UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
175,812,642 shares of $.01 par value Common Stock
Outstanding on May 1, 1997
<PAGE>
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1997
Index
Page
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Statement of Income 1
Balance Sheet 2
Statement of Cash Flows 3
Notes 4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
FORWARD-LOOKING STATEMENTS In addition to historical information, this interim
report contains forward-looking statements that reflect management's
expectations. These statements relate to, among other things, the Company's
strategy, revenues, profit margin, sources of liquidity and capital
expenditures. Achievement of the expressed expectations is subject to certain
risks and uncertainties that could cause actual results to differ materially
from those expectations. See "Description of Business" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in this
interim report for a discussion of important factors that may cause such
differences.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Revenues
Commissions $274,919 $240,913
Mutual fund service fees 94,698 68,835
Principal transactions 69,135 61,634
Interest revenue, net of interest
expense of $123,130 in 1997 and $99,009 in 1996 76,723 58,944
Other 20,179 16,455
- ------------------------------------------------------------------------------
Total 535,654 446,781
- ------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 220,838 195,708
Communications 45,701 42,954
Occupancy and equipment 35,414 29,976
Depreciation and amortization 27,773 24,751
Advertising and market development 35,835 22,203
Commissions, clearance and floor brokerage 22,444 19,533
Professional services 13,881 13,435
Other 23,448 18,551
- ------------------------------------------------------------------------------
Total 425,334 367,111
- ------------------------------------------------------------------------------
Income before taxes on income 110,320 79,670
Taxes on income 43,585 32,727
- ------------------------------------------------------------------------------
Net Income $ 66,735 $ 46,943
==============================================================================
Weighted-average number of common and
common equivalent shares outstanding* 180,825 178,887
==============================================================================
Primary/Fully Diluted Earnings Per Share $ .37 $ .26
==============================================================================
Dividends Declared Per Common Share $ .05 $ .04
==============================================================================
</TABLE>
* Amounts shown are used to calculate primary earnings per share.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 713,396 $ 633,317
Cash and investments required to be
segregated under Federal
or other regulations (including resale
agreements of $5,896,118 in 1997 and
$6,069,930 in 1996) 7,481,623 7,235,971
Receivable from brokers, dealers and
clearing organizations 313,006 230,943
Receivable from customers - net 5,436,552 5,012,815
Securities owned - at market value 201,919 127,866
Equipment, office facilities and property - net 322,625 315,376
Intangible assets - net 63,960 68,922
Other assets 109,980 153,558
- ------------------------------------------------------------------------------
Total $14,643,061 $13,778,768
==============================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 190,264 $ 225,136
Payable to brokers, dealers and
clearing organizations 1,081,633 877,742
Payable to customers 11,792,551 11,176,836
Accrued expenses and other 357,421 360,683
Borrowings 283,317 283,816
- ------------------------------------------------------------------------------
Total liabilities 13,705,186 12,924,213
- ------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares
authorized; $.01 par value
per share; none issued
Common stock - 500,000 shares authorized;
$.01 par value per share; 178,459 shares
issued in 1997 and 1996 1,785 1,785
Additional paid-in capital 222,275 200,857
Retained earnings 781,058 723,085
Treasury stock - 1,983 shares in 1997
and 3,391 shares in 1996, at cost (45,805) (60,277)
Unearned ESOP shares (4,650) (5,517)
Unamortized restricted stock compensation (17,503) (8,658)
Foreign currency translation adjustment 715 3,280
- ------------------------------------------------------------------------------
Total stockholders' equity 937,875 854,555
- ------------------------------------------------------------------------------
Total $14,643,061 $13,778,768
==============================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 66,735 $ 46,943
Noncash items included in net income:
Depreciation and amortization 27,773 24,751
Deferred income taxes (5,516) (421)
Stock compensation 4,969 3,961
Other 1,099 1,070
Change in securities owned - at market value (74,053) (4,924)
Change in other assets 48,975 64,478
Change in accrued expenses and other 14,389 8,549
- ------------------------------------------------------------------------------
Net cash provided before change in
customer-related balances 84,371 144,407
- ------------------------------------------------------------------------------
Change in customer-related balances:
Payable to customers 624,347 416,033
Receivable from customers (425,478) (111,953)
Drafts payable (34,255) (50,579)
Payable to brokers, dealers and
clearing organizations 205,782 97,920
Receivable from brokers, dealers and
clearing organizations (86,222) (24,988)
Cash and investments required to be segregated
under Federal or other regulations (252,139) (305,344)
- ------------------------------------------------------------------------------
Net change in customer-related balances 32,035 21,089
- ------------------------------------------------------------------------------
Net cash provided by operating activities 116,406 165,496
- ------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and
property - net (32,727) (68,700)
Cash payments for business acquired (3,709)
- ------------------------------------------------------------------------------
Net cash used by investing activities (32,727) (72,409)
- ------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 34,000
Purchase of treasury stock (1,024)
Dividends paid (8,762) (6,984)
Other 5,521 2,161
- ------------------------------------------------------------------------------
Net cash provided (used) by financing activities (3,241) 28,153
- ------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (359) (95)
- ------------------------------------------------------------------------------
Increase in cash and cash equivalents 80,079 121,145
Cash and cash equivalents at beginning of period 633,317 454,996
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 713,396 $ 576,141
==============================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company). CSC is a holding company engaged, through its
subsidiaries, in securities brokerage and related financial services. CSC's
principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities
broker-dealer with 242 branch offices in 46 states, the Commonwealth of Puerto
Rico and the United Kingdom, and four regional telephone service centers.
Another subsidiary, Mayer & Schweitzer, Inc. (M&S), is a market maker in Nasdaq
securities that provides trade execution services to broker-dealers, including
Schwab, and institutional customers. ShareLink, acquired in 1995 to expand the
Company's international operations, is a retail discount securities brokerage
firm located in the United Kingdom.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, reflect all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles. All adjustments were
of a normal recurring nature. All material intercompany balances and
transactions have been eliminated. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report to Stockholders, which are
incorporated by reference in the Company's 1996 Annual Report on Form 10-K.
Prior periods' financial statements have been reclassified to conform to
the 1997 presentation.
Statement of Financial Accounting Standards No. 125
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 125 - Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, except for certain
financial assets for which the effective date has been delayed until 1998 by
SFAS No. 127 - Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The adoption of this statement did not have an effect on the Company's financial
position, results of operations, earnings per share or cash flows.
Statement of Financial Accounting Standards No. 128
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 - Earnings per Share. The Company is required to adopt this statement at
December 31, 1997.
This statement replaces current earnings per share (EPS) reporting
requirements and requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income by the weighted-
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
If this statement had been in effect during the current and prior year
periods, basic EPS would have been $.38 and $.27 for the quarters ended March
31, 1997 and 1996, respectively. Diluted EPS would not have been different than
primary and fully diluted EPS currently reported for the periods.
Statement of Financial Accounting Standards No. 129
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129 - Disclosure of Information about Capital Structure. The Company is required
to adopt this statement at December 31, 1997. This statement establishes
standards for disclosing information about the Company's capital structure. The
adoption of this statement will not have an effect on the Company's financial
position, results of operations, earnings per share or cash flows.
Commitments and Contingencies
M&S has been named as one of thirty-three defendant market-making firms in
a consolidated class action, In re: Nasdaq Market-Makers Antitrust Litigation,
which is pending in the United States District Court for the Southern District
of New York pursuant to an order of the Judicial Panel on Multidistrict
Litigation. On December 16, 1994, the plaintiffs filed a consolidated amended
complaint purportedly on behalf of certain persons who purchased or sold Nasdaq
securities during the period
- 4 -
<PAGE>
May 1, 1989 through May 27, 1994. On August 22, 1995, a second consolidated
amended class action complaint was filed. On November 26, 1996, a plaintiff
class was certified by the Court. The consolidated 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 certain Nasdaq
securities. The consolidated complaint does not set forth any specific amount of
damages, although it requests that the actual damages be trebled where permitted
by statute. The ultimate outcome of this consolidated action cannot currently be
determined.
On July 16, 1996, the Department of Justice filed a civil action in the
United States District Court for the Southern District of New York, United
States of America v. Alex Brown & Sons, Inc., et al., against M&S and twenty-
three other market makers in Nasdaq securities alleging violations of the
federal antitrust laws in connection with certain customs and practices. On July
16, 1996, the twenty-four market-maker defendants, including M&S, entered into a
Stipulation and Order resolving the civil action. Under the Stipulation, the
parties agreed that the defendants would not engage in certain types of market-
making activities and would take specific steps to assure compliance with the
agreement. No fines or damages were assessed. Certain parties challenged
portions of the Stipulation and Order and, on January 14, 1997, the Court heard
arguments on whether the Stipulation and Order should be approved. On April 23,
1997, the Court approved the Stipulation and Order. The objecting parties have
60 days from the date the order approving the Stipulation and Order was entered
in which to file an appeal. If the Stipulation and Order is finally approved,
after all periods for appeal have passed, the civil action will be dismissed.
Between August 12, 1993 and November 17, 1995, Schwab was named as a
defendant in eleven class action lawsuits, five of which have been resolved
favorably to Schwab and six of which are still pending in state courts in
Illinois, Louisiana, Texas and California. The class actions purport to be
brought on behalf of customers of Schwab who purchased or sold securities for
which Schwab received payments from the market maker, stock dealer or other
third party who executed the transaction. The complaints generally allege that
Schwab failed to disclose and remit such payments to members of the class, and
generally seek damages equal to the payments received by Schwab. On June 30,
1995, a class was certified in Civil District Court for the Parish of Orleans in
Louisiana for Louisiana residents who purchased or sold securities through
Schwab between February 1, 1985 and February 1, 1995 for which Schwab received
monetary payments from the market maker or stock dealer who executed the
transaction. The class certification was affirmed by the Louisiana Court of
Appeals on February 29, 1996. On August 16, 1995, another class was certified in
Civil District Court for the Parish of Natchitoches in Louisiana for residents
of all states who purchased or sold securities through Schwab since 1985 for
which Schwab received monetary payments from the market maker or the third party
who executed the transaction. The class certification was affirmed by the
Louisiana Court of Appeals on December 2, 1996. The actions in Illinois and
California have been dismissed on the grounds that the claims asserted are
preempted by federal law. Plaintiffs have filed appeals in both cases. The
action in Texas has been stayed. The ultimate outcome of these actions cannot
currently be determined.
There are various other 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.
Regulatory Requirements
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the 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 March 31, 1997, Schwab's net
capital was $576 million (10% of aggregate debit balances), which was $463
million in excess of its minimum required net capital and $295 million in excess
of 5% of aggregate debit balances. At March 31, 1997, M&S' net capital was $9
million (454% of aggregate debit balances), which was $8 million in excess of
its minimum required net capital.
Schwab and ShareLink had portions of their cash and investments segregated
for the exclusive benefit of customers at March 31, 1997, in accordance with
applicable regulations. M&S had no such cash reserve requirement at March 31,
1997.
- 5 -
<PAGE>
Cash Flow Information
Certain information affecting the cash flows of the Company follows (in
thousands):
Three Months
Ended
March 31,
1997 1996
---- ----
Income taxes paid $ 1,552 $ 370
======== ========
Interest paid:
Customer cash balances $104,740 $ 86,436
Borrowings 9,104 7,403
Stock-lending activities 7,646 4,861
Other 1,914 2,770
-------- --------
Total interest paid $123,404 $101,470
======== ========
Subsequent Event
During April 1997, the Company repurchased and recorded as treasury stock a
total of 500,000 shares of its common stock for approximately $16 million. As of
April 30, 1997, authorization granted by the Company's Board of Directors
allowed for the repurchase of an additional 871,000 shares.
- 6 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Description of Business
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related financial
services for over 4.2 million active customer accounts(a). Customer assets
totaled $267.6 billion at March 31, 1997. CSC's principal subsidiary, Charles
Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 242 branch
offices in 46 states, the Commonwealth of Puerto Rico and the United Kingdom.
Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq
securities, provides trade execution services to broker-dealers and
institutional customers. ShareLink, acquired in 1995 to expand the Company's
international operations, is a retail discount securities brokerage firm located
in the United Kingdom.
The Company's strategy is to attract and retain customer assets by focusing
on a number of areas within the financial services industry - retail brokerage,
mutual funds, support services for independent investment managers, equity
securities market-making, electronic brokerage and 401(k) defined contribution
plans. To pursue its strategy and its objective of long-term profitable growth,
the Company plans to continue to leverage its competitive advantages. These
advantages include advertising and marketing programs that have created a
national brand, a broad range of products and services, diverse delivery systems
and an ongoing investment in technology.
The Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as its products and services. These
programs helped the Company open a record 297,000 new customer accounts and
gather a record $16.1 billion in net new customer assets during the first
quarter of 1997.
The Company offers a broad range of products and services to meet
customers' investment and financial needs at prices that management believes
represent superior value. The Company's branch office network assists investors
in developing asset allocation strategies and evaluating their investment
choices. Branch staff also refer investors who desire additional guidance to
independent fee-compensated investment managers through the Schwab AdvisorSource
(trademark) service. In addition, the Company is continuing to enhance and
broaden the Mutual Fund OneSource (registered trademark) service, which provides
customers with the ability to invest in over 720 mutual funds from 87 fund
families without incurring transaction fees. Also, the Company has recently
entered into arrangements with two major regional banks allowing them to offer
the Mutual Fund OneSource service directly to their customers.
The Company invests in diverse delivery systems that uphold the Company's
customer service standards. In addition to its branch office network, the
Company maintains four regional telephone service centers as well as electronic
brokerage channels that provide customers with online and telephonic access.
Online channels include PC-based services such as SchwabLink (registered
trademark) - a service for investment managers, StreetSmart (registered
trademark) - Schwab's trading software, e.Schwab (trademark) - which provides
online brokerage services, and SchwabNOW! (trademark) - which provides
information and trading services through Schwab's World Wide Web site.
Telephonic channels include TeleBroker (registered trademark) - Schwab's touch-
tone telephone trading service, and VoiceBroker (trademark) - Schwab's service
that uses voice recognition technology to provide individual investors with
real-time quotes.
- ---------
(a) Accounts with balances or activity within the preceding twelve months.
- 7 -
<PAGE>
The Company's ongoing investment in technology is a key element in
providing fast and consistent customer service, and reducing processing costs.
The Company is a forerunner in placing technology in the hands of customers.
During the first quarter of 1997, Schwab added a number of new features to
SchwabNOW! (trademark) including Mutual Fund OneSource (registered trademark)
Online, which provides information and flexible tools for comparing mutual
funds, and MarketBuzz (trademark), which offers company and market information
from a variety of news sources. Also during the first quarter of 1997, Schwab
World Wide Web trading became available through America Online.
The Company faces significant competition from full commission and discount
brokerage firms, as well as mutual fund companies. Increasingly, competition has
come from banks, software development companies, insurance companies and others
as they expand their product lines. A general trend of consolidation in
financial services has attracted new competitors and strengthened existing ones.
This competition may negatively impact the Company's revenue growth and profit
margin.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. Since
transaction-based revenues continue to represent a majority of the Company's
revenues, the Company may experience significant variations in revenues from
period to period.
The Company adjusts its expenses in anticipation of and in response to
changes in financial market conditions and customer trading patterns. Certain of
the Company's expenses (including variable compensation, portions of
communications, and commissions, clearance and floor brokerage) vary directly
with changes in financial performance or customer trading activity. Expenses
relating to the level of temporary employees, contractors, overtime hours,
professional services, and advertising and market development are adjustable
over the short term to help the Company achieve its financial objectives.
Additionally, developmental spending (e.g., branch openings, product and service
rollouts, and technology enhancements) is discretionary and can be altered in
response to market conditions. However, a significant portion of the Company's
expenses such as salaries and wages, occupancy and equipment, and depreciation
and amortization do not vary directly, at least in the short term, with
fluctuations in revenues or securities trading volumes. Given the nature of the
Company's revenues and expenses, and the economic and competitive factors
discussed above, the Company's earnings and common stock price may be subject to
significant volatility from period to period. The Company's results for any
interim period are not necessarily indicative of results for a full year.
In addition to historical information, this interim report contains
forward-looking statements that reflect management's expectations. These
statements relate to, among other things, the Company's strategy (see
Description of Business), revenues (see Financial Overview and Principal
Transactions), profit margin (see Financial Overview and Principal
Transactions), sources of liquidity (see Liquidity and Capital Resources-
Liquidity) and capital expenditures (see Liquidity and Capital Resources-Cash
Flows and Capital Resources). Achievement of the expressed expectations is
subject to certain risks and uncertainties that could cause actual results to
differ materially from those expectations. Important factors that may cause such
differences are noted throughout this interim report and include, but are not
limited to: the effect of customer trading patterns on Company revenues and
earnings; changes in technology; the effects of competitors' pricing, product
and service decisions and intensified competition; evolving regulation adversely
affecting the Company; the uncertainties of litigation; changes in revenues and
profit
- 8 -
<PAGE>
margin due to cyclical securities markets and interest rates; and a
significant downturn in the securities markets over a short period of time or a
sustained decline in securities prices and trading volumes.
Three Months Ended March 31, 1997
Compared To Three Months Ended
March 31, 1996
Financial Overview
Net income for the first quarter of 1997 totaled $67 million, up 42% from
first quarter 1996 net income of $47 million. Earnings per share for the first
quarter of 1997 increased 42% to $.37 per share from $.26 per share for the
first quarter of 1996.
First quarter 1997 revenues were $536 million, up 20% from $447 million for
the first quarter of 1996, as all revenue categories increased, primarily due to
higher trading volume and an increase in customer assets. The Company's strategy
of placing technology in the hands of customers and providing diverse delivery
systems has facilitated growth in electronic trading at Schwab. During the first
quarter of 1997, total daily average trades, which include revenue trades and
Mutual Fund OneSource (registered trademark) trades, totaled 104,600, up 30%
from 80,500 daily average trades for the same period last year. A total of
34,100 daily average trades were generated through online brokerage channels
during the first quarter of 1997, up 86% from 18,300 daily average trades for
the same period last year. A total of 14,400 daily average trades were generated
through TeleBroker (registered trademark) during the first quarter of 1997, up
8% from 13,300 daily average trades for the same period last year.
Assets in customer accounts totaled $267.6 billion at March 31, 1997, an
increase of $67.1 billion, or 33%, from a year ago. Customers' equity securities
increased $28.0 billion to $108.1 billion, and customer assets in Schwab's
Mutual Fund Marketplace (registered trademark) increased $20.5 billion to $78.5
billion. In addition, customer assets in cash and money market funds increased
$13.1 billion to $54.4 billion. Schwab added a record 297,000 new customer
accounts during the first quarter of 1997, an increase of 21% from the 245,000
new accounts added during the first quarter of 1996.
Total operating expenses excluding interest during the first quarter of
1997 were $425 million, up 16% from $367 million for the first quarter of 1996,
primarily resulting from additional staff to support the Company's growth and
expansion, as well as an increase in advertising and market development
spending.
The after-tax profit margin for the first quarter of 1997 was 12.5%, up
from 10.5% for the first quarter of 1996. The annualized return on stockholders'
equity for the first quarter of 1997 was 30%, up from 29% for the first quarter
of 1996.
The Company experienced a decline in customer trading activity during March
1997 as compared to the first two months of the quarter. Daily average revenue
trades in March 1997 were 62,600, down from 70,800 in January 1997 and 71,000 in
February 1997. As the Company entered the second quarter of 1997, trading
continued to decline with daily average revenue trades of 58,600 in April 1997.
The Company's flexibility in its expense structure (as described above in
Description of Business) allows adjustments to be made to reflect changes in
trading and market activity through various discretionary measures. Since the
Company intends to continue its practice of aggressively investing throughout
most market cycles, if customer trading activity remains at April levels, second
quarter 1997 revenues and profit margin are expected to be lower than the first
quarter of 1997.
Commissions
Commission revenues for the Company were $275 million for the first quarter
of 1997, up
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<PAGE>
$34 million, or 14%, from the first quarter of 1996. The Company earns
commissions when acting as an agent and principal transaction revenues when
acting as a principal or a market maker.
Commissions earned on customer revenue trades, excluding commissions on
trades with specialists, were $273 million for the first quarter of 1997,
compared to $238 million for the first quarter of 1996. Daily average revenue
trades were 68,200 in the first quarter of 1997, compared to 53,700 for the
comparable period in 1996. The Company's total revenue trades have increased as
its customer base has continued to grow and customer accounts in general were
more active. Average commission per revenue trade declined due to a higher
proportion of trades placed through electronic brokerage channels, which provide
additional commission discounts from the Company's standard rates.
- ---------------------------------------------------------------
Three Months
Commissions Earned Ended
on Customer Revenue March 31, Percent
Trades 1997 1996 Change
- ---------------------------------------------------------------
Customer accounts that
traded during the quarter
(in thousands) 1,080 905 19%
Average customer
revenue trades
per account 3.85 3.74 3
Total revenue
trades (in thousands) 4,161 3,389 23
Average commission
per revenue trade $65.55 $70.39 (7)
Commissions earned
on customer revenue
trades (in millions) $ 273 $ 238 15
===============================================================
Mutual Fund Service Fees
Mutual fund service fees increased $26 million, or 38%, to $95 million in
the first quarter of 1997 from the comparable period in 1996. The increase was
primarily attributable to significant increases in customer assets in funds
purchased through Schwab's Mutual Fund OneSource (registered trademark)
service, and in customer assets in Schwab's proprietary funds, collectively
referred to as the SchwabFunds (registered trademark). Most of these fees are
earned for record keeping and shareholder services provided to funds in the
Mutual Fund OneSource service, and for transfer agent services, shareholder
services, administration and investment management provided to proprietary money
market funds.
Customer assets held by Schwab that have been purchased through the Mutual
Fund OneSource service, excluding SchwabFunds, totaled $41.4 billion at March
31, 1997, compared to $28.7 billion at March 31, 1996, a 44% increase. Customer
assets invested in the SchwabFunds increased 35% to $47.3 billion at March
31, 1997 from $35.0 billion at March 31, 1996.
Customer assets invested in the Mutual Fund Marketplace (registered
trademark), excluding the Mutual Fund OneSource service, totaled $37.1 billion
at March 31, 1997, compared to $29.3 billion at March 31, 1996, a 27% increase.
Schwab charges a transaction fee on trades placed in the funds included in the
Mutual Fund Marketplace (except on trades through the Mutual Fund OneSource
service) and these fees are recorded as commission revenues.
Principal Transactions
Principal transaction revenues increased $7 million, or 12%, to $69 million
in the first quarter of 1997 from the comparable period in 1996. This increase
was primarily due to higher trading volume handled by M&S, partially offset by
lower average revenue per principal transaction mainly due to the impact of the
January 1997 implementation of the Securities and Exchange Commission (SEC)
Order Handling Rules (see discussion below).
In August 1996, the SEC adopted certain new rules and rule amendments,
known as the Order Handling Rules, which significantly alter the manner in which
orders related to both Nasdaq and
- 10 -
<PAGE>
listed securities will be handled. These rules became effective on January 20,
1997, with respect to exchange-listed stocks and a limited number of Nasdaq
securities, and are being phased in with respect to additional Nasdaq securities
during 1997. Average revenue per principal transaction declined during the first
quarter of 1997 as compared to the first quarter of 1996, and the Company
expects further significant declines in this measure as additional securities
are phased-in under the Order Handling Rules.
The Order Handling Rules, along with other potential regulatory actions and
improvements in technology, could impact the manner in which business is
currently conducted in the Nasdaq market. In addition, during 1994, the SEC
commenced an investigation into the Nasdaq market and the activities of broker-
dealers, including M&S, who act as market makers in Nasdaq securities. On August
8, 1996, the SEC issued a report of its investigation, and the National
Association of Securities Dealers consented to sanctions for failing to enforce
compliance with its rules and the federal securities laws. The SEC is
continuing its investigation and has stated that further enforcement
proceedings have not been precluded. These new rules, regulatory actions and
changes in market customs and practices are expected to have a material adverse
impact on M&S' principal transaction revenues, M&S' profit margin and on the
manner in which M&S conducts its business. See "Commitments and Contingencies"
note in the Notes to Condensed Consolidated Financial Statements regarding
certain civil litigation relating to various principal transaction activities.
Interest Revenue, Net of Interest Expense
Interest revenue, net of interest expense (referred to as net interest
revenue), increased $18 million, or 30%, to $77 million in the first quarter of
1997 from the comparable period in 1996 as shown in the following table (in
millions):
- -----------------------------------------------------------
Three Months
Ended
March 31,
1997 1996
- -----------------------------------------------------------
Interest Revenue
Margin loans to customers $ 99 $ 77
Investments, customer-related 94 76
Other 7 5
- -----------------------------------------------------------
Total 200 158
- -----------------------------------------------------------
Interest Expense
Customer cash balances 109 86
Stock-lending activities 8 5
Borrowings 5 4
Other 1 4
- -----------------------------------------------------------
Total 123 99
- -----------------------------------------------------------
Net Interest Revenue $ 77 $ 59
===========================================================
Customer-related daily average balances, interest rates and average net
interest margin for the first quarters of 1997 and 1996 are summarized in the
following table (dollars in millions):
- -----------------------------------------------------------------------
Three Months Ended
March 31,
1997 1996
- -----------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 7,229 $ 5,637
Average interest rate 5.29% 5.39%
Margin loans to customers:
Average balance outstanding $ 5,350 $ 4,026
Average interest rate 7.49% 7.67%
Average yield on interest-earning assets 6.22% 6.34%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $ 10,098 $ 7,791
Average interest rate 4.37% 4.46%
Other interest-bearing sources:
Average balance outstanding $ 978 $ 649
Average interest rate 4.38% 4.45%
Average noninterest-bearing portion $ 1,503 $ 1,223
Average interest rate on funding sources 3.85% 3.89%
Summary:
Average yield on interest-earning assets 6.22% 6.34%
Average interest rate on funding sources 3.85% 3.89%
- ----------------------------------------------------------------------
Average net interest margin 2.37% 2.45%
======================================================================
- 11 -
<PAGE>
The increase in net interest revenue from the prior year's first quarter
was primarily due to higher levels of average earning assets, partially offset
by a decrease in average net interest margin.
Expenses Excluding Interest
Compensation and benefits expense for the first quarter of 1997 increased
$25 million, or 13%, to $221 million from the prior year's first quarter
primarily due to an increase in salaries and wages resulting from a larger
number of employees, partially offset by a decrease in variable compensation.
During the first quarters of 1997 and 1996, variable compensation represented
22% and 25%, respectively, of total compensation and benefits expense. At March
31, 1997, the Company had full-time, part-time and temporary employees, and
persons employed on a contract basis that represented the equivalent of
approximately 11,100 full-time employees, compared to approximately 9,900 at
March 31, 1996. Compensation for temporary employees, contractors and overtime
hours accounted for $31 million and $23 million of total compensation and
benefits expense during the first quarters of 1997 and 1996, respectively.
Advertising and market development expense increased $14 million, or 61%,
to $36 million from the prior year's first quarter primarily due to increased
media, print and direct mail advertisements relating to campaigns covering
Mutual Fund OneSource (registered trademark) and e.Schwab (trademark), as well
as new product and service offerings. The Company was selected as the official
investment firm for the Professional Golf Association Tour, which also
contributed to the increase in advertising and market development expense.
The Company's effective income tax rate for the first quarter of 1997 was
39.5% compared to 41.1% for the comparable period in 1996.
Liquidity and Capital Resources
Liquidity
Schwab
Liquidity needs relating to customer trading and margin borrowing
activities are met primarily through cash balances in customer accounts, which
totaled $11.4 billion and $10.9 billion at March 31, 1997 and December 31, 1996,
respectively. 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
$250 million subordinated revolving credit facility maturing in September 1998,
of which $210 million was outstanding at March 31, 1997. At quarter end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
- - $10 million maturing in 1998 and $15 million maturing in 1999. Borrowings
under these subordinated lending arrangements qualify as regulatory capital for
Schwab.
For use in its brokerage operations, Schwab maintained uncommitted,
unsecured bank credit lines totaling $495 million at March 31, 1997. Schwab used
such borrowings for five days during the first three months of 1997, with the
daily amounts borrowed averaging $61 million. These lines were unused at March
31, 1997.
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 cash equivalents, and
marketable securities. M&S may borrow up to
- 12 -
<PAGE>
$35 million under a subordinated lending arrangement with CSC. Borrowings under
this arrangement qualify as regulatory capital for M&S. This facility was unused
at March 31, 1997.
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. Schwab and M&S 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 any unsecured advances or loans to their parent or
employees if such payment would result in net capital of less than 5% of their
aggregate debit balances or less than 120% of their minimum dollar amount
requirement of $1 million. At March 31, 1997, Schwab had $576 million of net
capital (10% of aggregate debit balances), which was $463 million in excess of
its minimum required net capital. At March 31, 1997, M&S had $9 million of net
capital (454% of aggregate debit balances), which was $8 million in excess of
its minimum required net capital. Management believes that funds generated by
the operations of CSC's subsidiaries 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 issued and
outstanding $278 million Senior Medium-Term Notes, Series A (Medium-Term Notes),
as well as from the funding of cash dividends, common stock repurchases and
acquisitions. The Medium-Term Notes have maturities ranging from 1997 to 2005
and fixed interest rates ranging from 5.32% to 7.72% with interest payable
semiannually. The Medium-Term Notes were rated A3 by Moody's Investors Service
and BBB+ by Standard & Poor's Ratings Group at March 31, 1997 and December 31,
1996.
As of March 31, 1997, CSC had a prospectus supplement on file with the SEC
enabling CSC to issue up to $196 million in Senior or Senior Subordinated
Medium-Term Notes, Series A. These notes remained unissued at March 31, 1997.
CSC may borrow under its $250 million committed, unsecured credit facility
with a group of nine banks through June 1997. The funds are available for
general corporate purposes for which CSC pays a commitment fee on the unused
balance. The terms of this facility require CSC to maintain a minimum level of
stockholders' equity and Schwab and M&S to maintain minimum levels of net
capital, as defined. This facility was not used in the first quarter of 1997.
See "Commitments and Contingencies" note in Part I - Financial Information,
Item 1., Notes to Condensed Consolidated Financial Statements.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $95 million for the first
three months of 1997, up 32% from $72 million for the first three months of
1996. Depreciation expense totaled $25 million for the first quarter of 1997,
as compared to $22 million for same period in the prior year. Amortization
expense totaled $3 million for both the first quarter of 1997 and 1996. During
the first three months of 1997, the Company's capital expenditures totaled $33
million for equipment and office facilities relating to continued enhancements
of its data processing and telecommunications systems. In addition, the Company
opened four new branch offices during the first three months of 1997 and three
more during April 1997. As has been the case recently, capital expenditures
will vary from period to period as business conditions change.
During the first three months of 1997, the Company paid common stock cash
dividends totaling $9 million, up from $7 million paid during the first three
months of 1996.
The Company monitors both the relative composition and absolute level of
its capital
- 13 -
<PAGE>
structure. The Company's stockholders' equity at March 31, 1997 totaled $938
million. In addition, the Company had borrowings of $283 million that bear
interest at a weighted-average rate of 6.46%. These borrowings, together with
the Company's equity, provided total financial capital of $1,221 million at
March 31, 1997, up $82 million, or 7% from the December 31, 1996 level of $1,139
million.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of legal proceedings in Notes to Condensed Consolidated
Financial Statements, under "Commitments and Contingencies" in Part I -
Financial Information, Item 1., is incorporated herein by reference.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q.
Exhibit
Number Exhibit
- ------- ---------------------------------------------------------------------
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option
Plan, restated to include amendments through February 26, 1997, with
form of Non-Qualified Stock Option Agreement (Executive Officer Stock
Option Plan (1987)) attached, (supersedes Exhibit 10.159 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996).
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of Non-
Qualified Stock Option Agreement attached, (supersedes Exhibit 10.160
to the Registrant's Form 10-Q for the quarter ended September 30,
1996).
11.1 Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule (electronic only).
- ------------------------------------------------------------------------------
(b) Reports on Form 8-K
None.
- 14 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: May 14, 1997 /s/ Steven L. Scheid
---------------------------
Steven L. Scheid
Executive Vice President and
Chief Financial Officer
-15-
Exhibit 10.166
THE CHARLES SCHWAB CORPORATION
1987 EXECUTIVE OFFICER STOCK OPTION PLAN
(Restated to include Amendments through February 26, 1997)
Article 1. Introduction.
The purpose of the 1987 Executive Stock Option Plan, as Amended and
Restated (the "Plan") is to enable The Charles Schwab Corporation and its
subsidiaries to attract and retain directors, officers, and other key
employees and to provide such persons with additional incentive to advance
the interests of the Company. The Plan was initially adopted on March 24, 1987,
and was amended on September 17, 1996. The Plan is hereby restated and
amended as of February 26, 1997, and the terms of this Restatement shall
apply to all awards granted under the Plan on or after such date. The Plan
shall terminate not more than ten (10) years from the date the Plan initially
was adopted. The Plan will provide Awards in the form of Restricted Shares,
Performance Share Awards or Options. The Plan shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
Article 2. Administration.
2.1 The Committee. The Plan shall be administered by the Committee.
The Committee shall consist of two or more Non-Employee Directors, who shall
be appointed by the Board.
2.2 Committee Responsibilities. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons.
Article 3. Limitation on Awards.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 1,284,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares
being issued, or if any Options terminate for any other reason before being
exercised, then such Restricted Shares, Performance Share Awards or Options
shall again become available for Awards under the Plan. The limitation of this
Article 3 shall be subject to adjustment pursuant to Article 10. Any Common
Shares issued pursuant to the Plan may be authorized but unissued shares or
treasury shares.
Article 4. Eligibility.
4.1 General Rule. Key Employees shall be eligible for designation as
Participants by the Committee.
Article 5. Options.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions
of the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.
5.2 Options Nontransferability. No Option granted under the Plan
shall be transferable by the Optionee other than by will or the laws of descent
and distribution. An Option may be exercised during the lifetime of the
Optionee only by him or her. No Option or interest therein may be
transferred, assigned, pledged or hypothecated by the Optionee during his or
her lifetime, whether by operation of law or otherwise, or be made subject
to execution, attachment or similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10.
5.4 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than
100 percent of the Fair Market Value of a Common Share on the date of grant.
Subject to the preceding sentence, the Exercise Price under any Option shall be
determined by the Committee. The Exercise Price shall be payable in
accordance with Article 6.
5.5 Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. Subject to the preceding sentence, the Committee shall determine when
all or any part of an Option is to become exercisable and when such Option
is to expire; provided that, in appropriate cases, the Company shall have the
discretion to extend the term of an Option or the time within which,
following termination of employment, an Option may be exercised, or to
accelerate the exercisability of an Option. A Stock Option Agreement may
provide for accelerated exercisability in the event of the Participant's death,
disability, Retirement, or other termination of employment and may provide
for expiration prior to the end of its term in the event of the termination of
the Optionee's employment; provided that upon an Optionee's Retirement, the
exercisability of all outstanding Options shall be accelerated, other than any
Options that had been granted within two years of the date of the Optionee's
Retirement. Options may also be awarded in combination with Restricted Shares,
and such an Award may provide that the Options will not be exercisable
unless the related Restricted Shares are forfeited. In addition, Options
granted under this Section 5 may be granted subject to forfeiture provisions
which provide for forfeiture of the Option upon the exercise of tandem awards,
the terms of which are established in other programs of the Company.
5.6 Effect of Change in Control. The Committee (in its sole
discretion) may determine, at the time of granting an Option, that such Option
shall become fully exercisable as to all Common Shares subject to such
Option immediately preceding any Change in Control with respect to the Company.
5.7 Restrictions on Transfer of Common Shares. Any Common Shares
issued upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.8 Authorization of Replacement Options. Concurrently with the
grant of any Option to a Participant, the Committee may authorize the grant of
Replacement Options. If Replacement Options have been authorized by the
Committee with respect to a particular award of Options (the "Underlying
Options"), the Option Agreement with respect to the Underlying Options shall
so state, and the terms and conditions of the Replacement Options shall be
provided therein. The grant of any Replacement Options shall be effective
only upon the exercise of the Underlying Options through the use of Common
Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement
Options shall equal the number of Common Shares used to exercise the Underlying
Options, and, if the Option Agreement so provides, the number of Common
Shares used to satisfy any tax withholding requirements incident to the
exercise of the Underlying Options in accordance with Section 12.2. Upon the
exercise of the Underlying Options, the Replacement Options shall be evidenced
by an amendment to the Underlying Option Agreement. The Exercise Price of a
Replacement Option shall be no less than the Fair Market Value of a Common
Share on the date the grant of the Replacement Option becomes effective. The
term of each Replacement Option shall be equal to the remaining term of the
Underlying Option. No Replacement Options shall be granted to Optionees when
Underlying Options are exercised pursuant to the terms of the Plan and the
Underlying Option Agreement following termination of the Optionee's employment.
The Committee, in its sole discretion, may establish such other terms and
conditions for Replacement Options as it deems appropriate.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash at the time when such
Common Shares are purchased, except that the Committee may at any time
accept payment pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall
be valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being
surrendered are Restricted Shares that have not yet become vested, the same
restrictions shall be imposed upon the new Common Shares being purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all
or part of the Exercise Price and any withholding taxes.
Article 7. Restricted Shares and Performance Share Awards.
7.1 Time, Amount and Form of Awards. The Committee may grant
Restricted Shares or Performance Share Awards with respect to an Award Year
during such Award Year or at any time thereafter. Each such Award shall be
evidenced by a Stock Award Agreement between the Award recipient and the
Company. The amount of each Award of Restricted Shares or Performance Share
Awards shall be determined by the Committee. Awards under the Plan may be
granted in the form of Restricted Shares or Performance Share Awards or in
any combination thereof, as the Committee shall determine at its sole
discretion at the time of the grant. Restricted Shares or Performance Share
Awards may also be awarded in combination with Options, and such an Award
may provide that the Restricted Shares or Performance Share Awards will be
forfeited in the event that the related Options are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an
Award is granted in the form of Restricted Shares, the Award recipient, as a
condition to the grant of such Award, shall be required to pay the Company
in cash an amount equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be
issued pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award
Agreement. The Committee shall select the vesting conditions in the case of
Restricted Shares, or issuance conditions in the case of Performance Share
Awards, which may be based upon the Participant's service, the Participant's
performance, the Company's performance or such other criteria as the
Committee may adopt. A Stock Award Agreement may also provide for accelerated
vesting or issuance, as the case may be, in the event of the Participant's
death, disability or retirement. The Committee, in its sole discretion, may
determine, at the time of making an Award of Restricted Shares, that such Award
shall become fully vested in the event that a Change in Control occurs with
respect to the Company. The Committee, in its sole discretion, may determine,
at the time of making a Performance Share Award, that the issuance
conditions set forth in such Award shall be waived in the event that a Change
in Control occurs with respect to the Company.
The Committee shall have the discretion to adjust the payouts
associated with Awards downward.
7.4 Form of Settlement of Performance Share Awards. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 Death of Recipient. Any Common Shares that are to be issued
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries.
Each recipient of a Performance Share Award under the Plan shall designate one
or more beneficiaries for this purpose by filing the prescribed form with
the Company. A beneficiary designation may be changed by filing the prescribed
form with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
Article 8. Claims Procedures.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim
is filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim,
the claimant may appeal a denied claim to the Committee (or to a person
designated by the Committee) for further review. Such appeal shall be filed
in writing with the Committee on a form supplied by the Committee, together
with a written statement of the claimant's position, no later than 90 days
following receipt by the claimant of written notice of the denial of his or her
claim. If the claimant so requests, the Committee shall schedule a hearing.
A decision on review shall be made after a full and fair review of the claim
and shall be delivered in writing to the claimant no later than 60 days
after the Committee's receipt of the notice of appeal, unless special
circumstances (including the need to hold a hearing) require an extension of
time for processing the appeal, in which case a written decision on review
shall be delivered to the claimant as soon as possible but not later than 120
days after the Committee's receipt of the appeal notice. The claimant shall
be notified in writing of any such extension of time. The written decision on
review shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, and shall specifically refer to
the pertinent Plan provisions on which it is based. All determinations of
the Committee shall be final and binding on Participants and their
beneficiaries.
Article 9. Voting Rights and Dividends.
9.1 Restricted Shares.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other rights as the
Company's other stockholders.
(b) During the period of restriction, Named Executive Officers holding
Restricted Shares granted hereunder shall be credited with all regular cash
dividends paid with respect to all Restricted Shares while they are so held.
If a dividend is paid in the form of cash, such cash dividend shall be credited
to Named Executive Officers subject to the same restrictions on
transferability and forfeitability as the Restricted Shares with respect to
which they were paid. If any dividends or distributions are paid in shares
of Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted Shares
with respect to which they were paid. Subject to the succeeding paragraph, and
to the restrictions on vesting and the forfeiture provisions, all dividends
credited to a Named Executive Officer shall be paid to the Named Executive
Officer within forty-five (45) days following the full vesting of the
Restricted Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative security"
or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the longer of:
(i) the remaining vesting period of the Restricted Shares with respect to which
the dividend is paid; or (ii) six (6) months. The Committee shall establish
procedures for the application of this provision.
Named Executive Officers holding Restricted Shares shall have the
same voting rights as the Company's other stockholders.
9.2 Performance Share Awards. The holders of Performance Share
Awards shall have no voting or dividend rights until such time as any Common
Shares are issued pursuant thereto, at which time they shall have the same
voting, dividend and other rights as the Company's other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of
a dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a
spinoff or a similar occurrence, the Committee shall make appropriate
adjustments in one or more of (a) the number of Options, Restricted Shares and
Performance Share Awards available for future Awards under Article 3,
(b) the number of Performance Share Awards included in any prior Award which
has not yet been settled, (c) the number of Common Shares covered by each
outstanding Option or (d) the Exercise Price under each outstanding Option.
10.2 Reorganizations. In the event that the Company is a party to
a merger or other reorganization, outstanding Options, Restricted Shares and
Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent,
for their continuation by the Company (if the Company is a surviving
corporation), for accelerated vesting or for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class. Any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Common Shares subject to an Option. The grant of an Award
pursuant to the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure, to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
Article 11. Limitation of Rights.
11.1 Employment Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain
employed by the Company or any Subsidiary. The Company and its Subsidiaries
reserve the right to terminate the employment of any employee at any time, with
or without cause, subject only to a written employment agreement (if any).
11.2 Stockholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the issuance of a stock
certificate for such Common Shares. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date
when such certificate is issued, except as expressly provided in Articles 7, 9
and 10.
11.3 Creditors' Rights. A holder of Performance Share Awards shall
have no rights other than those of a general creditor of the Company.
Performance Share Awards represent unfunded and unsecured obligations of the
Company, subject to the terms and conditions of the applicable Stock Award
Agreement.
11.4 Government Regulations. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares
to be issued pursuant to the Plan shall be subject to all applicable laws,
rules and regulations, and such approvals by any governmental agencies as may
be required. The Company reserves the right to restrict, in whole or in part,
the delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to
the issuance of such Common Shares or to their registration, qualification or
exemption from registration or qualification under the Securities Act of
1933, as amended, or any applicable state securities laws; and
(b) Satisfactory assurances have been received that such Common
Shares, when issued, will be duly listed on the New York Stock Exchange or any
other securities exchange on which Common Shares are then listed.
Article 12. Withholding Taxes.
12.1 General. To the extent required by applicable federal, state,
local or foreign law, the recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to the Company for the
satisfaction of any withholding tax obligations that arise by reason of such
payment or distribution. The Company shall not be required to make such
payment or distribution until such obligations are satisfied.
12.2 Nonstatutory Options, Restricted Shares or Performance Share
Awards. The Committee may permit an Optionee who exercises Options, or who
receives Awards of Restricted Shares, or who receives Common Shares pursuant
to the terms of a Performance Share Award, to satisfy all or part of his or her
withholding tax obligations by having the Company withhold a portion of the
Common Shares that otherwise would be issued to him or her under such Awards.
Such Common Shares shall be valued at their Fair Market Value on the date
when taxes otherwise would be withheld in cash. The payment of withholding
taxes by surrendering Common Shares to the Company, if permitted by the
Committee, shall be subject to such restrictions as the Committee may impose,
including any restrictions required by rules of the Securities and Exchange
Commission.
Article 13. Assignment or Transfer of Award.
Any Award granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any creditor's
process, whether voluntarily, involuntarily or by operation of law. However,
this Article 13 shall not preclude (i) a Participant from designating a
beneficiary to succeed, after the Participant's death, to those of the
Participant's Awards (including without limitation, the right to exercise
any unexercised Options) as may be determined by the Company from time to time
in its sole discretion, or (ii) a transfer of any Award hereunder by will or
the laws of descent or distribution.
Article 14. Future of Plans.
14.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on February 26, 1997. The Plan shall remain in effect until it is
terminated under Section 14.2, except that no Awards shall be granted after
March 24, 1997.
14.2 Amendment or Termination. The Board may at any time terminate
this Plan, and the Board or the Committee make such modifications of the Plan
as it shall deem advisable; provided, however, that any amendment of the
Plan shall be subject to the approval of the Company's stockholders to the
extent required by applicable laws, regulations or rules.
14.3 Effect of Amendment or Termination. No Award shall be made
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Option, Restricted Share or
Performance Share Award previously granted under the Plan.
Article 15. Definitions.
15.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
15.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
15.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
15.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 14.1:
(a) A change in control required to be reported pursuant to
Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who either
(i) had been directors of the Company 24 months prior to such change or
(ii) were elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in office at the time
of the election or nomination;
(c) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and apart
from rights accruing under special circumstances) having the right to vote
at elections of directors (the "Base Capital Stock"); provided, however, that
any change in the relative beneficial ownership of securities of any person
resulting solely from a reduction in the aggregate number of outstanding shares
of Base Capital Stock, and any decrease thereafter in such person's
ownership of securities, shall be disregarded until such person increases in
any manner, directly or indirectly, such person's beneficial ownership of any
securities of the Company.
15.5 "Code" means the Internal Revenue Code of 1986, as amended.
15.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
15.7 "Common Share" means one share of the common stock of the
Company.
15.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
15.9 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
15.10 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
15.11 "Exercise Price" means the amount for which one Common Share
may be purchased upon exercise of an Option, as specified by the Committee in
the applicable Stock Option Agreement.
15.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair Market
Value shall be equal to the last transaction price quoted by the NASDAQ system
for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the NASDAQ system for such date;
and
(d) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
15.13 "Key Employee" means a key common-law employee of the Company
or any Subsidiary, as determined by the Committee.
15.14 "Named Executive Officer" means a Participant who, as of the
date of vesting of an Award is one of a group of "covered employees," as
defined in the Regulations promulgated under Code Section 162(m), or any
successor statute.
15.15 "Non-Employee Director" means a member of the Board who is
not a common-law employee.
15.16 "Option" means an employee stock option not described in
sections 422 through 424 of the Code, including a Replacement Option,
granted under the Plan and entitling the holder to purchase one Common Share.
15.17 "Optionee" means an individual, or his or her estate,
legatee or heirs at law that holds an Option.
15.18 "Participant" means a Non-Employee Director or Key Employee
who has received an Award.
15.19 "Performance Share Award" means the conditional right to
receive in the future one Common Share, awarded to a Participant under the
Plan.
15.20 "Plan" means this 1987 Executive Stock Option Plan of The
Charles Schwab Corporation, as it may be amended from time to time.
15.21 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident
to the exercise of an Option.
15.22 "Restricted Share" means a Common Share awarded to a
Participant under the Plan.
15.23 "Stock Award Agreement" means the agreement between the
Company and the recipient of a Restricted Share or Performance Share Award
which contains the terms, conditions and restrictions pertaining to such
Restricted Share or Performance Share Award.
15.24 "Stock Option Agreement" means the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her option.
15.25 "Subsidiary" means any corporation, if the Company and/or
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such
corporation. A corporation that attains the status of a Subsidiary on a
date after the adoption of the Plan shall be considered a Subsidiary commencing
as of such date.
15.26. "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under
the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The
foregoing definition shall apply to all Stock Option Agreements entered into
pursuant to the Plan, irrespective of any definition to the contrary
contained in any such Stock Option Agreement.
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
(Executive Officer Stock Option Plan (1987))
THIS AGREEMENT made as of this ____ day of _________, 19____, by and
between The Charles Schwab Corporation, a Delaware corporation ("Company") and
______________________________ ("Optionee").
WITNESSETH:
WHEREAS, there has been granted to Optionee, effective as of __________,
19___, a non-qualified stock option under the Executive Officer Stock Option
Plan (1987) of the Company ("Option Plan");
NOW THEREFORE, it is mutually agreed as follows:
1. The Optionee shall have a non-qualified stock option to acquire
________ shares of common stock of the company (the "Share"), at a price of
$_______ per share.
2. Except as provided in paragraphs 3 and 4 below, the other terms of
this option shall be the same as all of those provided for in the Option Plan,
which include, without limitation, vesting of Shares, limitations on exercise
and transfer, and other restrictions. The Option Plan is attached hereto as
Exhibit A and is incorporated herein by this reference. Optionee has read
the Option Plan and, other than as provided in paragraphs 3 and 4 below,
agrees to be bound by its terms. Without limitation, Optionee specifically
acknowledges the representations, warranties and agreements contained in
paragraph 6(e) of the Option Plan.
3. Notwithstanding paragraph 6(b) of the Option Plan, in the event
Optionee's employment or service as a director with or for the Company and its
subsidiaries terminates by reason of Optionee's death or permanent
disability, all Shares then no deemed to be Vested thereupon will be deemed
immediately Vested. For this purpose, "permanent disability" will mean the
reasonable determination by a qualified physician acceptable to the company
that the Optionee has an illness or incapacity that has disabled, or will
disable, the Optionee from rendering his or her normal services to the
Company and its subsidiaries for a period of more than six (6) consecutive
months in any consecutive twelve (12) month period.
4. Upon exercise of this Option, the Company will extend to the
Optionee rights under that certain Registration Rights and Stock Restriction
Agreement dated as of March 31, 1987, as amended, subject to the Optionee's
agreement to be bound by the terms thereof.
5. Any notice to be given by the Optionee under the terms of the
Option Plan shall be deemed to have been duly given, and effective upon the
receipt, if sent by Certified Mail, postage and certification prepaid, to
The Charles Schwab Corporation, 101 Montgomery, San Francisco, California
94104, Attention: Corporate Secretary, except as superseded by a different
address noticed to Optionee.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year referred to above.
THE CHARLES SCHWAB CORPORATION ("Company")
By: _____________________________________
__________________________________________
"Optionee"
Attachment (1) Spousal Consent
(2) Exhibit A: 1987 Stock Option Plan
Exhibit 10.167
THE CHARLES SCHWAB CORPORATION
1987 STOCK OPTION PLAN
(Restated to include Amendments through February 26, 1997)
Article 1. Introduction.
The purpose of the 1987 Stock Option Plan, as Amended and Restated (the
"Plan") is to enable The Charles Schwab Corporation and its subsidiaries to
attract and retain directors, officers, and other key employees and to provide
such persons with additional incentive to advance the interests of the Company.
The Plan was initially adopted on March 24, 1987, and was amended on July 29,
1987, April 17, 1989 and September 17, 1996. The Plan is hereby restated
and amended as of February 26, 1997, and the terms of this Restatement shall
apply to all awards granted under the Plan on or after such date. The Plan
shall terminate not more than ten (10) years from the date the Plan initially
was adopted. The Plan will provide for Awards in the form of Restricted
Shares, Performance Share Awards or Options, which may constitute incentive
stock options or nonstatutory stock options. The Plan shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
Article 2. Administration.
2.1 The Committee. The Plan shall be administered by the Committee.
The Committee shall consist of two or more Non-Employee Directors, who shall
be appointed by the Board.
2.2 Committee Responsibilities. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons.
Article 3. Limitation on Awards.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 1,616,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares
being issued, or if any Options terminate for any other reason before being
exercised, then such Restricted Shares, Performance Share Awards or Options
shall again become available for Awards under the Plan. The limitation of this
Article 3 shall be subject to adjustment pursuant to Article 10. Any Common
Shares issued pursuant to the Plan may be authorized but unissued shares or
treasury shares.
Article 4. Eligibility.
4.1 General Rule. Key Employees shall be eligible for designation as
Participants by the Committee.
4.2 Ten-Percent Stockholders. A Key Employee who owns more than 10
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for the
grant of an ISO unless (a) the Exercise price under such ISO is at least 110
percent of the Fair Market Value of a Common Share on the date of grant and
(b) such ISO by its terms is not exercisable after the expiration of five years
from the date of grant.
4.3 Attribution Rules. For purposes of Section 4.2, in determining
stock ownership, a Key Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his or her brothers, sisters, spouse,
ancestors or lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which the Key Employee holds an option shall not be counted.
4.4 Outstanding Stock. For purposes of Section 4.2, "outstanding
stock" shall include all stock actually issued and outstanding immediately
after the grant of the ISO to the Key Employee. "Outstanding stock" shall not
include treasury shares or shares authorized for issuance under outstanding
options held by the Key Employee or by any other person.
Article 5. Options.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions
of the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. The
Committee may designate all or any part of an Option as an ISO. The Committee
may designate all or any part of an Option as an ISO (or, in the case of a Key
Employee who is subject to the tax laws of a foreign jurisdiction, as an option
qualifying for favorable tax treatment under the laws of such foreign
jurisdiction).
5.2 Options Nontransferability. No Option granted under the Plan
shall be transferable by the Optionee other than by will or the laws of descent
and distribution. An Option may be exercised during the lifetime of the
Optionee only by him or her. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his or her lifetime,
whether by operation of law or otherwise, or be made subject to execution,
attachment or similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
5.4 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than
100 percent of the Fair Market Value of a Common Share on the date of grant,
except as otherwise provided in Section 4.2. Subject to the preceding sentence,
the Exercise Price under any Option shall be determined by the Committee.
The Exercise Price shall be payable in accordance with Article 6.
5.5 Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. The term of an ISO shall in no event exceed 10 years from the date of
grant, and Section 4.2 may require a shorter term. Subject to the preceding
sentence, the Committee shall determine when all or any part of an Option is to
become exercisable and when such Option is to expire; provided that, in
appropriate cases, the Company shall have the discretion to extend the term of
an Option or the time within which, following termination of employment, an
Option may be exercised, or to accelerate the exercisability of an Option. A
Stock Option Agreement may provide for accelerated exercisability in the
event of the Participant's death, disability, Retirement, or other termination
of employment and may provide for expiration prior to the end of its term in
the event of the termination of the Optionee's employment; provided that upon
an Optionee's Retirement, the exercisability of all outstanding Options
shall be accelerated, other than any Options that had been granted within two
years of the date of the Optionee's Retirement. NSOs may also be awarded in
combination with Restricted Shares, and such an Award may provide that the NSOs
will not be exercisable unless the related Restricted Shares are forfeited.
In addition, NSOs granted under this Section 5 may be granted subject to
forfeiture provisions which provide for forfeiture of the Option upon the
exercise of tandem awards, the terms of which are established in other programs
of the Company.
5.6 Limitation on Amount of ISOs. The aggregate fair market value
(determined at the time the ISO is granted) of the Common Shares with respect
to which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed $100,000; provided, however, that all or any portion of an Option which
cannot be exercised as an ISO because of such limitation shall be treated as an
NSO.
5.7 Effect of Change in Control. The Committee (in its sole
discretion) may determine, at the time of granting an Option, that such Option
shall become fully exercisable as to all Common Shares subject to such
Option immediately preceding any Change in Control with respect to the Company.
5.8 Restrictions on Transfer of Common Shares. Any Common Shares
issued upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 Authorization of Replacement Options. Concurrently with the grant
of any Option to a Participant, the Committee may authorize the grant of
Replacement Options. If Replacement Options have been authorized by the
Committee with respect to a particular award of Options (the "Underlying
Options"), the Option Agreement with respect to the Underlying Options shall so
state, and the terms and conditions of the Replacement Options shall be
provided therein. The grant of any Replacement Options shall be effective only
upon the exercise of the Underlying Options through the use of Common Shares
pursuant to Section 6.2 or Section 6.3. The number of Replacement Options shall
equal the number of Common Shares used to exercise the Underlying Options, and,
if the Option Agreement so provides, the number of Common Shares used to
satisfy any tax withholding requirements incident to the exercise of the
Underlying Options in accordance with Section 12.2. Upon the exercise of the
Underlying Options, the Replacement Options shall be evidenced by an amendment
to the Underlying Option Agreement. Notwithstanding the fact that the
Underlying Option may be an ISO, a Replacement Option is not intended to
qualify as an ISO. The Exercise Price of a Replacement Option shall be no
less than the Fair Market Value of a Common Share on the date the grant of the
Replacement Option becomes effective. The term of each Replacement Option
shall be equal to the remaining term of the Underlying Option. No Replacement
Options shall be granted to Optionees when Underlying Options are exercised
pursuant to the terms of the Plan and the Underlying Option Agreement following
termination of the Optionee's employment. The Committee, in its sole
discretion, may establish such other terms and conditions for Replacement
Options as it deems appropriate.
5.10 Options Granted to Non-United States Key Employees. In the
case of Key Employees who are subject to the tax laws of a foreign
jurisdiction, the Company may issue Options to such Key Employees that contain
terms required to conform with any requirements for favorable tax treatment
imposed by the laws of such foreign jurisdiction, or as otherwise may be
required by the laws of such foreign jurisdiction. The terms of any such
Options shall be governed by the Plan, subject to the terms of any Addendum
to the Plan specifically applicable to such Options.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash at the time when such
Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. However, the Committee may specify in the Stock Option Agreement
that payment may be made pursuant to Section 6.2 or 6.3.
(b) In the case of an NSO, the Committee may at any time accept
payment pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares
shall be valued at their Fair Market Value on the date when the new Common
Shares are purchased under the Plan. In the event that the Common Shares
being surrendered are Restricted Shares that have not yet become vested, the
same restrictions shall be imposed upon the new Common Shares being purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all
or part of the Exercise Price and any withholding taxes.
Article 7. Restricted Shares and Performance Share Awards.
7.1 Time, Amount and Form of Awards. The Committee may grant
Restricted Shares or Performance Share Awards with respect to an Award Year
during such Award Year or at any time thereafter. Each such Award shall be
evidenced by a Stock Award Agreement between the Award recipient and the
Company. The amount of each Award of Restricted Shares or Performance Share
Awards shall be determined by the Committee. Awards under the Plan may be
granted in the form of Restricted Shares or Performance Share Awards or in
any combination thereof, as the Committee shall determine at its sole
discretion at the time of the grant. Restricted Shares or Performance Share
Awards may also be awarded in combination with NSOs, and such an Award may
provide that the Restricted Shares or Performance Share Awards will be
forfeited in the event that the related NSOs are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an
Award is granted in the form of Restricted Shares, the Award recipient, as a
condition to the grant of such Award, shall be required to pay the Company
in cash an amount equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted
Shares shall become vested, in full or in installments, upon satisfaction of
the conditions specified in the Stock Award Agreement. Common Shares shall be
issued pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award
Agreement. The Committee shall select the vesting conditions in the case of
Restricted Shares, or issuance conditions in the case of Performance Share
Awards, which may be based upon the Participant's service, the Participant's
performance, the Company's performance or such other criteria as the
Committee may adopt. A Stock Award Agreement may also provide for accelerated
vesting or issuance, as the case may be, in the event of the Participant's
death, disability or retirement. The Committee, in its sole discretion, may
determine, at the time of making an Award of Restricted Shares, that such Award
shall become fully vested in the event that a Change in Control occurs with
respect to the Company. The Committee, in its sole discretion, may determine,
at the time of making a Performance Share Award, that the issuance conditions
set forth in such Award shall be waived in the event that a Change in Control
occurs with respect to the Company.
The Committee shall have the discretion to adjust the payouts associated
with Awards downward.
7.4 Form of Settlement of Performance Share Awards. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 Death of Recipient. Any Common Shares that are to be issued
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries.
Each recipient of a Performance Share Award under the Plan shall designate one
or more beneficiaries for this purpose by filing the prescribed form with
the Company. A beneficiary designation may be changed by filing the prescribed
form with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
Article 8. Claims Procedures.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim
is filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of
the Plan, and, where appropriate, an explanation as to how the claimant can
perfect the claim. If the claimant wishes further consideration of his or
her claim, the claimant may appeal a denied claim to the Committee (or to a
person designated by the Committee) for further review. Such appeal shall
be filed in writing with the Committee on a form supplied by the Committee,
together with a written statement of the claimant's position, no later than 90
days following receipt by the claimant of written notice of the denial of his
or her claim. If the claimant so requests, the Committee shall schedule a
hearing. A decision on review shall be made after a full and fair review of the
claim and shall be delivered in writing to the claimant no later than 60 days
after the Committee's receipt of the notice of appeal, unless special
circumstances (including the need to hold a hearing) require an extension of
time for processing the appeal, in which case a written decision on review
shall be delivered to the claimant as soon as possible but not later than 120
days after the Committee's receipt of the appeal notice. The claimant shall
be notified in writing of any such extension of time. The written decision on
review shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, and shall specifically refer to
the pertinent Plan provisions on which it is based. All determinations of
the Committee shall be final and binding on Participants and their
beneficiaries.
Article 9. Voting Rights and Dividends.
9.1 Restricted Shares.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other rights as the
Company's other stockholders.
(b) During the period of restriction, Named Executive Officers
holding Restricted Shares granted hereunder shall be credited with all regular
cash dividends paid with respect to all Restricted Shares while they are so
held. If a dividend is paid in the form of cash, such cash dividend shall be
credited to Named Executive Officers subject to the same restrictions on
transferability and forfeitability as the Restricted Shares with respect to
which they were paid. If any dividends or distributions are paid in shares
of Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted Shares
with respect to which they were paid. Subject to the succeeding paragraph, and
to the restrictions on vesting and the forfeiture provisions, all dividends
credited to a Named Executive Officer shall be paid to the Named Executive
Officer within forty-five (45) days following the full vesting of the
Restricted Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative security"
or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the longer of:
(i) the remaining vesting period of the Restricted Shares with respect to which
the dividend is paid; or (ii) six (6) months. The Committee shall establish
procedures for the application of this provision.
Named Executive Officers holding Restricted Shares shall have the
same voting rights as the Company's other stockholders.
9.2 Performance Share Awards. The holders of Performance Share
Awards shall have no voting or dividend rights until such time as any Common
Shares are issued pursuant thereto, at which time they shall have the same
voting, dividend and other rights as the Company's other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares, a
combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spinoff or a similar occurrence, the Committee shall
make appropriate adjustments in one or more of (a) the number of Options,
Restricted Shares and Performance Share Awards available for future Awards
under Article 3, (b) the number of Performance Share Awards included in any
prior Award which has not yet been settled, (c) the number of Common Shares
covered by each outstanding Option or (d) the Exercise Price under each
outstanding Option.
10.2 Reorganizations. In the event that the Company is a party to
a merger or other reorganization, outstanding Options, Restricted Shares and
Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent,
for their continuation by the Company (if the Company is a surviving
corporation), for accelerated vesting or for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10,
a Participant shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class. Any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the
number or Exercise Price of Common Shares subject to an Option. The grant of an
Award pursuant to the Plan shall not affect in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure, to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
Article 11. Limitation of Rights.
11.1 Employment Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain
employed by the Company or any Subsidiary. The Company and its Subsidiaries
reserve the right to terminate the employment of any employee at any time, with
or without cause, subject only to a written employment agreement (if any).
11.2 Stockholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the issuance of a stock
certificate for such Common Shares. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date
when such certificate is issued, except as expressly provided in Articles 7, 9
and 10.
11.3 Creditors' Rights. A holder of Performance Share Awards shall
have no rights other than those of a general creditor of the Company.
Performance Share Awards represent unfunded and unsecured obligations of the
Company, subject to the terms and conditions of the applicable Stock Award
Agreement.
11.4 Government Regulations. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares
to be issued pursuant to the Plan shall be subject to all applicable laws,
rules and regulations, and such approvals by any governmental agencies as may
be required. The Company reserves the right to restrict, in whole or in
part, the delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to
the issuance of such Common Shares or to their registration, qualification or
exemption from registration or qualification under the Securities Act of 1933,
as amended, or any applicable state securities laws; and
(b) Satisfactory assurances have been received that such Common
Shares, when issued, will be duly listed on the New York Stock Exchange or any
other securities exchange on which Common Shares are then listed.
Article 12. Withholding Taxes.
12.1 General. To the extent required by applicable federal, state,
local or foreign law, the recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to the Company for the satisfaction
of any withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
12.2 Nonstatutory Options, Restricted Shares or Performance Share
Awards. The Committee may permit an Optionee who exercises NSOs, or who
receives Awards of Restricted Shares, or who receives Common Shares pursuant
to the terms of a Performance Share Award, to satisfy all or part of his or her
withholding tax obligations by having the Company withhold a portion of the
Common Shares that otherwise would be issued to him or her under such Awards.
Such Common Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash. The payment of withholding taxes
by surrendering Common Shares to the Company, if permitted by the Committee,
shall be subject to such restrictions as the Committee may impose, including
any restrictions required by rules of the Securities and Exchange Commission.
Article 13. Assignment or Transfer of Award.
Any Award granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any creditor's
process, whether voluntarily, involuntarily or by operation of law. However,
this Article 13 shall not preclude (i) a Participant from designating a
beneficiary to succeed, after the Participant's death, to those of the
Participant's Awards (including without limitation, the right to exercise
any unexercised Options) as may be determined by the Company from time to time
in its sole discretion, or (ii) a transfer of any Award hereunder by will or
the laws of descent or distribution.
Article 14. Future of Plans.
14.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on February 26, 1997. The Plan shall remain in effect until it is
terminated under Section 15.2, except that no Awards shall be made after
March 24, 1997.
14.2 Amendment or Termination. The Board may at any time terminate
this Plan, and the Board or the Committee make such modifications of the Plan
as it shall deem advisable; provided, however, that any amendment of the
Plan shall be subject to the approval of the Company's stockholders to the
extent required by applicable laws, regulations or rules.
14.3 Effect of Amendment or Termination. No Award shall be made
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Option, Restricted Share or
Performance Share Award previously granted under the Plan.
Article 15. Definitions.
15.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
15.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
15.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
15.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e)
of Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who either
(i) had been directors of the Company 24 months prior to such change or
(ii) were elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in office at the time
of the election or nomination;
(c) Any "person" (as such term is used in sections 13(d) and 14(d)
of the Exchange Act) becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and apart
from rights accruing under special circumstances) having the right to vote
at elections of directors (the "Base Capital Stock"); provided, however, that
any change in the relative beneficial ownership of securities of any person
resulting solely from a reduction in the aggregate number of outstanding shares
of Base Capital Stock, and any decrease thereafter in such person's ownership
of securities, shall be disregarded until such person increases in any manner,
directly or indirectly, such person's beneficial ownership of any securities
of the Company.
15.5 "Code" means the Internal Revenue Code of 1986, as amended.
15.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
15.7 "Common Share" means one share of the common stock of the
Company.
15.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
15.9 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
15.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
15.11 "Exercise Price" means the amount for which one Common Share
may be purchased upon exercise of an Option, as specified by the Committee in
the applicable Stock Option Agreement.
15.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the NASDAQ system for such date;
and
(d) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
15.13 "ISO" means an incentive stock option described in section
422(b) of the Code.
15.14 "Key Employee" means a key common-law employee of the
Company or any Subsidiary, as determined by the Committee.
15.15 "Named Executive Officer" means a Participant who, as of the
date of vesting of an Award is one of a group of "covered employees," as
defined in the Regulations promulgated under Code Section 162(m), or any
successor statute.
15.16 "Non-Employee Director" means a member of the Board who is
not a common-law employee.
15.17 "NSO" means an employee stock option not described in
sections 422 through 424 of the Code.
15.18 "Option" means an ISO or NSO or, in the case of a Key
Employee who is subject to the tax laws of a foreign jurisdiction, an option
qualifying for favorable tax treatment under the laws of such jurisdiction,
including a Replacement Option, granted under the Plan and entitling the
holder to purchase one Common Share.
15.19 "Optionee" means an individual, or his or her estate,
legatee or heirs at law that holds an Option.
15.20 "Participant" means a Non-Employee Director or Key Employee
who has received an Award.
15.21 "Performance Share Award" means the conditional right to
receive in the future one Common Share, awarded to a Participant under the
Plan.
15.22 "Plan" means this 1987 Stock Option Plan of The Charles
Schwab Corporation, as it may be amended from time to time.
15.23 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident
to the exercise of an Option.
15.24 "Restricted Share" means a Common Share awarded to a
Participant under the Plan.
15.25 "Stock Award Agreement" means the agreement between the
Company and the recipient of a Restricted Share or Performance Share Award
which contains the terms, conditions and restrictions pertaining to such
Restricted Share or Performance Share Award.
15.26 "Stock Option Agreement" means the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her option.
15.27 "Subsidiary" means any corporation, if the Company and/or
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such
corporation. A corporation that attains the status of a Subsidiary on a date
after the adoption of the Plan shall be considered a Subsidiary commencing as
of such date.
15.28 "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee
has attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under
the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The
foregoing definition shall apply to all Stock Option Agreements entered into
pursuant to the Plan, irrespective of any definition to the contrary
contained in any such Stock Option Agreement.
<PAGE>
ADDENDUM A
The provisions of the Plan, as amended by the terms of this Addendum A,
shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following definitions shall
apply in addition to those set out in section 16 of the Plan:
Approved Option Means a stock option designed to qualify as an approved
executive share option under the Taxes Act;
Inland Revenue means the Board of the Inland Revenue in the United Kingdom.
Key U.K. Employee means a designated employee of Sharelink Investment
Services plc or any subsidiary (as that term is defined in the Companies Act
1985 of the United Kingdom, as amended) of which Sharelink Investment
Services plc has control for the purposes of section 840 of the Taxes Act;
Taxes Act means the Income and Corporation Taxes Act 1988 of the United
Kingdom.
2. An Approved Option may only be granted to a Key U.K. Employee who:
(i) is employed on a full-time basis; and
(ii) does not fall within the provisions of paragraph 8 of
Schedule 9 to the Taxes Act.
For purposes of this section 2(i) of Addendum A, "full-time" shall mean an
employee who is required to work 20 hours per week, excluding meal breaks.
3. No Approved Option may be granted to a Key U.K. Employee if it
would cause the aggregate of the exercise price of all subsisting Approved
Options granted to such employee under the Plan, or any other subsisting
options granted to such employee under any other share option scheme approved
under Schedule 9 of the Taxes Act and established by the Company or an
associated company, to exceed the higher of (a) one hundred thousand pounds
sterling and (b) four times such employee's relevant emoluments for the current
or preceding year of assessment (whichever is greater); but where there were
no relevant emoluments for the previous year of assessment, the limit shall be
the higher of one hundred thousand pounds sterling) or four times such
employee's relevant emoluments for the period of twelve months beginning with
the first day during the current year of assessment in respect of which
there are relevant emoluments. For the purpose of this section 3 of
Addendum A, "associated company" means an associated company within the meaning
of section 416 of the Taxes Act; "relevant emoluments" has the meaning given
by paragraph 28(4) of Schedule 9 to the Taxes Act and "year of assessment"
means a year beginning on any April 6 and ending on the following April 5.
4. Common Shares issued pursuant to the exercise of Approved Options
must satisfy the conditions specified in paragraphs 10 to 14 of Schedule 9 to
the Taxes Act.
5. Notwithstanding the provisions of Section 5.4 of the Plan, the
exercise price of an Approved Option shall not be less than 100 percent of
the closing price of a Common Share as reported in the New York Stock
Exchange Composite Index on the date of grant.
6. No Approved Option may be exercised at any time by a Key U.K.
Employee when that Key U.K. Employee falls within the provisions of paragraph 8
of Schedule 9 to the Taxes Act. If at any time the shares under an Approved
Option cease to comply with the conditions in paragraphs 10 to 14 of Schedule 9
to the Taxes Act, then all Approved Options then outstanding shall lapse and
cease to be exercisable from the date of the shares ceasing so to comply, and
no optionee shall have any cause of action against the Company, Sharelink
Investment Services plc or any subsidiary of the Company or any other person in
respect thereof.
7. An Approved Option may contain such other terms, provisions and
conditions as may be determined by the Committee consistent with the Plan,
provided that the approved option otherwise complies with the requirements
for approved executive option schemes specified in Schedule 9 of the Taxes Act.
8. In relation to an Approved Option, notwithstanding the terms of
section 10.1 of the Plan, no adjustment shall be made pursuant to section 10.1
of the Plan to any outstanding Approved Options without the prior approval of
the Inland Revenue.
9. In relation to an Approved Option any Key U.K. Employee shall make
arrangements satisfactory to the Company for the satisfaction of any tax
withholding or deduction -- at -- source obligations that arise by reason of
the grant to him or her of such option, or its subsequent exercise.
10. In relation to an Approved Option, in addition to the provisions
set out in section 15.2 of the Plan, no amendment which affects any of the
provisions of the Plan relating to Approved Options shall be effective until
approved by the Inland Revenue, except for such amendment as are required to
obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to
the Taxes Act.
<PAGE>
NON-OUALIFIED STOCK OPTION AGREEMENT
(1987 Stock Option Plan, as first amended)
THIS AGREEMENT, made as of this _____ of _________, 19__, by and between
The Charles Schwab Corporation, a Delaware corporation ("Company"), and
_______________ ("Optionee").
WITNESSETH:
WHEREAS, there has been granted to Optionee, effective as of _________ __,
19____, a non-qualified stock option under the 1987 Stock Option Plan, as
first amended, of the Company ("Option Plan");
NOW, THEREFORE, it is mutually agreed as follows:
1. The Optionee shall have a non-qualified stock option to acquire
_____ shares of common stock of the Company (the "Shares"), at a price of
$_______ per share.
2. Optionee acknowledges that paragraph 5(a) of the Option Plan
imposes significant restrictions on Optionee's ability to exercise this option.
3. This is a non-statutory stock option and The provisions of
paragraph 5(b) of the Option Plan are inapplicable to this 0ption. With that
exception and except as provided in paragraph 4, 5 and 6 below, the other terms
of this option shall be the same as without limitation, vesting of Shares,
limitations on exercise and transfer, and other restrictions. The Option Plan
is attached hereto as Exhibit A and is incorporated herein by this reference.
Optionee has read the Option Plan and, other than for the provisions of
paragraph 5(b) of the Option Plan and as provided in paragraphs 4, 5 and 6
below, agrees to be bound by its terms. Without limitation, Optionee
specifically acknowledges the representations, warranties and agreements
contained in paragraph 6(e) of the Option Plan.
4. Notwithstanding paragraph 6(b) of the Option Plan, in the event
Optionee's employment, service as a director or provision of independent
contractor services with or for the Company and its subsidiaries terminates by
reason of Optionee's death or permanent disability, all shares then not deemed
to be Vested thereupon will be deemed immediately Vested. For this purpose,
"permanent disability" will mean the reasonable determination by a qualified
physician acceptable to the Company that the Optionee has an illness or
incapacity that has disabled, or will disable, the Optionee from rendering his
or her normal services to the company and its subsidiaries for a period of
more than six (6) consecutive months in any consecutive twelve (12) month
period.
5. If the Company fails to timely exercise its right to repurchase
Unvested Shares, those Shares will be treated as Vested Shares. Options
underlying Unvested Shares may not be exercised once vesting ceases.
6. Any notice to be given by the Optionee under the terms of the
Option Plan shall be deemed to have been duly given, and effective upon
receipt, if sent by Certified Mail, postage and certification prepaid, to
The Charles Schwab Corporation, 101 Montgomery Street, San Francisco,
California 94104, Attention: Corporate Secretary, except as superseded by a
different address noticed to Optionee.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year referred to above.
BY:..______________________________________
on Behalf of The Charles Schwab Corporation
("Company")
___________________________
Optionee
Attachments:..(1).....Spousal Consent
(2).....Exhibit A: 1987 Stock Option
Plan, as first amended.
<TABLE>
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
Computation of Earnings Per Share
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Net Income $ 66,735 $ 46,943
========================================================================================
Shares
Primary:
Weighted-average number of common shares outstanding 175,179 173,303
Common stock equivalent shares related to option plans 5,646 5,584
- ----------------------------------------------------------------------------------------
Weighted-average number of common and
common equivalent shares outstanding 180,825 178,887
========================================================================================
Fully Diluted:
Weighted-average number of common shares outstanding 175,179 173,303
Common stock equivalent shares related to option plans 5,646 5,796
- ----------------------------------------------------------------------------------------
Weighted-average number of common and
common equivalent shares outstanding 180,825 179,099
========================================================================================
Primary/Fully Diluted Earnings Per Share $ .37 $ .26
========================================================================================
</TABLE>
<TABLE>
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Earnings before taxes on income $ 110,320 $ 79,670
- --------------------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 108,790 86,391
Interest expense - other 14,340 12,618
Interest portion of rental expense 6,226 5,427
- --------------------------------------------------------------------------------------------------
Total fixed charges (A) 129,356 104,436
- --------------------------------------------------------------------------------------------------
Earnings before taxes on income and fixed charges (B) $ 239,676 $ 184,106
==================================================================================================
Ratio of earnings to fixed charges (B) divided by (A)* 1.9 1.8
==================================================================================================
Ratio of earnings to fixed charges excluding customer interest expense** 6.4 5.4
==================================================================================================
* 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
and fixed charges. "Fixed charges" consist of interest expense incurred on payables to
customers, borrowings 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 excluding customer interest expense reflects the elimination
of such interest expense as a fixed charge.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Income and Condensed Consolidated Balance
Sheet of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,298,901
<RECEIVABLES> 5,749,558
<SECURITIES-RESALE> 5,896,118
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 201,919
<PP&E> 322,625
<TOTAL-ASSETS> 14,643,061
<SHORT-TERM> 190,264
<PAYABLES> 12,874,184
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 283,317
<COMMON> 1,785
0
0
<OTHER-SE> 936,090
<TOTAL-LIABILITY-AND-EQUITY> 14,643,061
<TRADING-REVENUE> 69,135
<INTEREST-DIVIDENDS> 199,853
<COMMISSIONS> 274,919
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 94,698
<INTEREST-EXPENSE> 123,130
<COMPENSATION> 220,838
<INCOME-PRETAX> 110,320
<INCOME-PRE-EXTRAORDINARY> 66,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,735
<EPS-PRIMARY> $0.37
<EPS-DILUTED> $0.37
</TABLE>
