
these strategies. To control this risk, the Company monitors
required margin levels daily and customers are required to
deposit additional collateral, or reduce positions, when
necessary.
In its capacity as market maker, M&S maintains inventories in
Nasdaq securities on both a long and short basis. While long
inventory positions represent M&S ownership of securities, short
inventory positions represent obligations of M&S to deliver
specified securities at a contracted price, which may differ from
market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions
may result in losses or gains to M&S as market values of
securities fluctuate. To control the risk of losses, long and
short positions are continuously monitored to assure compliance
with limits established by the Company.
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). A trial is scheduled for
August 1995. The asserted additional tax of $19 million (after
initial settlement stipulations), excluding interest, arises from
the IRS' audit of the tax periods ended March 31, 1988 and
December 31, 1988. The majority of the asserted additional tax
relates to deductions claimed by the Company for amortization of
intangible assets received in the Company's 1987 acquisition of
Schwab. The resolution of the contested issues may also affect
the Company's taxable years ended December 31, 1989 through 1994.
Of the $19 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 or
results of operations.
M&S has been named as a defendant and/or one of several
representatives of an alleged defendant class consisting of
market makers in Nasdaq securities in twenty six class actions,
twenty five of which were filed in Federal District Court between
May 27, 1994 and October 26, 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 Federal cases have been consolidated and transferred for all
pretrial purposes to Federal District Court in the Southern
District of New York and a consolidated amended complaint was
filed on December 16, 1994. The complaint does not set forth any
specific conduct by M&S and does not request any specific amount
of damages, although it requests that the actual damages be
trebled where permitted by statute. The consolidated amended
complaint generally alleges 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. On February
2, 1995, the defendants filed a motion to dismiss the
consolidated amended complaint for failure to state a claim. The
ultimate outcome of these actions cannot currently be determined.
There are other various lawsuits pending against the Company
which, in the opinion of management, will be resolved with no
material impact on the Company's financial position or results of
operations.
In December 1994, a $100 million letter of credit facility
20
<PAGE>
was established by CSC with a commercial bank to issue letters of
credit (LOCs) to three of the SchwabFunds (registered trademark)
money market funds in connection with the bankruptcies of Orange
County, California and the Orange County investment pool. CSC has
agreed to reimburse the bank for any payments made under the
LOCs, and to leave unutilized as much as $100 million of its $225
million credit facility. The LOC facility was voluntarily
established by CSC as a precautionary measure to provide
independent support for the valuation of certain securities held
by the funds. These securities were issued by municipalities that
participated in the investment pool maintained by Orange County
and, in one case, represent a direct obligation of Orange County.
Although the issuers, other than Orange County, have not filed
for bankruptcy, their ability to repay obligations in a timely
manner may be affected by shortfalls, if any, of amounts
scheduled to be received from investments in the Orange County
investment pool.
At December 31, 1994, LOCs totaling $58.5 million were
outstanding under this facility. The funds may make demands for
payments under the LOCs if the issuers of certain municipal
securities held by the funds fail to pay a specified percentage
of the principal amount of the securities when due or if the
proceeds received by the funds in the disposition of any such
securities are less than a specified percentage of the principal
amount of the securities. The funds will absorb losses of
principal amounts of the securities, if any, at disposition or
maturity for each security up to a specified percentage. The LOCs
expire and the securities mature on or before August 1, 1995 and
pertain to securities held by each of the three money market
funds at December 31, 1994 as follows: for the first fund, $340.0
million aggregate principal amount, representing 3.01% of the
fund's net assets, is covered in part by a $28.0 million LOC; for
the second fund, $74.2 million aggregate principal amount,
representing 2.44% of the fund's net assets, is covered in part
by an $18.5 million LOC; for the third fund, $39.9 million
aggregate principal amount, representing 3.06% of the fund's net
assets, is covered in part by a $12.0 million LOC. To date, the
LOCs have not been needed to maintain the funds' $1 per share net
asset values.
At December 31, 1994, had the funds disposed of all the
specified securities at values provided by the funds' pricing
service, the funds would have had the right to make demands for
payments on the bank totaling approximately $9 million. These
values may not be representative of market values in effect at
December 31, 1994. Whether, or to what extent, the funds would
make any demands for payments under the LOCs is dependent upon
factors such as the issuers' cash flows, the issuers' capacity
for the normal financing of their operations and the timely
resolution of the obligations of Orange County and the Orange
County investment pool. Accordingly, management is currently
unable to determine whether, or to what extent, the funds would
make any demands for payment under the LOCs.
Concentrations of Credit Risk
Schwab enters into collateralized Resale Agreements which could
result in losses in the event the counterparty to the transaction
does not purchase the securities held as collateral for the cash
advanced and the market value of these securities declines. To
control this risk, Schwab requires that the counterparty deliver
to a custodian securities to be held as collateral with a market
value in excess of the resale price. Schwab also sets standards
for the credit quality of the counterparty. Schwab also monitors
the market value of the underlying securities as compared to the
related receivable, including accrued interest, and requires
additional collateral where deemed appropriate.
Cash Flow Information
Certain investing and financing activities of the Company affect
its financial position but do not affect cash flows. For the year
ended December 31, 1993, common stock was issued to the Profit
Sharing Plan for a $15 million note receivable.
Certain additional information affecting the cash flows of the
Company follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year Ended December 31,
1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes paid $ 75,530 $ 86,453 $ 64,625
=====================================================================
Interest paid:
Customers $176,487 $114,606 $141,135
Long-term and subordinated
borrowings 11,632 13,584 13,134
Other 7,422 4,400 8,833
---------------------------------------------------------------------
Total interest paid $195,541 $132,590 $163,102
=====================================================================
</TABLE>
Subsequent Event
On January 17, 1995, the Board of Directors approved a three-for-
two stock split of the Company's common stock, which will be
effected in the form of a 50% stock dividend. The stock dividend
is payable March 1, 1995 to stockholders of record February 1,
1995. Share and per share data in this report have been restated
to reflect this transaction. The Board also increased the
quarterly cash dividend 29% to $.060 per share payable February
15, 1995 to stockholders of record February 1, 1995.
21
<PAGE>
Management's Report
To Our Stockholders:
Management of the Company is responsible for the preparation,
integrity and objectivity of the consolidated financial
statements and the other financial information presented in this
report. To meet these responsibilities we maintain a system of
internal control that is designed to provide reasonable assurance
as to the integrity and reliability of the financial statements,
the protection of Company and customer assets from unauthorized
use, and the execution and recording of transactions in
accordance with management's authorization. The system is
augmented by careful selection of our managers, by organizational
arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that employees adhere to the highest standards of personal and
professional integrity. The Company's internal audit function
monitors and reports on the adequacy of and compliance with our
internal controls, policies and procedures. Although no cost-
effective internal control system will preclude all errors and
irregularities, we believe the Company's system of internal
control is adequate to accomplish the objectives set forth above.
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and
necessarily include some amounts that are based on estimates and
our best judgments. The financial statements have been audited by
the independent accounting firm of Deloitte & Touche LLP, whose
audit included consideration of the internal control structure to
the extent necessary to render their opinion on the financial
statements. We made available to Deloitte & Touche LLP all the
Company's financial records and related data. We believe that all
representations made to Deloitte & Touche LLP during their audit
were valid and appropriate.
The Board of Directors through its Audit Committee, which is
comprised entirely of nonmanagement directors, has an oversight
role in the area of financial reporting and internal control. The
Audit Committee periodically meets with Deloitte & Touche LLP,
our internal auditors and Company management to review
accounting, auditing, internal control and financial reporting
matters.
Charles R. Schwab
Chairman of the Board and Chief Executive Officer
A. John Gambs
Executive Vice President and Chief Financial Officer
Independent Auditors' Report
To the Stockholders and Board of Directors of The Charles
Schwab Corporation:
We have audited the accompanying consolidated balance sheets of
The Charles Schwab Corporation and subsidiaries (the Company) as
of December 31, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The
Charles Schwab Corporation and subsidiaries at December 31, 1994
and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 27, 1995
<PAGE>
THE CHARLES SCHWAB CORPORATION
Chart Appendix List
In this appendix, the following descriptions of certain charts
in portions of the Company's 1994 Annual Report to Stockholders
that are omitted from the EDGAR Version are more specific with
respect to the actual numbers, amounts and percentages than is
determinable from the charts themselves. The Company submits
such more specific descriptions only for the purpose of complying
with the requirements for transmitting portions of this Annual
Report on Form 10-K electronically via EDGAR; such more specific
descriptions are not intended in any way to provide information
that is additional to the information otherwise provided in
portions of the Annual Report.
EDGAR
Version
Page
Number CHART DESCRIPTION
------ -----------------
3 Stacked bar chart titled "Assets in Schwab Customer
Accounts" depicting the composition of customer
assets at year end 1990, 1991, 1992 1993 and 1994
(shown on the bottom axis) as follows (billions of
dollars): Cash and Equivalents $10.6, $12.6, $15.6,
$20.1 and $28.6, respectively; Stocks (net of margin
loans) $12.7, $22.1, $29.6, $39.5 and $46.1,
respectively; Mutual Fund Marketplace (registered
trademark) $2.6, $6.4, $12.2, $26.2 and $32.2,
respectively; Fixed Income Securities $4.7, $6.4,
$8.2, $10.0 and $15.7, respectively; Assets in
Schwab Customer Accounts (bar labeled) $30.6, $47.5,
$65.6, $95.8 and $122.6, respectively.
3 Stacked bar chart titled "Schwab Customers' Daily
Average Trading Volume" depicting the composition of
Schwab's daily average volume for the fiscal years
1990, 1991, 1992, 1993 and 1994 (shown on the bottom
axis) as follows (thousands of trades): Commission
and Other Trades 13.1, 17.6, 22.2, 27.9 and 29.2,
respectively; Mutual Fund OneSource (trademark)
Trades 0, .3, 1.4, 7.4 and 14.3, respectively;
Schwab Customers' Daily Average Trading Volume (bar
labeled) 13.1, 17.9, 23.6, 35.3 and 43.5,
respectively.
4 Bar chart titled "Revenues" depicting revenues for
the fiscal years 1990, 1991, 1992 1993 and 1994
(shown on the bottom axis) as follows (millions of
dollars) (bar labeled): $387, $570, $750, $965 and
$1,065, respectively.
4 Pie chart titled "Composition of Revenues" depicting
composition of revenues (percent of total) for the
fiscal years 1992, 1993 and 1994 as follows:
Commissions 60%, 57% and 51%, respectively; Net
Interest Revenue 12%, 12% and 15%, respectively;
Principal Transactions 17%, 18% and 15%,
respectively; Mutual Fund Service Fees 8%, 10% and
15%, respectively; Other 3%, 3% and 4%,
respectively.
4 Stacked bar chart titled "Commissions" depicting the
composition of commissions for the fiscal years
1992, 1993 and 1994 (shown on the bottom axis) as
follows (millions of dollars): Listed $251, $300
and $279, respectively; Options $32, $37 and $39,
respectively; Nasdaq $122, $169 and $169,
respectively; Other $36, $46 and $59, respectively;
Commissions (bar labeled) $441, $552 and $546,
respectively.
7 Pie chart titled "Expenses Excluding Interest"
depicting composition of expenses excluding interest
(percent of total) for the fiscal years 1992, 1993
and 1994 as follows: Compensation & Benefits 51%,
52% and 52%, respectively; Communications 13%, 12%
and 13%, respectively; Occupancy & Equipment 11%,
10% and 10%, respectively; Depreciation &
Amortization 7%, 6% and 6%, respectively; Other 18%,
20% and 19%, respectively.
7 Stacked bar chart titled "Compensation and Benefits"
depicting the composition of compensation and
benefits for the fiscal years 1992, 1993 and 1994
(shown on the bottom axis) as follows (millions of
dollars): Salaries and Wages $183, $225 and $273,
respectively; Variable Compensation $80, $108 and
$101, respectively; Other Benefits $44, $60 and $63,
respectively; Compensation and Benefits (bar
labeled) $307, $393 and $437, respectively.
10 Bar chart titled "Net Cash Provided by Operating
Activities" depicting net cash provided by operating
activities for the fiscal years 1992, 1993 and 1994
(shown on the bottom axis) as follows (millions of
dollars) (bar labeled): $121, $132 and $206,
respectively.
10 Bar chart titled "Ratio of Assets to Stockholders'
Equity" depicting the Company's ratio of assets to
stockholders' equity at year end 1992, 1993 and 1994
(shown on the bottom axis) as follows (bar labeled):
23, 18 and 17, respectively.
12 Bar chart titled "Net Income" depicting net income
for the fiscal years 1992, 1993 and 1994 (shown on
the bottom axis) as follows (millions of dollars)
(bar labeled): $81, $118 and $135, respectively.
12 Bar chart titled "Dividends Declared per Common
Share" depicting dividends declared per common share
for the fiscal years 1992, 1993 and 1994 (shown on
the bottom axis) as follows (bar labeled): $.099,
$.126 and $.188, respectively.
13 Stacked bar chart titled "Composition of Assets"
depicting the composition of the Company's assets at
year end 1992, 1993 and 1994 (shown on the bottom
axis) as follows (millions of dollars): Cash and
Investments $3,714, $3,956 and $4,587, respectively;
Secured Receivables $1,952, $2,625 and $3,010,
respectively; Other $239, $316 and $321,
respectively; Composition of Assets (bar labeled)
$5,905, $6,897 and $7,918, respectively.
Exhibit 21.1
THE CHARLES SCHWAB CORPORATION
Subsidiaries of the Registrant
Schwab Holdings, Inc., a Delaware corporation
Charles Schwab & Co., Inc., a California corporation
Charles Schwab (Hong Kong) Limited, a Hong Kong corporation
Charles Schwab Limited, a United Kingdom corporation
Charles Schwab Investment Management, Inc., a Delaware corporation
Mayer & Schweitzer, Inc., a New Jersey corporation
The Charles Schwab Trust Company, a California corporation
Performance Technologies, Inc., a North Carolina corporation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-
Effective Amendment No. 1 to Registration Statement No. 33-
21582 on Form S-8, in Registration Statement No. 33-30260 on
Form S-8, in Registration Statement No. 33-37485 on Form S-
8, in Registration Statement No. 33-45356 on Form S-8, in
Registration Statement No. 33-37842 on Form S-8, in
Registration Statement No. 33-54701 on Form S-8, and in
Amendment No. 1 to Registration No. 33-50923 on Form S-3 of
The Charles Schwab Corporation of our reports dated February
27, 1995 appearing in and incorporated by reference in this
Annual Report on Form 10-K of The Charles Schwab Corporation
for the year ended December 31, 1994.
DELOITTE & TOUCHE
San Francisco, California
March 24, 1995
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and Consolidated Balance Sheet of the Company's
1994 Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report, for the period ended December 31, 1994, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 556598
<RECEIVABLES> 3009895
<SECURITIES-RESALE> 4030484
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 129105
<TOTAL-ASSETS> 7917862
<SHORT-TERM> 117383
<PAYABLES> 6966782
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 171363
<COMMON> 595
0
0
<OTHER-SE> 466419
<TOTAL-LIABILITY-AND-EQUITY> 7917862
<TRADING-REVENUE> 162595
<INTEREST-DIVIDENDS> 362944
<COMMISSIONS> 546112
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 156812
<INTEREST-EXPENSE> 198236
<COMPENSATION> 437064
<INCOME-PRETAX> 224343
<INCOME-PRE-EXTRAORDINARY> 135343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135343
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.54
</TABLE>
