UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
266,928,489* shares of $.01 par value Common Stock
Outstanding on April 28, 1998
* Reflects the September 1997 three-for-two common stock split.
<PAGE>
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 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 7-16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 17-18
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Revenues
Commissions $297,845 $274,919
Mutual fund service fees 125,382 94,698
Interest revenue, net of interest expense of $155,595 in 1998
and $123,130 in 1997 104,591 76,723
Principal transactions 52,658 69,135
Other 23,930 20,179
- ----------------------------------------------------------------------------------------------
Total 604,406 535,654
- ----------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 265,873 220,838
Communications 47,044 45,701
Occupancy and equipment 45,170 35,414
Advertising and market development 40,150 35,835
Depreciation and amortization 34,195 27,773
Commissions, clearance and floor brokerage 19,349 22,444
Professional services 19,047 13,881
Other 21,244 23,448
- ----------------------------------------------------------------------------------------------
Total 492,072 425,334
- ----------------------------------------------------------------------------------------------
Income before taxes on income 112,334 110,320
Taxes on income 44,370 43,585
- ----------------------------------------------------------------------------------------------
Net Income $ 67,964 $ 66,735
==============================================================================================
Weighted-average number of common shares outstanding(1, 2) 274,827 271,237
==============================================================================================
Earnings Per Share(1)
Basic $ .26 $ .26
Diluted $ .25 $ .25
==============================================================================================
Dividends Declared Per Common Share(1) $ .040 $ .033
==============================================================================================
(1) Reflects the September 1997 three-for-two common stock split.
(2) Amounts shown are used to calculate diluted earnings per share.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
</TABLE>
<PAGE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 905,202 $ 797,447
Cash and investments required to be segregated under federal or other
regulations (including resale agreements of $5,846,274 in 1998
and $4,707,187 in 1997) 8,145,795 6,774,024
Receivable from brokers, dealers and clearing organizations 404,575 267,070
Receivable from customers -- net 7,936,080 7,751,513
Securities owned -- at market value 234,083 282,569
Equipment, office facilities and property -- net 348,671 342,273
Intangible assets -- net 53,717 55,854
Other assets 165,414 210,957
- ---------------------------------------------------------------------------------------------------------
Total $18,193,537 $16,481,707
=========================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 288,631 $ 268,644
Payable to brokers, dealers and clearing organizations 1,282,740 1,122,663
Payable to customers 14,612,631 13,106,202
Accrued expenses and other liabilities 471,198 478,032
Borrowings 361,037 361,049
- ---------------------------------------------------------------------------------------------------------
Total liabilities 17,016,237 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;
267,689 shares issued in 1998 and 1997 2,677 2,677
Additional paid-in capital 240,901 241,422
Retained earnings 1,012,856 955,496
Treasury stock -- 939 shares in 1998 and 1,753 shares in 1997,
at cost (36,448) (35,401)
Unearned ESOP shares (2,178) (2,769)
Unamortized restricted stock compensation (42,162) (17,228)
Foreign currency translation adjustment 1,654 920
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,177,300 1,145,117
- ---------------------------------------------------------------------------------------------------------
Total $18,193,537 $16,481,707
=========================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 2 -
</TABLE>
<PAGE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 67,964 $ 66,735
Noncash items included in net income:
Depreciation and amortization 34,195 27,773
Compensation payable in common stock 6,774 4,969
Deferred income taxes 325 (5,516)
Other 173 1,099
Change in securities owned -- at market value 48,486 (74,053)
Change in other assets 45,047 48,975
Change in accrued expenses and other liabilities 6,716 14,389
- -------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 209,680 84,371
- -------------------------------------------------------------------------------------------------
Change in customer-related balances:
Cash and investments required to be segregated under
federal or other regulations (1,366,558) (252,139)
Receivable from brokers, dealers and clearing organizations (134,552) (86,222)
Receivable from customers (183,660) (425,478)
Drafts payable 19,675 (34,255)
Payable to brokers, dealers and clearing organizations 158,178 205,782
Payable to customers 1,499,537 624,347
- -------------------------------------------------------------------------------------------------
Net change in customer-related balances (7,380) 32,035
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 202,300 116,406
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property -- net (37,776) (32,727)
- -------------------------------------------------------------------------------------------------
Net cash used by investing activities (37,776) (32,727)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (10,604) (8,762)
Purchase of treasury stock (55,024)
Proceeds from stock options exercised and other 8,594 5,521
- -------------------------------------------------------------------------------------------------
Net cash used by financing activities (57,034) (3,241)
- -------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 265 (359)
- -------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 107,755 80,079
Cash and cash equivalents at beginning of period 797,447 633,317
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 905,202 $ 713,396
=================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
- 3 -
<PAGE>
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company). CSC is a holding company engaged, through its
subsidiaries, in securities brokerage and related financial services. CSC's
principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities
broker-dealer with 275 domestic branch offices in 47 states, as well as a branch
in both the Commonwealth of Puerto Rico and the United Kingdom. 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 (formerly known as ShareLink), 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.
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):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 67,964 $ 66,735
Foreign currency translation adjustment 734 (2,565)
- --------------------------------------------------------------------------------
Total comprehensive income $ 68,698 $ 64,170
================================================================================
</TABLE>
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.
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 obtaining or developing software for
internal use be capitalized and amortized over the software's useful life.
Currently, the Company capitalizes costs incurred for obtaining 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
The Company adopted SFAS No. 128 -- Earnings Per Share in 1997. This
statement replaced previous earnings per share (EPS) reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
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
for per share amounts):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 67,964 $ 66,735
================================================================================
Basic Shares (1):
Weighted-average common
shares outstanding 264,692 261,539
================================================================================
Diluted Shares (1):
Weighted-average common
shares outstanding 264,692 261,539
Common stock equivalent shares
related to stock incentive plans 10,135 9,698
- --------------------------------------------------------------------------------
Diluted weighted-average
common shares outstanding 274,827 271,237
================================================================================
Basic earnings per share (1) $ .26 $ .26
================================================================================
Diluted earnings per share (1) $ .25 $ .25
================================================================================
(1) Reflects the September 1997 three-for-two common stock split.
</TABLE>
Regulatory Requirements
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule) and each compute net capital under
the alternative method permitted by this Rule, which requires the maintenance of
minimum net capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar amount, which is
based on the type of business conducted by the broker-dealer. The minimum dollar
amount for both Schwab and M&S is $1 million. Under the alternative method, a
broker-dealer may not repay subordinated borrowings, pay cash dividends, or make
any unsecured advances or loans to its parent or employees if such payment would
result in net capital of less than 5% of aggregate debit balances or less than
120% of its minimum dollar amount requirement. At March 31, 1998, Schwab's net
capital was $902 million (11% of aggregate debit balances), which was $744
million in excess of its minimum required net capital and $506 million in excess
of 5% of aggregate debit balances. At March 31, 1998, M&S' net capital was $7
million (461% of aggregate debit balances), which was $6 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 March 31, 1998,
in accordance with applicable regulations. M&S had no such cash reserve
requirement at March 31, 1998.
Commitments and Contingent Liabilities
On March 24, 1998, the last remaining defendant reached a settlement
agreement in the consolidated class action, In re: Nasdaq Market-Makers
Antitrust Litigation, which is pending in the United States District Court for
the Southern District of New York. The court is expected in 1998 to consider
final approval of the proposed settlements, which would fully resolve alleged
claims on behalf of certain persons who purchased or sold Nasdaq securities
during the period May 1, 1989 through July 17, 1996 concerning the width of
spreads between the bid and ask prices of certain Nasdaq securities. M&S reached
a settlement agreement in 1997. As of December 31, 1997, the Company had
recognized all of the settlement charges for the litigation and does not expect
to incur any further charges relating to this settlement.
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 March 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 Texas, California and Louisiana. The action in Texas has been stayed.
The action in California has been dismissed, and plaintiffs have filed an
appeal.
On April 8, 1998, the Louisiana Court of Appeals unanimously ruled in
favor of Schwab's motion to dismiss on the grounds of federal preemption in a
case filed in the Civil District Court for the Parish of Orleans in Louisiana.
On June 30, 1995, the Orleans court had certified a class on behalf of Louisiana
residents who purchased or sold securities through Schwab between February 1,
1985 and February 1, 1995 for which Schwab received monetary payments from the
market maker or stock dealer who executed the transaction. A case pending in the
Civil District Court for the Parish of Natchitoches in Louisiana is stayed
pending final determination of the preemption issue in the Orleans action. On
August 16, 1995, the Natchitoches court had certified a class on behalf of
residents of all states who purchased or sold securities through Schwab since
1985 for which Schwab received monetary payments from the market maker or the
third party who executed the transaction.
The 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):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Income taxes paid $ 999 $ 1,552
================================================================================
Interest paid:
Customer cash balances $ 134,402 $ 104,740
Borrowings 11,382 9,104
Stock-lending activities 9,366 7,646
Other 3,783 1,914
- --------------------------------------------------------------------------------
Total interest paid $ 158,933 $ 123,404
================================================================================
</TABLE>
Subsequent Event
During the period April 1 through April 28, 1998, the Company repurchased
and recorded as treasury stock a total of 1,080,000 shares of its common stock
for approximately $38 million. As of April 28, 1998, authorization granted by
the Company's Board of Directors allows for future repurchases of 2,322,500
shares.
<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 over 5.0 million active customer accounts(a). Customer assets were
$406.7 billion at March 31, 1998. CSC's principal subsidiary, Charles Schwab &
Co., Inc. (Schwab), is a securities broker-dealer with 275 domestic branch
offices in 47 states, as well as a branch in both the Commonwealth of Puerto
Rico and the United Kingdom. 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 (formerly known as
ShareLink), a retail discount securities brokerage firm located in the United
Kingdom.
The Company's strategy is to attract and retain customer assets by
focusing on a number of areas within the financial services industry -- retail
brokerage, mutual funds, support services for independent investment managers,
equity securities market-making 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 358,000 new customer accounts and gather $20.8
billion in net new customer assets during the first 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. 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 over 5,400 independent investment managers. As of March 31, 1998,
Schwab held $121.7 billion in customer assets in accounts managed by these
investment managers. The Company's Mutual Fund Marketplace-Registered Trademark-
provides customers with the ability to invest in 1,460 mutual funds from 233
fund families, including 874 Mutual Fund OneSource-Registered Trademark- funds.
- --------
(a) Accounts with balances or activity within the preceding twelve months.
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-Registered Trademark- -- a service for
investment managers, and the Charles Schwab Web Site-TM- (formerly known as
SchwabNOW!-TM-) -- an information and trading service on the Internet. Automated
telephonic channels include TeleBroker-Registered Trademark- -- Schwab's
touch-tone telephone trading service, and VoiceBroker-TM- -- Schwab's voice
recognition quote service. During the first quarter of 1998, Schwab began to
provide 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 first
quarter of 1998, Schwab introduced a number of new Internet-based investment
services, including The Analyst Center-TM-, which provides customers access to
extensive third-party investment and research information at no cost, and the
IRA Analyzer-TM-, an online investment tool designed to educate investors about
their retirement planning choices. Also during the first quarter of 1998, the
Schwab MoneyLink-Registered Trademark- service was expanded to allow customers
to use the Charles Schwab Web Site-TM-, automated telephone system or Schwab
representatives to transfer money between Schwab and other financial
institutions. In addition, the Company's Performance Technologies, Inc.
subsidiary launched a new Windows-Registered Trademark- version of its
Centerpiece-Registered Trademark- portfolio management software, which makes it
easier for independent investment advisors to update their client information,
analyze portfolio performance, and review transaction history.
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 in the first quarter of 1998 of the
consolidation trend within the financial services industry. 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 quarter 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 quarter 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 technology enhancements) is discretionary and can be
altered in response to market conditions. However, a significant portion of the
Company's expenses such as salaries and wages, occupancy and equipment, and
depreciation and amortization do not vary directly, at least in the short term,
with fluctuations in revenues or securities trading volumes. 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 (see Description of
Business), revenues (see Principal Transactions), profit margin (see Principal
Transactions), 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 March 31, 1998
Compared To Three Months Ended
March 31, 1997
Financial Overview
Net income for the first quarter of 1998 was $68 million, up 2% from first
quarter 1997 net income of $67 million. Diluted earnings per share for both of
the first quarters of 1998 and 1997 was $.25 per share. Share and per share data
have been restated to reflect the effects of the September 1997 three-for-two
common stock split.
First quarter 1998 revenues were $604 million, up 13% from $536 million
for the first quarter of 1997, primarily due to a 32% increase in mutual fund
service fees, a 36% increase in interest revenue, net of interest expense
(referred to as net interest revenue), and an 8% increase in commission
revenues. These increases mainly resulted from an increase in customer assets
and higher trading volume. During the first quarter of 1998, trading activity
reached record levels as shown in the following table (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Ended
March 31, Percent
Daily Average Trades 1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue Trades
Online 42.5 21.2 100%
TeleBroker-Registered Trademark- 9.2 12.8 (28)
Regional customer telephone
service centers, branch offices
and other 33.7 34.2 (1)
- --------------------------------------------------------------------------------
Total 85.4 68.2 25%
================================================================================
Mutual Fund OneSource-Registered Trademark- Trades
Online 17.7 12.9 37%
TeleBroker 1.2 1.6 (25)
Regional customer telephone
service centers, branch offices
and other 21.9 21.9 ---
- --------------------------------------------------------------------------------
Total 40.8 36.4 12%
================================================================================
Total Daily Average Trades
Online 60.2 34.1 77%
TeleBroker 10.4 14.4 (28)
Regional customer telephone
service centers, branch offices
and other 55.6 56.1 (1)
- --------------------------------------------------------------------------------
Total 126.2 104.6 21%
================================================================================
</TABLE>
Assets in Schwab customer accounts were $406.7 billion at March 31, 1998,
an increase of $139.1 billion, or 52%, from a year ago as shown in the table
below. This increase resulted from net new customer assets of $72.3 billion and
net market gains of $66.8 billion.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Growth in Schwab
Customer Assets and
Accounts March 31, Percent
(In billions, except as noted) 1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets in Schwab customer accounts
Schwab One-Registered Trademark- and other
cash equivalents (1) $ 13.7 $ 11.3 21%
SchwabFunds-Registered Trademark-
Money market funds (1) 53.3 43.1 24
Equity and bond funds 9.7 4.2 131
- --------------------------------------------------------------------------------
Total SchwabFunds 63.0 47.3 33
- --------------------------------------------------------------------------------
Mutual Fund Marketplace-Registered Trademark- (2):
Mutual Fund OneSource 66.4 41.4 60
All other 55.2 37.1 49
- --------------------------------------------------------------------------------
Total Mutual Fund
Marketplace 121.6 78.5 55
Equity and other securities (2) 185.4 108.1 72
Fixed income securities 30.9 27.9 11
Margin loans outstanding (7.9) (5.5) 44
- --------------------------------------------------------------------------------
Total $406.7 $267.6 52%
================================================================================
Net growth in assets in Schwab
customer accounts
Net new customer assets $ 20.8 $ 17.4 20%
Net market gains (losses) 32.2 (3.0) n/m
- --------------------------------------------------------------------------------
Net growth $ 53.0 $ 14.4 268%
================================================================================
New Schwab customer accounts
(in thousands) 358.1 297.3 20%
Active Schwab customer accounts
(in millions) 5.0 4.2 19
================================================================================
(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.
</TABLE>
Total operating expenses excluding interest during the first quarter of
1998 were $492 million, up 16% from $425 million for the first quarter of 1997,
primarily resulting from additional staff to support the Company's growth and
expansion.
The after-tax profit margin for the first quarter of 1998 was 11.3%, down
from 12.5% for the first quarter of 1997. The annualized return on stockholders'
equity for the first quarter of 1998 was 23%, down from 30% for the first
quarter of 1997, reflecting the Company's higher equity base in the first
quarter of 1998.
REVENUES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Ended
March 31,
Composition of Revenues 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commissions 49% 51%
Mutual fund service fees 21 18
Net interest revenue 17 14
Principal transactions 9 13
Other 4 4
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
</TABLE>
Commissions
Commission revenues for the Company were $298 million for the first
quarter of 1998, up $23 million, or 8%, from the first quarter of 1997. As shown
in the table below, the total number of revenue trades executed by the Company
has increased 25% as the Company's customer base has grown. Average commission
per revenue trade decreased 13%. This decrease was mainly due to the Company's
reduction of the price of online trades for most of its customers in the first
quarter of 1998, causing relatively more trades to be placed through online
brokerage channels.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Commissions Earned Ended
on Customer Revenue March 31, Percent
Trades 1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer accounts that
traded during the quarter
(in thousands) 1,195 1,080 11%
Average customer
revenue trades
per account 4.37 3.85 14
Total revenue
trades (in thousands) 5,221 4,161 25
Average commission
per revenue trade $ 56.88 $ 65.55 (13)
Commissions earned
on customer revenue
trades (in millions) (1) $ 297 $ 273 9
================================================================================
(1) Excludes commissions on trades with specialists totaling $1 million in the
first quarter of 1998 and $2 million in the first quarter of 1997.
</TABLE>
Attracting new customer accounts is important in generating commission
revenues. Schwab added 358,000 new customer accounts during the first quarter of
1998, an increase of 20% from the 297,000 new accounts added during the first
quarter of 1997.
Mutual Fund Service Fees
Mutual fund service fees were $125 million for the first quarter of 1998,
up $31 million, or 32%, from the first quarter of 1997. This increase was
primarily due to significant increases in customer assets in Schwab's
proprietary funds, collectively referred to as the SchwabFunds-Registered
Trademark-, and in customer assets in funds purchased through Schwab's Mutual
Fund OneSource-Registered Trademark- 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, and record keeping and
shareholder services provided to funds in the Mutual Fund OneSource service.
Net Interest Revenue
Net interest revenue was $105 million for the first quarter of 1998, up
$28 million, or 36%, from the first quarter of 1997 as shown in the following
table (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest Revenue
Margin loans to customers $ 149 $ 99
Investments, customer-related 98 94
Other 13 7
- --------------------------------------------------------------------------------
Total 260 200
- --------------------------------------------------------------------------------
Interest Expense
Customer cash balances 138 109
Stock-lending activities 10 8
Borrowings 6 5
Other 1 1
- --------------------------------------------------------------------------------
Total 155 123
- --------------------------------------------------------------------------------
Net interest revenue $ 105 $ 77
================================================================================
</TABLE>
Customer-related daily average balances, interest rates and average net
interest margin for the first quarters of 1998 and 1997 are summarized in the
following table (dollars in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 7,357 $ 7,229
Average interest rate 5.42% 5.29%
Margin loans to customers:
Average balance outstanding $ 7,835 $ 5,350
Average interest rate 7.70% 7.49%
Average yield on interest-earning assets 6.60% 6.22%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $12,295 $10,098
Average interest rate 4.54% 4.37%
Other interest-bearing sources:
Average balance outstanding $ 1,202 $ 978
Average interest rate 4.56% 4.38%
Average noninterest-bearing portion $ 1,695 $ 1,503
Average interest rate on funding sources 4.04% 3.85%
Summary:
Average yield on interest-earning assets 6.60% 6.22%
Average interest rate on funding sources 4.04% 3.85%
- --------------------------------------------------------------------------------
Average net interest margin 2.56% 2.37%
================================================================================
</TABLE>
The increase in net interest revenue from the first quarter of 1997 was
primarily due to higher levels of average earning assets.
Principal Transactions
Principal transaction revenues were $53 million for the first quarter of
1998, down $16 million, or 24%, from the first quarter of 1997. This decrease
was primarily due to lower average revenue per principal transaction (see
discussion below), partially offset by greater share volume handled by M&S.
Certain new 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 during the first quarter of 1998 as compared to the first quarter of
1997, although monthly principal transaction revenues in the first quarter of
1998 were consistent with those in November and December 1997. 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, the Company expects M&S' average revenue per principal
transaction for 1998 to be materially less than during comparable periods of
1997. Recent and future regulatory changes, changes in industry customs and
practices, and changes in trading systems may result in further declines in
average revenue per principal transaction.
See "Commitments and Contingent Liabilities" note in Item 1. Notes to
Condensed Consolidated Financial Statements regarding certain civil litigation
relating to various principal transaction activities.
Expenses Excluding Interest
Compensation and benefits expense was $266 million for the first quarter
of 1998, up $45 million, or 20%, from the first quarter of 1997 primarily due to
a greater number of employees to support the Company's continued growth. The
following table shows a comparison of certain compensation and benefits
components and employee data (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months
Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Compensation and benefits expense as a
% of revenues 44% 41%
Variable compensation as a
% of compensation and benefits expense 18% 22%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 15% 14%
Full-time equivalent employees(1) 13.4 11.1
Revenues per average full-time equivalent
employee $45.8 $49.4
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
</TABLE>
Occupancy and equipment expense was $45 million in the first quarter of
1998, up $10 million, or 28%, from the first quarter of 1997. This increase was
primarily due to increased lease and rental expenses on data processing
equipment, as well as additional lease expenses on the Company's expanded office
space.
Advertising and market development expense was $40 million in the first
quarter of 1998, up $4 million, or 12%, from the first quarter of 1997. This
increase was primarily due to increased media, print, and direct mail spending.
Advertising and market development expense was 7% of revenues for both of the
first quarters of 1998 and 1997.
Depreciation and amortization expense was $34 million in the first quarter
of 1998, up $6 million, or 23%, from the first quarter of 1997. This increase
was primarily due to newly acquired data processing equipment which expanded the
Company's customer service capacity.
The Company's effective income tax rate for both of the first quarters of
1998 and 1997 was 39.5%.
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 $14.1 billion and $12.7 billion at March 31, 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 March 31, 1998, Schwab had $902 million of net capital (11% of
aggregate debit balances), which was $744 million in excess of its minimum
required net capital and $506 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
$400 million subordinated revolving credit facility maturing in September 1999,
of which $315 million was outstanding at March 31, 1998. At quarter end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
- -- $10 million maturing in 1999 and $15 million 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 March 31, 1998. These lines
were unused during the first quarter of 1998.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation, Schwab has unsecured letter of credit agreements
with five banks totaling $450 million. Schwab pays a fee to maintain these
letter of credit agreements. No funds were drawn under these agreements during
the first quarter 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, receivable from brokers, dealers and clearing organizations,
and marketable securities.
M&S' liquidity is affected by the same net capital regulatory requirements
as Schwab (see discussion above). At March 31, 1998, M&S had $7 million of net
capital (461% of aggregate debit balances), which was $6 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 quarter 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 $361
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 1998 to 2007 and fixed interest
rates ranging from 5.67% 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.
As of March 31, 1997, CSC had a prospectus supplement on file with the SEC
enabling CSC to issue up to $196 million in Senior or Senior Subordinated
Medium-Term Notes, Series A. At March 31, 1998, $85 million of these notes
remained unissued.
CSC may borrow under its $350 million committed, unsecured credit facility
with a group of 11 banks through June 1998. The funds are available for general
corporate purposes for which CSC pays a commitment fee on the unused balance.
The terms of this facility require CSC to maintain 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. This facility was unused during the first quarter of 1998.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $102 million for the
first quarter of 1998, up 8% from $95 million for the first quarter of 1997,
allowing the Company to finance its operations with internally generated funds.
Depreciation and amortization expense related to equipment, office facilities
and property was $31 million for the first quarter of 1998, as compared to $25
million for the first quarter of 1997, or 5% of revenues for each quarter.
Amortization expense related to intangible assets was $3 million for both of the
first quarters of 1998 and 1997.
The Company's capital expenditures were $38 million in the first quarter
of 1998 and $33 million in the first quarter of 1997, or 6% of revenues for each
quarter. Capital expenditures in the first quarter of 1998 were for equipment
relating to continued enhancements of its data processing systems, as well as
leasehold improvements and additional office facilities to support the Company's
growth. In addition, the Company opened three new branch offices during the
first quarter of 1998, compared to four branch offices opened during the first
quarter of 1997. Capital expenditures may vary from period to period as business
conditions change.
During the first quarter of 1998, the Company repurchased 1,584,000 shares
of its common stock for $61 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 March 31, 1998, the Company has
repurchased 41,691,300 shares of its common stock for $225 million. See
"Subsequent Event" note in Item 1. Notes to Condensed Consolidated Financial
Statements.
During the first quarter of 1998, the Company paid common stock cash
dividends totaling $11 million, up from $9 million paid during the first quarter
of 1997.
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 March 31, 1998 was $1,538 million, up $32 million, or
2% from December 31, 1997. At March 31, 1998, the Company had borrowings of $361
million, or 23% of total financial capital, that bear interest at a
weighted-average rate of 6.65%. At March 31, 1998, the Company's stockholders'
equity was $1,177 million, or 77% 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 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. The Company's Year 2000 compliance project began in
1996. The Company plans to have its significant systems modified by the end of
1998. The Company's progress under its comprehensive Year 2000 compliance plan
is reviewed and monitored by senior management.
The success of the Company's plan depends in part on parallel efforts
being undertaken by other entities with which the Company's systems interact and
therefore, the Company is taking steps to determine the status of these other
entities' Year 2000 compliance. There can be no assurance that all such other
entities will provide accurate and complete information, or that all their
systems in fact will achieve full Year 2000 compliance. Other entities' 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 Company's plan includes participation in
industry-wide testing, and the Company is communicating its concerns regarding
the timely compliance of all securities market participants to others with whom
it does business, regulators, and industry groups. The Company is formulating
contingency plans to be implemented in the event that any other entity with
which the Company's systems interact, or the Company itself, fails to achieve
timely and adequate Year 2000 compliance.
The Company currently estimates that it will cost approximately $35
million to $45 million to modify its core brokerage computer systems to be Year
2000 compliant. These expenditures will consist primarily of compensation for
information technology employees and contractors dedicated to this project and
related hardware and software costs. This estimate excludes the time that may be
spent by management and administrative staff in guiding and assisting the
information technology effort described above or for bringing systems other than
core brokerage computer systems into Year 2000 compliance. The cost of the
project and the projected dates of completion are based on the Company's
estimates, which make numerous assumptions about future events, including those
described above. However, there can be no assurance that these estimates will be
correct and actual results could differ materially from these estimates. The
Company expects to fund all Year 2000 related costs through operating cash
flows. These costs are not expected to result in increased information
technology expenditures because they will be funded through a reallocation of
the Company's overall developmental spending. In accordance with generally
accepted accounting principles, Year 2000 expenditures will be expensed as
incurred.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Financial Instruments Held For Trading Purposes
The Company held government securities with a fair value of approximately
$7 million at March 31, 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, Nasdaq and other securities on both a long and short basis. The
fair value of these securities at March 31, 1998 was $32 million in long
positions and $38 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 $600,000 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 inventory
positions. This hypothetical 10% change in fair value of these securities at
March 31, 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 March 31, 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 and do not present a material interest rate
risk (dollars in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal amount Fair
by maturity date value
December 31, March 31,
1998 Thereafter 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Resale agreements (1) $5,956 $5,956
Weighted-average
interest rate 5.55%
Certificates of deposit $1,820 $1,820
Weighted-average
interest rate 5.58%
Commercial paper $ 319 $ 319
Weighted-average
interest rate 6.04%
================================================================================
(1) Includes resale agreements of $5,846 million included in cash and
investments required to be segregated under federal or other regulations and
$110 million included in cash and cash equivalents.
</TABLE>
At March 31, 1998, CSC had $361 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates. 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 March 31, 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):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ending
December 31, 1998 1999 2000 2001 2002 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate $40 $40 $48 $39 $40 $154
Weighted-average
interest rate 6.1% 6.8% 6.3% 7.0% 7.0% 6.7%
================================================================================
</TABLE>
The Company maintains investments in mutual funds, approximately $45
million at March 31, 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 discussion 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.
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
On April 8, 1998, Timothy F. McCarthy, President and Chief Operating
Officer of Charles Schwab & Co., Inc., resigned. David S. Pottruck, Co-Chief
Executive Officer, President and Chief Operating Officer of the Company, has
assumed Mr. McCarthy's responsibilities.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
10.196 Credit Agreement dated June 27, 1997 between the Registrant and the
banks listed therein (supersedes Exhibit 10.158).
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule (electronic only).
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
None.
<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: May 12, 1998 /s/ Steven L. Scheid
------------ -----------------------------
Steven L. Scheid
Executive Vice President and
Chief Financial Officer
Exhibit 10.196
CREDIT AGREEMENT
dated as of
June 27, 1997
==========
THE CHARLES SCHWAB CORPORATION
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("this Agreement") is entered into as of
June 27, 1997, between The Charles Schwab Corporation, a Delaware corporation
(the "Borrower"), and the Bank named on the signature page hereto (the "Bank").
WHEREAS, the Bank is willing to make revolving credit loans to
the Borrower from time to time through June 26, 1998, and to make Term Loans to
the Borrower on or before June 26, 1998 and maturing no later than June 25,
1999, on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
1. DEFINITIONS
Assessment Rate: For any Interest Period for any Advance or
Term Loan for which the CD Rate has been
selected, the assessment rate per annum
(adjusted upward, if necessary, to the
nearest 1/100 of 1%) determined by the
Confirming Bank on the first day of such
Interest Period for determining the then
current annual assessment payable by the
Bank to the Federal Deposit Insurance
Corporation (or any successor thereto) for
such Corporation's (or successor's) insuring
U.S. dollar time deposits of the Bank in the
United States. The CD Rate shall be adjusted
automatically on and as of the effective
date of any change in the Assessment Rate.
Banking Day: Any Monday, Tuesday, Wednesday, Thursday or
Friday, other than a day on which banks are
authorized or required to be closed in
California or New York.
Borrowing Advice: A written request made by the Borrower
with respect to an Advance or Term Loan
specifying the information required in
Paragraph 2.3 hereof and executed by the
Borrower from time to time.
Borrowing Agreement: Any of those separate credit agreements (so
long as the Credit (as defined herein)
thereunder has not been terminated) between
the Borrower and any of the Banks referred
to in Schedule I hereto (other than the
Bank) and having terms substantially similar
to those contained in this Agreement. Such
Schedule I may from time to time be amended
by th Borrower by Borrower's delivery to
each Bank (including the Bank) of a new
Schedule I, and each such new Schedule I
delivered by the Borrower to each Bank
(including the Bank) shall replace and
supersede the then-existing Schedule I
and shall be the Schedule I referred to in
this Agreement; provided, however, that no
such newly delivered Schedule I shall
amend or otherwise change the name, address,
or amount of Credit applicable to the Bank
on the initial Schedule I hereto without the
prior written consent of the Bank or as
otherwise permitted in accordance with the
terms of this Agreement. Each such newly
delivered Schedule I shall include all of
the then-existing credit agreements between
the Borrower and any Bank having terms
substantially similar to those contained in
this Agreement so long as the Credit (as
defined herein) thereunder has not been
terminated.
Broker Subsidiary: Charles Schwab & Co., Inc., a California
corporation, and its successors and assigns.
CD Banking Day: Any Banking Day on which dealings in bank
certificates of deposit are conducted by New
York City certificate of deposit dealers.
CD Rate: For any Interest Period for any Advance
or Term Loan for which the CD Rate has been
selected or is applicable, the sum of:
(a) the Assessment Rate for the Interest
Period, plus
(b) the rate per annum obtained by dividing
(i) the rate of interest per annum
determined by the Confirming Bank to be
(aa) the average (adjusted upward, if
necessary, to the nearest 1/16 of 1%)
rate per annum at which bids are
received by the CD Reference Banks for
their certificates of deposit as at
11:00 a.m. New York City time (or as
soon as practicable thereafter), on the
first day of an Interest Period from two
or more New York City certificate of
deposit dealers of recognized standing
selected by the Confirming Bank for the
purchase at face value of such
certificates of deposit in an amount
comparable to the Advance or Term Loan
for which the CD Rate has been selected
and having a maturity comparable to such
Interest Period or (bb) in the event the
Confirming Bank cannot, without undue
effort, obtain rates from such CD
Reference Banks, the certificate of
deposit rate as reported for the date of
the Borrowing Advice in "Federal Reserve
Statistical Release--Selected Interest
Rates-- H.15(519)," published by the
Board of Governors of the Federal
Reserve System, or any successor
publication, under the caption "CDs
(Secondary Market)" having a maturity
most closely approximating the
conclusion of such Interest Period, by
(ii) a percentage (expressed as a
decimal) equal to 1.00 minus the CD Rate
Reserve Percentage.
CD Rate Reserve
Percentage: For any Interest Period for any Advance
or Term Loan for which the CD Rate has
been selected or is applicable, the
percentage (expressed as a decimal) as
calculated by the Confirming Bank that
is in effect on the first day of such
Interest Period, as prescribed by the
Board of Governors of the Federal
Reserve System (or any successor), for
determining the maximum reserve
requirements (including, without
limitation, basic, supplemental,
marginal and emergency reserves) for a
bank with deposits exceeding five
billion dollars that is a member of the
Federal Reserve System, in respect of
new non-personal time deposits in U.S.
dollars in the United States having a
maturity comparable to the applicable
Interest Period for said Advance or Term
Loan for which the CD Rate has been
selected (such bank's reserve ratio on
such time deposits in effect on June __,
1997 was 0%). The CD Rate shall be
adjusted automatically on and as of the
effective date of any change in the CD
Rate Reserve Percentage.
CD Reference Banks: Bank of America Illinois
Citibank, N.A.
Change in Law
Affecting Cost: The occurrence of any one of the following
events:
(a) the imposition, modification or
application of any reserve, capital
adequacy requirement, special deposit or
similar requirement against assets held
by, or deposits in or for the account
of, or commitments, advances or loans
by, or any other acquisition of funds
by, the Bank (other than such
requirements described in the Eurodollar
Rate Reserve Percentage section hereof),
or the imposition upon the Bank of any
other condition with respect to the
London interbank market or to this
Agreement or any borrowing hereunder,
(b) a change in the basis of taxation of
payments to the Bank of principal,
interest or any other amount payable
hereunder (except for changes in
Federal, state or local income tax rates
and their equivalents), or
(c) the adoption or enactment of any
applicable law, treaty, regulation or
directive, or any change therein or in
the interpretation or application
thereof, or compliance by the Bank with
any request (whether or not having the
force of law) of any relevant government
or corporation entity.
Closing Date: June 27, 1997
Confirming Bank: Bank of America Illinois
Confirming Bank
Agreement: The Confirming Bank Agreement between the
Borrower and Bank of America Illinois dated
June 27, 1997, in substantially the form
attached as Exhibit B to the Credit
Agreement, as the same may be amended from
time to time.
Controlled Subsidiary: Any corporation 80% of whose voting stock
(except for any qualifying shares) is owned
directly or indirectly by the Borrower.
Federal Funds
Effective Rate: For any day, an interest rate per annum
equal to the weighted average of the rates
on overnight Federal funds transactions with
members of the Federal Reserve System
arranged by Federal funds brokers, as
published for such day (or, if such day is
not a Banking Day, for the next preceding
Banking Day) by the Federal Reserve Bank of
New York; or, if such rate is not published
for any day which is a Banking Day, an
interest rate per annum equal to the
arithmetic mean of the rates on overnight
Federal funds transactions with members of
the Federal Reserve System arranged by
Federal funds brokers on such day, received
by each Reference Rate Reference Bank from
three Federal funds brokers of recognized
standing selected by each Reference Rate
Reference Bank in its sole discretion.
Interest Period: Any period specified in accordance with
Paragraph 2.4 hereof.
Intermediate Parent: Schwab Holdings, Inc. and its successors and
assigns.
Eurodollar Banking Day: Any Banking Day on which dealings in dollar
deposits are conducted by and among banks in
the London Eurodollar Market, or such other
Eurodollar Market as may from time to time
be selected by the Bank with the approval of
the Borrower.
Eurodollar Rate: The rate obtained by dividing (i) the
average rate per annum at which deposits of
U.S. dollars for the selected Interest
Period and in the amount of the Advance or
Term Loan for which the Eurodollar Rate has
been selected are offered (a) if at least
two such offered rates appear on the Reuters
Screen LIBO Page as at 11:00 am. (London
time) two Eurodollar Banking Days prior to
the commencement of the relevant Interest
Period, the arithmetic mean (adjusted
upward, if necessary, to the nearest 1/16 of
1%), of such offered rates as determined in
accordance with the provisions of the
Confirming Bank Agreement or (b) if fewer
than two offered rates appear, in
immediately available funds to the
Eurodollar Rate Reference Banks in the
London interbank market (adjusted upward, if
necessary, to the nearest 1/16 of 1%) as at
11:00 a.m. (London time) two Eurodollar
Banking Days prior to the commencement of
the relevant Interest Period, determined in
accordance with the provisions of the
Confirming Bank Agreement, by (ii) a
percentage (expressed as a decimal) equal to
1.00 minus the Eurodollar Rate Reserve
Percentage.
Eurodollar Rate Reserve
Percentage: For any Interest Period for any Advance or
Term Loan for which the Eurodollar Rate has
been selected or is applicable, the
percentage (expressed as a decimal) as
calculated by the Confirming Bank that is in
effect on the first day of such Interest
Period, as prescribed by the Board of
Governors of the U.S. Federal Reserve System
(or any successor), for determining reserve
requirements to be maintained by the Bank
under Regulation D (or any successor
regulation thereof) as amended to the date
hereof (including such reserve requirements
as become applicable to the Bank pursuant to
phase-in or other similar requirements of
Regulation D at any time subsequent to the
date hereof) in respect of "Eurocurrency
liabilities" (as defined in Regulation D).
The Eurodollar Rate shall be adjusted
automatically on and as of the effective
date of any change in the Eurodollar Rate
Reserve Percentage.
Eurodollar Rate
Reference Banks: Union Bank of Switzerland
The Bank of New York
Minimum Stockholder's
Equity: As of the last day of September 1997, and
the last day of each fiscal quarter
thereafter, the greater of:
(a) $450 million, or
(b) $450 million plus 40% of the sum of
cumulative Net Earnings of the Borrower
and its Subsidiaries beginning with July
1, 1997.
MSI: Mayer & Schweitzer, Inc., a New Jersey
corporation, and its successors and assigns.
Net Capital Ratio: As of the date of determination, that
percentage of net capital to aggregate debit
items of any entity subject to the Net
Capital Rule 15c3-1 promulgated by the
Securities Exchange Commission pursuant to
the Securities Exchange Act of 1934 and any
successor or replacement rule or regulation
therefor.
Net Earnings: With respect to any fiscal period, the
consolidated net income of the Borrower and
its Subsidiaries, after taking into account
all extraordinary items, taxes and other
proper charges and reserves for the
applicable period, determined in accordance
with U.S. generally accepted accounting
principles, consistently applied.
Notice of Interest
Period: A written request made by the Borrower with
respect to an outstanding Term Loan prior to
its maturity date specifying the information
required in Paragraph 2.3 hereof and
executed by the Borrower from time to time.
Reference Rate: For any Interest Period for any Advance or
Term Loan for which the Reference Rate has
been selected (or for any post-Interest
Period period covered by clause (ii) of
Paragraph 2.7 hereof), the average daily per
annum rate of interest calculated by the
Confirming Bank during such Interest Period
or period, with the rate on each day being
equal to the higher of (i) the highest per
annum rate of interest (adjusted upward, if
necessary, to the nearest 1/16 of 1%)
publicly announced by any of the Reference
Rate Reference Banks on such day as its
"prime rate," "prime commercial lending
rate," "reference rate," or "base rate," as
the case may be, and (ii) the highest per
annum Federal Funds Effective Rate available
to any Reference Rate Reference Bank, plus
1/2 of 1%.
Reference Rate
Reference Banks: The First National Bank of Chicago
Chase Manhattan Bank
Revolving Credit
Facility: The revolving credit facility available to
the Borrower pursuant to paragraph 2.1
hereof.
Stockholder's Equity: As of any date of determination,
Stockholders' Equity of Borrower and its
Subsidiaries as of that date determined in
accordance with U.S. generally accepted
accounting principles, consistently applied.
Subsidiary: Any corporation or other entity of which a
sufficient number of voting securities or
other interests having power to elect a
majority of the board of directors or other
persons performing similar functions are at
the time directly or indirectly owned by the
Borrower.
Term Loan Facility: The term loan facility available to the
Borrower pursuant to Paragraph 2.2 hereof.
2. THE FACILITIES
The Bank agrees that consistent with the terms and conditions
set forth in this Article 2 respecting Advances under the Revolving Credit
Facility and Term Loans under the Term Loan Facility, it will lend to the
Borrower sums which, in the aggregate principal amount outstanding at any one
time, shall not exceed the dollar amount of the Bank's commitment as specified
in Schedule I hereto. Such amount, as it may from time to time be reduced
pursuant to Paragraph 2.11 hereof, shall be referred to as the "Credit," and the
Credit shall encompass both the Revolving Credit Facility described in Paragraph
2.1 hereof and the Term Loan Facility described in Paragraph 2.2 hereof.
2.1 The Revolving Credit Facility. From time to time
commencing on June 27, 1997 and ending on June 26, 1998, the Borrower may
borrow, repay at the end of any Interest Period (or otherwise as permitted by
Paragraph 3.2 hereof) and reborrow amounts during the continuation of the
Credit, as the Borrower may see fit, subject to the applicable provisions of
this Agreement. Each such revolving credit loan made hereunder (an "Advance")
shall be in the amount of $1,000,000 or integral multiples thereof and shall
become due and payable on the last day of the Interest Period for such Advance.
The obligation of the Borrower to repay the aggregate unpaid
principal amount of the Advances shall be evidenced by a promissory note of the
Borrower (the "Revolving Note") in substantially the form attached hereto as
Exhibit A-1, with the blanks appropriately completed, payable to the order of
the Bank, bearing interest as hereinafter specified. The Revolving Note shall be
dated, and shall be delivered to the Bank, on the date of the execution and
delivery of this Agreement by the Borrower. The Bank shall, and is hereby
authorized by the Borrower to, endorse on the schedule contained on the
Revolving Note, or on a continuation of such schedule attached thereto and made
a part thereof, appropriate notations regarding the Advances evidenced by the
Revolving Note as specifically provided therein; provided, however, that the
failure to make, or error in making, any such notation shall not limit or
otherwise affect the obligations of the Borrower hereunder or under the
Revolving Note.
2.2 Term Loan Facility. The Borrower from time to time may
borrow under the Term Loan Facility (and may reborrow any amount theretofore
prepaid) until close of business on June 26, 1998, for a term not to exceed 364
days from the date of the borrowing. Each such loan under the Term Loan Facility
(a "Term Loan") shall be in the amount of $1,000,000 or an integral multiple
thereof and shall become due and payable on the last day of the term selected by
the Borrower for such Term Loan (the "Term Loan Maturity Date"), which shall in
no event be later than 364 days from the date of such Term Loan. The maximum
availability under the Term Loan Facility shall be the amount of the Credit
minus the aggregate outstanding principal amount of Advances and Term Loans made
by the Bank; provided, however, that to the extent the proceeds of a Term Loan
are used to repay an outstanding Advance (or a portion thereof), such Advance
(or portion thereof) shall not be considered part of the aggregate principal
amount of outstanding Advances made by the Bank for purposes of this sentence
(such maximum availability hereafter being referred to as the "Term Loan
Availability"). Under no circumstances shall the aggregate outstanding principal
amount of Term Loans and Advances made by the Bank exceed the Credit, and under
no circumstances shall the Bank be obligated (i) to make any Term Loan (nor may
the Borrower reborrow any amount heretofore prepaid) after June 26, 1998, or
(ii) to make any Term Loan in excess of the Term Loan Availability. Each Term
Loan made hereunder shall fully and finally mature and be due and payable in
full on the Term Loan Maturity Date specified in the Borrowing Advice for such
Term Loan; provided, however, that to the extent the Borrowing Advice for any
Term Loan selects an Interest Period that expires before the Term Loan Maturity
Date specified in such Borrowing Advice, the Borrower may from time to time
select additional interest rate options and Interest Periods (none of which
shall extend beyond the Term Loan Maturity Date for such Term Loan) by
delivering a new Notice of Interest Period pursuant to Paragraphs 2.3, 2.4 and
2.5 hereof.
The obligation of the Borrower to repay the aggregate unpaid
principal amount of the Term Loans shall be evidenced by a promissory note of
the Borrower (the "Term Note") in substantially the form attached hereto as
Exhibit A-2, with the blanks appropriately completed, payable to the order of
the Bank, bearing interest as hereinafter specified. The Term Note shall be
dated, and shall be delivered to the Bank, on the date of the execution and
delivery of this Agreement by the Borrower. The Bank shall, and is hereby
authorized by the Borrower to, endorse on the schedule contained on the Term
Note, or on a continuation of such schedule attached thereto and made a part
thereof, appropriate notations regarding the Term Loans evidenced by the Term
Note as specifically provided therein; provided, however, that the failure to
make, or error in making, any such notation shall not limit or otherwise affect
the obligations of the Borrower hereunder or under the Term Note.
2.3 Making of Advances and Term Loans; Interest Periods;
Notice. Whenever the Borrower desires the Bank to make an Advance or a Term
Loan, or to specify a new Interest Period in respect of a Term Loan as to which
an Interest Period is expiring (a "new Term Loan Interest Period"), it shall
give the Bank at least one Banking Day's prior irrevocable notice for Reference
Rate Advances or Term Loans (or New Term Loan Interest Periods to which the
Reference Rate applies), one CD Banking Day's prior irrevocable notice for CD
Rate Advances or Term Loans (or New Term Loan Interest Periods to which the CD
Rate applies), or three Eurodollar Banking Days' prior irrevocable notice for
Eurodollar Rate Advances or Term Loans (or new Term Loan Interest Period to
which the Eurodollar Rate applies) (each such notice to be in the form of a
Borrowing Advice in substantially the form attached hereto as Exhibit C) setting
forth the following information:
(a) The date, which shall be either a Banking Day, a CD
Banking day, or a Eurodollar Banking Day, on which
such Advance or Term Loan is to be made or on which
such New Term Loan Interest Period is to commence;
(b) The Interest Period selected in accordance with
Paragraph 2.4 hereof;
(c) The interest rate option selected in accordance with
Paragraph 2.5 hereof; and
(d) The aggregate principal amount of the Advance or Term
Loan to which such Interest Period and interest rate
shall apply.
Notice of each Borrowing Advice or Notice of Interest Period
indicating the selection of an Interest Period and whether the interest
calculation is to be based on the Eurodollar Rate, the CD Rate or the Reference
Rate shall simultaneously be given to the Confirming Bank by the Borrower. Any
notice required pursuant to this Paragraph 2.3 shall be given no later than
12:00 noon (New York City time) on the date such notice is required to be given.
With respect to any Advance having an Interest Period ending
on or before June 26, 1998, if prior to the last day of the Interest Period for
such Advance the Borrower fails timely to provide a new Borrowing Advice in
accordance with this Paragraph 2.3, such Advance shall, on the last day of the
then-existing Interest Period for such Advance, automatically convert into a new
Reference Rate Advance with an Interest Period of thirty (30) days (or, in the
event that there are fewer than thirty (30) days remaining to June 26, 1998, an
Interest Period of the number of days remaining to June 26, 1998). In the event
of any such automatic conversion, the Borrower on the date of such conversion
shall be deemed to make a representation and warranty to the Bank that, to the
best of the Borrower's knowledge, (i) neither the Broker Subsidiary nor MSI is
in violation of minimum net capital requirements as described in Paragraph 7.1,
(ii) the Borrower's Stockholders' Equity is not below the Minimum Stockholders'
Equity as described in Paragraph 7.2, and (iii) no amount owing with respect to
any Commitment Fee, any outstanding Advance, any outstanding Term Loan, or any
interest thereon, or any other amount hereunder, is due and unpaid.
If prior to the last day of the Interest Period applicable to
any Term Loan the Borrower fails timely to provide a Notice of Interest Period
in accordance with this Paragraph 2.3, such Term Loan shall, on the last day of
the then-existing Interest Period for such Term Loan, automatically, have
applicable to it a New Term Loan Interest Period of thirty (30) days (or, in the
event there are fewer than thirty (30) days remaining to the Term Loan Maturity
Date for such Term Loan, an Interest Period of the number of days remaining to
such Term Loan Maturity Date) and shall bear interest at the Reference Rate.
Each Advance or Term Loan to the Borrower under this Agreement
shall be made by 12:00 noon (New York City time) on the date the Advance is to
be made, and shall be in immediately available funds credited to the account of
Borrower with the Bank or wired to the Borrower's account at Citibank, N.A.
(Account 4055-4016) or such other account as may be designated by the Borrower.
The Bank, by notice to the Borrower (to be given not later
than two Banking Days prior to the initial Advance or Term Loan hereunder) may
request that Advances or Term Loans made hereunder for which the interest
calculation is to be based on the Eurodollar Rate be evidenced by separate
Revolving Notes (in the case of Advances) and Term Notes (in the case of Term
Loans), substantially in the form of Exhibit A-1 hereto (in the case of
Advances) and Exhibit A-2 hereto (in the case of Term Loans), payable to the
order of such Bank for the account of its office, branch or affiliate it may
designate as its Eurodollar lending office. Each reference to the Bank in
Paragraph 2.6(b) and 3.5 shall include the Bank's designated Eurodollar lending
office; all notices given to the Bank in accordance with this Agreement shall be
deemed to have been given to such Eurodollar lending office.
2.4 Interest Periods. The Borrower may select the Interest
Period (as defined in the next sentence) for each Advance and an Interest Period
applicable from time to time for each Term Loan, it being understood that the
Borrower (i) may request multiple Advances on the same day and may select a
different Interest Period for each such Advance; and (ii) may request multiple
Term Loans having different Interest Periods (including New Term Loan Interest
Periods) applicable thereto; provided, however, that each such Advance or Term
Loan shall be in the amount of $1,000,000 or an integral multiple thereof. An
Interest Period shall be each period, as selected by the Borrower in accordance
with the terms of this Agreement, (i) in the case of each Advance, beginning on
the day such Advance is made under this Agreement, and (ii) in the case of a
Term Loan, beginning on the date specified in the Borrowing Advice or Notice of
Interest Period pertaining thereto, as the case may be, and ending on the date
specified by the Borrower:
(a) Not more than 180 days thereafter, in the case of any
Interest Period for which the interest is to be based
on the Reference Rate, provided that if the last day
of an Interest Period would be a day that is not a
Banking Day, such Interest Period shall be extended
to the next succeeding Banking Day;
(b) either 30, 60, 90 or 180 days thereafter, in the case
of any Interest Period for which the interest is to
be based on the CD Rate, provided that if the last
day of an Interest Period would be a day that is not
a CD Banking Day, such Interest Period shall be
extended to the next succeeding CD Banking Day; or
(c) not less than 7 nor more than 180 days thereafter, in
the case of any Interest Period that is to be based
on the Eurodollar Rate, provided that if the last day
of an Interest Period would be a day that is not a
Eurodollar Banking Day, such Interest Period shall be
extended to the next succeeding Eurodollar Banking
Day, unless such next succeeding Eurodollar Banking
Day is in a different calendar month, in which case
such interest period shall end on the next preceding
Eurodollar Banking Day;
provided, however, that (i) no Interest Period applicable to any Advance shall
extend beyond September 24, 1998; and (ii) no Interest Period applicable to any
Term Loan shall extend beyond the Term Loan Maturity Date specified in the
Borrowing Advice for such Term Loan, which in no event shall be later than June
25, 1999.
2.5 Interest Rates. Each Advance and each Term Loan, while
outstanding, shall bear interest, payable on the last day of each Interest
Period applicable thereto (provided that (i) if any Advance, Term Loan or New
Term Loan Interest Period is based on the Reference Rate, interest attributable
thereto also shall be payable on the last day of each calendar quarter that
occurs before the last day of the applicable Interest Period, or (ii) if the
Interest Period is longer than 90 days, interest with respect thereto also shall
be payable on the Banking Day following the 90th day from the commencement of
the Interest Period) at a rate per annum (based on a 360-day year and actual
days elapsed for Eurodollar Rate and CD Rate Advances, and a 365-day year and
actual days elapsed for Reference Rate Advances, counting the first day but not
the last day of any Interest Period) that shall be equal to one of the following
as selected by the Borrower:
(a) Eurodollar Rate, plus 3/8 of 1% per annum,
(b) CD Rate, plus 1/2 of 1% per annum, or
(c) Reference Rate.
2.6 Substitute Rates. If upon receipt by the Bank of a
Borrowing Advice relating to an Advance or of a Borrowing Advice or Notice of
Interest Period relating to a Term Loan:
(a) the Confirming Bank shall determine in accordance
with the provisions of the Confirming Bank Agreement
that by reason of changes affecting the New York City
certificate of deposit market and/or the London
interbank market, adequate and reasonable means do
not exist for ascertaining the applicable CD Rate
and/or Eurodollar Rate, respectively, with respect to
any Interest Period; or
(b) the Bank shall determine that by reason of any change
since the date hereof in any applicable law or
governmental regulation (other than any such change
in the regulations described in the definition of
Eurodollar Rate Reserve Percentage in Article I
hereof), guideline or order (or any interpretation
thereof), the adoption or enactment of any new law or
governmental regulation or order or any other
circumstance affecting the Bank or the New York City
certificate of deposit market and/or the London
interbank market, the CD Rate and/or Eurodollar Rate,
determined in accordance with the Confirming Bank
Agreement shall no longer represent the effective
cost to the Bank of certificates of deposit and/or of
U.S. dollar deposits, respectively, in the relevant
amount and for the relevant period; or
(c) the Confirming Bank or the Bank shall determine that,
as a result of any change since the date hereof in
any applicable law or governmental regulation or as a
result of the adoption of any new applicable law or
governmental regulation, the applicable CD Rate
and/or Eurodollar Rate, would be unlawful;
then, and in any such event, the Bank and the Borrower shall agree upon a rate
of interest applicable to the Advance or Term Loan that is reasonably judged by
them to be the nearest equivalent of the selected rate; provided, however, that
if no such rate is judged by them to be equivalent to the selected rate, the
basis for determining the rate of interest and the Interest Period shall be the
Reference Rate for an Interest Period of 30 days.
2.7 Interest Upon Default. After the principal amount of any
Advance or Term Loan, accrued interest upon such Advance or Term Loan,
Commitment Fee, or any other amount hereunder shall have become due and payable
by acceleration, or otherwise, it shall thereafter (until paid) bear interest,
payable on demand, (i) until the end of the Interest Period with respect to such
Advance or Term Loan at a rate per annum equal to 1% per annum in excess of the
rate or rates in effect with respect to such Advance or Term Loan and (ii)
thereafter, at a rate per annum equal to 1% per annum in excess of the Reference
Rate.
2.8 Commitment Fee. Through June 26, 1998, the Borrower will
pay to the Bank a credit commitment fee (the "Commitment Fee") for each calendar
quarter at a rate per annum (based on a 360 day year and actual days elapsed) of
100/1000 of 1% of the average daily unused principal amount of the Credit in
effect during such quarter payable on the first Banking Day after the end of
such quarter (or portion of such quarter, if applicable), and upon termination
of the Credit; provided, however, that any such payment upon termination of the
Credit during any calendar quarter shall be in lieu of (and not in addition to)
the payment otherwise due for such portion of such quarter on the first Banking
Day after the end of such quarter.
2.9 Facility Fee. On June 27, 1997, the Borrower shall pay a
facility fee to the Bank in an amount equal to 50/1000 of 1% of the Bank's
commitment as specified in Schedule I.
2.10 Confirming Bank Fee. On June 27, 1997, the Borrower
shall pay to the Confirming Bank a fee of $10,000.
2.11 Reduction of Credit. The Borrower, from time to time,
upon at least three Banking Days' written notice to the Bank, may permanently
reduce any then-unutilized portion of the Credit in units of $1,000,000 without
penalty or premium; thereafter, during the continuation of the Credit, the
computation of the Commitment Fee and the Bank's obligations for Advances or
Term Loans shall be based upon such reduced Credit. The Borrower, from time to
time, upon at least three Banking Days' written notice to the Bank, may
permanently reduce all or any part of the then-utilized portion of the Credit by
making payment to the Bank on such utilized portion pursuant to Paragraph 2.1 or
Paragraph 3.2 hereof, and thereafter, during the continuation of the Credit, the
computation of the Commitment Fee and the Bank's obligations for Advances or
Term Loans shall be based upon such reduced Credit; provided, however, that in
order for a payment to result in a permanent reduction of the Credit under this
paragraph, the written notice required under this paragraph must expressly
provide that the payment is being tendered pursuant to this paragraph and is
intended to result in a permanent reduction of the Credit. Any written notice
delivered pursuant to either of the foregoing two sentences shall be irrevocable
unless the Bank consents in writing to its revocation. In the event the Credit
shall be reduced to zero pursuant to this paragraph, the Credit shall be deemed
terminated, and any Commitment Fee or any other amount payable hereunder then
accrued shall become immediately payable. Such termination of the Credit shall
terminate the Borrower's obligations with respect to the Commitment Fee to the
extent not theretofore accrued and shall terminate the Bank's obligations to
make any further Advances or Term Loans under this Agreement.
3. PAYMENT
3.1 Method of Payment. All payments hereunder and under the
Revolving Note and the Term Note shall be payable in lawful money of the United
States of America and in immediately available funds not later than 12:00 noon
(New York City time) on the date when due at the principal office of the Bank or
at such other place as the Bank may, from time to time, designate in writing to
the Borrower.
3.2 Optional Prepayment. The Borrower shall be entitled to
prepay the Revolving Note and/or the Term Note in whole or in part (such part
being in integral multiples of $1,000,000) without premium or penalty. In the
case of each such prepayment (i) the Borrower shall give to the Bank at least
three Banking Days' prior irrevocable notice of the aggregate principal amount
of any such prepayment, (ii) at the time of prepayment, the Borrower shall pay
all unpaid interest accrued on the amount prepaid, and (iii) the Borrower shall
pay the Bank any amount payable to the Bank in accordance with Paragraph 3.4
hereof as a result of such prepayment.
3.3 Net Payments. All payments by Borrower hereunder and under
the Revolving Note and the Term Note shall be made without set-off or
counterclaim and in such amounts as may be necessary in order that all such
payments, after deduction or withholding for or on account of any present or
future taxes, levies, imposts, duties or other charges of whatsoever nature
imposed by any government or any political subdivision or taxing authority
thereof (collectively, "Taxes"), shall not be less than the amounts otherwise
specified to be paid under this Agreement. Notwithstanding the foregoing, the
Borrower shall not be liable for the payment of any tax on or measured by the
net income of the Bank pursuant to the laws of the jurisdiction where an office
of the Bank making any loan hereunder is located or does business. The Borrower
shall pay all Taxes when due and shall promptly send to the Bank original tax
receipts or copies thereof certified by the relevant taxing authority together
with such other documentary evidence with respect to such payments as may be
required from time to time by the Bank. If the Borrower fails to pay any Taxes
to the appropriate taxing authorities when due or fails to remit to the Bank any
such original tax receipts or certified copies thereof as aforesaid or other
required documentary evidence, the Borrower shall indemnify the Bank for any
taxes, interest or penalties that may become payable by the Bank as a result of
such failure.
3.4 Indemnity for Losses. The Borrower shall indemnify the
Bank for any loss or expense (including, without limitation, any interest paid
by the Bank to lenders of funds borrowed by it to make or maintain any Advance
or Term Loan and any loss incurred by the Bank in connection with the
reemployment of funds obtained by the Bank for the purpose of making or
maintaining any Advance or Term Loan hereunder) which the Bank may sustain as a
result of (i) any payment or prepayment of any Advance or Term Loan on a date
other than the last day of any Interest Period, (ii) any failure of the Borrower
to borrow on a date specified in a Borrowing Advice furnished hereunder or (iii)
any failure by the Borrower to prepay any amount on the date and in the amount
specified in a notice furnished by the Borrower in accordance with the terms
hereof. A certificate as to any amounts payable pursuant to the foregoing
submitted by the Bank to the Borrower shall, in the absence of manifest error,
be conclusive.
3.5 Change in Law. In the event that the Bank shall become
subject to any increased cost (including, but not limited to, taxes, increases
in reserves and reductions in amounts receivable by the Bank) with respect to
this Agreement or making or maintaining any borrowing hereunder as a result of
any Change in Law Affecting Cost, then as soon as practicable thereafter, the
Bank shall give the Borrower notice of such Change in Law Affecting Cost and a
certificate containing the amount and basis of demand, and the Borrower shall
pay to the Bank additional amounts that will compensate the Bank for such
increased cost or reduced amount receivable and, at the option of the Borrower
on notice to the Bank, the Borrower may either elect to (i) change the basis for
determining interest on outstanding indebtedness for the remainder of the
applicable Interest Period in accordance with Paragraph 2.4 hereof, or (ii)
prepay the principal amount outstanding with accrued interest thereon to the
date of prepayment. If such change or prepayment is made on a day that is not
the last day of an Interest Period, the Borrower shall pay the Bank, upon
request, such amount or amounts as will compensate the Bank for any loss or
expense incurred by the Bank in the redeployment of funds obtained by the Bank
for the purpose of making or maintaining the Advances or Term Loans provided for
herein. A certificate as to any additional amounts payable pursuant to the
foregoing sentence submitted by the Bank to the Borrower shall, in the absence
of manifest error, be conclusive.
4. CONDITIONS
4.1 Conditions Precedent to the Effectiveness of this
Agreement. The Borrower shall deliver to the Bank the following documents
concurrently with the execution of this Agreement:
(a) A written opinion, dated the date hereof, of counsel
for the Borrower, in the form of Exhibit D.
(b) A copy of a resolution or resolutions adopted by the
Board of Directors or Executive Committee of the
Borrower, certified by the Secretary or an Assistant
Secretary of the Borrower as being in full force and
effect on the date hereof, authorizing the execution,
delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby,
and a copy of the Certificate of Incorporation and
the By-Laws of the Borrower, similarly certified.
(c) A certificate, signed by the Secretary or an
Assistant Secretary of the Borrower and dated the
date hereof, as to the incumbency of the person or
persons authorized to execute and deliver this
Agreement.
(d) A certificate signed by the Chief Financial Officer
of the Borrower that, as of the date hereof, there
has been no material adverse change in its
consolidated financial condition since December 31,
1996 not reflected on its Quarterly Reports on Form
10-Q filed with the SEC for the period ending March
31, 1997.
(e) A certificate, signed by the Secretary or an
Assistant Secretary of the Borrower and dated the
date hereof, as to the persons authorized to execute
and deliver a Borrowing Advice, a Notice of Interest
Period, and the Revolving Note and the Term Note. The
Bank may rely on such certificate with respect to the
Advances and Term Loans hereunder unless and until it
shall have received an updated certificate and, after
receipt of such updated certificate, similarly may
rely thereon.
4.2 Conditions Precedent to Advances and Term Loans. The Bank
shall not be required to make any Advance or Term Loan pursuant to Article 2
hereof:
(a) when the Credit, the Revolving Credit Facility (in
the case of an Advance) or the Term Loan Facility (in
the case of a Term Loan) has been terminated; or
(b) when any of the representations or warranties of the
Borrower set forth in Article 5 hereof shall prove to
have been untrue in any material respect when made,
or when any Event of Default or any event that, upon
lapse of time or notice or both, would become an
Event of Default as defined in Article 8, has
occurred; or
(c) when the Broker Subsidiary or MSI is in violation of
minimum net capital requirements as described in
Paragraph 7.1; or
(d) when the Borrower's Stockholder's Equity is below the
Minimum Stockholders' Equity as described in
Paragraph 7.2.; or
(e) when any amount owing with respect to any Commitment
Fee or any outstanding Advance or Term Loan or any
interest thereon or any other amount payable
hereunder is due and unpaid.
Each Borrowing Advice given by the Borrower shall be deemed to
be a representation and warranty by the Borrower to the Bank, effective on and
as of the date of the Advance or Term Loan covered thereby, that (i) the
representations and warranties set forth in Article 5 hereof are true and
correct as of such date, and (ii) no Event of Default, and no event which with
the lapse of time or notice or both would become an Event of Default, has
occurred and is continuing.
5. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants, as of the date of
delivery of this Agreement and as of the date of any Advance or Term Loan, as
follows:
5.1 The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the state of Delaware and has
full power, authority and legal right and has all governmental licenses,
authorizations, qualifications and approvals required to own its property and
assets and to transact the business in which it is engaged; and all of the
outstanding shares of capital stock of Borrower have been duly authorized and
validly issued, are fully paid and non-assessable.
5.2 The Borrower has full power, authority and legal right to
execute and deliver, and to perform its obligations under, this Agreement, and
to borrow hereunder, and has taken all necessary corporate and legal action to
authorize the borrowings hereunder on the terms and conditions of this Agreement
and to authorize the execution and delivery of this Agreement, and the
performance of the terms thereof.
5.3 This Agreement has been duly authorized and executed by
the Borrower, and when delivered to the Bank will be a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, except, in each case, as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting enforcement of
creditors' rights or by general equity principles.
5.4 The execution and delivery of this Agreement by the
Borrower and the performance of the terms hereof will not violate any provision
of any law or regulation or any judgment, order or determination of any court or
governmental authority or of the charter or by-laws of, or any securities issued
by, the Borrower or any provision of any mortgage, indenture, loan or security
agreement, or other instrument, to which the Borrower is a party or which
purports to be binding upon it or any of its assets in any respect that
reasonably could be expected to have a material adverse effect on the Borrower
and its Subsidiaries taken as a whole on a consolidated basis; nor will the
execution and the delivery of this Agreement by the Borrower and the performance
of the terms hereof result in the creation of any lien or security interest on
any assets of the Borrower pursuant to the provisions of any of the foregoing.
5.5 Except as disclosed in writing by Borrower, no consents of
others (including, without limitation, stockholders and creditors of the
Borrower) nor any consents or authorizations of, exemptions by, or
registrations, filings or declarations with, any governmental authority are
required to be obtained by the Borrower in connection with this Agreement.
5.6 The consolidated financial statements of the Borrower
contained in the documents previously delivered to the Bank have been prepared
in accordance with U.S. generally accepted accounting principles and present
fairly the consolidated financial position of the Borrower.
5.7 The Broker Subsidiary possesses all material licenses,
permits and approvals necessary for the conduct of its business as now conducted
and as presently proposed to be conducted as required by law or the applicable
rules of the SEC and the National Association of Securities Dealers, Inc.
5.8 The Broker Subsidiary is registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended.
5.9 The Broker Subsidiary is not in arrears with respect to
any assessment made upon it by the Securities Investor Protection Corporation,
except for any assessment being contested by Broker Subsidiary in good faith by
appropriate proceedings and with respect to which adequate reserves or other
provisions are being maintained to the extent required by U.S. generally
accepted accounting principles.
5.10 The Borrower has paid and discharged or caused to be paid
and discharged all taxes, assessments, and governmental charges prior to the
date on which the same would have become delinquent, except to the extent that
such taxes, assessments or charges are being contested in good faith and by
appropriate proceedings by or on behalf of the Borrower and with respect to
which adequate reserves or other provisions are being maintained to the extent
required by U.S. generally accepted accounting principles.
5.11 The Borrower is in compliance with the provisions of and
regulations under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Internal Revenue Code of 1986, as amended, applicable
to any pension or other employee benefit plan established or maintained by the
Borrower or to which contributions are made by the Borrower (the "Plans"). The
Borrower has met all of the funding standards applicable to each of its Plans,
and there exists no event or condition that would permit the institution of
proceedings to terminate any of the Plans under Section 4042 of ERISA. The
estimated current value of the benefits vested under each of the Plans does not,
and upon termination of any of the Plans will not, exceed the estimated current
value of any such Plan's assets. The Borrower has not, with respect to any of
the Plans, engaged in a prohibited transaction set forth in Section 406 of ERISA
or Section 4975(c) of the Internal Revenue Code of 1986.
5.12 The Borrower will not use any amounts advanced to it
under this Agreement to remedy a default under any mortgage, indenture,
agreement or instrument under which there may be issued any indebtedness of the
Borrower to any bank or bank holding company, or their respective assignees, for
borrowed money. Further, the Borrower will not use any amounts advanced to it
under this Agreement for the immediate purpose of acquiring a company where the
Board of Directors or other governing body of the entity being acquired has made
(and not rescinded) a public statement opposing such acquisition.
5.13 This Agreement contains terms no less favorable to the
Bank than the terms of any Borrowing Agreement.
5.14 The Borrower will not use the proceeds of any loan
provided hereby in such a manner as to result in a violation of Regulations G,
T, U or X of the Board of Governors of the Federal Reserve System.
5.15 The persons named for such purpose in the certificates
delivered pursuant to Paragraph 4.1(e) hereof are authorized to execute
Borrowing Advices.
5.16 Borrower is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement, note or
lease to which the Borrower is a party or by which it may be bound.
5.17 There is no action, suit or proceeding pending against,
or to the knowledge of the Borrower, threatened against or affecting, the
Borrower or any of its Subsidiaries before any court, arbitrator, governmental
body, agency or official in which there is a significant probability of an
adverse decision which could materially adversely affect the business or the
financial position of the Borrower.
5.18 The Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
6. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that so long as the Credit
shall continue or any Advance or Term Loan by the Bank remains outstanding and
until full payment of all amounts due to the Bank hereunder, it will, unless and
to the extent the Bank waives compliance in writing:
6.1 Give prompt notice to the Bank, no later than three
Banking Days after becoming aware thereof, of any Event of Default or any event
that, upon lapse of time or notice or both, would become an Event of Default.
6.2 Deliver to the Bank, within ten Banking Days of the filing
thereof with the SEC, a copy of each registration statement filed under the
Securities Act of 1933, a copy of each filing (including exhibits) made by the
Borrower with the SEC under the Securities Exchange Act of 1934, as amended
(but, in the event the Borrower requests an extension of any such filing from
the SEC, promptly (but not later than the second Banking Day following the
filing of such request) deliver a copy of such request to the Bank).
6.3 Maintain and keep in force in adequate amounts such
insurance as is usual in the business carried on by the Borrower.
6.4 Maintain adequate books, accounts and records and prepare
all financial statements required hereunder in accordance with U.S. generally
accepted accounting principles and practices and in compliance with the
regulations of any governmental regulatory body having jurisdiction thereof.
6.5 Advise the Bank, in a timely manner, of material changes
to the nature of business of the Borrower or its Broker Subsidiary as at present
conducted. The Broker Subsidiary is at present engaged in the business of
providing financial services, primarily to individual investors and/or their
advisors.
6.6 With respect to each and any Advance or Term Loan
requested by the Borrower under this Agreement (a "primary Advance" or a
"primary Term Loan," as the case may be), the Borrower will concurrently request
an Advance (or Term Loan) under each of the Borrowing Agreements (each such
other Advance or Term Loan under each of the Borrowing Agreements being
hereinafter individually referred to as an "other Advance" or "other Term Loan"
and collectively referred to as the "other Advances" or "other Term Loans," as
the case may be), with each such other Advance or other Term Loan being
requested in an amount equal to the same percentage of the Credit under the
applicable Borrowing Agreement as the primary Advance or Term Loan constitutes
as a percentage of the Credit under this Agreement. As an illustration of the
application of this Section 6.6 and by way of example only, if the Borrower
requests an Advance under this Agreement that is in an amount equal to 10% of
the Credit under this Agreement, the Borrower shall simultaneously seek an other
Advance under each of the Borrowing Agreements, each of which other Advances
shall be requested in an amount equal to 10% of the Credit under the applicable
Borrowing Agreement.
7. NEGATIVE COVENANTS
The Borrower covenants and agrees that so long as the Credit
shall continue or any Advance or Term Loan by the Bank remains outstanding and
until full payment of all amounts due to the Bank hereunder, unless and to the
extent the Bank waives compliance in writing:
7.1 The Borrower will not permit the Broker Subsidiary to
allow (i) the average of two consecutive month-end Net Capital Ratios to be less
than 7%, or (ii) any month-end Net Capital Ratio to be less than 5%. The
Borrower similarly will not permit MSI to allow (i) the average of two
consecutive month-end Net Capital Ratios to be less than 7%, or (ii) any
month-end Net Capital Ratio to be less than 5%.
7.2 The Borrower will not allow Stockholder's Equity to fall
below the Minimum Stockholders' Equity.
7.3 The Borrower will not (i) permit either Broker Subsidiary
or Intermediate Parent to (a) merge or consolidate, unless the surviving company
is a Controlled Subsidiary, or (b) convey or transfer its properties and assets
substantially as an entirety except to one or more Controlled Subsidiaries; or,
(ii) except as permitted by (i) immediately preceding, sell, transfer or
otherwise dispose of any voting stock of Broker Subsidiary or Intermediate
Parent, or permit either Broker Subsidiary or Intermediate Parent to issue, sell
or otherwise dispose of any of its voting stock, unless, after giving effect to
any such transaction, Broker Subsidiary or Intermediate Parent, as the case may
be, remains a Controlled Subsidiary.
7.4 The Borrower will not permit the Broker Subsidiary to
create, incur or assume any indebtedness other than:
(a) indebtedness incurred in the ordinary course of
business, including but not necessarily limited to, (i)
indebtedness to customers, other brokers or dealers,
clearing houses and like institutions, (ii) "broker
call" credit, (iii) stock loans, (iv) obligations to
banks for disbursement accounts, (v) trade and other
accounts payable, (vi) indebtedness incurred for the
purchase of tangible property on a non-recourse basis or
for the leasing of tangible property under a capitalized
lease; and (vii) indebtedness incurred for the purchase,
installation or servicing of computer equipment and
software;
(b) intercompany indebtedness; and
(c) other indebtedness in the aggregate not exceeding
$70,000,000.
7.5 The Borrower will not, and will not permit any Subsidiary
at any time directly or indirectly to create, assume, incur or permit to exist
any indebtedness secured by a pledge, lien or other encumbrance (hereinafter
referred to as a "lien") on the voting stock of any Subsidiary without making
effective provision whereby the Revolving Note and the Term Note shall be
secured equally and ratably with such secured indebtedness so long as other
indebtedness shall be so secured; provided, however, that the foregoing covenant
shall not be applicable to Permitted Liens (as defined in Paragraph 7.6 below).
7.6 The Borrower will not create, incur, assume or suffer to
exist any lien or encumbrance upon or with respect to any of its properties,
whether now owned or hereafter acquired, except the following (the "Permitted
Liens"):
(a) liens securing taxes, assessments or governmental
charges or levies, or in connection with workers'
compensation, unemployment insurance or social
security obligations, or the claims or demands of
materialmen, mechanics, carriers, warehousemen,
landlords and other like persons not yet delinquent
or which are being contested in good faith by
appropriate proceedings with respect to which
adequate reserves or other provisions are being
maintained to the extent required by U.S. generally
accepted accounting principles;
(b) liens not for borrowed money incidental to the
conduct of its business or the ownership of property
that do not materially detract from the value of any
item of property;
(c) attachment, judgment or other similar liens arising
in the connection with court proceedings that do not,
in the aggregate, materially detract from the value
of its property, materially impair the use thereof in
the operation of its businesses and (i) that are
discharged or stayed within sixty (60) days of
attachment or levy, or (ii) payment of which is
covered in full (subject to customary and reasonable
deductibles) by insurance or surety bonds; and
(d) liens existing at Closing Date provided that the
obligations secured thereby are not increased.
8. EVENT OF DEFAULT
8.1 The occurrence of any of the following events shall
constitute an "Event of Default":
(a) The Borrower shall fail to pay any interest with
respect to the Revolving Note or the Term Note or any
Commitment Fee in accordance with the terms hereof
within 10 days after such payment is due.
(b) The Borrower shall fail to pay any principal with
respect to the Revolving Note or the Term Note in
accordance with the terms thereof on the date when
due or shall fail to pay when due (after expiration
of any applicable grace periods) any principal or
interest with respect to any advance or other loan
under any of the Borrowing Agreements.
(c) Any representation or warranty made by the Borrower
herein or hereunder or in any certificate or other
document furnished by the Borrower hereunder shall
prove to have been incorrect when made (or deemed
made) in any respect that is materially adverse to
the interests of the Bank or its rights and remedies
hereunder.
(d) Except as specified in (a) and (b) above, the
Borrower shall default in the performance of, or
breach, any covenant of the Borrower with respect to
this Agreement, and such default or breach shall
continue for a period of thirty days after there has
been given, by registered or certified mail, to the
Borrower by the Bank a written notice specifying such
default or breach and requiring it to be remedied.
(e) An event of default as defined under any Borrowing
Agreement, or an event of default as defined in any
mortgage, indenture, agreement or instrument under
which there may be issued, or by which there may be
secured or evidenced, any indebtedness for borrowed
money of the Borrower in a principal amount not less
than $30 million, shall have occurred and shall
result in such indebtedness becoming or being
declared due and payable prior to the date on which
it otherwise would become due and payable; provided,
however, that if such event of default shall be
remedied or cured by the Borrower, or waived by the
holders of such indebtedness, within twenty days
after the Borrower has received written notice of
such event of default and acceleration, then the
Event of Default hereunder by reason thereof shall be
deemed likewise to have thereupon been remedied,
cured or waived without further action upon the part
of either the Borrower or the Bank.
(f) A court having jurisdiction in the premises shall
enter a decree or order for relief in respect of the
Borrower or the Broker Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar
official) of the Borrower or Broker Subsidiary or for
any substantial part of its respective properties, or
ordering the winding-up or liquidation of its
affairs, and such decree or order shall remain
unstayed and in effect for a period of 60 consecutive
days.
(g) The Borrower or the Broker Subsidiary shall commence
a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in
effect, or shall consent to the entry of an order for
relief in an involuntary case under such law, or
shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar
official) of the Borrower or Broker Subsidiary or for
any substantial part of its respective properties, or
shall make any general assignment for the benefit of
creditors, or shall fail generally to pay its
respective debts as they become due or shall take any
corporate action in furtherance of any of the
foregoing.
(h) A final judgment or judgments for the payment of
money in excess of $25,000,000 in the aggregate shall
be entered against the Borrower by a court or courts
of competent jurisdiction, and the same shall not be
discharged (or provisions shall not be made for such
discharge), or a stay of execution thereof shall not
be procured, within 30 days from the date of entry
thereof and the Borrower shall not, within said
period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal
therefrom and cause the execution thereof to be
stayed during such appeal.
8.2 If an Event of Default occurs and is continuing, then and
in every such case the Bank at its option may terminate the Credit and all
obligations of the Bank to make any further Advances or Term Loans, and declare
the principal, any accrued and unpaid interest, any accrued and unpaid
Commitment Fees, or any other amounts payable under the outstanding Revolving
Note and/or under the outstanding Term Note, to be due and payable immediately,
by a notice in writing to the Borrower, and upon such declaration such
principal, interest, Commitment Fees, or other amounts payable hereunder accrued
thereon shall become immediately due and payable, together with any funding
losses that may result as a consequence of such declaration, without
presentment, demand, protest or other notice of any kind, all of which are
expressly waived by the Borrower; provided, however, that in the case of any of
the Events of Default specified in subparagraph (f) or (g) of Paragraph 8.1,
automatically without any notice to the Borrower or any other act by the Bank,
the Credit and the Bank's obligations to make any further Advances or Term Loans
shall thereupon terminate and the outstanding principal of the Revolving Note
and of the Term Note, any accrued and unpaid interest, any accrued and unpaid
Commitment Fees or any other amounts payable hereunder shall become immediately
due and payable, together with any funding losses that may result as a
consequence thereof, without presentment, demand, protest or other notice of any
kind, all of which are expressly waived by the Borrower.
9. MISCELLANEOUS
9.1 Notices. Any communications between the parties hereto or
notices provided herein shall be effective upon receipt and shall be, unless
otherwise specified, in writing (which may include telex or telecopy
transmission) and shall be given to the Bank at the address specified in
Schedule I hereto and to the Borrower at The Charles Schwab Corporation, Attn:
Treasury Department, 101 Montgomery Street, San Francisco, California 94104, fax
number (415) 636-9891, or to such other address as either party shall hereafter
have indicated to the other party in writing. In the event the Borrower consents
to any assignment by the Bank with respect to this Agreement, upon receiving
written notice from the Bank that such assignment has been effected, the
Borrower thereafter shall give all notices required to be given under this
Agreement to the assignee at the address specified for such assignee by the Bank
or such assignee. Notwithstanding the granting of any participation by the Bank
with respect to this Agreement as permitted by Paragraph 9.4, all notices
required to be given under this Agreement may continue to be given by the
Borrower only to the Bank and shall be effective upon delivery to the Bank as
though no such participation had been granted.
9.2 Waivers. No delay or omission to exercise any right, power
or remedy accruing to the Bank upon any breach or default of the Borrower under
this Agreement shall impair any such right, power or remedy of the Bank, nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. Any amendment,
modification, waiver, permit, consent or approval of any kind or character on
the part of the Bank of any breach or default under this Agreement, or any
waiver on the part of the Bank of any provision or condition of this Agreement,
must be in writing signed by the Bank and shall be effective only to the extent
specifically set forth in writing. All remedies, either under this Agreement or
by law or otherwise afforded to the Bank, shall be cumulative and not
alternative.
9.3 Expenses. The Borrower agrees to pay all reasonable
out-of-pocket expenses of the Bank (including the reasonable fees and expenses
of its counsel) in connection with the negotiation, preparation, execution and
delivery of this Agreement, any amendments or modifications of or supplements to
any of the foregoing and any and all other documents furnished in connection
herewith, as well as, after the occurrence of any event that upon a lapse of
time or notice or both, would become an Event of Default, all costs and expenses
(including reasonable fees and expenses of counsel who may be employees of Bank)
in connection with the enforcement or administration (including, without
limitation, actions taken by the Bank in connection with litigation or
regulatory proceedings as to which this Agreement becomes relevant) of, or legal
advice in respect to the rights and responsibilities or the exercise of any
right or remedy under, any provision of this Agreement, the Revolving Note, the
Term Note, and any amendments or modifications of or supplements to any of the
foregoing.
9.4 Assignment. Except as hereinafter set forth in this
Paragraph 9.4, no rights of the Bank hereunder may be assigned, transferred,
sold, assigned, pledged or otherwise disposed of, and no lien, charge or other
encumbrance may be created or permitted to be created thereon without the prior
written consent of the Borrower.
(a) Transfers to Affiliated Entities and Federal Reserve
Banks. The Bank shall have the right at any time and
from time to time, to transfer any loan hereunder to
any Federal Reserve Bank or to any parent,
subsidiary, affiliate, branch or other related office
of the Bank which is not engaged in the securities
brokerage business or the investment advisory
business, and to grant participations hereunder to
any such Federal Reserve Bank, parent, subsidiary,
affiliate, branch or other related office of the
Bank. In no event shall any such transferee or
participant be considered a party to the Agreement,
and Bank shall continue to service any loan
transferred pursuant to this Paragraph 9.4(a) and
shall remain liable for the performance of all of its
obligations under this Agreement. Notwithstanding any
such transfer or grant of a participation, Borrower
shall continue to make payments required under this
Agreement to Bank unless and until otherwise notified
in writing by Bank, and Bank agrees to indemnify and
hold Borrower harmless from and against any claims by
any transferee or participant arising out of any
payment made to Bank in accordance with this
Paragraph 9.4(a).
(b) Transfers to Unrelated Entities. Subject to the
provisions of this subsection 9.4(b), the Bank may at
any time sell to one or more unrelated financial
institutions not engaged in the securities brokerage
business or the investment advisory business (each a
"Participant") participating interests in any Advance
or Term Loans, the Revolving Note, the Term Note, the
Bank's Credit hereunder or any other interest of the
Bank hereunder. In the event of any such sale by the
Bank to a Participant, the Bank's obligations under
this Agreement shall remain unchanged, the Bank shall
remain solely responsible for the performance hereof,
the Bank shall remain the holder of the Revolving
Note and of the Term Note for all purposes under this
Agreement, and the Borrower shall continue to deal
solely and directly with the Bank in connection with
the Bank's rights and obligations under this
Agreement. Any agreement pursuant to which Bank may
grant a participation shall provide that the Bank
shall retain the sole right and responsibility to
enforce the obligations of the Borrower hereunder
including, without limitation, the right to declare
an acceleration or default hereunder and the right to
approve any amendment, modification or waiver of any
provision of this Agreement.
The Borrower may not assign this Agreement or any of its
rights hereunder without the prior written consent of the Bank.
The provisions of this Agreement shall be binding upon and
inure to the benefit of the Bank and the Borrower and their respective
successors and assigns, and the term "Borrower" as used in this Agreement shall
include the Borrower and all such successors and assigns.
9.5 Confidentiality. Bank agrees to hold any confidential
information that it may receive from Borrower pursuant to this Agreement in
confidence, except for disclosure: (a) to legal counsel and accountants for
Borrower or Bank; (b) to other professional advisors to Borrower or Bank,
provided that the recipient has delivered to the Bank a written confidentiality
agreement substantially similar to this Section 9.5; (c) to regulatory officials
having jurisdiction over Bank; (d) as required by applicable law or legal
process or in connection with any legal proceeding in which Bank and Borrower
are adverse parties; and (e) to another financial institution in connection with
a disposition or proposed disposition to that financial institution of all or
part of Bank's interests hereunder or a participation interest in the Revolving
Note and/or the Term Note, each in accordance with Section 9.4 hereof, provided
that the recipient has delivered to Bank a written confidentiality agreement
substantially similar to this Section 9.5. Bank further agrees that it will not
use such confidential information in any activity or for any purpose other than
the administration of credit facilities extended to Borrower and its
Subsidiaries and, without limitation, will take such steps as are reasonably
appropriate to preclude access to any such confidential information to be
obtained by any person employed by Bank, or by an affiliate of Bank, who is not
involved in the administration of credit facilities extended to Borrower and its
Subsidiaries. For purposes of the foregoing, "confidential information" shall
mean any information respecting Borrower or its Subsidiaries reasonably
specified by Borrower as confidential, other than (i) information filed with any
governmental agency and available to the public, (ii) information published in
any public medium from a source other than, directly or indirectly, Bank, and
(iii) information disclosed by Borrower to any person not associated with
Borrower without a written confidentiality agreement substantially similar to
this Section 9.5. Certain of the confidential information pursuant to this
Agreement is or may be valuable proprietary information that constitutes a trade
secret of Borrower or its Subsidiaries; neither the provision of such
confidential information to Bank or the limited disclosures thereof permitted by
this Section 9.5 shall affect the status of any such confidential information as
a trade secret of Borrower and its Subsidiaries. Bank, and each other person who
agrees to be bound by this Section 9.5, acknowledges that any breach of the
agreements contained in this Section 9.5 would result in losses that could not
be reasonably or adequately compensated by money damages. Accordingly, if Bank
or any such other person breaches its obligations hereunder, Bank or such other
person recognizes and consents to the right of Borrower, Intermediate Parent,
and/or Broker Subsidiary to seek injunctive relief to compel such Bank or other
Person to abide by the terms of this Section 9.5.
9.6 Waiver of Jury Trial. The Borrower waives any right it may
have to trial by jury in any action or proceeding to enforce or defend any
rights or remedies arising under this Agreement and the Revolving Note and the
Term Note.
9.7 Entire Agreement. This instrument and the exhibits hereto
embody the entire agreement with respect to the subject matter hereof between
the Borrower and the Bank.
9.8 Counterparts. This Agreement may be executed in as many
counterparts as may be deemed necessary or convenient, and by the different
parties hereto on separate counterparts each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same instrument.
9.9 Governing Law. This Agreement and the Revolving Note and
the Term Note shall be deemed to be contracts under, and for all purposes shall
be governed by, and construed and interpreted in accordance with, the laws of
the State of California.
9.10 Notice of Modification of Borrowing Agreements. The
Borrower shall give prior notice to the Bank of any proposed modification in the
terms of any of the Borrowing Agreements and hereby agrees, should the Bank so
request, to make identical modifications in the terms of this Agreement.
9.11 No Priority. Nothing in this Agreement is intended, or
shall be interpreted, to create any priority of any of the banks listed on
Schedule I over any other of such banks with respect to their rights under the
Borrowing Agreements.
<PAGE>
9.12 Headings. All headings in this Agreement are for
convenience of reference only and shall not be construed to limit or interpret
the provisions they introduce.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
Bank: Borrower:
[NAME OF BANK] THE CHARLES SCHWAB
CORPORATION
By _____________________________ By _________________________________
Its_____________________________ Christopher V. Dodds
Senior Vice President and Treasurer
<PAGE>
SCHEDULE I
to Credit Agreement dated as of June 27, 1997 between
The Charles Schwab Corporation and the Banks listed below
(Dollars in Millions)
Amount
Bank of America Illinois $50
Attn: John E. Williams IV, Vice President
231 South LaSalle Street
Chicago, IL 60697
Bank of New York 50
Attn: Mark Rogers, Vice President
One Wall Street, First Floor
New York, NY 10286
Chase Manhattan Bank 20
Broker Dealer Division
Attn: Richard Cassa, Vice President
One Chase Plaza, 21st Floor
New York, NY 10081
Citicorp USA, Inc. 50
Attn: Michael Mauerstein, Vice President
399 Park Avenue, 12th Floor, Zone 10
New York, NY 10043
The First National Bank of Chicago 20
Attn: Rob Danziger, Vice President
153 West 51st Street
New York, NY 10019
First Tennessee Bank National Association 20
Attn: Victor Notaro, Vice President
P.O. Box 84
Main Office, 9th Floor
Memphis, TN 38103
The Fuji Bank, Limited 20
San Francisco Agency
Attn: Mike Rogers, Vice President
601 California Street
San Francisco, California 94108
Norwest Bank Minnesota, N.A. 30
Attn: Janet Klein, Vice President
6th and Marquette
Minneapolis, MN 55479-0085
PNC Bank 50
Attn: Brenda Peck, Vice President
1600 Market Street, 21st Floor
Philadelphia, PA 19101
NationsBank, N.A. (South) 20
Attn: Jim Dever, Senior Vice President
55 Broadway, 4th Floor
New York, NY 10006
Union Bank of Switzerland 20
New York Branch
Attn: Virginia Loebel, Managing Director
299 Park Avenue
New York, NY 10171-0026
<PAGE>
EXHIBIT A-1
REVOLVING NOTE
Date:
$__________________
For value received, the undersigned The Charles Schwab
Corporation ("Schwab") hereby promises to pay to the order of ________________
(the "Bank") at ______________, the principal amount of each Advance made by the
Bank to Schwab under the terms of a Credit Agreement between Schwab and the
Bank, dated as of June 27, 1997, as amended from time to time (the "Credit
Agreement"), as shown in the schedule attached hereto and any continuation
thereof, on the last day of the Interest Period (as defined in the Credit
Agreement) for such Advance. The undersigned also promises to pay interest on
the unpaid principal amount of each Advance from the date of such Advance until
such principal amount is paid, at the rates per annum, and payable at such
times, as are specified in the Credit Agreement. This Note shall be subject to
the Credit Agreement, and all principal and interest payable hereunder shall be
due and payable in accordance with the terms of the Credit Agreement. Terms
defined in the Credit Agreement are used herein with the same meanings.
Principal and interest payments shall be in money of the
United States of America, lawful at such times for the satisfaction of public
and private debts, and shall be in immediately available funds.
Schwab promises to pay costs of collection, including
reasonable attorney's fees, if default is made in the payment of this Note.
The terms and provisions of this Note shall be governed by the
applicable laws of the State of California.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed by its officers or employees thereunto duly authorized and directed by
appropriate corporate authority.
The Charles Schwab Corporation
By: _______________________________
Christopher V. Dodds
Senior Vice President and Treasurer
<PAGE>
EXHIBIT A-2
TERM NOTE
Date:
$__________________
For value received, the undersigned The Charles Schwab
Corporation ("Schwab") hereby promises to pay to the order of
___________________ (the "Bank") at ____________________________, the principal
amount of each Term Loan made by the Bank to Schwab under the terms of a Credit
Agreement between Schwab and the Bank, dated as of June 27, 1997, as amended
from time to time (the "Credit Agreement"), as shown in the schedule attached
hereto and any continuation thereof, on the Term Loan Maturity Date (as defined
in the Credit Agreement) for such Term Loan. The undersigned also promises to
pay interest on the unpaid principal amount of each Term Loan from the date of
such Term Loan until such principal amount is paid, at the rates per annum, and
payable at such times, as are specified in the Credit Agreement. This Note shall
be subject to the Credit Agreement, and all principal and interest payable
hereunder shall be due and payable in accordance with the terms of the Credit
Agreement. Terms defined in the Credit Agreement are used herein with the same
meanings.
Principal and interest payments shall be in money of the
United States of America, lawful at such times for the satisfaction of public
and private debts, and shall be in immediately available funds.
Schwab promises to pay costs of collection, including
reasonable attorney's fees, if default is made in the payment of this Note.
The terms and provisions of this Note shall be governed by the
applicable laws of the State of California.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed by its officers or employees thereunto duly authorized and directed by
appropriate corporate authority.
The Charles Schwab Corporation
By: _______________________________
Christopher V. Dodds
Senior Vice President and Treasurer
<PAGE>
EXHIBIT B
CONFIRMING BANK AGREEMENT
This Agreement is entered into as of June 27, 1997 between The
Charles Schwab Corporation (the "Borrower") and Bank of America Illinois (the
"Confirming Bank").
WHEREAS, under the terms of separate substantially similar
Credit Agreements (the "Credit Agreements") between the Borrower and each of the
banks (the "Banks") set forth on Schedule I hereto, the Banks have severally
agreed to lend certain amounts to the Borrower on a revolving credit loan basis
through June 26, 1998 and maturing no later than September 24, 1998 and to make
Term Loans to the Borrower on or before June 26, 1998 and maturing no later than
June 25, 1999;
WHEREAS, the Borrower desires the Confirming Bank to calculate
the basis for the rates of interest to be borne by certain of the loans which
may be made by the Banks to the Borrower under the Credit Agreements:
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as follows:
1. Terms defined in the Credit Agreements shall bear the same
meanings herein unless the context otherwise requires.
2. Upon the terms and subject to the conditions hereinafter
mentioned, the Confirming Bank shall determine the CD Rate (including the
Assessment Rate and the CD Rate Reserve Percentage), the Eurodollar Rate
(including the Eurodollar Rate Reserve Percentage) or the Reference Rate which
is to serve as the basis for the interest rate of certain loans made under any
of the Credit Agreements.
3. Simultaneously with the giving of a Borrowing Advice, to
any of the Banks, the Borrower shall give to the Confirming Bank notice of such
Borrowing Advice (such notice being hereinafter referred to as a "Rate Request")
which shall specify the Bank to which such Borrowing Advice was given and the
principal amount, the Interest Period, and the basis for interest calculation
referred to therein.
4. (a) Upon receipt by the Confirming Bank of a Rate Request
relating to an Interest Period for which the interest calculation is to be based
on the Eurodollar Rate, the Confirming Bank, as soon as practicable, shall (i)
calculate the Eurodollar Rate Reserve Percentage for such Interest Period, which
shall be the percentage (expressed as a decimal) that is in effect on the first
day of such Interest Period, as prescribed by the Board of Governors of the U.S.
Federal Reserve System (or any successor), for determining the reserve
requirements to be maintained by the Bank under Regulation D (or any successor
regulation thereof) as amended to the date hereof (including such reserve
requirements as become applicable to the Bank pursuant to phase-in or other
similar requirements of Regulation D at any time subsequent to the date hereof)
in respect of "Eurocurrency liabilities" (as defined in Regulation D), (ii) (aa)
if there appear on the Reuters Screen LIBO Page as at 11:00 A.M. (London time)
two Eurodollar Banking Days prior to the commencement of the relevant Interest
Period at least two rates at which deposits of U.S. dollars for the selected
Interest Period are offered, identify such offered rates and calculate the
Eurodollar Rate to be the arithmetic mean (adjusted upward, if necessary, to the
nearest 1/16 of 1%) of such offered rates or (bb) if fewer than two offered
rates appear, obtain from each of the Eurodollar Rate Reference Banks
information with respect to the average rate per annum (adjusted upward, if
necessary, to the nearest 1/16 of 1%) at which deposits of U.S. dollars for the
selected Interest Period and in the amount specified in the Rate Request are
offered in immediately available funds to such Eurodollar Rate Reference Bank
(without giving effect to reserve requirements described in the Eurodollar Rate
Reserve Percentage section of the Credit Agreement) in the London interbank
market as at 11:00 a.m. (London time) two Banking Days prior to the commencement
of the relevant Interest Period and shall determine the Eurodollar Rate for the
relevant Interest Period to be the average of the rates so obtained, adjusted
upward, if necessary, to the nearest 1/16 of 1%, and (iii) determine the
Eurodollar Rate for the relevant Interest Period to be (aa) the applicable rate
obtained pursuant to paragraph 4(a)(ii)(aa) or (bb) hereof, divided by a
percentage (expressed as a decimal) equal to 1.00 minus the Eurodollar Rate
Reserve Percentage. The Eurodollar Rate shall be adjusted automatically on and
as of the effective date of any change in the Eurodollar Rate Reserve
Percentage.
In the event that (x) fewer than two offered rates
appear on the Reuters Screen LIBO Page as described above and fewer than two
Eurodollar Rate Reference Banks shall have provided information with respect to
such offered rates to the Confirming Bank, or (y) the Confirming Bank shall have
determined (which determination shall be conclusive and binding upon the
Borrower and the Banks) that by reason of changes affecting the London interbank
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for the relevant Interest Period, the Confirming Bank shall
notify the Borrower and the Bank specified in the Rate Request of such fact as
soon as possible (and provide information concerning the basis for any such
determination described in (y) above).
(b) As soon as possible after the determination of
the Eurodollar Rate, the Confirming Bank shall forthwith notify the Borrower and
the Bank specified in the Rate Request of such determination by telephone,
confirmed by written or telegraphic communication. The Confirming Bank shall
simultaneously notify the Borrower and the Bank as to which of the Eurodollar
Rate Reference Banks supplied information used in determining the Eurodollar
Rate and the information supplied by each such bank.
5. (a) Upon receipt by the Confirming Bank of a Rate Request
relating to an Interest Period for which the interest calculation is to be based
on the CD Rate, the Confirming Bank, as soon as practicable, shall:
(i) estimate the Assessment Rate for such Interest
Period, which shall be the assessment rate per annum (adjusted upward, if
necessary, to the nearest 1/100 of 1%) on the first day of such Interest Period
for determining the then current annual assessment payable by the Bank specified
in the Rate Request to the Federal Deposit Insurance Corporation (or any
successor thereto) for such Corporation's (or such successor's) insuring U.S.
dollar deposits of the Bank specified in the Rate Request in the United States;
(ii) calculate the CD Rate Reserve Percentage for such
Interest Period, which shall be the percentage (expressed as a decimal) that is
in effect on the first day of such Interest Period, as prescribed by the Board
of Governors of the Federal Reserve System (or any successor), for determining
the maximum reserve requirements (including, without limitation, supplemental,
marginal and emergency reserves) for a bank with deposits exceeding five billion
dollars that is a member of the Federal Reserve System, in respect of new
non-personal time deposits in U.S. dollars in the United States in the amount
specified in the Rate Request having a maturity comparable to such Interest
Period (such bank's reserve ratio on such time deposits in effect on June , 1997
was 0%);
(iii) obtain (aa) from each of the CD Reference Banks
information with respect to the average rate per annum (adjusted upward, if
necessary, to the nearest 1/16 of 1%) at which bids are received by each such CD
Reference Bank for its certificates of deposit for the selected Interest Period
and in the amount specified in the Rate Request as at 11:00 a.m., New York City
time (or as soon as practicable thereafter), on the first day of the relevant
Interest Period from two or more New York City certificate of deposit dealers of
recognized standing selected by the Confirming Bank for the purchase at face
value of such certificates of deposit, and calculate the applicable rate to be
the arithmetic mean (adjusted upward, if necessary, to the nearest 1/16 of 1%)
of the average rates per annum of the CD Reference Banks, or (bb) in the event
the Confirming Bank cannot, without undue effort, obtain rates from such CD
Reference Banks the certificate of deposit rate as reported for the date of the
Borrowing Advice, in "Federal Reserve Statistical Release--Selected Interest
Rates--H.15 (519)" published by the Board of Governors of the Federal Reserve
System, or any successor publication, under the caption "CDs (Secondary Market)"
having a maturity most closely approximating the conclusion of the Interest
Period; and
(iv) determine the CD Rate for the relevant Interest
Period to be the sum of (aa) the Assessment Rate for such Interest Period, plus
(bb) the applicable rate obtained pursuant to paragraph 5(a) (iii)(aa) or (bb)
hereof (adjusted upward, if necessary, to the nearest 1/16 of 1%) divided by a
percentage (expressed as a decimal) equal to 1.00 minus the CD Rate Reserve
Percentage. The CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Assessment Rate and the CD Rate Reserve
Percentage.
In the event that (x) fewer than two CD Reference Banks shall
have provided information with respect to such offered rates to the Confirming
Bank, or (y) the Confirming Bank shall have determined (which determination
shall be conclusive and binding upon the Borrower and the Banks) that by reason
of changes affecting the New York City certificate of deposit market, adequate
and reasonable means do not exist for ascertaining the CD Rate for the relevant
Interest Period, the Confirming Bank shall notify the Borrower and the Bank
specified in the Rate Request of such fact as soon as possible (and provide
information concerning the basis for any such determination described in (y)
above).
(b) As soon as possible after the determination of the CD
Rate or any adjustment of the CD Rate, the Confirming Bank shall forthwith
notify the Borrower and the Bank specified in the Rate Request of such
determination by telephone, confirmed by written or telegraphic communication.
The Confirming Bank shall simultaneously notify the Borrower and the Bank as to
which of the CD Reference Banks supplied information used in determining the CD
Rate and the information supplied by each such Bank.
6. (a) Upon receipt by the Confirming Bank of a Rate Request
relating to an Interest Period for which the interest calculation is to be based
on the Reference Rate, the Confirming Bank shall:
(i) determine, on a daily basis during such Interest
Period, the higher of (a) the highest per annum rate of interest (adjusted
upward, if necessary, to the nearest 1/16 of 1%) publicly announced by any
Reference Rate Reference Bank as its "prime rate," "prime commercial lending
rate," "reference rate," or "base rate," as the case may be, and (b) the highest
per annum Federal Funds Effective Rate available to any Reference Rate Reference
Bank, plus 1/2 of 1%;
(ii) on the last day of each month falling within such
Interest Period, determine the Reference Rate for the applicable portion of each
month then ending, which shall be equal to the arithmetic mean of the daily
rates of interest with the rate on each day being equal to the rate determined
under (i) above.
(b) At 10:00 a.m. on the first day of the month following
each month for which the Reference Rate has been determined, the Confirming Bank
shall notify the Borrower and the Bank specified in the Rate Request of such
determination by telephone, confirmed by written or telegraphic communication.
The Confirming Bank shall immediately notify the Borrower and the Bank as to
which of the Reference Rate Reference Banks supplied information used in
determining the Reference Rate and the information supplied by each such bank.
7. The determination of the Eurodollar Rate, the CD Rate or
the Reference Rate by the Confirming Bank shall be final and binding in the
absence of manifest error.
8. The Confirming Bank accepts its obligations herein set
forth, upon the terms and conditions hereof, including the following, to all of
which the Borrower agrees:
(a) The Confirming Bank shall be entitled to the
compensation to be agreed upon with the Borrower for all services rendered by
the Confirming Bank, and the Borrower agrees promptly to pay such compensation
and to reimburse the Confirming Bank for the reasonable out-of-pocket expenses
(including reasonable counsel fees) incurred by it in connection with the
services rendered by it hereunder. The Borrower also agrees to indemnify the
Confirming Bank for, and to hold it harmless against, any loss, liability or
expense (including the costs and expenses of defending against any claim of
liability) incurred without gross negligence or willful misconduct, arising out
of or in connection with its acting as Confirming Bank hereunder.
(b) In acting under this Agreement, the Confirming Bank
does not assume any obligation or relationship of agency or trust for or with
any of the Banks.
(c) The Confirming Bank shall be protected and shall incur
no liability for or in respect of any action taken or omitted to be taken or
anything suffered by it in reliance upon any notice (including any Rate
Request), direction, certificate, affidavit, statement or other paper or
document reasonably believed by such Confirming Bank to be genuine and to have
been passed or signed by the proper parties. Under all circumstances, the
Confirming Bank's maximum liability for any error or omission in the performance
of its rate determination and notification obligations under this Agreement
shall be the difference between (1) any erroneous rate it determined and/or
provided notification of in response to a Rate Request from the Borrower, and
(2) the corresponding actual rate it should have determined and/or provided
notification of pursuant to the provisions of this Agreement.
(d) The Confirming Bank, its officers, directors and
employees may engage or be interested in any financial or other transaction with
the Borrower (including the lending of moneys to the Borrower under one of the
Borrowing Agreements), and may act on, or as depositary, trustee or agent for,
any committee or body of holders of notes or other obligations of the Borrower,
as freely as if it were not the Confirming Bank.
(e) The Confirming Bank shall be obligated to perform such
duties and only such duties as are herein specifically set forth, and no implied
duties or obligations shall be read into this Agreement against the Confirming
Bank.
(f) The Confirming Bank may consult with counsel
satisfactory to it and the opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, omitted to be taken
or suffered by it hereunder in good faith and in accordance with the opinion of
such counsel.
(g) Any written order, certificate, notice (including any
Rate Request), request, direction, or other communication, from the Borrower
made or given under any provision of this Agreement shall be sufficient if
signed by a person authorized to execute and deliver a Borrowing Advice.
9. (a) The Confirming Bank may at any time resign as such
Confirming Bank by giving written notice to the Borrower and the Banks of such
intention on its part, specifying the date on which its desired resignation
shall become effective; provided, however, that no such resignation shall become
effective until a successor Confirming Bank is selected by the Borrower. The
Confirming Bank may be removed at any time by the filing with it of an
instrument in writing signed on behalf of the Borrower and specifying such
removal and the date when it is intended to become effective. Such resignation
or removal shall take effect upon the date of the appointment by the Borrower,
as hereinafter provided, of a successor Confirming Bank (which shall be
acceptable to the Banks) and the acceptance of such appointment by such
successor Confirming Bank. Upon its resignation or removal, the Confirming Bank
shall be entitled to the payment by the Borrower of its compensation for the
services rendered hereunder and to the reimbursement of all out-of-pocket
expenses, including reasonable fees of counsel, incurred in connection with the
services rendered hereunder by the Confirming Bank.
(b) In case at any time the Confirming Bank shall resign,
or shall be removed, or shall become incapable of acting, or shall be adjudged
bankrupt or insolvent, or shall file a voluntary petition in bankruptcy or make
an assignment for the benefit of its creditors or consent to the appointment of
a conservator, liquidator or receiver of all or any substantial part of its
property, or shall admit in writing its inability to pay or meet its debts as
they mature or shall suspend payment thereof, or if an order of any court shall
be entered approving any petition filed by or against the Confirming Bank under
the provisions of any applicable bankruptcy or insolvency law, or if a
liquidator or receiver of it or of all or any substantial part of its property
shall be appointed, or if any public officer shall take charge or control of it
or of its property or affairs for the purpose of rehabilitation, conservation or
liquidation, a successor Confirming Bank (which shall be acceptable to the
Banks) may be appointed by the Borrower by an instrument in writing, filed with
the successor Confirming Bank. Upon the appointment as aforesaid of a successor
Confirming Bank and acceptance by it of such appointment, the Confirming Bank so
superseded shall cease, if not previously disqualified by operation of law, to
be such Confirming Bank hereunder.
(c) Any successor Confirming Bank appointed hereunder shall
execute, acknowledge and deliver to its predecessor and to the Borrower (which
shall deliver a copy of same to the Banks) an instrument accepting such
appointment hereunder, and thereupon such successor Confirming Bank, without any
further act, deed or conveyance, shall become vested with all the authority,
rights, powers, trusts, immunities, duties and obligations of such predecessor
with like effect as if originally named as such Confirming Bank hereunder, and
such predecessor, upon payment of its charges and disbursements then unpaid,
shall thereupon become obliged to transfer and deliver, and such successor
Confirming Bank shall be entitled to receive, copies of any relevant information
maintained by such predecessor Confirming Bank.
(d) Any corporation or bank into which the Confirming Bank
may be merged or converted, or any corporation or bank with which the Confirming
Bank may be consolidated, or any corporation or bank resulting from any merger,
conversion or consolidation to which the Confirming Bank shall be a party, or
any corporation or bank to which the Confirming Bank shall sell or otherwise
transfer all or substantially all the assets and business of such Confirming
Bank, shall, to the extent permitted by applicable law and provided that it
shall be qualified as aforesaid, be the successor Confirming Bank under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto. Notice of any such merger, conversion,
consolidation or sale shall forthwith be given to the Borrower and to each of
the Banks.
10. The Borrower undertakes that, so long as any Revolving
Note or Term Note is outstanding under any of the Credit Agreements, there shall
at all times be two Eurodollar Rate Reference Banks, two CD Reference Banks, and
two Reference Rate Reference Banks. The initial Eurodollar Rate Reference Banks,
CD Reference Banks and Reference Rate Reference Banks shall be those stated in
the Credit Agreements.
If any Reference Bank (i.e., any Eurodollar Rate Reference
Bank, any CD Reference Bank or any Reference Rate Reference Bank) or office
thereof is later unable or unwilling to act as such, the Borrower will appoint
another leading bank or office thereof (independent of the Borrower and
acceptable to the Banks) engaged in business in the appropriate market for
determination of applicable rates to replace such Reference Bank in such
capacity. The Borrower shall notify the Confirming Bank and each of the Banks
forthwith upon any change in the identity of any of the Reference Banks. Pending
receipt of any such notification the Confirming Bank shall be entitled to assume
that the Reference Banks are those named in the Credit Agreement as modified by
changes of which notification has already been received by the Confirming Bank.
11. Except where telephonic instructions or notices are
authorized herein to be given, all notices, demands, instructions and other
communications required or permitted to be given or made upon any party hereto
shall be in writing and shall be personally delivered or sent by registered or
certified mail, postage prepaid, return receipt request, or by prepaid Telex,
TWX or telegram (with messenger delivery specified in the case of a telegram),
or by telecopier, and shall be deemed to be given for purposes of this Agreement
on the day that such writing is delivered to the intended recipient thereof in
accordance with the provisions of this paragraph. Unless otherwise specified in
a notice sent or delivered in accordance with the foregoing provisions of this
paragraph, notices, demands, instructions and other communications in writing
shall be given to or made upon the respective parties hereto at their respective
addresses (or to their respective Telex, TWX or telecopier numbers) indicated
below, and, in the case of telephonic instructions or notices, by calling the
telephone number or numbers indicated for such party below:
If to the Borrower: The Charles Schwab Corporation
101 Montgomery Street
San Francisco, CA 94104
Attn: Treasury
Telephone: (415) 636-9879
FAX: (415) 636-9891
If to the Confirming Bank: Bank of America Illinois
Attn: John E. Williams IV,
Vice President
231 South LaSalle Street
Chicago, IL 60697
Telephone: (312) 828-6904
FAX: (312) 828-3359
If to any of the Banks: To the respective address, telephone number
or telex number set forth opposite the name
of such Bank on Schedule I hereto.
12. Schedule I hereto may be amended from time to time by the
Borrower by the Borrower's delivery to the Confirming Bank of a new Schedule I.
Each such new Schedule I delivered by the Borrower to the Confirming Bank shall
replace and supersede the then-existing Schedule I, and any such newly delivered
Schedule I shall be the Schedule I referred to in this Agreement. Each such
newly delivered Schedule I shall include all of the then-existing Credit
Agreements between the Borrower and any Bank having substantially similar terms
to the Credit Agreements listed on the original Schedule I hereto.
13. This Agreement shall be deemed to be a contract under, and
for all purposes shall be governed by and construed and interpreted in
accordance with, the laws of the State of California.
14. This Agreement may be executed in as many counterparts as
may be deemed necessary or convenient, and by the parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the date first above written.
BANK OF AMERICA ILLINOIS THE CHARLES SCHWAB CORPORATION
By: /s/ John E. Williams IV By: /s/Christopher V. Dodds
------------------------ --------------------------
Christopher V. Dodds
Its: Vice President Senior Vice President and Treasurer
<PAGE>
SCHEDULE I
to Confirming Bank Agreement dated as of June 27, 1997 between
The Charles Schwab Corporation and Bank of America Illinois
(Dollars in Millions)
Amount
Bank of America Illinois $50
Attn: John E. Williams IV, Vice President
231 South LaSalle Street
Chicago, IL 60697
Bank of New York 50
Attn: Mark Rogers, Vice President
One Wall Street, First Floor
New York, NY 10286
Chase Manhattan Bank 20
Broker Dealer Division
Attn: Richard Cassa, Vice President
One Chase Plaza, 21st Floor
New York, NY 10081
Citicorp USA, Inc. 50
Attn: Michael Mauerstein, Vice President
399 Park Avenue, 12th Floor, Zone 10
New York, NY 10043
The First National Bank of Chicago 20
Attn: Rob Danziger, Vice President
153 West 51st Street
New York, NY 10019
First Tennessee Bank National Association 20
Attn: Victor Notaro, Vice President
P.O. Box 84
Main Office, 9th Floor
Memphis, TN 38103
The Fuji Bank, Limited 20
San Francisco Agency
Attn: Mike Rogers, Vice President
601 California Street
San Francisco, California 94108
Norwest Bank Minnesota, N.A. 30
Attn: Janet Klein, Vice President
6th and Marquette
Minneapolis, MN 55479-0085
PNC Bank 50
Attn: Brenda Peck, Vice President
1600 Market Street, 21st Floor
Philadelphia, PA 19101
NationsBank, N.A. (South) 20
Attn: Jim Dever, Senior Vice President
55 Broadway, 4th Floor
New York, NY 10006
Union Bank of Switzerland 20
New York Branch
Attn: Virginia Loebel, Managing Director
299 Park Avenue
New York, NY 10171-0026
<PAGE>
EXHIBIT C
BORROWING ADVICE
1. This Borrowing Advice is executed and delivered by The
Charles Schwab Corporation ("Borrower") to [Bank] pursuant to that certain
Credit Agreement dated as of June 27, 1997, entered into by Borrower and [Bank]
(the "Credit Agreement"). Terms defined in the Credit Agreement and not
otherwise defined herein are used herein as defined in the Credit Agreement.
2. Borrower hereby requests that [Bank] make an Advance [or
Term Loan] for the account of Borrower (at _______________, Account No.
________________) pursuant to Paragraph 2.3 of the Credit Agreement as follows:
(a) Amount of Advance [or Term Loan]:_________________
(b) Date of Advance [or Term Loan]: _________________
(c) [If an Advance] Type of Advance (check one only):
________ Reference Rate with ____ - day Interest Period
________ CD Rate with _________- day Interest Period
________ Eurodollar Rate with _______- day Interest Period
(d) [If a Term Loan] Type of Term Loan (check one only):
________ Reference Rate with initial ____ - day Interest
Period
________ CD Rate with initial _______ - day Interest
Period
________ Eurodollar Rate with initial ______- day Interest
Period
(e) [If a Term Loan] Maturity Date of Term Loan: _____________
3. Following this request for Advance [or Term Loan], the
aggregate outstanding amount of all Advances and Term Loans under the Revolving
Note will not exceed the Credit amount.
4. This Borrowing Advice is executed on ______________ by the
Borrower.
BORROWER:
THE CHARLES SCHWAB CORPORATION
a Delaware Corporation
By ___________________________
[Printed Name and Title]
<PAGE>
EXHIBIT D
[Howard, Rice Letterhead]
[Date]
[Bank]
Re: Credit Agreement Between
The Charles Schwab Corporation and [Bank]
Ladies and Gentlemen:
This opinion is delivered at the request of The Charles Schwab
Corporation to you in your capacity as the Bank under the Credit Agreement dated
as of June 27, 1997 (the "Credit Agreement") between you and The Charles Schwab
Corporation, a Delaware corporation ("Borrower"). This opinion letter speaks as
of close of business on June 27, 1997 (hereafter the "operative date").
We have acted as special counsel to Borrower in connection
with the Credit Agreement. In such capacity we have examined originals, or
copies represented to us by Borrower to be true copies, of the Credit Agreement
and the Confirming Bank Agreement dated as of June 27, 1997 between Borrower and
Bank of America Illinois (the "Confirming Bank Agreement"); and we have obtained
such certificates of such responsible officials of Borrower and of public
officials as we have deemed necessary for purposes of this opinion. We have
assumed without investigation the genuineness of all signatures on original
documents, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as photostatic
copies of originals, and the accuracy and completeness of all corporate records
certified to us by the Borrower to be accurate and complete. We have further
assumed that the Credit Agreement is binding upon and enforceable against the
Bank, and that the Confirming Bank Agreement is binding upon and enforceable
against Bank of America Illinois. As to factual matters, we have relied upon the
representations and warranties contained in and made pursuant to the Credit
Agreement.
Capitalized terms not otherwise defined herein have the
meanings given for such terms in the Credit Agreement. For the purpose of this
opinion, "Loan
<PAGE>
[Bank]
June , 1997
Page Two
Documents" as used herein means the Credit Agreement and the Confirming Bank
Agreement.
Based upon the foregoing and in reliance thereon, and subject
to the exceptions and qualifications set forth herein, we are of the opinion
that:
1. Borrower is a corporation duly formed, validly existing,
and in good standing under the laws of Delaware.
2. Borrower has all requisite corporate power and authority to
execute, deliver and perform all of its obligations under the Loan Documents.
3. Each of the two Loan Documents has been duly authorized,
executed and delivered by Borrower. Each of the two Loan Documents constitutes
the legal, valid and binding obligation of Borrower, enforceable against
Borrower in accordance with its terms, except as such validity, binding nature
or enforceability may be limited by:
(a) the effect of applicable federal or state bankruptcy,
reorganization, insolvency, fraudulent conveyance,
moratorium or other similar laws and court decisions
relating to or affecting creditors' rights generally;
(b) the effect of legal and equitable principles upon the
availability of creditors' remedies, regardless of
whether considered in a proceeding in equity or at
law;
(c) the effect of California judicial decisions involving
statutes or principles of equity which have held that
certain covenants or other provisions of agreements,
including without limitation those providing for the
acceleration of indebtedness due under debt
instruments upon the occurrence of events therein
described, are unenforceable under circumstances where
it cannot be demonstrated that the enforcement of such
provisions is reasonably necessary for the protection
of the lender, has been undertaken in good faith under
the circumstances then existing, and is commercially
reasonable;
(d) the effect of Section 1670.5 of the California Civil
Code, which provides that a court may refuse to
enforce a contract or may limit the application
thereof or any clause thereof which the court finds as
a matter of law to have been unconscionable at the
time it was made;
(e) the unenforceability, under certain circumstances, of
provisions purporting to require the award of
attorneys' fees, expenses, or costs, where such
provisions do not satisfy the requirements of
California Civil Code Section 1717 et seq., or in any
action where the lender is not the prevailing party;
<PAGE>
[Bank]
June , 1997
Page Three
(f) the unenforceability, under certain circumstances, of
provisions waiving stated rights or unknown future
rights and waiving defenses to obligations, where such
waivers are contrary to applicable law or against
public policy;
(g) the unenforceability, under certain circumstances, of
provisions which provide for penalties, late charges,
additional interest in the event of a default by the
borrower or fees or costs related to such charges;
(h) the unenforceability, under certain circumstances, of
provisions to the effect that rights or remedies are
not exclusive, that every right or remedy is
cumulative and may be exercised in addition to or with
any other right or remedy, or that the election of
some particular remedy or remedies does not preclude
recourse to one or another remedy;
(i) the unenforceability of provisions prohibiting waivers
of provisions of either of the Loan Documents
otherwise than in writing to the extent that Section
1698 of the California Civil Code permits oral
modifications that have been executed;
(j) limitations on the enforceability of release,
contribution, exculpatory, or nonliability provisions,
under federal or state securities laws, Sections 1542
and 1543 of the California Civil Code, and any other
applicable statute or court decisions; and
(k) limitations on the enforceability of any indemnity
obligations imposed upon or undertaken by the borrower
to the extent that such obligations do not satisfy the
requirements of Sections 2772 et seq. of the
California Civil Code and any judicial decisions
thereunder.
The foregoing opinions are subject to the following exceptions
and qualifications:
a. We have not been requested to verify and have not
verified the validity, accuracy, or reasonableness of any of the factual
representations contained in either or both of the Loan Documents, and we
express no opinion with respect to any of such matters.
b. We are members of the bar of the State of California and
are not admitted to practice in any other jurisdiction. Accordingly, we are
opining herein only concerning matters governed by the Federal laws of the
United States of America, the laws of the State of California, and the General
Corporation Law of the State of Delaware, and only with respect to Borrower. We
express no opinion concerning the applicability to either or both of the Loan
Documents, or the effect thereon, of the laws of any other jurisdiction.
Furthermore, we express no opinion
<PAGE>
[Bank]
June , 1997
Page Four
with respect to choice of law or conflicts of law, and none of the opinions
stated herein shall be deemed to include or refer to choice of law or conflict
of law.
c. We express no opinion on any Federal or state securities
laws as they may relate to either or both of the Loan Documents.
d. We express no opinion as to compliance with the usury
laws of any jurisdiction.
The opinions set forth herein are given as of the operative
date. We disclaim any obligation to notify you or any other person or entity
after the operative date if any change in fact and/or law should change our
opinion with respect to any matters set forth herein. This opinion letter is
rendered to you in your capacity as the Bank under the Credit Agreement and may
not be relied upon, circulated or quoted, in whole or in part, by any other
person or entity (other than a person or entity who becomes an assignee or
successor in interest of the Bank or acquires a participation from the Bank
consistent with the terms of the Loan Documents) and shall not be referred to in
any report or document furnished to any other person or entity without our prior
written consent; provided, however, that the foregoing shall not preclude the
Bank from describing or otherwise disclosing the existence or contents of this
letter to (i) any bank regulatory authority having jurisdiction over the Bank,
as required by such authority, (ii) a person or entity who, in good-faith
discussions between the Bank and such person or entity, is proposed to become an
assignee or successor in interest of the Bank or to acquire a participation from
the Bank consistent with the terms of the Loan Documents, and (iii) counsel to
the Bank.
Very truly yours,
HOWARD, RICE, NEMEROVSKI,
CANADY, FALK & RABKIN
A Professional Corporation
By ___________________________
JLS/gff
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Earnings before taxes on income $112,334 $110,320
- ---------------------------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 137,672 108,790
Interest expense - other 17,923 14,340
Interest portion of rental expense 7,399 6,226
- ---------------------------------------------------------------------------------------------------------
Total fixed charges (A) 162,994 129,356
- ---------------------------------------------------------------------------------------------------------
Earnings before taxes on income and fixed charges (B) $275,328 $239,676
=========================================================================================================
Ratio of earnings to fixed charges (B) / (A)* 1.7 1.9
=========================================================================================================
Ratio of earnings to fixed charges excluding customer interest expense** 5.4 6.4
=========================================================================================================
</TABLE>
* 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 payable 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 payable 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> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Income and Condensed Consolidated Balance
Sheet of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 3,204,723
<RECEIVABLES> 8,340,655
<SECURITIES-RESALE> 5,846,274
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 234,083
<PP&E> 348,671
<TOTAL-ASSETS> 18,193,537
<SHORT-TERM> 288,631
<PAYABLES> 15,895,371
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 361,037
0
0
<COMMON> 2,677
<OTHER-SE> 1,174,623
<TOTAL-LIABILITY-AND-EQUITY> 18,193,537
<TRADING-REVENUE> 52,658
<INTEREST-DIVIDENDS> 260,186
<COMMISSIONS> 297,845
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 125,382
<INTEREST-EXPENSE> 155,595
<COMPENSATION> 265,873
<INCOME-PRETAX> 112,334
<INCOME-PRE-EXTRAORDINARY> 112,334
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,964
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
