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 September 30, 1998 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.
267,284,289* shares of $.01 par value Common Stock
Outstanding on October 27, 1998
* Excludes the effects of the three-for-two common stock split declared
October 22, 1998, payable December 11, 1998.
<PAGE>
THE CHARLES SCHWAB CORPORATION
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1998
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 7-21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21-22
Part II - Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
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, Company
contingencies, strategy, revenues, profit margin, sources of liquidity, capital
expenditures, and the Year 2000 project. 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>
THE CHARLES SCHWAB CORPORATION
Part 1 - 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Commissions $ 337,031 $ 322,679 $ 934,208 $ 858,994
Mutual fund service fees 143,977 112,155 405,719 308,677
Interest revenue, net of interest expense(1) 124,346 94,013 345,214 253,221
Principal transactions 74,823 61,252 186,559 193,985
Other 25,094 21,740 75,937 63,400
- -----------------------------------------------------------------------------------------------------------------
Total 705,271 611,839 1,947,637 1,678,277
- -----------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 290,684 255,104 835,370 700,061
Communications 53,449 45,790 153,519 137,002
Occupancy and equipment 50,796 39,279 147,502 113,183
Advertising and market development 34,009 29,303 101,726 91,092
Depreciation and amortization 35,175 34,948 104,625 92,407
Commissions, clearance and floor brokerage 20,379 26,290 60,237 70,951
Professional services 22,240 19,865 63,720 50,319
Other 36,040 34,320 80,224 80,259
- -----------------------------------------------------------------------------------------------------------------
Total 542,772 484,899 1,546,923 1,335,274
- -----------------------------------------------------------------------------------------------------------------
Income before taxes on income 162,499 126,940 400,714 343,003
Taxes on income 64,727 50,415 158,622 135,781
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 97,772 $ 76,525 $ 242,092 $ 207,222
=================================================================================================================
Weighted-average number of common shares outstanding(2, 3) 273,460 273,001 273,806 271,964
=================================================================================================================
Earnings Per Share (3)
Basic $ .37 $ .29 $ .92 $ .79
Diluted $ .35 $ .28 $ .88 $ .76
=================================================================================================================
Dividends Declared Per Common Share (3) $ .040 $ .033 $ .120 $ .099
=================================================================================================================
Pro forma weighted-average number of common shares
outstanding(2, 4) 410,190 409,501 410,709 407,946
=================================================================================================================
Pro Forma Earnings Per Share (4)
Basic $ .25 $ .20 $ .61 $ .53
Diluted $ .24 $ .19 $ .59 $ .51
=================================================================================================================
Pro Forma Dividends Declared Per Common Share (4) $ .027 $ .022 $ .080 $ .066
=================================================================================================================
(1) Interest revenue is presented net of interest expense. Interest expense for the three months ended
September 30, 1998 and 1997 was $166,780 and $142,338, respectively. Interest expense for the nine months
ended September 30, 1998 and 1997 was $483,018 and $398,594, respectively.
(2) Amounts shown are used to calculate diluted earnings per share.
(3) Excludes the effects of the three-for-two common stock split declared October 22, 1998, payable
December 11, 1998.
(4) Pro forma amounts include the effects of the three-for-two common stock split declared October 22, 1998,
payable December 11, 1998.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
</TABLE>
<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,020,972 $ 797,447
Cash and investments required to be segregated under federal or other
regulations (including resale agreements of $5,680,448 in 1998
and $4,707,187 in 1997) 7,765,920 6,774,024
Receivable from brokers, dealers and clearing organizations 331,388 267,070
Receivable from customers - net 8,940,251 7,751,513
Securities owned - at market value 212,538 282,569
Equipment, office facilities and property - net 389,784 342,273
Intangible assets - net 49,270 55,854
Other assets 135,890 210,957
- --------------------------------------------------------------------------------------------------------------
Total $18,846,013 $16,481,707
==============================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 186,268 $ 268,644
Payable to brokers, dealers and clearing organizations 1,163,981 1,122,663
Payable to customers 15,347,265 13,106,202
Accrued expenses and other liabilities 491,589 478,032
Borrowings 351,002 361,049
- --------------------------------------------------------------------------------------------------------------
Total liabilities 17,540,105 15,336,590
- --------------------------------------------------------------------------------------------------------------
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;
267,688 shares issued in 1998 and 1997* 2,677 2,677
Additional paid-in capital 201,082 241,422
Retained earnings 1,165,827 955,496
Treasury stock - 852 shares in 1998 and 1,753 shares in 1997,
at cost* (28,049) (35,401)
Unearned ESOP shares (359) (2,769)
Unamortized restricted stock compensation (37,686) (17,228)
Foreign currency translation adjustment 2,416 920
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,305,908 1,145,117
- --------------------------------------------------------------------------------------------------------------
Total $18,846,013 $16,481,707
==============================================================================================================
* Excludes the effects of the three-for-two common stock split declared October 22, 1998, payable
December 11, 1998.
See Notes to Condensed Consolidated Financial Statements.
- 2 -
</TABLE>
<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 242,092 $ 207,222
Noncash items included in net income:
Depreciation and amortization 104,625 92,407
Compensation payable in common stock 27,797 21,843
Deferred income taxes 16,362 (19,403)
Other 2,757 2,711
Change in securities owned - at market value 70,031 (48,303)
Change in other assets 58,488 34,343
Change in accrued expenses and other liabilities 58,463 121,178
- ----------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 580,615 411,998
- ----------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Cash and investments required to be segregated under
federal or other regulations (979,845) 638,761
Receivable from brokers, dealers and clearing organizations (60,529) (178,053)
Receivable from customers (1,187,221) (2,064,932)
Drafts payable (83,084) 6,776
Payable to brokers, dealers and clearing organizations 38,012 385,098
Payable to customers 2,227,345 1,123,564
- ----------------------------------------------------------------------------------------------------------
Net change in customer-related balances (45,322) (88,786)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 535,293 323,212
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (144,842) (103,215)
- ----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (144,842) (103,215)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 30,000 61,000
Repayment of borrowings (40,047) (24,685)
Dividends paid (31,925) (26,382)
Purchase of treasury stock (147,884) (16,230)
Proceeds from stock options exercised and other 22,268 11,320
- ----------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (167,588) 5,023
- ----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 662 (786)
- ----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 223,525 224,234
Cash and cash equivalents at beginning of period 797,447 633,317
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,020,972 $ 857,551
==========================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 3 -
</TABLE>
<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 279 domestic branch offices in 47 states, as well as a branch
in the Commonwealth of Puerto Rico, the United Kingdom and the U.S. Virgin
Islands. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in
Nasdaq and other securities, provides trade execution services to
broker-dealers, including Schwab, and institutional customers. Other
subsidiaries include Charles Schwab Investment Management, Inc., the investment
advisor for Schwab's proprietary mutual funds, and Charles Schwab Europe, 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 1997 Annual Report to Stockholders, which are
incorporated by reference in the Company's 1997 Annual Report on Form 10-K and
the Company's Quarterly Reports on Form 10-Q for the periods ended March 31,
1998 and June 30, 1998. The Company's results for any interim period are not
necessarily indicative of results for a full year.
Certain items in prior periods' financial statements have been
reclassified to conform to the 1998 presentation.
New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 125 -- Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, was adopted by the Company in 1997, except for certain financial
assets for which the effective date had been delayed by SFAS No. 127 -- Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125, which was
adopted by the Company effective January 1, 1998. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The adoption of these statements did
not have an effect on the Company's financial position, results of operations,
earnings per share or cash flows.
SFAS No. 130 -- Reporting Comprehensive Income, was adopted by the Company
effective January 1, 1998. This statement establishes standards for the
reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to, stockholders. Comprehensive income is as follows (in thousands):
- ---------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------
Net income $ 97,772 $ 76,525 $242,092 $207,222
Foreign currency
translation adjustment 898 (1,717) 1,496 (3,368)
- ---------------------------------------------------------------------------
Total comprehensive
income $ 98,670 $ 74,808 $243,588 $203,854
===========================================================================
SFAS No. 131 -- Disclosures about Segments of an Enterprise and Related
Information, was issued in 1997 and the Company is required to adopt this
statement at December 31, 1998. This statement establishes standards for
disclosures related to business operating segments. 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, but will impact financial
statement disclosure.
SFAS No. 133 -- Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998 and the Company is required to adopt this
statement by January 1, 2000. This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability, measured at its fair value.
The statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. While
the Company is currently evaluating the effects of this statement, its adoption
is not expected to have an impact on the Company's financial position, results
of operations, earnings per share or cash flows.
Statement of Position 98-1 -- Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, was issued in March 1998 and is
effective for fiscal years beginning after December 15, 1998. This statement
requires that certain costs incurred for purchasing or developing software for
internal use be capitalized and amortized over the software's useful life.
Currently, the Company capitalizes costs incurred for purchasing software for
internal use, but expenses costs incurred for developing software for internal
use. While the Company is currently evaluating the effects of this statement,
its adoption is expected to have an impact on the Company's financial position,
results of operations, and earnings per share.
Earnings Per Share
SFAS No. 128 -- Earnings Per Share, requires a dual presentation of basic
and diluted earnings per share (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 reduction in EPS
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Earnings per share under the basic and
diluted computations are as follows (in thousands, except per share amounts):
- -------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------
Net income $ 97,772 $ 76,525 $242,092 $207,222
=========================================================================
Basic Shares (1):
Weighted-average
common shares
outstanding 264,562 262,787 264,387 262,106
=========================================================================
Diluted Shares (1):
Weighted-average
common shares
outstanding 264,562 262,787 264,387 262,106
Common stock
equivalent shares
related to stock
incentive plans 8,898 10,214 9,419 9,858
- -------------------------------------------------------------------------
Diluted weighted-
average common
shares outstanding 273,460 273,001 273,806 271,964
=========================================================================
Basic EPS (1) $ .37 $ .29 $ .92 $ .79
=========================================================================
Diluted EPS (1) $ .35 $ .28 $ .88 $ .76
=========================================================================
(1) Excludes the effects of the three-for-two common stock split declared
October 22, 1998, payable December 11, 1998.
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 September 30, 1998, Schwab's
net capital was $943 million (11% of aggregate debit balances), which was $764
million in excess of its minimum required net capital and $495 million in excess
of 5% of aggregate debit balances. At September 30, 1998, M&S' net capital was
$29 million (2,168% of aggregate debit balances), which was $28 million in
excess of its minimum required net capital.
Schwab and Charles Schwab Europe had portions of their cash and
investments segregated for the exclusive benefit of customers at September 30,
1998, in accordance with applicable regulations. M&S had no such cash reserve
requirement at September 30, 1998.
Commitments and Contingent Liabilities
Between August 12, 1993 and November 17, 1995, Schwab was named as a
defendant in eleven class action lawsuits in seven states. The class actions all
purport to be brought on behalf of customers of Schwab who purchased or sold
securities for which Schwab received "order flow" payments from the market
maker, stock dealer or 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. Through September 1998, one of the actions was voluntarily dismissed
and six were resolved favorably to Schwab on the grounds that the claims
asserted are preempted by federal law. The remaining four cases are pending in
state courts in California, Texas and Louisiana. On October 5, 1998, the
California Court of Appeals affirmed the dismissal of the action in that state.
The Texas action and one of the two Louisiana actions are stayed and there has
been no recent activity in the other Louisiana action.
The ultimate outcome of the legal proceedings described above and the
various other civil actions, arbitration proceedings, and claims pending against
the Company cannot be determined at this time, and the results of these legal
proceedings cannot be predicted with certainty. There can be no assurance that
these legal proceedings will not have a material adverse effect on the Company's
results of operations in any future period, depending partly on the results for
that period, and a substantial judgment could have a material adverse impact on
the Company's financial condition and results of operations. However, it is the
opinion of management, after consultation with outside legal counsel, that the
ultimate outcome of these actions will not have a material adverse impact on the
financial condition or operating results of the Company.
Supplemental Cash Flow Information
Certain information affecting the cash flows of the Company follows (in
thousands):
- --------------------------------------------------------
Nine Months Ended
September 30,
1998 1997
- --------------------------------------------------------
Income taxes paid $ 98,382 $112,338
========================================================
Interest paid:
Customer cash balances $427,595 $349,912
Stock-lending activities 30,039 27,086
Borrowings 24,024 18,602
Other 7,899 6,127
- --------------------------------------------------------
Total interest paid $489,557 $401,727
========================================================
Subsequent Events
During the period October 1 through October 27, 1998, the Company
repurchased and recorded as treasury stock a total of 66,500 shares of its
common stock for approximately $2 million. As of October 27, 1998, authorization
granted by the Company's Board of Directors allows for future repurchases of
816,900 shares.
On October 22, 1998, the Board of Directors approved a three-for-two split
of the Company's common stock, which will be effected in the form of a 50% stock
dividend. The stock dividend is payable December 11, 1998 to stockholders of
record November 13, 1998. Share and per share data have not been restated to
reflect this transaction.
On October 22, 1998, the Board of Directors increased the quarterly cash
dividend from $.040 per share to $.042 per share payable November 27, 1998 to
stockholders of record November 13, 1998.
<PAGE>
THE CHARLES SCHWAB CORPORATION
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 5.5 million active customer accounts(a). Customer assets were
$408.2 billion at September 30, 1998. CSC's principal subsidiary, Charles Schwab
& Co., Inc. (Schwab), is a securities broker-dealer with 279 domestic branch
offices in 47 states, as well as a branch in the Commonwealth of Puerto Rico,
the United Kingdom and the U.S. Virgin Islands. Another subsidiary, Mayer &
Schweitzer, Inc. (M&S), a market maker in Nasdaq and other securities, provides
trade execution services to broker-dealers and institutional customers. Other
subsidiaries include Charles Schwab Investment Management, Inc., the investment
advisor for Schwab's proprietary mutual funds, and Charles Schwab Europe, a
retail discount securities brokerage firm located in the United Kingdom.
- --------------------------------------------------------------------------------
(a) Accounts with balances or activity within the preceding twelve months.
Effective October 30, 1998, active customer accounts will be defined as accounts
with balances or activity within the preceding eight months. This change is
expected to decrease active customer accounts by approximately 100,000.
- --------------------------------------------------------------------------------
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 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 a
nationally recognized brand, a broad range of products and services,
multi-channel 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 278,000 new customer accounts and gather $19.3
billion in net new customer assets during the third quarter of 1998.
The Company offers a broad range of value-oriented products and services
to meet customers' varying investment and financial needs. The Company also
offers access to extensive investment news and information. The Company's branch
office network assists investors in developing asset allocation strategies and
evaluating their investment choices. Internet access is available to investors
at most of the branches. Branch staff also refer investors who desire additional
guidance to independent investment managers through the Schwab AdvisorSource(TM)
service. Schwab provides custodial, trading and support services to 5,400
independent investment managers. As of September 30, 1998, Schwab held $121.8
billion in customer assets in 647,000 accounts managed by these investment
managers. The Company's Mutual Fund Marketplace(R) provides customers with the
ability to invest in 1,550 mutual funds from 247 fund families, including 963
Mutual Fund OneSource(R) funds. During the third quarter of 1998, Schwab
introduced a new service that provides customers with access to debt
underwritings lead-managed by Credit Suisse First Boston.
The Company's multi-channel delivery systems allow customers to choose how
they prefer to do business with the Company. To enable customers to obtain
services in person with a Company representative, the Company maintains a
network of branch offices. Telephonic access to the Company is provided
primarily through four regional customer telephone service centers and two
online customer support centers that operate both during and after normal market
hours. Additionally, customers are able to obtain financial information and
execute trades on an automated basis through the Company's electronic brokerage
channels that provide both online and telephonic access. Online channels include
PC-based services such as SchwabLink(R) -- a service for investment managers,
and the Charles Schwab Web Site(TM) -- an information and trading service on the
Internet. Automated telephonic channels include TeleBroker(R) -- Schwab's
touch-tone telephone trading service, and VoiceBroker(TM) -- Schwab's voice
recognition quote and trading service. Schwab provides every retail customer
access to all delivery channels and flat-fee pricing for Internet-based trades.
The Company's ongoing investment in technology is a key element in
enhancing its delivery systems, providing fast and consistent customer service,
and reducing processing costs. The Company uses technology to empower its
customers to manage their financial affairs and is a forerunner in driving
technological advancements in the financial services industry. During the third
quarter of 1998, Schwab improved its Web site to provide online customers with
customized account information displays and a stock screening tool.
The Company's operations are highly dependent on the integrity of its
computer and technological systems and the Company's success depends, in part,
on its ability to make timely enhancements and additions to its technology to
anticipate customer demands. To the extent the Company experiences system
interruptions, errors or downtime (which could result from a variety of causes,
including changes in customer use patterns, technological failure, changes to
its systems, linkages with third-party systems, and power failures), the
Company's business and operations could be negatively impacted.
The Company faces significant competition from companies seeking to
attract customer financial assets, including full commission brokerage firms,
discount brokerage firms, mutual fund companies and banks. Certain of these
competitors have significantly greater financial resources than the Company,
particularly given the acceleration of the consolidation trend within the
financial services industry in the first nine months of 1998. In addition, the
recent expansion and customer acceptance of conducting financial transactions
online has attracted competition from providers of online services and software
development companies. In the first nine months of 1998, price competition
continued in the area of online investing as competitors sought to gain market
share in this rapidly growing area. Increased competition can be expected due to
the low barriers to entry for the establishment and operation of online
investment services. The Company experienced declines in its average commission
per revenue trade in the first nine months of 1998 mainly due to the Company's
integration of its online and traditional brokerage services and reduction of
the price of online trades for most of its customers, causing an increase in the
proportion of trades placed through its online brokerage channels. As the
Company focuses on further enhancements to its electronic service offering,
average commission per revenue trade is expected to continue to decline. These
competitive factors, pricing changes and trading trends 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 (including branch openings, product and
service rollouts, and certain information technology systems improvements) 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. Also, the Company views its developmental spending as essential for
future growth and therefore attempts to avoid major adjustments in such spending
unless faced with a sustained slowdown in customer trading activity. 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, Company contingencies (see
"Commitments and Contingent Liabilities" note in the Notes to Condensed
Consolidated Financial Statements), the Company's strategy, revenues and profit
margin (see Description of Business), sources of liquidity (see Liquidity and
Capital Resources-Liquidity), capital expenditures (see Liquidity and Capital
Resources-Cash Flows and Capital Resources), and the Year 2000 project (see
Liquidity and Capital Resources-Year 2000). Achievement of the expressed
expectations is subject to certain risks and uncertainties that could cause
actual results to differ materially from the expressed 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; computer system failures;
risks associated with the Year 2000 computer system conversions; the effects of
competitors' pricing, product and service decisions and intensified competition;
evolving regulation and changing industry customs and practices adversely
affecting the Company; adverse results of litigation; changes in revenues and
profit 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 September 30, 1998
Compared To Three Months Ended
September 30, 1997
Financial Overview
Net income for the third quarter of 1998 was a record $98 million, up 28%
from third quarter 1997 net income of $77 million. Diluted earnings per share
for the third quarters of 1998 and 1997 were $.35 and $.28 per share,
respectively. Share and per share data have not been restated to reflect the
effects of the three-for-two common stock split declared October 22, 1998,
payable December 11, 1998.
Third quarter 1998 revenues were a record $705 million, up 15% from $612
million for the third quarter of 1997, primarily due to a 28% increase in mutual
fund service fees and a 32% increase in interest revenue, net of interest
expense (referred to as net interest revenue). These increases mainly resulted
from increases in customer assets and margin loans to customers. During the
third quarter of 1998, total trading activity reached record levels as shown in
the following table (in thousands):
- -------------------------------------------------------------
Three Months
Ended
September 30, Percent
Daily Average Trades 1998 1997 Change
- -------------------------------------------------------------
Revenue Trades
Online 58.1 30.8 89%
TeleBroker(R) 8.1 12.9 (37)
Regional customer telephone
service centers, branch offices
and other 33.4 33.7 (1)
- -------------------------------------------------------------
Total 99.6 77.4 29%
=============================================================
Mutual Fund OneSource(R) Trades
Online 18.8 13.2 42%
TeleBroker 1.1 1.4 (21)
Regional customer telephone
service centers, branch offices
and other 22.4 20.2 11
- -------------------------------------------------------------
Total 42.3 34.8 22%
=============================================================
Total Daily Average Trades
Online 76.9 44.0 75%
TeleBroker 9.2 14.3 (36)
Regional customer telephone
service centers, branch offices
and other 55.8 53.9 4
- -------------------------------------------------------------
Total 141.9 112.2 26%
=============================================================
Assets in Schwab customer accounts were $408.2 billion at September 30,
1998, an increase of $63.5 billion, or 18%, from a year ago as shown in the
table below. This increase from September 30, 1997 resulted from net new
customer assets of $80.7 billion offset by net market losses of $17.2 billion.
- -----------------------------------------------------------
Growth in Schwab Customer
Assets and Accounts
(In billions, at quarter end, September 30, Percent
except as noted) 1998 1997 Change
- -----------------------------------------------------------
Assets in Schwab customer accounts
Schwab One(R) and other
cash equivalents (1) $ 14.7 $ 11.6 27%
SchwabFunds(R):
Money market funds (1) 63.0 46.4 36
Equity and bond funds 11.0 6.8 62
- -----------------------------------------------------------
Total SchwabFunds 74.0 53.2 39
- -----------------------------------------------------------
Mutual Fund Marketplace(R)(2):
Mutual Fund OneSource 59.0 56.9 4
All other 51.7 48.1 7
- -----------------------------------------------------------
Total Mutual Fund
Marketplace 110.7 105.0 5
Equity and other securities(2) 183.3 151.8 21
Fixed income securities 34.4 30.2 14
Margin loans outstanding (8.9) (7.1) 25
- -----------------------------------------------------------
Total $ 408.2 $ 344.7 18%
===========================================================
Net growth (decline) in assets
in Schwab customer accounts
(for the quarter ended)
Net new customer assets $ 19.3 $ 16.4 18%
Net market gains (losses) (38.6) 22.0 n/m
- -----------------------------------------------------------
Net growth (decline) $ (19.3) $ 38.4 n/m
===========================================================
New Schwab customer accounts
(in thousands, for the
quarter ended) 278.4 294.1 (5%)
Active Schwab customer accounts
(in millions) 5.5 4.6 20%
===========================================================
(1) Represents a component of customer cash and equivalents.
(2) Excludes money market funds and all of Schwab's proprietary
money market, equity and bond funds.
n/m Not meaningful.
Total operating expenses excluding interest during the third quarter of
1998 were $543 million, up 12% from $485 million for the third quarter of 1997,
primarily resulting from additional staff and related costs.
The after-tax profit margin for the third quarter of 1998 was 13.9%, up
from 12.5% for the third quarter of 1997. The annualized return on stockholders'
equity for the third quarter of 1998 was 31%, up from 30% for the third quarter
of 1997.
REVENUES
As the Company's mutual fund service fees and net interest revenue
continued to grow at rates that exceeded the growth rate of total revenues,
non-trading revenues increased to 41% of total revenues for the third quarter of
1998, from 37% for the third quarter of 1997 as shown in the table below.
- -------------------------------------------------------------
Three Months
Ended
September 30,
Composition of Revenues 1998 1997
- -------------------------------------------------------------
Commissions 48% 53%
Principal transactions 11 10
- -------------------------------------------------------------
Total trading revenues 59 63
- -------------------------------------------------------------
Mutual fund service fees 20 18
Net interest revenue 18 15
Other 3 4
- -------------------------------------------------------------
Total non-trading revenues 41 37
- -------------------------------------------------------------
Total 100% 100%
=============================================================
Commissions
Commission revenues for the Company were $337 million for the third
quarter of 1998, up $14 million, or 4%, from the third quarter of 1997. As shown
in the table below, the total number of revenue trades executed by the Company
has increased 29% as the Company's customer base has grown. Average commission
per revenue trade decreased 18%. This decrease was mainly due to the Company's
integration of its online and traditional brokerage services and reduction of
the price of online trades for most of its customers in the first quarter of
1998, causing an increase in the proportion of trades placed through its online
brokerage channels.
- -----------------------------------------------------------
Three Months
Commissions Earned Ended
on Customer Revenue September 30, Percent
Trades 1998 1997 Change
- -----------------------------------------------------------
Customer accounts that
traded during the quarter
(in thousands) 1,333 1,153 16%
Average customer
revenue trades
per account 4.78 4.30 11
Total revenue
trades (in thousands) 6,376 4,955 29
Average commission
per revenue trade $52.83 $64.61 (18)
Commissions earned
on customer revenue
trades (in millions) (1) $ 337 $ 320 5
===========================================================
(1) Excludes commissions on trades with specialists totaling
$3 million in the third quarter of 1997.
Schwab added 278,000 new customer accounts during the third quarter of
1998, a decrease of 5% from the 294,000 new accounts added during the third
quarter of 1997.
Mutual Fund Service Fees
Mutual fund service fees were $144 million for the third quarter of 1998,
up $32 million, or 28%, from the third quarter of 1997. This increase was
primarily due to a significant increase in customer assets in Schwab's
proprietary funds, collectively referred to as the SchwabFunds(R), as well as an
increase in customer assets in funds purchased through Schwab's Mutual Fund
OneSource(R) service (see Growth in Schwab Customer Assets and Accounts table in
Financial Overview). The Company earns mutual fund service fees for transfer
agent services, shareholder services, administration and investment management
provided to the SchwabFunds, as well as record keeping and shareholder services
provided to funds in the Mutual Fund OneSource service.
Net Interest Revenue
Net interest revenue was $124 million for the third quarter of 1998, up
$30 million, or 32%, from the third quarter of 1997 as shown in the following
table (in millions):
- ------------------------------------------------------------
Three Months
Ended
September 30,
1998 1997
- ------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 181 $ 129
Investments, customer-related 96 99
Other 14 8
- ------------------------------------------------------------
Total 291 236
- ------------------------------------------------------------
Interest Expense
Customer cash balances 148 126
Stock-lending activities 10 10
Borrowings 7 5
Other 2 1
- ------------------------------------------------------------
Total 167 142
- ------------------------------------------------------------
Net interest revenue $ 124 $ 94
============================================================
Customer-related daily average balances, interest rates and average net
interest margin for the third quarters of 1998 and 1997 are summarized in the
following table (dollars in millions):
- -----------------------------------------------------------
Three Months Ended
September 30,
1998 1997
- -----------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $ 9,359 $ 6,614
Average interest rate 7.69% 7.73%
Investments:
Average balance outstanding $ 7,195 $ 7,193
Average interest rate 5.24% 5.47%
Average yield on interest-earning assets 6.63% 6.55%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $13,364 $10,943
Average interest rate 4.40% 4.56%
Other interest-bearing sources:
Average balance outstanding $ 1,341 $ 1,185
Average interest rate 4.32% 4.40%
Average noninterest-bearing portion $ 1,849 $ 1,679
Average interest rate on funding sources 3.90% 3.99%
Summary:
Average yield on interest-earning assets 6.63% 6.55%
Average interest rate on funding sources 3.90% 3.99%
- -----------------------------------------------------------
Average net interest margin 2.73% 2.56%
===========================================================
The increase in net interest revenue from the third quarter of 1997 was
primarily due to higher levels of margin loans to customers.
Principal Transactions
Principal transaction revenues were $75 million for the third quarter of
1998, up $14 million, or 22%, from the third quarter of 1997. This increase was
primarily due to greater share volume handled by M&S, partially offset by lower
average revenue per principal transaction (see discussion below). The remainder
of the increase was primarily due to higher revenues related to Schwab's
specialist operations.
Certain Securities and Exchange Commission (SEC) rules and rule
amendments, known as the Order Handling Rules, have significantly altered the
manner in which orders for both Nasdaq and exchange-listed securities are
handled. These rules were implemented in phases between January 20, 1997 and
October 13, 1997. Additionally, in June 1997, most major U.S. securities
markets, including Nasdaq and the New York Stock Exchange, Inc., began quoting
and trading securities in increments of one-sixteenth dollar per share instead
of one-eighth dollar per share for most securities, and these markets are
currently considering further reductions in the increments by which securities
are priced. Mainly as a result of these regulatory changes and changes in
industry customs and practices, average revenue per principal transaction
declined in the third quarter of 1998 as compared to the same period in 1997.
Average revenue per principal transaction increased, however, in the third
quarter of 1998 compared to the first and second quarters of 1998. Since the
change to trading securities in increments of one-sixteenth dollar per share was
implemented in June 1997 and the Order Handling Rules were not fully implemented
until October 1997, M&S' average revenue per principal transaction in 1998 has
been materially less than during comparable periods of 1997.
Expenses Excluding Interest
Compensation and benefits expense was $291 million for the third quarter
of 1998, up $36 million, or 14%, from the third quarter of 1997 primarily due to
a greater number of employees. The following table shows a comparison of certain
compensation and benefits components and employee data (in thousands):
- -------------------------------------------------------------
Three Months
Ended
September 30,
1998 1997
- -------------------------------------------------------------
Compensation and benefits expense as a
% of revenues 41% 42%
Variable compensation as a
% of compensation and benefits expense 25% 27%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 14% 13%
Full-time equivalent employees(1) 13.0 12.0
Revenues per average full-time equivalent
employee $54.1 $52.2
=============================================================
(1) Includes full-time, part-time and temporary employees,
and persons employed on a contract basis.
Occupancy and equipment expense was $51 million in the third quarter of
1998, up $12 million, or 29%, from the third quarter of 1997. This increase was
primarily due to additional lease expenses on the Company's expanded office
space, as well as increased lease and maintenance expenses on data processing
equipment.
Commissions, clearance and floor brokerage expense was $20 million in the
third quarter of 1998, down $6 million, or 22%, from the third quarter of 1997.
This decrease was primarily due to a decrease in the fees paid by M&S to
broker-dealers for orders received for execution.
The Company's effective income tax rate for the third quarters of 1998 and
1997 was 39.8% and 39.7%, respectively.
Nine Months Ended September 30, 1998
Compared To Nine Months Ended
September 30, 1997
Financial Overview
Net income for the first nine months of 1998 was $242 million, up 17% from
net income for the first nine months of 1997 of $207 million. Diluted earnings
per share for the first nine months of 1998 and 1997 were $.88 and $.76 per
share, respectively.
Revenues for the first nine months of 1998 were $1,948 million, up 16%
from $1,678 million for the first nine months of 1997, primarily due to a 31%
increase in mutual fund service fees, a 36% increase in net interest revenue,
and a 9% increase in commission revenues. These increases mainly resulted from
increases in customer assets and margin loans to customers, as well as higher
trading volume. During the first nine months of 1998, trading activity reached
record levels as shown in the following table (in thousands):
- -------------------------------------------------------------
Nine Months
Ended
September 30, Percent
Daily Average Trades 1998 1997 Change
- -------------------------------------------------------------
Revenue Trades
Online 50.0 24.9 101%
TeleBroker(R) 8.4 12.2 (31)
Regional customer telephone
service centers, branch offices
and other 32.7 32.8 ---
- -------------------------------------------------------------
Total 91.1 69.9 30%
=============================================================
Mutual Fund OneSource(R) Trades
Online 17.8 12.9 38%
TeleBroker 1.1 1.4 (21)
Regional customer telephone
service centers, branch offices
and other 21.9 20.2 8
- -------------------------------------------------------------
Total 40.8 34.5 18%
=============================================================
Total Daily Average Trades
Online 67.8 37.8 79%
TeleBroker 9.5 13.6 (30)
Regional customer telephone
service centers, branch offices
and other 54.6 53.0 3
- -------------------------------------------------------------
Total 131.9 104.4 26%
=============================================================
Total operating expenses excluding interest during the first nine months
of 1998 were $1,547 million, up 16% from $1,335 million for the first nine
months of 1997, primarily resulting from additional staff and related costs.
The after-tax profit margin for the first nine months of 1998 was 12.4%,
up from 12.3% for the first nine months of 1997. The annualized return on
stockholders' equity for the first nine months of 1998 was 26%, down from 29%
for the first nine months of 1997, reflecting the Company's higher equity base
in the first nine months of 1998.
REVENUES
As the Company's mutual fund service fees and net interest revenue
continued to grow at rates that exceeded the growth rate of total revenues,
non-trading revenues increased to 42% of total revenues for the first nine
months of 1998, from 37% for the first nine months of 1997 as shown in the table
below.
- -------------------------------------------------------------
Nine Months
Ended
September 30,
Composition of Revenues 1998 1997
- -------------------------------------------------------------
Commissions 48% 51%
Principal transactions 10 12
- -------------------------------------------------------------
Total trading revenues 58 63
- -------------------------------------------------------------
Mutual fund service fees 21 18
Net interest revenue 18 15
Other 3 4
- -------------------------------------------------------------
Total non-trading revenues 42 37
- -------------------------------------------------------------
Total 100% 100%
=============================================================
Commissions
Commission revenues for the Company were $934 million for the first nine
months of 1998, up $75 million, or 9%, from the first nine months of 1997. As
shown in the table below, the total number of revenue trades executed by the
Company has increased 30% as the Company's customer base has grown. Average
commission per revenue trade decreased 16%. This decrease was mainly due to the
Company's reduction of the price of online trades described in the comparison
between the three-month periods.
- ---------------------------------------------------------
Nine Months
Commissions Earned Ended
on Customer Revenue September 30, Percent
Trades 1998 1997 Change
- ---------------------------------------------------------
Customer accounts that
traded during the period
(in thousands) 2,405 2,028 19%
Average customer
revenue trades
per account 7.12 6.51 9
Total revenue
trades (in thousands) 17,131 13,206 30
Average commission
per revenue trade $ 54.48 $ 64.59 (16)
Commissions earned
on customer revenue
trades (in millions) (1) $ 933 $ 853 9
=========================================================
(1) Excludes commissions on trades with specialists totaling
$1 million in the first nine months of 1998 and $6 million
in the first nine months of 1997.
Schwab added 984,000 new customer accounts during the first nine months of
1998, an increase of 12% from the 881,000 new accounts added during the first
nine months of 1997.
Mutual Fund Service Fees
Mutual fund service fees were $406 million for the first nine months of
1998, up $97 million, or 31%, from the first nine months of 1997. This increase
was generally attributable to the factors described in the comparison between
the three-month periods.
Net Interest Revenue
Net interest revenue was $345 million for the first nine months of 1998,
up $92 million, or 36%, from the first nine months of 1997 as shown in the
following table (in millions):
- ------------------------------------------------------------
Nine Months
Ended
September 30,
1998 1997
- ------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 499 $ 339
Investments, customer-related 290 290
Other 39 23
- ------------------------------------------------------------
Total 828 652
- ------------------------------------------------------------
Interest Expense
Customer cash balances 428 350
Stock-lending activities 30 28
Borrowings 19 14
Other 6 7
- ------------------------------------------------------------
Total 483 399
- ------------------------------------------------------------
Net interest revenue $ 345 $ 253
============================================================
Customer-related daily average balances, interest rates and average net
interest margin for the first nine months of 1998 and 1997 are summarized in the
following table (dollars in millions):
- -----------------------------------------------------------
Nine Months Ended
September 30,
1998 1997
- -----------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $ 8,678 $ 5,917
Average interest rate 7.69% 7.66%
Investments:
Average balance outstanding $ 7,280 $ 7,205
Average interest rate 5.32% 5.37%
Average yield on interest-earning assets 6.61% 6.40%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $12,838 $10,486
Average interest rate 4.46% 4.47%
Other interest-bearing sources:
Average balance outstanding $ 1,295 $ 1,091
Average interest rate 4.39% 4.45%
Average noninterest-bearing portion $ 1,825 $ 1,545
Average interest rate on funding sources 3.94% 3.94%
Summary:
Average yield on interest-earning assets 6.61% 6.40%
Average interest rate on funding sources 3.94% 3.94%
- -----------------------------------------------------------
Average net interest margin 2.67% 2.46%
===========================================================
The increase in net interest revenue from the first nine months of 1997
was primarily due to higher levels of margin loans to customers.
Principal Transactions
Principal transaction revenues were $187 million for the first nine months
of 1998, down $7 million, or 4%, from the first nine months of 1997. This
decrease was due to lower average revenue per principal transaction (see
discussion in the comparison between the three-month periods), partially offset
by greater share volume handled by M&S, higher revenues related to Schwab's
specialist operations, and increased revenues from customer trading in fixed
income securities for which Schwab earns a mark-up.
Expenses Excluding Interest
Compensation and benefits expense was $835 million for the first nine
months of 1998, up $135 million, or 19%, from the first nine months of 1997
primarily due to a greater number of employees. The following table shows a
comparison of certain compensation and benefits components and employee data (in
thousands):
- --------------------------------------------------------------
Nine Months
Ended
September 30,
1998 1997
- --------------------------------------------------------------
Compensation and benefits expense as a
% of revenues 43% 42%
Variable compensation as a
% of compensation and benefits expense 22% 23%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 14% 14%
Full-time equivalent employees(1) 13.0 12.0
Revenues per average full-time equivalent
employee $148.0 $148.8
==============================================================
(1) Includes full-time, part-time and temporary employees, and
persons employed on a contract basis.
Occupancy and equipment expense was $148 million for the first nine months
of 1998, up $34 million, or 30%, from the first nine months of 1997. This
increase was generally attributable to the factors described in the comparison
between the three-month periods.
Commissions, clearance and floor brokerage expense was $60 million for the
first nine months of 1998, down $11 million, or 15%, from the first nine months
of 1997. This decrease was generally attributable to the factors described in
the comparison between the three-month periods.
The Company's effective income tax rate for both of the first nine months
of 1998 and 1997 was 39.6%.
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
were $14.8 billion and $12.7 billion at September 30, 1998 and December 31,
1997, 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.
Schwab is subject to regulatory requirements that are intended to ensure
the general financial soundness and liquidity of broker-dealers. These
regulations prohibit Schwab from repaying subordinated borrowings to CSC, paying
cash dividends, or making 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 of $1
million. At September 30, 1998, Schwab had $943 million of net capital (11% of
aggregate debit balances), which was $764 million in excess of its minimum
required net capital and $495 million in excess of 5% of aggregate debit
balances. Schwab has historically targeted net capital to be 10% of its
aggregate debit balances, which primarily consist of customer margin loans. To
achieve this target, as customer margin loans have grown, a larger portion of
cash flows have been retained to support aggregate debit balances.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$450 million subordinated revolving credit facility maturing in September 1999,
of which $380 million was outstanding at September 30, 1998. At quarter end,
Schwab also had outstanding $25 million in fixed-rate subordinated term loans
from CSC maturing in 2000. 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 $570 million at September 30, 1998. Schwab
used such borrowings for six days during the first nine months of 1998, with the
daily amounts borrowed averaging $87 million. These lines were unused at
September 30, 1998.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation, Schwab had unsecured letter of credit agreements
with six banks totaling $550 million at September 30, 1998. Schwab pays a fee to
maintain these letter of credit agreements. No funds were drawn under these
agreements during the first nine months of 1998.
M&S
M&S' liquidity needs are generally met through earnings generated by its
operations. Most of M&S' assets are liquid, consisting primarily of cash and
cash equivalents, marketable securities, and receivable from brokers, dealers
and clearing organizations.
M&S' liquidity is affected by the same net capital regulatory requirements
as Schwab (see discussion above). At September 30, 1998, M&S had $29 million of
net capital (2,168% of aggregate debit balances), which was $28 million in
excess of its minimum required net capital.
M&S may borrow up to $35 million under a subordinated lending arrangement
with CSC. Borrowings under this arrangement qualify as regulatory capital for
M&S. This facility was unused during the first nine months of 1998.
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. As discussed
above, Schwab and M&S are subject to regulatory requirements that may restrict
them from certain transactions with CSC. 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 liquidity needs that arise from its issued and outstanding $351
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 1999 to 2008 and fixed interest
rates ranging from 5.78% to 7.72% with interest payable semiannually. The
Medium-Term Notes are rated A3 by Moody's Investors Service and A- by Standard &
Poor's Ratings Group.
On July 8, 1998, the SEC declared effective CSC's registration statement
covering the issuance of up to an additional $150 million in Senior or Senior
Subordinated Medium-Term Notes, Series A, bringing the aggregate principal
amount of such notes available to be issued to $205 million. At September 30,
1998, $205 million of these notes remained unissued.
CSC may borrow under committed, unsecured credit facilities aggregating
$350 million with a group of 10 banks. One-half of the commitments under these
facilities expires in June 1999, and the other half expires in June 2001. The
funds are available for general corporate purposes for which CSC pays a
commitment fee on the unused balance. The terms of these facilities require CSC
to maintain minimum levels of stockholders' equity, and Schwab and M&S to
maintain specified levels of net capital, as defined. The Company believes that
these restrictions will not have a material effect on its ability to meet future
dividend or funding requirements. These facilities were unused during the first
nine months of 1998.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $347 million for the
first nine months of 1998, up 16% from $300 million for the first nine months of
1997, allowing the Company to finance its operations primarily with internally
generated funds. Depreciation and amortization expense related to equipment,
office facilities and property was $97 million for the first nine months of
1998, as compared to $80 million for the first nine months of 1997, or 5% of
revenues for each period. Amortization expense related to intangible assets was
$8 million for the first nine months of 1998, as compared to $12 million for the
first nine months of 1997.
The Company's capital expenditures were $145 million in the first nine
months of 1998 and $103 million in the first nine months of 1997, or 7% and 6%
of revenues for each period, respectively. Capital expenditures in the first
nine months of 1998 were for equipment relating to the Company's information
technology systems, leasehold improvements, and additional office furniture and
equipment. The Company opened seven new domestic branch offices during the first
nine months of 1998, compared to 27 domestic branch offices opened during the
first nine months of 1997. Capital expenditures may vary from period to period
as business conditions change.
The Company issued $30 million and repaid $40 million in Medium-Term Notes
during the first nine months of 1998.
During the first nine months of 1998, 4,301,900 of the Company's stock
options, with a range of exercise prices from $1.28 to $30.96, were exercised
with cash proceeds received by the Company of $22 million.
During the first nine months of 1998, the Company repurchased 4,103,200
shares of its common stock for $148 million. During the full year of 1997, the
Company repurchased 820,000 shares of its common stock for $18 million. From the
inception of the repurchase plan in 1988 through September 30, 1998, the Company
has repurchased 44,210,400 shares of its common stock for $312 million. See
"Subsequent Events" note in Item 1. Notes to Condensed Consolidated Financial
Statements.
In October 1998, the Board of Directors approved a three-for-two split of
the Company's common stock, which will be effected in the form of a 50% stock
dividend. The stock dividend is payable December 11, 1998 to stockholders of
record November 13, 1998. Share and per share data have not been restated to
reflect this transaction.
During the first nine months of 1998, the Company paid common stock cash
dividends totaling $32 million, up from $26 million paid during the first nine
months of 1997. See "Subsequent Events" note in Item 1. Notes to Condensed
Consolidated Financial Statements.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's total financial capital (borrowings plus
stockholders' equity) at September 30, 1998 was $1,657 million, up $151 million,
or 10% from December 31, 1997. At September 30, 1998, the Company had borrowings
of $351 million, or 21% of total financial capital, that bear interest at a
weighted-average rate of 6.70%. At September 30, 1998, the Company's
stockholders' equity was $1,306 million, or 79% of total financial capital.
Year 2000
Many existing computer programs use only two digits to identify a specific
year and therefore may not accurately recognize the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. Due to the Company's dependence on
computer technology to operate its business, and the dependence of the financial
services industry on computer technology, the nature and impact of Year 2000
processing failures on the Company's business, financial position, results of
operations or cash flows could be material. The Company is currently modifying
its computer systems in order to enable its systems to process data and
transactions incorporating year 2000 dates without material errors or
interruptions. Because systems critical to the Company's functioning other than
its computer systems may be affected by the century change, the Company's Year
2000 compliance efforts also encompass facilities and equipment which rely on
date-dependent technology, such as, building equipment that contains embedded
technology.
Status of Compliance Efforts
The Company's Year 2000 compliance efforts are directed towards defined
categories of actions, which include awareness, inventory, assessment,
remediation, testing, installation, contingency planning and vendor management.
With respect to particular business units, the work associated with those
categories may be performed in phases or simultaneously with other categories of
Year 2000 tasks, depending on the nature of the work to be performed and the
technology and business requirements of the specific business unit. For
instance, the Company's contingency planning efforts continue simultaneously
with remediation efforts, but inventory efforts generally constituted a phase
undertaken prior to assessment.
Currently, the focus of the Company's efforts is the completion of
remediation and testing, and continuing contingency planning and vendor
management efforts. The Company anticipates that work on the awareness,
contingency planning, and vendor management phases of the project will continue
through the century change. The Company anticipates that the installation,
remediation and testing will be completed by mid-1999. The Company's domestic
subsidiaries which will be participating in the industry-wide test sponsored by
the Securities Industry Association in the first half of 1999 are implementing
plans to be prepared to participate in the tests.
The Company's vendor management initiatives include creating inventories
of vendors, analyzing the results of the inventories to assess the criticality
of specific vendor relationships in order to formulate plans for dealing with
possible Year 2000 issues, inquiring directly as to the status of vendors' Year
2000 compliance efforts, and continuing contacts with vendors to monitor the
progress of vendors who may not yet have achieved Year 2000 compliance. These
initiatives also include joint testing with selected critical vendors, joint
contingency planning with selected critical vendors, and addressing Year 2000
concerns with new vendors. The vendor management initiatives include computer
system vendors as well as vendors of goods and services which comprise or rely
upon date-dependent technology, such as embedded technology.
The success of the Company's Year 2000 compliance efforts depends in part
on parallel efforts being undertaken by vendors and other third parties with
which the Company's systems interact and therefore, the Company is taking steps
to determine the status of critical third parties' Year 2000 compliance. There
can be no assurance that all such third parties will provide accurate and
complete information, or that all their systems in fact will achieve full Year
2000 compliance. Third parties' Year 2000 processing failures might have a
material adverse impact on the Company's systems and operations. The Company's
plan may be affected by regulatory changes, changes in industry customs and
practices, and significant systems modifications unrelated to the Year 2000
project including upgrades and additions to capacity, and the cost and continued
availability of qualified personnel and other resources.
The progress of the Company's Year 2000 compliance efforts is managed and
reviewed by senior management and by the Company's Year 2000 Corporate Steering
Committee, which is responsible for maintaining awareness of Year 2000 issues
throughout the Company, monitoring overall progress of the project, resolving
issues, and providing strategic direction. The Company's Board of Directors
receives regular status reports on the project.
Contingency Planning and Risks
The Company commenced its contingency planning efforts in 1997. Its
contingency planning process is intended to create, update, and implement, as
necessary, plans in the event of Year 2000 errors or failures of third parties
with whom the Company interacts or who supply critical services or goods to the
Company, or of the Company itself.
In management's opinion, currently there is not sufficient reliable
information available to enable the Company to determine whether any specific
Year 2000 failures are reasonably likely to occur. The Company continues to take
steps to reduce this uncertainty by participating in industry conferences,
communicating with business alliance partners, monitoring the progress of
critical vendors, monitoring national and international governmental and
industry initiatives, and working with professional consultants and advisors.
Given the uncertainty of predicting at this point which, if any, Year 2000
errors or failures are reasonably likely to occur, the Company's contingency
planning process targets systems, transactions, processes, and third parties in
the light of their respective criticality to the Company's business, results of
operations, or financial condition.
Compliance Cost Estimates
The Company currently estimates that it will cost approximately $42
million to $50 million to modify its core brokerage computer systems, which
include Schwab's critical trading systems and certain additional systems, to be
Year 2000 compliant. The Company currently estimates that the cost of completing
the Company's entire Year 2000 project, including core brokerage computer
systems, distributed applications, facilities, and systems in subsidiaries other
than Schwab, but excluding potential costs related to the implementation of
contingency plans which address possible Year 2000 failures of third-party
systems or the Company's systems, is approximately $60 million to $75 million.
This estimate excludes the time that may be spent by management and
administrative staff not specifically dedicated to the Year 2000 project. As of
September 30, 1998, the Company had incurred approximately $34 million of the
estimated cost of the entire project.
The estimated cost and timing of the project are based on the Company's
estimates, which make numerous assumptions about future events. However, there
can be no assurance that these estimates will be correct and actual costs and
timing could differ materially from these estimates. The Company expects to fund
all Year 2000 related costs through operating cash flows and a reallocation of
the Company's overall developmental spending. This reallocation did not result
in the delay of any critical information technology projects. In accordance with
generally accepted accounting principles, Year 2000 expenditures will be
expensed as incurred.
European Economic and Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union (referred to as the participating countries) are scheduled to establish
fixed conversion rates between their existing national currencies and the euro
and adopt the euro as their common legal currency. The United Kingdom is not a
participating country and will not change its national currency on January 1,
1999. As a retail discount securities brokerage firm in the United Kingdom,
Charles Schwab Europe will continue to trade securities in sterling, and does
not need to modify its information technology systems to accommodate the euro
conversion for its current business operations. Therefore, the euro conversion
is not expected to have a material financial impact on the Company based on its
current business operations.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Financial Instruments Held For Trading Purposes
The Company held government and corporate fixed income securities with a
fair value of approximately $11 million at September 30, 1998. These securities,
and the associated interest rate risk, are not material to the Company's
financial position, results of operations or cash flows.
Through Schwab and M&S, the Company maintains inventories in
exchange-listed and Nasdaq equity securities on both a long and short basis. The
fair value of these securities at September 30, 1998 was $37 million in long
positions and $46 million in short positions. The potential loss or gain in fair
value, using a hypothetical 10% increase or decrease in prices, respectively, is
estimated to be approximately $900,000 due to the offset of change in fair value
in long and short positions. In addition, the Company generally enters into
exchange-traded option contracts to hedge against potential losses in equity
inventory positions. This hypothetical 10% change in fair value of these
securities at September 30, 1998 would not be material to the Company's
financial position, results of operations or cash flows. The notional amount of
option contracts was not material to the Company's consolidated balance sheet at
September 30, 1998.
Financial Instruments Held For Purposes Other Than Trading
For its working capital and reserves required to be segregated under
federal or other regulations, the Company invests in money market funds, resale
agreements, certificates of deposit, and commercial paper. Money market funds do
not have maturity dates and do not present a material market risk. The other
financial instruments, as shown in the following table, are fixed rate
investments with short maturities for which fair value approximates carrying
value and which do not present a material interest rate risk (dollars in
millions):
- -------------------------------------------------------------
Principal amount Fair
by maturity date value
Sep. 30, Sep. 30,
1999 Thereafter 1998
- -------------------------------------------------------------
Resale agreements $5,680 --- $5,680
Weighted-average
interest rate 5.43%
Certificates of deposit $1,559 --- $1,559
Weighted-average
interest rate 5.51%
Commercial paper $ 553 --- $ 553
Weighted-average
interest rate 5.82%
=============================================================
At September 30, 1998, CSC had $351 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates ranging from 5.78% to 7.72%. The
Company has fixed cash flow requirements regarding these Medium-Term Notes due
to the fixed rate of interest. The fair value of these Medium-Term Notes at
September 30, 1998, based on estimates of market rates for debt with similar
terms and remaining maturities, approximated their carrying amount. The table
below presents the principal amount of these Medium-Term Notes by year of
maturity (dollars in millions):
- ------------------------------------------------------------
Year Ending Weighted-Average Principal
December 31, Interest Rate Amount
- ------------------------------------------------------------
1999 6.8% $ 40
2000 6.3% 48
2001 7.0% 39
2002 7.0% 40
2003 6.4% 43
Thereafter 6.7% 141
============================================================
The Company maintains investments in mutual funds, approximately $42
million at September 30, 1998, to fund obligations under its deferred
compensation plan, which is available to certain employees. Any decrease in the
fair value of these investments would be offset by a reduction in the deferred
compensation plan obligation and would not affect the Company's financial
position, results of operations or cash flows.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The discussions of legal proceedings in Notes to Condensed Consolidated
Financial Statements, under "Commitments and Contingent Liabilities" in Part I -
Financial Information, Item 1., is incorporated herein by reference. See also
the Company's Quarterly Reports on Form 10-Q for the periods ended March 31,
1998 and June 30, 1998.
Item 2. Changes in Securities and Use of Proceeds
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
- --------------------------------------------------------------------------------
3.9 Second Restated Bylaws, as amended on September 22, 1998, of the
Registrant (supersedes Exhibit 3.8 to the Registrant's Form 10-Q
for the quarter ended September 30, 1996).
10.199 The Charles Schwab Corporation Deferred Compensation Plan, as
amended through July 24, 1998 (supersedes Exhibit 10.162 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996).
12.1 Computation of Ratio of Earnings to Fixed
Charges.
27.1 Financial Data Schedule (electronic only).
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
On July 17, 1998, the Registrant filed a Current Report on Form 8-K
relating to up to $205 million aggregate principal amount of debt
securities issuable by the Registrant pursuant to Registration Statement
Numbers 333-54001 and 333-12727 declared effective by the SEC on July 8,
1998 and November 1, 1996, respectively. Certain exhibits relating to the
Medium-Term Notes, Series A, which are issuable pursuant to the
Registration Statements, are contained in the Current Report.
<PAGE>
THE CHARLES SCHWAB CORPORATION
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: November 10, 1998 /s/ Steven L. Scheid
----------------- -------------------------------------
Steven L. Scheid
Executive Vice President and
Chief Financial Officer
Exhibit 3.9
SECOND RESTATED BYLAWS OF
THE CHARLES SCHWAB CORPORATION
(As Amended on September 22, 1998)
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of The Charles
Schwab Corporation (the "Corporation") in the State of Delaware shall be at 1209
Orange Street, Wilmington, Delaware, and the name of the registered agent at
that address shall be the Corporation Trust Company.
Section 1.02. Principal Office. The principal office for the
transaction of the business of the Corporation shall be at 101 Montgomery
Street, San Francisco, California. The Board of Directors (hereafter called the
"Board") is hereby granted full power and authority to change said principal
office from one location to another.
Section 1.03. Other Offices. The Corporation may also have an office
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Annual Meetings. Annual meetings of the stockholders of
the Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings shall be held each
year on a date and at a time designated by the Board.
Section 2.02. Special Meetings. Special meetings of the stockholders
for any purpose or purposes may be called by the Chairman of the Board, the
Board or a committee of the Board which has been duly designated by the Board
and whose powers and authority, as provided in a resolution of the Board or in
these Bylaws, include the power to call such meetings. Unless otherwise
prescribed by statute, the Certificate of Incorporation or these Bylaws, special
meetings may not be called by any other person or persons. No business may be
transacted at any special meeting of stockholders other than such business as
may be designated in the notice calling such meeting.
Section 2.03. Place of Meeting. The Board of Directors, the Chairman
of the Board, or a committee of the Board, as the case may be, may designate the
place of meeting for any annual meeting or for any special meeting of the
stockholders called by the Board of Directors, the Chairman of the Board, or a
committee of the Board. If no designation is so made, the place of meeting shall
be the principal office of the Corporation.
Section 2.04. Notice of Meeting. Written or printed notice, stating
the place, day and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be delivered by the Corporation not less than ten (10)
days nor more than sixty (60) days before the date of the meeting, either
personally or by mail, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail with postage thereon prepaid, addressed to the
stockholder at his address as it appears on the stock transfer books of the
Corporation. Such further notice shall be given as may be required by law. Only
such business shall be conducted at a special meeting of stockholders as shall
have been brought before the meeting pursuant to the Corporation's notice of
meeting. Meetings may be held without notice if all stockholders entitled to
vote are present, or if notice is waived by those not present in accordance with
Section 8.02 of these Bylaws. Any previously scheduled meeting of the
stockholders may be postponed, and (unless the Certificate of Incorporation
otherwise provides) any special meeting of the stockholders may be canceled, by
resolution of the Board upon public notice given prior to the date previously
scheduled for such meeting of stockholders.
Section 2.05. Quorum and Adjournment. Except in the case of any
meeting for the election of directors summarily ordered as provided by law, the
holders of record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority of the shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class. In the absence of a forum at any meeting or any adjournment
thereof, a majority in voting interest of the shareholders present in person or
by proxy and entitled to vote thereat or, in the absence therefrom of all
stockholders, any officer entitled to preside at, or to act as secretary of such
meeting may adjourn such meeting from time to time. The Chairman of the meeting
or a majority of the shares so represented may adjourn the meeting from time to
time, whether or not there is such a quorum. No notice of the time and place of
adjourned meetings need be given except as required by law. No business may be
transacted at a meeting in the absence of a quorum other than the adjournment of
such meeting, except that if a quorum is present at the commencement of a
meeting, business may be transacted until the meeting is adjourned even though
the withdrawal of stockholders results in less than a quorum.
Section 2.06. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board and the proposal
of business to be considered by the stockholders may be made at an annual
meeting of stockholders (A) pursuant to the Corporation's notice of
meeting, (B) by or at the direction of the Board or (C) by any stockholder
of the Corporation who was a stockholder of record at the time of giving of
notice provided for in this Bylaw, who is entitled to vote at the meeting
and who complies with the notice procedures set forth in this Bylaw.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of paragraph
(a)(i) of this Bylaw, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business
on the 60th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and
not later than the close of business on the later of the 60th day prior to
such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the Corporation.
In no event shall the public announcement of an adjournment of an annual
meeting commence a new time period for the giving of a stockholder's notice
as described above. Such stockholder's notice shall set forth (A) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such
person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (B) as to any other business that
the stockholder proposes to bring before the meeting, a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (C) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (1) the name and address of such stockholder, as they
appear on the Corporation's books, and of such beneficial owner and (2) the
class and number of shares of the Corporation which are owned beneficially
and of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of paragraph
(a)(ii) of this Bylaw to the contrary, in the event that the number of
directors to be elected to the Board of the Corporation is increased and
there is no public announcement by the Corporation naming all of the
nominees for director or specifying the size of the increased Board at
least 70 days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public
announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (i) by or at the direction of the Board or (ii)
provided that the Board has determined that directors shall be elected at such
meeting, by any stockholder of the Corporation who is a stockholder of record at
the time of giving of notice provided for in this Bylaw, who shall be entitled
to vote at the meeting and who complies with the notice procedures set forth in
this Bylaw. In the event the Corporation calls a special meeting of stockholders
for the purpose of electing one or more directors to the Board, any such
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (a)(ii) of this Bylaw shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board to be elected at such meeting. In no event shall
the public announcement of an adjournment of a special meeting commence a new
time period for the giving of a stockholder's notice as described above.
(c) General. (i) Only such persons who are nominated in
accordance with the procedures set forth in this Bylaw shall be eligible to
serve as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Bylaw. Except as otherwise provided by law, the
Chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Bylaw and, if any proposed nomination or business is not in compliance with
this Bylaw, to declare that such defective proposal or nomination shall be
disregarded.
(i) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(ii) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to
affect any rights (A) of stockholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act or (B) of the holders of any series of Preferred Stock to elect
directors under specified circumstances.
Section 2.07. Voting.
(a) Each stockholder shall, at each meeting of the
stockholders, be entitled to vote in person or by proxy each share or fractional
share of the stock of the Corporation having voting rights on the matter in
question and which shall have been held by him and registered in his name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 6.05 of these Bylaws as the
record date for the determination of stockholders entitled to notice of and
to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (a) at the
close of business on the day next preceding the day on which notice of the
meeting shall be given or (b) if notice of the meeting shall be waived, at
the close of business on the day next preceding the day on which the
meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or
to another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Nothing in this section shall be construed as limiting the right of
the Corporation to vote stock, including but not limited to its own stock, held
by it in a fiduciary capacity. Persons holding stock of the Corporation in a
fiduciary capacity shall be entitled to vote such stock. Persons whose stock is
pledging shall be entitled to vote, unless in the transfer by the pledgor on the
books of the Corporation he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or his proxy, may represent such stock
and vote thereon. Stock having voting power standing of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the General Corporation Law of the
State of Delaware.
(c) Any such voting rights may be exercised by the
stockholder entitled thereto in person or by his proxy appointed by an
instrument in writing, subscribed by such stockholder or by his attorney
thereunto authorized and delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted or acted upon after three years from its
date unless said proxy shall provide for a longer period. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless he shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of the
stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority of the shares present in person or by proxy and entitled to vote
thereat and thereon, a quorum being present. The vote at any meeting of the
stockholders on any questions shall be by ballot and each ballot shall be signed
by the stockholder voting, or by his proxy, if there be such proxy, and it shall
state the number of shares voted. The chairman of the meeting shall fix and
announce at the meeting the date and time of the opening and the closing of the
polls for each matter upon which the stockholders will vote at a meeting.
Section 2.08. List of Stockholders. The Secretary of the Corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the duration thereof, and may be inspected by any stockholder who is
present.
Section 2.09. Inspectors of Election. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to act at the meeting. If no inspector
or alternative is able to act at a meeting of stockholders, the chairman of such
meeting shall appoint one or more inspectors to act at the meeting. Each
inspector so appointed shall first sign an oath faithfully to execute the duties
of inspector at such meeting with strict impartiality and according to the best
of his ability. The inspectors shall ascertain the number of shares outstanding
and the voting power of each, determine the shares represented at a meeting and
the validity of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors, and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. Reports of the inspectors shall be in writing and subscribed and
delivered by them to the Secretary of the Corporation. The inspectors may
appoint or retain other persons or entities to assist them in the performance of
their duties as inspectors. The inspectors need not be stockholders of the
Corporation, and any officer of the Corporation may be an inspector on any
question other than a vote for or against a proposal in which he shall have a
material interest.
Section 2.10. No Stockholder Action by Written Consent. Except as
otherwise fixed by or pursuant to the provisions of Article FOURTH of the
Certificate of Incorporation relating to the rights of holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation with respect to such class or series of stock, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of such holders and may not
be effected by any consent in writing by such stockholders.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. General Powers. The property, business and affairs of
the Corporation shall be managed by or under the direction of the Board.
Section 3.02. Number, Election and Terms. Except as otherwise fixed by
or pursuant to the provisions of Article FOURTH of the Certificate of
Incorporation relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect additional directors under specified circumstances, the
number of the directors of the Board of the Corporation shall be fixed from time
to time exclusively pursuant to a resolution adopted by a majority of the total
number of directors which the Corporation would have if there were no vacancies.
Commencing with the 1996 annual meeting of stockholders, the directors, other
than those who may be elected by the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
shall be classified, with respect to the time for which they severally hold
office, into three classes, as nearly equal in number as is reasonably possible,
one class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1997, the second class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1998, and the
third class to be originally elected for a term expiring at the annual meeting
of stockholders to be held in 1999, with each director to hold office to hold
office until his or her successor is duty elected and qualified. At each annual
meeting of the stockholders of the Corporation, commencing with the 1997 annual
meeting, the successors of the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election, with each director to hold office until his or her director shall have
been duly elected and qualified.
Section 3.03. Procedure for Election of Directors; Required Vote.
Election of directors at all meetings of the stockholders at which directors are
to be elected shall be by ballot, and, except as otherwise fixed by or pursuant
to the provisions of Article FOURTH of the Certificate of Incorporation relating
to the rights to the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect directors
under specified circumstances, a plurality of the votes cast thereat shall elect
directors.
Section 3.04. Resignations. Any director of the Corporation may resign
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.05. Removal. Subject to the rights of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, any director may
be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of 80% of the combined voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class.
Section 3.06. Vacancies. Subject to applicable law and except as
otherwise provided for or fixed by or pursuant to the provisions of Article
FOURTH of the Certificate of Incorporation relating to the rights of the holders
of any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation to elect directors under specified circumstances,
and unless the Board of Directors otherwise determines, vacancies resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, and newly created directorships resulting from any increase in the
authorized number of directors, may be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum of the Board of
Directors, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board of Directors of the Corporation shall shorten
the term of any incumbent director.
Section 3.07. Place of Meeting, Etc. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time by resolution designate or as shall be designated by
the person or persons calling the meeting or in the notice or a waiver of notice
of any such meeting. Directors may participate in any regular or special meeting
of the Board by means of conference telephone or similar communications
equipment pursuant to which all persons participating in the meeting of the
Board can hear each other, and such participation shall constitute presence in
person at such meeting.
Section 3.08. First Meeting. The Board shall meet as soon as
practicable after each annual election of directors and notice of suc first
meeting shall not be required.
Section 3.09. Regular Meetings. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution determine.
If any day fixed for a regular meeting shall be a legal holiday at the place
where the meeting is to be held, then the meeting shall be held at the same hour
and place on the next succeeding business day not a legal holiday. Except as
provided by law, notice of regular meetings need not be given.
Section 3.10. Special Meetings. Special meetings of the Board may be
called by the Chairman of the Board of Directors or the President. Notice of any
special meeting of directors shall be given to each director at his business or
residence in writing by hand delivery, first-class or overnight mail or courier
service, telegram or facsimile transmission, or orally by telephone. If mailed
by first-class mail, such notice shall be deemed adequately delivered when
deposited in the United States mails so addressed, with postage thereon prepaid,
at least five (5) days before such meeting. If by telegram, overnight mail or
courier service, such notice shall be deemed adequately delivered when the
telegram is delivered to the telegraph company or the notice is delivered to the
overnight mail or courier service company at least twenty-four (24) hours before
such meeting. If by facsimile transmission, such notice shall be deemed
adequately delivered when the notice is transmitted at least twelve (12) hours
before such meeting. If by telephone or by hand delivery, the notice shall be
given at least twelve (12) hours prior to the time set for the meeting. Such
notice may be waived by any director and any meeting shall be a legal meeting
without notice having been given if all the directors shall be present thereat
or if those not present shall, either before or after the meeting, sign a
written waiver of notice of, or a consent to, such meeting or shall after the
meeting sign the approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or be made a part of the
minutes of the meeting.
Section 3.11. Quorum and Manner of Acting. Except as otherwise
provided in the Certificate of Incorporation or these Bylaws or by law, the
presence of a majority of the total number of directors then in office shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board. Except as otherwise provided in the Certificate of Incorporation
or these Bylaws or by law, all matters shall be decided at any such meeting, a
quorum being present, by the affirmative votes of a majority of the directors
present. In the absence of a quorum, a majority of directors present at any
meeting may adjourn the same from time to time until a quorum shall be present.
Notice of any adjourned meeting need not be given. The directors shall act only
as a Board, and the individual directors shall have no power as such.
Section 3.12. Action by Consent. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.13. Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse each
such director for any expense incurred by him on account of his attendance at
any meetings of the Board or Committees of the Board. Neither the payment of
such compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Corporation or its subsidiaries in any
other capacity and receiving compensation therefor.
Section 3.14. Executive Committee. There may be an Executive Committee
of two or more directors appointed by the Board, who may meet at stated times,
or in notice to all by any of their own number, during the intervals between the
meetings of the Board; they shall advise and aid the officers of the Corporation
in all matters concerning its interest and the management of its business, and
generally perform such duties and exercise such powers as may be directed or
delegated by the Board from time to time. The Board of Directors may also
designate, if it desires, other directors as alternate members who may replace
any absent or disqualified member of the Executive Committee at any meeting
thereof. To the full extent permitted by law, the Board may delegate to such
committee authority to exercise all the powers of the Board while the Board is
not in session. Vacancies in the membership of the committee shall be filled by
the Board at a regular meeting or at a special meeting for that purpose. In the
absence or disqualification of any member of the Executive Committee and any
alternate member in his or her place, the member or members of the Executive
Committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may, by unanimous vote, appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member. The Executive Committee shall keep written
minutes of its meeting and report the same to the Board when required. The
provisions of Sections 3.09, 3.10, 3.11 and 3.12 of these Bylaws shall apply,
mutatis mutandis, to any Executive Committee of the Board.
Section 3.15. Other Committees. The Board may, by resolution passed by
a majority of the whole Board, designate one or more other committees, each such
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may also designate, if it desires, other directors as
alternate members who may replace any absent or disqualified member of any such
committee at any meeting thereof. To the full extent permitted by law, any such
committee shall have and may exercise such powers and authority as the Board may
designate in such resolution. Vacancies in the membership of a committee shall
be filled by the Board at a regular meeting or a special meeting for that
purpose. Any such committee shall keep written minutes of its meeting and report
the same to the Board when required. In the absence or disqualification of any
member of any such committee and any alternate member or members of any such
committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may, by unanimous vote, appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member. The provisions of Section 3.09, 3.10, 3.11
and 3.12 of these Bylaws shall apply, mutatis mutandis, to any such committee of
the Board.
ARTICLE IV
OFFICERS
Section 4.01. Number. The officers of the Corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents, a Secretary and
a Treasurer. The Chief Executive Officer of the corporation shall be such
officer as the Board shall from time to time designate. The Board may also elect
one or more Assistant Secretaries and Assistant Treasurers. A person may hold
more than one office providing the duties thereof can be consistently performed
by the same person.
Section 4.02. Other Officers. The Board may appoint such other
officers as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4.03. Election. Each of the officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 4.02 or Section 4.05 of this Article, shall be chosen annually by the
Board and shall hold his office until he shall resign or shall be removed or
otherwise disqualified to serve, or his successor shall be elected and
qualified.
Section 4.04. Salaries. The salaries of all executive officers of the
Corporation shall be fixed by the Board or by such committee of the Board as may
be designated from time to time by a resolution adopted by a majority of the
Board.
Section 4.05. Removal; Vacancies. Subject to the express provisions
of a contract authorized by the Board, any officer may be removed, either with
or without cause, at any time by the Board or by any officer upon whom such
power of removal may be conferred by the Board. Any vacancy occurring in any
office of the Corporation shall be filled by the Board.
Section 4.06. The Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the stockholders and directors and shall have
such other powers and duties as may be prescribed by the Board or by applicable
law. He shall be an ex-officio member of standing committees, if so provided in
the resolutions of the Board appointing the members of such committees.
Section 4.07. The President. The President shall be the managing
officer of the Corporation. Subject to the control of the Board, the President
shall have general supervision, control and management of the affairs and
business of the Corporation, and general charge and supervision of all offices,
agents and employees of the Corporation; shall see that all orders and
resolutions of the Board are carried into effect; shall, in the absence of the
Chairman of the Board, preside at all meetings of the stockholders and Board;
and in general shall exercise all powers and perform all duties incident to
President and managing officer of the Corporation and such other powers and
duties as may from time to time be assigned to him by the Board or as may be
prescribed in these Bylaws.
The President may execute bonds, mortgages and other contracts
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board to some
other officer or agent of the Corporation.
The President shall be an ex-officio member of standing committees, if
so provided in the resolutions of the Board appointing the members of such
committees.
Section 4.08. The Vice Presidents. In the absence of the President or
in the event of his inability or refusal to act, the Vice President (or in the
event there be more than one Vice President, the Vice Presidents in the order
designated, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board may from time to time prescribe.
Section 4.09. The Secretary and Assistant Secretary. The Secretary
shall attend all meetings of the Board and all meetings of the stockholders and
record all the proceedings of the meetings of the Corporation and of the Board
in a book to be kept for that purpose and shall perform like duties for the
standing and special committees of the Board when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board, and shall perform such other duties as may be prescribed
by the Board or President, under whose supervision he shall act. He shall have
custody of the corporate seal of the Corporation and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring it
and, when so affixed, it may be attested by his signature or by the signature of
such assistant secretary. The Board may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature.
The assistant secretary, or if there be more than one, the assistant
secretaries in the order determined by the Board (or if there be no such
determination, then in the order of their election), shall, in the absence of
the Secretary or in the event of his inability or his refusal to act, perform
the duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
Section 4.10. The Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board.
He shall disburse the funds of the Corporation as may be ordered by
the Board, making proper vouchers for such disbursements, and shall render to
the President and the Board, at its regular meetings, or when the Board so
requires, an account of all his transactions as Treasurer and of the financial
condition of the Corporation.
If required by the Board , he shall give the Corporation a bond (which
shall be renewed every six (6) years) in such sum and with such surety or
sureties as shall be satisfactory to the Board for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 4.11. The Assistant Treasurer. The Assistant Treasurer, or if
there be more than one, the assistant treasurers in the order determined by the
Board (or if there be no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01. Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness payable by the
Corporation and all contracts or agreements shall be signed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person or persons shall give such bond, if
any, as the Board may require.
Section 5.02. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the purpose
of collection for the account of the Corporation, the President, any Vice
President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
Section 5.03. General and Special Bank Accounts. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01. Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman, Vice Chairman or President or a Vice President, and by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Any of or
all of the signatures on the certificates may be a facsimile. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the Corporation with the same
effect as though the person who signed such certificate, or whose facsimile
signature shall have been placed thereupon, were such officer, transfer agent or
registrar at the date of issue. A record shall be kept of the respective names
of the persons, firms or corporations owning the stock represented by such
certificates, the number and class of shares represented by such certificates,
respectively, and the respective dates thereof, and in case of cancellation, the
respective dates of cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so canceled, except in cases provided
for in Section 6.04.
Section 6.02. Transfers of Stock. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 6.03, and upon surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon. The person in whose name shares of stock stand on the books
of the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, such fact shall be so expressed in the entry of
transfer if, when the certificate or certificates shall be presented to the
Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
Section 6.03. Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
Section 6.04. Lost, Stolen, Destroyed, and Mutilated Certificates. In
any case of loss, theft, destruction or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board may direct; provided, however, that a new
certificate may be issued without requiring any bond when, in the judgment of
the Board, it is proper so to do.
Section 6.05. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders, or to receive payment of any
dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action except for consenting to corporate action in
writing without a meeting, the Board of Directors may fix a record date, which
shall not precede the date the resolution fixing the record date is adopted and
which record date shall not be more than sixty (60) nor less than ten (10) days
before the date of any meeting of stockholders, nor more than sixty (60) days
prior to the time for such other action as herein before described; provided,
however, that if no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day preceding the day
on which notice is given or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or to exercise any rights in respect of any change,
conversion or exchange of stock or any other lawful action except for consenting
to corporate action in writing without a meeting, the record date shall be the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.
For purposes of determining the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted, as of which shall be determined the
stockholders of record entitled to consent to corporate action in writing
without a meeting. If no record date has been fixed by the Board of Directors
and no prior action by the Board of Directors is required by the Delaware
General Corporation Law, the record date shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation in the manner prescribed in Section 2.09 hereof. If
no record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by the Delaware General Corporation Law with
respect to the proposed action, the record date for determining stockholders
entitled to consent to corporate action writing shall be the close of business
on the day in which the Board of Directors adopts the resolutions taking such
prior action.
ARTICLE VII
INDEMNIFICATION
Section 7.01. Indemnification of Officers, Directors, Employees and
Agents; Insurance.
(a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee, trustee, agent or
fiduciary of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee, trustee, agent,
fiduciary, or in any other capacity, while serving as a director, officer,
employee, agent, trustee or fiduciary of another corporation shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitees in connection therewith and such indemnification shall continue as
to an indemnitee who has ceased to be a director, officer, employee, trustee,
agent, fiduciary or in any other capacity, and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that except
as provided in paragraph (c) hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized or is subsequently
ratified by the Board of Directors of the Corporation. The Corporation shall not
be liable to indemnify the indemnitee with regard to any award in any proceeding
if the Corporation was not given a reasonable and timely opportunity, at its
expense, to meaningfully participate in the defense of such proceeding.
(b) Right to Advancement of Expenses. The right to
indemnification conferred in paragraph (a) of this Section shall include the
right to be paid by the Corporation the expenses (including attorneys' fees)
incurred in defending any proceeding for which such right to indemnification is
applicable in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Section or otherwise.
(c) To obtain indemnification under this Bylaw, a claimant
shall submit to the Corporation a written request, including therein or
therewith such documentation and information as is reasonably available to the
claimant and is reasonably necessary to determine whether and to what extent the
claimant is entitled to indemnification. Upon written request by a claimant for
indemnification pursuant to the first sentence of this paragraph (c), a
determination, if required by applicable law, with respect to the claimant's
entitlement thereto shall be made as follows: (1) if requested by the claimant,
by Independent Counsel (as hereinafter defined), or (2) if no request is made by
the claimant for a determination by Independent Counsel, (i) by the Board by a
majority vote of a quorum consisting of Disinterested Directors (as hereinafter
defined), or (ii) if a quorum of the Board consisting of Disinterested Directors
is not obtainable or, even if obtainable, such quorum of Disinterested Directors
so directs, by Independent Counsel in a written opinion to the Board, a copy of
which shall be delivered to the claimant, or (iii) if a quorum of Disinterested
Directors so directs, by the stockholders of the Corporation. In the event the
determination of entitlement to indemnification is to be made by Independent
Counsel at the request of the claimant, the Independent Counsel shall be
selected by the Board unless there shall have occurred within two years prior to
the date of the commencement of the action, suit or proceeding for which
indemnification is claimed a "Change of Control" as defined in the Senior
Executive Severance Policy, in which case the Independent Counsel shall be
selected by the claimant unless the claimant shall request that such selection
be made by the Board. If is so determined that the claimant is entitled to
indemnification, payment to the claimant shall be made within 10 days after such
determination.
(d) Right of Indemnitee to Bring Suit. The rights to
indemnification and to the advancement of expenses conferred in paragraphs (a)
and (b) of this Section shall be a contract between the Corporation and each
director or officer of the Corporation who serves or served in such capacity at
any time while this Article VII is in effect. Any repeal or modification of this
Article VII or any repeal or modification of relevant provisions of the Delaware
General Corporation Law or any other applicable laws shall not in any way
diminish any rights to indemnification of such director or officer or the
obligations of the Corporation hereunder. If a claim under paragraph (a) or (b)
of this Section is not paid in full by the Corporation within thirty (30) days
after a written claim pursuant to paragraph (c) has been received by the
Corporation, or in the case of a claim for advancement of expenses, in which
case the applicable period shall also be thirty (30) days, the indemnitee may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit, or in a
suit brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) in any suit by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its board of directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Section or otherwise shall be on the Corporation.
(e) Non-Exclusivity of Rights. The rights to indemnification
and to the advancement of expenses conferred in this Section shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's certificate of incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
(f) Insurance. The Corporation may maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law, provided that such
insurance is available on acceptable terms, which determination shall be made by
the Board of Directors or by a committee thereof.
(g) Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent and in accordance with the terms
authorized from time to time by the board of directors, grant rights to
indemnification, and to the advancement of expenses to any employee or agent of
the Corporation to the fullest extent of the provisions of this Section with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
(h) For purposes of this Section, references to "the
Corporation" shall include, in addition to the Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Section with respect to the
Corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this Section, references to "serving at
the request of the Corporation" shall include any service as director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to an
employee benefit plan, its participants or beneficiaries; and a person who acted
in good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Section.
(j) Notwithstanding anything else in this Article VII, in
the event that the express provisions of the Delaware General Corporation Law
relating to indemnification of, or advancement of expenses by the Corporation
to, persons eligible for indemnification or advancement of expenses under this
Article VII are amended to permit broader indemnification or advancement of
expenses, then the Corporation will provide such indemnification and advancement
of expenses to the maximum extent permitted by the Delaware General Corporation
Law.
(k) If this Article VII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each indemnitee of the Corporation as
to costs, charges and expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement with respect to any action, suit or proceeding,
whether civil, criminal, administrative or investigative, including an action by
or in the right of the Corporation, to the full extent permitted by any
applicable portion of this Article VII that shall not have been invalidated and
to the full extent permitted by applicable law.
(l) Notwithstanding anything else in this Article VII, at
any and all times at which the Corporation is subject to the provisions of the
California Corporations Code by virtue of the operation of Section 2115 thereof
or otherwise, the indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VII shall be in all respects limited by the
provisions of the California Corporations Code made applicable by such Section
2115 (or such other provision of California law).
(m) If a determination shall have been made pursuant to
paragraph (c) of this Bylaw that the claimant is entitled to indemnification,
the Corporation shall be bound by such determination in any judicial proceeding
commenced pursuant to paragraph (d) of this Bylaw.
(n) The Corporation shall be precluded from asserting in any
judicial proceeding commenced pursuant to paragraph (d) of this Bylaw that the
procedures and presumptions are not valid, binding and enforceable and shall
stipulate in such proceeding that the Corporation is bound by all the provisions
of this Bylaw.
(o) For purposes of this Bylaw:
(i) "Disinterested Director" means a director of the Corporation who
is not and was not a party to the matter in respect of which
indemnification is sought by the claimant.
(ii) "Independent Counsel" means a law firm, a member of a law firm,
or and independent practitioner, that is experienced in matters of
corporation law and shall include any person who, under the applicable
standards of professional conduct then prevailing, would not have a
conflict of interest in representing either the Corporation or the claimant
in an action to determine the claimant's rights under this Bylaw.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Seal. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation and
words and figures showing that the Corporation was incorporated in the State of
Delaware and the year of incorporation.
Section 8.02. Waiver of Notices. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
Section 8.03. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board.
Section 8.04. Amendments. These Bylaw may be altered, amended or
repealed at any meeting of the Board or of the stockholders, provided notice of
the proposed change was given in the notice of the meeting and, in the case of a
meeting of the Board, in a notice given not less than two days prior to the
meeting; provided, however, that, in the case of amendments by stockholders,
notwithstanding any other provisions of these Bylaws or any provision of law
which might otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of the capital
stock of the Corporation required by law, the Certificate of Incorporation of
these Bylaws, the affirmative vote of the holders of at least 80% of the total
voting power of all the then outstanding shares of Voting Stock of the
Corporation, voting together as a single class, shall be required to alter,
amend or repeal this Section 8.04 or any provision of Sections 2.06, 2.10, 3.02,
3.05 and 3.06 of these Bylaws.
Section 8.05. Voting Stock. Any person so authorized by the Board, and
in the absence of such authorization, the Chairman of the Board, the President
or any Vice President, shall have full power and authority on behalf of the
Corporation to attend and to act and vote at any meeting of the stockholders of
any corporation in which the Corporation may hold stock and at any such meeting
shall possess and may exercise any and all rights and powers which are incident
to the ownership of such stock and which as the owner thereof the Corporation
might have possessed and exercised if present. The Board by resolution from time
to time may confer like powers upon any other person or persons.
Exhibit 10.199
THE CHARLES SCHWAB CORPORATION
DEFERRED COMPENSATION PLAN
(RESTATED TO INCLUDE AMENDMENTS
THROUGH JULY 24, 1998)
<PAGE>
THE CHARLES SCHWAB CORPORATION
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Section Page
Article I. Purpose
1.1 Establishment of the Plan 2
1.2 Purpose of the Plan 2
Article II. Definitions
2.1 Definitions 3
2.2 Gender and Number 4
Article III. Administration
3.1 Committee and Administrator 5
Article IV. Participants
4.1 Participants 6
Article V. Deferrals
5.1 Salary Deferrals 7
5.2 Deferrals of Bonuses and Other Cash Incentive Compensation 7
5.3 Deferral Procedures 8
5.4 Election of Time and Manner of Payment 8
5.5 Accounts and Earnings 10
5.6 Maintenance of Accounts 11
5.7 Change in Control 11
5.8 Payment of Deferred Amounts 14
5.9 Acceleration of Payment 14
<PAGE>
Section
Page
Article VI. General Provisions
6.1 Unfunded Obligation 15
6.2 Informal Funding Vehicles 15
6.3 Beneficiary 16
6.4 Incapacity of Participant or Beneficiary 17
6.5 Nonassignment 17
6.6 No Right to Continued Employment 17
6.7 Tax Withholding 17
6.8 Claims Procedure and Arbitration 17
6.9 Termination and Amendment 19
6.10 Applicable Law 19
<PAGE>
THE CHARLES SCHWAB CORPORATION
DEFERRED COMPENSATION PLAN
Article I. Purpose
1.1 Establishment of the Plan. Effective as of July 1, 1994, The
Charles Schwab Corporation (hereinafter, the "Company") hereby establishes The
Charles Schwab Corporation Deferred Compensation Plan (the "Plan"), as set forth
in this document.
1.2 Purpose of the Plan. The Plan permits participating employees to
defer the payment of certain cash compensation that they may earn. The
opportunity to elect such deferrals is provided in order to help the Company
attract and retain key employees. This Plan is unfunded and is maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. It is accordingly intended to be
exempt from the participation, vesting, funding, and fiduciary requirements set
forth in Title I of the Employee Retirement Income Security Act of 1974.
Article II. Definitions
2.1 Definitions. The following definitions are in addition to any other
definitions set forth elsewhere in the Plan. Whenever used in the Plan, the
capitalized terms in this section shall have the meanings set forth below unless
otherwise required by the context in which they are used:
(a) "Administrator" the administrator described in section 3.1
that is selected by the Committee to assist in the
administration of the Plan.
(b) "Beneficiary" means a person entitled to receive any benefit
payments that remain to be paid after a Participant's death,
as determined under section 6.3.
(c) "Board" means the Board of Directors of the Company.
(d) "Company" means The Charles Schwab Corporation, a Delaware
corporation.
(e) "Category 1 Participant" and "Category 2 Participant" each
refer to a specific Participant group and have the meaning
set forth in section 4.1.
(f) "Committee" means the Compensation Committee of the Board.
(g) "Deferral Account" means the account representing deferrals
of cash compensation, plus investment adjustments, as
described in sections 5.5 and 5.6.
(h) "Participant" means any employee who meets the eligibility
requirements of the Plan, as set forth in Article 4, and
includes, where appropriate to the context, any former
employee who is entitled to benefits under this Plan.
(i) "Plan" means The Charles Schwab Corporation Deferred
Compensation Plan, as in effect from time to time.
(j) "Plan Year" means the calendar year.
(k) "Retirement" shall mean any termination of employment with
the Company and its Subsidiaries for any reason other than
death at any time after the Participant has attained age
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.Provided, however, that with
respect to any payments made on account of a deferral
election made prior to November 1, 1994, Retirement shall
also mean any termination of employment with the Company and
its Subsidiaries for any reason other than death after the
Participant has attained age 55.
(l) "Subsidiary" means a corporation or other business entity in
which the Company owns, directly or indirectly, securities
with more than 80 percent of the total voting power.
(m) "Valuation Date" means each December 31 and any other date
designated from time to time by the Committee for the
purpose of determining the value of a Participant's Deferral
Account balance pursuant to section 5.5.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine or feminine terminology shall also include the neuter and other
gender, and the use of any term in the singular or plural shall also include the
opposite number.
Article III. Administration
3.1 Committee and Administrator. The Committee shall administer the
Plan and may select one or more persons to serve as the Administrator. The
Administrator shall perform such administrative functions as the Committee may
delegate to it from time to time. Any person selected to serve as the
Administrator may, but need not, be a Committee member or an officer or employee
of the Company. However, if a person serving as Administrator or a member of the
Committee is a Participant, such person may not vote on a matter affecting his
interest as a Participant.
The Committee shall have discretionary authority to construe and
interpret the Plan provisions and resolve any ambiguities thereunder; to
prescribe, amend, and rescind administrative rules relating to the Plan; to
select the employees who may participate and to terminate the future
participation of any such employees; to determine eligibility for benefits under
the Plan; and to take all other actions that are necessary or appropriate for
the administration of the Plan. Such interpretations, rules, and actions of the
Committee shall be final and binding upon all concerned and, in the event of
judicial review, shall be entitled to the maximum deference allowable by law.
Where the Committee has delegated its responsibility for matters of
interpretation and Plan administration to the Administrator, the actions of the
Administrator shall constitute actions of the Committee.
Article IV. Participants
4.1 Participants. Officers and other key employees of the Company and
each of its Subsidiaries shall be eligible to participate in this Plan upon
selection by the Committee. To be nominated for participation, an employee must
be highly compensated or have significant responsibility for the management,
direction and/or success of the Company as a whole or a particular business unit
thereof. Directors of the Company who are full-time employees of the Company
shall be eligible to participate in the Plan. Participating employees of the
Company in the position of executive vice president or above shall be "Category
1 Participants." All other participating employees shall be "Category 2
Participants."
Article V. Deferrals
5.1 Salary Deferrals. Each Category 2 Participant selected under
section 4.1 may elect to defer up to 50 percent of his regular base salary
(subject to the provisions of this Article V). Any such election must be made by
entering a deferred compensation agreement with the employer, as evidenced by a
form approved by and filed with the Administrator on or before the deadline
specified by the Committee (which shall be no earlier than one month prior to
the beginning of the election period for which the deferred salary is to be
earned). For this purpose, the election period shall be the calendar year;
provided, however, that during periods in which the Plan is not in effect for a
full calendar year or an employee is not a Participant for a full calendar year,
the election period shall be the portion of the calendar year during which the
Plan is in effect and the employee is an eligible Participant. Notwithstanding
the foregoing, a person who is not a Participant at the beginning of a calendar
year shall not be allowed to elect a deferral of compensation that takes effect
during that year without the consent of the Committee. Salary deferrals that
have been elected shall occur throughout the election period in equal increments
for each payroll period.
5.2 Deferrals of Bonuses and Other Cash Incentive Compensation. Each
Category 1 Participant and each Category 2 Participant may elect to defer all or
any portion (subject to the provisions of this Article V) of any amount that he
subsequently earns under an annual cash bonus program and/or a long-term cash
incentive compensation program of the Company or a participating Subsidiary. Any
such election must be made by entering a deferred compensation agreement with
the employer, as evidenced by a form approved by the Committee that is filed
with the Administrator on or before the deadline specified by the Committee. For
annual cash bonuses, this deadline shall be no earlier than one month prior to
the beginning of year (or portion thereof) for which the bonus will be earned.
For other cash incentive compensation, this deadline shall be a date no later
than six months before the end of the year or other period for which the
incentive compensation will be earned. Rules similar to those in section 5.1
shall apply in cases where the Plan is not in existence or an employee is not a
Participant for the full period in which an annual cash bonus or long-term
incentive compensation award is earned.
5.3 Deferral Procedures. Participants eligible to elect salary
deferrals under section 5.1 shall have an opportunity to do so each year.
Participants eligible to elect deferrals under section 5.2 shall have a separate
opportunity to do so for each cash bonus under an annual bonus program and for
each other cash bonus or incentive payment under a long-term incentive plan that
they may earn. Unless the Committee specifies other rules for the deferrals that
may be elected, the minimum deferral shall be 20 percent of the compensation to
which a deferral election applies; and, subject to the maximum percentage
allowed under section 5.1 or 5.2, as applicable, deferrals in excess of the
minimum allowable percentage may be made only in increments of 10 percent.
If a deferral is elected, the election shall be irrevocable with
respect to the particular compensation that is subject to the election. Deferral
elections shall be made on a form prescribed by the Committee or the
Administrator. As provided in section 6.7, any deferral is subject to
appropriate tax withholding measures and may be reduced to satisfy tax
withholding requirements.
5.4 Election of Time and Manner of Payment. At the time a Participant
makes a deferral election under section 5.1 or 5.2, the Participant shall also
designate the manner of payment and the date on which payments from his or her
Deferral Account shall begin, from among the following options:
(i) a lump sum payable by the end of February of any year that
the Participant specifies; (ii) a lump sum payable by the end
of February in the year immediately following the
Participant's Retirement; (iii) a series of annual
installments, commencing in any year selected by the
Participant and payable each year on or before the end of
February, over a period of four years; or (iv) a series of
annual installments, commencing in the year following the
Participant's Retirement and payable each year on or before
the end of February, over a period of five, ten, or fifteen
years, as designated by the Participant.
However, if a Participant terminates employment for any reason other
than Retirement, the payment of the Participant's entire Deferral Account,
including any unpaid installments pursuant to clause (iii) above, shall be made
in a single lump sum by the end of February in the year next following the year
in which the Participant terminates employment, notwithstanding the terms of the
Participant's election.
Any election of a specified payment date pursuant to clauses (i) or
(iii) shall be subject to any restrictions that the Committee may, in its sole
discretion, choose to establish in order to limit the number of different
payment dates that a Participant may have in effect at one time.
A Participant may modify an election of the time for payment under
circumstances determined by the Committee, provided that (i) a payment election
may not be modified in a manner that would cause payments to commence earlier
than the date payments would have commenced absent such modification, and (ii)
all payment elections shall become irrevocable one year prior to the date on
which payment will commence under the election.
If payment is due in the form of a lump sum, the payment shall equal
the balance of the Deferral Account being paid, determined as of the Valuation
Date coincident with or immediately preceding the payment date. If payment is
due in the form of installments, the amount of each installment payment shall be
equal to the quotient determined by dividing (A) the value of the portion of the
Deferral Account to which the installment payment election applies (determined
as of the Valuation Date coincident with or immediately preceding the date the
payment is to be made), by (B) the number of years over which the installment
payments are to be made, less the number of years in which prior payments
attributable to such installment payment election have been made.
Notwithstanding the foregoing, however, if earnings or any other
amounts credited to a Participant's Deferral Account are not considered
performance-based compensation, within the meaning of Section 162(m) of the
Internal Revenue Code, and do not otherwise meet Internal Revenue Code
conditions allowing the Company and its Subsidiaries to receive a federal income
tax deduction for such amounts upon paying them at the time provided under the
Participant's election, the payment of such amounts, to the extent in excess of
the amount that would be currently tax deductible, shall automatically be
deferred until the earliest year that the payment can be deducted.
5.5 Accounts and Earnings. The Company shall establish a Deferral
Account for each Participant who has elected a deferral under section 5.1 or 5.2
above, and its accounting records for the Plan with respect to each such
Participant shall include a separate Deferral Account or subaccount for each
deferral election of the Participant that could cause a payment made at a
different time or in a different form from other payments of deferrals elected
by the same Participant. Each Deferral Account balance shall reflect the
Company's obligation to pay a deferred amount to a Participant or Beneficiary as
provided in this Article V. Under procedures approved by the Committee and
communicated to Participants, a Participant's Deferral Account balance shall be
increased periodically (not less frequently than annually) to reflect an assumed
earnings increment, based on an interest rate or other benchmark selected by the
Committee and in effect at the time. Until the time for determining the amount
to be paid to the Participant or Beneficiary, such assumed earnings shall accrue
from each Valuation Date on the Deferral Account balance as of that date and
shall be credited to the account as of the next Valuation Date.
The rate of earnings may, but need not, be determined with reference to
the actual rate of earnings on assets held under any existing grantor trust or
other informal funding vehicle that is in effect pursuant to section 6.2. Any
method of crediting earnings that is followed from time to time may, with
reasonable advance notice to affected Participants, be revoked or revised
prospectively as of the beginning of any new Plan Year. Earnings that have been
credited for any Plan Year, like deferred amounts that have been previously
credited to a Participant, shall not be reduced or eliminated retroactively
unless they were credited in error. The crediting of assumed earnings shall not
mean that any deferred compensation promise to a Participant is secured by
particular investment assets or that the Participant is actually earning
interest or any other form of investment income under the Plan.
Consistent with the foregoing authority to exercise flexibility in
establishing a method for crediting assumed earnings on account balances, the
Committee may, but need not, consult with Participants about their investment
preferences and may, but need not, institute a program of assumed earnings that
tracks the investment performance in a Participant's qualified defined
contribution plan account or in an assumed participant-directed investment
arrangement.
5.6 Maintenance of Accounts. The Accounts of each Participant shall be
entered on the books of the Company and shall represent a liability, payable
when due under this Plan, out of the general assets of the Company. Prior to
benefits becoming due hereunder, the Company shall expense the liability for
such accounts in accordance with policies determined appropriate by the
Company's auditors. Except to the extent provided pursuant to the second
paragraph of this section 5.6, the Accounts created for a Participant by the
Company shall not be funded by a trust or an insurance contract; nor shall any
assets of the Company be segregated or identified to such account; nor shall any
property or assets of the Company be pledged, encumbered, or otherwise subjected
to a lien or security interest for payment of benefits hereunder.
Notwithstanding that the amounts to be paid hereunder to Participants
constitute an unfunded obligation of the Company, the Company may direct that an
amount equal to any portion of the Accounts shall be invested by the Company as
the Company, in its sole discretion, shall determine. The Committee may in its
sole discretion determine that all or any portion of an amount equal to the
Accounts shall be paid into one or more grantor trusts that may be established
by the Company for the purpose of providing a potential source of funds to pay
Plan benefits. The Company may designate an investment advisor to direct the
investment of funds that may be used to pay benefits, including the investment
of the assets of any grantor trusts hereunder.
5.7 Change in Control. In the event of a Change in Control (as
defined below), the following rules shall apply:
(a) All Participants shall continue to have a fully vested,
nonforfeitable interest in their Deferral Accounts.
(b) Deferrals of amounts for the year that includes the Change
in Control shall cease beginning with the first payroll
period that follows the Change in Control.
(c) A special allocation of earnings on all Deferral Accounts
shall be made under section 5.5 as of the date of the Change
in Control on a basis no less favorable to Participants than
the method being followed prior to the Change in Control.
(d) All payments of deferred amounts following a Change in
Control, whether or not they have previously begun, shall be
made in a cash lump sum no later than 30 days following the
Change in Control and, except as provided in section 5.4
with respect to installment payments in progress, shall be
in an amount equal to the full Deferral Account balance, as
adjusted pursuant to paragraph (c) above, as of the date of
the Change in Control.
(e) Nothing in this Plan shall prevent a Participant from
enforcing any rules in a contract or another plan of the
Company or any Subsidiary concerning the method of
determining the amount of a bonus, incentive compensation,
or other form of compensation to which a Participant may
become entitled following a change in control, or the time
at which that compensation is to be paid in the event of a
change in control. For purposes of this Plan, a "Change in
Control" means any of the following:
(1) Any "person" who, alone or together with all
"affiliates" and "associates" of such person, is or
becomes (1) an "acquiring person" or (2) the
"beneficial owner" of 35% of the outstanding voting
securities of the Company (the terms "person",
"affiliates", "associates" and "beneficial owner"
are used as such terms are used in the Securities
Exchange Act of 1934 and the General Rules and
Regulations thereunder); provided, however, that a
"Change in Control" shall not be deemed to have
occurred if such "person" is Charles R. Schwab, the
Company, any subsidiary or any employee benefit
plan or employee stock plan of the Company or of
any Subsidiary, or any trust or other entity
organized, established or holding shares of such
voting securities by, for or pursuant to, the terms
of any such plan; or
(2) Individuals who at the beginning of any period of
two consecutive calendar years constitute the Board
cease for any reason, during such period, to
constitute at least a majority thereof, unless the
election, or the nomination for election by the
Company's Shareholders, of each new Board Member
was approved by a vote of at least three-quarters
(3/4) of the Board members then still in office who
were Board members at the beginning of such period;
or
(3) Approval by the shareholders of the Company of:
(A) the dissolution or liquidation of the Company;
(B) the sale or transfer of substantially all
of the Company's business and/or assets to
a person or entity which is not a
"subsidiary" (any corporation or other
entity a majority or more of whose
outstanding voting stock or voting power is
beneficially owned directly or indirectly
by the Company); or
(C) an agreement to merge or consolidate, or
otherwise reorganize, with one or more
entities which are not subsidiaries (as
defined in (B) above), as a result of which
less than 50% of the outstanding voting
securities of the surviving or resulting
entity are, or are to be, owned by former
shareholders of the Company; or
(4) The Board agrees by a majority vote that an event
has or is about to occur that, in fairness to the
Participants, is tantamount to a Change in Control.
A Change of Control shall occur on the first day on
which any of the preceding conditions has been satisfied.
However, notwithstanding the foregoing, this section 5.7
shall not apply to any Participant who alone or together
with one or more other persons acting as a partnership,
limited partnership, syndicate, or other group for the
purpose of acquiring, holding or disposing of securities of
the Company, triggers a "Change in Control" within the
meaning of paragraphs (1) and (2) above.
5.8 Payment of Deferred Amounts. A Participant shall have a fully
vested, nonforfeitable interest in his or her Deferral Account balance at all
times. However, vesting does not confer a right to payment other than in the
manner elected by the Participant pursuant to section 5.4 (subject to any
modification that may occur pursuant to section 5.5, 5.7 or 5.9). Upon the
expiration of a deferral period selected by the Participant in one or more
deferral elections, the Company shall pay to such Participant (or to the
Participant's Beneficiary, in the case of the Participant's death) an amount
equal to the balance of the Participant's Account attributable to such expiring
deferral elections, plus assumed earnings (determined by the Company pursuant to
section 5.5) thereon.
5.9 Acceleration of Payment. The Committee, in its discretion, upon
receipt of a written request from a Participant, may accelerate the payment of
all or any portion of the unpaid balance of a Participant's Deferral Account in
the event of the Participant's Retirement, death, permanent disability,
resignation or termination of employment, or upon its determination that the
Participant (or his Beneficiary in the case of his death) has incurred a severe,
unforeseeable financial hardship creating an immediate and heavy need for cash
that cannot reasonably be satisfied from sources other than an accelerated
payment from this Plan. The Committee in making its determination may consider
such factors and require such information as it deems appropriate.
Article VI. General Provisions
6.1 Unfunded Obligation. The deferred amounts to be paid to
Participants pursuant to this Plan constitute unfunded obligations of the
Company. Except to the extent specifically provided hereunder, the Company is
not required to segregate any monies from its general funds, to create any
trusts, or to make any special deposits with respect to this obligation. Title
to and beneficial ownership of any investments, including any grantor trust
investments which the Company has determined and directed the Administrator to
make to fulfill obligations under this Plan shall at all times remain in the
Company. Any investments and the creation or maintenance of any trust or
Accounts shall not create or constitute a trust or a fiduciary relationship
between the Administrator or the Company and a Participant, or otherwise create
any vested or beneficial interest in any Participant or his or her Beneficiary
or his or her creditors in any assets of the Company whatsoever. The
Participants shall have no claim for any changes in the value of any assets
which may be invested or reinvested by the Company in an effort to match its
liabilities under this Plan.
6.2 Informal Funding Vehicles. Notwithstanding section 6.1, the Company
may, but need not, arrange for the establishment and use of a grantor trust or
other informal funding vehicle to facilitate the payment of benefits and to
discharge the liability of the Company and participating Affiliates under this
Plan to the extent of payments actually made from such trust or other informal
funding vehicle.
Any investments and any creation or maintenance of memorandum accounts
or a trust or other informal funding vehicle shall not create or constitute a
trust or a fiduciary relationship between the Committee or the Company or an
affiliate and a Participant, or otherwise confer on any Participant or
Beneficiary or his or her creditors a vested or beneficial interest in any
assets of the Company or any Affiliate whatsoever. Participants and
Beneficiaries shall have no claim against the Company or any Affiliate for any
changes in the value of any assets which may be invested or reinvested by the
Company or any Affiliate with respect to this Plan.
6.3 Beneficiary. The term "Beneficiary" shall mean the person or
persons to whom payments are to be paid pursuant to the terms of the Plan in the
event of the Participant's death. A Participant may designate a Beneficiary on a
form provided by the Administrator, executed by the Participant, and delivered
to the Administrator. The Administrator may require the consent of the
Participant's spouse to a designation if the designation specifies a Beneficiary
other than the spouse. Subject to the foregoing, a Participant may change a
Beneficiary designation at any time. Subject to the property rights of any prior
spouse, if no Beneficiary is designated, if the designation is ineffective, or
if the Beneficiary dies before the balance of the Account is paid, the balance
shall be paid to the Participant's surviving spouse, or if there is no surviving
spouse, to the Participant's estate.
6.4 Incapacity of Participant or Beneficiary. Every person receiving or
claiming benefits under the Plan shall be conclusively presumed to be mentally
competent and of age until the date on which the Administrator receives a
written notice, in a form and manner acceptable to the Administrator, that such
person is incompetent or a minor, for whom a guardian or other person legally
vested with the care of his person or estate has been appointed; provided,
however, that if the Administrator finds that any person to whom a benefit is
payable under the Plan is unable to care for his or her affairs because of
incompetency, or because he or she is a minor, any payment due (unless a prior
claim therefor shall have been made by a duly appointed legal representative)
may be paid to the spouse, a child, a parent, a brother or sister, or to any
person or institution considered by the Administrator to have incurred expense
for such person otherwise entitled to payment. To the extent permitted by law,
any such payment so made shall be a complete discharge of liability therefor
under the Plan.
If a guardian of the estate of any person receiving or claiming
benefits under the Plan is appointed by a court of competent jurisdiction,
benefit payments may be made to such guardian provided that proper proof of
appointment and continuing qualification is furnished in a form and manner
acceptable to the Administrator. In the event a person claiming or receiving
benefits under the Plan is a minor, payment may be made to the custodian of an
account for such person under the Uniform Gifts to Minors Act. To the extent
permitted by law, any such payment so made shall be a complete discharge of any
liability therefor under the Plan.
6.5 Nonassignment. The right of a Participant or Beneficiary to the
payment of any amounts under the Plan may not be assigned, transferred, pledged
or encumbered nor shall such right or other interests be subject to attachment,
garnishment, execution, or other legal process.
6.6 No Right to Continued Employment. Nothing in the Plan shall be
construed to confer upon any Participant any right to continued employment with
the Company, nor shall the Plan interfere in any way with the right of the
Company to terminate the employment of such Participant at any time without
assigning any reason therefor.
6.7 Tax Withholding. Appropriate taxes shall be withheld from cash
payments made to Participants pursuant to the Plan. To the extent tax
withholding is payable in connection with the Participant's deferral of income
rather than in connection with the payment of deferred amounts, such withholding
may be made from other wages and salary currently payable to the Participant,
or, as determined by the Administrator, the amount of the deferral elected by
the Participant may be reduced in order to satisfy required tax withholding for
employment taxes and any other taxes.
6.8 Claims Procedure and Arbitration. The Company shall establish a
reasonable claims procedure consistent with the requirements of the Employee
Retirement Income Security Act of 1974, as amended. Following a Change in
Control of the Company (as determined under section 5.8) the claims procedure
shall include the following arbitration procedure.
Since time will be of the essence in determining whether any payments
are due to the Participant under this Plan following a Change in Control, a
Participant may submit any claim for payment to arbitration as follows: On or
after the second day following the termination of the Participant's employment
or other event triggering a right to payment, the claim may be filed with an
arbitrator of the Participant's choice by submitting the claim in writing and
providing a copy to the Company. The arbitrator must be:
(a) a member of the National Academy of Arbitrators or one who
currently appears on arbitration panels issued by the Federal
Mediation and Conciliation Service or the American Arbitration
Association; or
(b) a retired judge of the State in which the claimant is a resident
who served at the appellate level or higher. The arbitration
hearing shall be held within 72 hours (or as soon thereafter as
possible) after filing of the claim unless the Participant and
the Company agree to a later date. No continuance of said hearing
shall be allowed without the mutual consent of the Participant
and the Company. Absence from or nonparticipation at the hearing
by either party shall not prevent the issuance of an award.
Hearing procedures which will expedite the hearing may be ordered
at the arbitrator's discretion, and the arbitrator may close the
hearing in his or her sole discretion upon deciding he or she has
heard sufficient evidence to satisfy issuance of an award. In
reaching a decision, the arbitrator shall have no authority to
ignore, change, modify, add to or delete from any provision of
this Plan, but instead is limited to interpreting this Plan. The
arbitrator's award shall be rendered as expeditiously as
possible, and unless the arbitrator rules within seven days after
the close of the hearing, he will be deemed to have ruled in
favor of the Participant. If the arbitrator finds that any
payment is due to the Participant from the Company, the
arbitrator shall order the Company to pay that amount to the
Participant within 48 hours after the decision is rendered. The
award of the arbitrator shall be final and binding upon the
Participant and the Company. Judgment upon the award rendered by
the arbitrator may be entered in any court in any State of the
United States. In the case of any arbitration regarding this
Agreement, the Participant shall be awarded the Participant's
costs, including attorney's fees. Such fee award may not be
offset against the deferred compensation due hereunder. The
Company shall pay the arbitrator's fee and all necessary expenses
of the hearing, including stenographic reporter if employed.
6.9 Termination and Amendment. The Committee may from time to time
amend, suspend or terminate the Plan, in whole or in part, and if the Plan is
suspended or terminated, the Committee may reinstate any or all of its
provisions. Except as otherwise required by law, the Committee may delegate to
the Administrator all or any of its foregoing powers to amend, suspend, or
terminate the Plan. Any such amendment, suspension, or termination may affect
future deferrals without the consent of any Participant or Beneficiary. However,
with respect to deferrals that have already occurred, no amendment, suspension
or termination may impair the right of a Participant or a designated Beneficiary
to receive payment of the related deferred compensation in accordance with the
terms of the Plan prior to the effective date of such amendment, suspension or
termination, unless the affected Participant or Beneficiary gives his express
written consent to the change.
6.10 Applicable Law. The Plan shall be construed and governed in
accordance with applicable federal law and, to the extent not preempted by such
federal law, the laws of the State of California.
EXHIBIT 12.1
<TABLE>
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before taxes on income $162,499 $126,940 $400,714 $343,003
- ----------------------------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 148,286 125,665 427,975 350,474
Interest expense - other 18,494 16,673 55,043 48,120
Interest portion of rental expense 8,259 6,657 23,628 19,405
- ----------------------------------------------------------------------------------------------------------
Total fixed charges (A) 175,039 148,995 506,646 417,999
- ----------------------------------------------------------------------------------------------------------
Earnings before taxes on income and fixed charges (B) $337,538 $275,935 $907,360 $761,002
==========================================================================================================
Ratio of earnings to fixed charges (B) divided by (A)* 1.9 1.9 1.8 1.8
==========================================================================================================
Ratio of earnings to fixed charges excluding
customer interest expense** 7.1 6.4 6.1 6.1
==========================================================================================================
* 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 September 30, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,106,444
<RECEIVABLES> 9,271,639
<SECURITIES-RESALE> 5,680,448
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 212,538
<PP&E> 389,784
<TOTAL-ASSETS> 18,846,013
<SHORT-TERM> 186,268
<PAYABLES> 16,511,246
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 351,002
0
0
<COMMON> 2,677
<OTHER-SE> 1,303,231
<TOTAL-LIABILITY-AND-EQUITY> 18,846,013
<TRADING-REVENUE> 186,559
<INTEREST-DIVIDENDS> 828,232
<COMMISSIONS> 934,208
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 405,719
<INTEREST-EXPENSE> 483,018
<COMPENSATION> 835,370
<INCOME-PRETAX> 400,714
<INCOME-PRE-EXTRAORDINARY> 400,714
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242,092
<EPS-PRIMARY> .92 <F1>
<EPS-DILUTED> .88 <F1>
<FN>
<F1> The information has been prepared in accordance with SFAS No. 128. Basic
and diluted EPS have been entered in place of primary and fully diluted,
respectively.
</FN>
</TABLE>
